Comtech Telecommunications Corp (CMTL) 2003 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to Comtech Telecommunications corporation second quarter fiscal year 2003 earnings conference call.

At this time all participants are in a listen only mode.

Later we will conduct a questions and answers.

At this time if you have a question you will need to press the star and one on your push button phone.

As a reminder this conference is being recorded Wednesday, March 12, 2003.

I would now like to turn the conference over to Ms. Stephanie Palmer of Comtech Telecommunications.

Please go ahead, ma'am.

Thank you and good morning.

Welcome to Comtech Telecommunications conference call on results for the second quarter for fiscal year 2003.

With us on the call this morning are Fred Kornberg, President and Chief Executive Officer of Comtech and Robert Rouse, Chief Financial Officer.

A news release of the company's results was issued earlier this morning.

If you have not received a copy please call me and I will be happy to send you one.

Before we proceed I need to remind you of the company's Safe Harbor language in the following way.

Certain information presented in this call will include but not be limited to information relating to the future performance and financial condition of the company.

The plans and objectives of the company's management and the company's assumptions regarding such performance and plans are forward-looking in nature and involve certain significant risks and uncertainties.

Actual results could differ materially from such forward-looking information.

The company's form 10(Q) filed with the Securities and Exchange Commission identifies many of such risks and uncertainties which include the following, the company's ability to keep pace with rapid technological changes, our backlog being subject to customer cancellation or modification, our sales to the U.S.

Government being subject to funding, deployment and other risks, our fixed price contracts being subject to risk, the price contracts being subject to risk, the highly competitive nature of our market, our dependence on component availability, subcontractor availability and performance by key suppliers, our dependence on international sales and our mobile data communication business being in an early stage.

Additionally, these forward-looking statements are qualified in their entirety by cautionary statements contained in the company's Securities and Exchange Commission filings.

With that I am pleased to introduce the president of Comtech, Fred Kornberg.

Fred?

Thank you, Stephanie.

Good morning, everyone, and thank you for joining us today.

This morning we will be discussing our results for the second quarter of fiscal 2003.

As you can see from today's press release, our second quarter results were outstanding.

Sales increased by over 38% from $30.5 million in the prior year second quarter to a record of $42.3 million this quarter.

Diluted earnings per share increased from 2 cents in the second quarter of fiscal 2002 to 23 cents during the second quarter of fiscal 2003.

This is well above our 13 to 15 cents guidance that we previously provided.

These results reflect the impact of the growth drivers that we have discussed during our conference calls over the last year coming to fruition.

To get more into our operating results without delay, let me introduce Robert Rouse, our CFO, who will lay down the foundation for this morning's discussion.

After that, I will discuss recent developments, provide guidance for the rest of the year and take your questions.

Rob?

Thanks Fred, and good morning to all of you.

As Fred mentioned, Q2 of fiscal 2003 was truly an outstanding quarter for Comtech.

This was the 29th consecutive quarter of profitability and the fourth sequential quarter that we have posted earnings increases excluding IR and D. charges.

Last quarter we said that our lows are behind us this quarter demonstrates that we are clearly off to new heights.

Let's review some of the key income statement amounts for the second quarter ended January 31, 2003.

Sales were $42.3 million, the highest level of quarterly sales in the company's history.

Sales in the second quarter of fiscal 2002 were 30.5 million and on a sequential basis sales were $33.33 million during the first quarter of fiscal 2003.

During the quarter over the prior year sales increased in all of our business segments.

However, increased sales in our mobile data communication services segment were the primary reason for the 38.7% increase in sales.

An increases in orders from our MTS contract with the U.S.

Army logistics command combined with our recently announced order from a major U.S. prime contractor that is providing a battle command application to the U.S.

Army led to the significant increase in sales in this segment.

Second quarter sales broken out by segment are as follows. 52.7% telecommunications transmission, 14.9% RF microwave amplifiers and 32.4% mobile data communication services.

Of the second quarter fiscal 2003 sales, 37.6% were international, 13.4 were to domestic commercial customers and 49% were to the U.S.

Government or major primes to U.S. Government.

Gross profit was $13.5 million for the second quarter of fiscal 2003, versus $9.1 million for the second quarter of fiscal 2002.

The higher gross profit was primarily the result of the increase in sales.

In addition, the gross margin increased from 29.9% to 32% as a result of a change in product mix as well as greater overhead absorption in connection with the increased sales.

