Comtech Telecommunications Corp (CMTL) 2007 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Comtech Telecommunications Corp.'s fourth-quarter 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, September 20, 2007. I would now like to turn the conference over to Ms. Stephanie LaMantia of Comtech Telecommunications. Please go ahead, ma'am.

Thank you and good morning. Welcome to the Comtech Telecommunications Corp. conference call for the fourth quarter and 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'll be happy to send you one.

Before we proceed, I need to remind you of the Company's Safe Harbor language in the following way. Certain information presented in this call will include but not be limited to information relating to the future performance and financial condition of the Company. The plans and objectives of the Company's management and the Company's assumptions regarding such performance and plans are forward-looking in nature and involve certain significant risks and uncertainties.

Actual results could differ materially from such forward-looking information. Any forward-looking statements are qualified in their entirety by cautionary statements contained in the Company's Securities and Exchange Commission filings. With that, I'm pleased to introduce the President of Comtech, Fred Kornberg. Fred?

Good morning. Thank you, Stephanie. Good morning, everyone, and thank you for joining us today for our fiscal 2007 fourth-quarter earnings call. Our performance in this quarter was a strong finish to another year of significant accomplishments at Comtech. In fact, as I predicted at this time last year, fiscal 2007 was our fifth consecutive year of record revenues and profits. And virtually all of that growth in the past five years has been organic, driven by a continuous introduction of innovative products which address the growing demand in the commercial and military markets we serve.

The past year has been particularly exciting and eventful and I believe positions us very strongly for the future. Based on the broadening of our product lines and the strengthening of our businesses, we are once again well positioned to deliver another record year in fiscal 2008.

Before I provide guidance for fiscal 2008, Mike Porcelain, our Chief Financial Officer, will provide an overview of our financial results for the quarter as well as some commentary regarding our full-year results for fiscal 2007. Then Rob Rouse, our Chief Operating Officer, will then provide an update on each of our three business segments. Mike.

Thinks, Fred. Good morning, everyone. Let's begin by reviewing some of the key income statement trends for the quarter ended July 31, 2007. Q4 sales were $117.8 million, compared to $100.2 million in the fourth quarter of fiscal 2006. The increase reflects growth in our mobile data communications and RF Microwave Amplifier segments, partially offset by slightly lower sales in our Telecommunications Transmission segment.

Sales in our Telecommunications Transmission segment in Q4 2007 were $49.1 million, which was $2 million lower than sales in Q4 of fiscal 2006 and reflected increased sales of our 16 megabits per second TRC-170 tropo scatter modem kits, offset by lower sales of satellite earth station products. The lower sales of satellite earth station products were primarily due to the timing of orders received and eventually shipped in each of the respective periods. Our Telecommunications Transmission segment represented 41.7% of net sales in Q4 2007, as compared to 51% in Q4 2006.

In our mobile data communications segment, sales were $59.2 million, which was $18.2 million higher than sales in of Q4 fiscal 2006. The increase in sales was primarily due to higher sales in our MTS and Blue Force tracking contracts. Sales in Q4 2006 also included $4.1 million relating to a favorable cumulative gross profit adjustment on our MTS contract. Our mobile data communications segment represented 50.3% of net sales in Q4 2007, as compared to 40.9% in Q4 2006.

Sales in our RF Microwave Amplifier segment in Q4 2007 were $9.5 million, which represents an increase of $1.4 million from Q4 2006. Our Q4 2007 sales continue to benefit from strong sales into various defense programs. Our RF microwave segment represented 8% of net sales in Q4 2007, as compared to 8.1% in Q4 2006.

Of the Company's consolidated fiscal 2007 fourth-quarter sales, 24.5% were to international end-users; 63.5% were to the U.S. government; and 12% were to domestic commercial customers. Gross profit increased to $52.5 million in the fourth quarter fiscal 2007 from $43.8 million. The increase in gross profit was primarily driven by an increase in the gross margin percentage to 44.6% from 43.7%.

Included in gross profit for the fourth quarter of fiscal 2007 and 2006 are favorable cumulative adjustments related to our MTS contract of $6.1 million and $3.8 million respectively. The adjustments are primarily related to increased operating efficiencies. And additionally, as it relates to the fourth quarter of fiscal 2007, the finalization of total contract costs, including our estimates for warranty obligations, related to the completion of our original MTS contract. Excluding these adjustments to both sales and gross profit, gross margin would have been 39.4% in Q4 of fiscal 2007, compared to 41.6% in fiscal 2006.

