Comtech Telecommunications Corp (CMTL) 2004 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Comtech Telecommunications Corporation's first-quarter fiscal year 2004 earnings conference call. (OPERATOR INSTRUCTIONS). I would 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 first quarter of fiscal year 2004. 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 on the Company's results was issued after the close of the market yesterday. 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 objective 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 market; our dependence on component availability, subcontractor 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 am pleased to introduce the President of Comtech, Fred Kornberg.

Thank you, Stephanie. Good morning everyone, and thank you for joining us today. This morning we will be discussing our results for the first quarter of fiscal 2004. With fiscal 2003 being a record-breaking year in almost every respect, we had our work cut out for us going into fiscal 2004.

While as you can see from today's earnings release, during Q1 of fiscal 2004, we once again delivered in a big way. Sales increased over the prior year period by a remarkable 80 percent to a record of 56.3 million. Diluted earnings per share increased to a record of 37 cents for the first quarter of fiscal 2004 from 7 cents for the first quarter of fiscal 2003. This surpassed the previous record set in the third quarter of fiscal 2003 of 29 cents by 28 percent despite the increase in our shares outstanding.

As you can see, our first quarter of fiscal 2004 was the most successful quarter in the history of Comtech. At this point, let me introduce Rob Rouse, our CFO, who will review our operating results for the first quarter of fiscal 2004 in more detail. 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, Q1 of fiscal 2004 was another record-breaking quarter for Comtech. It also represented our Company's 32nd consecutive quarter of profitability, excluding IP R&D charges.

Let us review some of the key income statement trends for the quarter ended October 31st, 2003. As Fred mentioned, sales were $56.3 million, surpassing the previous record set in Q4 of fiscal 2003. The 80 percent increase from the $31.3 million in sales during the prior year first quarter was virtually all organic growth. Strong sales of over-the-horizon microwave and satellite earth station products in our telecommunication transmission segment combined with a substantial increase in sales in our mobile data communications segment were the primary drivers behind the revenue growth. These increases were offset by a decrease in sales in our RF microwave amplifier segment due to continuing softness in our aviation and instrumentation product lines.

First-quarter 2004 sales broken out by segment were as follows -- 62.3 percent telecommunication transmission, 29 percent mobile data communications, and 8.7 percent RF microwave amplifiers. Of the first-quarter fiscal 2004 sales, 43.3 percent were to international end-users, 40.3 percent were to the U.S. government for primes to the U.S. government, and 16.4 percent were to domestic commercial customers.

Gross profit was $21 million for the first quarter of fiscal 2004 versus $11.7 million for the first quarter of fiscal 2003. The higher gross profit was directly related to the significant increase in sales. Our gross margin as a percentage of sales was 37.3 percent for both of the three-month periods. And although the first quarter of fiscal 2004 contained a significantly higher proportion of mobile data communications segment sales, which have historically been at lower margins, the impact was offset by sales of high margin satellite earth station products and greater operating efficiencies associated with the increase in sales.

SG&A expenses increased from $6.3 million in the first quarter of fiscal 2003 to $8.6 million in the first quarter of fiscal 2004. The increase was attributable to higher expenses related to the significant increases in sales and profitability, as well as expenses associated with recent corporate governance regulations. SG&A expenses as a percentage of sales decreased between the periods from 20.2 percent to 15.2 percent. R&D spending increased to $3.5 million during the first quarter of fiscal 2004 from $3 million during the first quarter of fiscal 2003, and we do expect R&D to ramp up during the remainder of the year.

Operating income for the three months ended October 31st, 2003 was a record $8.4 million compared to $1.8 million in the prior year period. The increase was driven by substantial increases in profitability in our telecommunications transmission and mobile data communications segments as a result of the sales increases I mentioned earlier.

Interest expense decreased to $24,000 from $691,000 as a result of the prepayment of our long-term debt in July 2003. The effective tax rate of 32 percent reflects the continuing benefit of research and experimentation tax credits, as well as tax benefits associated with our international sales. This resulted in net income for the first fiscal quarter of fiscal 2004 of $5.7 million or 37 cents per diluted share, which compared to $800,000 or 7 cents per diluted share for the first quarter of fiscal 2003. The higher diluted shares outstanding for the first quarter of fiscal 2004 reflect the 2.1 million shares reissued in the July 2003 private placement, as well as the impact of our increased stock price from the calculation of incremental stock options shares.

EBITDA, or earnings before interest, income taxes, depreciation and amortization, was a record $9.9 million in the first quarter of fiscal 2004, triple the $3.3 million in the first quarter of fiscal 2003. Our backlog as of October 31st, 2003 was $99 million compared to $85.5 million last year and $100.1 million as of July 31st, 2003. Our balance sheet as of October 31st, 2003 remains strong as evidenced by nearly $50 million of unrestricted cash and no debt outstanding.

