Comtech Telecommunications Corp (CMTL) 2005 Q4 法說會逐字稿

Welcome to Comtech Telecommunications Corporation's fourth quarter and fiscal year 2005 earnings conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded Thursday, September 22, 2005.

I would now like to turn the conference over to Ms. Stephanie Lamantia of Comtech Telecommunications. Please go ahead ma'am.

Thank you. And good morning. Welcome to the Comtech Telecommunication Corp. conference call for the fourth quarter and fiscal year 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'm pleased to introduce the President of Comtech, Fred Kornberg. Fred?

Thank you, Stephanie. And 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 2005, which provided a strong finish to our third consecutive record-breaking year. As you can see from this morning's press release, our fourth quarter results were truly outstanding. With record levels of sales, operating profits, net income, and earnings per share.

Our fourth quarter sales soared to 98.3 million, compared to 59.1 million in the fourth quarter of fiscal 2004. And diluted EPS for the fourth quarter was $0.42 per share, versus $0.25 for the fiscal 2004 fourth quarter. Full-year revenues at 307.9 million surpassed the $300 million revenue mark for the first time in our Company's history, and that after breaking the $200 million revenue mark for the first time in fiscal 2004. Diluted EPS of $1.42 for fiscal 2005 crushed the previous record of $0.92 we set in fiscal 2004.

Most importantly, however, we enter fiscal 2006 again with lots of optimism, and continued strong demand for our product offerings. I will discuss our outlook a little later in this call. But first, let me introduce Rob Rouse, our CFO, who will review our operating results for the quarter, as well as provide some summary data for the full fiscal year. After that, I will discuss recent development, provide some guidance for fiscal 2006, and then Rob and I will take your questions.

Rob?

Thanks, Fred. And good morning to all of you. As Fred mentioned, Q4 topped off a remarkable year of accomplishments by Comtech in fiscal 2005. As I will outline in my comments, the quarter and full-year results were impressive on virtually every level, based on any measure. And let's begin by reviewing some of the key income statement trends for the fourth quarter of fiscal 2005.

Q4 sales of $98.3 million smashed the previous record set in Q2 of fiscal 2005 of $78.1 million, and were 66% higher than the $59.1 million in sales that we achieved in the fourth quarter of fiscal 2004. Sales in the fourth quarter of fiscal 2005 reflect continued strength in all three of our business segments. Increased sales in our telecommunications transmission segment were driven by strong satellite earth station product sales, and the ramping up of a large over the horizon microwave contract that we received earlier in the year.

In our mobile data communications segment, we posted strong sales, despite the fact that previously discussed delays associated with our MTS program's transition to our next generation satellite transceiver occurred. Other military demand for our product offerings remained very strong, and Tolt which we acquired in February, contributed $6.2 million of revenue in Q4.

Although the U.S. Army's transition to the next generation MTS transceiver caused a delay in the receipt of MTS hardware orders, and related revenues in fiscal 2005, we are extremely pleased that the Army has embraced our next generation technology. As you can see from our recent press announcements, we have recently received significant orders for the new transceivers, this out of fiscal 2005 government funding, and enter fiscal 2006 with record levels of backlog and strong bookings in Q1.

Sales in our RF microwave amplifier segment were off the chart. This segment posted $19.9 million of revenue in Q4 of fiscal 2005, versus $7.7 million in the fourth quarter of fiscal 2004. The marked increase in sales was primarily driven by strong demand for our defense-related products. In particular, we are currently delivering amplifiers to a prime contractor, for incorporation into a jamming system used to counteract Improvised Explosive Devices, or IEDs.

The sustainability of this level of activity in the RF amplifier segment, will be dependent on the receipt of significant additional orders for IED jamming system amplifiers, or participation in additional large electronic warfare programs. Of the fiscal 2005 fourth quarter sales, 43.4% were to international end users, 41.3% were to the U.S. government, or primes to the U.S. government, and 15.3% were to domestic commercial customers. Our gross profit increased to $38.5 million for the fourth quarter of fiscal 2005, from $25.3 million in the fourth quarter of fiscal 2004, as a result of the substantial increase in sales.

