Aviat Networks - Earnings Call - Q3 2025

Executive Summary

• Aviat delivered Q3 FY25 revenue of $112.640M, up 1.6% YoY and ahead of S&P Global consensus $104.831M by ~7.5%; non-GAAP EPS was $0.88 vs $0.284 consensus, a major beat, and adjusted EBITDA set a quarterly record at $14.879M, driven by software mix and OpEx discipline. Estimates from S&P Global noted with asterisk below.*
• Management maintained FY25 guidance (revenue $430–$470M; adjusted EBITDA $30–$40M) and said Q4 should approximate current Street consensus given macro/tariff uncertainty, avoiding raising expectations near-term.
• Mix supported gross margin improvement YoY (GAAP 34.9%, non-GAAP 35.8%), aided by Pasolink software and Aprisa contribution; North America strength offset softer international timing comps (APAC).
• Tariff exposure is being mitigated with inventory, supply-base actions, and potential pass-through; management frames near-term gross margin pressure but “EPS neutral,” and sees possible U.S.-footprint share gains over ~12 months as a positive offset.

What Went Well and What Went Wrong

• What Went Well

  • Record adjusted EBITDA ($14.879M) on strong margins and cost control; non-GAAP EPS up 13% YoY to $0.88.
  • Software traction: initial ProVision Plus sales to Pasolink customers; management cites software mix supporting margins.
  • OpEx discipline: non-GAAP OpEx down YoY; OpEx ~24% of sales, the lowest in 2+ years; cost pruning and NEC TSA roll-off helping.

• What Went Wrong

  • International revenues -4.8% YoY on timing of MNO capex (APAC tough comp), partially offsetting North America growth.
  • Tariffs present near-term gross margin headwinds (2–2.5% of COGS upper bound) before mitigation; Q4 gross margin unlikely to “accelerate” vs Q3.
  • U.S. Tier 1 remains “between projects,” with management looking for an uptick a couple of quarters after perceived capex bottom; Africa constrained by currencies until rates moderate.

Transcript

Operator (participant)

Good afternoon. Welcome to Aviat Networks' Third Quarter Fiscal 2025 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to your host, Mr. Andrew Fredrickson, Director of Investor Relations. Thank you. You may now begin.

Andrew Fredrickson (Director of Investor Relations)

Thank you, and welcome to Aviat Networks' Third Quarter Fiscal 2025 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 opening remarks on the company's fiscal quarter, followed by Michael Connaway, 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 fiscal guidance, 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 expressed or implied on this call can be found in our most recent annual report on Form 10-K filed with the SEC. The company undertakes no obligations to revise or make public any revisions 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.

Pete Smith (President and CEO)

Thanks, Andrew, and good afternoon, everyone. Let's review the highlights from the third quarter. Total revenue of $112.6 million. Non-GAAP gross margin of 35.8%. Record adjusted EBITDA of $14.9 million, up 17% versus the year-ago period. Non-GAAP EPS of $0.88, up 13% year-over-year. These results were possible thanks to Aviat's disciplined operating model and the hard work and commitment from the entire Aviat team. With our second consecutive quarter of record quarterly adjusted EBITDA, we see the work of our strategy to grow the scale of Aviat taking hold. Let's briefly discuss our end markets. Looking at our mobile service provider market, we had another good quarter. Products and services related to Pasalink were in line with our long-term expectations for the business. Software volumes were good, assisting with our improved gross margins year-over-year. In a previous earnings call, we announced the launch of our ProVision Plus software for Pasalink.

We are happy to report initial sales of ProVision Plus to Pasalink customers during the third quarter. The successful effort to sell ProVision Plus shows the significant progress we have made servicing our tier one and larger mobile service provider customers that joined from the Pasalink acquisition. In private networks, Aviat continues to maintain its share of demand in North America and expand the sales funnel internationally. In public safety, we've built and shipped additional phases of our recently won statewide network project. In the utility space, we're making progress cross-selling our offering of Apriza access radios and routers alongside microwave backhaul, and are excited about the sales funnel developing with these customers. Based on investor inquiries, I would like to add that we have not seen any cancellations to date with our U.S. federal government customers as a result of spending reduction efforts.

