Comtech Telecommunications Corp (CMTL) 2007 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Comtech Telecommunication Corp.'s third quarter of fiscal 2007 earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. [OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded Thursday, June 7, 2007.

I would now like to turn the conference over to Ms. Stephanie Lamantia of Comtec Telecommunications. Please go ahead, mam.

Thank you and good morning. Welcome to the Comtech Telecommunication Corp. conference call for the third 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. The news release on the Company's results was issued yesterday afternoon. If you have not received a copy, please call me and I'll be happy to send you one.

Before we proceed, I need to remind you of the Company's Safe Harbor language in the following way. Certain information presented in this call will include, but not be limited to information relating to the future performance and financial condition of the Company. The plans and objectives of the Company's management and the Company's assumptions regarding such performance and plans are forward looking in nature and involve certain significant risks and uncertainties. Actual results could differ materially from such forward-looking information. Any forward-looking statements are qualified in their entirety by cautionary statements contained in the Company's Securities and Exchange Commission filings.

With that I'm pleased to introduce the President of Comtech, Fred Kornberg. Fred?

Thank you, Stephanie. Good morning, everyone, and thank you for joining us today. The third quarter we're about to report was yet another strong showing in a sustained period of outstanding performance by Comtech. Virtually almost all of our growth has been organic, driven by our significant investments in technology and research and development, which have translated into well-entrenched leadership positions in high-growth markets and participation in high-profile programs. Anchored by our performance during the first nine months, fiscal 2007 is expected to be another record year for us, our sixth year in a row on the top and bottom lines, certainly by a wide margin. Before I share updated guidance for fiscal 2007, Mike Porcelain, our Chief Financial Officer, will provide an overview of our financial results for the quarter. 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, and good morning, everyone. Q3 sales were $119.4 million compared to $89 million in the third quarter of fiscal 2006, an increase of 34.2%. 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 $56.2 million in Q3 2007, which represents an increase of $9.3 million or 19.8% as compared to Q3 of last year. Our Telecommunications Transmission segment benefited from increased sales of our over-the-horizon microwave products, including deliveries of our 16 megabit per second troposcatter modem upgrade kit for use on U.S. Department of Defense TRC-170 digital troposcatter terminals. We had, as expected, have lower sales, both direct and indirect, of our over-the-horizon microwave systems to a North African country who we continue to believe who is between major phases of a large program. As Rob will discuss in more detail, although sales of our satellite earth station products did increase slightly year over year, bookings during the three months ended April 30, 2007, were soft.

In our Mobile Data Communications segment, sales were $55 million in Q3 2007, which represents an increase of $22.2 million or 67.7% as compared to Q3 2006. This was primarily due to an increase in deliveries to the U.S. Army and Army National Guard for ongoing support of MTS program activities. Net sales in this segment for Q3 were also positively impacted by $4.6 million relating to a favorable adjustment of the estimated gross margin on the MTS contract. This increase was partially offset by a decline in sales of approximately $4.1 million related to the impact of our decision made in fiscal 2006 to significantly de-emphasize stand-alone sales of low-margin, turnkey employee mobility solutions. Sales in our RF Microwave Amplifier segment were $8.2 million in Q3 2007, which represents a decrease of $1.1 million or 11.8% as compared to Q3 2006. The decrease in net sales is primarily attributable to timing. Specifically, orders that are currently in backlog which are not expected to ship until future quarters, including the fourth quarter of fiscal 2007.

Of the Company's consolidated fiscal 2007 third quarter sales, 23% were to international end users, 65.8% were to the U.S. government, and 11.2% were to domestic commercial customers. Gross profit was 43.2% of sales in the third quarter of fiscal 2007 as compared to 38.4% in the third quarter of fiscal 2006. The gross profit percentage in Q3 2007 was impacted by a favorable cumulative gross profit adjustment of $4.6 million in the Mobile Data Communications segment relating to our MTS contract resulting from ongoing review of total estimated contract revenues and costs and the related gross margin at completion on our MTS contract. This adjustment was primarily related to improved operating efficiencies, as well as increased funding received during the quarter from the U.S. Army. Excluding this adjustment, gross profit as a percentage of sales would have been 40.9% in Q3 of fiscal 2007 as compared to 38.4% in Q4 of fiscal 2006. The increase in the gross profit percentage reflects increased gross margins in our Telecommunications Transmission segment, including the benefit of higher sales over our new 16 megabit per second troposcatter modem upgrade kit, as well as increased operating efficiencies in our Mobile Data Communications segment.

