Comtech Telecommunications Corp (CMTL) 2006 Q1 法說會逐字稿

Welcome to the Comtech Telecommunications Corporation's first quarter fiscal 2006 earnings conference call. At this time all participants are in listen-only mode. Later we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded Tuesday, December 6, 2005. I would now like to turn the conference over to Ms. Stephanie Lamantia of Comtech Telecommunications.

Welcome to the Comtech Telecommunications Corp. conference call for the first quarter of fiscal 2006. 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 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?

Good morning, everyone and thank you for joining us today. This morning we will be discussing our record results for the first quarter of fiscal 2006. As you can see from this morning's press release, our results for the three months ended October 31, 2005 were truly exceptional as we posted all-time high levels of sales, operating profit, EBITDA, net income and diluted earnings per share. Quarterly sales broke through the $100 million mark for the first time in Comtech's history and increased substantially over the fiscal 2005 quarter revenues to 106.6 million.

Pursuant to new accounting standards, we began expensing stock option compensation during the first quarter of fiscal 2006. Diluted earnings per share after deducting stock option expense were $0.43. However, for comparison purposes, diluted EPS excluding the impact of stock option expensing was $0.47 per share in the first quarter of fiscal 2006 as compared to $0.28 in the first quarter of fiscal 2005. The $0.47 exceeded the top end of our guidance for the quarter by $0.04.

We believe these results reflect the continuing strong demand we have been experiencing for our product offerings in all three of our operating segments. I'll discuss recent developments and activities in each of our three segments later, but first let me introduce Rob Rouse, our CFO, who will review our operating results for this quarter. Rob?

Thanks, Fred, and good morning to all of you. As Fred mentioned, Q1 was a great start to what we believe will be another record year for Comtech in fiscal 2006. Let's begin by reviewing some of the key income statement trends for the first quarter of fiscal 2006.

As Fred mentioned, Q1 sales were $106.6 million in the first quarter of fiscal 2006 compared to $56.1 million in the first quarter of fiscal 2005 representing an increase of 90%. Also point out that the Q1 sales also handily beat the previous quarterly record set in Q4 of fiscal 2005 of $98.3 million. The increase in sales was experienced across all three of our business segments with telecommunications transmission sales increasing by 36%, mobile data communications sales increasing by 307%, and RF microwave amplifier sales increasing by 82%.

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 received in fiscal 2005. In our mobile data communications segment the increase in sales resulted from the rollout of our next generation MTS transceiver and higher sales of battlefield command and control applications to the U.S. military.

Sales in Q1 of fiscal 2005 were negatively impacted by the timing of the receipt and fulfillment of funded orders from the government. In addition, Tolt, which we acquired in February 2005, contributed $6.5 million of sales in the first quarter of fiscal 2006.

Our RF microwave amplifier segment had another strong quarter driven by strong demand for our defense-related products particularly an improvised explosive device jamming amplifier. Of the fiscal 2006 first-quarter sales 38.9% were to international end users, 47.4% were to the U.S. government or primes to the U.S. government, and 13.7% were to domestic commercial customers. The U.S. government sales percentage was skewed upward during the quarter primarily due to strong U.S. government sales in our mobile data communications segment.

Gross profit increased to $40.2 million in the first quarter of fiscal 2006 from $27.1 million in the first quarter of fiscal 2005. The increase was the result of the substantial increase in sales partially offset by a decrease in the gross margin percentage from 48.3% to 37.7%.

The anticipated decrease in the gross margin percentage was partly due to a much higher proportion of our sales being in the mobile data communications segment in the first quarter of fiscal 2006 compared to fiscal 2005. This segment typically realizes lower margins than our other two segments.

On our Q1 call last year we noted that the 48.3% gross margin was unusually high partially due to the unusually low proportion of mobile data communications segment sales. In addition, the first quarter of fiscal 2006 includes sales related to Tolt which currently has lower margins than the traditional U.S. government business in this segment. The gross margin decrease was also impacted by a higher level of gross margin adjustments on long-term contracts during the prior year first quarter compared to fiscal 2006.

