Comtech Telecommunications Corp (CMTL) 2004 Q4 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to Comtech Telecommunications Corp.'s fourth quarter and fiscal year 2004 earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and if at that time (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded Wednesday, September 22, 2004. And with that I am pleased to turn the program over to Ms. Stephanie Lemonier (ph) of Comtech Telecommunications. Please go ahead, ma'am.

Thank you and good morning. Welcome to the Comtech Telecommunications Corp. conference call for fiscal 2004 fourth-quarter and full year. 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 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. Any 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 record results for the fourth quarter of fiscal 2004, which was a fitting finale to a truly remarkable year for Comtech. As you can see from this morning's press release, our fourth-quarter results were quite impressive as evidenced by a record level of sales, operating profit, net income and earnings per share. Our fourth-quarter diluted earnings per share increased to 40 cents from 27 cents during the fourth quarter of fiscal 2003, and significantly exceeded our previous earnings guidance for this quarter of 26 to 28 cents. For the full fiscal year we surpassed the $200 million revenue mark for the first time in our Company's history, posting sales of over $223 million.

Diluted earnings per share of $1.42 for fiscal 2004 crushed the previous record set in fiscal 2003 of 80 cents. Most importantly, however, we entered fiscal 2005 very optimistic about all three of our business segments. I will discuss this enthusiasm a little later in this call. But first, let me introduce Rob Rouse, our CFO, who we review our operating results for the quarter, as well as provide some summary data for the full year. After that, I will discuss recent developments, provide guidance for fiscal 2005 and take your questions.

Thanks, Fred, and good morning to all of you. As Fred mentioned Q4 topped off an outstanding performance by Comtech in fiscal 2004. As we will discuss, the quarter and full year results were impressive on virtually every level. Let's begin by reviewing some of the key income statement trends for the fourth quarter of fiscal 2004.

Sales of $59.1 million for the quarter set a new quarterly record and were 14.3 percent higher than the fiscal 2003 Q4 level of $51.7 million. Q4 sales also showed strong sequential growth as sales for Q3 of fiscal 2004 were $51.2 million. Sales in the fourth quarter of fiscal 2004 reflected continued strength in our telecommunications transmission and mobile data communications segments. These two segments have led the way in fueling our growth during the past two years.

In addition, our RF microwave amplifier segment had a breakthrough quarter in sales during Q4, driven by the increased bookings that we have mentioned during the past two conference calls. Our fourth-quarter sales broken out by segment are as follows. 64.3 percent telecommunications transmission, 22.7 percent mobile data communications, and 13 percent RF microwave amplifiers. Of the fourth-quarter sales, 48.1 percent were to international end-users, 39.5 percent were to the U.S. Government or primes to the U.S. Government and 12.4 percent were to domestic commercial customers.

Gross profit was $25.3 million for the fourth quarter of fiscal 2004 versus $18 million for the fourth quarter of fiscal 2003. The higher gross profit during the fiscal 2004 period was partially due to the increase in sales. However, also contributing to the increase was a significant improvement in the gross margin percentage from 34.8 percent to 42.8 percent. The increase in the gross margin percentage in Q4 fiscal 2004 was driven by a higher percentage of our sales being in the telecommunications transmission segment, which generally carry higher margins than our other two segments; margin improvements in our mobile data communications segment and increased operating efficiencies and overhead absorption associated with the overall increase in sales and continued focus on utilizing our Arizona manufacturing facility, by all of our segments for certain high-volume manufacturing requirements.

In addition, increased funding and improved operating efficiencies resulted in a 2 percentage point increase in the estimated gross margin at completion for our MTS contract with the U.S. Army. This improvement, which will positively impact our margins on this contract going forward was the result of increased funding and increased operating efficiencies. In connection with the margin reassessment, we recorded a $1.7 million positive gross margin adjustment in our mobile data communication segment in Q4, which relates to activity on this contract in prior periods.