The decline in the adjusted gross profit percentage was primarily due to a higher proportion of our consolidated net sales being in our mobile data communications segment, which typically realizes lower gross margins than our other three segments. In addition, we experienced lower gross margins in our Telecommunications Transmission and RF Microwave Amplifier segment in Q4 2007 as compared to Q4 2006, primarily due to unfavorable product mixes.

SG&A expenses in both the fourth quarter of fiscal 2007 and 2006 were $19.8 million. SG&A expenses for the fourth quarter of fiscal 2007 include $1.7 million of stock based compensation expense, compared to $1.2 million in the fourth quarter of fiscal 2006. As a percentage of net sales, SG&A expenses were 16.8% in Q4 versus 19.8% in Q4 of last year. The decline in SG&A expenses as a percentage of net sales was primarily due to the reduction of SG&A expenses in Q4 2007 associated with our decision in the latter part of Q4 2006 to deemphasize stand-alone sales of low margin turnkey employee mobility solutions in our mobile data communications segment.

Research and development expenses were $9.6 million in the fourth quarter of fiscal 2007, 39.1% higher than the $6.9 million in the fourth quarter of fiscal 2006. As a percentage of net sales, research and development expenses were 8.2% in Q4 2007 versus 6.9% in Q4 2006.

Operating income for the fourth quarter of fiscal 2007 was $22.4 million, compared to $16.4 million in the prior year period. Included in operating income are the positive impacts on operating income of $5.3 million and $3.3 million respectively related to our MTS favorable cumulative adjustments. In addition, operating income for Q4 2007 includes $2.1 million of stock based compensation expense, compared to $1.5 million for the prior year period.

Interest expense, which primarily represents interest on our convertible notes, was consisted between the fiscal quarters at approximately $700,000. Interest and other income increased significantly from $2.8 million in the fourth quarter of fiscal 2006 to $4.3 million in the fourth quarter of 2007 primarily due to higher interest rates and additional investable cash.

The GAAP effective tax rate for Q4 2007 was 34.5%, compared to 36.5% in the same period last year. The decrease from Q4 2006 primarily reflects the benefit in Q4 2007 of federal research and experimentation credits as well as the approval by our stockholders of an amendment to our 2000 stock option plan that will permit us to claim tax deductions for certain cash incentive awards. Looking forward, our GAAP effective tax rate in fiscal 2008 is expected to approximate 35%. On a non-GAAP basis, excluding the impact of stock based compensation, the effective tax rate for Q4 fiscal 2007 would be 34.5% compared to the same tax rate for Q4 of fiscal 2006 of 35.5%. GAAP net income for the fourth quarter of fiscal 2007 was $17.1 million or $0.63 per diluted share as compared to $11.8 million or $0.45 per diluted share.

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 based awards. With that in mind, net income for the fourth quarter of fiscal 2007, excluding stock based compensation expense, would have been $18.5 million or $0.67 per diluted share versus net income for the fourth quarter of fiscal 2006 of $12.9 million or $0.48 per diluted share.

Earnings before interest, taxes, depreciation, and amortization of intangibles and stock based compensation, or EBITDA, was $27.2 million for the fourth quarter of fiscal 2007 versus $20.3 million for the fourth quarter of fiscal 2006. Cash flow from operating activities in Q4 of fiscal 2007 was $23.8 million, compared to cash flow from operating activities of $35 million in Q4 of fiscal 2006. Cash flow in Q4 2006 was exceptionally strong and was the result of the collection of certain large receivables that had built up during fiscal 2006 and were collected in Q4 of last year.

Now a few remarks about the full-year operating results for fiscal 2007. The $445.7 million in sales for fiscal 2007 represented a 13.8% increase over the fiscal 2006 level. Almost all the growth was organic. Fiscal 2007 bookings were $388.7 million. Backlog as of July 31, 2007 was $129 million, which compares to $153 million as of April 30, 2007 and $186 million as of July 31, 2006. An important note is that backlog does not include any bookings on our new MTS contract or our new Blue Force tracking contact which Rob will discuss in a bit.

Gross profit increased $159.3 million in fiscal 2006 to $193 million in fiscal 2007. The increase in fiscal 2007 was primarily driven by the significant increase in sales. As disclosed in our 10-K filed yesterday afternoon, both fiscal years included a number of favorable cumulative adjustments on certain of our long-term contracts. Operating profit also increased nicely, up more than 32.9% from $63.9 million in fiscal 2006 to $84.9 million in fiscal 2007.

GAAP net income for fiscal 2007 was $65.2 million or $2.42 per diluted share. This compares to $1.72 per diluted share in fiscal 2006, an increased of 40.7%. Fiscal 2007 non-GAAP net income of $70.2 million or $2.57 per diluted share was significantly higher than the fiscal 2006 net income of $49.6 million or $1.86 per diluted share. EBITDA for fiscal 2007 was $102.5 million versus $78.3 million in fiscal 2006, an increase of 30.9%. We ended fiscal 2007 with more than $340 million of deployable cash and a rock solid balance sheet.

