Comtech Telecommunications Corp (CMTL) 2006 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Comtech Telecommunications Corporation's third-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 Thursday, June 8, 2006. I would now like to turn the conference over to Mrs. Stephanie [LaMantia] of Comtech Telecommunications.

Thank you and good morning. Welcome to the Comtech Telecommunications Corp. conference call for the third quarter of fiscal 2006. With us on the call this morning are Fred Kornberg, President and Chief Executive Officer of Comtech, and Robert Rouse, Executive Vice President and Chief Operating Officer, and Michael Porcelain, Chief Financial Officer.

A news release on the Company's results was issued yesterday afternoon. 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. Good morning, everyone, and thank you for joining us today. This morning we will be discussing our results for the third quarter of fiscal 2006, another successful quarter in what is clearly shaping up to be another record year. As you can see from yesterday's press release, our businesses turned in yet another solid quarter driven by strong performances in all three of the Company's segments. Our third-quarter results exceeded our prior expectations, beating our high-end EPS guidance by 15% or by $0.05.

As we have mentioned on numerous occasions in the past, our revenues and earnings tend to fluctuate dramatically from quarter-to-quarter, particularly in productlines that are focused on very large contracts. These large contracts are important to us because they effectively provide Comtech with opportunities to grow faster than our peers; opportunities which, as you know, we have consistently been successful in landing. By their very nature however, these large, high-profile contract awards can result in lumpiness in quarterly results based on the timing of the receipt and customer delivery requirements.

We have in the past, and continue in the future, managed our businesses on a long-term basis and our strategy will continue to be to seek out and welcome these large opportunities to help us drive the Company's annual and long-term growth despite the volatility they can cause short-term to our quarterly performance results.

Moving on now to our discussion of the third quarter, Mike Porcelain, our Chief Financial Officer, will review our operating results. Then Rob Rouse, or Chief Operating Officer, will discuss recent developments and activities in each of our three business segments. And finally, I will provide guidance for fiscal 2006 and make a few comments about fiscal 2007. Mike?

Thanks, Fred. Good morning. Let's begin by reviewing the key income statement trends for the quarter ended April 30, 2006. Third-quarter sales were $89 million, compared to $75.4 million in the third quarter of fiscal 2005, an increase of 18%. The increase in sales was driven by increases in sales in our telecommunications transmission and Mobile Data Communications segments offset slightly by lower sales in our RF Microwave Amplifier segment.

The increase in sales in our Telecommunication Transmission segment from $43.2 million to $46.9 million was primarily due to strong demand for our satellite earth station products and sales related to a manufacturing outsource contract. This was offset in part by lower sales related to certain over-the-horizon microwave contracts. This is one of the productlines that, as Fred mentioned earlier, can experience dramatic quarterly fluctuations in sales and profit based on the receipt of large contracts and our related performance.

In our Mobile Data Communications segment, sales for Q3 of fiscal 2006 were $32.8 million or 47.1% higher than the $22.3 million of sales in Q3 of fiscal 2005. In fact, sales for the first nine months of fiscal 2006 are already 26% higher than the full 12-month sales for fiscal 2005. Sales increased due to higher sales on the MTS and Blue Force tracking contracts. Sales here can also fluctuate dramatically from quarter-to-quarter based on the timing of the receipt of orders and fielding requirements.

Sales in our RF Microwave Amplifier segment decreased by 6.1% from $9.9 million in the third quarter of fiscal 2005 to $9.3 million in the third quarter of fiscal 2006. This decrease is primarily the result of lower sales of amplifiers or IED jamming systems during this quarter compared to a very active Q3 in fiscal 2005. Of the Company's fiscal 2006 third-quarter sales, 33.5% were to international end-users; 44.5% were to U.S. government or primes to the U.S. government; and 22% were to domestic commercial customers.

On the gross profit line, gross profit increased to $34.2 million in the third quarter of fiscal 2006 from $29.5 million in the third quarter of fiscal 2005. The increase in gross profit was primarily attributable to the increase in sales partially offset by a decrease in the gross margin percentage from 39.1% to 38.4%. The decrease in the margin percentage was primarily due to a higher percentage of the Company's fiscal 2006 Q3 sales being in the Mobile Data Communications segments which typically realizes lower gross margins than our other two segments.

On the operating expense side, SG&A expenses increased from $12.9 million in the third quarter of fiscal 2005 to $15.4 million in the third quarter of fiscal 2006. The increase was attributable to the general increased level of sales and activity company wide and expenses associated with the refocusing of our commercial sales force to satellite-based Mobile Data applications. In addition, SG&A expenses for the third quarter of fiscal 2006 include $1.1 million of stock-based compensation in connection with our adoption in Q1 of FAS 123(R). Excluding the stock-based compensation expense, SG&A expenses were actually lower as a percentage of sales at 16.1% and 17.1% respectively in the third quarters of fiscal 2006 and 2005.