Partially offsetting these margin increases in the fourth quarter was an estimated loss recorded on a contract in our RF microwave amplifier segment which is not expected to recur. SG&A expenses increased from $8.1 million in the fourth quarter fiscal 2003 to $9.9 million in the fourth quarter of fiscal 2004. The increase was attributable to higher expenses related to the increase in sales and overall size of the Company, higher incentive compensation costs in connection with the substantial increase in profitability, and increased compliance costs in connection with recently issued corporate governance regulations.

R&D spending increased to $4.7 million during the fourth quarter of fiscal 2004 from $3.5 million during the fourth quarter of fiscal 2003. The 34 percent increase reflects our ongoing commitment to investing a portion of today's profits in new technologies to fuel our future growth. In addition, customer funded research and development was $1.9 million for the quarter.

During the fourth quarter of fiscal 2004 we recorded a charge of $940,000 relating to acquired in process research and development in connection with our acquisition of Memotec in May of this year. Excluding the in process R&D charge, Memotec operated at approximately breakeven during the quarter.

Operating income for the three months ended July 31, 2004 was $9.2 million versus $5.9 million in the prior year period. Interest expense during Q4 of fiscal 2004 of approximately $700,000 was consistent with Q4 of fiscal 2003. The fiscal 2004 expense primarily relates to our recently issued 2 percent convertible senior notes, while the fiscal 2003 amount related to interest on previously existing long-term debt, which was retired in Q4 of fiscal 2003.

Interest income for the fourth quarter of fiscal 2004 increased to approximately $400,000 due to the higher level of investable cash resulting from the issuance of our convertible notes. The effective tax rate of 32 percent in both periods reflects the continuing benefit of research and experimentation tax credits, as well as tax benefits associated with our significant international operations.

Net income for the fourth quarter of fiscal 2004 were $6.1 million or 40 cents per share compared to $3.6 million or 27 cents per share for the fourth quarter of fiscal 2003. Excluding the tax effected impact of the in process research and development charge fourth quarter net income for fiscal 2004 was $6.7 million or 44 cents per diluted share. The higher diluted shares outstanding for the fourth quarter of fiscal 2004 primarily reflects the 2.1 million shares issued in the July 2003 private placement of common stock.

Earnings before interest, taxes, depreciation and amortization or EBITDA after adjusting for the in process research and development charge were $12 million for the fourth quarter of fiscal 2004 versus $7.6 million for the same period in fiscal 2003. In addition, cash flows from operating activities for the fourth quarter of fiscal 2004 were $18 million reversing the trend that we experienced earlier in the year associated with a buildup of accounts receivable.

Cash flows from operating activities for the fourth quarter of fiscal 2003 were $7.6 million. Backlog as of July 31, 2004 was $83.5 million compared to $100.1 million a year ago. The decrease was the result of our performance on two large Over-the-Horizon microwave contracts received in fiscal 2003 and the delay in the receipt of another anticipated Over-the-Horizon microwave contract. However, as we reported earlier this week, the contract was received for $77 million which is going to significantly increase our backlog to nearly $160 million.

Our balance sheet strengthened as of July 31, 2004 as evidenced by $163.3 million of deployable cash. Our total accounts receivable decreased from the amount as of the end of last quarter by $5.6 million. And more importantly, our unbilled receivables decreased dramatically during the quarter. Unbilled receivables decreased from $20.4 million at the beginning of the quarter to $6.7 million at July 31, 2004 as a result of significant billings on one of our large Over-the-Horizon microwave contracts.

The $3.1 million increase in inventory during the quarter was largely the result of the Memotec acquisition in May, as well as the increase in total companywide sales. Now a few remarks about the full year operating results. Fiscal 2004 sales soared past the $200 million mark for the first time in our history to $223.4 million as compared to $174 million in fiscal 2003, representing a 28.4 percent increase. This was on top of the 45.7 percent increase in sales that we experienced from 2002 to 2003.

Gross profit increased dramatically from 59.7 million in fiscal 2003 to $87.5 million in fiscal 2004. The increase was driven by the increase in sales, as well as the significant improvement in gross margin percentage from 34.3 percent to 39.2 percent, primarily for the reasons I mentioned in connection with Q4.

