Comtech Telecommunications Corp (CMTL) 2007 Q2 法說會逐字稿

Currently all sites are on the conference line in a listen-only mode and please note this call may be recorded. I will now turn the call over to Stephanie Lamantia.

Thank you and good morning. Welcome to the Comtech Telecommunications Corporation conference call for the second quarter of fiscal 2007. 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 that 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 of 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 am pleased to introduce the President of Comtech, Fred Kornberg.

Thank you, Stephanie. Good morning, everyone, and thank you for joining us today for our earnings call for the second quarter of fiscal 2007. I am pleased to report another very strong quarter for Comtech abased on our results for the first half of the year, I am confident that we are on the track for another record year in fiscal 2007. Before I provide updated guidance for fiscal 2007, Mike Porcelain, our Chief Financial Officer, will provide an overview of our operating results for the quarter, and Mike will be followed by Rob Rouse, our Chief Operating Officer, who will provide an update on each of our three business segments. Mike?

Thanks, Fred. Good morning, everyone. Let's begin by reviewing some income statement items for the quarter ended January, 31 2007. Q2 sales were $111.4 million, compared to $95.7 million in the second quarter of fiscal 2006, an increase of 16.4%. The increase in net sales reflects growth in the Telecommunications Transmission and Mobile Data Communications segments, partially offset by lower sales, as anticipated, in the RF Microwave Amplifier segment.

Sales in our Telecommunications Transmission segment were $62.6 million, or 27.8% higher in Q2 of fiscal 2007 than in Q2 of fiscal 2006. Sales in the segment reflect increased sales of our Over-the-horizon microwave systems and continued strong demand for our satellite earth station products. Sales of our over-the-horizon microwave systems were higher due to deliveries of our new 16 megabit per second Troposcatter modem upgrade kits for use on the U. S. Department of Defense TRC-170 digital Troposcatter terminals, which were partially offset, as previously anticipated, by lower sales, both direct and indirect of our over-the-horizon microwave systems to a North African country. As previously discussed we believe our North African country end customer is between major phases of a large program. Net sales on the segment during the three months ended generate 31 2007 January 31, 2007 were also positively impacted by $1.2 million relating to a gross profit adjustment on a large over-the-horizon microwave system contract.

In our Mobile Data Communications segment, sales increased by $3.5 million, or 9.7%, primarily due to an increase in deliveries to the U.S. Army and Army National Guard for ongoing support of MTS program activities. We also had higher sales of battlefield command-and-control applications to the U. S. military, which were partially offset by a decline in sales of approximately $4.6 million related to the impact of our decision made in fiscal 2006 to significantly deemphasize standalone sales of low-margin turnkey employee mobility solutions. Mobile Data Communications segment sales in Q2 of fiscal 2007 and Q2 of fiscal 2006 were positively impacted by $3.8 million and $6.7 million, respectively, relating to favorable adjustments to the estimated gross margin on the MTS contract, which occurred due to increased funding as well as improved operating efficiencies.

Sales in our RF Microwave Amplifier segment decreased by $1.4 million, or 13.3%, primarily as a result of lower sales, as previously anticipated, of our amplifiers that are incorporated into improvised explosive device jamming systems. This is, of course, due to the fact that in Q2 fiscal 2006, we had strong sales of those systems.

Of the Company's consolidated fiscal 2007 second-quarter sales, 28.6% were to international end-users, 58.5% were to the U. S. government, and 12.9% went to domestic commercial customers. Gross profit increased to $49.9 million, or 44.8% of sales, in the second quarter of fiscal 2007 from $41.1 million, or 42.9%, in the second quarter of fiscal 2006. During the second quarter of fiscal 2007, we recorded favorable cumulative gross profit adjustments of $4.9 million, of which $3.8 million related to the Mobile Data Communications segment and $1.1 million related to the Telecommunications Transmission segment. In fiscal Q2 2006, we recorded $7.3 million adjustments, of which $6.5 million related to the Mobile Data Communications segment and $800,000 related to the RF Microwave Amplifiers segment.

These adjustments related to our ongoing review of total estimated contract revenues and costs and the related gross margin at completion of long-term contracts. These adjustments were partially offset by an accrual of $400,000 and $1.7 million in the second quarter of 2007 and 2006, respectively, relating to a firmware warranty upgrade.