Our SG&A expenses increased from $11.2 million in the first quarter of fiscal 2005 to $16.1 million in the first quarter of fiscal 2006. The increase was primarily attributable to the increased level of sales and activity in all three of our business segments and expenses associated with the Tolt acquisition.

In addition, as Fred mentioned earlier, in the first quarter of fiscal 2006 SG&A expenses included $1.1 million of stock-based compensation in connection with our adoption of Statement of Financial Accounting Standards number 123(r). As a percentage of our consolidated sales, SG&A was 15% in the first quarter of fiscal 2006 versus 20% in the first quarter of fiscal 2005.

R&D expenses were $6.7 million in the first quarter of fiscal 2006 representing a 37% increase compared to $4.9 million in the first quarter of fiscal 2005. And our operating income for the three months ended October 31, 2005 was a strong $16.8 million compared to $10.4 million in the prior year period reflecting the significant increase in sales. The first quarter of fiscal 2006 also included stock-based compensation expenses aggregating $1.3 million.

Interest expense, which primarily represents interest on our 2% convertible Senior Notes, was consistent between the quarters at approximately $700,000. Interest income increased from 643,000 in the first quarter of fiscal 2005 to $1.8 million in the first quarter of fiscal 2006 due to higher interest rates as well as an increase in cash available for investment driven by our strong operating cash flow during the past year.

The effective income tax rate for the first quarter of the year was 36% compared to 32% for the first quarter of fiscal 2005. The increase in the effective tax rate was primarily attributable to the substantially higher level of pretax income, which diluted the percentage impact of tax savings, and the scheduled expiration of the federal research and experimentation credit in December 2005. If the R&E credit is renewed we could see a reduction in our effective tax rate going forward.

In addition, the expensing of stock-based compensation during the quarter resulted in an increase to our effective tax rate of approximately 1% due to the nondeductibility of compensation expense related to incentive stock options.

Net income for the first quarter of fiscal 2006 was $11.5 million or $0.43 per diluted share. Because we believe that many investors may want to measure our operating results before the expensing of stock-based compensation, we intend to disclose on a pro forma basis what our earnings would be if we did not expense stock options. With that in mind, net income for the first quarter of fiscal 2006, excluding stock option expensing, would have been $12.5 million or $0.47 per share versus net income for the first quarter of fiscal 2005 of $7.1 million or $0.28 per share.

Earnings before interest, taxes, depreciation and amortization, including amortization of stock-based compensation, were $20.1 million for Q1 of fiscal 2006 compared to $12.2 million for the first quarter of fiscal 2005. Our backlog as of October 31, 2005 was a strong $156.8 million compared to $153.3 million at the end of our fiscal year. And bookings for the quarter were an outstanding $110.1 million.

Our balance sheet remained very strong as well as of October 31st; we ended the quarter with $220 million of unrestricted cash. We did experience growth during the quarter in inventory and accounts receivable. The increase in inventory was somewhat modest given the record level of sales experienced during the quarter.

Accounts Receivable increased due to the increase in overall sales and higher unbilled receivables primarily related to a large over the horizon microwave contract. As we've noted before, our receivables can fluctuate based on the timing of our performance and billings on large contracts. For example, the first quarter of fiscal 2005 cash flows from operating activities included the liquidation of a large contract receivable that had built up over a few quarters while the first quarter of fiscal 2006 includes the buildup of receivables on the large over the horizon microwave contract.

It is possible that the total receivables on this contract will continue to grow in Q2 before liquidating in Q3. All in all the first quarter of fiscal 2006 was yet another strong showing for Comtech and it established a solid foundation for another outstanding year. Now back to Fred.

Thanks, Rob. First, I'd like to discuss recent business developments in each of our three business segments and then provide some guidance for the remainder of fiscal 2006. Our telecommunications transmission segment had another impressive quarter. This is our largest segment representing 48% of our consolidated sales in the first quarter of fiscal 2006 and more than 50% of our expected sales for the full year.