In summary, the fourth quarter was a solid finish to another record year for Comtech. And now to Rob, who will discuss recent developments in each of our three business segments. Rob?

Thanks, Mike. Good morning, thank you for joining the call today. 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.

In Telecommunications Transmission, our largest segment, we develop products and systems used to either, A, increase data throughput, minimize satellite transponder costs, and enhance satellite network bandwidth efficiency; or B, 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. Let's begin with our satellite earth station product line.

We enjoyed a strong resurgence in bookings in Q4 after a slower than typical bookings quarter in Q3, which we discussed on our June earnings call. Our newest modems, the 155 megabit per second CDM-700, our government SLM-5650 and our carrier and carrier enabled CDM-Qx have performed extremely well in the marketplace as customers continue to demand efficiency improvements that directly reduce satellite operating costs.

We believe that carrier and carrier offers a particularly compelling proposition by virtue of its ability to dramatically reduce satellite transponder costs for our end-users. Carrier in carrier, as a reminder, 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 link concurrently. These bandwidth savings are incremental to operational savings resulting from other techniques we offer such as our patented forward error correction technology.

In recent months, a broader group of customers has had the opportunity to become familiar with the significant efficiency improvements offered by our carrier-in-carrier enabled CDM-Qx modem. This innovative product has further differentiated us from our competition. The primary function of our satellite earth station products is to transmit video, voice, and data traffic via satellite in the most efficient, lowest cost manner possible. And the underlying growth drivers for satellite transmission remain strong and include -- first, the exponential growth in video transmission and HDTV content; secondly, new cellular networks in emerging markets; and third, continued demand for satellite bandwidth by the U.S. government.

We have been successful in recent months in selling more bundled products such as our satellite earth station modems coupled with our Memotec voice gateways, our Digicast media routers, and our Vipersat network management systems. Each of these complementary products provides an important strategic add-on to our core modem products, which allow us to offer integrated solutions to our customers, further differentiating us from our competitors.

As we head into fiscal 2008, we intend to continue to leverage our significant technology investment, market leadership, and brand presence to further grow and expand our satellite earth station product line. With that said, let's move on to our over the horizon microwave product line.

For those of you not familiar with this technology, over the horizon microwave, or tropo, is a highly secure point-to-point communications technology that can transmit voice, video, and data using the troposphere, a layer of the atmosphere 7 miles above the earth, to reflect a signal from one terminal to the other. Due to the complexity of this technology, we not only develop and manufacture the hardware and systems, but we often act as the systems integrator to ensure the quality of the communications link. We are the de facto market leader, having remained committed to innovation and customer service in this area for three decades.

Our over-the-horizon microwave productline revenues continue to remain lumpy based on the ebbs and flows of orders from a handful of key customers. As we expected, our Q4 revenues in this productline were modest due to the timing of customer orders. As you know, we have substantially completed our work related to the $77 million contract from our North African customer. We are in active discussions with the customer in the next phase of its tropo network build out that we previously suggested could result in a contract award to Comtech in excess of $40 million.

While we are disappointed that we are not yet in a position to announce this contract, we continue to believe that the order is just a matter of timing. With that in mind, the timing of this order will obviously effect the amount of related revenue we will recognize in fiscal 2008.

With respect to our other large customer, the U.S. government, we received a $4.4 million order in Q4 and continue to anticipate additional orders for modem kits related to the TRC-170 modem upgrade program. The TRC-170's are military over-the-horizon microwave terminals that were initially built 20 or more years ago and that have been used in a reduced capacity until recently. The U.S. government's decision to reembrace tropo is based on the significant improvements in throughput that we have been able to demonstrate combined with the serious satellite bandwidth crunch being faced by the DOD in Iraq and Afghanistan today.

By deploying tropo, the U.S. government is able to replace satellite links for medium-range applications, typically 70 to 150 miles, and free up satellite transponder capacity for longer range communication needs. We believe there were originally more than 600 TRC-170 terminals produced. But we also believe that perhaps 100 to 150 of the original terminals are unaccounted for or permanently damaged. The TRC-170 program office is actively working to obtain additional funding to upgrade the terminals that to date have not been upgraded with our new modems.

We are also making meaningful progress in our goal to develop new international customers for our tropo technology and have made significant strides with other countries. 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 in fiscal 2008.

In conclusion, 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 clearly differentiated technology. Now on to our Mobile Data Communications segment.

