Comtech Telecommunications Corp (CMTL) 2005 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Comtech Telecommunications Corporation’s Second Quarter Fiscal Year 2005 Earnings Conference Call.

(OPERATOR INSTRUCTIONS)

I would now like to turn the conference over to Mrs. Stephanie Lamentia (ph) of Comtech Communications. Please go ahead, ma’am.

Thank you and good morning. Welcome to the Comtech Telecommunications Corp. conference call for the second 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’ll 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 related 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’m pleased to introduce the President of Comtech, Fred Kornberg.

Thank you, Stephanie, and good morning everyone. And thank you for joining us today. This morning, we will be discussing our results for the second quarter of fiscal 2005.

As you can see from this morning’s press release, the quarter was truly outstanding in every sense of the word: sales, operating profit, EBITDA, net income, and diluted earnings per share, all shattered previous records by wide margins. And continued strong demand for our products in all three of our business segments is expected to drive fiscal 2005 to new heights of performance, as evidenced by the flurry of recent releases regarding new contract awards.

I’ll further discuss our upbeat outlook, as well as our 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, Q2 was another record breaking performance for Comtech. Let’s discuss the key income statement trends for the three months ended January 31st, 2005. Sales for the second quarter of fiscal 2005 were a record $78.1 million, as compared to the fiscal 2004 Q2 level of $56.8 million. Of the fiscal 2005 Q2 sales, approximately $5.9 million relate to cumulative adjustments we recorded on two large over-the-horizon microwave contracts, as well as the MTS contract in our Mobile Data Communications segment, which I will discuss during my remarks on our gross margins.

However, with or without the impact of these adjustments, sales soared past the $70 million mark for the first time in our history. The impressive increase in sales occurred across all three of our business segments.

Second quarter sales broken out by segment are as follows: 50.8 percent Telecommunications Transmission, 38.2 percent Mobile Data Communications, and 11 percent RF Microwave Amplifiers. Of the second quarter sales, 37.6 percent were to international end users, 51.8 percent were to the U.S. government or primes to the U.S. government, and 10.6 percent were to domestic commercial customers.

The increase from pervious quarters in the percentage of Mobile Data Communications sales, as well as the increase in the percentage of U.S. government sales, was the result of the anticipated increase in Mobile Data Communications sales from Q1 to Q2, due to the timing of the U.S. government’s funding cycle, which begins on October 1st.

Gross profit was $32.3 million for the second quarter of fiscal 2005, versus $20.6 million for the second quarter in the prior year period. The increase in gross profit was attributable to the significant increase in sales and an increase in our gross margin percentage from 36.3 percent to 41.4 percent. The increase in the gross margin percentage was primarily due to increased sales of our Satellite Earth Station products, which typically realize higher margins than sales of our other products, which was partially offset by a higher percentage of Mobile Data Communications segment sales, which typically realize lower margins than sales of our other products. Increased operating efficiencies also contributed to the margin percentage increase, as well as the cumulative adjustments to two large over-the-horizon microwave contracts and the MTS contract.

The adjustments to the estimated margins at completion on the two over-the-horizon microwave contracts were the result of the favorable resolution of certain cost contingencies as the contracts continue to draw nearer to completion. In fact, during the second quarter, one of the contracts was substantially completed.

We also recorded an adjustment to the estimated margin at completion on the MTS contract with the U.S. Army. The adjustment was the result of increased funding for this program, as well as continued improvements in operating efficiencies.

In addition, we modified during the quarter the manner in which we estimate our progress towards completion related to service revenue on the MTS contract to address the way our customer is currently deploying and using the units, particularly in Iraq.

The aggregate impact of these adjustments on gross profit for the second quarter of fiscal 2005 was $3.7 million. Excluding the sales and gross profit relating to these adjustments, our gross margin percentage for Q2 would have been 39.6 percent, and would have been north of 40 percent if it was not for the higher level of Mobile Data Communications segment sales in the quarter.