Operating profit also showed a marked improvement nearly doubling to $32.6 million in fiscal 2004 from $16.8 million last year. Fiscal 2004 net income of $21.8 million or $1.42 per diluted share was significantly higher than the fiscal 2003 net income of $9.7 million or 80 cents per share. The record level of earnings per share represents a 70 percent increase over the previous high set in fiscal 2003.

EBITDA after adjusting for the in process R&D charge was $40.1 million for fiscal 2004 versus $23 million for fiscal 2003. And our cash flows from operating activities for fiscal 2004 were $24.3 million, slightly lower than the $26.8 million in fiscal 2003. The decrease in fiscal 2004 was primarily due to a $16.5 million increase in accounts receivable relating to higher sales and the anticipated buildup of receivables on the Over-the-Horizon microwave contract that I referred to earlier.

As you can see, the fourth quarter of fiscal 2004 as well as the full year continued to showcase Comtech's strong competitive position and ability to deliver solid financial results. And now back to Fred.

Thanks, Rob. First I would like to discuss some of the recent developments in our three business segments during fiscal 2004, and then provide some guidance for fiscal 2005. Once again in fiscal 2004, our telecommunications transmission segment led the way. This is our largest segment and provided over 63 percent of our sales in fiscal 2004. Our established leadership positions in satellite earth station products, Over-the-Horizon microwave systems and forward error correction technology fueled our growth and not only led the way to a record fiscal 2004, but poised this segment for another record performance in fiscal 2005.

Our largest activity in this segment is our satellite earth station products where we offer a complete line of satellite earth station products, and have established contact as a one-stop shop for customers such as domestic and international commercial satellite systems and network integrators, as well as U.S. and foreign governments. Our primary product focus in this area continues to be the satellite modem where we believe our technology has become the standard in optimizing bandwidth utilization, utilizing our patented Turbo Product coding technique.

And as demand for satellite bandwidth continues to grow, we are continuing to invest in the development of the next generation technologies to ensure that we remain the market leader in this area. For example, we have recently announced and are in the process of rolling out a new proprietary technology called Carrier-in-Carrier, which will provide significant bandwidth compression efficiencies.

This technology allows our modems to transmit and receive at the same frequency; thereby saving up to 50 percent of the necessary satellite bandwidth. In addition, through our purchase of Memotec in May of 2004, we have expanded our product offerings to include access devices and voice gateways which allow customers to consolidate multiservice traffic such as voice, video and data. When combined with our Turbo Product Code enabled satellite modems, the combined solution is ideal for backhauling cellular traffic using satellites and thereby reducing customer bandwidth requirements. The Memotec productline complements our modem line, and we expect the synergy to produce additional sales in both product lines.

Our leadership position in the forward error correction area has helped us to stay ahead of the competition in the satellite modem market since efficient forward error correction is such a critical factor in the performance of these modems. In fiscal 2004 we completed a new turbo chip that can achieve data rates up to 311 Mbps, making it the fastest stand-alone error correction IC in the world.

To allow us to stay ahead of the competition we are also in the process of introducing another breakthrough in the forward error correction area called low-density parity check or LDPC coding. This represents another major breakthrough by the Company in error correction technology with performance coming ever closer to theoretical limits.

Bookings in our satellite earth station productline strengthened in fiscal 2004 as well, particularly during the second half of the year. This trend bodes well for us in fiscal 2005, especially since margins in this productline are higher than our other productlines, thus providing significant operating leverage on incremental sales.

Turning now to our Over-the-Horizon microwave productline, the two large international contracts that we booked in fiscal 2003 drove significant increases in revenues and profits in fiscal 2004. And as we discussed during recent conference calls, these contracts will wind down during fiscal 2005. However, as we recently announced the receipt of a $77 million contract will more than offset any runoff relating to the fiscal 2003 contracts. In addition, this booking immediately increased our backlog to nearly 160 million and provides a strong revenue base for this productline over the next few years.

