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Posts Tagged ‘Aviat Networks Inc (NASDAQ:AVNW)’

Oozing Alpha has a write-up on the valuation of Aviat Networks, Inc. (NASDAQ:AVNW) (see the post archive here). AVNW is an interesting Ramius activist target trading at a small premium to net current asset value. Here’s the write-up from Oozing Alpha:

Investment Thesis
AVNW is an excellent opportunity to invest in a leading wireless backhaul producer at 19% EV/Sales and below tangible book value, while backhaul traffic continues to grow rapidly, bookings have bottomed and North American business activity begins to pick up.

AVNW has a very overcapitalized balance sheet with $137mm of net cash ($2.30/share) as of 6/30, a returning CEO who has tremendous knowledge and background in the business, and a new cost cutting program that will boost operating margins inline with business conditions and yield sustainable profitability at current trough revenue levels. Not to mention a recently announced active 6% shareholder Ramius, which outlines the opportunity well in a recent 13D filing.

I believe an investment in AVNW today has very little downside risk and 100%+ upside potential over next 1-2 years. Last night’s quarterly results and large guidance range for next quarter may provide a great entry point tomorrow.

Business
Developed market wireless subscriber growth appears to have stalled, but developing markets are growing rapidly and in many cases, the entire telecom infrastructure is wireless, providing a nice tailwind for Aviat. The keys for Aviat are new network placements and add on capacity as backhaul bottlenecks continue to occur globally.

60% of Aviat’s revenue is outside of North America currently, with Africa revenue being volatile the last 23 years as only 2 real customers historically and consolidation of carriers has hurt Aviat. Europe is having problems and it appears both it and Africa are currently losing money in their operations. Russia activity is picking up and is a key region for AVNW. Asia Pac continues to grow and management is optimistic in its future and ability to generate sound profitability, albeit exact margins there now are tough to determine.

The 10k breaks out North America vs. International operators and it appears N.A is breakeven, but a lot of costs associated with N.A. are really International given AVNW is based in CA and a lot of corporate costs associated with running the International ops are baked into the N.A. #s. Tough to say how much but management acknowledges this issue.

The general consensus is networks are moving rapidly to 4G/LTE, however, in reality Aviat believes there still exists a very large market for TDM/3G equipment, as voice uptime is more critical than data uptime. Aviat is very strong in TDM and will continue to leverage this as they build out there 4G/WIMAX abilities, given backhaul networks require more and more traffic provisioning cellular base station traffic is up 10 fold in 3 years and expected to double every 2 years, according to Yankee Group.

There is quite a bit of competition in this area with Ceragon and Dragonwave being 2 pure play comps and obviously Ericsson and Alcatel/Lucent. Ceragon is a very good competitor with strong product portfolio and have been aggressively recruiting Aviat personnel, especially in sales. Huawei in Taiwan has been a thorn in the industry’s side so to speak as Bank of China has offered them absurd financing and Huawei is financing their sales at or below cost, trying to capture market share. It has hurt industry pricing but can’t last forever.

Customers are aware of this and continue to want multiple vendors. Generally customers seem happy with Aviat (candidly, have only talked to 2 and most feedback is from analyst community), continue to require multiple vendors and Aviat should get a nice share of the market going forward given its strong customer list, global footprint and competitive product portfolio.

The new CEO Chuck Kissner was the CEO of Stratex Networks and due diligence on him over the last few weeks has come back pretty positive. He seems to be a no nonsense guy who realized the cost structure was too bloated for current business conditions and has an aggressive plan in place to adjust it the next few months. He has been there a month but knows from the board level that many investors were fed up with Harold’s growth ambitions that weren’t in sync with customer’s spending plans and the overall economic environment.

Recent changes
New strategic plan highlights and cost cutting program, per last night’s release and conference call:

* Focus on wireless transmission and their microwave backhaul solutions, where they have a strong presence and portfolio.
* Make WIMAX part of the wireless product offering, not a separate business.
* Expand its service businesses network mgmt, design, implementation.
* Achieve profitability on current revenue run rate levels of $110-120mm per quarter.
– Reduce overall cost structure by $30-35mm annually; $6-8mm per quarter in SG&A and rest in COGS through manufacturing efficiencies.