SG&A expenses increased from $8.8 million in the second quarter of fiscal 2004 to $12 million in the second quarter of fiscal 2005. The increase reflects the increased level of sales and activity in all three of our business segments; expenses associated with Memotec, which we acquired in May, 2004; the continued initiation of commercial marketing efforts in our Mobile Data Communications segment; and ongoing costs of compliance with recent corporate governance regulations, including Section 404 of the Sarbanes-Oxley Act. As a percentage of sales, SG&A expenses were 15.4 and 15.5 percent, respectively, in Q2 of fiscal 2005 and 2004.

Our R&D spending increased to $5 million for the second quarter of fiscal 2005, from $3.7 million during the second quarter of fiscal 2004. This significant 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 our outstanding performance in recent years, driven by technology leadership and innovation, is the best validation of the strategic approach.

Operating income for the second quarter of fiscal 2005 was $14.7 million, versus $7.6 million in the second quarter of fiscal 2004. All three segments posted solid performances at the operating profit line. Approximately $3.3 million of operating income for the quarter was the result of the adjustments that I discussed earlier.

Interest expense and interest income both increased in Q2 of fiscal 2005, primarily as a result of our convertible bond offering in January of 2004.

Our effective tax rate of 32 percent in both periods reflects the continuing benefit of research and experimentation credits, as well as tax benefits associated with our international sales.

Net income for the quarter ended January 31st, 2005 was $10.2 million, or $0.59 per diluted share compared to $5.2 million or $0.34 per diluted share in the prior year period.

As we discussed on our last conference call, these EPS amounts reflect new accounting requirements for the manner in which convertible securities are factored into the EPS calculation. Adoption of the new requirements resulted in approximately $0.05 of dilution in Q2 of fiscal 2005. In other words, our diluted EPS would have been $0.64 pre-adoption of this accounting pronouncement. The adjustments on long-term contracts contributed $2.2 million to net income during the quarter.

EBITDA was a record $16.6 million for the second quarter of fiscal 2005, versus $9.2 million for the same period in fiscal 2004. And our cash flows from operating activities for the six months ended January 31st, 2005, as reported in our 10Q filed earlier today, were $40.5 million. This strong cash flow for the period reflects our strong operating results, as well as favorable working capital changes. With that in mind, turning to the balance sheet, the impressive cash flow has resulted in another all-time high unrestricted cash balance as of the end of the quarter of $201.7 million. These cash resources we have available will be used to fund future organic growth, as well as pursue acquisitions.

Our receivables decreased slightly from the July 31st, 2004 amount, but have increased from the October 31st, 2004 balance in connection with the significant increase in sales during the second quarter. The receivable balance, including unbilled receivables, is less than 50 days of Q2 sales.

Inventories decreased from the July 31st and October 31st, 2004 amounts as we performed on our contracts during the quarter. We do expect the inventory level to rise somewhat for the remainder of the year in anticipation of continuing strength in demand for our products.

Our backlog as of January 31st, 2005 was $159 million, also an impressive amount considering the record level of sales during the quarter. This compares to $83.5 million in backlog as of the end of our last fiscal year, and $162.6 million as of the end of Q1.

In Q2 of fiscal 2005, Comtech once again posted record performance. And in doing so, we have solidified fiscal 2005 as another record-breaking year. And now back to Fred.

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

Our Telecommunications Transmission segment continues to fuel our Company’s growth. Record performance at the top and bottom line is the best evidence of our dominant leadership positions in this segment. The largest product line in this segment is our Satellite Earth Station product line, 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 and network integrators, as well as U.S. and foreign government.

Our primary focus continues to be in the satellite modem area, where we believe we have the leading market share, and 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.

In previous conference calls, we have discussed at length why we believe we are well positioned for future growth in this market. Well, as they say, the proof is in the pudding. Bookings during the first half of the year in our Satellite Earth Station product line have been at the highest level ever. And we hope to continue this trend by continuing to introduce during FY ’05 industry leading technology solutions, such as our in carrier technology, which allows our modems to transmit and receive at the same frequency, thereby providing significant bandwidth and transmission cost efficiencies; such as our Memotec Access devices and Voice Gateways, which allow our customers to consolidate multi-service traffic; and such as our new technology in the forward error correction area called Low-Density Parity-Check, or LDPC, coding, which represents another major breakthrough in forward error correction technology.

