Comtech Telecommunications Corp (CMTL) 2005 Q1 法說會逐字稿

Good morning. Welcome to the Comtech Telecommunications Corporation conference call for the first quarter of fiscal 2005. 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. And now, I would like to hand the conference over to Ms. Stephanie Lemontier (ph). Go ahead, please.

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 2005.

As you can see from this morning's press release, the first quarter was yet another solid showing for Comtech. Our first-quarter EBITDA of 12.2 million, net income of 7.1 million and diluted earnings per share of 46 cents were all quarterly records, and we handily exceeded our diluted earnings per share guidance of 30 to 32 cents. Sales for the first quarter, although essentially flat at $56.1 million, also surpassed our guidance of $52 to $54 million. More importantly, we continue to be very optimistic about the remainder of fiscal 2005, and anticipate significant revenue growth in the second, third and fourth quarters.

The receipt of the $77 million contract for over-the-horizon microwave equipment in September, the strong bookings in our Mobile Data Communications segment over the past few months and the continued strong demand for our Satellite Earth Station products have set the foundation for record results in fiscal 2005. And I will further discuss our upbeat outlook, as well as recent developments, a little later in this call.

But first, let me introduce Rob Rouse, our CFO, who will review our operating results for the quarter. Rob?

Thanks, Fred, and good morning to all of you. As Fred mentioned, Q1 was a good start to what we believe will truly be a great year.

Let's discuss the key income statement trends for the three months ended October 31, 2004. Sales for the first quarter of fiscal 2005 were $56.1 million, as compared to the fiscal 2004 Q1 level of $56.3 million. Sales in the first quarter of fiscal 2005 reflected growth in our Telecommunications Transmission and RF Microwave Amplifiers segments, offset by lower sales in our Mobile Data Communications segment.

Sales in the Telecommunications Transmission segment increased, despite the anticipated decline in Q1 over-the-horizon microwave product line revenues, primarily due to a strengthening in demand for our Satellite Earth Station products. Incremental sales from the recently received $77 million contract are expected to reverse the revenue decline in the over-the-horizon microwave product line for the balance of this year.

Sales in the Mobile Data Communications segment decreased from the prior-year period by approximately 40 percent. However, we anticipate quarterly net sales to increase dramatically from the Q1 level for the remainder of fiscal 2005, as we deliver on recently received orders, as well as pending orders from the US Army. In fact, we continue to predict full year-over-year sales growth in the segment.

Our RF Microwave Amplifiers segment had a breakthrough quarter. Sales increased to $8.9 million, which was an 81.6 percent increase over the first quarter of fiscal 2004. As we have discussed in recent investor conference calls, strong demand, particularly for our defense-related products, has led to higher bookings during the past year, which are now translating into increased sales.

First-quarter sales broken out by segment are as follows -- 66.8 percent Telecommunications Transmission, 17.3 percent Mobile Data Communications and 15.9 percent RF Microwave Amplifiers. Of the first-quarter sales, 46.7 percent were to international end users, 39 percent were to the US government or primes to the US government and 14.3 percent were to domestic commercial customers.

Gross profit was $27.1 million for the first quarter of fiscal 2005, versus $21 million for the first quarter of fiscal 2004. The higher gross profit during the fiscal 2005 period was due to a significant increase in the gross margin percentage from 37.3 percent to 48.3 percent. The increase in the gross margin percentage was primarily due to the higher percentage of our consolidated sales being in the Telecommunications Transmission segment, which, as you know, typically realize higher margins than our other two segments; increased operating efficiencies; and a more favorable product mix within our segments.

During the first quarter of fiscal 2005, we increased the estimated gross margins on two large over-the-horizon microwave contracts, as they continue to draw nearer to completion and cost contingencies are resolved in a favorable matter. The margin reassessments resulted in a $2.4 million increase to the gross profit for the quarter. These margin reassessments are an ongoing part of our operations, and can happen on large contracts that extend over many reporting periods.

