Comtech Telecommunications Corp (CMTL) 2006 Q4 法說會逐字稿

Welcome to Comtech Telecommunications Corporation's fourth quarter and full year fiscal 2006 earnings conference call. [OPERATOR INSTRUCTIONS]. As a reminder this conference is being recorded Thursday, September 21, 2006. I would now like the 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 Telecommunications conference call for the fourth quarter and full year fiscal 2006. With us on the call this morning are Fred Kornberg, President and Chief Executive Officer of Comtech; 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 & Exchange Commission filings.

With that, I would 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 fourth quarter of fiscal 2006, which provided a strong finish to another outstanding year for Comtech. Our strong fourth quarter results exceeded our expectations, and our results for fiscal 2006 exceeded the guidance which we provided to you during our last conference call, propelling us to another record year, our fourth in a row.

In fiscal 2006 we once again experienced a flurry of activity in all of our business segments as the markets we serve continue to evolve. Robert Rouse, our Chief Operating Officer, will discuss some of these recent developments in each of our three business segments, and then I will discuss our guidance for fiscal 2007. But first, Mike Porcelain, our Chief Financial Officer, will review our operating results for the fourth quarter as well as provide some summary financial data for the full fiscal year.

Mike?

Thanks, Fred. Good morning, everybody.

Let's begin by reviewing some of the key income statement trends for the quarter ended July 31, 2006. Q4 sales were $100.2 million compared to $98.3 million in the fourth quarter of fiscal 2005. The increase reflects a significant increase in sales in our Mobile Data Communications offset by declines in our Telecommunications Transmission and RF Microwave Amplifiers segments.

Sales in our Telecommunications Transmission segment were $3 million lower in Q4 of fiscal 2006 than in Q4 of fiscal 2005. The satellite earth station area in this segment was once again a grower, while the over-the-horizon microwave product line lagged due to some large projects moving to the right.

In our Mobile Data Communications sales increased by $16.7 million, primarily due to higher sales on our MTS contract, including orders received from the Army National Guard as well as sales related to Blue Force tracking. Approximately $4.1 million of the increase in Q4 MTS sales resulted from a favorable adjustment to the estimated gross margin on the MTS contract due to increased funding and improved operating efficiencies. Offsetting the increase in MTS revenues was a reduction in sales relate to go Tolt, which Robert Rouse will talk about further during his remarks.

Sales in our RF Microwave Amplifiers segment decreased by $11.8 million primarily as a result of lower sales of amplifiers for IED jamming systems during this quarter compared to a very active Q4 in fiscal 2005. Of the Company's consolidated fiscal 2006 fourth quarter sales, 32.7% were to international end-users, 49.3% were to the U.S. government, and 18% were to domestic commercial customers.

Gross profit increased to $43.8 million in the fourth quarter of fiscal 2006 from $38.5 million in the fourth quarter of fiscal 2005. The increase in gross profit was primarily driven by an increase in the gross margin percentage from 39.1% to 43.7%. Excluding the impact on sales and gross profit from the MTS adjustment that I referred to earlier, gross margins for Q4 would have been 41.6%. This reflects positive changes in product mix in our Telecommunications Transmission segment, and stronger margins in our Mobile Data Communications segment.

SG&A expenses increased from $15.7 million in the fourth quarter of fiscal 2005 to $19.8 million in the fourth quarter of fiscal 2006. The increase was attributable to the general increased level activity companywide during fiscal 2006, higher commission expenses on certain international sales in our Telecommunications Transmission segment, and expenses associated with the repositioning of Tolt to better focus on satellite-based mobile data applications. In addition, as a reminder, SG&A expenses for the fourth quarter of fiscal 2006 included $1.2 million of stock-based compensation in connection with our adoption of FAS 123-R in fiscal 2006.

Research and development expenses were $6.9 million in the fourth quarter of fiscal 2006, 15% higher than the $6 million in fourth quarter of fiscal 2005. We do expect research and development expenses to continue to increase and ramp up in fiscal 2007.

Operating income for the three months ended July 31, 2006, was $16.4 million compared to $16.2 million in the the prior year period. The fourth quarter of fiscal 2006 operating income does include stock-based compensation expense of $1.5 million, which was not included in fiscal 2005.

Interest expense, which primarily represents interest on our 2% convertible notes was consistent between the quarters at approximately $700,000. Interest income increased significantly from $1.3 million in the fourth quarter of fiscal 2005 to $2.8 million in the fourth quarter of fiscal 2006 primarily due to higher interest rates as well as additional investable cash. The effective tax rate for Q4 of fiscal 2006 was 36..5% compared to 34.6% in the same period last year. The increase reflects the higher twelve of pretax income, the expiration of the federal research and experimentation credit in December of 2005, and the non-deductibility of compensation expense relating to incentive stock options. On a non-GAAP basis, excluding the impact of stock option expensing, the effective tax rate for Q4 of fiscal 2006 would be 35.5%.