On the U.S. government side, we are actively pursuing opportunities to upgrade or replace Government's current inventory of Over-the-Horizon microwave terminals. For example, during fiscal 2004 we received a $3.1 million order relating to the enhancement of one such Government nomenclature line of sight microwave system to which we added our Over-the-Horizon microwave capability. The systems we delivered are now being tested by the U.S. Government, and if the U.S. Government decides to proceed and obtains funding for these programs, the revenue base in this product line could grow dramatically.

And finally, throughout fiscal 2004 and now into fiscal 2005 we continue to improve the performance of our products and systems in this segment through an ongoing and increasing R&D effort. Our focus continues to be on bandwidth utilization and forward error correction in our satellite modems, and adaptive modem technology in our Over-the-Horizon microwave offerings where we are already well ahead of our competitors.

Turning to our mobile data communications, this segment had another outstanding year and provided approximately 27 percent of our fiscal 2004 sales. This business continues to experience strong demand from the U.S. military. The MTS program continues to gain support within the U.S. Army as evidenced by increased funding and order flow. In fact, as a result of increased funding and operating efficiencies during the fourth quarter of fiscal 2004, we increased the estimated gross margin that we used to recognize revenue in this contract by 2 percentage points. This reassessment reflects the continued success and improved profitability of this important program and further, future increased funding could actually increase our gross margin some more.

The MTS line item in fiscal 2005 defense budget signed by President Bush includes funding of approximately $40 million for the MTS program. We also understand that the National Guard has already authorized approximately $4 million for MTS for 2005. And in addition, we expect to receive orders from other Government line items within the 2005 budget. Similarly as occurred in fiscal 2004. On the war fighter front, the SBCB 2, or Blue Force Tracking Program continues to be a success, and we are proud to play a role in enhancing this communication platform to provide for satellite long haul communications when terrestrial line of sight microwave channels are not available.

Here, too, we have expectations of larger funding in 2005 than received in 2004. Despite the significant increase in revenues in this segment over the past few years, our technology is only on board on a small number of total logistics and war fighter vehicles that the U.S. Army would like to equip through both the MTS and the FBCB 2 programs. Accordingly, these programs should provide solid growth potential in fiscal 2005 and beyond.

We are also working with various other areas within the U.S. military such as the Army Reserves and the Marines, as well as several prime U.S. contractors in addressing potential needs that our technology can satisfy. At the same time we are actively working with existing and potential customers in enhancing our product offerings. For example, the project to miniaturize our satellite transceiver down to the size of a cigarette pack is being tested now in prototype form by some of our customers.

We are also in the process of incorporating RFID technology into our transceivers, as well as the various higher level security functions. All of these developments offer potential new markets for our products. With the scale and reputation we have established in the Government market, we have begun exploring for some time now various strategic alternatives relating to the commercial side of the business. In fact we are currently conducting trials to validate our plans for the commercial market before committing additional substantial resources.

Accordingly, fiscal 2005 will finally begin our entry into the commercial market, and will therefore be a year of investment in this segment as we incur costs with only modest expected revenues as we launch our commercial productline. All in all, the potential military, homeland defense and commercial markets for our technology continued to grow. And we expect fiscal 2005 to be another record year for this segment.

In our third segment, RF microwave amplifiers, we finally experienced the revenue impact of strengthening demand for our products. Sales in the fourth quarter jumped by more than 60 percent from the third-quarter level. This increased demand has largely been on the defense side of the business. For example in fiscal 2004 we received over $5 million each from two prime contractors who will use our amplifiers, one in a system to counteract and provide explosive devices and the other in the Eplos (ph) microwave radio. Both programs have large potential for fiscal 2005 and beyond.

We expect higher level of revenue in bookings to continue into fiscal 2005. In fact, we anticipate that fiscal 2005 will be a record year on the top and bottom lines for this segment as well. Before I discuss earnings guidance, I also wanted to mention that we continue to actively pursue acquisitions. The $105 million that we raised in January 2004 provides us with ample financial resources to complement our impressive organic growth with some strategic acquisition growth.

And as I noted during the last conference call, the $163 million of cash we have available to grow our businesses will not cause us to waiver from our disciplined approach in identifying, assessing and integrating acquisitions. In other words we will not spend the money just because we have it. Having said that, we hope to put ourselves in a position to pull the trigger on at least one or two acquisitions in the next twelve months.