Research and development expenses were $6.1 million in the third quarter of fiscal 2006, compared to $5.3 million in the third quarter of fiscal 2005. We do expect to significantly ramp up R&D spending in Q4 in connection with certain R&D projects. This includes network and software development in the Mobile Data Communications segment and new ASIC development in the telecom transmission segment.

Operating income for the three months ended April 30, 2006 was $12.1 million compared to $10.7 million in the prior year period. The third quarter of fiscal 2006 does include stock-based compensation, which aggregates $1.4 million. Interest expense, which primarily represents interest on our convertible notes, was consistent between the quarters at approximately $700,000. Interest income increased from $1.2 million in the third quarter of fiscal 2005 to $2.5 million in the third quarter of fiscal 2006 primarily due to higher interest rates and additional investable cash.

On the income tax line, our reported GAAP rate was 37%. Going forward as a result of our level of pretax income, the expiration of the Federal Research and Experimentation credit, and the nondeductibility of compensation expense relating to incentive stock options, we anticipate that our effective tax rate for fiscal 2006, excluding special items, will be 36.5%. On a non-GAAP basis, excluding the expensing of stock options and special items, our effective tax rate would be 35.5%.

Because we believe that many investors still want to measure our operating results before the expensing of stock-based compensation, we intend to continue 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 third quarter of fiscal 2006, excluding stock-based expensing, would have been $9.7 million or $0.37 per diluted share versus net income for the third quarter of fiscal 2005 of $8.4 million or $0.32 per diluted share, which did not include stock option expensing.

Net income for the third quarter of fiscal 2006 was $8.7 million or $0.33 per diluted share on a GAAP basis. Earnings before interest, taxes, depreciation, and amortization, including the amortization of stock-based compensation, were $15.6 million for Q3 of fiscal 2006, compared to $12.6 million for Q3 of fiscal 2005.

Backlog as of April 30, 2006 was $138.3 million compared to $151 million at January 31, 2006 and $153.3 million at July 31, 2005. The decrease in the backlog is the result of our performance and recognition of related revenue on a $77 million over-the-horizon microwave contract and a delay in the receipt of certain large contract orders which Rob will discuss further during his comments.

On the balance sheet, as discussed during the past two conference calls, receivables have increased largely due to a buildup of receivables on our $77 million over-the-horizon microwave contract. As anticipated during March's call, the unbilled portion of such receivable has decreased via increased billings in Q3 and we do expect to convert a large portion of cash commencing in Q4. In addition, receivables did increase in Q3 due to the timing of cash collections in our Mobile Data Communications sector. All in all, the third quarter of fiscal 2006 was another strong showing for Comtech. And now to Rob who will discuss recent developments in our three business segments. Rob?

Thanks, Mike, and good morning to all of you. Let me begin with our telecommunications transmission segment; representing 53% of third-quarter sales, this continues to be our largest segment and has been a major catalyst for our growth in recent year. With its strong performance for the first nine months of fiscal 2006, this segment is all but assured of posting another record year. Its sustained success has been the result of its well-established leadership positions in satellite earth station products and over-the-horizon microwave systems.

As a reminder, our largest productline in this segment is satellite earth station products. Comtech is well recognized as a one-stop shop for satellite earth station products. Most of this productline is commercial and we sell our products to a broad group of global communications service providers as well as domestic and international satellite network integrators. We also sell to U.S. and foreign governments.

We believe our modem technology is the de facto standard in optimizing satellite bandwidth utilization using our patented forward error correction techniques, thus significantly reducing transmission costs for our end customers. But just don't take our word for it. Look to our primary competitors who have incorporated our patented technology into their high-end modems. A very clear sign of technology leadership.

Although this productline has experienced significant growth in recent years, we never rest on the successes of today but rather focus on the next wave of technology enhancements. For example, let me briefly discuss three new products and technologies that are coming online as we speak. First, our Carrier-in-Carrier technology allows end-users to transmit both the forward and return sides of the satellite link concurrently using the same satellite bandwidth, resulting in a transmission of a full duplex link in half the bandwidth. This 50% savings is incremental to operational savings resulting from other techniques such as our forward error correction.

The CDM-Qx modem is our first product to incorporate Carrier-in-Carrier technology. The modem has been very well received by our customers. As an example of the savings this technology can produce, one of our customers has deployed Carrier-in-Carrier in its network and has packed two existing transponders of traffic into a single transponder resulting in more than $1 million a year in operating costs savings.