The company took major charges this quarter and made it a kitchen sink quarter dropped intangibles $71mm and PP&E $10mm, sold TX manufacturing facility, announced plans to close Raleigh facility and are moving to a 100% outsourced manufacturing model. D&A will drop $12mm annually as a result. Moved to Santa Clara will save $1.5mm annually, took $2mm of cash to do it however but still a smart move.

Company produced $28.3mm of operating cash flow in FY2010 (June), lower than previous years but decent given poor operating performance and bloated cost structure.

$10-12mm of cash will be burned to complete this restructuring, mainly over next 2 quarters. Gross margins will be weak in the 1Q due to scrap inventory charge on India WIMAX equipment, but will return to 32-33% range by 2H. If not for this charge, GM%would be up nventory charge on India WIMAX equipment, but will return to 32-33% range by 2H. If not for this charge, GM% would be up QoQ over last quarter. OPEX was $43mm last quarter and will be down $6-7mm by Q311 (3/31/11).

Worst case, if not turned around and successful by end of next year, I see 2 scenarios:

1) Deemphasize WIMAX altogether and shun Telsima acquisition operations, focus purely on TDM/3G microwave business that continues to be the core and most successful product offering, thereby reducing costs even further; or

2) Close down Africa and Europe, focus on North America and AsiaPac, dramatically reducing cost structure and running a 10% EBIT margin, albeit on $250-300mm of revenue. Less growth prospects, but highly profitable. This is a drastic move and most likely wouldn’t happen until 2012. Shareholder pressure may also cause this or a cleanup of the business to dress it up for a sale to strategic. Private equity would also be interested, especially today, but shareholders wouldn’t be rewarded enough as private equity would want the upside of the cost cuts and restructuring.

Balance sheet/Liquidity
Pristine condition with $137mm of net cash, $189mm of net working capital (current asset minus total liab) and $80mm untapped credit facility.

Buyback would be a good use of cash and board has considered it, as well as tuck in acquisitions, but neither is in the cards for now until business turns and cost structure is reset. If stock doesn’t respond in a reasonable amount of time, I fully expect the board to feel pressure to consider a sale to either a strategic like Juniper or Cisco, or to private equity worst case, both of which should be at nice premiums to today’s quote.

Valuation
$500mm revenue business with 33-35% gross margins and nice medium-long term prospects for $90mm enterprise value. Stock has traded on balance sheet value principally the last few months and appears to have bottomed.

Once cost cutting is complete and assuming revenue stays flat, AVNW should do $40-50mm of EBITDA on $450-500mm in revenue. Did $20mm on $479mm last year, plus $30-35mm of cost reductions. This would be conservative as management fully expects to grow revenue in the future given backhaul traffic growth and excellent microwave product portfolio and R&D team.

At 6x, $270mm EV would yield $6.62/share. That is my base case. D&A will be down $12mm annually so I am assuming $25mm in annual D&A and $15mm of annual capex, and 25% tax rate. At $45mm in EBITDA, that would be $15mm in net income, or $.25/share, and $25mm in FCF or $.42/share.

Please see below comp chart with Ceragon and Dragonwave. Ceragon is a better comp as Dragonwave is principally a WIMAX business even thought they are focused on expanding. DRWI blew up recently as its main customer Clearwire cut back its growth capex.

{My note: The table presented in the write-up is really “busy” and unreadable. Instead, just look up the EV/2010 Estimated EBITDA multiples of the two comps, CRNT and DRWI, on FirstCall. CRNT is trading at 12x and DRWI at 10x.}

Risks
* Bookings remain soft in Africa and N.A. doesn’t turn.
* Cost cutting cuts muscle, not just fat, hurting product portfolio, performance and company’s reputation.
* Huawei continues to take share with unprofitable bids.
* Continued pushout of deal closings and supply shortages causes further revenue weakness below $110-120mm quarterly.

Catalyst:
* Achieving cost cutting program in size and on target, generating profitable quarters once again.
* Bookings and revenue growth return.
* Market recognizes turnaround and growth potential, assigning a reasonable earnings and sales multiple.

Long AVNW.

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In July Ramius Capital disclosed an activist holding in Aviat Networks, Inc. (NASDAQ:AVNW). I thought then, and continue to think, the opportunity described by Ramius in the letter annexed to the 13D is compelling (outlined in the original post here).