Assuming that Congress passes the much anticipated legislation to reinstate the federal R&E credit, our effective tax rate in fiscal 2007 is expected to be consistent with the Q4 fiscal 2006 rates. Without passage of such legislation, our non-GAAP effective tax rate should approximate 37%, and our GAAP effective tax rate should approximate 38%.

Because we believe that many investors may continue 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 fourth quarter of fiscal 2006, excluding stock option expensing, would have been $12.9 million or $0.48 per diluted share versus net income for the fourth quarter of 2005 of $11 million or $0.42 per diluted share, which did not include stock option expensing.

GAAP net income for the fourth quarter of fiscal 2006 was $11.8 million or $0.45 per diluted share. Earnings before interest, taxes, depreciation and amortization, including the amortization of stock-based compensation, or EBITDA, was 20.3 million for the fourth quarter of fiscal 2006, versus $18.2 million for the fourth quarter of fiscal 2005. Cash flow from operating activities was $35 million in Q4 of fiscal 2006, and was exceptionally strong as a result of the collection of certain large receivables that we had anticipated, and as discussed in our last invest or conference call.

Now a few remarks about the full year operating results for fiscal 2006. After surpassing the $200 million revenue mark for the first time in fiscal 2004 and the $300 million revenue mark for the first time in fiscal 2005, we nearly reached $400 million in revenue in fiscal 2006. The $391.5 million in sales for fiscal 2006 represented a 27.2% increase over the fiscal 2005 level. Fiscal 2006 bookings were an impressive $424.2 million, 12.3% higher than a $377.7 million in fiscal 2005. Gross profit increased from $127.4 million in fiscal 2005 to $159.3 million in fiscal 2006. The increase in fiscal 2006 was primarily driven by the significant increase in sales.

Operating profit also increased nicely, up more than 22% from $52.1 million in fiscal 2005 to $63.9 million in fiscal 2006. Fiscal 2006 non-GAAP net income of $49.6 million or $1.86 per diluted share was significantly higher than the fiscal 2005 net income of $36.7 million or $1.42 per diluted share. GAAP net income for fiscal 2006 which includes $4.4 million of after tax stock option expense was $45.3 million or $1.72 per diluted share. EBITDA for fiscal 2006 was $78.3 million versus $59.7 million, an increase of 31%. We ended fiscal 2006 with more than $250 million of deployable cash and a rock solid balance sheet.

Backlog as of July 31, 2006, was $186 million, a new record for Comtech. This compares to $138.3 million as of April 30, 2006, and $153.3 million as of July 31, 2005. In summary, the fourth quarter was a solid finish to another record year for Comtech, and now let me turn it to Rob who will discuss recent developments in our three business segments. Rob?

Thanks, Mike. Good morning to all of you.

Let me begin my comments with our Telecommunications Transmission segment. Representing just over 50% of our fiscal 2006 consolidated sales, this is our largest segment, and has been a major catalyst for our growth in recent years. Posting yet another record year of its own, the Telecommunications Transmission segment once again led the way in establishing fiscal 2006 as the most successful year in Comtech's history. Its sustained success has been a result of its well established leadership positions in satellite earth station products and over-the-horizon microwave systems.

As a reminder our largest product line in this segment is satellite earth station products. Comtech is well recognized as a one-stop shop for this important family of products. Most of the product line 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. However, the U.S. government particularly, and also foreign governments are becoming an increasingly more important part of this product line.

Increased demand in this product line has been driven by the global development of information-intensive economies, the need for developing countries to upgrade or build out their communications infrastructures, and the emergence of information-based network centric warfare. All of these trends place a premium on the development of technology to increase the efficiency of satellite networks, which can reduce overall operating costs, and provide more voice, video and data throughput.

Accordingly, our R&D efforts are primarily focused on optimizing the efficiency of our end-users networks. We believe our modem technology is a de facto standard for optimizing satellite bandwidth utilization. Even our primary competitors incorporate certain of our patented technology into their product offerings, a clear sign of our technology leadership. Although this product line has experienced significant growth in recent years, fueled by our technology leadership position, we have continued to focus a great deal of our efforts on the next wave of technology enhancements.

In fact, we are in the process of rolling out several new exciting products. For example, we employ carrier and carrier technology in our satellite modems, which allows end-users to transmit both the forward and return sides of a satellite link concurrently, using the same satellite bandwidth, resulting in the transmission of a full duplex link and up to half the satellite transponder bandwidth. This translate to say a potential of up to 50% power and bandwidth savings, which is incremental to other operational savings from our other techniques that we offer such as patented forward error correction technology.