Turning to our over-the-horizon microwave product line, we’re expecting another strong performance in fiscal 2005. We have a large backlog from our traditional customers, which provides us a solid revenue base over the next few years in this product line.

Perhaps more important than this product line’s expected strong financial performance in fiscal 2005, we’ll be at the positioning at the U.S. government opportunities, which are emerging for this technology. The advancements we have made in this area have opened up applications for our technology that were never before possible. For example, our adaptive 8 megabit over-the-horizon microwave modem now enables the transmission of black and white video over this type of channel for the first time. The U.S. government is considering a number of applications of this technology, one being the upgrade and eventual replacement of approximately 600 stand-alone over-the-horizon microwave terminals now in its inventory.

The U.S. Army is also addressing the need to enhance some of its line-of-sight microwave systems with our over-the-horizon capability to provide a dual capability for short-haul and long-haul communications. And recently, the U.S. Air Force announced the requirements for a KU band 8-megabit transit case over-the-horizon microwave terminal to be used in its Theater Deployable Communications, or TDC program.

We believe we are uniquely positioned to capitalize on these opportunities, since we have continuously invested in this technology platform over the past 20 years and, we believe, have become a leading supplier in this market.

In order to capitalize on these opportunities, we are working closely with the DoD and are providing the necessary information, and performing field demonstration tests to obtain funding. And even funding on a small percentage of these total opportunities could result in significant growth drivers for this product line for Comtech. We’ll obviously keep you posted as this area continues to develop.

In summary, within the Telecommunications Transmission segment, our ongoing and increasing R&D efforts continue to pay big dividends. We are truly the leaders in the Satellite Earth Station modems, over-the-horizon microwave systems, and forward error correction areas. Being leaders in the markets we serve is a fundamental underpinning of our strategy. And we intend to continue our focus on innovation by committing significant resources to R&D as this segment continues to grow.

Our Mobile Data Communications segment also had a great quarter. And as I mentioned during our last call, quarterly sales can fluctuate dramatically from quarter to quarter. And as expected, Q2 made up for the softness in sales that we experienced in Q1. This, due to the release of the initial round of fiscal 2005 U.S. government funding starting on October 1st, 2005.

The importance of the role our technology plays, both within the logistics and the war fighter communities, continues to grow. Our mobile satellite transceivers and related communications satellite network are critical, particularly when threshold line-of-sight microwave channels are not available.

Despite the extraordinary growth this segment has achieved in recent years, the MTS and Blue Force Tracking programs continue to be significant growth platforms for the future. Since only a small number of the logistics and war fighter vehicles that the U.S. Army would like to equip with this technology have been equipped to date.

As I’ve mentioned before, we have been working as a partner with the Army in identifying additional functionalities that the Army would like in our transceiver. We have now incorporated RFID capability, as well as an enhanced security feature into our more advanced transceiver. We’re also changing our in-vehicle computer to add features, enhance performance, and provide more ruggedness.

And during Q2, we received further tangible validation of our important role in the DoD’s communication infrastructure. We were notified by the MTS program manager that the Army plans to accelerate its transition to the more advanced hardware platform we are now offering. We view this as a positive development as it demonstrates the commitment we have to providing the Army with the best technology solution, and the Army’s commitment to us as its key supplier in this area.

That’s the good news. The bad news is that negotiating the changes, along with transitioning to a new production line, may impact the timing of the receipt of some MTS orders for the new transceivers and computers and, obviously, the related recognition of revenue for the balance of fiscal 2005.

Having said that, we still believe that fiscal 2005 sales in this segment will be higher than fiscal 2004 and at record levels. And more importantly, in the intermediate and long run, it clearly sets the foundation for potential significant revenue growth into fiscal 2006.