Excluding these adjustments, which are more fully described in our 10-Q filed yesterday, our gross profit as a percentage of sales was 42.7% in Q2 of fiscal 2007 and 39.9% in Q2 of fiscal 2006. This increase reflects, one, a higher proportion of consolidated net sales occurring in our Telecommunications Transmission segment, which typically realizes higher margins than our other two segments. Two, increased operating efficiencies in our Mobile Data Communications segment, including the benefit of our decision to significantly deemphasize standalone sales of low-margin turnkey employee mobility solutions. And, three, our gross margin reflects the reduction in our estimated reserve for warranty obligations by $200,000 due to lower-than-anticipated claims received to date on a large over-the-horizon microwave system contract whose warranty period is nearing expiration.

SG&A expenses increased from $18.8 million in the second quarter last year to $18.3 million in the second quarter of fiscal 2007. The increase in expenses was primarily attributable to increased expenses, including higher payroll-related expenses associated with the overall increase in sales activity across our businesses. This increase was offset in part by lower expenses in our Mobile Data Communications segment as we continue to deemphasize standalone sales of low-margin turnkey employee mobility solutions.

Research and development expenses were $7.6 million in the second quarter of fiscal 2007, nearly 27% higher than the $6 million in the second quarter of fiscal 2006. As Rob will mention later, we do expect to continue to invest heavily in research and development, particularly in our Mobile Data Communications segment, for the remainder of fiscal 2007.

Operating income for the three months ended January 31, 2007 was $23.3 million, compared to $18.7 million in the prior year period. Operating income in the three months ended January 31, 2007 and January, 31 2006 was favorably impacted by $3.8 million and $4.8 million, respectively, for the aggregate adjustments I previously described. Operating income in both periods includes stock-based compensation of approximately $1.5 million.

In Q2 fiscal 2007, our amortization of stock-based compensation was favorably impacted by a $400,000 reduction associated with an increase in the estimated forfeiture rate of stock-based awards. We currently expect stock-based compensation expense to approximate $4 million for the second half of the year. This amount is equally split between the quarters.

Interest expense, which primarily represents the interest on our convertible notes, was consistent between the quarters at approximately $700,000. Interest income increased significantly from $2.2 million in the second quarter of fiscal 2006 to $3.3 million in the second quarter of fiscal 2007, primarily due to the increase in interest rates and investable cash that have we generated since January, 31 2006.

The effective tax rate for Q2 of fiscal 2007 was 30%, compared to 44% 34% in the same period last year. The decrease in the effective tax rate was primarily attributable to the retroactive extension in December of 2006 of the Federal research and experimentation credit from December 31, 2005 until December 31, 2007. It was also impacted by the approval by our stockholders of an amendment to the 2000 stock incentive plan which will permit us to claim tax deductions for cash awards anticipated to be paid under the plan without limitation under section 162(m) of the Internal Revenue Code. We also recorded a tax benefit of $200,000 related to disqualifying dispositions of incentive stock options.

Included in the tax provision for the three months ended January, 31 2007 is a $600 million tax benefit related to the retroactive application of the Federal research and experimentation credit to fiscal 2006. Last year, our tax rate was favorably impacted by the recording of a net benefit of $600,000 relating to the favorable settlement of a state tax matter. For the remainder of the year, we are now estimating a non-GAAP effective tax rate of 34.5% and a GAAP effective tax rate of 35%.

Cap net income for the second quarter of fiscal 2007 was $18.2 million, or $0.68 per diluted share, as compared to $13.3 million, or $0.50 per diluted share, in the prior year period. 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 second quarter of fiscal 2007 excluding stock option expensing would have been $19.1 million, $0.70 per diluted share, versus net income for the second quarter of fiscal 2006 of $14.5 million or $0.54 per diluted share.

Earnings before interest taxes depreciation and amortization before the amortization of stock-based compensation, or EBITDA, was $27.3 million for the second quarter of fiscal 2007, versus $22.3 million for the second quarter of fiscal 2006. Cash provided by operating activities was $17.2 million for the first six months of fiscal 2007. We continue to expect that our built up in inventory will be reduced during the remainder of fiscal 2007. Backlog as of January, 31 2007 was $203.5 million. This compares to $186 million as of July 31, 2006 and $151 million as of January 31, 2006.