The gross margin percentage for Q4 of fiscal 2005 was 39.1%, compared to 42.8% in the prior year fourth quarter. This because the fourth quarter of fiscal 2004, gross margin percentage was favorably impacted by gross margin adjustments on certain large long-term contracts. The fourth quarter of fiscal 2005 did not include significant margin adjustments on those contracts. In addition, the gross profit related to Tolt sales, which is only in the 2005 period is at a lower margin than our other product lines.

SG&A expenses increased from $9.9 million in the fourth quarter of fiscal 2004 to $15.7 million in the fourth quarter of fiscal 2005. The significant increase was attributable to higher expenses associated with the significant increase in sales, and overall increase in size of our Company, higher incentive compensation costs in connection with the substantial increase in profitability, expenses associated with Tolt, which is only in the '05 period, and increased cost of compliance with corporate governance regulations, such as the Sarbanes-Oxley Act.

R&D expenses increased to $6 million during the fourth quarter of fiscal 2005, from $4.7 million during the fourth quarter of fiscal 2004. The 28% increase reflects our ongoing commitment to investing a significant portion of today's profits in new technologies, to fuel our future growth. During the fourth quarter of fiscal 2004, we recorded a charge of $940,000, related to acquired in-process research and development, in connection with our acquisition of Memotec. There were no such charges in fiscal 2005.

Operating income for the three months ended July 31, 2005, was $16.2 million, compared to $9.2 million in the prior year period, reflecting the significant increase in sales. Our interest expense which primarily relates to interest on our 2% convertible senior notes, was consistent between the quarters at approximately $675,000. Interest income increased dramatically from $378,000 in the fourth quarter of fiscal 2004 to $1.3 million in the fourth quarter of fiscal 2005, due to higher interest rates on investable cash, as well as an increase in our investable cash driven by our strong operating cash flow.

The effective tax rate for the fourth quarter of fiscal 2005 was 34.6%, compared to 32% in the prior year period. The fourth quarter of fiscal 2005 included additional tax expense to adjust the cumulative effective tax rate for the full year to 33.5%, excluding the nonrecurring tax benefits that we recorded in Q3. The increase in the normalized effective tax rate from 32% to 33.5% was the result of a substantially higher level of pre-tax income in fiscal 2005, which diluted the percentage impact of tax savings associated with R&E credits, as well as our tax benefits related to foreign sales.

Net income for the fourth quarter of fiscal 2005 was $11 million, or $0.42 per share, compared to $6.1 million, or $0.25 per share in the fiscal 2004 fourth quarter. EBITDA was $18.2 million for the fourth quarter of fiscal 2005, versus $12 million for the fourth quarter of fiscal 2004, after adjusting for the in-process R&D charge in fiscal 2004. Our backlog as of July 31, 2005, was $153.3 million, compared to $83.1 million a year ago. And our bookings for the quarter were a very strong $98.1 million.

Our balance sheet was rock solid as of July 31, 2005. As evidenced by $214.4 million of deployable cash. Our accounts receivable and inventory levels did increase, in connection with the significant increase in sales during fiscal 2005, particularly in Q4.

Now, a few remarks about the full-year operating results. As Fred mentioned in his opening remarks, fiscal 2005 sales surpassed the $300 million mark for the first time in our history. The 38% increase in sales in fiscal 2005, follows increases in fiscal 2004 and 2003, of 28 and 46% respectively. Fiscal 2005 bookings were an impressive record $377.7 million.

Our gross profit increased dramatically for the year as well, from $87.5 million in fiscal 2004, to $127.4 million in fiscal 2005. The increase in fiscal 2005 was primarily driven by the significant increase in our sales. The gross margin percentage also increased for the full year from 39.2% to 41.4%, due to continued increased operating efficiencies, and the incremental full-year impact of favorable gross margin adjustments on certain large long-term contracts in fiscal 2005, versus the amounts recorded in fiscal 2004.

