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Q2 2024 Aviat Networks Inc Earnings Call

Participants

Andrew Fredrickson; Director, Corporate Development and Investor Relations; Aviat Networks Inc

Peter Smith; President & CEO; Aviat Networks Inc

David Gray; SVP & CFO; Aviat Networks Inc

Theodore O’Neill; Analyst; Litchfield Hills Research, LLC

Scott Searle; Analyst; Roth Capital Partners, LLC

Erik Suppiger; Analyst; JMP Securities LLC

Jaeson Schmidt; Analyst; Lake Street Capital Markets

Presentation

Operator

Good afternoon and welcome to Aviat Networks second quarter fiscal 2024 earnings call. (Operator Instructions) Please note this conference is being recorded. And I will now turn this conference over to your host, Mr. Andrew Fredrickson, Director of Investor Relations. You may begin.

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Andrew Fredrickson

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 the replay of today's call.
With me today are Pete Smith, Aviat's President and CEO, who will begin with 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 in the 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.

Peter Smith

Thank you, Andrew, and good afternoon, everyone. Thank you for joining us to review RVR networks' results for the second quarter of fiscal year 2024. We are pleased to report that RVR 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 a year ago. Adjusted EBITDA of $13.7 million, a record high of 14.5% of revenue and 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 as against the year ago period that benefited from the large initial order from our Bharti Airtel wind. These financial and operational results are driven by the continued implementation of Avios operating model and made possible thanks to the effort and execution of the RVR 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, obviously closed the acquisition of the NEC wireless business on November 30th. We now refer to this as the PASOLINK business. At this point, we can provide an update that will emphasize the components of the RBR 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 team. This approach has been agreeable with the customer base and align with the obvious customer focus element of the Harvia operating model. Note that this work stream 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 IVL will continue to offer innovation and value across our entire suite of products and services during the period between sign and close RVR to synthesize 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 Tennant. We reviewed the organization of both RBR and PASOLINK. On day one. 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 in 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, low 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 counseling portfolio has appreciated by customers who have invested significantly into the product lineup, thanks to its high level performance and dependability. The customer base is excited to continue doing business with RBS. Our plans to integrate our network management software provision plus with passionately products will deliver improved functionality and ease of use to cancelling customers. This is a request we have heard from many customers and we are excited to deliver for that 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 will be opportunities for cross-selling products to RVR and counseling 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 achieving the goals we have established for the passenger business won $140 million in annual run rate revenue contribution and to achieving stand-alone gross margins of 33% and standalone adjusted EBITDA of 11% to 13% by the end of our 2nd year of ownership. Obviously, confidence in delivering the targets are based on the RVR operating model and our execution of some history for content. 16 quarters ago, RBR 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 RVR and the Red Lion acquisition, and we are now eager to show results with more scale.
Moving on to the obvious 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 obvious resilient to fluctuations in business and CapEx cycles in private networks and IVR 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 two large statewide networks announced earlier this fiscal year. In addition to numerous smaller network projects, we believe that the American Rescue Plan Act or are but still has meaningful contribution to our business over the next three years by aiding state and local spending on private network upgrades and expansion. While some of the projects have at Arbor funding, 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 Arka funds get layered in, we see a strong private network spending environment. As a reminder, our PO funds must be fully spent by the end of calendar year 2026. One of our focuses at Avion has been to grow international private network business. Our recently announced partnership with smart French Telecom in Indonesia is a good win for RVO RVR will work closely with smartphone 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 Power Solutions transaction and the associated geography and scale accelerated the discussions and made the private network partnership more compelling for smart grids in mobile networks. We are encouraged by the dialogue with customers expect this market will continue to provide growth prospects for RVR as microwave transport spend for 4G and 5G networks remains healthy. Rvr was recently highlighted by three Tier one customers, global MTN and Bharti Airtel recognized RVR as a key partner in their annual supplier evaluation award cycle. We view these nominations as proof of the value and superior performance that RVR offers and look forward to working closely with the three 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 made of the forecasted decline in operator spending. According to Dell'Oro. Worldwide brand revenues are projected to remain approximately flat. We are undeterred. We believe we can grow in this environment for three 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 one operators spread fairly evenly across Africa Asia-Pac, India, Latin America and the US. We are protected from a slowdown in any one country or region. Investor sentiment is largely driven by the U.S. Tier ones of which we have exposure to only one. There is our confidence in our ability to take share. As we mentioned, we believe RVR as 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 IVR portfolio, we have a strong value proposition for network migration on top of our product offerings, we remain optimistic on the wallet share gain opportunities in many regions. This will ultimately drive a share expansion for Onvia.
Moving to the rural broadband business, albeit at a record amount of sales in the first half of fiscal year 2024 in the obvious 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 Argos or 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 to broadband equity access and deployment program or bead will begin to impact RVR 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 B program and the enhanced Alternative Connect America cost model program for enhanced A-CAM with the concern that obviously customers may be excluded from receiving the funding. We do not believe that this will be an issue among all the odd customers, and we look forward to supporting them in their feed related activities. With that, I will turn it over to David to review our financials before coming back for some final comments. David?