SG&A expenses increased from $8.6 million in the first quarter of fiscal 2004 to $11.2 million in the first quarter of fiscal 2005. The increase was the result of, among other things, the increased overall size and scope of our operations; expenses associated with our Memotec acquisition, which occurred in May 2004; costs associated with compliance with corporate governance regulations, including Section 404 of the Sarbanes-Oxley Act; and the initiation of commercial marketing efforts in our Mobile Data Communications segment.

In addition, the first quarter of fiscal 2005 includes approximately $400,000 of net expenses relating to hurricane damage sustained at two of our facilities located in Florida. SG&A expenses as a percentage of sales increased to 20 percent during the first quarter. We expect the percentage to decrease for the remainder of fiscal 2005 as these costs, many of which are fixed, are leveraged over a higher revenue base.

R&D spending increased to $4.9 million for the first quarter of fiscal 2005 from $3.5 million during the first quarter of fiscal 2004. The 40 percent increase is tangible evidence of our ongoing commitment to investing a portion of today's profits into new technologies to fuel our future growth. We believe that our exceptional performance in recent years, driven by leadership and innovation, is a validation of this strategic approach.

The increase in amortization of intangibles relates to our acquisition of Memotec last May. Operating income for the first quarter of fiscal 2005 was $10.(technical difficulty) million versus $8.4 million in the first quarter of fiscal 2004. The significant increase in gross profit was partially offset by increased operating expenses, as I discussed earlier.

Interest expense increased from $24,000 in Q1 of fiscal 2004 to $669,000 in the first quarter of fiscal 2005, as a result of interest on our convertible senior notes, which were issued in January 2004.

On the other hand, our interest income increased from $105,000 to $643,000 as a result of a higher average investable cash balance, combined with increased interest rates. Our 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 international sales. All in all, net income for the quarter ended October 31, 2004 was a record $7.1 million or 46 cents per diluted share, compared to $5.7 million or 37 cents per diluted share for the first quarter of fiscal 2004.

Earnings before interest, taxes, depreciation and amortization, or EBITDA, were a record $12.2 million for the first quarter of fiscal 2005, versus $9.9 million for the same period in fiscal 2004.

Cash flows from operating activities for the three months ended October 31, 2004 were an impressive $20.3 million, compared to $1.6 million for the three months ended October 31, 2003, as our strong operating results were combined with a significant reduction in accounts receivable during the fiscal 2005 period. As you may recall, we predicted the buildup of a receivable related to a North African country in fiscal 2004 and the liquidation of a receivable in the beginning of fiscal 2005.

Turning to our balance sheet, the strong cash flow for the quarter resulted in an all-time-high unrestricted cash balance of $182.1 million as of October 31, 2004. The cash resources we have available put us in an ideal position to fund future organic growth, as well as pursue acquisitions. As I mentioned, we collected a substantial amount of receivables during the quarter, as evidenced by a reduction in accounts receivable from $43 million as of July 31, 2004 to $30.9 million as of October 31, 2004.

Inventories increased to $43.4 million as of the end of the quarter from $39.8 million as of July 31st, in anticipation of a significant increase in sales expected in Q2, which Fred will talk more about later. Our backlog as of October 31, 2004 was also at an all-time high of $162.6 million.

As you can see, Q1 of fiscal 2005 was in itself a strong quarter for Comtech, but more importantly, it has solidified the foundation for another record-breaking year in fiscal 2005.

And now, back to Fred.

Thanks, Rob. First, I would like to discuss some recent developments in our three business segments, and then provide guidance for the balance of fiscal 2005.

Once again, our Telecommunications Transmission segment continued to lead the way, representing approximately two-thirds of our consolidated sales. And specifically, it was the Satellite Earth Station product line, which is also our largest product line, and where we offer a complete line of Satellite Earth Station products and have established Comtech as a one-stop shop for customers such as domestic and international commercial satellite system and network integrators, as well as US and foreign governments. Our primary focus continues to be in the satellite modem area, where we believe we have the leading market position. Our technology has become the de facto standard in optimizing bandwidth utilization using our patented Turbo Product Coding technique, thus reducing transmission costs for our customers.