The CDM Q X modem is our first product to incorporate carrier and carrier technology. In fact, we presently have one customer operating 3.5 satellite transponders full of data with carrier and carrier technology, which would normally use seven transponders. We also have several other large networks being deployed. We recently introduced the SLM-5650 satellite modem for the government market.

Our earth station product line has historically been focused on commercial customers. A few years ago, however, in supporting our strategy to further penetrate the government market, we launched a R&D effort to design an advanced satellite modem specifically for government end-users. The new modem meets the requirements of Mills standard 188-165-A and includes extended data rates, a wide range of modulation options and advanced forward error correction. As you may have seen in recent press releases announcing orders for this new product, the SLM 5650 has been well received.

Finally we are in the process of introducing our newest modem series, the CDM-700 and 710. These high speed modems operate at data rates of up to 155 megabits per second and include the latest DVB-S-2 digital broadcasting standards, which enable our customers to reduce the power and bandwidth required over existing DVB-S and DVD-DVB satellite transmission links by more than 30%. Compare this to our best-selling CDM 600 modem, that was introduced five years ago at data rates of up to 20 megabits per second, by far the fastest most bandwidth efficient and feature rich satellite modem in its class at the time.

Although we are proud of our well established leadership position in this high technology area, we are driven by continued advancements and are not afraid to leap frog our older technology to better address our customer needs. We intend to continue to increase our technology investments in the satellite earth station product line with a very keen focus on bandwidth optimization solutions for our commercial and government customers.

Now onto our over-the-horizon microwave product line. Here we have been and continue to be the clear world leader in providing equipment and systems which use the troposphere as the transmission medium. The troposphere is a layer of the earth's atmosphere approximately 7 miles above the earth's surface that is used to to transmit signals of voice, video and data. One of the major differences between troposcatter and satellite systems is the use of the troposphere is free. This type of channel is also very secure and not prone to jamming from enemy territory.

As I mentioned during the last investment conference call the advancements we made in this technology have increased data rates from 2 megabits to 16 megabits per second and higher, 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 in turn opened up new markets for our tropo scatter systems.

Among such markets is the U.S. Department of Defense which has shown a renewed interest in introducing troposystems back into its infrastructure. During the past few years we have spent a significant amount of time and devoted substantial resources in developing technology that best addresses the DOD's operational needs. The TRC-170 modem upgrade program is the result of our efforts. As you know, after many demonstrations of our latest technology, in May 2006, we were awarded this very important contract. In July, the DOD exercised its option to purchase the full number of modem upgrade kits pursuant to the initial contract, bringing the total estimated contract value to approximately $28 million. All 184 modem upgrade kits are expected to be delivered in fiscal 2007 to the Air Force, Marines, and Army Reserve.

I will point out, however, only about half of this contract value is included in the backlog amount that Mike mentioned earlier as of July 31st, since the final contract value was not definitized as of July 31. The remainder of the contract value, which is about half, will go into backlog upon definitization during Q1 of fiscal '07. We believe there were approximately 600 TRC-170 terminals originally manufactured, and there are additional terminals the DOD would like to upgrade.

In fact, a few weeks ago, we received an additional order for $5.5 million to upgrade 36 more terminals. This time for the U.S. Army. Now the Air Force, Marines, Army and Army Reserve will all have retrofitted TRC-170s. In addition to the TRC-170 modem upgrade program, there are other tropo opportunities with the U.S. DOD, including the TRC-175 beyond line of site or BLOS terminal, for which we have already provided our over-the-horizon microwave equipment. There is also the theater deployable communications or TDC program, which we believe is a much longer-term opportunity since the role of tropo is less clearly defined and the program needs additional funding.

We believe the clear current DOD priority is the TRC 170 modem upgrade program. As we noted in the past, the size and timing of these programs is dependent upon DOD priorities and available funding, simply the nature of the government side of this business. However, we believe that the backward compatibility of the upgraded TRC 170 terminal modem kits that we will be delivering with any non-upgraded TRC-170 terminals, the TRC-175 terminals and any additional programs will put us in an extremely strong position for any future U.S. government tropo awards since these terminals have to be able to talk to each other.

In addition to the exciting new U.S. government market, our primary markets in this product line have been foreign governments and the oil and gas industry. And these markets continue to be platforms for future growth. On the international front, revenues related to our $77 million contract with a north African country were lower in Q4 than they were early in the year and in Q4 of fiscal 2005. In fact, our revenues related to this contract were $8.4 million lower in the fourth quarter of fiscal 2006 than they were in the fourth quarter of fiscal 2005.