And now to Rob, who will discuss recent developments in our three business segments. Rob?

Thanks, Mike. Good morning and thank you for joining the call today. I will provide an update on our three business segments and will begin the discussion with the Telecommunications Transmission segment, which is our largest segment.

In this segment, we develop products and systems used to either enhance satellite bandwidth efficiency or enable wireless communications in environments where terrestrial communications are unavailable, inefficient, or too expensive. This segment is comprised of two major product lines, satellite earth station products and over-the-horizon microwave systems.

We had another outstanding quarter in our satellite earth station product line in Q2, as evidenced by another strong quarter of very solid bookings. This strength was broad-based and included impressive showings from our newest modems CDM-700, SLM-5650, and the CDM-Qx, which I talked about during the last few conference calls. Additionally, our Turbo IP product line continues to perform very well. Turbo IP as an Internet protocol accelerator that meets the rigorous MIL standard specifications and is a product of choice for the JNN program. Turbo IP is now also qualified for use in the WWSS, or worldwide satellite systems program.

These new products continue to open up new markets and opportunities for us. And demand for these newer products was complemented by solid demand for our more established modems and other ground station equipment.

As you are probably aware, our well-established market leadership position in satellite modems is primarily attributable to our relentless focus on maximizing the efficiency of our product offerings, thereby reducing our customers' satellite transponder costs and ultimately total cost of network ownership.

Breakthrough technologies such as our next generation forward error correction, carrier-in-carrier, and Turbo IP continue to offer a compelling value proposition to our customers. A recent example is our CDM-Qx modem, which incorporates this carrier-in-carrier technology. This important technology yielded us the product of the year award by unanimous selection of the World Teleport Association's Technology of the Year Committee for its ability to reduce bandwidth requirements by 50% while maintaining equivalent throughput and performance.

This is achieved by allowing end-users to transmit both the forward and return sides of a satellite link concurrently using the same amount of satellite bandwidth. These bandwidth savings are incremental to other operational savings we offer from our other techniques, such as our patented forward error correction technology.

While we continue to experience broad-based demand for our products driven by the rollout of HDTV and the dramatic increase in video-based applications, we are also seeing robust demand for cellular backhaul products from carriers who are building out new networks in emerging markets. These markets play to our strengths, in that satellite is often the only transmission medium available in less-developed parts of the world. And by participating in the initial design of these backhaul networks, we are able to provide a more comprehensive solution-oriented sale, where we can cross-sell other cellular backhaul optimization products, such as our Memotec voice gateways and access devices.

Additionally, we continue to strengthen our position in the U. S. government market, where we are leveraging our R&D investments on the commercial side to address the U. S. government's primary need, increased satellite bandwidth, by offering our military spec modems, such as the SLM-5650, which incorporates our core efficiency enhancing technologies. We remain committed to being the thought leader in the satellite earth station product area and are investing heavily in R&D to ensure that we protect and enhance our leadership position.

In the over-the-horizon microwave, or Troposcatter, area we continue to make solid progress on our multipronged growth strategy of, first, identifying opportunities to further expand into the U. S. military; second, working closely with our North African customer on the next phase of its tropo network buildout; and, thirdly, aggressively exploring new business opportunities with other foreign countries.

For those of you who aren't aware, tropo is a highly-secure point-to-point technology that can transmit voice, video, and data using the troposphere, a layer of the Earth's atmosphere about 7 miles above the Earth's surface, to reflect a signal from one terminal to another. Due to the complexity of this technology, we not only develop and manufacture the systems, but we have often times served as the systems integrator as well to ensure the quality of the communication link. We have been in the business for three decades and remain the clear global market leader.

I will now provide an update of our current tropo customer activities. In the second quarter, we continued to deliver against the TRC-170 contract to provide the U. S. government with 220 upgraded modem kits and related support and installation services. As you may know, originally, there were more than 600 TRC-170 terminals originally produced. Our customer is actively working to obtain additional funding for more terminals, but we do not have a timetable at this time for when that funding will become available.