David Gray

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 six months of fiscal 20 for North America is up 6% versus the prior year. Bookings remain. International revenue was $43.7 million for the quarter, an increase of $5.1 million or 13.1% in the same period last year. Growth in Latin America and Asia Pacific regions more than offset currency headwinds for local services and Africa and the large initial Bharti Airtel shipments in the second quarter of last year. Our trailing 12 months book-to-bill ratio remained above one 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 product 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 investments.
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 loss 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 acquisitions, 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 invest. 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 position 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 liability. 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 yet used $330,000 to repurchase just over 11,000 shares of our stock at an average price of $29.59 per share. With that, I'll turn it back to Pete for some final comments.

Peter Smith

The bank's stated before opening for Q&A, I will provide updates on our guidance inclusive of the supply business. We are raising our fiscal year 2024 guidance as follows revenue to be in the range of 425 to 4 and 32 million and adjusted EBITDA to be in the range of 51 to 56 million. This updated guidance reflects contribution from the acquired PASOLINK business, the remainder of the fiscal year. We anticipate that the revenue from the counseling business will continue to ramp up over the next four quarters to reach annual contribution levels of 140 million. We are raising our adjusted EBITDA guidance unchanged, even though we anticipate slight dilution from the counseling business in the remainder of the fiscal year 2024. This is a result of the confidence we have in the core of the U.S. business profitability and the benefits of the RVR operating model. You can reference Slide 19 in our investor presentation for an outline of how we see the parceling 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 penciling to be accretive by the fourth quarter of ownership. We would now like to update our outlook for the deal to be accretive by the third quarter after close, specifically the July to September 2020 fourth quarter. This is a sign of our confidence in the work that we have done thus far and our line of sight to improved 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.

Question and Answer Session

Operator

(Operator Instructions) Theodore O'Neill, Litchfield Hills Research.

Theodore O’Neill

Thank you very much and congratulations on a good quarter. Thanks of. So Peter, I was wondering if you could give us all your viewpoint on the first 30 days of ownership with the NEC business and how that's going?

Peter Smith

Theo, I think David will take that that question because it will give a little bit of financial color. So David, go.

David Gray

Okay, thanks, Theo. So we're really encouraged by the progress we've made so far on the integration. We are planning in the interim phase. You allowed us to quickly take cost out of the combined business on day one as well as introduce the obvious 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 only had real operational ownership of the business for about a week during the quarter. And the reason for that, obviously, when we first closed, we had to do physical counts of inventory transfers as well as IT systems and data migration. And then once we got things up and running, we have 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 we had very limited sample of activity in the quarter, we think would likely lead to extrapolation years 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 will go ahead and disclose our RVR 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 contracts, did we reported at the end of fiscal 2023 that our backlog was up 18% versus the prior year. So in that six month interim period, we've increased the cash increase from 18% to 24%. And I think that's all very indicative of a very healthy core business.

Theodore O’Neill

Okay. And I'm just I'm just a little interested here in the adjusted EBITDA guidance since Slide 6 shows that PASOLINK has a zero contribution to EBITDA. If I'm reading this right and keeping the guidance the same implies that there's some good, really good stuff going on with the core RV business. Can you comment on that?

Peter Smith

Yes, we agree. Yes, we would agree. If we are in the absence of the parceling transaction, we would be raising the bomb where we would be raising the core power profitability guidance range so what I would say is stay tuned on that as we execute on. Perhaps there will be an update on that later in the year.

Theodore O’Neill

Okay. And one more question here. On slide 5, you talked about expecting a $140 million contribution from PASOLINK. And I'm assuming that since you have salespeople on both sides that have to learn new products that that's going to ramp more or less linearly throughout the next four quarters, if I got that, is that about right?