We predicted this trend more than a year ago based on the production schedule for this contract which was in its peak production phase in late fiscal 2005 and early fiscal 2006. We are, however, expect to go receive a substantial follow-on contract related to this end customer, which represents the next phase of the current project. We believe we are simply in between major phases of this large program as the timing of this award has continued to move to the right.

We also believe that there are new program opportunities developing with this end customer. Although the timing of contract awards from international customers is difficult to predict, we expect to receive at least one award from this end customer during fiscal 2007. We are also continuing to work with other potential international customers who have similar needs and geographic terrain where over-the-horizon microwave technology is the logical solution.

We also believe that the U.S. DOD is an important reference customer, which will put us in a better position to market the utility of our technology to existing and potential international customers who may or may not be familiar with this unique and useful platform. In summary, our telecommunications transmission segment has been a major driver behind our phenomenal growth in recent years and is expected to fuel our future growth through technology innovation and new product introductions.

Our Mobile Data Communications segment had a truly remarkable year. With revenues growing by more than 73% to just under $150 million. On the government's side of this business, funding for the logistics communities MTS continues to be on the rise. The baseline palm funding are for the MTS program ending September 30, 2007, is unprecedented at approximately $85 million. As you know, the MTS contract expires in July 2007. At this point, no requests for proposal has been issued by the program office in preparing for a recompete of the contract. With less than ten months left before the contract expires, it is possible that the program office may request that the contract be extended for some period of time until the recompete process is completed.

Because of the critical nature of this program, we believe that the Army will continue to roll out this technology irrespective of whether the contract is extended or recompeted. However, the lack of clarity regarding what will happen in this time year of the initial contract, does present some additional uncertainty as to how much and when funding will be received and how related deliveries will be affected.

In addition to the core MTS funding, we are also receiving orders pursuant to the National Guard Supplemental Funding Bill. As a reminder MTS was the second highest priority identified in this bill, which allocated $113 million to be spent on MTS. Although the MTS program office of National Guard will retain a portion of the amount for their own expenses and peripheral equipment, we expect to receive the lion's share of this funding. To date, we have received approximately $55 million of orders from the national guard. The remaining orders are expected to be received and contribute to revenue in fiscal 2007.

We also continue to provide hardware, satellite services and other support to the war fighter community. Most notably for the FBCB 2 or Blue Force tracking program. Our technology is critical to this high profile program as it provides for communications when forces are spread out beyond line of sight range on the Battlefield. Our transceivers can be mounted on all types of ground-based vehicles as well as aircraft. The FBCB-2 program office and its prime contractor have recently solicited bids for the next generation communications network. We do not believe any new network will be deployed for at least a few years, and we intend to partner with a large player relating to our involvement on a next generation network.

Also point out that despite the well publicized DOD belt tightening that exists today, we have continued to receive a steady flow of orders on these two high profile programs. We view this as a testament to the importance of MTS and Blue Force tracking in the DOD's communications infrastructure and the fact that not nearly enough of the vehicles that the DOD would like to deploy our technology on have to date been equipped. We are of course not completely immune from spending cuts and DOD priorities can change at any time, but we believe these two important programs are very well positioned.

The government's side of this business continues to perform exceptionally well, and we are investing heavily in R&D to enhance our hardware, software, and network offerings to maximize our future opportunities with our U.S. DOD customers.

Earlier this month we completed the acquisition of Insight Technologies. Insight will allow our mobile data communications segment to offer additional software applications to the logistics and war fighter communities within the U.S. DOD as well as to approved ally military forces. In fact, Insight was recently awarded a contract to incorporate its GO-OP software platform into a multinational satellite based friendly force tracking system to be deployed by NATO. We also believe that Insight will be helpful to us in penetrating some of the vertical commercial markets that may be subject to Department of Homeland Security realtime tracking man ates.

Now, on to Tolt. In Q4 we continued to experience challenges in transitioning the Tolt salesforce off of sales of standalone Tolt products and on to sales of satellite based mobile data applications, which was the primary reason for the Tolt acquisition to begin with. Accordingly, the operations of Comtech Tolt have been combined into our Comtech Mobile Datacom facility in Germantown, Maryland. This will enable us to further focus our efforts on the satellite area and all but eliminate stand alone sales of low margin Tolt hardware.

We continue to believe that in the long-term, the combination of our superior location and messaging product offerings, state of the art network op center, proven operating performance in the demanding military environment, the newly acquired Insight GO-OP software platform and the ability to integrate handheld devices into our satellite based offerings will provide commercial companies in vertical markets require near realtime communications with a compelling well integrated solution. Despite the loss of approximately $15 million of Tolt legacy hardware sales, we expect that fiscal 2007 will be another record year for our mobile data communications segment.