And now to North Africa. As expected, we recorded modest revenues in Q2 related to our North African end-customer based on the wind down of our $77 million contract. While we do not have a definitive next phase order to announce from our North African customer, we continue to discuss the next phase of this network deployment with the customer, which we previously described as a potential $40 million opportunity. We currently believe that the opportunity is likely to be larger than that, but the timing of this contract is still uncertain. We are also in discussions with this customer on additional sizable projects. We remain very confident that we will be able to announce additional orders from this important customer, but as is typical with foreign government contracts, things can slip to the right.

With that in mind, our guidance that Fred will discuss later in this call assumes no revenues from additional North African-related awards in fiscal 2007. However, we continue to believe that fiscal 2008 will benefit from at least one large contract from this customer.

During the quarter, we also made meaningful progress in our efforts to market our tropo technology to new international customers. We will provide more details on these opportunities as they become clearer.

Finally we continue to pursue opportunities with our oil and gas customers, who deploy our systems on offshore oil platforms. All in all, our opportunities and addressable markets continue to expand in both our satellite earth station and over-the-horizon microwave product lines, which bodes well for this important segment.

In the Mobile Data Communications segment, the vast majority of our revenues are derived from two major U.S. Army programs, the movement tracking system, or MTS program, and the FBCB2, or Blue Force Tracking program. These are revenues are supplemented by revenues from other branches of the U. S. DoD and NATO.

Our product offering in this segment is an end-to-end satellite-based system that provides location, tracking, and near real-time messaging for vehicles, including tanks, trucks, and helicopters. As you know, our eight-year $418 million MTS contract expires in July 2007. While we continue to work closely with the MTS program office in addressing its day-to-day operations and fielding goals, we, as the incumbent contractor, are not privy to its procurement strategy and discussions. And, unfortunately, do not yet have any information to share with you with respect to a potential recompete or extension of the current contract. However, the customer has informed us that a decision will be made by the beginning of April.

The MTS program office's increased focus on its procurement strategy has also made the forecasting of the timing of new orders even more difficult. And, in addition, our customer has recently experienced delays in the receipt of certain government-furnished components from another vendor. Further delays of these components, which we incorporate into our transceivers, could impact the timing of our related deliveries.

However, with all that being said, we feel stronger than ever about the important role our technology plays in enabling communications and saving lives. In fact, we have been very encouraged by the continued strong funding trends for MTS, most recently demonstrated by a significant increase in the fiscal 2008 DoD budget that President Bush submitted to Congress. Total funding for MTS in this budget proposal, excluding any National Guard funding, is $143.1 million, far exceeding any other year in the history of the contract.

The National Guard, which receives more than $100 million in funding for MTS products in 2006, is a good example of the validation our solutions have garnered in the field, in Iraq, in Afghanistan, and in the aftermath of Hurricane Katrina. To date, we have announced total orders of $55.9 million from this National Guard funding, but at this time, do not have additional insight to share with you with respect to the timing of additional orders since the Guard is still finalizing its procurement plans.

Q2 was a busy quarter with the Blue Force Tracking program office. As previously announced, we are in active negotiations with the customer on a new five-year IDIQ contract for hardware as well as satellite airtime and support. In the meantime, since the 2006 Blue Force Tracking satellite contract expired on December 31, we received an order for $26.8 million during the second quarter to provide immediate availability of airtime and support before the IDIQ contract is finalized.

Looking beyond this new five-year IDIQ contract, which we believe will be in the $200 million range, as I mentioned on the past few investor calls, the Blue Force Tracking program is developing a strategy for its next-generation satellite network. The current vision for this advanced network is for a significant increase in network speed and capacity, while maintaining the on the move Communications capability that is a key part of our current offering.

BFT has identified Inmarsat's next-generation satellite network, known as BGAN, or broadband global area network, has a compelling next-generation network due to its truly global high-speed and secure L-band characteristics, and has requested that BGAN be incorporated into BFTs next-generation terminals and network. To address our customers BGAN need in an effective and proactive manner, we have teamed with Thrane & Thrane, who we believe to be the worldwide leader in BGAN terminal technology.