Our established leadership positions in satellite earth station products and over the horizon microwave systems continue to drive strong operating results. As a reminder, satellite earth station products constitute the largest productline in this segment and we have established Comtech as a one stop shop for satellite earth station products for customers such as domestic and international, commercial, satellite integrators as well as U.S. and foreign governments.

Our primary focus and the lion's share 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 bandwidth utilization using our patented turbo product coding technique thus significantly reducing transmission costs for our customers.

We continue to invest heavily on bandwidth optimization solutions in this productline and have recently introduced various new products with the most advanced innovations in the industry. Our customers are noticing and acknowledging our efforts as evidenced by record levels of bookings in this productline for the past year. In fact, bookings in the first quarter of fiscal 2006 were at their highest level ever.

Turning to our over the horizon microwave productline, the first quarter was another strong showing. The $77 million contract that we received in September 2004 generated significant revenues during this quarter as the contract is now in its peak production phase and we expect quarterly revenues from this contract to be at its peak at the moment and decrease for the balance of fiscal 2006.

As noted in previous conference calls, revenues can fluctuate dramatically from quarter-to-quarter in this productline based not only on the timing of the receipt of the orders but also on our performance on large contracts such as this one. There are large follow-on opportunities with is end customer which we expect to book in the immediate term.

We have been and expect to continue to be successful in winning large opportunities. Our proven technology is far superior to our limited competition and we are well-established as the leading supplier of these systems. As you know, we have continued to improve our productline and have invested in this unique area for many years. We firmly believe that our field tested technology is the best in the world despite recent claims to the contrary by others. Our view is that such claims merely validate the significant opportunities that we have long believed exist in this important technology.

On that note we remain excited about the positioning of our over the horizon microwave technology with the U.S. government. We've been working with the DOD for quite some time in responding to its technical requirements and actually demonstrating in the field the effectiveness of our system. The clear and convincing case we have made to various groups within the DOD that this technology should play an important role in its communication infrastructure has been effective in obtaining end-user support for our technology.

That said, as you know, ultimately it comes down to funding; obtaining funding for new programs particularly with all of the competing demands on the defense budget can be a difficult undertaking. Despite the current budgetary pressures, in the past 60 days we have seen some encouraging signs that funds are being requested at the appropriate levels and our technology is the platform of choice. Beyond that I can't say much more.

The release of U.S. government funding for our over the horizon microwave systems could be a significant driver in growth in this productline. We're expecting to realize some low level of revenue from the U.S. government by the fourth quarter of fiscal 2006.

In summary, within the telecommunications transmission segment our ongoing and increasing R&D efforts continue to solidify and strengthen our leadership position and we intend to continue our focus on future technology innovation by committing significant resources to R&D as this segment continues to grow. And once again, we expect this segment will produce another record year in '06.

Our mobile data communications segment also had a blowout quarter in Q1 of fiscal 2006. We posted sales of 39.4 million in this segment for the quarter and as Rob mentioned earlier, Q1 revenue was favorably impacted by the anticipated rollout of our next generation mobile MTS satellite transceiver, the model MT-2012. The MT-2012, as you know, includes RFID capability and an enhanced security anti spoofing feature.

In addition, we continue to provide hardware and services to the war fighter community, most notably for the Blue Force Tracking program where our satellite technology is addressing line of sight communication limitations. The importance of the role of our Packet Data technology, both within the logistics and war fighter communities, continues to grow. One of the major communications obstacles identified during the Iraqi conflict has been the inadequacy of terrestrial communications when our forces are spreadout in the field of battle. Our mobile satellite transceivers and related communications network are now mission critical when terrestrial line of sight channels are not available.

Despite the remarkable growth this segment has achieved in recent years, the MTS and Blue Force Tracking programs still continue to be significant growth vehicles since only a relatively small percentage of the U.S. Army's logistics and war fighter vehicles have today been upgraded to use this system. We're also continuing to work with other areas within the DOD such as the Army reserves and the Marines as well as various prime U.S. government contractors in addressing potential needs and applications that our technology can address.