And now, on to guidance. Although the business climate has dramatically improved, there continued to be many factors that make the projections of EPS very difficult. That being said, our diluted EPS guidance for fiscal 2005 is $1.55 to $1.60 per share, up from our previous guidance of $1.41 to $1.43. The estimated fiscal 2005 EPS growth is on top of the 78 percent growth in fiscal 2004. Fiscal 2005 revenues are expected to be between $250 million and $260 million, up from the previous guidance of $236 to $242 million.

As I mentioned earlier in previous conference calls, our quarterly results can fluctuate significantly from quarter to quarter due to the impact of funding and timing of large contracts. And as such, we strongly continue to encourage investors to view our performance on a full-year basis. With that in mind, estimated diluted EPS for the first quarter of fiscal 2005 is expected to be 30 to 32 cents with revenues expected to be between $52 and $54 million.

Revenues and EPS for the second, third and fourth quarters of fiscal 2005 are expected to be significantly higher than the first quarter due to the incremental revenues from the $77 million contract that we just received, as well as the anticipated timing of orders in our mobile data communications segment, which are expected after the start of the Government's fiscal year in October 1, 2004.

The fiscal 2005 guidance takes into consideration, among other things, the margin improvements on our two larger than horizon microwave contracts as they draw nearer to completion, incremental selling and marketing costs in our mobile data communications segment as we validate and launch our entry into the commercial market. Our earnings guidance, however, does not assume any benefit from an acquisition, and here an acquisition would further add to our growth, both on the top and bottom line.

One thing I would like to mention is that recently some changes were proposed to the accounting rules for contingently convertible debt. The issue being addressed relates to how the existence of contingently convertible debt impact the calculation of diluted EPS. The emerging issues task force is scheduled to meet next week regarding this matter. These changes would not impact our net income or the underlying trends in our business. However, if finalized in their current form and if there is no Grandfather provision, the impact of the calculation on our diluted EPS would decrease EPS by approximately 2 to 3 cents per quarter.

Finally, we are extremely pleased about our record performance in fiscal 2004. In fact, we believe that Comtech's performance during the past two record-setting years has firmly established the Company as a proven innovative leader. We've demonstrated our staying power during the post bubble downturn and our consistent ability to outperform our peers as the economy improves. We look forward to fiscal 2005. We believe fiscal 2005 is positioned to be another year for record sales and earnings.

Thank you very much. I would like to mention also that an updated investor presentation will be posted to our website at www.Comtechtell.com shortly after this call. And now, we will be happy to take your questions. Operator.

(OPERATOR INSTRUCTIONS) Mark Jordan with A. G. Edwards.

Good morning, gentlemen, and congratulations on putting another excellent year in the record books. It's two in a row, it's quite impressive. Looking at mobile data, from the K it looks like you had an operating margins expanded there to almost 16 percent. Obviously benefiting from the increase in your gross margin assumption. Do you see that as the new sustainable rate as you move through fiscal '05?

I guess, Mark, just as a correction I believe that is 17 percent that we raised it to, by 2 percent from the previous 15 percent. And yes, we believe that that rate will continue going forward, in that program. And as I mentioned, future funding and increased orders could in fact also get us into a higher rate than that.

Your comment on moving into the commercial marketplace with mobile data technology, could you tell us what is going to be your marketing thrust? And for example, how you might position mobile data vis-a-vis say Qualcomm's omi (ph) tracks?

Right now our expectation is not really to start competing with Qualcomm. We are in the throes of having some demonstrations of our transceivers in a number of applications with some potential customers. I think we will really determine our roadmap once we complete those demonstrations.

Are the RF microwave group, has historically been able to show operating margins in the 8 to 10 percent range, obviously this year we are a little bit above breakeven. Given the higher revenue rates that you expect, can that business be a double-digit operating margin business next year?

I think so, Mark. I think our expectations are that that segment, as well, will have some record sales and profits. Fiscal 2004 had some rough times on two programs, which really lowered the margins.