Second, we recently introduced the SLM-5650 satellite modem. Our earth station productline has historically been focused on commercial customers. A few years ago, however, in driving our strategy to further penetrate the government market in this area, we launched in R&D effort to design an advanced satellite modem specifically for government end-users. The SLM-5650 is the fruit of our efforts. This modem meets the requirements of most standard 188-165A and includes extended data rates, a wide range of modulation options, and advanced forward error correction. Recent press releases announcing new contract awards for this modem are tangible signs of its potential value in taking market share on the government side of the satellite earth station market.

Third, we are in the process of rolling out our newest modem, the CDM-700. This high-speed modem operates at data rates of up to 155 Mbps and includes the latest DVB-S2 digital broadcasting standards. Compare this to our best-selling CDM-600 modem that was introduced just five years ago at data rates of up to 20 Mbps, by far the fastest, most bandwidth efficient and feature rich satellite modem in its class at the time.

Although we are the well-established leader in this high-technology area, we are driven by continued advancements and are not afraid to leapfrog our older technology to better address customer needs. We intend to continue to invest heavily in technology innovation in this area with a very keen focus on bandwidth optimization solutions for our commercial as well as government customers.

Now to our over-the-horizon microwave productline. Here we have been and continue to be the world leader in providing equipment and systems which use the troposphere as a transmission medium. The troposphere is a layer of the earth's atmosphere that is used to redirect signals similar to a satellite repeater to transmit voice, video, and data. However, one of the major differences is that use of the troposphere is free and therefore more cost-effective from an operating point of view.

Until recently our primary target markets have been foreign governments and the oil and gas industry, and these continue to be fertile markets today. Foreign governments use our systems for communications infrastructure as well as back calling intelligence and air defense data from remote locations to headquarters. And as oil and gas platforms and exploratory efforts have moved farther out to sea, oil and gas customers are using Comtech tropo systems when line of sight systems are no longer within communications range.

During the past few years, advancements that we have made in this technology have increased data rates from 2 Mbps to 16 Mbps, thereby opening the door for a variety of new applications including the transmission of color video, video from unmanned aerial vehicles, and IP over this type of channel for the first time. The higher data rate capability made possible by our technology has also opened up new markets for tropo systems.

Among such markets is the U.S. Department of Defense, which has shown a renewed interest in introducing tropo systems back into its infrastructure. This potentially large market has received much attention during the past year or so. As we've discussed on previous conference call, the first major tropo program funded by the DOD is for the modem upgrade of the TRC-170 terminals. For all intents and purposes, we identified and developed this upgrade market by developing technology to specifically address the DOD's operational needs.

We have spent a fair amount of time during the past year responding to questions concerning our alleged competitors' statements regarding our 35-year-old technology and why we were not qualified to win the TRC-170 program. We never understood how being committed to developing the latest advancements in a technology over a long period of time was a negative. However, as we've said on numerous occasions during the past year, our focus has been solely on winning the contract and our focus has paid off.

As you know from our press release and the DOD's announcement in mid-May, we have won the TRC-170 modem upgrade program. We are extremely pleased to work with this important customer. The potential value of the initial contract is $28.3 million, which includes modem upgrade kits for 184 TRC-170 terminals. There are additional terminals that the customer would like to upgrade subject to the receipt of funding, and there are approximately 600 terminals that were originally manufactured.

In addition to the TRC-170 modem upgrade program, there are other opportunities with the U.S. DOD including the TRC-175 HMDA beyond line of sight terminal for which we have already provided our over-the-horizon tropo equipment, and the theater deployable communications or TDC program with the U.S. Air Force.

As we noted in the past with the TRC-170 program, the size and timing of these programs is dependent upon DOD priorities and the availability of funding. However, we believe that the backward compatibility of the upgraded TRC-170 terminals that will be delivering with any non-upgraded TRC-170 terminals, the TRC-175 terminals and any future programs such as TDC will put us in a very strong position for any future U.S. government tropo awards since the terminals have to be able to talk to each other.

On the international front, as predicted on the past several conference calls, revenues related to our $77 million contract were lower in Q3 than earlier in the year as the contract has moved out of its peak production phase. However, there continue to be significant follow-on opportunities with this end customer. Although the timing of contract awards from international customers are difficult to predict, we expect to receive at least one award from this end customer in fiscal 2007. We are also continuing to speak to other foreign customers who have similar needs and geographic terrain where over-the-horizon tropo would be a logical solution.

The advancements we have made in our over-the-horizon microwave technology are resulting in new, exciting opportunities driven by a broad array of new applications that can now run over this type of channel. Our well entrenched position in this area as evidenced by the receipt of the TRC-170 modem upgrade contract last month puts us in a unique position to capitalize on these opportunities. In summary, our telecommunications transmission segment continues to lead the way as our technology innovation fuels new product introductions and business opportunities.

Our Mobile Data Communications segment has another strong quarter. On the government side of this business, we continued the rollout of our new RFID enabled satellite transceiver known as the MT-2012. This technology serves as another example of our working closely with customers, in this case the logistics community within the U.S. Army, and developing a solution to an important operational need.