SG&A expenses increased from $5.3 million in the second quarter of fiscal 2002 to $6.4 million in the second quarter of fiscal 2003.

The increase was primarily attributable to the increase in sales as well as the addition of Comtech A. H. A. during the 2003 period.

SG&A as a percentage of sales, however, decreased between the periods from 17.4% to 15.1%.

R&D expenses increased by over 20% from $2.7 million in Q2 of fiscal 2002 to $3.3 million in Q2 of fiscal 2003.

Our continuing investment in R&D has enabled us to take market share from our competitors.

In addition, our advanced technology offerings have converted into new orders and backlog.

We believe that these same investments will position us for significant future growth as economic conditions improve.

Amortization of intangibles increased from $370,000 to $526,000, directly as a result of amortization during the fiscal 2003 period relating to the A. H. A. acquisition.

Interest expense was consistent between the periods in light of our fixed rate debt.

Interest income was slightly lower during the second quarter of fiscal 2003 as a result of lower interest rates on available cash.

Our effective tax rate for the quarter of 32% is consistent with the rate used in Q1.

Net income for the second quarter of fiscal 2003 was $1.9 million, or 23 cents per share, versus $148,000, or two cents per share during the second quarter of fiscal 2002.

EBITDA or earnings before interest, income taxes, depreciation and amortization, increased by 145% from 2 million in Q2 of fiscal 2002 to $4.9 million in Q2 of fiscal 2003.

Our backlog as of January 31, 2003 was an impressive $87.9 million compared to $49 million as of January 31, 2002, and $44.1 million as of July 31, 2002.

In addition, one should note that our backlog increased over Q2 over the first quarter amount of 85.5 million despite the record sales during the quarter.

I would also like to point out that our backlog does not include the remainder of this years funding for our MTS contract with the U.S. Army.

Our balance sheet continued to improve during the second quarter.

Cash increased during the quarter by $6.9 million to $27.3 million.

In fact, cash provided by operating activities for the six months ended January 31, 2003, were $13.4 million.

Such amount includes customer advances of $6.2 million primarily related to a large order received in Q1.

In addition, we were able to control our working capital balances despite the significant increase in sales as evidenced by improved inventory turns and a reduction in DSOs.

In summary, during the second quarter of fiscal 2003, we posted record sales, strong margins and operating profits, we generated significant cash flow and strengthened our balance sheet; all while increasing our investment in R&D.

And now back to Fred.

Thanks, Rob.

At the time I would first like to make a few comments regarding recent developments and future business prospects in our three business segments and then provide some guidance for the rest of fiscal 2003.

As you can see our telecommunications transmission segment continues to perform remarkably well in an economic environment that continues to be difficult.

We continue to be the only one stop shop for satellite earth station products and the leading provider of satellite earth station modems and over-the-horizon microwave equipment.

As we've discussed in previous conference calls, our over-the-horizon microwave product line is experiencing a resurgence as evidenced by a significant increase in bookings and bid activity.

The reliability, security and ability of our over-the-horizon microwave equipment to communicate over unfriendly terrain or large bodies of water make it ideal for defense and commercial offshore oil platform applications.

We have significant bids outstanding for these types of applications, which could be awarded in the next 12 to 18 months.

We also believe that the commercial side of our satellite earth station business is beginning to firm up.

Although commercial sales continue to be adversely affected by the decreased telecom spending, the commercial order flow has stabilized.

In addition, we continue to see increased interest and activity on the government side of the satellite earth station business.

In response to a looming satellite bandwidth crunch the government is currently assessing ways to improve the efficiency of its satellite communications infrastructure.

Here our turbo product codec modems which provide data rates of up to 20 Megahertz a second can offer a solution by increasing data throughput or reducing transponder costs by up to 60%.

Our newest modem, the 20 megabits per second model CBM 600 has been well-received by our customers.

In fact, Comtech and Intelsat, Intelsat being one of the premier global satellite service provider, are working to together to market the CBM 600 to Intelsat's large customer base.

We are very pleased by this endorsement of our leadership position by an industry leader is such as Intelsat.

Comtech AHA which we acquired in July, 2002, continues to be profitable and has enabled us to solidify our leadership position in this turbo product coding area.

In our RF microwave amplifier segment, sales although up modestly continue to be impacted by soft economic conditions, particularly in the commercial aviation industry.