I talked a little bit back in September about some of our new product introductions, and how we believe we are well-positioned for future growth in this market. Well, as they say, the proof is in the pudding. The first quarter of fiscal 2005 was the strongest booking quarter ever in our Satellite Earth Station product line. We believe that we continue to take market share from our competitors, and are confident that our new product and technology introductions will enhance and preserve our reputation as the leader in the satellite modem product line, some of which we mentioned before, such as our proprietary carrier and carrier product line, which allows our modems to transmit and receive at the same frequency and provide significant bandwidth and transmission cost efficiencies. Also, our new Memotec access devices and gateways, which allow our customers to consolidate multiservice traffic such as voice, video and data, and the new technology in the forward correction area called Low-Density Parity-Check Coding, or LDPC, which represents another major breakthrough in error correction technology, with performance coming ever closer to the theoretical limits.

Turning to our over-the-horizon microwave product line, we're very optimistic about the balance of fiscal 2005. As I mentioned during the last investor conference call, we knew that the first quarter of fiscal 2005 would be impacted by the delayed receipt of the $77 million contract that we announced in September. As Rob discussed earlier, this contract will begin to contribute significant sales in the second quarter. The contract also increased our backlog in this product line to a new record level, providing a strong revenue base over the next three years.

On the US government side, we continue to actively pursue opportunities to upgrade and potentially replace the government's current inventory of approximately 600 of over-the-horizon microwave terminals. In addition, the government has also is also addressing the need to enhance some of its line-of-sight microwave systems with our over-the-horizon microwave capability. Should the US government decide to proceed and provide funding for these programs, the revenue base in this product line could grow dramatically.

Within our Telecommunications Transmission segment, we believe that our ongoing and increasing R&D efforts have paid big dividends by establishing Comtech as the recognized leader in satellite station modems, forward error correction technology and over-the-horizon microwave systems, and we intend to continue our focus on innovation by ramping up R&D spending in fiscal 2005 in a focused way, as this segment continues to grow.

Our Mobile Data Communications segment is also poised for an outstanding year in fiscal 2005. However, as we anticipated, sales in the first quarter of fiscal 2005 were lower than the expected quarterly sales for the balance of the year. As a reminder, our quarterly sales in this segment can fluctuate dramatically from quarter to quarter, and since the government in on an October 1 to September 30 fiscal year, and funding is usually released after October 1, our first-quarter sales can be impacted by the timing of the receipt and the fulfillment of orders from the US Army.

The good news is that we booked more than 15 million in orders in the first quarter, and the second quarter could be more than double that. In other words, our bullish outlook for this segment for the balance of fiscal 2005 is based on the substantial amount of new orders in the past couple of months, and not just on wishful thinking. The recent string of new orders for both the MTS and the Blue Force Tracking programs is continuing evidence of the important role that our technology is playing in providing vital tracking and messaging capabilities for both the logistics and war fighter communities. These capabilities are of particular importance when directional line-of-sight microwave channels are not available.

Despite the extraordinary growth that this segment has achieved in recent years, the MTS and Blue Force Tracking programs continue to be significant growth platforms, since only a small number of the logistics and war fighter vehicles that the US Army would like to equip with our technology have been upgraded with this technology to date. We're also working with other areas within the DoD, such as the Army Reserves and the Marines as well as several prime US contractors, and addressing potential needs that our technology can fill.

The R&D project aimed at miniaturizing our mobile satellite transceiver and incorporating RFID technology into the transceiver have been met with much enthusiasm by both the government and several primes. These R&D investments are also opening up new potential markets for our products.

As you have seen, we also announced last week that we have begun to receive orders from the former Iraqi Coalition Provisional Authority -- this for our new MTS Lite product, in which all of the hardware and software is packaged in a brief-sized container. This new product, called the MTS Lite, will be used in a direct support of the reconstruction and protection of the Iraqi oil infrastructure.

Also, as I mentioned during our last conference call, we're continuing to conduct commercial trials using our mobile transceiver technology with approximately 10 trucking companies. Our strategy has always been to approach the commercial side of this market slowly, thoughtfully and carefully. And although we're not projecting significant commercial sales in fiscal 2005, we believe that we will have the framework in place by the end of this fiscal year to begin to see meaningful bookings as we enter fiscal 2006. With the potential military, homeland defense and commercial markets for this technology continuing to grow, the outlook for this segment in fiscal 2005 and beyond looks very bright.