SG&A expenses increased from $15.4 million in the third quarter of fiscal 2006 to $18.6 million in the third quarter of fiscal 2007. As a percentage of consolidated net sales, SG&A expenses were 15.6% in Q3 2007 versus 17.3% in Q3 2006. The increase in SG&A expenses in dollars was primarily attributable to increased payroll-related expenses and increased other costs associated with the overall growth of our business. This increase was offset in part by lower expenses in our Mobile Data Communications segment as we continue to de-emphasize stand-alone sales of low-margin, turnkey employee mobility solutions. Research and development expenses were $8.1 million in the third quarter of fiscal 2007, nearly 33% higher than the $6.1 million in the third quarter of fiscal 2006. As a percentage of consolidated net sales, R&D expenses were 6.8% in Q3 2007 versus 6.9% in Q3 2006.

Operating income for the three months ended April 30, 2007, was $24.2 million compared to $12.1 million in the prior-year period, an increase of $12.1 million. This increase includes a favorable impact of $3.9 million in connection with the MTS contract adjustment I previously described. Operating income also reflects stock-based compensation expense of approximately $1.9 million in the third quarter of fiscal 2007 as compared to $1.4 million in the third quarter of fiscal 2006. The increase in our stock-based compensation expense is primarily attributable to an increase in both the number and related fair value of stock-based awards that are being amortized over their respective service periods for the three months ended April 30, 2007, as compared to the three months ended April 30, 2006. 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 $2.5 million in the third quarter of fiscal 2006 to $3.4 million. This was primarily due to an increase in interest rates and divestible cash that was generated since April 30, 2006.

Our effective tax rate for Q3 of fiscal 2007 was 29% compared to 37% for the same period last year. The decrease in the effective tax rate was primarily attributable to the passage of legislation in fiscal 2007 extending the federal research and experimentation credit. Also impacting was the approval of our stockholders of an amendment to our 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 of the internal revenue code. Our tax rate also was impacted by a $1 million reduction of income tax reserves that we determined were no longer needed due to the expiration of applicable statutes of limitations, as well as $600,000 of tax benefits, primarily associated with an adjustment relating to the difference between the estimates used in the computation for the fiscal 2006 book income tax provision and the actual amounts reported in the fiscal 2006 income tax return. We estimate that our effective tax rate for the full fiscal 2007, excluding adjustments, will approximate 35% on a GAAP basis and 34.5% on a non-GAAP basis.

GAAP net income for the third quarter of fiscal 2007 was $19.1 million or $0.71 per diluted share as compared to $8.7 million or $0.33 per diluted share in the prior-year period. Net income for the third quarter of fiscal 2007, excluding amortization of stock-based compensation, would have been $20.5 million or $0.75 per diluted share versus net income for the third quarter of fiscal 2006 of $9.7 million or $0.37 per diluted share. Earnings before interest, taxes, depreciation and amortization, or EBITDA, was $28.7 million for the third quarter of fiscal 2007 as compared to $15.6 million for the third quarter of fiscal 2006.

Cash flows from operations were extremely strong. In fact, during the three months ended April 30, 2007, we generated $48.2 million of cash flow from operations. For the first nine months of 2007, cash flows from operations were $65.4 million. This strong cash flow generation reflects an increase in year-over-year net income and strong cash collections from customers, including advanced payments received, partially offset by the timing of payments for accounts payable and a decrease in deferred service revenue. Bookings in total for the three months ended April 30, 2007, and 2006 were $68.9 million and $76.3 million, respectively. For the nine months ended April 30, 2007, and 2006, bookings were $294.9 million and $276.3 million, respectively. Backlog as of April 30, 2007, was $153 million and this compares to $186 million as of July 31, 2006; and $138.3 million as of April 30, 2006.

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

Thanks, Mike, and good morning and thank all of you for joining the call today. As I usually do, I will provide a quick overview of what we do in each of our business segments and then provide an update on the key issues, trends, and opportunities pertaining to each business. Let's begin with Telecommunications Transmission, our largest segment. In this segment we develop products and systems used to either increase data throughput, minimize satellite transponder cost and enhance satellite band efficiency, or enhance 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. In the satellite earth station product line, we continue to see strong customer interest in our newest modems. Our 155 megabit per second CDM-700, our government SLM-5650, and our flagship carrier and carrier-enabled CDM-QX. Our recently introduced turbo IP product line was designed as geared specifically to meet rigorous mil standard spec, has also been very well received.

These new products continue to open up new markets and opportunities for us. As Mike mentioned a bit earlier, sales of our earth station products did increase slightly year over year for the three months ended April 30, 2007. However, bookings were lower than we anticipated in Q3. However, we believe this was most likely due to the inherent order flow fluctuations that exist in any communications technology book-and-ship business. In fact, bookings in our satellite earth station product line strengthened back to expected levels during May and the beginning of June. In addition, we have received a $9.1 million purchase order for cellular backhaul equipment through our Memotec subsidiary and are in the process of finalizing the related terms and conditions. We expect to finalize and book this important order later this month and ship the equipment throughout fiscal 2008.