Funding for the MTS program continues to clearly be on the rise. As discussed during prior conference calls, the baseline POM funding for the MTS program in the government's fiscal 2007 year is unprecedented at approximately $80 million. The MTS program office appears to have already spent much of its core fiscal 2006 funding, more so than we originally were told, but in any event funding for fiscal 2007 is shaping up to be extremely strong.

In fact, on the last call we discussed a significant fielding opportunity for the Army National Guard. MTS was the second highest priority item identified in the entire National Guard supplemental funding request last December. Since our last call, approximately $113 million has been allocated to be spent on MTS systems by the Army National Guard. And although the MTS program office will retain a portion of the amount for its own expenses, we expect to receive the lion's share of this funding.

In April, we received a $9.3 million initial order against the National Guard funding, which relates primarily to the hurricane prone states. We expect to deliver these systems in the fourth quarter of fiscal 2006. The balance of the orders is expected to be received in late fiscal 2006 and fiscal 2007 and contribute significantly to revenue in fiscal 2007. The timing of additional orders will be dependent upon the manner in which the guard rolls out its fielding plan.

We also continue to provide hardware satellite services and other support to the war fighter community, most notably for the FBCB2 or our Blue Force tracking program. Our technology is critical to this high-profile program, as it provides for communications when forces are spread beyond line of sight range on the battlefield. Our transceivers can be mounted on ground-based vehicles as well as aircraft, as evidenced by the recent orders we have announced in the past few weeks for both standard and aviation units. The government side of this business continues to perform remarkably well and ample opportunities continue to exist for future growth. The National Guard program presenting just one example.

During our last conference call, Fred described some of the challenges we have experienced on the commercial side of this business. And as we discussed, we acquired Tolt Technologies in February 2005 as a way to supplement our limited commercial sales force. And in February, 2006 we revamped the incentive compensation plan for Tolt's salespeople to better focus their efforts on selling commercial satellite-based Mobile Data applications as opposed to lower margin Tolt legacy products.

As expected, Tolt's sales in Q3 were lower than in the comparable prior year period as a result of the redirecting of these efforts. However, the Tolt management team has made progress in improving gross margins during the last 90 days. In addition, we continue to seek ways to better match and supplement our product offerings with the commercial customer base that we are pursuing.

We continue to believe that our advanced technology is well-suited for certain vertical commercial markets, particularly those requiring near real-time communications. As Mike mentioned earlier, to date in this fiscal year the Mobile Data Communications segment has already far surpassed its previous record performance posted in fiscal 2005, even though the year is only three quarters of the way complete. And with the anticipated order flow and backlog that we see entering fiscal 2007, next year could be more of the same.

And now on to our third segment, RF Microwave Amplifiers. This segment continued its solid performance in the third quarter of fiscal 2006. In addition to their primary application in various defense systems around the world, our high-power broadband amplifiers play an important role in a variety of commercial applications such as oncology treatment systems and air to satellite to ground communications and commercial aircraft. In that regard, during fiscal 2006 we have experienced an increase in demand for our Satcom family of amplifiers as the commercial aviation market has finally shown signs of life again.

Our amplifiers are of particular importance in many electronic warfare applications. And with that in mind, much attention has been paid to the Warlock IED jamming program which resulted in significant revenue increases for this segment in Q4 of fiscal 2005 and Q1 of fiscal 2006. As predicted, we have not received orders for Warlock during fiscal 2006 largely due to the conflicting programs that the DOD has outstanding in its IED counteraction efforts.

We have not been standing still, however, and we have established relationships with various companies who are potential system providers for the growing IED jamming market and have developed and delivered through our R&D efforts several leading-edge technology products to these companies that are being utilized in system concepts qualification testing.

For example we have recently delivered units to Syracuse research in connection with the CREW-2 program. Our strategy is to be the amplifier supplier of choice in this area no matter who wins the work. However, our RF Microwave Amplifier segment is not just about one program or one application. In fact, bookings for the first nine months of fiscal 2006 in this segment were an unprecedented $42.6 million despite a very low level of IED jamming orders and fiscal 2006 is expected to be a record bookings year, our third in a row.

Our opportunities in the segment are broad-based and growing. Just in the past few months we have announced orders for a variety of electronic warfare applications including communications jamming amplifiers for a large international end-user and the integrated radiofrequency assembly for the high-profile Army enhanced position location reporting system radio, or EPLRS, contract which is part of the FBCB2 program.

We continue to aggressively invest in the latest solid-state technologies and incorporate these innovations into new products for existing and potential customers. This segment is poised to post another year of revenues in the mid $40 million range, just a few short years after being in the low $20 million range. It's been a major success story and ends the third quarter with record backlog. And now back to Fred, who will discuss our outlook for the balance of fiscal 2006 and some comments on fiscal 2007. Fred?