Together, we will codevelop a dual-mode terminal that incorporates Comtech's existing waveform technology and Thrane's BGAN waveform technology. With this approach, we will be able to provide new, higher data rate terminals with the BGAN waveform, and very importantly, with backward compatibility to the existing network, thereby minimizing any potential disruption to Blue Force Tracking operations. We are very excited to team with Thrane & Thrane and are already moving forward with the development of a powerful next-generation terminal for the Blue Force Tracking program. We continue to invest intelligently, but aggressively in this segment to address these important long-term opportunities with both the MTS and BSD programs.

Outside of MTS and Blue Force Tracking, we have made important strides with NATO. In Q2, we received an additional $2.5 million related to the incorporation of our geoOps interoperability software into NATO's Afghanistan force tracking system. Our solutions will allow all participating friendly forces in the region to receive up-to-the-minute latitude/longitude information. This feature significantly enhances each force's ability to avoid friendly fire or blue-on-blue engagements. This system is also interoperable with the Blue Force Tracking program and other similar systems fielded by NATO nations.

Our Mobile Data Communications segment is poised for another record year in fiscal 2007. And at the same time, we are investing heavily in important next-generation program endeavors.

Our RF Microwave Amplifiers segment is the largest independent provider of high-power broadband amplifiers in the marketplace. We work closely with our customers to custom-designed power amplifiers into their larger complex systems. We sell to various primes, whose end markets system applications include the defense sector for jamming and IFF, commercial aviation for air-to-satellite-to-ground communications, medical equipment for oncology treatment systems, and various industrial sector applications.

Our strong bookings momentum continued in the second quarter of fiscal 2007 and included a $3.7 million contract from a new international customer for communications jamming and a $4.8 million contract from a major domestic OEM to supply high-power amplifiers for incorporation into a complex identification friend-or-foe system used to interrogate aircraft to determine their friend-or-foe status. This order supplements a significant installed base of Comtech IFF high-power amplifiers previously delivered to this important customer.

We have found a very strong revenue footing in this segment in the mid-$40 million range and continue to aggressively bid on more programs with our existing customers, while simultaneously landing new customers and introducing new applications. And now back to Fred, who will update our guidance for fiscal 2007. Fred?

Thanks, Rob. As you can surmise from Rob's comments, it remains very difficult for us to provide revenue and EPS guidance due to such factors as the timing of bookings and related revenues on large contracts, the uncertainty, particularly in today's environment, regarding U. S. government funding priorities, and budget constraints, and economic conditions in general. These factors have been and will continue to be an inherent part of our business.

Today, I will provide our guidance, as I have done in the past, on a GAAP basis, which includes stock option expensing, as well as on a non-GAAP basis, which excludes stock option expensing. Please note that our earnings releases and quarterly investor presentations reconcile the GAAP and the non-GAAP information.

With that in mind, excluding the impact of stock option expensing, non-GAAP diluted earnings per share for fiscal 2007 are expected to be between $2.28 and $2.30, an increase of $0.23 from the guidance we provided last quarter. This equates to a GAAP diluted EPS range of $2.13 to $2.15. The EPS guidance I have given you assumes a non-GAAP effective tax rate of 34.5% and a GAAP effective tax rate of 35% for both the third and fourth quarter.

Fiscal 2007 revenues are expected to be between $445 million and $450 million. Our solid outlook for the remainder of fiscal 2007 demonstrates the overall strength and organic growth of our business, which is expected to produce another record year, our fifth in a row. Thank you very much and now we are ready for questions, operator.

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

Can I just confirm, first of all, your GAAP guidance? Was that $2.13 to $2.15?

$2.13 to $2.15, yes.

Thank you. Last quarter, you said that the RF Com group should do $44 million to $45 million in total sales. Is that still a good number, which would imply a big step up in volume to the $13 million range per quarter in the second half?

Mark, we still believe that that mid-$40 million number is on target. It could be a little bit lower or a little bit higher, but generally speaking, the mid-40s is the right way to think about it for this year.

Looking at the new BGAN technology you are working on integrating, could you talk about how that enhances the throughput? I understand BGAN is about a 400 kilobit per second throughput. What is the effective throughput today and the integration of this technology, what does that allow you -- what will that allow you to do, or the military to do in terms of communications into the vehicles?

Mark, I think we really can't talk in terms of what the throughput of today's systems are, but they are extremely low, extremely low. The data throughput that we have been working, and we call it X, and we have been in development on our own waveform to increase that to about eight times X. So whatever we have got out there in the field today, we have already in the laboratory and demonstrated it to the customer have increased our own waveform to about 8 X, which is sufficient for what the customer's needs are today.