In fact, the National Guard has used our technology both in Iraq and in the U.S. Gulf Coast when responding to hurricane Katrina. The MTS system is one of the top requirements that is being requested by the Army National Guard in its most recent supplemental funding request which we hope would be signed before the end of this month.

All in all many opportunities exist in the government side of the productline and fiscal 2006 is well on its way to being another record year. As I've said many times before, quarterly bookings, sales and profits can fluctuate significantly in this segment as well. The first quarter of fiscal '06 was an exceptionally strong quarter partly due to the timing of and the receipt and performance on new orders relating to this new model MT-2012 transceiver.

Although we do not anticipate that quarterly revenues will remain at the high-level -- at the high quarterly level that we experienced in quarter one, we expect a broader annual trend for demand in this productline which has consistently been on the rise to continue. We just don't see that trend changing.

On the commercial front our efforts are focused around the Tolt acquisition which we completed in February. Our intent has been to transition Tolt, which is an enterprise mobility solution value added reseller, into a mobile satellite communications provider focused on the commercial trucking market. We continue to approach the commercial side of this market in a cautious and methodical way. That said, we expect the commercial business this year to be a net cost center. In summary, the mobile data communications segment had a great start to what we anticipate will be its sixth consecutive record year.

Our third segment, RF microwave amplifiers, picked up where it left off at the end of fiscal 2005 posting 16.3 million in sales in quarter one. Demand over the past 18 months has been especially strong for our defense-related products. Among the defense programs we have participated in during the past year has been the WARLOCK program where we provide amplifiers for incorporation into a microwave jamming system used to counteract improvised explosive devices.

The DOD has numerous IED programs at various stages of development. Whether we participate in such programs in the future will depend on the requirements -- who the prime contractors are and what the power and bandwidth requirements are. Our amplifiers obviously operate at the very high-power level over very, very broad frequency spectrums.

As I've said in recent conference calls, IED jamming is not the only application for our technology. Many electronic warfare applications require high-power amplifiers. For example, we recently received a $3.8 million order from another prime contractor for an amplifier that would be part of a communications jamming system for ship board and tactical ground mobile platforms.

Some of our commercial product lines also have shown renewed signs of growth. For example, we recently received a $1.7 million order for our amplifiers which will be incorporated into a medical system for oncology treatment. In fact the first quarter of fiscal 2006 was the strongest bookings quarter ever in this segment. Although we do not anticipate that quarterly sales in this segment again will remain at this very high Q1 level. In the absence of additional orders for IED jamming amplifiers obviously this segment has been a major success story in the past year and it's poised to benefit from significant programs and applications that can be addressed by this industry-leading technology.

Before I discuss guidance I wanted to mention once again that with 220 million in deployable cash we're continuing to actively seek acquisitions. We haven't found any to date. However, we continue to be disciplined in our approach to identifying and evaluating targets, particularly in light of the strong growth potential we expect to be realized in our existing businesses.

And now on to guidance. Again, not to be repetitive, but as I've 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 in bookings and related revenues and certain of our product lines. And the first quarter of fiscal 2006 was a good example of how quarterly revenues can fluctuate, particularly in our mobile data communications and RF microwave amplifier segments as well to some degree, on the over the horizon microwave productline in our telecommunications transmission segment.

We have consistently encouraged our investors in the past to view our performance on an annual basis and obviously we do so again. As mentioned earlier, in Q1 of fiscal 2006 we were required to adopt revisions of a new accounting pronouncement relating to the expensing of stock options. I will provide our guidance on a GAAP basis which includes stock option expensing as well as on a non-GAAP basis which excludes stock option expensing.