Thanks, Rob. Obviously as I have mentioned in previous investor conference calls, there continue to be many factors that make projection of revenues and EPS difficult. Including the quarterly fluctuations in bookings and related revenues in certain of our product lines. Once again let me say that these quarterly fluctuations are not going to go away. They are an inherent part of our business.

As Mike mentioned earlier, in fiscal 2006 we adopted the provisions of a new accounting pronouncement relating to the expensing of stock options. Therefore 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. Remember, for comparison basis our fiscal 2005 results did not include stock option expensing.

With that in mind, excluding the impact of stock option expensing, we are raising our non-GAAP diluted EPS guidance for fiscal 2006 by $0.08 to a range of $1.71 to $1.73. Fiscal 2006 revenues are expected to be between $377 million and $382 million, $12 million higher than our previous guidance. GAAP diluted EPS for fiscal 2006 is estimated to be $1.56 to $1.58 or $0.08 above our previous guidance.

Although it is premature to provide fiscal 2007 revenue and earnings guidance, current signs are that fiscal 2007 should also be a record year, our fifth in a row. All in all, our businesses continue to perform remarkably well and we look forward to completing another record year in fiscal 2006 and continuing our strong track record as we enter fiscal 2007. Thank you very much and we will now take your questions. Operator?

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

Can we talk a little bit about Accounts Receivable? You did mention that your African contract has now been -- you made a major billing. You had about $18 million, $19 million related to that contract. Should we assume therefore that you should be freeing up somewhere in the range of 12 to $50 million from that source, number one? And secondly, sequentially your governmental Accounts Receivable increased $10 million. Was that just a function of a flurry of shipments late in the quarter?

Mark, on the first part of it, the unbilled receivables, as you noted, as we predicted, did go down from Q2 to Q3. We do expect and we've actually seen pretty large payments against that already, so that contract billing will come down. I don't want to get into specific amounts because they could have ups and downs in other areas. For example our Accounts Receivable on the government side primarily relates to Mobile Data Comm. just because of the timing of revenue in the third quarter and we also expect to see significant liquidation of some of those receivables as well. But we certainly expect to see what went from unbilled to billed to be collected during the fourth quarter.

Could you amplify your comments relating to the over-the-horizon modem market for the U.S. military, the concept that your modem technology is unique and therefore it would be difficult or impossible for someone to design a compatible modem?

It's important, Mark, that from a technology point of view that these things can talk back and forth to each other -- not only back and forth to each other, but our new modem is actually backward compatible with the technology that's currently in the TRC-170s, which is important because, as I mentioned in my comments, they are not retrofitting all the modems at one time. It's going to take some period of time for them to do that.

So I think we as well as the other party that was bidding on this kind of agreed that there would probably be one winner in this area because of the compatibility issue concerns that are out there with the customer.

Okay. Moving forward would it be difficult also for someone to design a modem that would be able to interface effectively with your new 16 MB throughput product?

Yes, Mark, I think the modulation techniques in our modem are probably not compatible with the modulation techniques in our competitor's modem. So it's not equivalent to let's say the satellite area where what we have is kind of an open architecture and everybody builds to the same modulation scheme. This is more of a closed architecture modem and therefore it can only talk to itself.

Okay. A final question. You mentioned increased R&D spending specifically in the area of ASIC development and telecom and in Mobile Data. Could you -- is the ASIC development focused on your CDM-700? And secondly in Mobile Data, what area are you advancing or investing in in that subsidiary?

In the Mobile Data Comm. area it's primarily focused on network and software. We're trying to continue to enhance our overall product offering. And again, in this market we're doing not only hardware but network and software. So we're spending money in that area, looking to the customer needs, not only on the logistics side but the war fighter side and that's a strategic focus we have over the next few years.

On the ASIC side, it's not only our new modem but it's also the new DVB-S2 standard that's out there, trying to take our technology and get it down into an ASIC, which we plan on doing in the very short-term. So we've been planning for this. There have been certain other R&D projects, some of which were customer funded, that we've been working on. But we expect in Q4 to see the R&D ramp up significantly.

Thank you very much.

Rich Valera, Needham & Co.

Rob, you mentioned in your comments that the POM funding for MTS in fiscal '07 I believe looks like around $80 million and you suggested that was meaningfully higher than fiscal '06. Can you give us a sense of what that fiscal '06 baseline was?

I believe it was in the 25 to $30 million area in the POM. And they still have some money left for '06 to spend. Just one point there. You all may be aware that the DOD right now currently is in a bit of a bind because Congress did not approve the supplemental spending bill that's out there. So we did and when we came up with our guidance for the year assume very low level of bookings on the Mobile Data Comm. side even out of the '06 funding in Q4, just because all programs right now are kind of waiting for the Congress to deal with the supplemental funding.