Our mobile datacom business has enjoyed a busy and exciting few months to say the least. On August 31, 2007 we received two new IDIQ contracts aggregating $821 million from the U.S. Army. The first is a $605 million contract for the U.S. Army's Movement Tracking System, or MTS, which runs through July of 2010. This contract, the largest in our company's history, follows a $463 million eight-year contract that ended on August 31st. Just to clarify, the original $418 million MTS contract was set to expire on July 12th, but was extended through August 31st and the ceiling was increased by $45 million to $463 million. In fact, yesterday we announced our first orders against the new contract aggregating $37.3 million.

Our product offering to MTS is an end-to-end satellite based system that enables location, tracking, and near real-time messaging for logistics vehicles. As the prime contractor on this program, we provide full systems integration including the design and development of hardware and software, the manufacturing of the transceiver, the integration, testing, and fielding of all associated components, the procurement of satellite airtime for the customer, and the management and operation of a worldwide satellite network that facilitates tracking and communications for thousands of mobile assets.

The second contract is a $216 million IDIQ contract with CECOM for the Force XXI Battle Command Brigade and Below, also known as the Blue Force tracking system, or BFT, the battle command real-time situational awareness and control system. Under this contract, we will provide satellite transceivers, worldwide satellite bandwidth, network management, program management, and engineering support services through December 2011.

Blue Force tracking is a critical program for the U.S. Army and is recognized as an essential part of the DOD's communications infrastructure in Iraq and Afghanistan. In fact, it has become of the higher profile army programs as a result of its cost-effective solution to dealing with terrestrial communication distance limitations. The $53.3 million Blue Force tracking transceiver order that we received earlier this month is a clear demonstration of the strong demand for our products and solutions and our customers' confidence in Comtech to deliver.

As with MTS, we will continue to invest thoughtfully and aggressively in the products, networks, and services necessary to offer innovative next generation solutions to this important customer. From our unique vantage point, we believe that we are in a strong position to anticipate and address opportunities to further enhance the capabilities of our technology. This includes our efforts in developing new hardware and network technology for the next generation of Blue Force tracking.

In addition to the new contracts with MTS and BFT, we won new contracts in international arena during the quarter including our first-ever contract from the Australian defense force for ground station equipment, the messaging and tracking system and technical support services to be used in domestic operations, and from the Republic of Georgia for our portable tracking systems, satellite bandwidth, and support services for Georgian troops deployed in the Middle East. While the orders were relatively modest, aggregating approximately $4 million, when combined our ongoing fielding efforts for the NATO friendly force tracking system, they demonstrate the attractiveness and viability of our mobile data solutions beyond the U.S. military, particularly with coalition forces.

An update on the National Guard. As you may recall, the National Guard received more than $100 million in funding in 2006 for MTS purchases as a direct result of Congress' approval of an emergency supplemental bill following Hurricane Katrina. We have now announced total orders to date of $99.5 million from the National Guard including more than $40 million during the past few months. With almost all of the funding already spent, it is unlikely that we will receive additional orders related to the original funding, however we believe the Guard may seek additional funding for hardware and services in the future.

We enter fiscal 2008 with the wind at our backs. Both the MTS and Blue Force tracking contracts are signed, with contract ceilings totaling $821 million. The current draft of the DOD fiscal 2008 budget includes strong funding for MTS with a recommended total funding level of $143 million. And we recently, as you know, received orders of $53.3 million for Blue Force tracking, $37.3 million for core MTS orders, and $31.2 million for the U.S. Army National Guard. We are delighted at the opportunity to continue to serve our key U.S. Army customers while also looking for opportunities to introduce our unique technology to new customers for a variety of applications.

We believe our RF Microwave Amplifier segment is the largest independent provider of high-power broadband amplifiers in the market. We work closely with our customers to custom-design power amplifiers into their larger complex systems. And we sell to various primes whose end market system 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.

As we said in our last earnings call, we believe that fiscal 2008 will prove to be a record revenue year for this segment as we reap the benefits of strong bookings in fiscal 2007. In addition, fiscal 2008 will also benefit from backlog that was originally expected to ship in 2007 but was delayed due to longer than expected production times on certain new programs.

Our backlog is well diversified and provides us with a strong springboard into fiscal 2008. As the largest independent high-power broad frequency amplifier designer and manufacturer, we continue to leverage our technology platform to expand our addressable market. Our strong bid and proposal activity is the driver behind our increased backlog and optimistic outlook for fiscal 2008. We expect to continue to seek more at-bats with our customer base that includes many other recognized prime contractors in the world.