Peter Smith

I would say progressively. So we expect our low revenue quarter to be the quarter we're in and will move progressively up over the next four quarters. And the way we see it all we see 140 million of revenue. And we want to be conservative in saying that we will stepwise go up on that one 40 as we progress, but we are actively working to shorten lead times that are end-to-end cycle time with the PASOLINK business. So So what we'd like to do is we're committed to 140 million.
We'd like to say that we will progressively incrementally move up as we go through the four quarters.
But as we bring the passenger business into our VRV, our operating system, we may modify the way that 140 million will play out before for Accuray. The way we haven't modeled in the way we would ask the investor base to model it is model and as a progressive step off for now.

Theodore O’Neill

Okay, thanks very much.

Operator

Scott Searle, Roth MKM.

Scott Searle

Good afternoon. Thanks for taking the questions and congratulations on the record numbers for the bank. Maybe just to quickly follow-up on a prior question related to PASOLINK. I just want to clarify here are we're going to ramp up to $140 million for the year. So we're exiting four quarters from now on 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 energy front?
And then just to follow up on the cash flow front on that front, it sounds like I think you said 35 million of incremental inventory. Now 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?

Peter Smith

So David will take the cash flow side.

David Gray

Hey, Scott. From a cash flow perspective, we expect NEC will be positively impact cash in the near term and by the near term, I mean, the next couple of quarters, right? So we acquired over 50 million in ARR with only $12 million in accounts payable. So So as that is collected and paid out, that should generate cash. And 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 and we'll be able to generate the core business of the PASOLINK business will generate modest cash or generate modestly positive cash flow. But then we have the inventory of that reduction that that provides substantial upside to it as we work to reduce those inventory levels to our targeted about a third of what we currently got.

Scott Searle

Oh, no, just and just that $140 million run rate, I just want to clarify that. That is what you expect contribution from NEC over the next four quarters, $140 million ramping from a smaller number to a larger number as we exit that Q4. Is that correct?

David Gray

That's correct.

Scott Searle

Okay, if I could follow up, Dave, on the gross margins was a great quarter. It sounds like there was some some software benefits in there. I think there's also some new product mix that you called out as well, 11 Giga hurts.
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 that trajectory still continues to be on an upward basis on EBITDA, I guess we're going to have the first quarter of a full NEC contribution in March. How should we be thinking about gross margin?

David Gray

Yes. 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 margins to persist in the near term on the core, and 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 that with Astrolink that 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 it drive synergies thereafter, which will which will drive the excellent gross margins for the North and mitigate any dilutionary effect of that, that would be very helpful.

Scott Searle

Lastly, if I could, Pete, just to follow up on your comments on North America, 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 our book. And if I could follow up on the beat commentary as well. We've seen some commentary from Calix and others talking about a little bit of a pause, not just related to A-CAM, 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 big awards starting to happen in mid to late 2024? Thanks.

Peter Smith

Yes. So first, we never thought it was going to impact calendar year 24 so, you know, in our script, we basically said we think bead is still on track. We we really believed it was going to have an impact, say, a year from now So that's part one. And part two, I think a rational economic started is starting to prevail, right? The whole idea of bead is to connect and connect the unconnected or under connected Americans and for certain deployments in less dense areas, suburbs and rural, all developments by wireless makes more sense. And so we think that the the the oversubscription to fiber is starting to rationalize, and we think that the opportunity for wireless will be will be improved.
And what I would also want to talk a little bit more about is the the six gigahertz frequency. It was that's been delayed from the summer of 2023 bond. Now the FCC saying that that should have it on March eighth, and we think that that down when that when that comes into that unlicensed broadband service really comes in, it will pave the way for more microwave backhaul. And we think that's going to have a positive effect on both our golf and the feed appropriations that we'll dose.
Maybe more than you bought it for in your question, Scott, then there was perfect.

Scott Searle

Thanks. I'll get back in queue.

Operator

Erik Suppiger, JMP Securities.

Erik Suppiger

Yes, thanks for taking my question. And congrats on. First off, can you explain why the why the past PASOLINK revenue ramps up? What are the dynamics that are at play that start off small and then pickup and can you give us some some context in terms of how we should anticipate that contribution in the March quarter?