So that's something that we just felt was appropriate to do given that we're in June here and Congress is still mulling over that. But with some additional funding from '06 moving into '07 and the large increase in '07. And the fact, as I mentioned earlier, that most of the guard funding, even if we really receive it within the next month, it's going to all be revenue other than the initial $9 million flood in fiscal '07. So fiscal '07 in that segment is just -- if everything goes according to plan, just looks outstanding.

Great, that's very helpful. And with respect to the backlog, the quarter ending backlog, as you guys noted, was down sequentially, but you have had pretty good order flow since then. Can you give any commentary on maybe where your current backlog level is or whether you expect that might be up or down at the end of this current quarter?

We would expect that at the end of the current quarter it will be up, Rich. Obviously some of that's dependent on the receipt of some amount of national guard funding. But when you look at some of the things that have happened over the last, as you pointed out, month, month and a half, we've experienced a tremendous amount of new orders come in. And keep in mind, in our backlog as it relates to the TRC-170 program, since that was received in May that's not in there at all.

So we would expect to see it go up. The primary reason it went down is we're continuing to perform on the $77 million contract and we did have a softer than normal quarter as it relates to the government bookings in the Mobile Data Comm. area for the reasons that we discussed. But there's a tremendous amount of pent-up demand in backlog -- of bookings, I should say, that we see coming down the pike over the next three to six months.

Great. And you alluded to the foreign government of OTH follow-on opportunity, that you thought you'd get something in fiscal '07. But is there anything you've seen there that indicates some forward progress that gives you some encouragement that that is going to move forward at some future date?

I would say, Rich, with this end customer it's always come down to timing. I think every opportunity that we've discussed has come to fruition. In fact, since last quarter I would say that the number of opportunities there has continued to increase. In fact, we've seen a few brand-new opportunities come up.

In terms of timing we still think there will be at least one in fiscal 2007. There could be more than one, but in terms of overall potential size of demand, we see that number continuing to increase. And part of it is that particular area of the world right now is very flush with cash as a result of oil prices. So we're seeing the overall demand with this end-user continue to rise.

Great. And just one final question if I could. In the RF amplifier segment, again you alluded to some very healthy bookings in that segment. Can you give any sense of the revenue trajectory sort of on a sequential basis going forward? Do you think you're going to start -- you've kind of dipped here to a base and you might actually start seeing that ramp up sequentially as we go forward?

I think obviously, Rich, we don't want to give specific segment guidance for next year, but we think for a segment that was kind of peaking out at about $20 million, that they've kind of set a base in that low to mid $40 million range that we're obviously going to try to grow from. But I think it's just premature to specifically talk about revenues for next year other than we don't think what we've experienced over the past couple years is an aberration. We see it as something that's sustainable and we're trying to grow it from there. I think you could see from our bookings for the first nine months, even without the IED type opportunities, there's a lot of demand out there particularly on the electronic warfare side.

Great, that's very helpful. Thanks, guys.

Jim McIlree, Unterburg Towbin.

You spoke about R&D being up significantly in Q4. Can you frame what that means?

You could expect it, Jim, to be in the 8% of revenue area.

And is that a new level going forward or is that just due to these projects that you have underway?

Some of it is project driven. We do expect to ramp up going forward in general, Jim, but there are a few discrete projects that we expect the funding -- the spending to occur in Q4. It's possible that some of that spending may shift into Q1, in which case that would increase our numbers for the quarter. But we do have them scheduled and we plan on spending and finishing some of those projects during the quarter at least for what we budgeted for. And that's why we expect that to be higher than the normal percentage.

Great. Does the TRC-170 modem upgrade kits, do those start shipping in the July quarter or is that something in fiscal '07?

Those would all be in fiscal '07, Jim.

So there's absolutely nothing of that order that will hit this fiscal year?

There's no revenue in fiscal '06, that's correct.

And when those do ship since they're just -- since they're modem upgrades I assume that they have higher margins than a normal OTH system. Is that correct?

I don't want to talk specifically about margins, Jim, but obviously they're going to have an impact on the first half of next year as we ship them. I don't get into that level of granularity.

Okay. The 10-Q talks about the Telco transmission business being partly driven by an increase in third party manufacturing, can you explain what that is and maybe frame what dollar amounts you're referring to?

Sure. In our facility out in Arizona, Jim, those are our satellite earth station business, we have entered into an arrangement with a third party company to do their contract manufacturing for them, which is helping us absorb some overhead. It's not a huge amount of revenue, but we do have some inventory related to it. You could assume let's say it's in the $2 million'ish range that's in the numbers, somewhere in that range.

Okay. I think that's it. Thanks a lot.

Marc Balcer, Redstone Investors.