In fact, we expect to continue to participate as a significant amplifier and switch vendor on the CREW 2.1 counter-IED program, which appears to be gaining traction in recent months. We now have a total of five amplifier and switch products that are used in the CREW 2.1 system and we believe that our continuous commitment to technology and product development and resulting broad product offerings, together with our proven track record for quality and reliability and high-volume production capabilities, are clear and compelling differentiators for us in this segment. And now back to Fred. Fred?

Thanks, Rob. Before I discussed guidance, just an update regarding our cash position. As you know, during prior earnings calls we discussed the possibility of returning some portion of our cash on hand to our shareholders, depending obviously on where we stood in our M&A efforts. Although we have not yet pulled the trigger, we are continuing to pursue a number of potential acquisition targets at this time. And as a strategic buyer with significant cash available, we believe that we're in a more advantageous position than ever before.

Due to the radical upheaval in the credit markets in recent months, companies and private equity firms that have been competing with us for acquisitions we believe now may find it more difficult to lever up their balance sheets in this new environment, giving us an advantage because of our cash position. Accordingly we will continue pursuing strategic acquisitions while also continuing to carefully monitor our cash position. We believe our balance sheet has become a clear differentiator to potential acquirees.

And now on to guidance. As I've stated many times in the past, our ability to provide revenue and EPS guidance is dependent upon a number of factors, many of which are beyond our control. And I'll repeat these again. These include but are not limited to the timing of bookings and related revenues and large contracts, such as our MTS and Blue Force tracking, and our over-the-horizon microwave contracts. Two, the uncertainty, particularly in today's environment, regarding U.S. government funding priorities and budget constraints. And finally, economic conditions in general.

That notwithstanding, I will provide our guidance, as I have done in the past, on a GAAP basis which includes amortization of stock based compensation as well as on a non-GAAP basis which excludes amortization of stock based compensation. With that in mind, excluding the amortization of stock based compensation, non-GAAP diluted earnings per share for fiscal 2008 are expected to be in the range of $2.72 and $2.78. This equates to a GAAP diluted EPS range of $2.48 and $2.54. The EPS guidance assumes a non-GAAP effective tax rate of 34.5% and a GAAP effective tax rate of 35%.

Our guidance includes only a half a year's benefit relating to the R&E tax credit, which is currently set to expire in December 2007. Fiscal 2008 revenues are expected to be between $500 million and $515 million. Although we no longer provide quarterly guidance, I'll point out that similar to Q1 of fiscal 2007, we expect fiscal 2008 first quarter to be the softest quarter within the year due to the timing of the large orders and contracts that slipped from fiscal 2007 into 2008, some of which we have already received. We believe our contribution of Q1 to our full-year EPS in fiscal 2008 should be similar in proportion to what we experienced in Q1 of fiscal 2007.

Once again, our record performance in fiscal 2007, and the record guidance we are forecasting for fiscal 2008, we believe are objective evidence of the strength, breath, and resiliency of our three business segments. And as I mentioned previously, we're also continuing to methodically evaluate strategic acquisition targets to complement our organic growth, but we don't have anything to report to you today.

As always, the Comtech team is enthusiastically committed to executing on the exciting opportunities that we see in each of our businesses in fiscal 2008 and delivering our sixth consecutive year of record sales and earnings. Thank you very much. And now, operator, we'll take some questions.

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

Congratulations on a good year. Could you first just give us a breakdown of the backlog at year-end? I guess $129 million was the total, but could you give us the three components?

Sure, Mark. In our Telecom Transmission segment it was $47.2 million. In our Mobile Data Communications segment it was $40.4 million. And our RF Microwave Amplifier backlog was $41.4 million for a total of $129 million.

Okay, if my numbers are correct it looks like you've received $138 million worth of orders in the first seven weeks of the year for MTS. And with that -- and I would assume all of that should be expected to ship in the current fiscal year.

Yes, anything on the MTS side, Mark, that we've received to date would be expected to ship within the current fiscal year. There's a small piece of the order that we announced yesterday that will have some services that may extend -- they may be annual in nature, so they may extend into the August time frame. On the Blue Force tracking side, the large order that we received, based on the initial delivery schedule a piece of that may extend into next fiscal year, but the lion's share will be in fiscal '08.

Do you expect to -- when do you expect to see some contract flow funded out of the '08 budget? And if you were to look that -- the line item of $143 million, what percentage of that might have the opportunity of falling in the current fiscal year?

It really depends, Mark. As you know -- first of all, when the budget is finalized it's still making its way through Congress. When it gets to the program office and then eventually went orders are cut, I'll point out to you that we believe obviously that the order that we announced yesterday was received out of last year's funding. So it's very difficult to predict and it's one of the reasons in the guidance that Fred laid out from a revenue point of view.

