Comtech Telecommunications Corp (CMTL) 2003 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Comtech Telecommunications Corporation's fourth quarter fiscal year 2003 earnings conference call. At this time all participants are in listen only mode. Later we will conduct a question and answer question. At that time if you have a question you will need to press star one on your push button phone. As a reminder this conference is being recorded Tuesday, September 23rd, 2003. I would now like to turn the call 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 fourth quarter of fiscal year 2003. With us on the call this morning are Fred Kornberg, President and Chief Executive Officer, and Robert Rouse, Chief Financial Officer. A news release on the company's results was issued earlier this morning. If you have not received a copy, please call me and I'd 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 that 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-K, filed with the Securities and Exchange Commission, identifies many 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 risks; the highly competitive nature of our markets; our dependence on component availability, contractor availability, and performance by key suppliers; our dependence on international sales; and our mobile data communications 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'm 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 fourth quarter of fiscal year 2003. We will also review some of the highlights in fiscal 2003, which was, by all measures, a truly remarkable year for our company. However, before we discuss our operating results, I would like to highlight some of the important events that have happened since our last conference call. In July, we sold 2.1 million shares of our common stock in a private placement transaction. The net proceeds from the transaction of approximately $38 million were used to prepay our long-term debt of approximately $29 million. This will reduce our interest expense going forward. We also ended fiscal 2003 with no long-term debt and approximately $49 million of unrestricted cash. In June we announced a three-for-two stock split. This is the second time in the past five years that we have split our shares. The split, along with the additional 2.1 million shares issued in the private placement, resulted in a significant increase in the number of shares outstanding, which we believe will make our stock more accessible to individual and institutional investors. Also in this quarter, as an acknowledgment of our increased market cap and our strong performance, Comtech has now been included in the prestigious Russell 2000 index. Now, getting back to our operating results, which, as you can see from this morning's press release, we're once again quite impressive. Sales increased by 81% to $51.7 million from $28.5 million in the prior year fourth quarter. Diluted earnings per share increased to 27 cents from 5 cents in the fourth quarter of fiscal 2002. And at 27 cents was well above our 18 cents to 19 cents guidance that we provided during our previously quarterly conference call. These fourth quarter results were a fitting conclusion to the outstanding year we had in our fiscal 2003. For the year, in an economy that continues to struggle, we achieved record levels of sales, record levels of bookings, backlog, EBITDA, profits, and earnings per share; and we clearly demonstrated our ability to deliver on the growth drivers we have been discussing with you since fiscal 2002. At this point, let me introduce Robert Rouse, our CFO, who will review our operating results for the fourth quarter, as well as provide some summary data for the full year. After that, I will discuss recent developments, provide guidance for fiscal 2004, and then take your questions. Rob?

Thanks, Fred, and good morning to all of you. As Fred mentioned, Q4 marked the end of a tremendous year for Comtech. It also marked the 31 consecutive quarter of profitability, excluding process R&D charges. Let's review some of the key income statement amounts for the quarter ended July 31st, 2003. Sales were $51.7 million, surpassing the previous record set in Q3 of this year, as well the $50 million quarterly sales mark for the first time in our Company's history. Sales in Q4 of fiscal 2002 were $28.5 million. Higher than expected orders in our mobile data communications segment, combined with strong sales in our telecommunications transmission segment, were the primary drivers behind significant revenue growth in 2003. Sales in our RF microwave amplifier segment decreased due to continuing softness in our aviation and instrumentation product lines. Fourth quarter sales broken up by segment in 2003 were as follows; 61.5% telecommunications, transmission, 29.3% mobile data communications, and 9.2% RF microwave amplifiers. And of the fourth quarter fiscal 2003 sales, 42.7% were to international end users, 42.6% were to the U.S. Government or major primes to the U.S. Government, and the remaining 14.7% were to domestic commercial customers. Gross profit was $18 million for the fourth quarter of fiscal 2003 versus $10.8 million for the fourth quarter of fiscal 2002. The higher gross profit was directly related to the significant increase in sales. The gross margin percentage was 34.8% in Q4 of fiscal 2003, as compared to 37.7% in Q4 of fiscal 2002. The decrease in the gross margin percentage was the result of the significantly higher proportion of mobile data communications segment sales during the fiscal 2003 period versus the fourth quarter of fiscal 2002. Our mobile data communications sales are generally at lower gross margin than our other product lines. However the gross margin percentage decrease was partially offset by greater operating efficiencies associated with a significant increase in sales during Q4 of fiscal 2003. SG&A expenses increased from $6.1 million in the third quarter fiscal 2002 to $8.1 million in the fourth quarter of fiscal 2003. The increase was primarily attributable to the significant increase in sales, incentive compensation and commissions associated with a significant increase in profits, the addition of AHA in July 2002, an increased accounting, auditing, and legal costs associated with corporate governance regulations.