Okay, and two quick ones and then I will yield the floor. One, any change in your tax rate assumption in '05 as you grow larger? And secondly, where are you in terms of positioning yourself for Sarbanes-Oxley 404 compliance, and what do you see the expenditures in that area as you move through the upcoming year?

I will let Rob handle that one.

Thanks, Fred. In terms of the tax rate, Mark, although obviously with the higher level of pretax income that would tend to drive our rate up. At this point in time we are still assuming a 32 percent tax rate because given the significant investments in R&D that we are making, they are driving incremental research and experimentation credit. So the R&D spending is also having a cash benefit for us on the tax side. So we are assuming a 32 percent rate again for '05.

And in terms of Sarbanes-Oxley, we do expect to incur some additional incremental cost. But we have incurred additional costs in fiscal 2004 in connection with the project because we tried to get an early jump on it. I would not really want to go through a specific number, especially since at this point in time we haven't been through our complete process yet. But we are very far along, and we do not see that significantly trending the numbers one way or the other in '05.

Okay, thank you very much.

Rich Valera with Needham and Company.

Can you guys hear me? With the MTS program, you mentioned some specific funding levels in the budget, I think it was 40 million allocated for '05. Can you remind us what the equivalent number was in the '04 budget?

The equivalent number in the '04 budget was 36 million after which we received a 9 million plus up for a total of 45 million. So this year we see a 40 million plus the National Guard of 4 million, roughly the same amount of initial funding anyway. And as I mentioned, Rich, we expect additional funding from other line items in the budget. For instance, one that I can mention is from the former coalition authority in Iraq, which name I do not remember what it was changed to. We expect an additional 8 to $9 million from that area.

So just to be clear you do expect that business to be up year-over-year?

Yes.

Great. In your Over-the-Horizon business I was wondering if you would be willing to talk about how much backlog you had at the end of the fiscal year in that segment specifically.

Rich, going into the year in that particular productline within the segment we have just about $15 million of backlog going into the year, and again that is obviously before the large contract we announced earlier this week. So it's primarily the runoff on the two large contracts that Fred referred to in his comments.

Absolutely, and would you expect to be able to sort of maintain the same run rate in that business? Or maybe even a little higher without any additional orders now that you've gotten the large $77 million order?

I think it is probably fair to say that we expect the same run rate with this order to occur in 2005 and probably 2006. And any additional funding let's say from the military side just provides an upsurge.

And I know you probably don't have great visibility on this, but any sense of any possible data points to look for on either of those U.S. military OTH opportunities in terms of when we might hear on either of them?

It's very difficult to predict when the Government finally will have some funding and decide on going forward. We are very encouraged in both areas. One that I mentioned, which is the combined radio, which now combines the microwave and the Over-the- Horizon in 1 terminal. That being tested as I mentioned, and it has been already very successful in its initial test.

We do expect, I think some orders in that area, certainly in 2005; exactly when very, very difficult to say. We also expect some orders to start flowing in on the refurbishment of the Track 170 terminals, which I previously mentioned in previous telecoms. That, too, has been tested successfully and it's just a matter of funding.

Great. And sounds like your EF Data segment is actually doing quite well, and I'm sure you follow Radyne Com Stream, which talked about a little weaker second half than they had originally been thinking about. Any thoughts there? You think you guys maybe taking some share or why you guys might be outperforming them it seems on a relative basis?

I think, Rich, to put it in perspective I think we've said that a number of times in the past. We believe we've been taking share, not only from Radyne but from other modem manufacturers. Specifically because of our patented Turbo Product Code technology, and our forward error correction technology. So I think we see a demand in our modem area, which is very, very strong at this point.

Great. And just one final one, could you talk about just your comments with regard to the contingent convertibles. Just sort of reiterate those comments -- where you saying that if it sort of passed the way it is written now, you would take that 2 to 3 cent per share hit when you calculated EPS, if you could just sort of reiterate those comments.