Our third segment, RF Microwave Amplifiers, had an outstanding quarter. Sales and profits were at record levels, as we are finally enjoying the tangible benefits of the increased demand we have been experiencing over the past year. This demand has been particularly strong, for our defense-related products -- whether being used to jam improvised explosive devices, to intercept unfriendly aircraft or a multitude of other uses of our high-power broadband amplifiers -- are key components in many high-profile military programs.

In addition, we have also begun to see some of the commercial markets for our amplifiers come out of the doldrums. For example, the commercial aircraft market for our amplifiers, which are used in communicating from aircraft to satellite to ground, is again beginning to show signs of life. All in all, this segment, which had lagged behind our other two segments in its growth during the past couple of years, is contributing nicely to our sales and profits in fiscal 2005.

Before I discuss earnings guidance, I also want to again mention that we continue to look to supplement the remarkable organic growth that we have experienced in recent years by actively pursuing acquisitions. As Rob mentioned earlier, as of the end of the first quarter, we had more than $182 million of unrestricted cash, and we hope to use some of that to make one or two acquisitions during the next 12 months.

Now, on to guidance. Obviously, we have said it before and we will say it again -- there continue to be many factors that make the projection of EPS very difficult. That being said, I will provide some guidance for both the second quarter and the full year fiscal 2005.

Before I discuss the numbers, however, I wanted to give our shareholders an update on the impact of recent accounting pronouncements on the calculation of diluted EPS. You might recall that during the last conference call, I mentioned that the EITF, or Emerging Issues Task Force, of the FASB had come to a tentative consensus which would require convertible debt, including our convertible senior notes, to be assumed as converted in calculating diluted EPS.

Well, the EITF finalized its consensus in late September. And accordingly, starting in the second quarter of fiscal 2005, we will be required to assume the conversion of our convertible senior notes in calculating diluted EPS. In addition, we will be required to restate any prior impacted periods for comparative purposes. For example, if this pronouncement was in place during fiscal 2004, our diluted earnings per share for the year would have been $1.38, or 4 cents less than the $1.42 that we reported. To make it clear, our updated investor presentation, as well as our 10-Q filed earlier today, outlined the impact of this new pronouncement on each period that will be affected.

Our fiscal 2005 diluted EPS for the first quarter under this new pronouncement would be 43 cents, or 3 cents less than the 46 cents prior to the EITF impact. The guidance I will provide today for both the second quarter and the balance of fiscal 2005 will be presented both ways, with and without adopting the new accounting pronouncement. That said, we are raising our pre-EITF diluted EPS guidance for fiscal 2005 to $1.70 to $1.75, which is a 15 cent increase from the previous guidance and 20 percent higher than our fiscal 2004 diluted EPS.

The EITF impact for fiscal 2005 is projected to be 11 cents, thereby reducing the EITF impact EPS guidance to $1.59 to $1.64. Fiscal 2005 revenues are expected to be between 255 and 265 million, up from the previous guidance of between 250 and 260 million. And as I mentioned in past conference calls, our quarterly results can fluctuate significantly from quarter to quarter. As such, we continue to strongly encourage investors to view our performance on a full-year basis.

With that in mind, the estimated diluted pre-EITF EPS for the second quarter of fiscal 2005 is 43 to 45 cents, and 40 to 42 cents after the EITF impact of 3 cents. Second-quarter revenues are expected to be between 66 and 68 million.

Our guidance takes into consideration, among other things, significant sales from our recently received $77 million over-the-horizon microwave contract, possible margin improvements on the two large over-the-horizon microwave contracts that are winding down, a more moderate level of Satellite Earth Station product bookings and a ramp-up of R&D spending, particularly during the second half of the year. Our guidance does not assume any benefit from any acquisition, and certainly, an accretive acquisition would further add to our growth.

In summary, we remain extremely excited about all three of our business segments, and we are confident that fiscal 2005 will be another record year for Comtech. For the remainder of fiscal 2005, we will focus on delivering record results, as well as setting the foundation for future growth in fiscal 2006 and beyond.