Our operating profit increased from $32.6 million in fiscal 2004, to $52.1 million in fiscal 2005. And the full year net income of $36.7 million, or $1.42 per share, was significantly higher than the fiscal 2004 net income of $21.8 million, or $0.92 per diluted share. I will just point out the diluted EPS amounts have been adjusted to reflect our 3-for-2 stock split back in April, and the adoption of new accounting rules regarding contingently convertible debt, which requires us to assume conversion of our senior notes.

EBITDA for fiscal 2005 was $59.7 million, versus $40.1 million in fiscal 2004, after adjusting for the fiscal 2004 in-process R&D charge. And our cash flows from operating activities for fiscal 2005 were $56.1 million. The fiscal 2004 fourth quarter and full-year results were truly outstanding showings for our Company.

Our fiscal 2004 performance set the bar high for fiscal 2005, but we delivered once again in a big way. And now back to Fred.

Thanks, Rob. First, I would like to discuss recent business developments in each of our three segments, and then provide guidance for fiscal 2006.

Our telecommunications transmission segment had another great year. This is our largest segment representing approximately 57% of our consolidated sales for fiscal 2005. Our established leadership positions in satellite earth station products, and over the horizon microwave systems, continued to fuel our growth in fiscal 2005, and position this segment for another strong performance in fiscal 2006.

Our primary focus and the bulk of our R&D efforts, continue to be in the satellite modem area, where we believe we have the leading market share, and our technology continues to be the defacto standard in optimizing satellite manned with utilization, using our patented turbo product coating technique, thus significantly reducing transmission costs for our customers. We continue to reinvest heavily in this product line, and during fiscal 2005, we introduced new products with the most advanced innovations in the industry. Including first our carrier-to-carrier technology, which allows earth stations equipped with our modems, to transmit and receive at the same frequency, thereby reducing satellite bandwidth requirements by approximately one-half.

Second was our introduction of low density parity check, or LDPC coating, which represents another major breakthrough in forward error-correction technology. And finally, our Memotec access devices and voice gateways, which allow our customers to consolidate multi-service traffic, such as voice, video and data, and which are ideal for cellular backhaul using satellites.

We're not however resting on our laurels, and just recently introduced our model SLM3650 satellite modem, which is targeted at the defense and security markets. This new modem meets DSCS requirements, and is mill-standard 188-165 type B compliance.

Our strategy in the satellite earth station product area, which is the largest product area in this segment, is to continue to differentiate our product offerings by continuing to focus our R&D efforts on bandwidth optimization solutions, for both our commercial and government customers. Bookings for fiscal 2005 in this product line were at their highest level ever. Reaffirming our well-established leadership position.

Turning to our Over-the-Horizon microwave product line, fiscal 2005 was another successful year. The $77 million contract that we received last September, is coming online nicely, and has more than offset the impact of two large contracts, that are at or near completion. We're also confident that follow-on opportunities with this customer in the intermediate term are available to us.

Backlog from our traditional foreign government and oil and gas customers is strong, which provides a solid revenue base in this product line over the next few years. And as you know, we have been and expect to continue to be, successful in winning large opportunities in this Over-the-Horizon microwave area. Our proven technology is far superior to our limited competition, and we are well-known as the leading supplier of Over-the-Horizon troposcatter modem systems.

Recently, as you may have heard, one of our satellite earth station competitors claimed that it was developing an Over-the-Horizon tropo modem. Without first-hand knowledge, we obviously cannot comment on any technology that is being developed by a competitor. However, we are confident that our proven field-tested technology is the best in the world. And in a sense, the recent claims by others aimed at entering this market, validate the significant opportunities that we believe exist for this important technology.