Sure, Rich, there is two I guess items to address in that regard; the first is just the mathematical calculation that says, I just want to reiterate what Fred said, has nothing to do with our earnings or our underlying businesses, but it's a mathematical re-application of the way this calculation is done. That would result in a 2 to 3 cent reduction in earnings per share if it is promulgated in the form that it is currently in.

The other thing that the emerging issues task force is looking at is whether or not there should be a grandfathering provision in this for companies who have had the debt outstanding in advance. As we obviously did. So there's really three things that could happen. They could either pass on it completely, they could Grandfather it, or they could pass in its current form and require it to be applied retroactively. So at this point in time, we don't really know where they are going to come out, but we just wanted to provide that information so you guys would know based on where they come out what the impact would be.

And what is your best guess as to timing of when that decision would be made?

Well, they are meeting as Fred said next week, but is not necessarily certain that they will definitize it next week; it could go to their next meeting which I believe is in December or January.

Thanks very much. Nice quarter, guys.

Jim McIlree with Unterberg Tobin.

You said it perfectly, thank you. Just one more time on this convert. The $1.50, $1.55 to $1.60 that you are taking about, assumes that you aren't taking the 2 to 3 cent hit on convert, or it does assume that you are taking the 2 to 3 cent per quarter hit?

It assumes we aren't.

You aren't, okay. So you would be down, you would be $1.45, $1.50 give or take? If the EITF goes forward? Or there's no grandfather?

Yes.

Okay, great.

But obviously Jim, the prior period would have to be adjusted also just for comparability purposes.

Okay. On the mobile data business, Fred you talked about record sales but did not say record profits, and instead you tempered it with investment in the commercial business. Am I hearing that right that profits in that business could be flat or down in fiscal '05 versus this fiscal year?

Okay, just to re-mention it, record profits obviously for 2004, both top and bottom line for that segment. I think we assume record profits and revenues for 2005, as well.

In that specific segment?

In that specific segment, yes.

Basically Jim, we will be recouping whatever that investment we anticipate still having earnings growth despite the investment. Obviously not at the same rate as the top line because we are going to be as we said earlier, reinvesting some of that profit in our future. As Fred said, we're going to have a limited amount of revenue with the incurrence of cost, this will be our investment year in the commercial side.

Right.

We still expect to show profit growth that notwithstanding.

Okay, great. And I just wanted to make sure that you are also expecting some FBCB 2 type deployments for the mobile data business in fiscal '05? In your guidance?

Yes, that is a little bit more difficult for us to see through because we are a subcontractor in that area. But we have expectations that the funding will be larger in 2005 than it was in 2004.

Okay, very good. And then the operating expense levels that you are expecting in fiscal '05 either on an absolute dollar basis or as a percent of sales, can you comment on that versus fiscal '04?

I would say, Jim, that looking at the Q4 run rates would be more indicative where we would be obviously for '05 than looking at an average for the year since we obviously did increase the size of the business during the period. So as kind of a place setter, if you take the run rates for Q4 and add a little bit on to them, I think you will be within the realm of reason for the year.

And you are talking absolute dollars here, Rob, right?

Correct.

I think that's it. Thanks a lot.

Selman Akyol with Stifel Nicolaus.

First of all, very nice quarter. Could you just further expand a little bit on backlog just by the segment of it? Obviously most of it goes to transmission.

Sure, Selman. The backlog as of July 31st by segment was 30 million in Telecom, 25.9 million in RF microwave amplifier and 27.6 million in mobile data com. And again, that's prior to the receipt of the large order, so that would significantly drive up the Telecom backlog.

And then also, you sit there and you look at the track 170 line of site and opportunities out there, just how large are those potentials?

The track 170, the number of inventoried units in the U.S. Government is approximately 600 terminals. And the other terminal which I believe is nomenclature that the track 175, I believe that is somewhere in the 140 terminal area.

And that is what is then also referred to as the line of sight opportunity?

Right.

Okay, great. All right, I think that is it. Thanks.

Gentlemen, at this time there are no further questions in the queue, so I will go ahead and turn it back over to you.

I like to thank everybody for joining us today. And we look forward to speaking with you again very soon. Thank you very much.