That being said, a few months of bookings in either direction, as I alluded to earlier, do not make a trend. However, we continue to remain very confident that the demand drivers for satellite transmission that we have outlined in prior calls with you remain very much intact. They include the following: First, the dramatic increase in HDTV penetration that requires significantly greater bandwidth when transmitted; the explosive growth in the transmission of video on both computers and mobile devices; continued demand for cellular backhaul products from global carriers who are building new cellular networks in emerging markets; and the insatiable demand for satellite bandwidth by the U.S. government combined with its serious bandwidth constraints. As you are probably aware, our market leadership positions in satellite modems is primarily attributable to our relentless focus on maximizing the efficiency of our product offerings, thereby reducing our customer's satellite transponder costs and ultimately the total cost of network ownership.

Breakthrough technology, such as next generation forward error correction, carrier-and-carrier, and Turbo IP continue to offer a compelling value proposition to our customers. Carrier-and-carrier specifically is a game changer, by virtue of its ability to dramatically reduce satellite transponder costs to satellite bandwidth end users. Carrier-and-carrier can reduce bandwidth requirements by 50% while maintaining equivalent throughput and performance, by allowing end users to transmit both the forward and return sides of a satellite linking currently. These bandwidth savings are incremental to operational savings resulting from other techniques we offer, such as our patented forward error correction. We are finally beginning to see traction in this important area for us.

With that said, let's move on to our over-the-horizon microwave product line. In the over-the-horizon microwave, or troposcatter area, we continue to execute on our plan to capture additional opportunities with the U.S. military, work closely with our North African end customer on the next phase of its tropo network buildout, and create new business opportunities with other foreign countries. As you are aware, tropo is a highly secure point-to-point communications technology that can transmit voice, video, and data using the troposphere, which is a layer of the earth's atmosphere about seven miles up, to reflect a signal from one terminal to the other. Due to the complexity of the technology, we not only develop and manufacture the systems, but we often act as the system's integrator to ensure the quality of the communication link. We are the de facto market leader in this area, having remained committed to innovation and customer service for three decades.

I'll now provide an update on our current tropo activities. By the end of the third quarter, we had delivered the majority of the 220 modem kits ordered by the U.S. government related to the first phase of the TRC-170 modem upgrade program and have received additional orders for modem kits and support and installation services. As you may recall, the TRC-170's are military over-the-horizon terminals that were initially built more than 20 years ago and have been used in a reduced capacity for the past few years. As a result of our proactive modem innovation, essentially increasing bandwidth throughput on these terminals by five to ten times from two to four megabits per second to 20 megabits per second, the U.S. government has realized how powerful over-the-horizon microwave can once again be by replacing satellite links for medium-range applications, typically 70 to 100 miles, and freeing up satellite transponder capacity for longer-range communication needs.. This is particularly important due to the satellite bandwidth crunch faced by the DoD on a daily basis in Iraq and Afghanistan.

Furthermore, over-the-horizon microwave provides a necessary communications infrastructure diversity and is a highly secure form of transmission, an important consideration for today's DoD. There were more than 600 TRC-170 terminals produced originally. While we believe that perhaps 100 to 150 of the original terminals are unaccounted for or permanently damaged, the TRC-170 program office is working to obtain additional funding to upgrade the terminals that have to date not been updated with our new modems.

With respect to North Africa, we still do not have a definitive next phase order to announce from our North African end customer, but I can tell you that we are finally in the midst of the actual bidding process at this time. We previously described this as a potential revenue opportunity, exceeding $40 million and still believe that ultimately an order of such magnitude or above will come. While we remain as optimistic as ever about this opportunity, we continue to be uncertain about the timing of the ultimate contract award. Nonetheless, we continue to believe that we will receive at least one large contract from this important end customer in fiscal 2008. We are also making very meaningful progress in our goal to develop new international customers for our tropo technology and have made strides with other countries for whom we believe we may see at least one other large order in fiscal 2008. We will provide more details on these opportunities as they become clearer.

Finally, we continue to pursue opportunities with our oil and gas customers that deploy our systems on offshore oil platforms. We expect additional business from this sector as well in fiscal 2008. The difficulty in predicting the timing of large orders in this product line comes with the territory, so to speak, in doing business with foreign governments in contracts of this magnitude. While we can only estimate the timing of the orders from our customers, we could potentially see meaningful orders from three sources in fiscal 2008: Additional U.S. government TRC-170 upgrades; our existing North African end customers' next phase orders; and orders from at least one other international customer. In summary, our Telecommunications Transmission segment remains firmly positioned as a market leader, where our success continues to be driven by our ability to offer compelling solutions to our customers based on an unwavering commitment to technology innovation.

