Comtech Telecommunications Corp (CMTL) 2008 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Comtech Telecommunications Corp.'s first quarter fiscal 2008 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, December 6, 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 first quarter of fiscal year 2008. 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?

Thank you, Stephanie. Good morning, everyone, and thank you for joining us today. I'm pleased to report, once again, a very strong first fiscal 2008 quarter, which supports my optimistic comments that I made on our last September earnings call when I said that I expected fiscal 2008 to be another year of record revenues and profits, our sixth year in a row. What's more, this unprecedented growth has predominantly been organic. Our Company continues to benefit from the compelling product and technology solutions we offer as well as from the strength, diversity, and breadth of our business, of our customers and of our end markets we operate in. Before I provide updated guidance for fiscal 2008, Mike Porcelain, our Chief Financial Officer, will provide an overview of our financial results for the quarter, and Rob Rouse, our Chief Operating Officer, will then provide an update on each of our three business segments. Mike?

Thanks, Fred. Good morning, everyone. Let's begin by reviewing some of the key income statement trends for the quarter ended October 31. First quarter sales were $115.1 million compared to $97.1 million in the first quarter of fiscal 2008 -- 2007. The increase reflects significant growth in both our mobile data communications and RF Microwave Amplifier segments partially offset by lower net sales in our Telecommunications Transmission segment. Sales in our Telecommunications Transmission segment were $3.1 million lower in the first quarter of fiscal 2008 than in the first quarter of fiscal 2007. The decrease in net sales in this segment primarily reflects decreased sales of our Over-the-Horizon Microwave systems partially offset by an increase in sales of our Satellite Earth Station products. Sales of our Over-the-Horizon Microwave equipment were negatively impacted by lower sales to the U.S. DoD for our 16 mega bits per second troposcatter modem upgrade kits for use on the track 170 digital troposcatter terminals as well as lower sales, both direct and indirect, to our North African country end customer, who we believe is between major phases of a multi- year rollout of a large project.

Sales of our Satellite Earth Station products were higher in Q1 2008 as we continue to benefit from increased demand for our bandwidth efficient Satellite Earth Station modems used in both commercial and government network applications. In our mobile data communications segment, sales increased by $17.3 million, primarily due to the significant increase in deliveries to the U.S. Army in connection with our new MTS and Blue Force Tracking IDIQ contracts with the U.S. Army that were awarded to us in August of 2007. Our Q1 2007 sales for the mobile data communications segment included sales of $1.2 million related to a favorable cumulative adjustment on our original MTS contract.

Sales in our RF Microwave Amplifier segment increased by $3.8 million, primarily as a result of higher sales of our amplifiers and high power switches that are incorporated into defense related systems including sales associated with our participation in the crude 2.1 electronic warfare jamming program. Of the Company's consolidated fiscal 2008 first quarter sales, 30.6% were to international end-users, 60.6% were to the U.S. government, and 8.8% were to domestic commercial customers. Gross profit increased to $50.5 million in the first quarter of fiscal 2008 from $39.4 million. The increase in gross profit was primarily attributable to an increase in net sales as well as an increase in the gross profit percentage to 43.9% from 40.6%. Excluding the impact of a favorable cumulative gross profit adjustment of $1.1 million related to our original MTS contract in last year, it would have been 39.9%. There were no favorable adjustments in our Q1 2008 results.

The increase in gross profit percentage was driven by an increased gross margin in both our Mobile Data Communications and Telecommunications Transmission segments partially offset by lower gross margins in our RF microwave amplifier segment. The increase in gross margins in our mobile data communications segment was primarily the result of increased operating deficiencies relating to an increase in deliveries of orders placed under our new MTS and Blue Force Tracking contracts and a more favorable product mix during the first quarter of fiscal 2008 as compared to the first quarter of fiscal 2007.

Our Telecommunications Transmission segment experienced higher gross margins as it benefited from increased usage of our high volume technology manufacturing center as well as a higher proportion of sales of Satellite Earth Station products which typically realized higher gross margins than our Over-the-Horizon Microwave systems. Our RF Microwave Amplifier segment experienced lower gross margins due to long production times associated with certain complex amplifiers that employ newer technology.