We attribute this to the mission-critical nature of our deployments. Regarding tariffs and the impact to Aviat, our team has been working diligently to mitigate the impact to our business and customers. We have deployed the playbook we used to successfully navigate the COVID supply chain crisis. In addition, our manufacturing partners have footprints that will permit optimization when the tariff landscape settles. Anticipating the tariffs, we ramped up our inventory purchases. For the vast majority of the hardware we sell in the U.S., it is assembled in the U.S. We believe Aviat has the largest operational U.S. footprint in the microwave space. During the quarter, we had strategic discussions with three U.S.-headquartered Fortune 500 companies focused on doing more in the U.S. This may be a positive catalyst in approximately 12 months.

Nonetheless, much of the tariff headline is focused on costs, and we do utilize components and contract manufacturing from international sources. We are working alongside our contract manufacturer and suppliers to adjust sourcing locations as available, but we expect exposure over the next couple of quarters. Our goal with the tariff impact to our business will be to be margin-neutral through productivity, sourcing, manufacturing footprint, and price. I would now like to turn the call over to Michael to review the financial results of the quarter before coming back for some closing remarks.

Michael Connaway (CFO)

Thank you very much, Pete, and good afternoon, everyone. I'll review some of the key fiscal 2025 third quarter results. Please note that our detailed financials can be found in our press release, and all comparisons discussed are between the third quarter of fiscal year 2025 and the third quarter of fiscal year 2024, unless otherwise noted. For the third quarter, we reported total revenues of $112.6 million, as compared with $110.8 million for the same period last year, an increase of $1.8 million, or 1.6% year-over-year. North America, which comprised 44% of our total revenues for the quarter, was $49.4 million, an increase of $5 million, or 11% from the same period last year, due to growth in private networks. International revenues were $63.2 million for the quarter, a decrease of $3.2 million, or 5% from the same period last year.

This was driven by a difficult year-over-year comparable, with APAC recording its best quarter on record in the Q3 fiscal 2024 period. Our trailing 12-month book-to-bill was over 1 in the quarter. Gross margins in 3Q were 34.9% on a GAAP basis and 35.8% on a non-GAAP basis. This compares to 32.5% GAAP and 35.1% non-GAAP in the prior year. Gross margins improved thanks to regional mix and software mix in the quarter. Third quarter GAAP operating expenses were $30 million, down versus $30.4 million in the year-ago period. Non-GAAP operating expenses, which exclude the impact of restructuring charges, share-based compensation, and deal costs, were $27.2 million, a decrease of $0.2 million versus the prior year. This decrease is due to disciplined cost management and increased efficiencies at Aviat. Third quarter operating income was $9.3 million on a GAAP basis and $13 million on a non-GAAP basis.

This compares to $5.7 million GAAP and $11.4 million non-GAAP in the year-ago period. The third quarter tax provision was $1.1 million, representing an effective tax rate of 24%. As a reminder, the company has approximately $450 million of net operating losses, or NOLs, that will continue to generate shareholder value via minimal cash tax payments for the foreseeable future. Third quarter GAAP net income was $3.5 million, and non-GAAP net income, which excludes restructuring charges, share-based compensation, M&A-related and other non-recurring expenses, and the non-cash tax provision, was $11.3 million. Third quarter non-GAAP earnings per share came in at $0.88 on a fully diluted basis, up by $0.10, or 12.8% versus the year-ago period. Adjusted EBITDA for the third quarter was $14.9 million, or 13.2% of revenues, an increase of $2.2 million, or 17.3% versus last year.

This is another quarterly record of adjusted EBITDA for Aviat and our second consecutive quarter of hitting this milestone. Moving on to the balance sheet, our cash and marketable securities at the end of the third quarter were $49.4 million. Our outstanding debt was $73.9 million, bringing our net debt position to $24.5 million. With that, I'll turn it back to Pete for some final comments. Pete.

Pete Smith (President and CEO)

Thanks, Michael. We are pleased with the results from this quarter and believe we are on the right track to delivering a good end to fiscal year 2025. In regards to guidance, we believe that Aviat will deliver results for fiscal year 2025 within the range of annual guidance previously provided. We expect to approximate the current full-year consensus estimate on revenue and EBITDA. Over the last five years, we have most frequently issued guidance for the fiscal year in August. Given the nature of the macro environment and tariffs, we will maintain this practice. With that, operator, let's open up for questions.