On the other hand, we anticipate that increases in defense spending could result in future orders of defense products.

Here, too, we are investing in additional marketing and R&D resources to maximize our share for the commercial and government opportunities.

Our mobile data communications services segment had an outstanding quarter.

Sales of 13.7 million in Q2 were up over 169% from the prior year second quarter.

Fiscal 2003 will be a record year for funding on our $418 million MTS or Movement Tracking System contract, with the U.S.

Army logistics command.

The 43.5 million in total funding for the MTS program in this year's government 2,003 fiscal budget is more than double the prior years amount.

And to date, we have received total orders under MTS of $62.6 million of which 28 and a half million were received so far in fiscal 2003.

A portion of the $15 million balance of the 2003 funding will be used to support the Army's program office and the remainder of the funding is expected to be issued as new orders to us this year.

While we are encouraged by the fact that the funding level has increased dramatically over prior years, funding for future years has not yet been determined.

And since there are many competing demands on defense budget dollars, in light of the war on terrorism and potential conflict with Iraq, fiscal 2004 funding could be impacted and could be lower than the 2003 funding.

With that said, the U.S.

Army logistics commands has requested funding in excess of $65 million per year for fiscal years 2004 through 2009.

However, at this time the preliminary version of the defense budget includes only 10.4 million per year for MTS.

We are continuing to work with the Army on MTS funding for fiscal 2004 and beyond.

We believe that the MTS program has already been proven successful because it is a technology the Army needs and likes.

Our system operates in L band which allows messaging and location tracking of helicopters which other systems at higher frequencies are unable to do.

Also as we have discussed during our last conference call, we are seeing increased interest in our MTS products within the war fighter community.

In fact, the turn on letter for 7.5 million which we referred to during our December conference call was openly definitized in a contract with a major U.S. prime contractor for more than $23 million.

This contract involves the integration of our mobile satellite transceiver into the prime contractors blue force command and control system that will provide capability for messaging and position reporting to the U.S. Army.

The performance of this work, which began in October, 2002, will continue through February, 2004; with significant follow up opportunity expected.

As you can see, we are attempting to mitigate the potential were diversion of defense dollars away from noncombat programs such as the core logistics MTS program by working on increased war fighter opportunities.

In any event, between the increased MTS. funding and the significant war fighter opportunities, fiscal 2003 will be a break through year for our mobile data communications services segment.

As you can see, we have demonstrated our ability to grow our revenues and profits during the past year.

The resurgence of interest we are experiencing in our over-the-horizon microwave communications technology, the potential upgrade of the satellite communications infrastructure and the solutions in removing government satellite bandwidth crunch as well as the MTS war fighter opportunities provide our company with growth vehicles that are not dependent on increased telecom spending or changes in the economic environment.

As you are aware, we've been discussing these opportunities with you during the last several conference calls and now we are delivering on the expectations we set.

Now for the look at the rest of the year.

Long term projections of earnings per share continue to be very difficult due to the uncertainty regarding when the economy will significantly improved and when telecom spending will increase.

Having said such we feel foolish enough to estimate that diluted earnings per share for the third quarter of fiscal 2003 will be between 25 and 27 cents.

We are also estimating Q4 earnings per share to be higher in the 27 to 29-cent range.

As you know, the past couple of years have been challenging for all technology companies, including Comtech.

We at Comtech, however, have demonstrated an ability to weather the storm and remain profitable during the worse of times.

We are now demonstrating our leadership and strength in the markets we serve by growing the top and bottom line in the present stagnant economic environment.

And we are also very optimistic that we are further leverage our strength and leadership and thrive in a robust environment as economic conditions improve in the future.

We look forward with confidence to the remainder of fiscal 2003 and beyond.

Thank you very much.

Also, I would like to just tell everybody that an updated presentation will be posted to our Web site shortly after this call at WWW.comtechtel.com.

Now it's your turn to ask questions.

Operator?

At this time if you would like to register your site are for question press star one on your touch-tone telephone at this time.

We will take our first question from Steve Wortman with Sidoti and Company.

Hi, just a couple of questions regarding the customer advances, [inaudible] is one of the reasons why, when can we expect those to reverse and may be if you can maybe highlight where you expect free cash to run during the second heart half of the year given the strength in the first half.

My expectation, Steve, would be that incremental $6 million will start to reverse in Q3 and Q4.

And then the remainder of it will run itself out over next year.