We’re also working with other areas within the DoD, such as the Army Reserves and the Marines, as well as several prime U.S. contractors, in addressing potential needs and new applications that our technology can fulfill.

Our R&D project aimed at miniaturizing our satellite transceiver has been met with much enthusiasm, by both the government and several of our primes. We have supplied over 300 units, 300 of these miniaturized units, for beta testing by four difference government prime contractors for various new applications.

The reduced size is also opening up a new potential commercial market for our products. In fact, on the commercial front, Q2 was also a period of much activity. Our commercial trials are continuing and we are investing in the infrastructure necessary to launch and market our products into the commercial space. Although these expenses are impacting fiscal 2005 without a corresponding increase in revenues, they are an investment for 2006 and beyond.

In addition during the quarter, we announced the acquisition of Tolt Technologies, which we closed on during the first week of February. Tolt has significant experience in providing turnkey employee mobility solutions to large enterprises, including hands-on experience with customers that have trucking fleets. Tolt’s sales in calendar 2004 were approximately $17 million.

In purchasing Tolt, we acquired a business of scale with an infrastructure to supplement our internal commercial efforts, particularly on the distribution and sales side. In addition, we see the acquisition helping us in the longer term where we also see convergence between in-cab and in-warehouse technology platforms for commercial trucking customers.

Fiscal 2005 is expected to be another record year for our Mobile Data Communications segment. And we expect to accomplish this while funding our investments into the future.

Our third segment, RF Microwave Amplifiers, also had another outstanding quarter. Demand in this segment has been particularly strong through our defense related products, whether being used to jam improvised explosive devices, intercept unfriendly aircraft, or a multitude of other uses, our high-power broadband amplifier is a key component in many high profile defense programs.

In addition, we have also seen some of the commercial markets for our amplifiers continue to improve, particularly in the medical and in the aviation areas. This segment, which has lagged behind our other two segments in its growth during the past few years, is now contributing to our sales and profits in fiscal 2005 in a very meaningful way. In fact, fiscal 2005 is expected to be a record year by a wide margin. And more importantly, the recent marked increase in bookings and emerging opportunities is paving the way for significant additional growth in fiscal 2006.

Before I discuss the earnings guidance, I also want to mention that we continue to look to supplement the remarkable organic growth that we have experienced in recent years by pursuing acquisitions. With more than $200 million in cash as of January 31, 2005, we’re well positioned to pursue our acquisition strategy. However, as we have shown during the past year, our criteria for evaluating potential acquisition candidates has not and will not change just because we have lots of cash to deploy.

Now, on to guidance. Obviously, as I have mentioned on previous telephone conferences, there continue to be many factors that make the projection of EPS very difficult. That being said, I will provide guidance for both the third quarter and the full year for fiscal 2005.

Keep in mind that, as Rob mentioned earlier, our diluted EPS guidance has been adjusted to reflect recent changes to the accounting literature regarding how to treat contingently convertible debt. In effect, we’re now required to assume that our $105 million of convertible notes are converted into shares of our common stock, even though the notes are not in the money, thereby increasing dilution by over 2 million shares.

With that in mind, and including that dilution, we are raising our diluted EPS guidance for fiscal 2005 to a range of $1.82 to $1.86, up from the $1.59 to $1.64 given to you during our last conference call.

Fiscal 2005 revenues are now expected to be between $275 and $280 million, as compared to a range of $255 to $265 million, given to you during our last conference call.

Keep in mind the guidance takes into consideration the slippage of some previously assumed second half fiscal 2005 Mobile Data Communications segment revenues. That’s slippage going into fiscal 2006 as a result of the transition to our new next generation transceiver.

On the positive side of the Mobile Data Communications segment’s new technology transition, we see sales slippage into next year helping to handily drive fiscal 2006 consolidated revenues over the $300 million mark.

Our quarterly results, as I’ve emphasized during past conference calls, can fluctuate significantly from quarter to quarter. And at the risk of being accused of being repetitious, we strongly encourage investors to view our performance on a full-year basis.