We obviously haven't included every dollar of revenue that we could possibly get, not just to be overly conservative, but because it's just very difficult to estimate. This time last year there's no way we could have known that the $37 million we got in yesterday would have shifted into the following year. So it's very difficult at this time to predict how much of that '08 will come into this year. I can tell you from a guidance point of view that we don't have all of it in there, but some of it could slip. The budget isn't finalized yet, it's early in the year and the like.

Okay. Could you -- clearly you have an interesting opportunity in servicing your IED customer. Could you tell us what is the delivery time frame for the recently announced $8.7 million contract supporting an IED manufacturer?

All I would say there, Mark, it's relatively short. It's not something that's going to extend out over -- through the balance of the year. It's relatively short. So you could think of it as in the next couple at the max.

Okay, because as I understand it there's talk of some significant ramp opportunity at EDO relative to the CREW 2.1. Could you talk a little bit -- are your products that are on the Q2, are you on all of the iterations of that product?

We're on -- again, our amplifier and we also have some switch products that are on these amplifiers as well -- on the CREW 2.1 system, I'll point out. We're on -- again, just to be careful here -- we're on most of the iterations is the way I could say it. To be clear, we're not the only vendor involved here, but given our relationship and our history here, we think we're in a very strong position.

Okay. A final question, if I may. R&D took a significant spike up to $9.6 million in the current quarter. Is that a sustainable rate in an absolute sense moving forward? Where should that go in '08? And secondly, what are you spending it on incrementally?

The R&D ramp up, Mark, is a function of a couple of things. The most notable thing is really in our mobile data segment where we are investing a lot in the next generation Blue Force tracking network, as we've talked about. I see that continuing throughout at least most of this year. We also have some R&D programs in the amplifier as well as the telecom transmission side, but the biggest fundamental change has been in that area.

So we should see this at the $9.5 million to $10 million rate quarterly through '08? Or higher?

It wouldn't be unreasonable, probably maybe a little bit lower than that, but not unreasonable.

Thank you very much.

Rich Valera, Needham & Co.

Thank you. Good morning, gentlemen. Rob, I was just wondering if you could comment on your contract adjustments you've gotten obviously for the last several years under the old MTS program. How do you think it's going to work on the new program? Do you have a similar structure in place so you would expect to potentially continue to get them or do you think you will set the accrual rates differently in this program such that you might actually accrue at a different rate and not get these adjustments? Just wondering how we should think about that.

Sure, I think two observations on that, Rich. The first is I think you're right. Obviously now that we have more years under our belt we're much more familiar with the technology, the program, the customer. Normally you wouldn't have to be as conservative as maybe in the past. But on top of that, just to make it clear, this contract is a bit different as it relates to the airtime component of it. In the past you may recall, Rich, that we had -- we were being prepaid for airtime and we were responsible for making sure that we had enough satellite air time to cover all the customers' needs. So that was one of the risk areas, if you remember, within the contract.

In our new contract of MTS, it's more similar to the Blue Force tracking contract in that in this case the customer is telling us where they need bandwidth and how much and we're going out and procuring it. So the level of estimating involved in the new contract vehicle in the airtime area is significantly less than it was on the older contract. So you're always going to have to estimate your hardware cost and things like that, but the airtime was a major -- one of the major reasons for the estimation process, and that won't be as relevant going forward.

Should that imply sort of higher gross margins on a run rate level and perhaps less positive adjustments? Is that a way to think about that?

It's not an unreasonable way to think about it.

Great. And with respect to the significant volume of orders you've received in MTS and in Blue Force tracking, which is essentially serviced out of your same facility in Phoenix, can you talk about what is your sort of run rate capacity at that facility on a quarterly basis? And what type of delivery time frame should we look at for the very considerable backlog of MTS and Blue Force tracking orders you have right now?

I'd say this, Rich, that capacity right now I can tell you is not an issue. The issue from a scheduling point of view -- and it's really not an issue -- is when they need the transceivers. You may remember in the past, as I've said before, Rich, what we've been trying to do is try to get larger orders and kind of spread their delivery over time. It's more efficient for us. It's better for the customer.

So unlike the past where we'd get an order, have to ship it within ex number of days. We've been trying to work with them. I'll use Blue Force tracking as an example. That $53 million will be shipped over a fairly long period of time, as I had mentioned in response to Mark's question. So I don't want to go into specific monthly capacity in our facility.

The other part of it that, if you remember, we've had to deal with in the past has been we do incorporate some government furnished parts into these transceivers and in some cases the limitation is based on how quickly we can get those. We've had transceivers sitting within our facility waiting for those cards let's say. So I really don't want to talk specifically about our production loading, but I can tell you that I do not have a concern about meeting the performance timelines that are in those orders or agreements.