Thank you very much. An updated investor presentation will be posted to our website at www.Comtechtel.com shortly after this call.

And now, it's your turn to ask questions. Both Rob and I will be happy to answer any questions. Operator?

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

With such a strong quarter, you could create a lot of questions. First of all, looking at the Satellite Earth Station products that you have, the pickup in demand that you see -- is that a function of just growth in the market, or are you also seeing replacement sales being driven by the fact that you have a new generation of higher-throughput modems available, and that volume increase is an attractive feature?

I guess, to answer your question, just repeating what I tried to say, I think we're seeing an overall pickup in the satellite area right across the board. I think we're taking market share from some of our customers. I think we're replacing old modems with our new technology modems, with our error correction technology, and we are also seeing a pickup in overall new systems being generated.

In the RF segment, if you go back in the fourth quarter, you did see your initial pickup in volume in the fourth quarter of last fiscal year, although you were not profitable in the fourth quarter in that segment. Now, in the first quarter, you are showing about a 12.5 percent segment operating margin in amplifiers. Is that a good run rate from here, now that you have ratcheted up and are running at sort of a $9 million per quarter type of run rate?

Mark, the profit margin in that segment can be impacted by mix. You might recall in Q4 of last year, we did have some charges we took on one of our longer-term contracts in that group, which did not recur. This quarter, we had a very favorable product mix within that segment, so I would say at this volume level that the target for us would be more in the 10-ish range. We did have a very favorable mix for this quarter.

Talking about margins also on the over-the-horizon and Mobile Data, clearly it was nice to see the conservatism in the way you booked the first two large contracts that you had. Given the experience that you have gotten with those contracts on this new one you're starting up here, could you comment as to what level of conservatism you are going to build in on the cost assumption side?

I think, Mark, this being another large contract with a new customer, even though it's for some of the same equipment that, obviously, we have previously provided, I think we will probably be starting on a similar basis in a nice conservative manner, in booking gross margin on it. And probably, I would have to say that we probably will evaluate it a little bit earlier, in terms of margin improvement, as we go along from quarter to quarter.

And part of that, Mark, is due to the fact that we do have some history now with these two contracts to look to. So, as Fred said, obviously, earlier on in the contract, as you are properly laying out the risks and the like, you tend to provide for those contingencies. But we'll continue to do that and, obviously, take into consideration our experience on those two contracts and others we have had in the past.

Given the positive outlook that is emerging for Mobile Data and the continuation of, well, growth of volumes, could you talk about the margin outlook at Mobile Data and how that might be -- how system redesigns, the new MTS Lite, would impact margins going forward?

Well, as you know, we have increased the margin on the MTS contract from the original one a couple of quarters ago. We're constantly evaluating those margins. Certainly, any of the new contracts that are being received right now, other than MTS -- for instance, the one that we just mentioned, which was the MTS Lite from the former CPA -- those margins are totally different from the MTS margin, and are larger than the MTS margins. So overall, I think one could expect that the segment itself, the margins will start to rise in a small way from quarter to quarter as we proceed.

I think, Mark, you could see that if you look at Q1's results and our 10-Q, although we did have a large drop, as we anticipated, in mobile datacom revenues, the operating margin in the segment was actually pretty strong, and that was driven by the fact that a lot of the sales were not MTS-related, and tend to have higher gross margins.

Two final quick ones. Could you talk about the status of Sarbanes-Oxley adoption, and how comfortable you are in that process?

And then secondly, you mentioned a ramp in R&D in the second half of the year. Could you say specifically where you're going to be spending that money?

Sure. I guess, in terms of the first question, Mark, we are, in our minds, on schedule. Obviously, being a July 31st year end, it's not as around-the-corner as it is for a December 31st year end. But we have been working on it for more than a year now, and obviously are incurring some expenses just like every other public company are. And at this point in time, I would say that we're on schedule, and obviously, the next six to seven months, there's going to be a lot of work. But we are prepared and stepped up for that, and don't see it as a major issue at this point in time.