If we are looking at the 2010 timeframe, yes, the customer is looking at a BGAN capability which will go up to about 400 kilobits per second, but that is not necessarily what the needs are. One big advantage of the BGAN network is really the Inmarsat network that supplies the BGAN waveform. Inmarsat satellites really have worldwide coverage and this is what the Army is interested in today to make sure that they have that capability worldwide by 2010. Today, we are working on satellites such as, I guess, Thoria and the Eutelsat --

MSV.

MSV and so forth. It does provide a lot of worldwide coverage, but certainly not in some remote areas that the Army may find itself in the future. So that capability that they are looking for really is really a worldwide capability and the only network that will provide that is the L-Band network that Inmarsat is providing.

And a final question, if I may. Looking at the TRC-170 contracts, could you kind of describe the delivery profile you have under that current contract in terms of -- should we assume soft of a level run rate for next couple of quarters as you execute on the 220 kits you are producing?

What I would say on that, Mark, is the second and third quarters would kind of be the heaviest quarters, if you will. Again, we want to try to avoid too much focus on the quarters, but generally speaking, the second quarter was very strong, third quarter -- assuming that we don't get any additional orders in, based on the backlog that we have now, that is kind of the way it would run out. But as I said during my comments, we do believe the customer is actively engaged in the process of finding money for additional units.

Rich Valera, Needham & Co.

Rob or Fred, I was wondering if you could contrast the $143 million the proposed fiscal 2008 DoD budget with what it was in '07? I thought it was about $80 million base level of MTS funding. Is that correct versus that $143 million in F '08?

Rich, what happened that there and, again, this is putting aside all the National Guard-related funding, that is a separate bucket. But the core amount in the fiscal '07 budget was about $85 million. In addition to the amounts I referred to in the fiscal '08 budget, there also appears to be additional funding for '07 in the $40 million range, I would say in, Mike, in that general vicinity. Again, since we are making our way through the year here, it is hard to get a lot of visibility into how that is going to make its way through the Congressional process. But the core line from last year was 85 and there -- it looks like there is some additional, supplemental funding in there for MTS for '07 as well, again, based on the public information that is out there.

So this time last year, we were looking at 85 versus the 143, and I think the year before that was around $40 million. Now, obviously, that still these to make its way through Congress and the whole conference process, but at this point in time, that is kind of how they line up to where they were before, Rich.

Great. Just to get a sense of the timing of this, so if that incremental $40 million for F '07 made its way through in tact, when do you think would be the earliest you would see that? It probably would actually, it sounds like, maybe slip into your fiscal '08 year, conceivably.

Yes, I guess just to comment on it, it is one of the reasons that we did, obviously, tighten our revenue guidance range, but as you can probably appreciate, without having the final decision on what procurement vehicle they are going to use, we have been in somewhat limbo on some of these things. But our other businesses have been able to certainly make up the slack there. And I guess the silver lining there is there are things that may push into next year as a result of the fact that things have slid to the right.

So we don't really know specifically, Rich, on the $40 million incremental piece for this year what is going to happen with it, if anything. Because, again, it does have to go through Congress, but generally speaking, we have more orders we are waiting for at this point in time in the Mobile Data Comm segment than we thought we would have three months ago. And we have managed to keep our revenue guidance the same, which bodes well for the future.

But to be frank about it, yes there is some uncertainty in the whole Mobile Data Comm area as we wait for the MTS contract vehicle decision to be made. But certainly there is a lot of additional funding out there and the reception of the program by the user community as well as the legislators is as strong as it has ever been.

Great. Just speaking to the delays, you mentioned these component issues of you having actually shortages of components that the Army provides you. How significant an issue has that been to date and how meaningful could it be going forward do you think?

Sure. It kind of popped up during this past quarter, and quite frankly, without getting into specific numbers, you may recall that Mike and I mentioned that we thought the inventory balance would start to come down this quarter and it would have. We had a bunch of product ready to go, but without this particular piece of government-furnished equipment, we can't send it out.