Fair enough. And one more on the MTS if I could. Is there any reason to expect a sequential downtick in the mobile data area? You obviously have very strong orders, some of which were received a good way through this current quarter, but any guidance at all in terms of just a sequential trajectory of -- in the mobile data area in light of the strong orders but perhaps the latest timing of them?

Sure. I think that's actually a good point, Rich. At this point just directionally you could probably assume some sequential lowering in Q1. As Fred mentioned, just given the timing of the receipt of orders and the like, not dissimilar at all from last year, you could model in a bit of a reduction because many of the orders we've received, certainly the ones in the last few weeks, we're obviously not going to be shipping in this quarter.

Great, and just one more if I could. On RF amplifiers, you've been building considerable backlog in that segment sort of quarter after quarter and have gotten some significant what appears to be short lead-time orders. Can we expect that business to have a fairly steady sequential upward trajectory over the next couple of quarters?

I think that's a fair way to look at it.

Great, that's it for me. Thank you, guys.

James McIlree, Collins Stewart.

If you looked at the contract margin that you got on the old MTS ex -- or not ex, but including all of the adjustments that you've made, is it reasonable to think that the margins on the new contract are in the same ballpark, or are they -- do you have new tasks or fewer tasks that would change that margin profile?

I would say this, Jim, that the MTS contract, the original one, was obviously over an eight-year period. In the beginning of the contract the contract was obviously nowhere near the volume that it is now. So when you look at the margins that we ended up -- without talking specific numbers, where we ended up on the original MTS contract, those margins reflect the initial years of the contract that were much slower. We didn't have as much leverage in the satellite time.

So I would say that the new contract we expect our margins to be consistent with where they've been on the kind of stand-alone yearly basis for the last couple of years. What I mean by that is the overall margin would probably be a bit higher than the consolidated margin that we closed the original MTS contract, because that margin reflects the first few years where we were very, very close to breakeven on the contract.

And when you say stand-alone, that would be excluding the contract adjustments from the prior periods or --?

What I mean by that, Jim, is the margin that we ended up at on the original MTS contract is a conglomeration of the first year through the eighth year. So we obviously from let's say a hardware point of view, the pricing is very similar to the old contract -- what the new contract is. So when you're looking at it on a very much -- how did we do from a cash flow point of view this year on the contract to next year, I believe it will be similar, which will be higher than the aggregate margin percentage on the old contract.

Think of the old contract as, again, a conglomeration of eight different year's worth of activity. So we don't have the drag, if you will, of those earlier years in that margin percentage because we're starting anew again.

Right, okay. And then the contract talks about a hand-held unit. Is that unit fully developed right now and are you delivering that to the customer or is that still to come?

We have a module, Jim, for a hand-held unit that not only the government and other primes are looking at, but the primary basis for this contract is the mobile transceiver. So there are items that are in there that are meant to be inclusive of things that are either not being used by them right now or are in development, but the lion's share of the contract we expect will be spent on the mobile side.

Okay. And I'm having a little but of problem -- I'm having a little difficulty reconciling the year-end or the full-year contract adjustments with the quarterly contract adjustments. Did you restate anything from the first three quarters in terms of the contract adjustments or is there something about the full-year contract adjustment that I can't get to add?

The way the adjustments, Jim, are calculated is we try to carve out for you the impact on the relevant period of taking the adjustment. So if you're looking at a quarter, what that adjustment represents is the impact on sales and profits in all previous quarters. So let's just say you're in the third quarter. If we had an adjustment in the third quarter, that adjustment disclosed in the quarterly area would be the impact from the end of Q2 to the beginning of the contract.

If you're looking at it on a year-to-date basis, we pushed the adjustment back to the beginning of the year. So what's going to happen is you're going to have different numbers for the individual quarter versus the full year-to-date period just based on the mechanics of the calculation.

So that's why I'm not able to add up the four quarters to the annual investment?

That's correct, that's correct.

Okay, terrific. And I think that's it. Thank you.

Tyler Hojo, Sidoti & Co.

I was hoping we could start, if you could just remind me what Warlock added to your RF segment in 2005 -- fiscal 2005 that is.

I don't think, Tyler, we disclosed a specific number, but it was significant, into kind of the double-digit million area. But I don't think we disclosed a specific number but it was significant.

Okay. And you guys were sole source on all those deliveries made to EDO back then, correct?

Correct.

Okay. I guess what I'm trying to understand, I guess just in terms of the kind of guidance you've given for the RF segment of a mid to low $40 million type run rate, does that still stand given kind of the outlook for these power amplifiers in the CREW 2.1?