Operator (participant)

Thank you. As a reminder, to ask a question, you will need to press star 11 and wait for your name to be announced. Please stand by while we compile the Q&A roster. The first question comes from the line of Jason Schmidt of Lake Street. Jason, please go ahead.

Jaeson Schmidt (Director of Research)

Hi, guys. Thanks for taking my questions, and congrats on the strong results. Pete, just want to start with guidance. I mean, I know you're maintaining that $430-$470 range. Just curious what the swing factor you think is to sort of that high end versus the low end.

Pete Smith (President and CEO)

Yeah, I think we also confirmed the consensus, so that's where I think we should be. I think there's possibilities for some pull-ins to avoid tariffs. We have the inventory. One of the questions that we got along the way during the quarter was, "What about push-ins and pull-outs?" I would say we probably had one or two pull-ins and push-outs, but you could imagine that there could be more to beat the tariffs in this quarter than previous quarters. That would swing us up. What we're most comfortable with is guiding on an annual basis and sticking to it as we try and improve our performance to street expectations.

Jaeson Schmidt (Director of Research)

Okay. No, that makes sense. I know you're not baking in sort of any significant contribution from the U.S. tier one market, but just curious what you're currently seeing there and if you think we've reached the bottom.

Pete Smith (President and CEO)

Yeah, I would say that the U.S. tier one CapEx cycle is probably bottomed with respect to us. When you read the U.S. tier one capital spending, what I would remind everyone is the capital spending typically goes fiber first, and then as you move away from urban centers, you're more likely to use microwave in the suburbs and in rural deployments. As CapEx has bottomed and stabilized, I would say the lag period is about six months. As the bottom, what we think is the bottom in CapEx is in, we would expect a couple of quarters an uptick in demand.

Jaeson Schmidt (Director of Research)

Gotcha. That's helpful. Just the last one from me, and I'll jump back into Q. Michael, looking at gross margin, obviously early strong in March, can you build upon that here in June? Or just given the mix you had in March, would we expect it to take a step back?

Michael Connaway (CFO)

Yeah, no. Yeah, look, maybe I'll just talk about the results first because you're right. Gross profits were a good story in the quarter, for sure, building on even Q2 results. Q3 was even better. Really, two reasons for that, both M&A-related. Pasalink is now in the comp in Q3 on a year-on-year basis. We've made some good improvements as we've integrated that business into Aviat. We're seeing the gross margin uplift on a year-over-year basis from that. The Apriza business as well, which was a Q1 2025 transaction, mixes us up. As it relates to Q4, just a couple of thoughts. Number one, we'll probably get into tariffs, so I'll save some of the remarks for when we may get asked about that. As it relates to the macro uncertainty, that's a part of it in Q4.

We had a really strong software quarter in Q3, which we built upon a nice software quarter in revenues in Q2 as well. That probably will not persist to the Q3 levels in Q4. Those are the two reasons why we do not see acceleration in gross margins in Q4. We were, as Pete alluded to, guiding to the consensus. We are a little bit more conservative given the macro.

Jaeson Schmidt (Director of Research)

Okay. Perfect. Appreciate the color. Thanks, guys.

Operator (participant)

One moment for your next question. The next question comes from the line of Scott Searle of ROTH Capital Partners. Scott, please go ahead.

Scott Searle (Managing Director and Senior Research Analyst)

Hey, good afternoon. Thanks for taking the questions. Great job on the quarter. Hey, Pete, maybe just to jump in on North America, down a little bit sequentially, yet gross margins stayed pretty good there. I guess Mike answered that a little bit, but wondering if there's anything in particular going on there, kind of what the outlook you're seeing for North America, and maybe fold that into Mike's comments about gross margins and tariffs. Can you kind of quantify what you think the impact is, what we should be thinking about, whether it's June or as we start to get into fiscal 2026, the impact of the headwinds?

Pete Smith (President and CEO)

Yeah. I think Michael can talk about the tariffs. I thought the quarter had the North American quarter, we had good private network business. If you roll back the clock, we are between projects with a U.S. tier one, and that is what showed up in the revenue. What I often say to investors is a good proxy for the U.S. private network business is to look at MSI's report. They would just say that the demand environment for public safety is very good. We would say the same. Utilities, which is our second biggest application in private networks, has been historically underinvested, and things like video and grid security are driving demand. We feel good about those. We are in between projects on U.S. tier one, and we are hopeful that the next project will kick in.