I probably missed it. Did you give the backlog by segment?

Sure, the telecom backlog as of Q3 was $59.6 million. The Mobile Data Comm. backlog was $44.2 million. And our amplifier segment was at $34.6 million for a total of $138.3 million.

And Marc, let me just comment on the numbers Mike just gave. If you'll compare it to last quarter, the Telecom Transmission backlog was down slightly even though we continued to perform on the over-the-horizon $77 million contract. So excluding that contract that went up. The amplifier backlog actually went up. It was really Mobile Data Comm., as I mentioned in my remarks, where there's just been some backlog, if you will, in getting orders out, which we're waiting for. But we see that turning around dramatically over the next three to six months.

Great. And just in terms of the HMDA and TDC long-term opportunities, what have you seen in terms of seeing that in an '07 or an '08 budget? Or what are your expectations for when those pieces of business might start coming into view?

Marc, the HMDA program certainly has taken centerstage I think for the time being by the TRC-170, because I think the DOD realizes that if they could just upgrade the modem kits here they could field more units. Just keep in mind that the TRC-175 program, that needs a whole installation of tropo equipment, not just the modem kit. So from our expectation point of view, we see at least for the next year the focus being on continuing to upgrade the TRC-170s and then beyond that the TRC-175; down the road ultimately the TRC-170 terminals themselves, they have to be replaced as well as the TDC program. But we're expecting for next year primarily to focus on the TRC-170 from a revenue point of view.

Great. And you did mention that you're not expecting anything from TRC-170 in the fourth quarter. In terms of competitive response or protest, is there anything that the competitor can protest about and/or are they past any time period that they could do that even if they wanted to?

Marc, just to kind of continue maybe answering your other question a little bit. On the TDC program, which is the other program other than the HMDA that the military has been talking about, that has no funding in '07 and I believe the funding plans as we now know it are in the 2010 timeframe. It's going as a KU-band program and it yet has to be proven in terms of whether KU-band can work in a tropo environment.

As you know, General Dynamics has been working this problem and I guess the expectation was on some recent release that was forthcoming, but we haven't seen that, so we really don't know too much about it except that the funding just isn't there for the moment. We're monitoring that program very closely and we'll continue to be obviously part of that program. On your next question in terms of -- which I forgot what it was.

The TRC-170 award that you received, is there anything that a competitor can say or is that just signed, sealed and delivered?

No, in terms of that award, as you noted, the DOD release and our own release kind of indicated that we were negotiating this program for a long, long period of time, specifically in a very detailed manner since March, so it took a long time. And the reasons for it were twofold. One was the funding itself that had to be accumulated by the Army and they've done a great job in getting that done.

And second, there was a protest that our competitors filed and the Army gave them the opportunity to present their equipment and their performance criteria. But in the end it didn't meet the requirements and we obviously won the contract. So we don't foresee any other protests at this point, not to say that they can't do it again.

Sure. Great, thanks. And with respect to the North African country, I think you may have indicated that most of that equipment is kind of in country and being integrated now. Is that the case or can you give us a little more detail on where that $77 million program is in it's actual deployment cycle as opposed to the revenue recognition?

Marc, some of the equipment is in country. We're certainly out of what I call the peak production phase of it, which we were really in at the end of the last fiscal year, beginning of this fiscal year. And as you could see from the revenue, its contributing less revenue as it relates to that contract. But this is the period where the end customer is looking to go for the next phase, as we've talked about before, and there are new opportunities there. So beyond that all I can tell you is we're out of the peak production phase and getting into the shipping into country and installation part of it.

Great. And my final question -- luckily I can do math, but should I take your lack of Q4 specific quarterly guidance as your first attempt to back away from giving quarterly guidance on an ongoing basis?

Well, Marc, I think it's very self-evident that we all can do the math, right?

Just for this quarter, but going on for fiscal '07 do you expect to not give quarterly guidance?

That's correct.

All right, thank you.

Tim Quillin, Stephens Inc.

This is [Neil Wagner] for Tim. Just a quick question. What's the status of the timing of the MTS contract recompete?

The MTS contract, the core contract itself ends in July 2007. But as you probably know, the customer is not anywhere near where it wants to be in terms of fielding the units. We think they're only on about 25% or so of the units that they'd like to be on. So at this point in time there has been no public request for proposal or anything like that as it relates to the contract. We quite frankly would welcome the recompete right now because we think we're in a very, very strong position.

As I mentioned in my earlier comments, we continue to invest in our network and software, where our system is a critical part of the infrastructure now particularly over in theaters, so we would welcome the recompete, but at this point in time we haven't see much progress in that regard and there's nothing out on the Street in that regard despite the fact that we're closing on the one year window in terms of when the formal program ends.