We are especially confident and we remain excited about the positioning of our Over-the-Horizon microwave technology with the U.S. government. As you know, we have continued to improve our product line, and have invested in this area for many years. While others focus their efforts elsewhere. The advancements we have introduced during the past few years have opened up applications for our technology, that were never before possible.

For example, last year, we demonstrated for the first time that our adapted 8 megabit per second Over-the-Horizon microwave modem, can transmit black and white video over this type of channel, enabling new applications such as the backhaul of UAV traffic. Here too, we have not stood still.

Our ongoing and increasing R&D efforts have enhanced our adaptive modem, and I'm pleased to say that it currently operates at 16 megabits per second, is capable of transmitting color video, and far exceeds anything the competition has to offer. We believe we have made a clear and convincing case with various groups within the DOD, that this technology should play an important role in its communication infrastructure. And many military officials are supporting the use of our Over-the-Horizon microwave systems in a variety of applications.

That said, as you know, predicting when a large contract will be awarded, particularly a government contract, can be a challenge. Since sizable programs oftentimes require considerable amounts of time in obtaining the buy-in for a new technology. But also, in obtaining funding.

We believe we have made great strides in working with the end users to obtain that buy-in technology, and the technology we need. We are now working diligently with the DOD to obtain the funding. Even funding for a small percentage of the total U.S. government opportunities could result in a significant growth driver for this product line. And we will keep you posted throughout the coming year, as this area continues to develop. Bookings for fiscal 2005 in this product line were also at their highest level ever.

In summary, within the telecommunications transmission segment, our ongoing and increasing R&D efforts, we believe continue to solidify our leadership positions. And we intend to continue our focus on future technology innovations, by continuing to commit significant resources to R&D, as this segment continues to grow.

Turning now to our mobile data communications segment, which had a fantastic year, we posted strong revenue growth, despite the fact that as Rob mentioned earlier, a significant portion of fiscal 2005 government funding for the MTS contract was delayed into the latter part of 2005, and the beginning of fiscal 2006.

As mentioned during the last two investor conference calls, the U.S. Army's MTS program office has accelerated its transition to our next generation transceiver, which includes RFID capability, and an enhanced security anti-spoofing feature. We also changed the MTS in-vehicle computer to add features, enhance performance, and provide more ruggedness.

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. The impact of the MTS product line transition delay in the fourth quarter, was offset by the continued strength in other mobile data communications program endeavors. Including Blue Force tracking program, where our satellite transceivers are addressing line-of-sight communications limitations.

And since our fiscal year ended on July 31, 2005, we have received significant orders for the next generation transceiver, known as our model MT-2012. And as such, our backlog as of today in this segment is very strong.

The importance of the rollout packet data technology plays, both within the logistics and the war fighter communities, continues to grow. Our mobile satellite transceivers and related communications networks are critical, particularly when terrestrial line-of-sight channels are not available. Despite the remarkable growth that this segment has achieved in recent years, the MTS and Blue Force tracking programs, still continue to be significant future growth vehicles, since only a relative small percentage of the U.S. Army's logistics and war fighter vehicles have to-date been upgraded.

We're also continuing to work with other areas within the DOD, such as the Army Reserves, the Army National Guard, and the Marines. As well as various prime U.S. government contractors, in addressing potential needs and applications that our packet data technology can address.

In response to the tragic impact of Hurricane Katrina, we provided FEMA, the Red Cross, and the Army National Guard with satellite transceivers free of charge. After their emergency efforts are completed, we will follow up with each of them, to explore how our technology can be used in the future, particularly in such situations such as encountered on the Gulf Coast, when terrestrial communications, including cell phones, became unavailable.

It is important to again repeat, as can be seen from the delayed impact of the Army's transition to our next generation transceiver, that quarterly performance can fluctuate significantly from quarter to quarter. However, the broader annual trends for demand in this product line has consistently been on the rise. And we don't see that trend changing.