On the expense side, SG&A expenses of $20.4 million for the first quarter of fiscal 2008 were $3.8 million higher than the first quarter of fiscal 2007. As a percentage of consolidated net sales, SG&A was 17.7% in the first quarter of fiscal 2008 compared to 17.1% in the first quarter of fiscal 2007. This increase was primarily attributable to an increase in cost including legal and other professional service fees primarily associated with the various legal matters including costs associated with responding to a subpoena that our Florida based subsidiary Comtech Systems Inc. did receive from the U.S. Immigration and Custom Enforcement branch of the Department of Homeland Security. In addition, SG&A expenses also increased due to higher payroll related expenses primarily amortization of stock based compensation which increased from $1.4 million to $2 million.

The subpoena relates to Comtech Systems contract with the government of Brazil with potential revenue of approximately $2 million, all of which has not been recognized as revenue in any of our prior financial statements. We believe the subpoena relates to an investigation as to whether or not Comtech Systems Inc. was in compliance with export related laws and regulations as it pertains to this specific contract. The Company has engaged outside counsel to review this matter, all of which is more fully described in our 10-Q. The Company is cooperating with the U.S. Government and, based on our review of the history of this contract, we believe that Comtech Systems made a good faith effort to comply with applicable regulations. Going forward and assuming no significant change or unexpected findings in the investigation, we do expect SG&A expenses as a percentage of sales to decrease during the remainder of fiscal 2008. The percentage for the full fiscal year 2008 is expected to be similar to that of fiscal 2007.

Research and development expenses were $11 million in the first quarter of fiscal 2008, 53% higher than the $7.2 million in the first quarter of fiscal 2007. The increase in expenses primarily reflects our continued investment in research and development efforts across all of our operating segments. As Rob will discuss in more detail later, we do expect to continue to ramp up R&D throughout fiscal 2008 as compared to fiscal 2007.

Amortization of intangibles was $400,000 and $600,000 for the three months ended October 31, 2007 and 2006, respectively; all of which relates to intangibles that we acquired in connection with prior acquisitions. Operating income for the three months ended October 31, 2007, was $18.7 million compared to $15 million in the prior year period. The increase was primarily attributable to the higher consolidated net sales and gross margins partially offset by our increased operating expenses. Operating income for the first quarter of fiscal 2008 includes stock based compensation of $2.7 million compared to $1.8 million in the first quarter of fiscal 2007. The increase in 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.

Interest expense, which primarily represents interest on our 2% convertible notes, was consistent between the fiscal quarters at approximately $700,000. Interest income increased from $3.2 million in the first quarter of fiscal 2007 to $4.4 million in the first quarter of fiscal 2008 primarily due to an increase in investable cash since October 31, 2006, partially offset by a slight decline in interest rates.

The effective tax rate for the first quarter of fiscal 2008 was 34.5% compared to 38% in the same period last year. The decrease in the effective tax rate primarily reflects the passage of legislation extending the federal research and experimentation credit through December 2007, as well as anticipated deductions associated with cash incentive awards expected to be paid under our 2000 stock incentive plan without limitation under Section 162M of the Internal Revenue Code. As well as the scheduled phase-in of the deduction for domestic production activities offset by the repeal of the extra territorial income exclusion.

In addition, we did record a discrete tax benefit of approximately $100,000 related to disqualifying dispositions of incentive stock options. On a non-GAAP basis, which excludes the impact of stock based compensation, the effective tax rate for the first quarter of fiscal 2008 would be 34.5% compared to the non-GAAP effective tax rate for the first quarter of fiscal 2007 of 37%. Going forward, and excluding the discrete item I mentioned above, we expect our GAAP effective tax rate for fiscal 2008 will approximate 34.75%.

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 our earnings excluding stock option expense. With that in mind, net income for the first quarter of fiscal 2008 would have been $16.5 million or $0.59 per diluted share versus non-GAAP net income for the first quarter of fiscal 2007 of $12.1 million or $0.45 per diluted share. GAAP net income for the first quarter of fiscal 2008 was $14.7 million or $0.54 per diluted share compared to $10.8 million or $0.41 per diluted share for the first quarter of fiscal 2007.