SG&A as a percentage of sales decreased between the period from 21.4-15.6%. Once again we have continued to invest heavily in our future through research and development. In fact, R&D spending increased by 21.4% from $2.9 million during the fourth quarter of fiscal 2002 to $3.5 million during fiscal 2003 fourth quarter. In fiscal 2002, we recorded a $2.2 million in-process R&D charge related to our acquisition of AHA. There were no in process R&D charges in fiscal 2003. Amortization of intangibles increased from $400,000-500,000 primarily as a result of the amortization of intangibles acquired in the AHA acquisition and our operating income for the fourth quarter of fiscal 2003 was $5.9 million versus an operating loss during Q4 of fiscal 2002 of approximately $800,000. Excluding the impact of the in process R&D charge in fiscal 2002, operating income would have been $1.4 million for the quarter. Interest expanse of $700,000 was consistence between the period. However, as Fred mentioned earlier, interest expense will decrease significantly in fiscal 2004 fiscal 2004 since we prepaid our long term debt in July in connection with sales of $2.1 million shares of our common stock in a private placement transaction. The effective tax rate of 32% reflects the continuing benefit of research and experimentation tax credits as well as tax benefits associated with our international sales. Net income for the fourth quarter of fiscal 2003 was $3.6 million or 27 cents per diluted share compared to a net loss in the fourth quarter of fiscal 2002 of $300,000 or 3 cents per diluted share. Excluding the impact of the in process R&D charge and a tax benefit related to prior year research and experimentation tax credits, fourth quarter net income for fiscal 2002 would have been $500,000 or 5 cents per diluted share. The diluted shares outstanding for the fourth quarter of fiscal 2003 were $13.2 million, as compared to $11.2 million in Q4 of fiscal 2002. The increase in the fiscal 2003 period reflects additional shares issued, including those issued in connection with stock option exercises and a weighting of the $2.1 million private placement shares discussed earlier, as well as the impact of our increased stock price on a calculation of incremental stock option shares. EBITDA or earnings before interest, income taxes, depreciation, and amortization was $7.6 million in the fourth quarter of fiscal 2003 versus $2.7 million in the fourth quarter of fiscal 2002 after adjusting for the in process research and development charge. For the full year, sales were a record $174 million, as compared to $119.4 million in fiscal 2002. And fiscal 2003 net income was $9.7 million or 80 cents per diluted share versus $1.1 million or 10 cents per diluted share in fiscal 2002. Excluding the in process R&D charge and the tax benefits that I mentioned earlier, net income for fiscal 2002 would have been $2 million or 17 cents per diluted share. EBITDA for fiscal 2003 was $23.1 million as compared to $10.8 million in fiscal 2002, after adjusting for the in process R&D charge. And our backlog as of July 31st, 2003, was $100.1 million compared to $44.1 million a year earlier. Bookings in fiscal 2003 were a record $230 million, which was 32% higher than our fiscal 2003 sales and 93% higher than our fiscal 2002 sales. Turning to the balance sheet, we significantly strengthened our financial position during fiscal 2003.

First, we continued to generate very strong cash flow from operations. In fact, cash generated by operating actives -- activities, as outlined in our 10-K filed earlier today, was $26.8 million. In addition as previously mentioned in July we raised net proceeds of approximately $38 million in connection with a private placement transaction. We utilized a portion of the proceeds to pay off all of our long-term debt and we ended the year with $48.6 million of unrestricted cash. We also were successful in controlling our core capital working levels as evidenced by the consistent amount of accounts receivable and inventory as of July 31st, 2003, and 2002 despite an increase in sales of 46% during the fiscal year. We accomplished all of these financial goals while continuing to invest in our future through an increase in R&D spending. And now back to Fred.