Having said that, estimated diluted EPS for the third quarter of fiscal 2005 is expected to be in the range of between $0.34 and $0.36. Third quarter revenues are expected to be between $65 and $67 million. Once again, the third quarter’s guidance is largely impacted by, among other things, the timing of that transmission to the next generation of Mobile Data Communications transceiver.

And lastly, our guidance does not assume any benefit from any acquisitions. And obviously, an accretive acquisition would further add to our growth.

Before I summarize my comments, I want to mention that the Board of Directors has approved a 3-for-2 stock split to be effective in the form of a dividend. We believe that the stock split will enhance our liquidity in the market for our shares, and make our shares more accessible to individual and institutional investors.

The guidance I have provided and the financial information discussed by Rob, as well as the financial information in this morning’s press release, has not been adjusted to reflect the stock split. An updated investor presentation, which will be posted to our website at www.comptechtel.com shortly after this call, will have a pro forma restated financial information reflecting the stock split.

In summary, we continue to outperform our peers and remain extremely excited about all three of our business segments. We’re confident that fiscal 2005 will be another record year for Comtech, the third year in a row.

As you can see from our guidance, we expect to crush the standards set in fiscal 2004. In fact, if it were not for the requirement to assume conversion of our senior notes, our diluted EPS guidance for fiscal 2005 would have crossed the $2 mark per share. Although it’s still too early to provide specific guidance for fiscal 2006, we also see clear signs that fiscal 2006 is shaping up to be another record breaking year for Comtech, for both sales and for earnings.

Thank you very much. Now, it’s your turn to ask questions. Operator?

(OPERATOR INSTRUCTIONS) Selman Akyol, Stifel Nicolaus.

Thank you kindly. Good morning. Couple of things. First of all, on the February 1st contract that you got for $13.5 million, did that make the bookings of the quarter? I mean, I suspect it didn’t, but--.

Yes, a portion of it did, Selman. The piece that was definitized is in bookings and backlog, but the undefinitized piece will end up in bookings and backlog for Q3.

And do you have any idea on kind of what the delivery schedule looks like on that? I mean, all between now in 2005 and 2006?

You’re talking about the improvised explosive device?

Yes.

We have a very minimal amount of that in the fiscal ’05 period.

Great. And then do you have the backlog breakdown by segment?

Sure. The Telecomm segment was approximately $104 million, Amplifiers was $29 million, and Mobile Data Communications $26 million.

And then in terms of the way you’re recognizing the revenue under, I guess, sort of the new recognition on the movement tracking system, does that accelerate the $418 million that you expect to deliver, or is that going to kind of accelerate under that contract? Or do you expect to burn through it a lot faster, because originally it was an eight year contract.

The adjustment there will only affect the accounting for it. If you look at our balance sheet, we have an account called “Deferred Service Revenue.” So what’s effectively going to happen now, given the way these units are deployed in Iraq, which we do describe in our 10Q, that amount will basically be amortized on a straight line basis over the remainder of the contract term. It does not affect the order flow, it just affects the way the prepaid service time is accounted for.

And then I just have one last question, related to--Fred mentioned about a U.S. Air Force contract proposal for 8-megabits. And then I didn’t quite get it all. But, who else could possibly even bid on that? Or are there other people that you guys see out there? Do you expect competition on it?

Well, it’s a brand new program for brand new equipment. And this being the first time that over-the-horizon will be extended into the KU band. It is for an application for 8-megabits or above, and I would say that, at the moment, we are the only supplier of an 8-megabit modem that can go into this kind of performance and for this type of channel.

So, I would say that we probably are the front runner for that program. On the other hand, it is a brand new program. It will go through its normal bidding cycle, and then maybe some competition.

And so then this would be--do you think--or the U.S. or the Air Force would make an award some time in 2006, or do you think it’s going to go longer than that?