So there was a whole bunch of revenue that was ready to go, basically, but we were waiting -- again, we didn't get quarterly guidance last time, but in the back of our minds, would go out. So if you look at our yearly guidance versus the six-month cumulative revenue, you will see that is a pretty big ramp-up in Q3 and Q4, but a decent chunk, certainly, of Q3's we have been ready to go on.

So it looks at this point in time that the delivery of these particular components is back on schedule. And we are certainly starting to ship some of that out now, but I just put it out there because it did kind of prop up. And we don't think it is going to happen again the rest of the year, but since it did cause a shift from Q2 to Q3, I mentioned it. But the vendor who supplies the government looks like it is back on track again.

Great. And just one more on MTS, if I could. You mentioned that the MTS program officers expected to make a decision I believe it was by early April. Can you say what is that decision they are expected to make? Is that to release an RFP, or maybe a decision on an extension, or both?

I think at this point, Rich, the contract ends in the middle of July. I think realistically to try to do a recompete in three months is somewhat impractical, but again we are not privy to their process. So I would be surprised if that happened during this three month period, but beyond that they could extend it, they could give us a new contract. As the incumbent, we are not allowed to be directly involved in those discussions, so we are just continuing to focus on making sure we are meeting their fielding plans and the like and trying to be as helpful as possible. But at this point in time, we can't really tell what is going to happen until April, as you just mentioned.

That's it for me. Thank you.

James McIlree, Unterberg, Towbin.

The margins in the Telco Transmission business, even after adjusting for the contract adjustments, were very strong. Is that likely to continue for the second half, or is there a mix issue we should be aware of that would impact second-half margins?

I think, Jim, if you look at the reasons behind it, certainly we have a lot of new products coming out in the earth station product line. We are also in the TRC-170 area. That product has been profitable, so given the trending for this year, we would expect margins to continue to be strong. I think this quarter was exceptionally strong. I have generally said to people before that if you look at our margins, probably we are in the 40% range, that they are probably starting to drift up now, probably closer to 41% on average. So I would expect them, if you look at the year as a whole, to kind of be in that 41% type range if not a little bit higher.

And you are talking gross margins for the entire Company?

Correct.

And then a similar question on the Mobile Data business, except, again, ex the adjustments, it was lower this quarter versus last quarter. And is that due to the -- I think, Rob, you said the word heavily investing a few times during the call. Is that due to those heavy investments or is there something else going on?

If you are talking about gross margins --

I am talking about the operating margins for the mobile data business.

We certainly --

Ex the adjustments that you made.

Sure. We certainly are investing a lot in R&D in this area. You have a bunch of trends happening within the segment. On one hand, you have the Tolt-related businesses pretty much not contributing a lot of revenue, which is causing the op margins to actually go up. But we are spending a whole bunch in R&D in the area working on the next generation BFT as well as MTS.

We also bought Insite back in August, and Insite to date really we haven't recognized any revenue on because we haven't fully delivered on the NATO contract, and we are recognizing all the revenue when we are done. So right now, all there are is really G&A in our P&L. So there is a bunch of different drivers there that are kind of different when you look second quarter last year to second quarter this year.

But overall, we certainly, if you look at the gross margins continued to improve in that segment as we continue to grow, and we have weeded out some of the lower margin business that we had related to Tolt.

Great. And I think usually you provide orders in backlog by division. Could you do that again for this quarter, please?

Sure. The backlog, Jim, the 203.5 million is split out -- 65.8 is telecom, 92.8 is mobile data, and 44.9 is amplifiers. And that equates -- you could back into it, but it equates to bookings of $49 million telecom, mobile data $44.4 million and RF microwave $11.1 million.

Tyler Hojo, Sidoti & Co.

I was wondering, Rob, maybe if you could talk about RF microwave a little bit more. What specifically in your order book is giving you confidence that you are going to see or you are implying that the back-half revenues are going to ramp here to get to that mid $40 million range in revs?

Yes, it is primarily the fact that if you look at our backlog over the last, let's say, five, six quarters, has continuously gone up. So this business, sometimes the backlog depending on the type of product it is can take longer or shorter to turn into revenue. So right now, we have as I said $44.9 million in backlog, and a lot of that work is due to ship out the end of this year, beginning of next year. In fact, I believe that last year our bookings in this segment were actually over $50 million.

