ProVision Plus And Aprisa 5G Propel Growth Amid Decisive Shifts And Margin Optimism

Key Takeaways

• Aviat's cross-selling potential and 5G router sales signal growth opportunities in private networks and utility sectors, enhancing revenue prospects.
  
• Transferring Pasolink manufacturing could reduce costs and boost profitability through improved margins and efficient inventory management.
  
• Challenges in revenue, profitability, and investor confidence stem from CapEx weakness, global market contraction, margin decline, and elevated operating expenses.

Catalysts

Provides microwave networking and wireless access networking solutions in North America, Africa, the Middle East, Europe, Latin America, and the Asia Pacific.

• Aviat's opportunity to sell its ProVision Plus network management software to Pasolink product customers is expected to be a $50 million upgrade opportunity over the next 5 years, which should enhance software revenues and potentially improve net margins through higher-margin software sales.
  
• The first purchase order for their Aprisa 5G router to an American utility company signifies progress in Aviat's private 5G business, which could positively impact revenue growth.
  
• Aviat is starting to realize cross-selling revenues from its 4RF acquisition, with 90% of private network customers not overlapping, suggesting potential for increased revenues.
  
• Recent wins in private network upgrades for utilities and grid modernization projects, including $8 million in contracts with Midwestern electric utilities, indicate future revenue streams.
  
• Aviat's plan to transfer Pasolink product manufacturing to its contract manufacturer aims to lower costs, improve gross margins, and manage inventory efficiently, potentially boosting profitability.

Aviat Networks Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Aviat Networks's revenue will grow by 8.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from -1.1% today to 10.1% in 3 years time.
• Analysts expect earnings to reach $52.4 million (and earnings per share of $5.89) by about November 2027, up from $-4.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 6.5x on those 2027 earnings, up from -39.2x today. This future PE is lower than the current PE for the US Communications industry at 24.2x.
• Analysts expect the number of shares outstanding to decline by 11.13% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.35%, as per the Simply Wall St company report.

Aviat Networks Future Earnings Per Share Growth

Risks

• The ongoing U.S. Tier 1 capital expenditure (CapEx) weakness and timing challenges in private network and international projects have impacted revenue, indicating potential continued revenue risk.
  
• The global microwave market contraction, with a reported 8% year-over-year decrease and the fourth consecutive quarter of revenue declines, could further pressure Aviat's revenues and net margins.
  
• A significant decline in gross margins from 35.9% in the prior year to 23.2% non-GAAP, driven by lower volumes and less favorable geographic mix, impacts the company’s profitability and net earnings.
  
• A reported adjusted EBITDA of minus $7.7 million and a GAAP net income loss indicate challenges in achieving positive earnings, impacting investor confidence in near-term financial performance.
  
• The elevated operating expenses driven by recent acquisitions (Pasolink, 4RF) and preparation for NEC transition services suggest continued pressure on net margins until these cost factors are mitigated.

Valuation

• The analysts have a consensus price target of $34.5 for Aviat Networks based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $55.0, and the most bearish reporting a price target of just $27.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $518.1 million, earnings will come to $52.4 million, and it would be trading on a PE ratio of 6.5x, assuming you use a discount rate of 7.3%.
  
• Given the current share price of $14.45, the analyst's price target of $34.5 is 58.1% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.