Thanks, Rob. First, as I said earlier, I would like to review our accomplishments, as well as recent developments in our three business segments in fiscal year 2003, and then provide some guidance for fiscal 2004. Once again, and despite the continuing depressed state of the telecom sector, our telecommunications transmission segment had a fantastic year. Our leadership positions on satellite earth station equipment and over-the-horizon microwave systems have resulted in record bookings in this segment. Let's begin our discussion of this segment with our satellite earth station products. Throughout the year, we have experienced strong bookings on the government side of our satellite earth station product lines. The government satellite bandwidth crunch continues to receive much attention in the aftermath of the war in Iraq, and the DOD estimates, that the satellite bandwidth requirement for theatre of war capability in the year 2010 will exceed 14 gigabits per second or 14 times greater as compare to approximately 1 gigabit per second during operation Iraqi freedom. This should continue to bode well in the short and long-term for sales of our satellite communications products to the government. On the commercial side, as we have noted in our prior conference calls, we have experienced a firming up of orders throughout fiscal 2003 in our satellite station product lines. We believe that to be because of our leadership position in satellite modem technology, our relationships with industry leaders, such as intelsat, and the ability of our leading edge technology products to continue to take market share from our competitors. Although we clearly saw the business firming up this past year, we were not really experiencing a significant increase in overall demand. In the past couple of months, however, we have experienced a marked increase in bookings to commercial customers. While it is premature to say whether this is a definite trend, this trend will favorably impact the first quarter of fiscal 2004, and if it continues, will favorably impact subsequent quarters. Turning to our over-the-horizon microwave product line, fiscal 2003 was a record booking year.

In October, we were awarded a $42 million contract from a large prime contractor in connection with a foreign government's communications system. And in April, we received a $20 million contract directly from a foreign customer. These large contract awards favorably impact our third and fourth quarter results in fiscal 2003, and are expected to impact our earnings in fiscal 2004, especially in the first and second quarters. As we mentioned during our last conference call, we've also been active in discussions with the U.S. Government regarding a possible upgrade of its inventory of over-the-horizon microwave terminals. In fact, earlier this month, we received a contract that demonstrates the viability of using our patented 8 megabits per second adaptive modem in the U.S. military over-the-horizon terminals. Though we are early in this process, this contract unable us to demonstrate the technological superiority of our products to a potentially significant customer. Comtech AHA, which we acquired in July 2002, was profitable throughout fiscal 2003. In addition, it has further established our leadership position in a patented turbo product codec area, which is used in our modems to provide 60% more data through input over a satellite channel. We're also continuing to search for new applications and markets for this patented technology for Comtech's [inaudible] and data compression technology. In March 2003, we acquired certain TDMA hardware and software technology for operating satellite bandwidth utilization, and in fiscal 2004 we expect to be selling bundled network solutions that incorporate satellite modems and software that optimize bandwidth utilization for broadband, 2-A satellite networks, and enabling advanced applications such as video conferencing, distance learning, telemedicine, and Internet content delivery. Moving on to our mobile data communications. Our mobile data communications segment had an outstanding year. Sales increased by 168% over fiscal 2002 from $17.9 million to $48.1 million. Fiscal 2003 was favorably impacted by record funding on our MTS contract with the U.S. Army logistics command, as well as sales relating to our contract with a major U.S. prime contractor for a battle command application called [FBCB-2] or blue force tracking. Fiscal 2003 funding for MTS was 37.4 million. This brings the cumulative orders on MTS through year end to $71.5 million, out of a potential $418 million, which the Army can purchase from Comtech through fiscal 2007. While we are encouraged by the significantly increased funding in fiscal 2003, funding for future years, including fiscal 2004, has still not been finalized. Fiscal 2003 also marked the first contract award to Comtech for a war-fighter application. This contract, which resulted in fiscal 2003 bookings of $26.4 million, involved the integration of our modal satellite transceivers into the prime contractor's command and control systems known as [FBCB-2] or blue force tracking. These systems provide capability for messaging and position reporting in a U.S. Army battlefield operation.