Our net Accounts Receivable did increase during the first quarter of fiscal 2004 by $7.7 million. The increase is the result of an increased in bills receivables due to the significant increase in sales, as well as an increase in unbilled receivables associated with work being performed on our long-term contracts, particularly our large over-the-horizon contract.

All-in-all, the first quarter of fiscal 2004 was yet another strong showing for Comtech. And now back to Fred.

Thanks, Ron.

First, as I said before,I would like to review recent developments in our three business segments and then provide some guidance for the balance of fiscal 2004. Once again, our telecommunications transmission segment is off to a great start. Our leadership positions in satellite earth station equipment and over-the-horizon microwave systems are continuing to drive revenue growth in this segment.

As we mentioned during our last investor conference call, we have experienced a strong level of bookings since July for our satellite earth station products. This strength reflects increased bookings on the commercial as well as the government side of this product line. The trend is consistent with the widely recorded improving state of the economy during recent months. We have noted on our past investment conference calls that once the economy starts to turn we believe that because of our continued R&D spending we would be ready and have industry-leading products to offer our customers. The recent bookings activity validates this belief. And as you can see from our first quarter operating results, a strong economy offers a significant operating leverage in our satellite earth station product line in light of the high margins these projects generally carry.

Now whether the recent uptick activity is sustainable remains to be determined over time. We are also continuing to further establish our leadership position in the forward error correction area as evidenced by a new 311 megabit per second turbo product codec chip that will be introduced in fiscal 2004 second quarter. In addition, we continue to search for new applications and markets for our forward error correction and data compression technology.

We also anticipate launching a new TDMA-based satellite earth station product offering by the end of fiscal 2004. These new products will optimize bandwidth utilization enabling advanced applications such as videoconferencing, distance learning, telemedicine and Internet content delivery.

Turning to our over-the-horizon microwave product line, the two large international contracts we booked in fiscal 2003 have ramped up and have contributed significant revenues and profits in the first quarter of fiscal 2004, and they are expected to continue to contribute significantly to our results for the remainder of fiscal 2004, particularly in Q2 and Q3. We have a number of additional large opportunities for this product line in the international arena. But as we have mentioned before, the ultimate award of a contract along with the related timing are difficult to predict for international projects.

On the government side, we have also successfully demonstrated this past quarter our ability to use our patented 8 Mbps adapted digital modem to improve the performance of the U.S. military's over-the-horizon microwave terminals over an existing operating communications link. This successful demonstration, which also included the transmission of black and white video for the first time over this kind of a channel, opens up potential opportunities to upgrade and potentially replace the government's inventory of over-the-horizon microwave terminals.

Our mobile data communications segment had another outstanding quarter. As reported, sales were a record 16.3 million. The first quarter of fiscal 2004 was favorably impacted by a strong order flow on our Movement Tracking System or MTS contract with the U.S. Army logistics command, as well as orders received relating to the FBCB-2 or Blue Force Tracking battlefield command and control program. The final allocation and apportionment of the fiscal 2004 defense budget, as well as the recently signed $87 billion supplemental spending bill, have yet to be completed, and estimating funded orders for both of these successful projects for the remainder of the year still remains very difficult to predict.

However, in light of the bookings activity we have had so far this year, we are increasing our assumed mobile data communications segment revenues for fiscal 2004 from the $40 million we discussed during the last investment conference call to approximately $50 million for this year. At this point, more than 95 percent of our sales in this segment are from U.S. military related contracts. As you can see, the government market has been very successful for us. With the scale we have attained in this product line, we are also currently exploring various alternatives as to how to enter the commercial market in a balanced way and that without sacrificing profitability in this segment.

In our third segment, RF microwave amplifiers, the first-quarter sales were impacted by continued softness in the commercial aviation and telecom industries. However, we have seen bid activity, particularly on the defense side, increase in recent months, and we are cautiously optimistic that this activity will turn into solid bookings during the next six months.

In summary, during the first quarter of fiscal 2004, we once again posted record levels of sales, earnings and EBITDA. We believe our disciplined approach to growing our businesses, both organically and through acquisitions, continues to drive the Company to new heights. Having said that, our performance for the remainder of fiscal 2004 continues to be subject to among other things, funding levels in our mobile data communications segment, continued improvement in the state of the economy, and bookings of additional large over-the-horizon microwave contract.