Our earnings press release and quarterly investor presentations from now on will reconcile the GAAP and non-GAAP information. With that in mind, excluding the impact of stock option expensing, we are raising our non-GAAP diluted EPS guidance for fiscal 2006 from $1.54 to $1.56 by $0.02 to $1.56 to $1.58. Keep in mind that the increase in our effective tax rate which Rob discussed earlier, resulted in a $0.02 reduction to both the full-year non-GAAP and GAAP EPS guestimate. Otherwise we would have had a $0.04 raise. Our GAAP diluted EPS guidance for fiscal 2006 is estimated at $1.43 to $1.45.

Fiscal 2006 revenues are expected to be the .360 and $365 million which is an increase of approximately $5 million over our previous guidance. Excluding the impact of stock option expensing, non-GAAP diluted EPS for Q2 of fiscal 2006 is estimated at $0.30 to $0.32. In addition to the impact of the higher effective tax rate Q2 assumes a higher level of our Indies pending compared to Q one relating to certain additional development projects that we have started.

GAAP diluted EPS for the second quarter of fiscal 2006 is estimated at $0.27 to $0.29. Fiscal 2006 second-quarter revenues are expected to be between 82 million and 84 million. This outlook does not assume any benefit from any acquisition -- obviously an accretive acquisition would further add to our growth. All three of our business segments are performing at record levels with strengthening leadership positions an important technology areas combined with participation and high-profile programs, we continue to see ample opportunities continuing organic growth.

And with the liquidity provided by a strong balance sheet we can pursue selected acquisitions to complement our current product portfolios and technologies. We believe we are well-positioned to post our fourth consecutive record year in a row in fiscal 2006. Thank you very much. Also I just want to mention, an updated investor presentation will be posted to our website at www.Comtech.com shortly after this call. Now it's your turn to ask questions. Operator?

(OPERATOR INSTRUCTIONS). Mark Jordan, AG Edwards.

Good morning, gentlemen. Tremendous quarter. Two questions and possibly they're related. I noticed that in the Q that the inventory reserves were down 1,000,002 in the quarter, also mobile data had, despite the very high volumes, operating profit margins of 10.7% which is well below last year's rate of 13.8 and two years ago 15.9. I guess the questions would be does the decline in the inventory reserve relate to this generational shift that you've completed and were there some inventory or other transitional charges that impacted the first quarter of mobile data's operating profit level or could you comment on where that should go over time?

Sure, Mark. I guess in terms of your first question regarding the inventory reserve, if you look at our 10-Q, which we filed this morning, you'll see in the footnote that relates to inventory we did have a $1.2 million decrease in the reserve for excess and obsolete inventories. But that entirely related to just the write-off of previously reserved for inventory. If you look at our cash-flow statement, we actually took a charge in the quarter of just under $500,000 which is pretty consistent with the prior year. So what you see in terms of the reserve is just the direct write-off of inventory against a reserve that had previously been established -- if that answers your question.

Is it specifically tied to mobile data and transitioning to a new generation of product?

No, and in fact most of it was actually in our satellite earth station business. Again, this is stuff that was reserved for in prior periods. So you basically write-off the inventory itself and then take it out of the reserve at the same time. That was not directly related to the transition.

Looking at the operating margin then at mobile data, again under 11% on clearly a phenomenal quarter from a top-line basis.

There are two things there that prove that percentage, Mark. The first is within the government side of that segment we did have a disproportionately large percentage of MTS revenues compared to our battlefield command and control revenues which the MTS revenues at this point carry a lower margin than the war fighter opportunities. So that percentage skewed it down.

And as Fred alluded to, Tolt, the commercial efforts we have at this point as we continue to invest in marketing and addressing this market continues to be a net cost center to us. So you have revenues in there that on an operating margin basis are actually at a loss. So if you take those things and you blend together you end up with an operating margin that's lower than it was at the end of last year.

Okay. But there isn't a fundamental change in the operating margin capability of the mobile data unit lines?

No, in fact on the government side of the business, if you look at the MTS contract itself and then the war fighter contract, as the revenues continue to grow we continue to build efficiency into those productlines.