AVNW has announced that it has settled with Ramius and will nominate to the board a director candidate recommended by Ramius. Here’s the announcement:

Aviat Networks Announces Settlement Agreement With Ramius LLC

Company to nominate one candidate recommended by Ramius to serve on Board of Directors

SANTA CLARA, Calif., Sept. 15 /PRNewswire-FirstCall/ — Aviat Networks, Inc. (“Aviat,” Nasdaq: AVNW), a leading wireless expert in advanced IP network migration, today announced that it has reached a settlement agreement with Ramius Value and Opportunity Advisors LLC, a subsidiary of Ramius LLC (together with its affiliates, “Ramius”).

Under the terms of the settlement agreement, Aviat Networks will include one candidate recommended by Ramius as a nominee on management’s slate for election at the Annual Meeting. The nominee would serve as an independent director of the Company. Aviat Network’s Board of Directors will consist of eight directors, seven of which will be independent. The Aviat Networks 2010 Annual Meeting will be held on November 9, 2010, at the Company’s headquarters in Santa Clara, California. Ramius, which beneficially owns approximately 7.6% of Aviat Networks’ outstanding shares, has agreed to vote its shares in favor of each of the Board’s nominees at the 2010 Annual Meeting and has agreed to certain, limited standstill restrictions.

“We believe that open dialogue with our shareholders is essential as we continue to execute our restructuring plan and outline our strategic vision for Aviat Networks,” said Chuck Kissner, Chairman and CEO of Aviat Networks. “Ramius is an important investor and we believe that this agreement aligns the interests of management and all of Aviat Networks’ shareholders. We expect the Ramius nominee will be an asset to the Company and we look forward to working with him as we continue building out a platform to drive sustainable, profitable revenue growth and enhanced shareholder value through innovation, prudent cost management and operational excellence.”

Peter A. Feld, Managing Director of Ramius, added, “We are pleased to have worked constructively with Aviat Networks with the shared goal of enhancing value for all shareholders. With the recently announced management change and cost reduction initiatives, we believe the Company is on track to significantly improve operating performance and profitability. We are confident that our nominee will provide valuable insight as the Company drives towards the goal of generating profitable growth.”

I hold AVNW.

Hat tip Oozing Alpha

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Ramius Capital has disclosed an activist holding in Aviat Networks, Inc. (NASDAQ:AVNW) (Hat tip Oozing Alpha). I covered Ramius Capital’s white paper The case for activist strategies around 18 months ago. I think the AVNW position, as described by Ramius in the letter annexed to the 13D, is compelling.

Ramius’s “Purpose” set out in the 13D is as follows:

On July 7, 2010, Ramius delivered a letter to the Issuer’s Chairman and CEO, Charles Kissner, the Issuer’s Board of Directors (the “Board”) and the Issuer’s Chief Financial Officer, Thomas L. Cronan III (the “July 7 Letter”). In the July 7 Letter, Ramius expressed its belief that the Issuer’s Shares are deeply undervalued and significant opportunities exist to improve the Issuer’s operating performance based on actions within the control of management and the Board. Ramius stated that the Issuer’s current market price clearly indicates that the public market is attributing essentially no value for the Issuer’s operating business and reflects a lack of confidence in the Issuer’s business strategy. Ramius also expressed its concern that the Issuer has taken little action, to date, to adjust the cost structure in-line with current business prospects, specifically noting that, while revenues have declined since fiscal year 2008, operating expenses have actually increased over the same period. Ramius further stated it believes a significant opportunity exists to adjust the cost structure of the Issuer to achieve acceptable operating margins, even at the current revenue run rate, and urged management and the Board to focus its attention on driving cost improvements by re-focusing on the Company’s core businesses and de-emphasizing growth investments in non-core product lines such as WiMAX. Ramius concluded the July 7 letter by stating it has a strong vested interest in the performance of the Issuer as one of the largest shareholders and hopes to work constructively with management and the Board to unlock value for all shareholders. A copy of the July 7 Letter is attached hereto as Exhibit 99.1 and is incorporated herein by reference.