Now onto our third segment, RF Microwave Amplifiers. Fiscal 2006 was another strong showing for this segment. The fiscal 2000 revenues of $44.2 million were essentially flat with fiscal 2005 revenues, but keep in mind that the end of fiscal 2005 and beginning of fiscal 2006 benefited from orders related to the Warlock IED jamming contract. Despite this spike in those quarters relating to such orders, this segment has manage to do set a new revenue base in the mid $40 million range, double our fiscal 2004 revenue base. In fact, bookings in this segment for fiscal 2006, which do not include any Warlock orders, were a record $55.2 million.

As you can see, the amplifier business is not just about one program or one application. Our opportunities in this segment are broad based. Our high power broadband amplifiers are of particular importance in many electronic warfare applications. IED jamming is one of the many such EW applications. Among the others are communications jamming, radar, and identification friend or foe.

Our amplifiers also play an important role in the variety of commercial applications such as oncology treatment systems, air to satellite ground communications on commercial aircraft. In fact, demand for our high-power amplifier products for the commercial aviation market has been at record levels. We continue to aggressively invest in the latest solid state technologies and incorporate these innovations into new products for existing and potential customers.

Now back to Fred who will discuss our guidance for fiscal 2007. Fred?

Thanks, Rob. As you know, it has always been difficult for us to provide guidance. This year is no different. Obviously there continue to be many factors that make the projection of revenues and EPS very difficult, including the timing of bookings and related revenues on large contracts, the uncertainty, particularly in today's environment, regarding the U.S. government's funding priorities and budget constraints, and finally the economic conditions in general. These factors are an inherent part of our business and will continue to be that way.

As Mike mentioned earlier, in fiscal 2006, we adopted the provisions 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 a non-GAAP basis, which excludes stock option expensing. Our earnings releases and quarterly investor presentations will continue to reconcile the GAAP and non-GAAP information. With that in mind, excluding the impact of stock option expensing, our non-GAAP diluted EPS guidance for fiscal 2007 is $1.93 to $1.95. The impact of stock option expensing on our EPS will actually increase in fiscal 2007 as a layer of older option drops out of the calculation and is replaced by a new layer as a higher option value resulting from our higher stock price. As a result of that, GAAP diluted EPS for fiscal 2007 is estimated to be between $1.75 to $1.77. Both the GAAP and the non-GAAP EPS guidance assumes that Congress does pass the anticipated ree instatement of the R and E tax credit during this year and that our GAAP and non-GAAP effective tax rates are consistent with the fourth quarter of fiscal 2006.

Fiscal 2007 revenues are expected to be between $435 million and $445 million. As you know from our historical results and from my comments during previous conference calls, our sales and earnings can fluctuate dramatically from quarter to quarter. As such, quarter to quarter comparisons of our results are generally not very meaningful. Although we are now providing revenue and EPS guidance only on an annual basis, I will point out that given the timing of recent orders and expected delivery schedules, investors should not assume our annual guidance can simply be divided by four to reflect our expected quarterly performance. In fact, we expect a trend which will start lower and continue to improve during the year.

In other words, the first quarter of fiscal 2007 is likely to be the lowest in the year in terms of revenue and EPS. Although we want to avoid giving quarterly guidance in order to avoid unrealistic expectations for Q1, I will mention that diluted non-GAAP EPS in the low to mid-30's cents area would be a reasonable assumption with a marked increase in Q2 and Q3. Once again in fiscal 2006, our fourth record year in a row, our growth was primarily organic, and we expect that to continue. In addition to that, with our strong cash position and continued expectations for cash growth, we're also able to continue to seek appropriate acquisitions and also consider deploying some of the expected cash flow in a stock buyback program. As the results clearly demonstrate, our business has continued to perform remarkably well, and we are focused on delivering another record year in fiscal 2007, our fifth year in a row. Thank you very much. And now operator, we will take some questions.

[OPERATOR INSTRUCTIONS]. We'll move first to the line of Tim Quillin with Stephens. Go ahead, please.

Good morning.

Good morning, Tim.

First of all, Fred, I was looking away and you said something about share repurchases. What did you say?

All I said was that we would consider deploying some of our cash in a stock buyback program.

Okay.

Fair enough. On Rob or Mike, could you give us the net income impact of the MTS contract adjustment if you have that available?

One-way to do it, Tim, would just be to take the amount that we disclosed as the gross profit impact which was $3.8 million. You could assume that on the operating profit line that number is about 85% of the $3.8 million and apply a tax rate to it. I don't have the calculation right in front of me.

That's helpful. I know there was some variations out there of people's calculations. Rob, could you give the backlog broken down by segment?