It looks like right now 2006. And in fact, as I kind of mentioned during my presentation, we’re doing a number of things with the U.S. Air Force and the Army in terms of, not only supplying information, but actually doing field trials. And we expect to do a field trial at KU band for this application.

Mark Jordan, A.G. Edwards.

Couple of questions relative to Mobile Data. You know, it’s great to see that you’ve enhanced your gross margin assumption there. And I think it was 18 months ago it was a risk factor and now I guess you’ve got the visibility and mass in that program, that you’re able to see an improvement in margin opportunity. Could you tell us what--if we were to be looking at a “normal” quarter in this area, which might be in the volume range of 20-plus million, what would be a normalized operating margin for this business? Again, obviously in this current quarter it was inflated with a number of the adjustments.

Some of it, Mark, does just come down to product mix because, again, the MTS contract and the Blue Force Tracking contracts do have different margins associated with them. But, assuming a normalized mix on the operating profit line, you’re probably somewhere in the--let’s say 15 to 17 percent range, in that vicinity.

You’re talking about--will this transition you speak about in Mobile Data be all completed from a products availability standpoint by the end of this current fiscal year?

Yes, Mark. And in fact, we’ve already demonstrated the RFID and the security feature in our new transceiver. And as I think I mentioned, the Army has actually decided that all future orders will be to this new transceiver. And that’s why we’re kind of talking about a hole in the third quarter because of the orders first coming for the new equipment, this will kind of slip into the fourth quarter and into the first quarter of the following year.

So it’s really more of a single quarter kind of hiatus.

Yes, it’s just--maybe we did a good thing in developing a new product, but kind of hurt ourselves in the present revenue stream.

Now, you did mention that, because of this redesign and the enhanced features, you see that there are a number of OEMs looking at this as a potential component to be integrated into other systems?

Yes. Yes, I thought it would be important for everybody to know that we’ve supplied over 300 of these--call it experimental beta units of this small sized transceiver with all these features. And to--not only the U.S. Army, but also to four independent prime contractors who have various applications that they’re looking at.

On the organized computer side, you say you’re re-enhancing your in-vehicle computer. Noticed in the last week or two that DRS got a contract for Blue Force Tracking computers. Do you believe that once you’re available there that you’ll be able to compete effectively for that, or is this just for the logistics part of the business?

At the moment, we’re only supplying the computer for the logistics part, for the MTS program, and not for the Blue Force Tracking. We found though, however, that even in the logistics area the computer had to be upgraded because of the environmental strains that it received under wartime conditions.

On your over-the-horizon business that you’re showing the Army both for the rebuilding the terminals and enhancing an existing line-of-sight communication links, you said you were demoing. Is there anyone else out there demoing or have technology that could be used there? Or is this just a case of, if the Army spends, it has to come to you?

I think at the moment we don’t see anybody else out there.

Final question relative to the satellite modem business. I think one of your competitors made a comment in the past that they were backing out of some of the large system bids because the pricing was getting too competitive. Could you comment as to the pricing environment you see in the satellite modem market, and what your margin performance has been there over the last quarter or two?

As you know, we’ve always mentioned--and in fact I’m pretty sure we mentioned it today--that the satellite modem area is our highest margin business. So, the best way I can answer that, Mark, is that we don’t play the pricing game. We don’t low ball and our margins are still up there.

I guess a final question. You know, early in this fiscal year you had been surprised at the relative pace and health of the modem business. It is a turns business with limited backlog. How would you characterize the pace of order flow in Q2 versus Q1, and do you have any feeling for the balance of the year?

I think, as I mentioned, I think we’ve seen a tremendous uptick in the surge of order flow in this area, and we anticipate that continuing.

Rich Valera, Needham and Company.

With respect to Tolt, can you say if it’s still running at about the same run rate it did last year? I think you mentioned $17 million they did in ’04.

Rich, for purposes of the guidance, we are actually assuming a lower run rate, just as we look at the business and get the business refocused. So, for the remainder of the year, we’re only assuming somewhere in the $7 million range for revenues for the six month period.