On the commercial front, as discussed during last quarter's call, we completed the acquisition of Tolt Technologies in February. Tolt is a value-added reseller, with experience in providing turn-key employee mobility solutions to large enterprises. We continue to believe that the commercial trucking market is the most fertile area for commercial applications, for our mobile data communications products. As a VAR, Tolt margins are significantly lower than our other product lines.

As such, although Tolt contributed approximately 11 million in revenues in fiscal 2005, it was marginally unprofitable. This was not out-of-line with our expectations, since the Tolt acquisition was a strategic cost-effective way to facilitate our entry into the commercial market. And we will continue to approach this market with caution, in a methodical way, to ensure that our product offerings are best matched with customer needs.

Fiscal 2005 was a busy and successful year in the mobile data communications segment. As we posted strong revenue growth, launched the next generation product transition from the MTS program, and made progress on our commercial initiatives, without sacrificing profitability.

And now, on to our third segment, RF microwave amplifiers. To say this segment had an outstanding year in fiscal 2005, would be a gross understatement. Sales more than doubled compared to fiscal 2005, with demand particularly strong for our defense-related products. In addition, we are also starting to see signs of life in some of our commercial markets. For our amplifiers specifically in the commercial aviation and the medical instrumentation areas.

One of the many growth drivers of fiscal 2005 was our participation in the high profile program to counteract Improvised Explosive Devices, using microwave jamming systems. We believe that there are many more electronic warfare applications for our high-powered broadband amplifier. And as Rob mentioned earlier, our fourth quarter sales in this segment were nearly 20 million, not far from the annual run rate just a few years ago.

Here too, I want to again point out that our quarterly sales do fluctuate dramatically, based on the timing of orders, and related performance requirements. This segment, which had lagged behind our other two segments in its growth during the past few years, contributed to our Company's record results in a big way in fiscal 2005. And we remain excited about the prospects for this business in fiscal 2006 and beyond.

Before I discuss guidance, I want to once again mention that with more than 200 million in deployable cash, we're still continuing to actively seek acquisitions. We have been and are currently pursuing various opportunities, but have not and will not change our criteria for evaluating potential acquisitions. Particularly in light of the strong potential, we expect to be realized in our existing core businesses.

And now on to guidance. Obviously, as I have mentioned in previous conference calls, there continue to be many factors that make the projection of revenues and EPS very difficult, including the quarter to quarter fluctuations, and bookings and related revenues, in certain of our product lines that I have discussed earlier. As such, we have consistently encouraged investors to view our performance on an annual basis, and we do so again. Starting in fiscal 2005, we're also required to adopt the provisions of a new accounting pronouncement, relating to the expensing of stock options.

We have estimated the pre-tax impact of adopting these new pronouncements at approximately 5.3 million for fiscal 2006, and 1.3 million for the first quarter of fiscal 2006, that's more fully described in our 10-K, which was filed earlier today. Simply put, that results in approximately a $0.03 per quarter adjustment. The new accounting rules, however, are extremely complex, and we're still finalizing our analysis of the tax impact of adopting the new pronouncement.

The guidance I am providing today excludes the impact of adopting the new accounting for stock option expensing. For comparability purposes, and given the noncash nature of the stock option expense, we will provide pro forma non-GAAP P&L disclosures, beginning in the first quarter of fiscal 2006, which back out the impact of stock option expensing. We encourage our investors to assess our results of operations, using both the non-GAAP measures, as well as our reported GAAP results.

As I mentioned previously, the projection of revenues and EPS are very difficult. However, we see our first quarter quite clearly at this date. Driven by strong backlog in our mobile data communications and RF microwave amplifier segments, diluted non-GAAP EPS for the first quarter of fiscal 2006, is estimated to be in the range from $0.41 to $0.43. And fiscal 2006 first quarter revenues are expected to be between 100 and $102 million. Our diluted non-GAAP EPS guidance for fiscal 2006 is estimated to be in the range of $1.54 to $1.56, and fiscal 2006 revenues are expected to be between 355 and $360 million.

