Aviat Networks Q2 Shows Cash Progress, Governance Risks Persist

What happened

Aviat Networks reported better-than-expected Q2/FY2026 results, with sales and profitability ahead of consensus and a sharp decline in net debt to $19.5 million, driven by stellar cash generation and record bookings. This addresses the DeepValue report's concern over rising leverage, but the report highlights unresolved material weaknesses in revenue recognition controls and an ongoing fraud investigation that undermine financial reliability. Management projects strong cash flow to continue through FY26, yet this optimism contrasts with the report's caution over volatile working capital and elevated governance risk. The quarter's operational improvements suggest some execution on guidance, but the premium valuation at 18x EV/EBITDA assumes sustained cash conversion and remediation of control issues. Investors must balance these short-term wins against the backdrop of persistent internal control deficiencies and potential cash flow volatility.

Implication

The net debt decline to $19.5 million alleviates balance sheet pressure, supporting a re-rating if sustained. Strong Q2 bookings enhance near-term revenue visibility, aligning with FY26 guidance. However, the DeepValue report's focus on material weaknesses and fraud investigation means any cash flow gains could be offset by restatement or enforcement risks. With the stock trading at a premium multiple, missteps on margins or controls could trigger sharp declines due to thin liquidity. A prudent stance is to monitor upcoming filings for cash flow consistency and control remediation before adjusting positions.

Thesis delta

The DeepValue report's bearish thesis on leverage is moderately alleviated by the net debt reduction, shifting towards a less negative view on balance sheet health. However, the core concerns over governance and cash flow volatility remain unchanged, as the article's positive spin does not address material weaknesses or fraud investigation risks. Thus, the thesis shifts only incrementally, maintaining a cautious outlook until more durable improvements are demonstrated.