Okay. Could you address with Tolt -- as I understand, addressing the commercial market is really a function of having complete turnkey systems versus just a hardware solution. What are you doing to -- what's the strategy to flesh out that -- the application suite and when will you be in a position to turn that into a profit contributor in calendar 2007?

I think, Mark, to answer that question, as we alluded to, I think Tolt is just our entry into the commercial business. And as such it is a cost center at the moment, obviously, as we're developing various technical solutions to the productline that we want to enter this market with. We certainly do expect 2007 to become profitable in this area.

Okay. A final question if I may. The over the horizon business opportunity you have with the Army, obviously you've stated that there is support both from a funding standpoint and from the decision-makers. When do you think you will see or there will be a formal RFP out on the street and what will be the expected decision cycle for that potential contract?

We've heard in numerous different ways from obviously different portions of the DOD. There is an RFQ that is expected to come out some time -- the promise was the end of this calendar year but I think we expect it more it terms of January. And probably since the funding isn't there yet for that RFQ, I would suspect that the proposal of it and the resulting contractual obligations that the government could put forth is probably going to slip into the fourth quarter.

Your fourth quarter?

Our fourth quarter.

Okay. Thank you very much.

Tim Quillin, Stephens Inc.

Could you give us the backlog by segment for this quarter, last quarter and first quarter of '04 if you have that in front of you.

Sure, the backlog for this quarter, Tim, was 156.9 million in total, that was -- 73.6 million of that was telecom transmission, 32 million was amplifiers and 51.2 million was mobile datacom. And at the end of July, at the end of our fiscal full year it was 153.3 million, $82.7 million was telecom transmission, 28.1 million was RF microwave amplifiers, and 42.6 million was mobile data.

I'll just point out that the reduction in the Telecom was just the bleeding down, as Fred mentioned, of the backlog on that large contract. But as you can see, the rest of the business has actually increased significantly. And then in the first quarter of last year, at $163 million in total, it was 106 million in telecom, again reflecting a full boat of backlog related to that contract, 23 million for RF microwave amplifiers and 34 million for mobile datacom.

That's very helpful, thank you. And it looks like if we strip out the revenue from your North African customer, the other telecom transmission sales grew at just a 6% clip in the first quarter. First of all, is that correct and does that -- if so, does that imply that the satellite modem sales growth is slowing despite these new product introductions?

Well, the 6%, Tim, I'm not sure how you calculated that, but again those percentages, international percentages are on all of our businesses. We do have international sales, for example, in the amplifier group. But as Fred mentioned, the first quarter -- and again, we caution people that in that business it is book and ship. It's hard to trend things just based on one or two months. But having said that, the first-quarter bookings, third-party bookings in that productline were higher than they were in any quarter last year. I hope that's responsive to your question.

Okay. And it looks like there was about $16 million in sales to the North African country, about 15.3% of overall sales in the first quarter. What is a sustainable level of quarterly sales to that customer? Do you expect that to drop off to a single digit revenue level through the remainder of the contract term?

We expect for the remainder of this year, Tim, and it's baked into our guidance for that to drop off to closer to a single digit number assuming that, as Fred mentioned, we don't have any additional contracts from the end-user and there are opportunities with that end-user certainly in the intermediate term. But just based on this contract alone, we have baked in a reduction in revenue in that productline specifically related to that contract for the balance of the year.

Can you tell us how much is remaining in the backlog from the $77 million contract?

I'd prefer not to, Tim.

Okay. And as far as the OT system sales opportunities, what do you expect the timing of a follow-on opportunity with that specific North African customer could be and then what are some other potential opportunities and what are the timing on those?

The timing has always been a problem both on the size of the contract involved and since they are international contract opportunities. We think in the intermediate term, and the intermediate term being defined somewhere between now and the end of our fiscal year, we could see some opportunities with the North African customer as well as some others that we have in the pipeline. But things in the quarter of the larger of these contracts tend to slip, so I wouldn't be surprised if it happens by the fourth quarter or it slips into the first or second quarter of next year.