In summary, all of our three business segments continue to deliver record results. With strengthening leadership positions in important technology areas, combined with participation in high profile programs, we continue to see ample opportunities for continuing organic growth, and with the financial resources provided by our strong balance sheet, we can pursue selected acquisitions to compliment our current product portfolios and technologies.

We're proud of our accomplishments in fiscal 2005, and as Rob said, our prior fiscal 2000 performance set the bar high for fiscal 2005, but we delivered in a big way. And we expect to deliver once again in a big way in fiscal 2006, on our way to another record year, our fourth in a row.

Thank you very much. Also, just to mention, 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. Operator?

Thank you, [OPERATOR INSTRUCTIONS] And it looks like we will go to our first question from Mark Jordan with A.G. Edwards. Please go ahead.

Good afternoon, everyone. And congratulations on a very good year. I would like to ask a question first on mobile data. I mean should we try to break apart the two pieces, in looking at the outlook for this business next year, and should we assume that Tolt would continue to be at about a $25 million annualized rate, as you develop that company, and around the breakeven point? And then the Army-related businesses being, you know, around a $90 million business with operating margin potential in the middle teens, is that the way to sort of blend those together?

Thank you. I think, Mark, you know, we really don't want to break the two out, the two pieces of that segment out separately.

Just to reiterate, though, the Tolt acquisition, as I believe I mentioned, we're being very careful and very deliberate in terms of the business posture of that particular portion of the segment. So that the $11 million that we did this past year, probably reflects on an annualized basis what we will probably do next year.

Okay. And again the goal for that would be, to be around the breakeven point?

Around the breakeven point, yes.

In fiscal '05, your performance in the overall mobile data group has ranged pretty widely, from, you know, kind of a low single digit operating margin to a peak of I think it was 22%, 22.5% in the second quarter. With the -- you know, as you near completion of this transition, and start to execute on the backlogs that you have, is your traditional mobile data business for the U.S. Army, should that trend line be in the middle teens range moving forward?

Are you talking about gross margin?

No, operating margin.

Operating margin.

Operating margin, it will fluctuate depending on the components even within the military business, I think as you know currently the war fighter business is at a higher gross margin than our logistics business, so I would assume for purposes of looking at the future, all other things being considered, that the mix would be about the same. Without any other variables at play here.

And then of course, the overall margin in the business will be somewhat diluted by the impact of Tolt. Again, as Fred mentioned in his comments, Tolt made more of a strategic positioning play for us.

But if you look at the government business by itself, I would assume the margins to be comparable.

Looking at the telcomm transmission segment had a superlative quarter obviously, significantly higher than anything out there, you mentioned a ramp in the new Over-the-Horizon radio contract, how does that level of activity pan out over the next, you know -- through the year, I mean is that a sustainable -- at a sustained run rate now?

And the modem business has been -- you've made comments through the year, through the year fiscal '05, that you've seen strengthening in that, so are you to a point where you would look at this current run rate of 54 million, and saying that that is a fairly sustainable rate moving through the year?

I think, to answer your question, Mark, certainly breaking it up into two pieces, at the moment, we're experiencing a pretty good run rate in the satellite product area. And we see nothing really changing in that area. In the Over-the-horizon microwave area, we do tend to get big lumps, and as such, we're in the middle of the $77 million contract, that we're working off. I think in the near term, I think we will see that performing pretty well the same way.

It's got another 2 to 2.5 years to run. At the end of that time, you know, we always need another big contract to get-going for the next coming of years. So overall, I think certainly in the near term, I think we expect to be still kind of growing this area pretty rapidly.

Okay. In your comments about Over-the-horizon, you said that there is an opportunity with your existing customer, large international customer for follow-on in the intermediate term, would you wrap around some kind of timeframe, as what you mean in intermediate term? Is that, you know, 12 months, 6 months, 18 months?

It is very difficult to tell. It is really extremely difficult. I would say it is -- it is anywhere between 12 to 18 months.