Well, obviously, Tyler, there's a lot of talk out there in terms of this program and a lot of people are focused on it. We obviously don't have the revenues in there that reflect the best case scenario here. I would just point out that in that low to mid $40 million range I think that Mike referred to earlier was kind of a ramping of the run rate. I would think that that would probably be the minimum where we'd be for this year just to clarify that. So I would think it would be more in the mid to -- maybe mid to upper $40 million range.

But all I could say as it relates to CREW 2.1 is since we're not the prime, we tend to take kind of a cautious view there. We do have some additional orders in our projection, but nowhere near some of the math that's out there went look at what could be. Because we just don't have enough visibility into it and it's very difficult to predict at this point in time.

So if I was to, say, look at what EDO has in their funded backlog in terms of CREW 2 and make some sort of calculation to contemplate the fact that you guys are dual sourcing this, would that get me somewhere towards the neighborhood of what you guys are contemplating in your guidance?

It could. I haven't done that analysis, so I couldn't tell you if the numbers there really sync up. But all I could tell you is what we have in our guidance now is what we've received. And there are certain -- there are certain additional -- additional activity that we know is kind of there that we're just working through. And then there's the next layer of these things which could be coming down the pike. And it certainly seems to us that the program has tremendous potential. But again, being one step removed from the end customer, we try to be as cautious there as possible.

Okay, thanks. And I guess one more. Just regarding North Africa, that's completely excluded from your guidance, is that correct?

Good question. In terms of the North African opportunity, we're still hoping to receive the order in towards the middle of our fiscal year. But given that it's kind of a black or white type situation, our guidance does not reflect any revenue from the new order. We still have a bit of a tale from the old contract, but there's no revenue in there from any new large contract from that customer.

Okay, and then I know you discussed it in your prepared remarks, Rob, but what kind of is the hold up there? Is it just kind of -- just getting it done? I mean, what's going on just in terms of finalizing it?

The only way I could describe it, Tyler, is this is one -- when you're dealing with a customer in this part of the world there's a certain amount of patience that's required. Every stage of this contract has resulted in a similar type situation. So we continue to feel very strongly that it's a matter of time. And that's not say that we're not disappointed that we're not further along, but it's just the cost of doing business in this part of the world.

Would you be at all surprised, say, if it slipped out of fiscal '08 and became a fiscal '09 issue? Or a fiscal '09 benefit I guess?

I wouldn't be pleased with it, but it wouldn't be something that would necessarily concern -- over concern me, because I've seen it happen before. But at this point in time we don't see that happening, but I'd be disingenuous if I said it couldn't happen.

Okay, I really appreciate the color.

Marc Balcer, Bluefin Investment Management. We'll take a follow-up question from James McIlree, Colin Stewart.

I had a little problem hearing the revenue guidance for the year. Could you repeat that, please?

Sure, the revenue guidance, Jim, was $500 to $515 million.

To $515 million?

Correct.

Okay, terrific. That's -- then clearly you have the MTS contracts that have been booked to date, but did you say if you had others expected in that guidance?

Yes, in that number, Jim, are some additional orders. But as I said earlier, don't assume -- the $143 million number that's out there in the budget, obviously the program office keeps some of that money for their own operations. But even net of that, not all of that is in there. And the best example I could tell the listeners as to why we don't do that, think of this time last year. The $37 million we received yesterday, that was in last year's budget and we got it yesterday.

So the full amount of funding that's in the budget that's making its way through Congress isn't in there again because it's early in the year. Things do slip into the following year in terms of their fielding plan. So the $500 million to $515 million, Jim, does include some additional orders but not up to the full 143.

And are you assuming that the satellite modem business has a normal year or is there anything to be aware of there relative to your guidance?

Just reasonable growth. There's not a one-off type thing in there that's driving it up.

Okay. And lastly ViaSat's been making some noise on the EBEM modem. Have you seen them in the market recently or is that still a little too early to have an impact?

On the EBEM modem?

Yes.

The EBEM modem was a contract that ViaSat had actually won several years ago, so that's been in development for some time. We on our own dime developed the SLM 5650, so in a sense they kind of had the leg up in that they were funded to do that. So yes, that's a modem that they've been working on and they've had direct exposure to the customer on. And that's an area that we're trying to gain a better presence in. And I think our guys out at EF Data have done a great job there and that modem is doing quite well for us. So sure, we see them around, but they were funded in that program several years ago, so that doesn't surprise us at all.

Right. No, I'm just referring to -- they say they have production units out now and they're starting to ship.

Yes.

Okay, great. Thank you again.

Thank you. And it appears that we have no further questions in the queue. I will now turn the call back over to Ms. LaMantia. Your line is open.

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

This does conclude today's teleconference. Thank you for your participation. You may disconnect at any time and have a great day.