However, offsetting that is the fact that we do have in connection with our mobile data communications segment, we do have a significant amount of unbilled receivables, which we believe will be substantially billed by the end of the year somewhat offsetting that.

So my estimate at this point in time will be to have a similar amount of cash at the end of this year as opposed to what we have now.

So I don't think you are going to see a big reduction in cash as the year goes by.

Subject to us being able to liquidate those unbilled receivables as the year goes by.

Just going forward is the strategy to not pay down any debt just let cash balances build as much as possible with excess cash flow?

We are currently looking at that Steve, the intention right now is to build up some cash but we are looking at a few options both in terms of refinancing and paying debt down but the board hasn't come up to a final conclusion on that at this point.

Also speaking of the cash, regarding any potential acquisitions out there, how are the activities running?

Not at this point.

Okay.

Moving over to the backlog real quick, does that include the full $23 million funding from the recent satellite contract?

Yes, it does, Steve.

So backlog from let's say the satellite business, I know it's not a heavy backlog contributor but could you give us a sense of what the book to bill was there?

Just to clarify that, the definitization of the contract occurred after January 31, so not all of that is in backlog I would say about half of that is probably in backlog at this point as of January 31.

Okay.

And also just to clarify, I mean you said the F'04 budget request has $10.5 million for MTS build in but for F'04 to F'09 they've expressed they want 65 million per year?

Actually the present budget line that the government has, has approximately 10 million plus for all of the years starting with F '04 through F '09.

The Army, however, has requested to increase that funding to 65 to 75 million approximately for every year from '04 to '09.

So it's an increase that's been requested but it hasn't been acted on yet.

And that is before any [inaudible] ups that could occur.

Thanks a lot.

Take our next question from the site of [Charles DeSanza of] Research.

Please go ahead.

It's Charles DeSanza.

I had one question.

I didn't catch what the budget amount for the MTS stuff is in '03.

I got that it's 10 million going forward and could be 65, but what's the '03 figure and what and it look like?

The '03 figure was a record funding of 43 and a half million dollars.

Of which a portion of that goes to carry the expenses of the program office in the logistics area of the U.S.

Army and the remainder goes to us.

As I mentioned we received to date $28.5 million of that funding which leaves a remainder of about 15 million, some of that going to the program office and the rest to us.

The 10.4, is some that in the program would go to program office as well?

The 10.4 going forward, yes, some of that would go to the program office as well, if that stays.

I understand.

Thanks a lot, Fred.

Our next question is from the site of Joe McKerkie with A.G. Edwards.

Go ahead, please.

Hi, good morning I'm standing in for Mark Jordan who I believe his plane has just landed so he may get on the call.

Question, the fourth quarter number, it looks like you raised your estimates there, what is the source of the strength in the fourth quarter?

Well, I think generally the business conditions that we've described generally follow through from the second quarter to the third and fourth quarters; generally the uptick in the mobile data communications business as well in some of our other business segments.

I would also note that we have not formally issued guidance up until now for Q4.

But in terms of the incremental amount it's also, a the large contract that we received back in October for our over-the-horizon microwave work is starting to kick in now that's starting to generate some incremental profits as the year goes on.

Going into 2004, I'm trying to explore some areas of upside that potentially exist and if you would comment on particularly the following three areas, one would be the over-the-horizon area as far as the remaining contracts out there, the size and possible timing at this point, secondly, mobile data communications, both, I guess you've talked about the logistics part of it, what you see potential for the war fighter side, and finally again if you would give a little more color on the satellite modem area.

Thanks.

Okay.

First on the over-the-horizon microwave area, as we've mentioned in a number of the past telephone conference calls, we see a tremendous resurgence in that area.

We booked approximately $42 million a couple of months back in that area.

We do have a number of outstanding bids which are, which are higher than that $20 million and lots of little guys about $1 million each, which we expect to convert into orders somewhere in the next 18 months.

On the Mobile Datacom communications area, we pretty well discussed it briefly here.

The expected contract additions to the war fighter community, it's hard to determine what they would be.

But right now we are getting a lot of interest.

But we really can't quantify those at this time.

On the MTS program, I think as we mentioned it's really all a matter of funding.

We do expect the remainder of the funding of this year to come in shortly.

However, the funding for the following year is really a matter of government approval of the new requested money.

So overall, I think if I were to give you a sense of the business going forward, we are very confident that the numbers that we have given as guidance are going to be met or exceeded

And finally would you give a little more color on the satellite modem area?