The question that was asked previously about the demand cycle in tier ones, we would say the CapEx bottom is in, and we're a couple of quarters from that rolling through to microwave demand.

Michael Connaway (CFO)

Yeah. Just as it relates to tariffs, because Pete mentioned part of it in his prepared remarks, what I found after being in the chair for roughly a year is some of what we're doing now springs from the playbook of how Aviat managed through COVID. One of the things we did that we talked about was we brought in some more inventory in anticipation of potential tariff regime changes. In terms of the effects, in order to put an illustrative upper bound on the exposure, we think in the near term, it could be as high as roughly somewhere between 2-2.5% of our COGS. As of this very moment, we're working hard with our supply base to minimize those effects. At the same time, we're committed to passing on to our customer base only what we can't mitigate ourselves.

Linking it back to gross margins in the immediate term, this may cause a little bit of gross margin rate pressure for owners, but we do not anticipate any per-share earnings leakage. Widening the aperture, though, over the long term, thinking about treating all our constituents as fairly as possible and like partners, we think will compound to longer-term benefits to owners. That is what we are doing on tariffs and a little bit of the spin through the P&L and how it may affect.

Scott Searle (Managing Director and Senior Research Analyst)

If I could just sneak in just a—go ahead, Pete.

Pete Smith (President and CEO)

Go ahead, Scott.

Scott Searle (Managing Director and Senior Research Analyst)

No, I was just going to ask Pete, in terms of just to follow up on pull-ins, right? It sounds like you haven't seen them yet, but just want to clarify that you haven't seen them, particularly looking at the North American numbers. That's where I think it would show up. If I could just throw in a last one, there had been some talk about potential opportunities with a large tier one in MDUs. I'm wondering if you could give us any updates or thoughts on progress on that front. Thanks.

Pete Smith (President and CEO)

All right. Pull-ins and push-outs were normal. I think if we were to put a quantify, I think we had two pull-ins and two push-outs in the quarter, and that's less than the normal in terms of project movements. It's a fair hypothesis to think that there could be more in this quarter to beat the tariffs. I would also say with respect to the tariffs, we performed well through COVID. We're reusing the appropriate part of the playbook. We recently exited Fukushima and put the Pasalink business into our CM. That builds the proper processes. As the tariff landscape settles, we think we have the skill to move our product manufacturing from one site to another, and we'll be able to probably in a couple of quarters find the low-cost tariff solution. Your last question, I believe, is around MDUs.

I'm going to maybe be a little bit long-winded. The MDU is part of a trend for fixed wireless access for apartment buildings, and it's an example for data needs driving networks. It pushes capacity demands to the edge of the network. It creates an opportunity for Aviat technology to be used in applications outside of the traditional backhaul space and specifically high-growth fixed wireless access. This trend could start with apartment building or some other category. Nonetheless, some of the technology limitations with the contemplated architectures favor Aviat technology. A lot of investors have called about a specific tier one customer who recently said that they've launched an MDU solution in more than 15 markets. That was a public disclosure. What we would say, from Aviat's perspective, is in general, the more MDU connections, especially with wireless access, are good for future backhaul needs.

We don't want to comment on others' public disclosures. Further, some super sleuthing Aviat investors have gone out in the field and saw some Aviat gear. We want to acknowledge that. It is not deniable. Aviat, in conjunction with Intercom, have launched a 28 GHz and 39 GHz hardware platform that will serve the fixed wireless access space. We also have Aviat software and services to go along with the hardware. We are excited about fixed wireless access. Given disclosure constraints, I think this is the appropriate place to stop. Thanks for the question, Scott.

Scott Searle (Managing Director and Senior Research Analyst)

Thanks. I'll get back into Q.

Operator (participant)

One moment for your next question. The next question comes from the line of Theodore O'Neill of Litchfield Hills Research. Theodore, please go ahead.

Theodore O'Neill (Research Analyst)

Thanks very much. Congratulations on the strong quarter. My first question is about OPEX, being able to hold it flat year over year. I mean, we're looking at the numbers here. It looks like R&D is the reason for it. Could you give us a little background on what's happening there and whether you expect to continue holding OPEX?