In our Mobile Data Communications segment, the vast majority of our revenues are currently derived from two major U.S. Army programs; the Movement Tracking System, or MTS program, and FBCB2, or Blue Force Tracking. These revenues are supplemented by other branches of the U.S. DoD and NATO. Our product offering in this segment is an end-to-end satellite-based system that enables location, tracking, and near real-time messaging for vehicles including tanks, trucks, and helicopters. We are proud of the important role that our products and solutions play in the U.S. government's communications infrastructure and continue to serve this important customer in meeting its fielding requirements and managing the day-to-day network operations.

With our eight-year, $418 million MTS contract expiring in July 2007, we, as the incumbent, could not previously provide you with more clarity as to what was specifically happening behind the scenes with this program. We now can. Although the specific contract terms have not been finalized, the MTS program office announced in May that it intends to extend our MTS ID/IQ contract for three years and to increase the ceiling by $646 million. We are very pleased with this important development and we believe the magnitude of ceiling increase is a testament to the critical role this program plays in the DoD's infrastructure. Our Mobile Data Comm team has been prepared for a potential contract negotiation for a number of months and will do everything in its power to meet the time line set by the MTS program office to finalize negotiations by July 13, at which time the original contract expires. Our most important goal is to ensure that the satellite-based tracking and messaging network that we manage is not disrupted in any manner.

Equally encouraging. on the funding front, we remain encouraged by the continued strong trends for MTS, demonstrated by a significant increase in the MTS funding included in the 2008 DoD budget that President Bush submitted to congress. Total funding for MTS in this budget proposal, excluding any National Guard funding, would be a record $143.1 million. The National Guard has been quiet with respect to orders in Q3. In fact, Guard orders in fiscal 2007 have amounted to only $2.7 million. As you may recall, the National Guard received more than $100 million in funding in 2006, which can be spent on MTS systems, as a direct result of congress' approval of an emergency supplemental bill for the National Guard after Hurricane Katrina. We have announced total orders to date of approximately $55 million from the National Guard. Although we do not have any additional insight to share with you respect to the specific timing of additional orders, we have been told repeatedly that the National Guard intends to spend the lion's share of the balance of this funding on MTS systems.

Now on to Blue Force Tracking. As we previously announced, we are in active negotiations with our customer on a new five-year, approximately $200 million ID/IQ contract for hardware as well as satellite air time and support. We are making significant progress on the -- in negotiations and expect to be able to announce a finalized contract before the end of our fiscal year. From a network and engineering perspective, we continue to look beyond fulfilling the new five-year ID/IQ requirements and are addressing the BFT customer's vision for its next generation network. Key characteristics of a future network are a significant increase in network speed and capacity while maintaining the on-the-move communications capabilities of the current network. We continue to make significant investments in R&D to ensure that we, as the incumbent, fulfill our customer's expectations now and in the future.

Fiscal 2007 will clearly be another record year in our Mobile Data Comm segment, and looking forward into fiscal 2008, we believe that the groundwork is in place to potentially achieve another record year based on: First, the initial indications of the potential size of the new three-year MTS contract; the current funding for MTS in the President's budget; and the potential for additional orders from the Army National Guard. One thing however is clear; the demand and potential contracts coming down the pike for our technology have never been at a higher level.

Our RF Microwave Amplifier segment is the largest independent provider of solid state high-power broadband amplifiers in the market. We work closely with our customers to custom design power amplifiers into their larger complex systems. In this area we sell to various primes who's end-market systems applications include: The defense sector for jamming, communications, radar, and IFF; commercial aviation for air to satellite to ground communications; medical equipment for oncology treatment systems; and various industrial sector applications. In Q3 we once again saw strong bookings in this segment that included an important $3 million contract from a domestic OEM to supply broadband solid state high-power radio signal jamming amplifiers and switches to be used as part a system to defeat the threat of remote-controlled IEDs, as well as the $3.7 million order we announced in the beginning of the quarter from a foreign OEM for broadband amplifiers to be used in high-power communications jamming systems.

We are particularly excited about the recently-announced orders for amplifiers for IED jamming because it validates the strategy we undertook months ago in anticipation of renewed DoD demand for IED jamming systems that I alluded to on our last call. Remember that, although our fiscal 2006 revenues included a large amount of IED-related sales, our current-year revenues have virtually no IED-related sales. While we have found a solid revenue footing in this segment in the $40 million range, our increased penetration of existing customers and the expansion of our customer base, as evidenced by our strong bookings and backlog, should position us to take the business to a record level in fiscal 2008.