With that in mind, let me give you an updated outlook for the second quarter, as well as fiscal year 2004. The last time we spoke we estimated the federal year of fiscal 2004 diluted earnings per share would be between 88 and 94 cents for the full year. We are now raising our guidance, and we now estimate diluted earnings per share for fiscal 2004 to be between $1.05 and $1.10 with second quarter EPS between 24 and 26 cents. This guidance assumes full year revenues between $200 and $210 million with Q2 revenues between $50 and $52 million. And as I said before, the guidance assumes a more modest satellite earth station product line bookings for the remainder of the year since it remains too early to tell whether bookings in recent months are sustainable; two, a more modest level of activity relating to the existing over-the-horizon microwave contracts during the second half of the year, and three, mobile data communications segment revenues coming in at approximately $50 million. Any change in the above assumptions could have a positive effect on our fiscal 2004 performance.

Once again, let me say that we are very pleased with the momentum we have demonstrated in Q1 of fiscal 2004, and we look forward to a successful balance of the year and beyond. Thank you very much. Also, I might mention an updated investment presentation will be posted to our website at www.comtechtel.com shortly after this call. And now, Rob and I will be happy to have you ask us our questions.

(OPERATOR INSTRUCTIONS). Rich Valera, Needham & Co.

Good morning, gentlemen. With respect to the increase in your mobile data from 40 to 50 million, can you give us a sense of which of the two categories that is going up and really be the MTS or the FBCB-2?

I think, Rich, in terms of which category, I think at this point, as you have seen with our announcement, it is really both. It is really both. Both are very active, and both are very successful programs. So both are being actively pursued.

Great. With respect to the over-the-horizon, it sounds like -- is it fair to say that your revenue expectations with respect to the two current programs have not changed for the year at this point? It sounds pretty consistent with what you said before on those.

I think we always said that those two programs have ramped out, and as I mentioned, they have had an effect obviously in Q1. We expect it similarly to affect the Q2 and Q3. It does tailoff in terms of those two programs. It does tailoff in Q4. But we certainly hope to have another one in hand by that time.

Can you say are those two programs with the same customer, or are those with different customers? Have you said that before?

One is with a U.S. domestic customer and one is with a foreign customer.

Great. Rob, with respect to the receivables, any sense of how they would trend more with respect to DSO maybe than absolute numbers in the next quarter?

In terms of the receivables, if you look at our 10-Q, some of the buildup has been in the unbilled area, which really relates to the two large contracts that you just referenced to. We would expect over the next quarter or two to have that grow somewhat.

In terms of our bills receivables, I think we are doing a decent job. What we had happen here is given the significant increase in sales, most of the buildup you see in cash receivables are just current receivables. So I see over time the receivables gravitating on a billed basis to a more normal level. If you look at the Days Sales Outstanding just on the billed side, we are still down under 40 days if you exclude the unbilled.

The unbilled, as I said, is somewhat flexible by quarter. We do see it probably building up by another $2 to $5 million during the next six months and then it will ratchet down pretty quickly.

One final question. With respect to the satellite earth station business, Fred, it sounds like you said that the strength that you had seen, that you mentioned on your last call, has maintained itself sort of to date. I suspect you are probably expecting that to continue maybe through the second quarter. Is it fair to say you are assuming strength through the first and then second quarters and maybe some tailoff in the second half? Is that what you are looking at there now in the guidance you gave?

Yes. I think, as I mentioned, we have seen some renewed strength right through the last conference call -- I guess we mentioned it back in July -- through today. That remains to be seen whether it continues.

It sounds like you have not seen that taper off at all? It's still pretty robust?

I think at this point that is true.

Thanks, gentlemen. Nice job on the quarter.

Mark Jordan, A. G. Edwards & Sons.

Good morning, gentlemen. Congratulations on a great, great quarter. The SG&A levels was at 8.6 million. That was partially inflated because of obviously the high-level of revenues and profits in the first quarter. Should we assume that that is the high watermark in an absolute sense for the year because there will be slightly lower revenue and profit levels through the quarter that the SG&A expense, again in an absolute cents, would be modestly below the first-quarter level?

I would say, Mark, since we do have some valuable and semi-variable costs in G&A that you are correct. Just as the expenses went up going in one direction, coming down there should be some movement there also. So I think your comment is right on point there. Keep in mind, in that line, you have things like commissions which are directly tied to sales. So I think that is correct.

Secondly, do you have any comments you could share with with regards to your goals or objectives for deploying the large cash position you have?

As we have mentioned before, we hope to continue our acquisition growth. We can't say at this time that we have anybody in the cross-hairs, but we continue looking.

Could you give us some feel as to how the telecommunications transmission group breaks down for modem versus over-the-horizon and at least some general ratio?

We would rather not go into that, Mark. This is kind of competitive information.