Sure. The $186 million of backlog is $64.9 million Telecommunications Transmission, $82 million Mobile Data Communications and $39.1 million RF Microwave Amplifiers. Just to reiterate, on the TRC-170 initial order, only half of that was in backlog into the end of the year as well.

Just to clarify, the initial order meaning the $28.3 million?

Correct. In Q1 what you'll have related from the TRC-170 based on what we have coming in now is the remainder of the 28 as well as the 5.5 million we received earlier this month.

Right. And based on your guidance for the first quarter earnings, are we to infer that shipments of the TRC-170 upgrade kits are going to be pushed out a little bit into your second quarter?

That's a good question, Tim. Really just to go through it quickly in all of our businesses, in Telecom Transmission it is primarily the TRC-170, the way the delivery schedule with the customer is working is skewing a bit more into Q2. We have the orders. It is a question of delivery. And the Mobile Data Communications segment, you might recall in prior discussions we've had we try and work with the customer when we get an order to try to come up with a more reasonable delivery schedule. We kind of do it over time rather than having peaks and valleys, and they've done that which means we're not going to have all of the deliveries from the bookings you saw in Q4 delivered in Q1, and our amplifiers segment as well in the first quarter has timing related delivery matters with it where things are going to get stronger as the year goes on.

That's why Fred said we kind of go into the annual guidance to begin with but just wanted to prevent people from having an unrealistic straightlining of the full year. If Q1 comes in where Fred mentioned, Q2 could be a complete blowout quarter given where the bookings and delivery schedules are.

I understand. And I think the comments were somewhat cautious around the MTS program and what might happen in you get an extension. Do you expect that to -- are you worried about that impacting the order flow under that program while they figure out what they are going to do on the recompetition?

This is certain amount in the guidance, Tim, reflecting that given that we are in the last year, what are they going to do? It is possible that their year ends September 30th. Ours is July 31st. If they delay that decision for awhile, maybe the stuff starts to get shifted back towards the end of the year. We tried it consider that in coming up with a guidance given the situation where it is not clear exactly whether there is going to be an extension or a recompete this year. If all the funding for '07 came in, not all of that funding is in our guidance. It is subject to movement outside of our fiscal year.

Do you expect the orders from the National Guard, the remaining 44 to $45 million of funding to be spent by the end of this government fiscal year by the end of September?

Yes. Certainly we would expect to receive the bulk of the orders that are remaining before the end of fiscal '07, absolutely, and we're working with them now on releasing the rest of the funding in there as well but certainly by fiscal '07. Keep in mind they are ordering under the MTS contract. They really need to kind of dove tails into the recompete process as well.

Understand. Just one last question before I jump off, you generally give revenue guidance. Did you give revenue guidance and I missed it?

Yes, we did.

I am sorry.

It was 435 to 445, Tim.

Okay. That's great. Thank you.

We'll move next to Rich Valera with Needham & Company. Go ahead, please.

Good morning. In your prepared remarks you alluded to expecting an order from your north African customer in the OTH segment. Within fiscal '07, any more clarity give us there? Is this something into fiscal '07 or could this happen mid-point? I know these are tough but anything else you can give us there in terms of expectations on that order?

I wish we could, Rich. It is very difficult. If you were to have asked me nine months ago, I would have said that it would have been in already. It just continues to move to the right for no real reason other than just the bureaucracy, so I would say if I were to guess, our expectations right now is towards the end -- maybe the third or fourth quarter of this fiscal year.

Okay. That's helpful, and then you mentioned in your prepared remarks as well that Tolt -- you incurred some costs related to Tolt in the fourth quarter. I was wondering if you can give us a sense of how large those were and going forward with Tolt, do you expect that to be break even, relative to the levels it has been running? I know at one point earlier in fiscal '06 I think you had well in excess of a million dollars loss per quarter. Where do we -- how should we think of that going forward in terms of its contribution to the bottom line?

Rich, if you look at our 10-K, we disclose in there the amount of Tolt's loss for the year which I believe, Mike, was around $5 million. 5 at the operating income line. That does include some wind-down costs in Q4 which will somewhat continue. You could assume about a penny or so worth of wind-down costs related to some severance and winding down of the facility costs out in Washington State, but as a stand alone entity, it will cease to exist. It effectively what will happen is the commercial efforts will basically be resident back in mobile datacom.

So we won't condition to have that burn rate as it relates to Tolt. However, we are ramping up our R&D investments at Mobile Data Comm as well and we'll continue to access the commercial market. It is not just the $5 million delta between the two. Most of the switch is really related to R&D, the shifting of more G&A costs to R&D as well as the fact that Insight will be in there as well and insight is probably about break even in the first year.