Peter Smith

So so the reason why you are focused on a ramp up is because we want to where the business is nearer to us and we wanted to make sure we set expectations and build into it. So it's not by any as far as 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 you know, the factory, our order management system, our deliveries. So that's the way we want to deal with it. And then, David, do you want to answer that be about the range of five for to for the next quarter's revenue?
Yes, I think the range for next quarter's revenue should be thought of in the mid 20s kind of a range. Like Pete said, though, there will be a ramp up here, Tom, and we're I'm 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 reduced.
While we're on this, as Scott asked about the ramp you asked, whether the RAB, so let's get out the FY 25, the revenue range for modeling purposes, ought to be up five, 15 to five 20 for FY 20. I have sort of right. And just for everybody who's on the call, we're on a July first through June 30th a cycle.

Erik Suppiger

That's great. And then last question, you didn't talk about combining the products so long as your longer-term roadmap, Paolo, on what is the timeframe in terms of getting getting the products combined.

Peter Smith

But I would say that that's in after year two in the 3rd year of ownership, we can start to see the convergence of hardware and we all in the prepared remarks, we talked a lot about software and the the parceling customers are eager to migrate to the DR ambiance, the network management software. So that's our first priority and we would hold that one in all year, one year 1.5, we will start to be able to deliver that software to the historical NEC customer base and then in your post year 24 months, we can start to see the convergence of hardware.
Great.
Okay. Thank you.

Operator

Jaeson Schmidt, Lake Street.

Jaeson Schmidt

Yes, thanks for taking my questions. 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 RBM business or the PASOLINK business getting margins lifted quicker than expected? And any color there would be helpful.

Theodore O’Neill

Yes. So the 34% to 37% was a combined number, right? So it's going to be we're assuming that the the PASOLINK business is going to be around 30% for this fiscal year and just doing the math, I would that would indicate that the core RBR margins are going to be in the 37% range or so. And so we feel pretty good about that. And then we've got a pretty solid synergy roadmap, too, improve our cost structure there and get the PASOLINK margins moving moving north here in the not-too-distant future.

Jaeson Schmidt

Got you. 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 now would be every place other than in the U.S., particularly with the Tier one customers that came over and from from NEC to IVR and needed. So that would be part one. And then part two is we are we're very excited about Indonesia. And the reason we're excited about Indonesia, and that was really smart friend, was it represented. So we we think that Indonesia is right for private networks due to an industrialized nature nation that has lots of microwave, but there's five Indonesia telecom operators typically deliver the private network services. And this is what the smart friend press releases about where we can go into Tier ones in emerging economies and bring the RVR of private network, our offering and deliver to say mining oil and gas public safety customers where they had principally been riding on the but the carriers of BakBone and the number one geography for that kind of application is Indonesia.
So 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.

Peter Smith

Okay.

Jaeson Schmidt

That's really helpful. And then just last one for me and I'll jump back in you had the India rollout. Do you still expect that to happen here in the March quarter and then ramp again in June?

So I think we were pretty confident that will happen sometime between March one and June 30th. So there is the quarterly timing on that a full. So that's what I would say, Jason, you know, and I know Doug can drive a little bit of lumpiness between the March and the June quarter. The good news is we're profits were induced in the India customer base and were so were conservative with respect to our timing. So for modeling purposes, put it put it in in the June quarter, but it could happen in the March quarter.

Jaeson Schmidt

Okay, that makes sense.

Peter Smith

Thanks a lot, guys.

Operator

Thank you. One moment please for our next question. Our next question comes from the line of Dave King with B. Riley.

Peter Smith

Okay, thank you. Good afternoon.

Theodore O’Neill

Now going back to Indonesia, so once it gets going, I mean, how big can it get?

David Gray

Can you become like maybe 10%, maybe high single digits, so high single digits, definitely 10%.

Theodore O’Neill

We'll see but we don't we don't get I'm not anticipating that at this point.

High single digits is the right answer, I think.

Theodore O’Neill

Fair enough. Got it. And then I'm equally I'm on India, how big can they get?

Al, we would say a little bit in Indonesia, a little bit lower than Indonesia.

David Gray

Okay. Got it.

Theodore O’Neill

And then what about margins from Indonesia and India as well. I mean, I think in the below, I assume you're going to be below corporate average.

Yes.

So what we do we've said before is below corporate average, but as weaker volume. We think that we can do far we can take cost out on the grow book. The Indonesia business is being driven by the power sourcing product, which is below corporate average. And so I would say for now that's the way to think about it. But, you know, we've said that we would get the passenger margin 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 for our from our vantage point today, and I'll ask the same question in a couple of quarters and hopefully I'll be able to give you a more favorable answer to Got it.

Theodore O’Neill

And my last question is can you just talk about the pricing environment? Any changes up or down on stable income?