In terms of the R&D ramp-up, you see $4.9 million worth of expenses in Q1. I would expect that to gradually ramp up into the mid-$5 million range by the end of the year, so Q3/Q4 being somewhere in that $5.3 to $5.7 million general range. That could be higher or lower, depending on -- we are not just spending it because of the way the numbers work out. We're spending it on discreet projects, and those numbers could shift. But from a modeling point of view, that's where I would expect it to be.

Again, specifically the product areas where you see the opportunity to invest?

Primarily in the satellite product area.

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

Fred, going back to your prepared comments, I think you made a comment that you thought that the orders -- that the Mobile Data area could more than double from the order level you saw in the first quarter. Did I hear that correctly?

Yes. I think we have booked approximately $15 or $16 million in the first quarter, and we expect the second quarter to more than double. So that would be, let's say, doubling it to 30-plus million.

And any sense of where those are coming from -- what divisions of the military, how much of that is sort of coming from Iraq? It's a pretty good pickup.

It's really across the board. As the one program that we just mentioned, which is the new product for us, which is the MTS Lite -- that is for the oil infrastructure in Iraq, obviously. A lot of the war fighter or FBCB2 or Blue Force Tracking, as it's called -- that's obviously very much oriented towards Iraq. The MTS is really across the board for logistics in Iraq, and logistics in the States, as well. So it's really coming across the board.

And with respect to SG&A, Rob, I think you mentioned that that was expected to trend down as a percentage of revenue as your revenue ramped. But how do you expect that to trend in absolute dollars, maybe sequentially, if you could maybe give a little help on that?

I think that, if you look at the year as a whole, I would expect the amount or the percentage becomes more meaningful. As I mentioned in my comments, some of these expenses are fixed or were certainly semi-variable. So they are not going to go up and down by quarter as much as a commission type expense would. So we would expect the SG&A levels to be in the 17 to 17.5 percent range for the year as a whole. So to the extent, as Fred mentioned in his comments, we do have quarters where our revenues can be up or down, given the timing of large orders, but on an annual basis, we would expect at this size to be in that 17 to 17.5 percent range.

And another margin question. It seems like, even if you back out the 2.4 million adjustment on your two over-the-horizon contracts, you still had about a 44 percent gross margin, which is well above your recent levels. How should we think of gross margin for the overall year, Rob? Can you give us a sense of where you expect that level for the year?

Sure. And you're absolutely right, Rich. If you do decide to back that item out, we did end up with a 44 percent margin, driven by a couple of things. First, as Fred mentioned, we had a disproportionate amount of our sales being in the Telecommunications Transmission segment, which, as you know, is our highest margin segment. And even within the segment, as I mentioned in my comments, within that segment we had a higher level of Satellite Earth Station modem sales, because our over-the-horizon sales, as we anticipated, were lower, given the delay in receiving the new contracts. So you really had a shift to that segment, and within that shift, a product mix trend, given the sales level and the components of the sales within this quarter.

So looking out for the year, again, it can fluctuate by quarter. But I would say for the year, overall on a blended basis, you take all that stuff and bake it in, you'll be somewhere, we would assume, in the 40 to 41 percent gross margin range. And also, obviously, with mobile datacom being lower in the first quarter, that has a lower margin. So that also -- it drove down the sales, but it drove up our gross margin percentage.

And then, just one final question a the competitive outlook. Obviously, you guys are putting up some very good numbers, and seemed to be performing well. But I'm assuming you heard comments from probably one of your most direct competitors in the satellite modem area, Radyne, who suggested that they had won some business head-to-head against you guys in the last quarter -- I think about $5 million worth of business -- and they thought they had meaningfully underpriced you. Could you just comment on sort of the competitive dynamics, and how you are feeling about the price of your products relative to those of your competitors?

I think, as I mentioned in the prepared text, Rich, we really believe we have been taking market share from all of our competitors, including Radyne. I think the technology we offer is unmatched at this point in time. I don't know the specific programs that Radyne was talking about that they have taken away from us -- not that they have not won their share of contracts, obviously. Where they try to really lowball us, we don't play, and we refuse to play. But I certainly have not seen any of those so-called big contracts being announced by Radyne, and I think you will be surprised, maybe, if we start announcing them.