Michael Connaway (CFO)

Yeah, no. Our OPEX performance was certainly a bright spot for us in the quarter. It is something that we have really worked hard on since I joined, in particular. We messaged that the second half of 2025 would be lower versus the first half in OPEX because we were rolling off of the transitional service agreement with NEC. Theo, to your point, in particular, even on a year-over-year basis, it is in our R&D spending bucket. That is what you see specifically going on there. It is the TSA and then the DSA, the developmental services agreement with NEC. Kind of moving on and zooming out a little bit, the other important thing that we did in the first part of 2025 was we took the opportunity to prune some additional costs out of the business.

We're also seeing that bear fruit now in an even better OPEX performance in Q3 than we thought we could achieve in the back half of 2025 when we planned our year. You kind of hit it. It's down on a year-over-year basis a little bit. As a percentage of revenues, if you look at it in that context, OPEX was just a shade over 24% of sales, which is the lowest it's been in over two years. I mean, look, you hear a lot of businesses talk about being disciplined operational executors and whatnot, but where that actually starts at the root is espousing a low-cost mindset in everything a company does. The good thing is that's something Pete and I share as a common leadership characteristic. Good to see that playing through.

You asked if that's going to continue, and the one-word answer is yes.

Theodore O'Neill (Research Analyst)

Okay. Pete, in your prepared remarks, you mentioned you're having strategic communication with U.S. customers about doing more business with U.S. suppliers. Is that something that would be incremental to sales driven by the tariffs?

Pete Smith (President and CEO)

I wouldn't say let's put it in the model, but it's a possibility that didn't exist in the pre-tariff environment. That's why I said that it would take maybe 12 months to materialize. Some of our larger customers are thinking, and we believe we have the largest operational footprint with respect to U.S. microwave assets. If the tariff environment is going to persist, this could be something that is beneficial to Aviat. While we struggle to model what the cost of the tariffs might be in a changing environment, I want it to be balanced and say, if tariffs persist, then given our footprint, there's going to be possibilities to land U.S.-oriented business as well.

Theodore O'Neill (Research Analyst)

It makes sense. Thanks very much.

Pete Smith (President and CEO)

Yep.

Operator (participant)

One moment for your next question. As a reminder, in order to ask a question, please press star 11 on your telephone and wait for your name to be announced. The next question comes from the line of Dave Kang of B. Riley. Dave, please go ahead.

Dave Kang (Senior Analyst)

Yes. Thank you. Good afternoon. Pete, regarding your outlook, if you strip out first three quarters, the midpoint looks to be around $130 million, $131 million. So that's about an $18 million-$19 million sequential increase. Just wondering if you can go over some of your assumptions on what will drive that $18 million-$19 million sequential uptick.

Michael Connaway (CFO)

Yeah. No, Dave, I wouldn't—the backwards math of taking out Q1 or kind of the arithmetic that you just verbalized—what we're guiding to is we think consensus on the year is the right spot for us. If you backwards math in revenues, for example, using the current consensus as the guide post on the year, you get to somewhere between $116 million-$120 million, roughly, in revenues. In the context of the quarter, that's kind of where we see it. The sequential build of $20 million that you get to by maybe just doing the average or stripping out Q1 is not really what we're guiding to in the context of the fourth quarter.

Dave Kang (Senior Analyst)

Got it. And then just a couple on the geography. First, so North America tier one did not sound like they did not really pick up. They were muted in 2Q and 3Q. Just wondering if you are seeing any activities out of those guys going into this quarter.

Pete Smith (President and CEO)

It's normal activity at the level between projects. We would say that we're working on landing a couple more projects. The tier one CapEx spend was really designed to say we think that ticks up in probably two quarters. That's what we would say.

Dave Kang (Senior Analyst)

Got it. Then similarly, Africa, that was kind of muted last quarter or 2Q. Just wondering what you saw out of those customers.

Michael Connaway (CFO)

Yeah. Nothing new or out of the ordinary. You alluded to it, and it's kind of a roughly flat environment.

Pete Smith (President and CEO)

Look, I think Africa is currency constrained. So the availability in Africa for dollars and euros is limiting that. In a lower interest rate environment, I think that would improve, and I do not think it is going to improve significantly until interest rates moderate.

Dave Kang (Senior Analyst)

Got it. Thank you.

Operator (participant)

One moment for your next question. The next question comes from the line of Tim Savageau of Northland Capital Markets. Tim, please go ahead.