Especially with the government side.

Yeah, the satellite business has pretty well stabilized for us, the modem business specifically for the government has been on an uptick.

We have a number of possible orders - one major, large contract which could be in the $40 million area that we bid on.

We should know that relatively shortly.

There were originally five bidders for this program.

There are only three remaining bidders of which Comtech is one of the remaining bidders.

That should be decided, I think, within the next 30 to 60 days.

So we look forward to winning that one.

Thank you.

Once again to register your site for a question please press the star one on your touch-tone telephone.

Well take our next question from the site of Selman Akyol with Stifel Nicolaus.

Go ahead, please.

Thank you.

A couple quick questions, on the improvement in mobile datacom profitability that, didn't include any of the recently announced contract so kind of going forward where can we expect to see margins move on that, too.

I'm not sure we can talk about an improved profitability.

We've stated in the past that on this business segment we are taking a 15% margin on the program.

And we continue to do that now, having said that, on the GDI. contract for the War fighter community, that's a slightly higher margin.

I would also just add to that on an operating margin basis that increase in sales at a stable gross margin is dropping a lot more down to the operating margin by absorbing all the G&A expenses.

I guess that was what I was thinking that you would see your out margins continue to expand as you increase your volumes.

That's correct.

So where do you think that could go to?

Well, depending on the sales volume I think that at least in the short term the Mobile Datacom sales were very strong, I wouldn't expect the operating margins to get much higher in that segment for the time being unless that $65 million in funding for next year gets approved, and that could drift up to that 10% or more range.

Okay.

On your R&D, it seems like the percentage was higher, it seems like the R&D was up.

Do we expect that to continue at these levels going forward?

We've always said that we want to keep our R&D somewhere between eight and 10% of sales.

Can you talk about in terms of total bids outstanding in terms of a dollar quantity?

It's really difficult to talk in terms of total bids.

It varies in different business segments.

In mobile data communications area, it's a matter of funding.

In the satellite area, even though that I mentioned that we have an outstanding bid for possibly what could be a $40 million contract, we normally book and ship within the same quarter.

So business comes in small little lumps,.

On the over-the-horizon microwave, that comes in big lumps.

So we have lots of bid activity in that area, and that's probably the easiest for us to define.

I would say at this point we probably have some where between 60 and $100 million of bids out there.

Just on the on over-the-horizon?

Just on over-the-horizon.

Is there a way you can break backlog up among the three segments?

Sure.

Of the 87.9 million, 54 million is in telecom transmission, 13 and a half million is in amplifiers and that 20.4 million is in Mobile Datacom.

Thank you so much.

Thank you.

Once again to register your site for a question please press the star one on your touch-tone telephone at this time.

We'll take our next question from the site of Mark Jordan with AG Edwards.

Go ahead, please.

Good morning, gentlemen, number one on the on over-the-horizon radio, you are talking about, you have a number of large orders that you've been willing to talk about for about a year now that are still outstanding, do you believe that those contracts or that business will eventually be done and if so what kind of time frame?

Second question is could you talk about the relative market success and acceptance of your new turbo product line?

Mark, welcome aboard.

You made it, huh?

Yeah.

I was here for the questions.

Okay.

First let me address the over-the-horizon market.

That as I mentioned before comes in large programs and we have a number of programs in the $20 million to, and higher.

As I mentioned we have about 60 to $100 million somewhere out there in the pipeline and also I think I mentioned that we expect that to turn into contracts somewhere within the eighteen-month time frame.

Now, on the modem side with the turbo codec, as I mentioned, you probably missed it, I mentioned that our CBM 600 which is our turbo Kodak modem of 20 Megabits per second was just recently approved by Intelsat, Intelsat being one of the major satellite system suppliers.

Intelsat is recommending that modem to all of its customers.

So that has really made us excited about the potential of this particular modem.

Okay.

Again, on the over-the-horizon, those contracts that have been out there, none of them have gone away?

You haven't lost any of them, it's just a question of when the programs actually get kicked off?

That's correct.

Those contracts being large contracts and mostly international, usually, no surprises if they move to the right quite a bit.

This year still out there and we are still expecting them win that eighteen-month time frame.

Thank you.

Okay, Mark.

It appears we have no further questions.

Well, thank you very much for your interest in Comtech and we look forward to speaking with you again in three months.

Thank you very much.