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

Thanks, Rob -- excuse me. As I have stated many times in the past and as Rob's comments confirm today, it remains very difficult for us to provide revenue and EPS guidance due to many factors, including: The timing of bookings and related revenues on large contracts, such as MTS, Blue Force Tracking, and our North American customer; the uncertainty, particularly in today's environment, regarding U.S. government funding priorities and budget constraints; and economic conditions in general. That notwithstanding, I will provide our guidance, as I have done in the past, on a GAAP basis, which includes the amortization of stock-based compensation, as well as on a non-GAAP basis, which excludes amortization of stock-based compensation. With that then in mind, including the amortization of stock-based compensation, non-GAAP diluted earnings per share for fiscal 2007 are expected to be between $2.35 and $2.37, an increase of $0.07 from the guidance we provided last quarter. This equates to a GAAP diluted EPS range of $2.20 to $2.22. The EPS guidance assumes a non-GAAP effective tax rate of 34.5% and a GAAP effective tax rate of 35% for our fourth quarter.

Fiscal 2007 revenues are expected to be between $440 million and $444 million. Our revenue guidance reflects some of the items that Rob and Mike discussed earlier, including the $9.1 million cellular backhaul equipment order, which we are finalizing now and had assumed would contribute to fiscal 2007 revenue, and the timing of certain deliveries in our RF Microwave Amplifier segment, which also were scheduled to ship in 2007. These items relate to timing and will effectively shift revenues into fiscal 2008. Our solid performance in fiscal 2007 demonstrates the overall strength of our three business segments, and as I mentioned previously, virtually all of our growth has been organic, and we continue to try to augment that organic strength by pursuing acquisitions, although we have nothing to report to you at this time. We're very excited about the large growth opportunities we see as we look to fiscal 2008 and beyond. As we have done in the past and we expect to provide guidance for next fiscal year on our fiscal 2007 year-end conference call in September.

We will now take your questions. Operator?

Yes. (OPERATOR INSTRUCTIONS) Our first question will come from the site of Mark Jordan with A.G. Edwards. Your line is open.

Good morning, gentleman.

Good morning, Mark.

We'd like to first talk about the RF group. You've had a backlog figure, I think, that's -- if my guess is right, you should be around $42 million, $43 million in that group, it's been well over $40 million, but running on a quarterly basis, under $10 million. You allude to the fact that you've got an uptick in orders moving forward in the fourth quarter and into the new year. Could you quantify what your expectations might be there in terms of the absolute dollars? And secondly and related to that, we're seeing a lot of money start to flow for the MRAP vehicles. Is it your belief that those vehicles are going to be equipped with jamming-type devices, and is that a very significant opportunity for you in fiscal '08 and '09?

Mark, in terms of -- you are correct. Our bookings have been extremely strong this year. A lot of these jobs we booked this year are kind of longer-term nature than we've had in the past, so you should start to see in Q4 and certainly next year their quarterly run rates start to ramp up, but their backlog as of the end of the quarter was well over $40 million -- closer to the mid-$40 million level. As I mentioned in my comments earlier, fiscal '07 really has nothing of note in it from an IED jamming point of view. You may recall on our last call I alluded to the fact that we were starting to see things move in that area. As a supplier -- a sub in this area, we don't have the same visibility as the primes do, but we certainly have seen, as you have, a lot of activity in this area and we think we're very well-positioned with a bunch of different people in this regard and do expect to see some additional IED-related business coming down the pike.

Okay. You alluded to your involvement with multiple suppliers in this marketplace?

Well, we've received an order from one, but we've had our boxes, if you will, pretty much with every major player in the market that's working in this area.

Okay. On the tropo front, when do you expect to see, specifically, the follow on from the U.S. Army? And I would assume that that, if it's the same size, would pretty much take care of the TRC-170s? Secondly, what kind of conversation's going on in addition to the TRC-175 and other applications like the Air Force?

Terms of the specific timing on the TRC-170 upgrade kits, Mark, it's very difficult to say. We know the customer's working on it. Obviously right now in Washington, there's a lot of banter back and forth on funding, but this remains a high priority. We also think down the road, because this is being reinstalled back into their infrastructure, that there are other components of the system that eventually will need to be addressed. We think this will be a very viable opportunity for some time for us and we certainly expect to receive additional orders in 2008. I just can't pinpoint to you when in 2008. In terms of the TRC-175, at this time, at this time, since the TRC-170 has received such good traction, all the focus within the DoD right now is really being paid to the TRC-170, and the TRC-175, we view as a longer-term opportunity if it occurs, because the moneys are being spent on the TRC-170. There are still a lot of opportunities there, not only on the upgrade kit side. But remember, as I mentioned in my comments, the terminals themselves in many cases are 20 to 30-years old, so ultimately down the road these things are going to have to be replaced, which is a lot higher ticket -- dollar item than the modem upgrade kits are.