We're also awaiting fiscal 2004 funding information on this program. As we have stated before, future funding levels for MTS and for FBCB-2 continued to be difficult to predict, and fiscal 2004 could be significantly impacted in a positive or negative way. Between the record MTS funding and the significant FBCB-2 contract, fiscal 2003 was the breakthrough year for our mobile data communications segment. The business is a quantum leap ahead from where it was just a few short years ago. In addition to its financial success, we're even more proud of the role our technology played during Operation Iraqi Freedom. Although our system was designed for logistics applications and supply line vehicles, it was used on a multitude of vehicles from Humvees to tanks to helicopters, and it performed remarkably well. In fact, many soldiers have noted that the ability to communicate through our system, when other communication channels were not available, where lines were stretched out, this system saved lives. The performance of this segment in fiscal 2004 will be directly impacted by the funding for MTS and FBCB-2. In our third segment, RF microwave amplifiers, the short and medium-term outlook is mixed. Defense-related sales continue to be solid and we expect this to continue as defense spending increases. Commercial sales, however, continue to be impacted by softness in the commercial aviation and telecom industries. We have new products coming on line and lots of activity in our pipeline, and we continue to be optimistic about the long-term prospects of the RF amplifier business once economic conditions in these sectors improve. However, we expect fiscal 2004 to be another challenging year for this segment. In summary, we believe our results in fiscal 2003 speak for themselves. We posted record performance based on virtually every meaningful measure. We believe our decision to continue to invest heavily in R&D during these tough times have resulted in strengthened leadership positions in the markets we serve. We're entering fiscal 2004 with a tremendous momentum and optimism. The economy, although it's still in a fragile state, appears to be finally turning. After achieving our goals in fiscal 2003 in a weakened economic environment, we are eager to demonstrate our potential in a more robust economy. Having said that, our performance in fiscal 2004, particularly during the second half of the year, depends upon, among other things, funding in our mobile data communications contracts and bookings of additional over-the-horizon microwave contracts. With that in mind, let me give you our updated outlook for the first quarter of fiscal 2004 as well as for the full year.

As you can see from my comments, there are many factors which make projections of EPS very difficult. We believe fiscal 2004 will be another successful year for Comtech. In fact, we are raising our earnings guidance. During our last conference call, we estimated that full-year fiscal 2004 diluted earnings per share would be between 75-80 cents. With the first quarter being in the 16-17 cents range. We now estimate diluted earnings per share for fiscal 2004 to be between 88 and 94 cents, with a very strong first quarter in the range of 30-32 cents. We believe that Q1 will be exceptionally strong as we benefit from the very strong satellite earth station product bookings in recent months, as significant activity continues in our long existing over-the-horizon microwave products and as funded orders from fiscal 2003 carry over into our mobile data communications segment. Assumptions in our full-year guidance reflect a more modest increase in satellite earth station product bookings for the remainder of the year since it's clearly too early to tell whether the last few months of bookings were sustainable. A more modest level of activity relating to existing over-the-horizon microwave contracts during the second half of the year and mobile data communications service bookings of approximately $40 million as compared to $65 million in fiscal 2003. And of course always broad economic conditions as well as conditions in the markets we serve could significantly impact our guidance for fiscal 2004. We believe that fiscal 2003 demonstrated our ability to outperform our peers in a stagnant economy, so we look forward to the opportunities that fiscal 2004 has to offer. Thank you very much. Also, an updated investor presentation will be posted to our web site shortly after this call. And now it's your turn to ask questions. Operator?

Again, if you'd like to ask a question, please press star and one on your touch-tone phone, and if you'd like to withdraw a question, please press the pound key. Again, please press star and one to is it ask a question. We do have a question from the site of Mark Jordan with AG Edwards. Go ahead, please.

Good morning, gentlemen. First of all, relative -- accounts receivable were very low relative to sales at 26.7 million. Is that a sustainable DSO rate, or was there something going on there, that being in the high 40-day range, is that normal or will that change over time?

I would suspect, Mark, that that would creep up somewhat. We had a large advance payment from a customer that we burned down from Q3 to Q4. There weren't really receivables attached to that. In addition we've done a good job in collecting our receivables on a timely basis, obviously. That number will probably creep up if we continue to run at that quarterly run rate that we achieved in Q4.

Okay. Deferred service revenues is also up to about $11 million. I take it that's the service revenue relative to mobile data. Over what time frame does that get realized?

They are able to use those -- they have 400 days' worth of prepaid service time, Mark, for every piece of hardware they buy, every trance transreceiver they buy they have to use those minute before the end of fiscal 2007 and Fiscal 2004 will be a key year because as our installed base grows, we will get a better sense of the use patterns on the hardware on this coming year. But they have until the end of 2007 to use the days.

Given your growing earnings base and potentially the finite size of your tax benefits that you have, do you expect the tax rate to start creeping upwards?