And on a very near term basis, could you say how that’s affecting the bottom line? Is it sort of neutral or maybe slightly dilutive very near term?

In the immediate future, it’s basically, let’s say, neutral. In fact, when you look at the guidance for the quarter and the year, from a margin point of view, obviously that’s going to pull the margins down somewhat, but we’re able to still post some pretty significantly increased despite that.

Sure. And then with respect to your IED Jammer award, as I understand it, you have one customer for that right now. Do you see any prospects for maybe an additional customer there as someone else maybe tries to meet the demand for that product?

I think what we’re seeing here, if you recall, we had a program called Short Stop in the early days of, like the Balkans and so forth. And the outgrowth into this particular program is still between ourselves and ETO Corp (ph). This is a very highly classified area. And there really is no competition there at this point, for both ETO or, for that matter, for ourselves. Not to say that at some point in the future there will be some competition. There always could be.

Sure. And just to that end, I think you at one point suggested that your RF Amplifier business might do $25 to $30 million in this fiscal year. And that seeming increasingly conservative given the robust performance year to date and the healthy backlog there. Is that still the operative number, or might that be higher at this point?

That number, Rich, we expect to be higher. And I think more importantly, not only do we expect it to be higher, but to Selman’s question earlier, we only expect a very small amount of the IED business to be in this year. So, going into ’06, in addition to the growth from ’05, most of that contract, the vast majority of it, is going to spill into ’06.

Great. And just one final question, if I could. Fred, you sounded pretty optimistic about growth in fiscal ’06. Could you maybe comment by segment how you feel about the growth prospects in ’06? And understanding you might not want to give numbers, but maybe just qualitatively?

I think probably the best way that I can answer that, Rich, is that we feel that all three segments in ’06 will be higher than ’05. And obviously, at a record level.

Jim McIlree, Unterburg, Towbin.

In addition to the Air Force over-the-horizon contract, it looks like there’s a very small after terminal contract that has your modems baselined into it. Can you talk about potential size of that solicitation?

I’d rather not, Jim, at this point. It’s really for one of those applications, and it’s what I kind of alluded to, almost a demonstration type of contract.

The impact of the accounting for the airtime on the MTS contract, does that make your margins for that particular piece of the business higher, lower, more volatile, the same? I mean, what happens going forward with the way you’re accounting for that airtime now?

Since the airtime, Jim, is part of the MTS contract and that contract is accounted for as one profit center under the accounting rules, it will not affect our margins. It will just affect the timing of when the prepaid service time is recognized. So, it’ll have no impact on the margins.

Great. And is there an estimate that we can ballpark for the incremental amortization that the Tolt acquisition brings in?

Yes, we expect it to be a fairly nominal number, Jim. We’re still finalizing the final purchase accounting allocation, but it’ll be nominal.

And if I heard correctly, it sounds--let me back up. In prior calls, you’ve been reluctant to include in your guidance continued strength in the satellite modem business, but it sounds like that’s changed, that now you’re incorporating a more robust growth outlook in the satellite modem area. Am I hearing you correctly?

Yes. I think in the past we’ve always been trying to be on the conservative side and not trying to characterize an upsurge on just a month or two vision. I think at this time, we see the satellite business almost getting back to the normal days.

And is that driven by commercial customers or by military customers?

Our satellite modem business is probably about 20 percent government. So, most of it is commercial.

And that would include, let’s say, a commercial buyer who then deploys it to a government customer?

No, no. When I say commercial, it’s for commercial applications. Government--the way we define government in all of our segments is whether it’s directly to the government or end used by the government.

Great, that’s helpful. If I can just try to understand a little bit more clearly the Mobile Data revenue progression of the rest of the year. It sounds like you’re talking about a relatively large decline in the April quarter versus the January quarter, and then another relatively large increase in the July quarter versus the April quarter. Do I have that correct?

Yes, directionally that’s fair.

And that’s based on contracts that you have in hand or contracts that you have in hand plus what you think is reasonably likely to occur in the next few months?