A final question. You are picking up your R&D spending. Could you give us a sense as to again how you are directing that and on what products are going to be the outgrowth of that increased spending?

Well, most of our R&D spending is in the satellite earth station product area. In that area, as I mentioned, we go anywhere from the chip, which I mentioned -- we have a new 311 Mbps turbo codec chip, which is fantastic speed which we will be introducing very very shortly. We also have a number of products for Internet communications and delivery. The TDMA that I mentioned was also one of the areas that we are heavily promoting with R&D dollars.

On the Mobile Datacom area, we are in process of making a new transceiver which we call our Generation II transceiver, which almost one could call it a pocket-sized transceiver for obviously various applications where size matters, and we are getting a very very good reception. We have actually delivered close to 100 of these units on a beta basis to one of our customers for government application.

As far as Comtech systems is concerned, in the over-the-horizon microwave area, we have done a lot of work now and spent some money on R&D areas in the over-the-horizon microwave area for government application. As I mentioned, we have had a very successful demonstration of our 8 Mbps modem, and this modem that we actually demonstrated, although it is the same performance of a prior modem, we have spent some R&D dollars. We have reduced the size and increased the quality of it. So the dollars are being spent relatively across the board, and I probably can say with the majority of it in the satellite transmission area.

I would also add, Mark, just from a financial point of view, that when I say ramp up in our guidance, we are assuming R&D spending of over $4 million per quarter.

Thank you. I guess a final question relative to your comments on the potential for over-the-horizon in the defense area, do you have a sense as to when the government might make some definitive decision as to a plan for spending?

In which area?

In the over-the-horizon upgrade area.

We hear some strong interest in trying to do something in fiscal 2004. Having said that, I think our plans really call for that to happen in fiscal 2005.

(OPERATOR INSTRUCTIONS). James McEllree, C.E. Unterberg Towbin.

The decline that you are looking for in revenues in Q2 -- I am trying to figure out where that is coming from. It sounds like satellite is strong. Over-the-horizon is strong. Mobile data sounds strong, and it can't be all in RF amps. What am I missing?

I think you may not be missing anything. I think we have always said that our quarterly numbers are not necessarily in a sequential basis. It is a matter of customer delivery dates, customer requirements, and so that at any given time, our quarters could go up or down depending upon what our backlog and what our delivery status is.

Right. But you said you're looking for Q2 revenues of 50 to 52 million?

Right, which is approximately 10 percent down from the first quarter, but, again, that will happen from quarter to quarter. If you look at our history, it is nothing unusual.

I am not suggesting that. I am just trying to understand where it's coming from because the commentary does not sound like anything is down quarter to quarter?

I think if you look at our Mobile Datacom revenue guidance for the year and you look at the amount that we did in the first quarter, a chunk of it is going to be right there. We did $16 million worth of revenue in the first quarter, and we are looking at 50 for the year. So that's --

Is there anything about the operating margins for the over-the-horizon contracts that would suggest margins at the tail-end of those contracts are higher or lower than what you are booking right now, or would they be about the same?

Depending upon the contract and how it works out, these obviously are multiyear contracts and very large contracts. We tend to take a very conservative view in the beginning of a contract, and on a percent completion basis, we usually use a lower gross margin than the estimate the completes show, and so at the end of the contract, we could have an increase in gross margin on those contracts.

On the other hand, in many contracts and the reason we take this conservative approach, is that many long-term contracts also go down. So it goes both ways.

So if you are fortunate enough to have your cost underneath, then you can play a catch-up in the last period when you book those revenues.

If things go well, (multiple speakers)

Finally, is there a seasonality associated with the satellite business that we should be aware of? Is there any one particular quarter typically greater or lesser than any other?

I don't think so. I don't think so. There may be some that but I am certainly not focused on, but we don't see the seasonality of it. It is really more of the economic impact that has driven that area these last two years.

Okay. Finally, the operating margins for the teleco transmission business are now at 20 percent, and I am struggling to see when they were that high. Is this a permanently higher level of profitability there, or is this maxed out, or can you just make some comments on how high that could go?

As we have mentioned before, our satellite area in the telecom transmission area is really a very very high margin business. So that when more satellite products are sold against, let us say, over-the-horizon products, you will see the margins tend to go up. Conversely if there is more over-the-horizon microwave sales which have lower margins, the margins could go down as well. So I think what you are seeing is what we said, is the resurgence of the satellite business area.

Okay. Great. Thank you.

Gentleman, it appears there are no further questions. I would like to turn the program back over to you for any concluding comments.

Well, okay. I guess we want to thank everybody for joining us today, and we will talk to you again in three months. Thank you very much.

This does conclude today's teleconference. We thank you for participating, and you may now disconnect your phone lines. Have a great day.