Jim McIlree, C.E. Unterberg Towbin.

Can you give us a feel for how big of a hit on the expense line you're taking for the marketing on the commercial mobile satellite side?

I would not want to share that information, Jim. I wouldn't want to share that at this point in time. It's meaningful in the context of the year. It's not going to make or break us. But I think Fred's point in discussing it was that we are really not expecting any type of sales level associated with it, so it's just an incremental G&A amount. I wouldn't want to specifically discuss that number.

And when you say that the orders for the Mobile Data business could double in Q2 versus Q1, what is the turnaround time on those projects? Is it typically, if you book it in the quarter, you are going to ship it in the next 90 to 120 days? Or is it a longer turn?

It depends, Jim, on the nature of the order. For example, if it's a hardware order, then it's received earlier on in the quarter, it's very likely that it will be shipped in the quarter. If it's an order for, let's say, satellite time, that will usually extend over multiple periods. In fact, to your question, I just want to point out that, if we do continue to receive these orders earlier in the quarter, as we have, it is possible that between Q2 and Q3, we could have some acceleration of revenues from Q3 into Q2, where we are comfortable with the amounts within the annual guidance we gave. But we could actually have some pull-in into Q2. But until we have greater visibility on that, we see the guidance as we laid it out this morning.

So to your question, it depends on the nature of the order and the timing within the quarter of the order.

But on the nature of the order, you guys are clearly looking at something that gives you confidence it's going to double this quarter. So, based on what you are seeing right now, is it more of a satellite time, or is it more of the equipment?

I think it's both, Jim. And I think you'll see that some of the inventory buildup is due to that projection that we have. But it really is both.

The two over-the-horizon projects that are nearing completion -- can you refresh my memory on when those are completely finished?

The $20 million contract, Jim, we expect to be substantially completed by the end of this quarter, and the $42 million contract will continue on into fiscal '06.

And the 77 million -- is it fair to say that that's about a $6 million a quarter revenue addition? Can we just divide the 77 million over the life of that contract? Is that close enough?

Well, it will take a couple of quarters to completely ramp up, Jim, so I would expect it to be higher in the third quarter than the second quarter. But again, I would just caution people against trying to be too stringent to the -- straight line it by quarter. It's probably not a bad way to do it, for lack of a better measure. But, as Fred has said on numerous occasions, our revenues can fluctuate because of some of these large contracts. But I would expect by Q3/Q4 for it to be in its normalized ramp-up mode.

(OPERATOR INSTRUCTIONS). Selman Akyol, Stifel Nicolaus.

Congratulations on a very nice quarter. A couple quick questions, if I may. First of all, can we get the backlog by segments?

Sure, Selman. The backlog by segment was 106 million in the Telecom Transmission segment, 34 million in Mobile Data Communications and 23 million in Amplifier.

And then just on the other side, if we can just go to transmission equipment -- obviously, it's divided between the over-the-horizon, as well as the satellite modems. And then, as you guys look forward, do you actually see the dollar amount for the satellite modems coming down and then being offset by over-the-horizon revenues picking up, or is it more just a flat line on the satellite modems, and then over-the-horizon picking up to become a greater percentage?

Well, in our guidance, as Fred mentioned, we are not assuming in our guidance that the Satellite Earth Station business continues at the same furious pace it has been at for the last few months. If it did, obviously, we would have upside there. But, given the fact that it is more of a book-and-ship business, it's hard to assume that type of level of bookings for the full year. So, within our guidance, I think what you'll see for the rest of the year is the over-the-horizon microwave business growing, because we had the lower first quarter, and the Satellite Earth Station business kind of moderating, just for purposes of the assumption we used in the guidance. If we were to continue to book at the same level we did in Q1, our guidance would certainly increase.

(OPERATOR INSTRUCTIONS). And at this time, it appears we have no further questions.

Okay. I guess I want to thank everybody for their interest in Comtech, and we look forward to speaking with you again very soon. And happy holidays to everybody. Thank you very much.

This concludes today's teleconference. You may now disconnect, and have a wonderful day.