Okay. And a final question, relative to, you know, your conversations with the Army, you have done demos for your Over-the-horizon modems, you're working with them. Has your potential Army, you know, customer seen any legitimate product, evaluated any legitimate product in any way, or do they expect -- do you know if they expect to see something presented to them, within some period of time?

You mean as far as our competition is concerned?

Right. Yes.

I think the best I can say in that area is that we have demonstrated the product as I mentioned both at 8 megabits and black and white video, and now we have our modem at 16 megabits. We've obviously been in development quite some time in improving that unit from 8 to 12, and now to 16, and we hope to go even further. We do have a unit. We've demonstrated it to the Army numerous times. Our competition I think has a very, very nice glossy data sheet.

Final question, tax rate, should we assume something in the 33.5 to 34 range next year? Or what guidance from that, Rob?

I'm assuming given the increased level of profitability, Mark, that we're going to drift from the 33.5% rate which was kind of our normalized rate for this year, without some of the nonrecurring things, into the 34-ish range.

Thank you very much.

Thanks, Mark.

Thank you. We will go next to the site of Rich Valera with Needham & Company. Please go ahead.

Thank you. Fred, for your guidance for next year, what do you expect in terms of OTH wins to make that guidance? Are there any baked into that?

We always -- you know, we don't necessarily have anything baked-in, in terms of large programs as such, because we're still working off that $77 million contract. We continuously receive small ones, you know, specifically in the oil and gas industry, and so forth. So there is always some small programs that will come in during the year -- on the commercial side.

On the military side, and that's really been very, very difficult to predict, and we have a very nominal amount baked in for this year. Any upside in some major military, let's say bookings, would really make our numbers go up higher.

Great. That's helpful.

Rich, I would just quickly add to, that as Fred said, the amount of the U.S. government that we have baked-in, is really just based on miscellaneous orders that we're kind of discussing right now.

In total, I believe we have less than $10 million baked into the projection for next year, related to the government side. And as you can see, we -- during the course of even the last few years, we tend to get $2 million orders here and there. As Fred said, certainly not the expectation of the big order, that would be incremental to our guidance.

Great. And then just circling back to questions Mark asked on the mobile data, your margin there was pretty low for that revenue level this quarter. I think around 7%, the op margin, was there anything sort of one-time in there, or maybe did you step-up spending on the commercial side at all, to take advantage of, sort of some of the upside on the quarter?

On the op margin line?

Yes on the op margin line of mobile data.

Some of it, Rich, was a function of the greater impact that Tolt had. We were somewhat impacted during the quarter by the delay in the MTS orders. It was more of a mix issue than anything else quite frankly.

Okay. And then circling back to the satellite modem business, it sounds like it has been gaining some momentum, but it has even picked up more momentum in this last quarter.

Is there anything you can say, Fred, in terms of either end markets or specific new products, like maybe your carrier in carrier, that are really driving that pickup that you've seen recently?

I think we see a pickup two ways. One, I think business in general has been good, and we probably have been taking some market share from some of our competition in the traditional products.

The second part of that equation is the new products that we introduced in the past year, which includes the LDPC, and the carrier and carrier. In fact the carrier and carrier was quite late in the year. So that impact was first beginning. We see those two really taking off.

So overall, I think we can same say that generally the modem, satellite modem area has really been increasing on a quarter-by-quarter basis, and we really don't see the end of it.

Okay. That's helpful. And moving on to another mobile data question.

The initial cut at the fiscal '06 DOD budget indicated a pretty sharp increase in war fighter funding, and I'm actually not sure where that budget is right now, but do you guys have any visibility to that, any sense of how much stronger war fighter might be for you in fiscal '06, than it was in fiscal '05?

It is difficult for us as a subcontractor to really quantify those items. We do know what we have in terms of bids outstanding, and what is happening in that arena. I would say overall, I think generally that area is being funded more than prior years. However, it is also, you know, to be fair about it, it is also being funded in various ways.