Okay. You mention a normalized GAAP tax rate of 35%. Just looking out into next year, should we assume that there will be some recurring benefits as you've had in the option expense and with R&D credits potentially lowering that trend-line growth rate for fiscal '08?

I wouldn't, Mark. I would think the rate going forward should be in that general range.

Okay. Thank you.

Sure.

Our next question comes from the site of Tim Quillin with Stephens, Inc. Your line is open.

Good morning.

Morning, Tim.

Rob, could you go through the backlog by segment, please?

Sure. The backlog is comprised of Telecom Transmission, $44.9 million, Mobile Data is $66.2 million; and RF Microwave Amps, $45.8 million. I'll point out on that number that when you look at our activity this year, as you can probably see, our revenue guidance, the $440 million to $445 million is very much in line with where it was right at the start of the year. If you think about what happened this year, we've had number -- certainly a delay in the MTS contract, certainly a delay in the Blue Force Tracking contract being finalized. In fact, they're waiting to release orders, most of which we don't have in our guidance. So, when you look at the backlog numbers, just be careful in that we have a lot of items that are in the queue that are just not finalized yet. So I know the backlog did come down from the last quarter, but our two or three biggest revenue drivers -- discreet revenue drivers are really at a point where we're just waiting for contracts to be finalized.

Understood. And the Telecom Transmission business, the backlog was down about $21 million and I know the North African customer burned off some backlog. How much backlog did you burn off because of the TRC-170 program?

I wouldn't want to go into that level of detail, Tim. I can tell you that some of it did relate to our earth station business. The bookings were soft in the quarter. They have come back with a vengeance in beginning of this quarter without even counting the $9.1 million Memotec order I talked about. But it's a combination of the burnoff of our North African customer, some of the TRC-170, and that three-month window there where we experienced the soft bookings in the earth station side.

Okay. Can you give us a sense of what the book-to-bill was on the -- in the satellite earth station business?

I'd prefer not to, to get into that level of granularity.

Okay. Well, how soft is soft, I guess, in any way you like to address that?

It's a book-and-ship business, Tim, so the bookings were soft enough for us to talk about in our 10-Q. If our bookings move by a couple million dollars in the quarter, we don't talk about it. I attribute some of it, quite frankly, to -- the government area in particularly was a little bit soft, which could be the fact that the government is -- there's a lot of banter in Washington on funding, so on and so forth, but the important point to me is that we've seen it return to normalcy in May and the beginning of June, and, again, I don't want to get into product line level revenue disclosures.

Okay. How about in terms of geography. Were there any pockets of weakness in terms of geography on the commercial side?

No. It was primarily on the government side and in no particular geographic area.

Okay. Okay, well I'll get back into the queue and ask you questions later. Thank you.

Our next question comes from the site of Rich Valera with Needham & Company. Your line is open.

Thank you. First, just a clarification. Fred, in your comments on guidance, did you say that your guidance for the full year of F07 and I guess implied fourth quarter guidance excluded the $9.1 million cellular backhaul order?

Yes.

Okay, just wanted to be clear on that.

What I was trying to say is that the original order was supposed to be in '07.

Right.

But unfortunately it got delayed and now it looks like it's finally going to be negotiated hopefully in the next few weeks, but revenues will fall into 2008.

Right. Rob, when you were discussing the TRC-170, you'd mentioned you'd shipped against most of your original TRC-170 order but that you'd received more orders that I think would ship in the fourth quarter. Can you give us a sense of magnitude what will ship in the fourth quarter for the TRC-170? I'm assuming you're down sequentially, but is there a material amount of TRC-170 that will ship in the fourth quarter?

What I meant by that, Rich, is I think there was an order for about $3 million or so that we had received a few months back. The numbers for the fourth quarter on the TRC-175 are going to be somewhat modest, not at the level they've been at for the last couple of quarters. And by the end of the year, we should have shipped everything that we've received to date from the government on that.

Right. Then with respect to MTS orders, I know you addressed this, I'm just wondering if there's any more color you can give here in terms of what's holding up these orders? Do you think that they're being held up possibly by the fact that you haven't nailed down your new contract extension or you think it's more just general funding paralysis within Washington because you have things like MRAP and other things that are potentially going to be taking funds. Any sense at all of what's holding up the MTS order flow?