The July 7 letter is as follows:

July 7, 2010

Mr. Charles D. Kissner
Chairman and Chief Executive Officer
Aviat Networks Inc.
5200 Great America Parkway
Santa Clara, CA 95054
CC: Aviat Networks Board of Directors
Thomas L. Cronan III, Chief Financial Officer

Dear Chuck:

As reported this morning in a 13D filing with the Securities and Exchange Commission, Ramius Value and Opportunity Advisors LLC, a subsidiary of Ramius LLC, and certain of its affiliates (collectively, “Ramius”) owns approximately 6.2% of the shares outstanding of Aviat Networks Inc. (“Aviat” or the “Company”), making us one of the Company’s largest shareholders. As we have outlined below, we believe that Aviat is deeply undervalued and significant opportunities exist to improve the operating performance of the Company based on actions within the control of management and the Board of Directors (the “Board”). Over the past several months, we have had in-depth discussions with the Company’s former Chief Executive Officer, Harald Braun, as well as the Company’s Chief Financial Officer, Tom Cronan, regarding our concerns about the deteriorating financial performance of the Company and the lack of action to adjust operating expenses in-line with the Company’s current business prospects. We look forward to continuing these discussions with you and expect that swift actions will be taken to address these concerns and unlock shareholder value.

At the current time, the public market is attributing almost no value for the operating business at Aviat. As depicted in the table below, the Company ended the last quarter with approximately $390 million of current assets including assets such as cash and cash equivalents, accounts receivables, and inventory. After subtracting the total liabilities of the Company from this amount, the Company is left with nearly $200 million of net current assets, or $3.35 per share. We believe this methodology provides for a fair assessment of the potential liquidation value of the Company’s balance sheet. The current stock price of $3.46 represents a mere 3.3% premium to this value clearly indicating that the public market is attributing essentially no value for the Company’s operating business. This analysis does not even take into account the value of Aviat’s long-term assets of $61 million, or $1.02 per share, which, when added to net current assets of $3.35 per share, equates to tangible book value of $4.37 per share.

We believe the current market price reflects a lack of confidence in the business strategy at Aviat. Over the past two years since FY 2008, revenues have declined by over $200 million. Yet, as shown in the table below, operating expenses have actually increased over the period by approximately $3 million. This has resulted in nearly a 70% decline in Adjusted EBITDA in just the past two years.

Aviat has taken little action, to date, to adjust the cost structure in-line with current business prospects. In fact, the Company has publicly stated that the current cost structure is designed to achieve a target operating margin of 10% only if quarterly revenues reach $150 million. For each of the past three quarters, revenues have been approximately $120 million and revenue guidance for 4Q 2010 is in a range of $120 million to $130 million.

Based on our research and analysis, we believe a significant opportunity exists to adjust the cost structure of Aviat to achieve acceptable operating margins even at the current revenue run rate. This can be achieved by re-focusing the Company on its core wireless backhaul and private network businesses and de-emphasizing growth investments in non-core product lines such as WiMAX. Our estimates indicate that the Company is currently spending between $15 million and $20 million per year on the WiMAX initiative. To date, the Company has recognized negligible revenues from this business making it a substantial drain on Company resources.

Additionally, the Company has made substantial investments in sales and marketing and research and development to drive penetration into new geographic markets. We believe the Company should focus its resources on markets where it has substantial penetration, a large installed base, and a stable pricing environment. In other non-core markets the Company should look for opportunities to utilize distribution partners or exit.

Even if you assume that the Company can only reach 50% to 75% of its target operating margin of 10% due to lower revenue levels and less absorption of overhead costs, the results still imply that Aviat is significantly undervalued. As demonstrated in the table below, at an annualized revenue run rate of $120 million per quarter and a 5.0% to 7.5% operating margin, Aviat would be trading at an Enterprise Value / EBITDA multiple of between 1.3x and 1.6x. The two closest public competitors, Ceragon Networks Ltd. (CRNT) and DragonWave Inc. (DRWI), currently trade at Enterprise Value / forward EBITDA multiples of 6.5x and 3.5x, respectively.

We believe this analysis clearly demonstrates that with prudent cost management, Aviat has the potential to generate substantial earnings and cash flow implying an extremely low valuation both on an absolute basis and relative to its peers. To that end, we urge management and the Board to focus its attention on driving cost improvements by re-focusing on the Company’s core businesses.

We greatly appreciate the time that Mr. Braun and Mr. Cronan have spent with us over the past several months and look forward to having an active and productive dialogue with you going forward. As one of the largest shareholders of Aviat, we have a strong vested interest in the performance of the Company and hope to work constructively with management and the Board to unlock value for all shareholders.

Best Regards,

Peter A. Feld

Jeffrey C. Smith

Ramius LLC

[Full Disclosure:  I hold AVNW. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]

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