Not only in the technology that we have to offer, but technologies that are different than ours. So it is very, very difficult for us to see exactly how that total pot will be allocated.

Great. And just one final one, and I will give the floor. You've announced roughly 40 million of mobile data orders at the end of the quarter. Is it safe to assume that none of those are included in the backlog number, or in the bookings number, for the just reported fourth quarter?

There is a piece of that, Rich, that isn't in the backlog. The press release that went out that first week of August, we were waiting for the $18 million of orders to come in on the MT-2012, so there is, let's say about 10 million at most, that would have been in the backlog as of the end of the year.

Okay. That's helpful. Thanks, guys.

And we will go next to James Mcilree, Unterberg Towbin. Please go ahead.

Thank you. Continuing on that line, the 18 million order for the 2012, is that expected to be delivered this quarter, or over the next couple of quarters?

There is a portion of it, Jim, that is expected to be delivered in this quarter, but the vast majority will be delivered by the end of the second quarter.

And the remaining units of the prior version, does that get shipped out this quarter? Or is that also over the next couple of quarters?

Well, the -- in terms of the MTS contract, the additional orders we've been receiving, Jim, don't relate to the old transceiver, they relate to other services under the contract.

Right.

Some engineering services, and the like. So some of the stuff, for example, some of the support services are actually over a year. Other things will be within the next say, 45 days to 6 months, depending on the nature of the item.

I was under the impression that you were shipping some of the old versions last quarter, and that you still had some to ship for this quarter.

We are shipping the old versions, Jim, but not for the MTS program. The MTS program now is fully converted to the new transceiver.

The old version is still being supplied to the Blue Force tracking people. They don't need the RFID or the anti-spoofing module.

Right. Okay. Great. The margin improvement in the RF amps business, is that sustainable? Assuming that you have similar revenues going forward, is it reasonable to expect that the margins would be equal to, or higher?

Well --

Than the Q4 levels?

Well, Jim, I think to be frank about it, given the level of revenue we had, we certainly had operating efficiencies driven by overhead absorption. So it would depend on the makeup of the revenues at that level, but as I said earlier, we're certainly not assuming in our guidance that the quarterly revenue stays at that level.

A lot it is being driven by the need to get these unit, these IED jamming units out. So to answer your question, if we had revenues at that level, I could see it being sustainable, but we're not baking-in revenues at that level in our guidance.

Okay. In the K, the cash flow statement shows a $9.9 million cash generation from stock option exercise benefit. What is that?

That relates to employees who exercise stock options, either nonqualified stock options or immediately sold shares, that they with were issued pursuant to incentive stock options. We get a tax benefit from whatever the gain they recognized on that sale. Okay. So there were sales that, insider sales that were made back in June, and the tax benefit related to that was 10 million, which will increase our cash flow going forward.

Got you. So the -- and that would come out of -- if I were thinking of it, as coming out of some of the P&L line, it would come out of the tax expense, and the P&L is actually overstated from a cash basis?

Well, what happens, Jim, just from an accounting perspective, is because in the past we haven't expensed the related stock options, none of that 10 million is in the P&L. It all goes directly through our statement of stockholders equity.

If you look at our statement of stockholders equity you will see the $17 million on the line next to stock options, that's $7 million worth on proceeds we received from exercise, plus the $10 million tax benefit. So none of that 10 million is in the P&L.

Okay. Great. I think the last one is, the 2012 version of the product, is that more expensive by a significant amount than the prior version? On a unit basis.

Let us just say it is more expensive.

Okay. I think that's it. Terrific. Thank you.

Thank you.

Thanks, Jim.

Thank you. And I would like to turn it back to the moderators for any closing comments.

Okay. Well, thank you all very much for your interest in Comtech, and we certainly look forward to speaking with you again. Thank you very much for joining us today.

Thank you. This concludes today's teleconference. You may now disconnect your lines at any time, and have a great day.