There are two offsetting events there, Mark. On one hand, the fact that our earnings base is increasing is going to drive the effective tax rate up. But given the increased level dollar-wise of international sales, you'll see in our 10-K for this year, we have realized a bigger benefit from international sales this year. So I would say that, you know, generally speaking, at the revenue levels and profit levels we're at, you should expect the rate to be around in the same 32% range.

Okay. And a final question; could you break down the $100 million backlog by major component?

Sure.. Okay. The bag log in the telecom sector -- backlog is 55.9 million. The RF microwave amplifiers, 18.2 million, and mobile data-com is 22.4 million.

Okay. And one last one. In the, you know, total telecom segment that you reported this year, can you break that piece down as to what is -- what was over-the-horizon and what is modem and then what would be, I guess, systems or others?

We really -- Mark, we really don't want to get into that -- you know, into actually breaking out the telecom sector.

Okay. Thank you very much.

Okay. Thank you.

Again, if you'd like to ask a question, please press star and one on your touch-tone phone at this time. We do have a question. It's from the site of Selman Akyol with Stifel Nicolaus & Company. Please go ahead.

Thank you kindly A. couple of kick questions, if I may -- quick questions, if I may. Can we get operating profit by segment?

It's in the 10-K,. For the Q4 or full year?

Q4.

Q4 operating profit for telecom transmission was 5.3 million.

Do you have it out to the thousands?

Let me pull the 10-K up.

Never mind. We can come back to that offline.

I have it. It's-- actually, I don't have -- I only have the year. I can -- offline I can get you the numbers rounded to the nearest thousand.

Thanks. Can you guys go through bookings for the quarter by segment?

For the quarter? Okay. Telecom, 23.5 million. RF microwave, 3.5 million. And mobile data-com, 8.9 million.

All right. Can you comment a little bit in terms of -- I assume with the cash on the balance sheet, looking to sheet, looking to do acquisitions, can you make any comments there?

Well, as you know, we've been acquisition-oriented, and we're constantly looking for acquisitions. I can't tell you that we have anything in the crosshairs right now, but we are evaluating a number of potential candidates.

And from where you've done your acquisitions in the past, would you say pricings has gone up, gone down, about the same, or can you draw any conclusions?

Hard to tell, Selman. Some are technology type of acquisitions that we look at and some are product acquisitions and they vary all over the lot.

All right. Thank you very much.

Okay.

We will take our next question from the site of Rhea Smith with Needham & Company.

Hi. Good afternoon.

Good afternoon.

You mentioned for the U.S. Army [troposcatter] retrofit contract project that you had won a demonstration contract?

We have recently announced a $360,000 demonstration or feasibility contract to use our 8 megabit patented adaptive modem in the Track 170 terminal, to increase the data throughput from its original 2 megabits to 8 megabits, and this feasibility actually is being actually performed starting last week and into this week, and we will have a report out shortly.

So is that just a couple weeks' long feasibility project or is it longer term than that?

No, it's just a couple of weeks. We've actually -- I think we probably mentioned that in the last telecom, we actually have a couple of Track 170 terminals at our facilities at our Florida facility, and we've demonstrated this feasibility in the plant. This actual test is over an existing link in the United States. So we will then have demonstrated it not only in the plant but also over an active link.

Okay. And are you still looking at perhaps a year away for a production contract?

It's very difficult to really answer that. The time frame is contingent upon a number of things, and funding being one of them. Funding being a competitive area right now for lots of programs out there. But we are getting very, very strong interest for these types of terminals, which have been deployed in both Afghanistan and in Iraq at this point for interest in getting that data up to 8 megabits.

And with over-the-horizon, your two major contract awards there, can you tell us how much you expect to be recognized over all the 2004?

The recognition -- the $42 million contract was over a three and a half year period, and the $20 million contract was over an 18-month period. And that's what it will be recognized over.

So the remaining portion of both of those contracts should be fully recognized in fiscal 2004?

No, not really. There will be some left over for the following year, specifically on the $42 million contract.

Can you give us an idea of how much might be left over?

I don't have that number right now.

Okay. Thank you very much.

Again, to ask a question, please press star and one on your touch-tone phone. It appears we have no further questions. I'll turn it back over to our speakers for any concluding remarks.

Okay. Well, thank you for your continued interest in Comtech, and we look forward to speaking with you in about three months. Thank you very much for joining us today.