It’s primarily contracts that we have in hand, Jim, combined with the fact that, as Fred mentioned, our backlog at the end of this quarter would’ve even been higher if the Army was continuing to place orders for the older generation technology. At this point in time, we’re still negotiating the final pricing and the like. So, those orders have obviously not come in so their not in backlog, but we know they’re coming in. It’s just a matter of timing. In terms of the non-MTS piece of it, most of that revenue is in backlog or very--have a high level of probability of the order coming in.

The last contact that you announced in that area was mid-February and that was for the old platform. Is that correct?

That’s correct.

Okay. And I think this will be the last one, but it seems that you’ve been talking about the upgrade to the current over-the-horizon terminals, as well as the Army’s line-of-sight project for a few quarters now. Have these things been pushed to the right versus what you initially thought? Is it kind of in the--is it kind of progressing as you thought it would? I guess I’m trying to figure out when do these things actually close?

I think we’ve mentioned in the past that it’s extremely difficult to predict exactly when funding or government appropriations are going to be there for any given program, especially under the conditions that we’re in these days. But, I think we’ve always maintained kind of in the latter 2005 to 2006 where the expectations of some of these awards could start to pop in.

Selman Akyol, Stifel Nicolaus.

In terms of reviewing the supplemental, there’s a lot of dollars for communications. Obviously, no mention of particular items for you guys, per se. But, did any of your guys either incorporate that or could that be additional upside? Are you seeing anything in there at all for you guys?

I guess the one thing that I might mention that we now know, and that is the Palm for the MTS program, which has been hovering around the $20 million mark--and then we’ve gotten, you know, plus that’s on an annual basis--has now been raised between ’06 through ’09 to the order of $65 to $75 million annually. So, that’s kind of an increase.

From the 20 order rate?

Pardon me?

From a run rate of 20, they’re going to 65 to 75?

Well, it’s not a true run rate of 20 because there’s always been the plus-ups. So, the 20 was in the actual DoD budget, but it’s always been plussed-up by 20 million-plus, let’s say. So, one could look at it as going from $40 million to certainly $65 million during that period.

And then if I can just dissect that just a little bit more. On that $40 million, would that have been just strictly from the logistics side, or would that also have included--?

That’s strictly logistics side.

Andy Schopick, Nutmeg Securities.

I wanted to ask, how much of the company’s current business is tied to percentage of completion accounting? And is it all focused in the telecomm division, or does that accounting cut across some of the other businesses as well?

We don’t disclose--and I don’t have the information right in front of me in terms of what the percentage of PCM business is, but I can tell you that, in the telecomm transmission business, our over-the-horizon microwave product line is primarily on percentage of completion. And then the Mobile Data Communications area, the MTS contract is on percentage of completion. And there’s a few contracts in the Amplifier business that are also on percentage of completion, generally if they extend beyond a year.

And you’ve been very fortunate in recent times to have had positive adjustments, although we know that that can sometimes work the other way. Is there any reason to anticipate in the balance of the fiscal year that there will be any adjustments to existing contract work in either of these long-term contracts?

We are not assuming any, but at the end of the day, changes can happen. For example, if the MTS funding goes through the roof, that could be another potential change. But, that’s not baked into our guidance.

Rich Valera.

Rob, I was just hoping you could maybe refine a little bit the MTS trajectory over the next couple of quarters. I mean, could it sort of approach the second quarter levels in the fourth quarter? It seems just kind of working through the numbers, that that seems like sort of how it might play out in terms of hitting the full year. Is that reasonable?

I would say, Rich, that it would be possible, you know, excluding the impact of the revenue adjustment in the quarter. That’s possible in Q4. You know, that was about let’s say $5 million or so. But, it is possible that we could get into that range again.

And at this time, I show no further questions. Would you like me to re-queue for questions, Mr.--?

Are there any more questions, operator?

At this time, I show we have no further questions.

Okay, then let me wrap it up. Thank you very much for your interest in Comtech and we look forward to speaking with you again in a couple of months. Thanks very much.

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