Peter Smith

Yes, stable, stable.

Theodore O’Neill

Got it.

Right.

Theodore O’Neill

Thank you.

Operator

Tim Savageaux, Northland Capital Markets.

Erik Suppiger

Good afternoon, and congrats on the congrats on closing the deal, Tom, let's see where to begin here on the backlog commentary. And while I appreciate the growth metric, I got a few more questions on that, which is, I think you gave us at last fiscal year end associated with that 18% growth with a backlog of $289 million. Given your book-to-bill commentary in the interim or I assume that's higher.
Well, I would love to get as much specifics as I can. I assume were reasonably of the 300 million, but do you have any color commentary on that I think the care your math there back of the envelope is reasonable as far as I said, north of 300.

Yes.

Erik Suppiger

Yes, Jim, we don't have the math broken out in front of us, but it's pretty simple math you have no 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 one. But in that context, you seem to be and you typically see seasonal declines in revenues in Q1. Given your kind of implicit parceling guide, you seem to be guiding to that again, just sort of typical carrier spending behavior in certain quarters or no, what are you seeing in terms of typical seasonality? Can you march down June up sounds like India could help that, but.

Theodore O’Neill

Yes, and just to clarify, you're talking about calendar Q1, our Q3 rate?

Erik Suppiger

Yes, that is correct.

Peter Smith

Sorry, you don't feature I think for me the wrong way to do it.
We would agree with your statement, Tim, with that. So we we hope to do better, but we need to we need to own the parceling business a little bit longer to understand the seasonality. And, you know, we're hopeful that shortening the cycle time working the inventory down will will lead to faster delivery of products faster revenue ramps. So I think with where we're at right now, we want to 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 are we to 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.

Erik Suppiger

I'll take that and given today, okay, will it? I think we might be mixing up albeit standalone seasonality in March and parcel link 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, it's a pretty solid growth this year or 7%, something like that.
Yes, um, and you look to be guiding it flat next year, which is it's a little a little Well, wait a minute. Please speak, which is a little bit distant from where some of the bookings and backlog and commentary that we see now that assumes that possibly gets to a full one 40 or 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.

Peter Smith

Yes. So for we typically guide the next fiscal year in August and for where we're at now, we want to be conservative and I wouldn't read you're right. We came out with the backlog statements. We think the core is healthy and so on. I don't know what the what the analysts have said to me if we don't give a number and you'll 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, right.

Erik Suppiger

And I don't know if that was a hard time just doing a little math here, but I heard you couple more quick ones. And so obviously the gross margins were surprisingly strong, especially given the international mix you cited. A couple of factors that are also very strong appear to be in A-Pac might have been Lat Am 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 a high end of the range gross margins with that degree of international mix?

Theodore O’Neill

Yes. Like I said, I think if you look at the regions where the region where the software was most beneficial, it was in A-Pac. And then also in the Americas, Pete mentioned the record store revenues in the first half. That also is margin accretive and as well as you know, we had some and favorable or easing material input costs. So that provides us a bit of a tailwind to us. I'd have to ask as well. So all those factors combined really kind of a couple of events. But again, we can be a little bit lumpy. But so I think our full year guidance is Yes, Alex.

Erik Suppiger

Okay. Tom, and last one for me. As you noted, RNG, we were up pretty sharply here in the quarter and I assume that's still stand alone or does that include anything from NEC given when you closed in on the one hand on the other, when you talk about incremental spend in R&D from that elevated baseline or some other baseline things.

Theodore O’Neill

And so the R&D does include a month worth of that and you see additional costs that are up contractually, we've spelled out with them and then we were up on just an organic basis as well. That's a planned increase as well. I've worked to develop the product roadmap, so seamless 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 it's not overspending in any way, it's rationally thought out and this is what we had planned.

Peter Smith

Okay.

Erik Suppiger

Fair enough, but it sounds like maybe something a little over the Q. one 24 expense baseline, yes.
Would be relevant for your incremental guide and then Q2 per se, since it's a stub that you have found that our Okay, very fair. Correct.

Peter Smith

Great.

Erik Suppiger

Thanks very much.

Thank you.

Operator

Thank you. I would now like to hand the call back over to CEO Pete Smith for any closing remarks.

Peter Smith

Thanks, everyone, for joining, and we look forward to updating you on our continued progress in about 90 days. Be safe.

Operator

Talk soon Thank you for participating, and this does conclude today's program, and you may now disconnect.