That's helpful. And just looking at mobile data on sort of a longer term basis, and I guess putting aside the renewal, the contract renewal issue, let's assume that gets renewed or that that's not an issue. How do you look at that longer term in terms of the growth prospects? Obviously it looks like you will have a great year in fiscal '07 with the large palm and the national guard's supplemental funding? How do you think about that longer term in fiscal '08 and beyond where that might go?

Rich, obviously we continue to try to expand to as many different areas within a DOD as possible, and as I mentioned in my comments, the number of vehicles, even after the funding from next year is done, is still really not anywhere near where they would like it to be. Ultimately given the concentration we have within our large customer there it is hard to give you an estimate of what '08 going to look like. We continue to make the case for our technology and the customer is doing that well to make it very clear that this technology is important not only from a communications point of view but from a troop safety point of view, and as you may have seen a few weeks ago, we announced a new order for the first time with the marines which was a very big win for us in terms of getting into a new branch, and they're looking to roll the technology out to help the Iraqi military forces, so the potential market here just within the DOD is substantially larger than we're running at today, but to give you a specific number or growth rate is hard to do because it is in such big chunks that we get the revenue flows.

Great and just one final question if I could. With respect to your R F amplifiers business you alluded in the fast you're actually working on some other IED opportunities beyond Warlock. Any updates there?

Nothing to report at this point, Rich. We're working a few -- There is probably four or five major players that are working in that area, and we really have conversations going with most of them as it relates to the high power amplifier side but nothing to report at this point in time.

Thank you, guys.

We'll move next to Jim McIlree with Unterberg Towbin. Go ahead. Please.

Jim, where are you?

Mr. Mcilree your line is open if you wish to ask a question.

I am sorry. Excuse me. Good morning. On the north African order that you mentioned, Rob, I think you characterize it as potentially substantial. Does that mean that it is approximately -- could be approximately the same size as the original order?

Jim, to clarify that, the program that we're working on the $77 million contract was a phase in a larger program with this customer, so we could be talking about a contract in the $40 million plus or even higher. If you go back in time, we originally had a 40 million a 20 million another 40 and a 70. In those type -- certainly a major number, not a $10 million contract. However, there are some smaller contracts out there that we're all pursuing that we might land in this year also. Unfortunately as we've talked about before, it is somewhat binary and to try to factor it is very difficult. Most of the revenues in that segment that we're projecting for this year are smaller orders or things that we have in backlog at this point for the most part.

Okay. Great. And the TRC-170 margins, I have kind of assumed that those are higher than a normal over-the-horizon system implementation because it seems like it is just more hardware. Is that a reasonable assumption?

I prefer, Jim, not to get into margin specifically by product line, but I would say that if you're building out a model you could assume from modeling purposes they're consistent. On one hand it is government work, but on the other hand we're just providing the upgrade kits, so you don't have the systems aspect of the business that you have on the north African side, but you could assume for modeling purposes consistent with the rest of that business.

Okay. Great. Finally, I am a little bit confused by your answer to Rich's question about what happens without Tolt in fiscal '07. I thought I heard you say that you're going to take the losses that Tolt generated and kind of deploy that into R&D instead in fiscal '07. Is that right?

There is two pieces of it. The first piece is that we're certainly going to ramp up our R&D spending, and we have certain R&D project that is are in process that we're working on. Their extensions to things we're doing. On the other hand we are going to continue to access the commercial market, so it doesn't mean if Tolt lost $5 million dollars last year that we're not going to have any expenses in that market. What I meant to say just to clarify is between those ongoing commercial expenses as well as the R&D ramp-up, that you're not going to see an immediate $5 million uptick from an operating margin point of view because we do have a rejiggering of the costs in that respect.

Right. Okay. That's great. Thank you very much.

Sure.

We'll move next to the line of Mark Jordan with AG Edwards. Go ahead, please.

Good morning, gentlemen. I have a question for Fred. First of all back to this buyback issue when you say you're going to consider a buyback, is this a new position for the Company? Is this something that you are for the first time seriously going to look at?

Yes and no. I mean we've from time to time we've discussed the possibility of a buyback program, but as you can see, we're kind of generating cash in a strong way, and we're trying to use that cash for acquisitions. We're looking really in both directions. We're looking for acquisitions, and we're looking if those aren't in the works, then maybe we'll try a buyback program.

Is there any time frame at which you will layout on the table what your plans are vis-a-vis buyback?

No. I probably would have said so if there was, but at this point in time we're just -- it is just a consideration.

Okay. Rob, relative to marketing to mobile data to the commercial world, obviously you have bolted the Tolt acquisition, putting it under Gaithersburg. Could you talk about how -- what your strategy is for the reconfiguration of your marketing effort towards the commercial market?