I don't think anybody believes that they won't continue the program. It's possible they may extend the program is it currently is for a couple of years, but we're prepared and it's one of the reasons we're making the R&D investments that Mike referred to earlier to win that next layer of the contract whatever they decide to do, and we're very focused on that as we speak. But beyond that, there really hasn't been much in the way of information as to what specifically the customer is doing in terms of bidding for the recompete.

Okay. And then have you experienced any traction with the miniaturized transceivers yet?

We have. The miniaturized transceivers are currently being used in a couple of different applications. We're also looking to shrink our core technology and our transceivers down to that level to even miniaturize or make smaller our core MT-2012 transceiver and a couple customers are looking at incorporating them to radios as well. So we have had traction in that area, but the focus really with the DOD at this point has really been at the vehicle level, not down to the soldier level at this point in time.

Okay, thanks.

(OPERATOR INSTRUCTIONS). Jim McIlree, Unterburg Towbin.

Rob, I think you talked about the POM for MTS at $80 million and then the National Guard at $113 million.

Yes.

Is there overlap between those two? That is, can the National Guard use the MTS contract to satisfy part of that $113 million or so?

In funding, Jim, there's no overlap. In other words, the money that's allocated, there are two different buckets. The National Guard is currently -- this is just an easier contract medium for them to operate under -- is currently ordering their equipment under the MTS contract, so the funding isn't coming out of the $80 million, but they are using that contract vehicle. And Blue Force tracking is currently using the MTS contract as well to buy its hardware. So the funding availability, there's no overlap at all.

I see, I see. But if they use the MTS contract vehicle, does that get applied to the ceiling on that?

Yes, it does.

So you're still pretty far away from that.

We're far away from it, Jim, but quite frankly, with the potential year we have coming up you start doing the math and we're speaking to the customer about what happens as we get out into '07. How do we raise that? And keep in mind, by the time that happens we're probably going to be within three to six months of the end of the formal contract. So the two kind of dovetail with each other because at that point in time hopefully they have either an extension in place or some other way to deal with that issue. But the funding itself, there are two separate pools.

Okay. And do you have any services contemplated that -- excuse me, the satellite services contemplated for the National Guard? Or is that simply you sell the transceiver and then they take care of everything?

Sure. On the MTS side, Jim, they're effectively buying the hardware the way the logistics community would buy it, with pre paid airtime. And so their procurement cycle is very similar to the core MTS program, versus the Blue Force tracking program, where they're buying their hardware under the MTS contract. But then, as you know, they're entering into a separate agreement where we're providing them with satellite bandwidth and a network. So the National Guard, you could almost think of them as procuring in the same manner as the core MTS customer.

Does it matter to you from a margin perspective which way the customer goes about doing it, buying it with a prepaid air time versus buying it separately?

Not really, Jim. The primary reason that the Blue Force track is done separately is given the nature of their operation, they want their own network. The logistics command on the MTS contract, that's our network. We can run other traffic. So for example, our commercial customers (technical difficulty) are running over that same network. The Blue Force tracking community is on its own network, so that's the primary reason why the business model is different there. The end customer has a different need, whereas the National Guard are primarily -- think of them as just additional orders against the MTS contract with a separate pool of funding.

Is there a chance that the Blue Force tracking community would leverage your existing network? That is, start using your network rather than their own?

Again, their network we helped put in place, installed all the equipment. It's operating with our software and the like. So this is another area where from a compatibility point of view there's a need there. The difference is that they have the right to use that network as they see fit versus the MTS network, which we can run any traffic that we want over that. So I think they'll continue to use their existing network just because of their mandate in terms of what they need to do in theaters is a bit different than the other customers.

Okay, great. Thank you.

Mark Jordan, A.G. Edwards.

Just to follow-up on -- I was wondering if you could have some comments on the M&A activity. I know Jerome has been with you for a quarter or so now. What expectations do you have in that area and just generically use of cash?

Mark, certainly since Jerome has been on board and Mike has taken over the helm as the CFO, we've been very focused and I think have done a good job in streamlining what we're looking at, narrowing it down. I think we've done a lot of work over the past few years. But I don't really have anything that I could report to you other than that's certainly what Jerome is spending most of his time on and I'm spending a good deal of my time on.

But again, it has only been three months and it's not a mandate to get something done. It's just a way to better enable us to do the right deal at the right time. So I have nothing specifically to report to you in that area, but we're certainly very focused on it and I think we've narrowed down the field to a more select group of meaningful targets than where we were before. And we're pursuing not each -- when I say each of them, not actually going to them and bidding or anything like that, but we're making sure that we're focused on the area and that it's a priority, which it clearly is.

Thank you.

We have no further questions at this time.

Okay, well thank you very much for joining us today and I guess we should mention that an updated presentation will be posted to our website at www.ComtechTel.com shortly after this call. Again, thank you for your interest and we look forward to speaking with you again soon.