Sure. There's no doubt, Rich, as you can probably imagine, just looking at MTS by itself. We were obviously very pleasantly surprised by the magnitude of a sole-source contract of that size, and certainly, I would imagine the program office is very much focused on making sure all the paperwork is done and so on and so forth. And as a result of that, in addition to the National Guard side of it, the order flow has been somewhat backed up there. I'll point out again that a lot of the things in our original guidance going into this year, which are going to shift into '08, we've managed to make up elsewhere. But at this point in time, we're really standing by, waiting to finalize things with them. I can't speak on their behalf, but these are -- when you look at it and take a step back, you're talking about over $800 million of sole-source awards for this important technology and I'm sure the customer wants to make sure everything's done according to the letter of the law. We certainly would have liked to received more orders by now, I have to be very honest about that, but we're working through the contract and hopefully once it's signed, we'll see the order flow return to normal with those vehicles in place.

Great. And just one more, if I could, on Blue Force Tracking. You mentioned you're working towards signing this five-year ID/IQ on Blue Force Tracking. As you well know, there's been an award made to a competitor to develop a competing Blue Force Tracking solution, and that could theoretically be completed within a year, which is obviously well within the five-year window of your new contract. Have you had the discussions with the Blue Force Tracking program about the fact that this ID/IQ would extend well beyond a potential competing solution being potentially chosen over you guys?

Well, I just comment two things on that, Rich. First, we are working on our own next generation solution. We're very close to a prototype demonstration on that. And without going into our specific strategy there, we think that we have a couple of things to offer; knowledge of this network to begin with, backward compatibility is very important. But I would just point out to you that the one-year time line is -- I'm not sure it's the time line for the full rollout of the new system. In fact, I would point out that they are assigning a five-year ID/IQ contract to give you just a general sense of whether or not that one-year time line is really the time line to roll out a brand new system. So we think we're going to have a very compelling next generation solution and obviously from the size of the ID/IQ contract that we're negotiating and the time frame, I think it should tell you something about the fact that it's not going to be something they're just going to rip out and put a new system in. We obviously hope it's our new system, but we don't see that as something happening over night given the importance of the units that are out there already. Keep in mind, by a year from now, there'll probably be 100,000 or more terminals out there.

Right.

That's a big investment and a big logistical issue for them to deal with, but we're working with them on the current system as well as the next generation.

Great, thank you.

Sure.

Our next question comes the site of Jim McIllree with Unterberg, Towbin. Your line open.

Thanks, good morning. There was a quarter to quarter a $10 million increase in customer advances and deposits. What does that relate to?

Jim, that's kind of across the board. There's a little bit of it in our amplifier business that is just the nature of some of foreign contracts, we get advanced payments. Some of it actually relates to our over-the-horizon microwave product line and there's a piece of it in the Mobile Data Comm business as well. So it was just one of those periods that we just had a lot of advanced collections from customers.

Okay. And Mark earlier asked a question about your exposure to MRAP, but it seems to me you could get potential business from the amplifier business as well as on the movement tracking systems. If that's the case, would you be selling through the normal channels and the normal contract vehicles, or would this be separate contracts from the MRAP program office.

It's too early for us, Jim, to really -- to say definitively. Obviously, our technology has utility that's relevant there, but most likely we would be selling through these contract vehicles and the direct visibility, we just don't have it there. But certainly there's a roll for our technology, but I don't want to in any way imply we have had specific conversations in that regard.

Okay, great. Thank you.

Sure.

And the next question comes from the site of Tyler Hojo with Sidoti & Company. Your line is open.

Hi. I was wondering if we could go back to the RF Microwave segment. I guess -- on the last conference call, I believe you guys said that with the backlog visibility that you had, you were hoping for a strong back half there and a mid-$40 million revenue number in that segment was doable. Has that changed? I'm just trying to get an understanding of what -- if there is something different there or what's going on?

Well, Tyler, has Fred mentioned earlier, we certainly --over the past two quarters, I've talked in the mid-40s and kind of the low 40s. What's happened is there's been a few large jobs that, because they're newer technology for us, we're just making sure everything is done completely in-line with the contract and some of it's just going to slip to '08. It's just as simple as that. If you look at the backlog, the backlog continues to grow. So the tough thing is obviously our revenues are a bit lighter than I would have liked to be this year, but we just have -- we go into the fourth quarter of this year with $46 million in backlog. Our backlog in this business a year ago was more than $10 million lower than that. So it's just a timing of delivery thing. It's not a question of the business not coming in. It's just a question of the delivery shifting a bit from Q4 into Q1 and Q2.