On the government side we are at the mercy of the government funding situation. And there's an aggressive competition for that funding in all areas. And so we believe that the Armed Forces, particularly the Marines and the Army and the Air Force do want our equipment and have the need for our equipment, but the funding really is a particular problem in its timing right now. So it's very, very difficult to predict.

Very good. And then just on the mobile data business, can you help me understand the timing of deliveries first off of the $18.5 million initial order for the MT-2012 and then there was a $12.7 million in October and then another order announced at the end of November. I guess most importantly I'm asking what the timing of that $18.5 million order was?

Typically our requirements in the mobile datacom area are for a 90-day delivery. We deliver either earlier than 90 days or certainly no later than 90 days. Having said that, however, one bit of caution. Portions of those contracts also relate to the space segment costs that we get paid for and those typically are over a year.

Okay. So just to restate, the $18.5 million would be realized over 90 -- forward 90 days or would the first shipment come 90 days?

The first shipment typically -- you should consider the first shipment will come within 90 days, within that quarter.

And just lastly, do you have any clarity on the funding for Blue Force Tracking and MTS in the House and Senate versions of the pending FY '06 defense appropriations bill? Thanks a lot, gentlemen.

The funding is as scheduled in the palm that the government has. Plus the additional defense appropriations bill that I mentioned that is due to be signed at the end of this month or hopefully before the holidays. There will be some funding in both of those areas. We don't know exactly how that will come out because it hasn't been signed.

Okay, thank you.

(OPERATOR INSTRUCTIONS). James McIlree, Unterburg Towbin.

Can you provide details on the backlog of the mobile data business that's related to the space segment?

I think we'd rather not really break that out, Jim.

I can tell you, in terms of our balance sheet, Jim, you'll see we do have an account on the balance sheet called deferred service revenue which it represents the deferral of revenue on the MTS contract. So that amount is the minimum amount of backlog plus whatever air service time we're being paid for related to Blue Force Tracking as well. But effectively that deferred service revenue you see on our balance sheet is the amount of prepaid service time, if you will, on the MTS contract.

Okay, great. The tax rate that you're using in your guidance, are you assuming the 36% rate going forward?

Yes. Jim, the way it works is excluding Statement of Financial Accounting Standards Number 123(r) we would have had a 35% tax rate so that the real apples-to-apples tax rate is 35. But we are using 36 in the guidance because that's what we used in the first quarter and it's the -- the GAAP rate would be stock compensation. I just want to reiterate though that if Congress does put back in place the R&E credit bill, that could drop our effective tax rate by another 1% again. But it drove it up by about 1%.

Okay. So the GAAP guidance you have is 36% tax rate and the non-GAAP guidance is 35?

That's correct. Which assumes that the R&E credit is not renewed.

Great, that's helpful. And I know that there's a portion of the management's compensation that's tied to pretax income -- I think it's tied to pretax income. Is that pre stock option expense or post stock option expense?

It's pre.

Okay. And I think lastly, SG&A this quarter versus prior quarter was up $100,000, but it looks like the stock comp this quarter was 1 million and last quarter I'm assuming it was nothing.

That's correct.

What's the reason for the decline excluding the stock comp?

It's just some timing things. There are expenses related to some of our operations, Jim, that relate to building the new markets and the like. And as we said over the past few quarters, we have been building infrastructure, so I think we're getting to a point now where we have the infrastructure in place that we need to accommodate our future growth. So we can have swings between quarters for 500,000 to 600,000 just based on the timing of expenditures and the like. There's no specific very large reason for it.

But it also implies then that there's not major growth in that area going forward either. Maybe it doesn't imply that, but it seems like -- okay. I think I got it. Great, that's everything. Thank you.

We have no additional questions at this time.

Okay. Since there are no questions, I want to thank everyone for your interest in Comtech. We certainly look forward to speaking with you again soon and we hope everybody has a great holiday. Thank you very much.