Sure. I think in very, very general terms, Mark, we've been talking for some time about focusing on vertical commercial markets rather than trying to access all markets, and with Tolt we tried to really make a much broader marketing play in terms of really marketing the product to any type of trucking, transportation company. The focus now is really on the vertical markets as I alluded to in my remarks that have two things. Realtime tracking requirements and the need for satellite.

At the end of the day as you can probably imagine our technology offering we believe is superior and done well by the folks over in theater in Iraq and Afghanistan now, so the next group of people that it is most prone to use in would be those who really need realtime tracking which would be hazardous materials, Homeland Security, maybe even oil and gas, and some of that is going to be driven by Homeland Security man dates where they're going to require hopefully certain types of carriers to have realtime capability, and using a terrestrial infrastructure or a satellite infrastructure that has significant latency isn't going to meet that requirement. We think the market is large enough where we can make a very nice living and maintain healthy margins where there is some type of economic or regulatory mandate for realtime messaging over satellite, and we're going to be kind of singularly focused in that respect rather than trying to look at all the different commercial markets at this point in time.

You clearly have a long-term track record with your one large African customer and that customer clearly is in the midst of an ongoing long-term buildout program, but there is as you mentioned other opportunities and you've seen really a documentation and a reference for your over-the-horizon technology by both this African country and also now the U.S. military. How are you going to -- I am sorry. How can you access the other potential customers in either say a NATO or African countries, what program do you have in place to try to leverage your current position?

I think we certainly aren't starting now. We have for a number of years been working with other North African countries, other European countries, other Asian countries in implementing troposcatter and trying to educate them that troposcatter is a tremendously economic solution for their problems in communicating, and maybe getting rid of some of the satellite costs, so we've done that. We've done that already, Mark. How we do that, we do that really through an internal marketing organization as well as a country wide -- worldwide I should say representative organization as well. We have reps in many countries, and we visit many countries. We make presentations. We educate them. We have demonstration terminals that we leave in countries, so we've done that now for a number of years. As we've repeated ad nauseum, these take a long time. This is a long strategy and doesn't happen overnight.

I don't think there is any doubt that having the U.S. government now as a customer makes it much easier for our sales people to have that credibility and validity going in where it really is a reference customer. We're hoping that in our follow-up meetings with all of these people we have been speaking to in the past that that's a validation, and it should enable them to get past some of the why don't the U.S. use it if it is such a great technology. We're hoping that that facilitates those efforts.

This is something there is nothing in your modeling for any other customer other than your one primary one and the small stuff that comes through?

There are other contracts certainly in the oil and gas industry that we've historically been getting.

I know, other than that's why I refer to it as the small things.

Okay. As far as large programs, there are no others modeled in for '07. Those will probably start cracking in '08.

Okay. A final question if I may. You mentioned the SLM-5650 modem product. Has that had an impact with regards to your governmental modem satellite modem market share?

I think very much so. In fact, if you've just been following some of our releases, they've been predominantly that particular modem, so it's had a very, very good acceptance.

Okay. That would represent a market share shift, then?

We wouldn't have it quantified, Mark, but I can tell you as I mentioned in my remarks that's an area that we historically haven't focused on as much. We primarily focused on commercial. You're probably in the last six months seen more military related press releases than we have in probably the last three, four years.

Okay.

It is hard to really say we picked up X percent market share, but we just think given where we were before that intuitively we have.

Thank you very much.

Sure.

We'll move next to the line of Tyler Hojo with Sidoti and Company. Go ahead, please.

Good morning. My first question is I missed the back half of the GAAP EPS guidance range you gif. It was $1.77 to what?

The GAAP EPS was $1.75 to $1.77.

All right. Great. And I was hoping maybe you could talk a little bit more about the TRC-170 order you announced recently for I believe $5.5 million. It seems like the pricing per kit has gone up a little bit since the original $18.6 million contract award for 123 kits. First I was wondering what you guys are anticipating? Are you anticipating more of these TRC-170's hitting in the back half of fiscal '07, and is this kind of increased pricing a trend that you expect to continue? Your comments there would be helpful.

Tyler, obviously the pricing, the first order was for a significantly higher number of units. I don't think the pricing in the broader context of the program has changed that. In terms of our guidance, there is a small amount of some additional orders in there, U.S. government related, but the majority of the U.S. government revenues were forecasting we have in backlog as of today.

Great. Thanks. That's all I have.

Sure.

We have no further questions registered at this time.

Okay. Please note that an updated investor presentation will be posted to our website at www.comtechtel.com shortly after this call. We thank you for your interest in Comtech and look forward to speaking with you in a couple of months. Thank you very much.

That does conclude today's conference. You may now disconnect your lines and thank you for participating.