Okay. But that roughly $46 million backlog, that's roughly a 12-month number, give or take?

Well, normally, our backlog is less than 12 months of revenue, but it really depends on what's in there because we have some jobs that go out a little over a year, other jobs are only three to six months. But it certainly is a record level by any measure, so even if you said it was 90%, we're very well positioned for next year.

Okay, great. Just in terms of the cash balance, any thoughts on what you're going to do with that? Acquisition, maybe a buyback, just your comment there?

Sure. I think we've been consistent that back in the fall we said that we wanted to take about nine to 12 months to fully vet out all the acquisition opportunities that we've been looking at and we're very much on track on doing that. As Fred said, we have nothing to report, but I still think within that time frame come the fall that we'll be able to give you better clarity as to the chances of doing a meaningful acquisition. As I've said before, if the answer to that question is no, then we're very open minded to returning the cash through a buyback, whatever it may be at that time.

Thanks for the color. Have a nice day.

Sure.

(OPERATOR INSTRUCTIONS) We'll take a follow-up question from the site of Tim Quillin with Stephens. Your line is open.

Just going back to the over-the-horizon business, was there other over-the-horizon revenue besides TRC-170 and the Morth African customer in the quarter?

Not anything of note, Tim.

Okay. And how about in terms of bookings? Were there anything of note on the over-the-horizon side on bookings?

Other than that TRC-170 piece, which I don't have right in front of me which quarter -- it might have been the end of the prior quarter, but nothing of size from an international point of view, no.

Okay. And then in Mobile Data business, do you have enough visibility right now to have a sense of whether that business will be roughly in line with what you did in the third quarter -- in the fourth quarter, or do you expect it to be down from that level? Is that part of why your guidance is revised down a little bit?

I really don't want to break out the guidance, Tim, by segment. I think we're pretty -- we're pretty comfortable with where we are. There's a few orders that we're waiting for to get in, but given the backup, if you will, in the contract stuff, unless it's -- it's pretty certain that we've left it out, so there shouldn't be a lot of variability. There's maybe a few million dollars worth of orders we should have receives. We would have liked it to been higher, but the contracts are in the final stages. Beyond that, I really wouldn't want to break out the guidance by segment.

Okay. Then there's a lot of -- there's a lot of things that you have in the pipeline right now that you have good visibility on for fiscal '08, but the timing -- a lot of the timing is uncertain. I'm wondering how you approach budgeting for G&A and R&D in light of a somewhat uncertain revenue stream in fiscal '08 and hypothetically, if revenue were down slightly, let's say from a very strong fiscal '07, would you size your G&A and R&D accordingly? Thanks.

Let me address it in a couple of pieces. The R&D side of it, Tim, we look at it -- the R&D is, what I think enables us to perform at the level that we to fuel our future growth, so our R&D spending is very much driven by how do we take it to the next level down the road. That's going to largely be based on the opportunities that we see out there and our return on investment on our R&D dollars. Certainly, at this point in time, when we're going through our budgeting process -- and I think you hit the nail on the head. The opportunities out there for us are staggering. There's close to $1 billion of opportunities if you look at MTS, Blue Force Tracking, the North African customer, there's no doubt that you're correct, that the timing of those things is difficult to estimate accurately right now because we don't have the contracts in place.

But we certainly, from a direct cost point of view, have a very -- very much a scalable system here where we can work to that end. In terms of our resources, our resources that manage those businesses and the like, we're assuming eventually that stuff's going to come and what we don't want to do is end up dislocating those opportunities by cutting into the bone. But without giving any guidance for next year, if you start to add up the opportunities, if everything kicks in, we're not viewing next year as a reduction in revenue. If at the end of the day all these things take much longer than we expected, we'll obviously react accordingly, but that certainly wouldn't be the scenario that we would see at this point in time, although anything can happen.

Okay. Just one last question, if I may. On the G&A, in the fourth quarter you typically have a big bump-up in G&A expense related to bonuses. Do you expect to see a similar phenomenon this year?

No, the G&A should not bump up in the fourth quarter because of bonuses, Tim. The incentive compensation in our Company is tied directly to operating profit for the most part, so if the operating profit's higher, the incentive compensation will be higher. So it's not like we book that in the fourth quarter. It's booked lock-step with the underlying financial results, so it's not something that I would view as a seasonal adjustment in the fourth quarter.

Okay. Thank you very much.

Sure.

It appears that there are no further questions at this time.

Okay. Thank you very much for your interest in Comtech and we certainly look forward to speaking with you again soon. Thank you very much.

This concludes today's conference call. You may disconnect at any time. Thank you and have a great day.