So some of those bookings convert to revenue in a little over a year, some under. So it is really the backlog. There is very, very little that we have in that $40 million number that is not in backlog. And again, when I say mid 40s, it could be 42, 47, somewhere in that range. But our bookings have continued to be strong and most of our revenue projection is in backlog.

Could you maybe talk about specifically what types of newer opportunities you are getting? Obviously, you benefited from the IED jamming products. What is kind of replacing that? I mean, you talked a little bit about it before, but maybe a little bit more in depth?

Sure. There is no doubt that not in this year but in the prior two years, we certainly had some wind at our back from the EDO Warlock program. The revenues you see for this year on the bookings don't have any significant IED-related revenues in them. But as I have said before, the IED jamming area is just one form of electronic warfare. So we think high-power amplifiers are ideally suited for applications in that area.

So what you have seen is communications jamming as I refer to, the IFF which is used on aircraft. Any type of a situation where you have an application that has to propagate some type of a signal over a long distance is going to need a high-power amplifier. So even when we had the Warlock program going on, we were trying to tell people that that is one example of many in this area.

I will also point out to you in the IED area that although we haven't had any material bookings this year, things are certainly starting to heat up in that area in terms of activity. And as I said on our last call, we have modules really with most of the major players, I should say, who are bidding on this new 2.1 program and the like. So we certainly don't have any of it in our guidance by any means, but it is possible that that area may heat up again going into next year.

So you have modules with all of the five proposals for the crew 2.1?

We don't have them on every one, but most of them.

Tim Quillin, Stephens Inc.

I guess I'm trying to figure out your comments from earlier, Rob, in terms of the TRC-170. Do you assume that what is in backlog is completed by the end of the current quarter, by the end of third quarter?

I would just say, Tim, I am going to assume it's completed by the end of the year.

Okay. And that includes that $4 million or so that was to help with the fielding of the systems?

A little piece of that, Tim, may push out a little bit, a bit, but a lot of it was installation and some other support in there. But in the broad context, most of what we have in backlog will be completed by the end of this year.

Okay. And cash continues to pile up, $266 million in cash. I don't suppose you can announce uses of cash on this conference call, but what are you thinking? Of course, you have been looking for acquisitions; you haven't found any. I think maybe the prices are still high, I don't know, but how are you going to use that cash?

I think, Tim, on the last couple of calls we have said that we were focused before, but we are more focused than ever in doing the right acquisition. We are not going to do something just because we have to, but I think we said last time that in the next six to nine months, we will have a better sense for whether an acquisition, a meaningful size acquisition is in the cards and in the near term; and would make a decision at that point in time.

So we are still in the process of that, and really since Fred's comments on the last call were in the same position, just farther along in our deliberative process.

Okay. Are there specific targets that you have in mind when you have that timeframe, when you lay out that timeframe, or is it just the general environment that you are evaluating right now?

All I could say, Tim, again is that we are actively pursuing the strategy. Obviously, there are things we're looking at all the time. I just don't want to go into specifics and lead anybody to believe there is a deal that we are going to announce next week or anything like that.

I understand. Just a couple detailed questions. Tax rate, is 35% a good assumption to go into '08 with?

Yes, I think it is a fair assumption, assuming that Congress reapproves the R&E credit beyond December '07, which again, I would be surprised, as we said last time, that they let it permanently expire, because it is such an important feature for high-tech companies. But technically, until they do that, since fiscal '08 would have a period where the credit wasn't in place, we would only be able to take that into our rate once they have done that. But at the end of the day, yes, I think the 35% GAAP rate is probably reasonable, assuming that they do that.

And then also on the stock option expense, is $2 million a quarter, is that a good assumption going into '08, or do you have vesting issues that would bump that up a little?

It really depends, Tim, on going forward, the number of options granted and what the option price is. Because, as you know, the higher the stock prices that the bigger that option grant, it does drive that up. So I wouldn't really want to give much guidance beyond that at this point, not knowing where the stock price will be, among other factors that are used in there.

Thanks. I appreciate it.

At this time, we have no further questions queued.

Okay. Well, thank you very much for your interest in Comtech. And we certainly look forward to speaking with you again in three months. Thank you very much.

Ladies and gentlemen, this concludes today's teleconference. You may disconnect at anytime.