Tim Savageau (Managing Director and Senior Research Analyst)

Thanks. Good afternoon, and congrats on the results. My first question is about seasonality, especially in the U.S. You seem to have followed that pattern here down in March. We've seen that the last couple of years. We've also seen a 20% plus—I do not know if that's seasonal or just coincidental, but I think it's seasonal—increase in the June quarter. I guess this year, is there anything that would lead you to conclude you might see something different? Are there some potential offsets on the international side to work against that? How do you see your outlook for U.S. revenues in the context of that seasonality?

Michael Connaway (CFO)

No. I mean, the guidance that we're sort of affirming at this point, Tim, is the consensus. If you back into what Q4 would be from a revenue standpoint, you get to a bit of a build versus Q3, yes, but not a 20% bump. As you alluded to, there have been years in the past where Q4 blows it out of the water versus Q3. For us, it's the uncertainty in the market as it relates to tariff and the broader macro was something that we wanted to make sure we aired on the conservative side. I wouldn't say, though, that there's some specific dampening element going on that we talk about specifically. That'd be my spin on it.

Pete Smith (President and CEO)

Yeah. So look, we're trying not to get talked into a higher consensus. Michael said that our bookings were—our book-to-bill was over one. The bookings in this quarter look good at the five weeks into the quarter. So we think the demand environment is good. We acknowledge that Africa is muted, probably due to interest rate. And we remain in between projects at the U.S. tier one. The Motorola stuff on public safety, we would agree with what has been published about Motorola's demand environment. I think that's a pretty wholesome set of remarks with respect to demand.

Tim Savageau (Managing Director and Senior Research Analyst)

Okay. Great. Pete, you mentioned several times now being between projects from a tier one standpoint. Just looking to get a little more color on that, I think at least maybe pre-Pasalink, you had Verizon threatening 10% of revenue here and again. I assume they're much lower now. What I'm trying to get a sense of is to the extent you're no longer between projects, what sort of impact that could have in the business from a revenue perspective of going back, whether it's more 5G or fixed wireless access. What could that look like from a business perspective?

Pete Smith (President and CEO)

Yeah. So just to comment on the customer concentration, we do not have any single customer over 6.5% of revenue. Let's say U.S. tier one kicked in, it could be top line lift anywhere from 2.5-5% of revenue.

Tim Savageau (Managing Director and Senior Research Analyst)

Thanks very much. Appreciate it.

Operator (participant)

One moment for your last question. The last question comes from the line of Rustam Kanga of Citizens. Rustam, please go ahead.

Rustam Kanga (VP of Research)

Great. Thanks. Thanks, guys. Thanks for taking the question. Nice suggested even outperformance. Just one on the tariffs. Michael, appreciate you providing the upper bound of 2-2.5% on COGS. Just sort of thinking about your comment about only passing on surcharges to customers that you could not mitigate yourselves. It sounds kind of like if the COVID playbook stakes out, then you would not need to do that. The upper bound on the surcharge would be that 2-2.5% to get you to margin neutral. Am I thinking about that correctly?

Michael Connaway (CFO)

Yeah. I mean, the arithmetic of it, you are. It is an intentional playbook for us: first, work back through the supply base as hard as possible to get offsets. Pete and I are driving—you kind of alluded to it—driving more potential longer-term manufacturing changes. The effect for us is ameliorated a little bit by an incumbent supply base in the U.S., which we think is the best in breed in our competitive space. We have a little bit of tailwind on it already. Only after we get through those mitigation effects do we then pass on the delta. I have seen this before, this level of movie and this level of uncertainty. You have to be really careful to treat all your partners exactly as such. You treat them like partners. That is what we intend to do.

I was really careful in my remarks and how I'm kind of broadcasting what we're going to do as it relates to tariffs, that it's earnings per share neutral. It may have a little bit of an effect on gross profit margin dampening in the near term. For owners, I think it's the right thing for us to do long term. Anyway, that's a little bit more just of our own point of view as we think about it at the company level, just for those interested. A little bit more detail on what we're doing to mitigate the cost side of it.

Rustam Kanga (VP of Research)

Super helpful, caller. Thanks, Michael.

Operator (participant)

This now includes the question-and-answer session. I would now like to turn it back to Pete Smith for closing remarks.

Pete Smith (President and CEO)

We'd like to thank everyone for joining and your interest in Aviat. We will talk to you again in another quarter. Thanks again. Bye.

Operator (participant)

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.