Earnings before interest, taxes, depreciation and amortization, or EBITDA, was $23.9 million for the first quarter of fiscal 2008 compared to $19.2 million for the first quarter of fiscal 2007. Cash flow used in operating activities for the first quarter of fiscal 2008 was $9.7 million compared to cash flow used in operating activities of $3.6 million in the first quarter of fiscal 2007 primarily reflecting several factors including the significant increase in accounts receivable due to the timing of shipments to our customers, primarily to the U.S. government, as well as a build up of related inventory anticipated to be shipped throughout fiscal 2008. Our cash flow was also negatively impacted by the timing of payments over our fiscal 2007 incentive compensation awards and the net impact of normal changes in other working capital accounts. Our cash balance at the end of the first quarter of fiscal 2008 was approximately $333 million. We enter Q2 2008 with a very strong backlog. As of October 31, our backlog was $248.9 million. This compares to $129 million as of July 31, 2007.

In summary, the first quarter of fiscal 2008 was a solid start to another anticipated record year for Comtech. And now to Rob who will discuss recent developments in our operating segments. Rob?

Thanks, Mike. Good morning and thank all of you for joining the call today. I will provide an update on the key opportunities, issues, and trends pertinent to each of our businesses.

In Telecommunications Transmission, we develop products and systems used to either increase data throughput, minimize satellite transponder costs and enhance satellite network bandwidth efficiency or enable wireless communications in environments where terrestrial communications are unavailable, inefficient, or too expensive. This segment, as you know, is comprised of two major product lines, Satellite Earth Station products and Over-the-Horizon Microwave systems.

Our Satellite Earth Station product line experienced very strong bookings in Q1. We believe that our newer modems, the Carrier-in-Carrier enabled CDM-Qx that addresses the commercial market and the government focused SLM-5650 modem, have gained significant attention in the market as customers have gained an appreciation for the significant satellite bandwidth savings and other features offered by these industry leading products.

The CDM-Qx modem is among the most powerful products we have ever delivered to the marketplace. The up to 50% reduction in satellite transponder costs generated by this product for our customers has driven significant sequential quarterly bookings growth of this product over the past few quarters with no signs of slowing. The bandwidth savings from the CDM-Qx are incremental to operational savings resulting from other techniques we offer, such as our patented forward error correction technology.

During the first quarter we also introduced the CLO-10 link optimizer, a standalone Carrier-in-Carrier enabling product that targets customers requiring carrier-in-carrier bandwidth efficiencies. These can be current or potential modem customers for us that want to continue to use their existing modems but at the same time benefit from the compelling value proposition offered by carrier-in-carrier technology. The CLO-10 has proven to be a powerful door opener with new customers. By selling it to new customers as a powerful intermediate solution, we believe we will be able to position ourselves for the sale of CDM-Qx modems at the time those customers choose to upgrade their installed base of existing modems. In fact in Q1, we received our first CL0-10 order for $800,000 from an Asian carrier and also sold the CLO-10 to a well known U.S. based communications company. We are highly optimistic about this product based on initial customer feedback.

The SLM-5650 continues to generate very strong interest within the various agencies of the U.S. government. During the quarter, we generated solid bookings from contract wins related to the 5650 as well as the 5650-A modem. The 5650-A is fully compatible with the FIPS 140-2 government security standard and has an advanced network processor able to handle 150 megabits per second of PCP/IP traffic. This product is expected to continue to strengthen our growing presence and market share with the U.S. government.

The SLM-5650 or SLM-5650-A can be bundled with our turbo IP performance enhancement proxy which accelerates transmission control sessions, or TCP, as well as our Vipersat network management solution. These products in different configurations have been sold to various government agencies as well as the Department of Defense.

Additionally, we announced a $5.3 million order from the Air Force for the HDR RF, or high data rate radio frequency, ground modem for deployment in the next generation wide band global SATCOM satellites program that is focused on intelligence, surveillance, and reconnaissance. Our highly integrated manufacturing facility has proven to also be an important competitive advantage with the U.S. government. A combination of the government's Built in America preference, the vertical integration of our primary manufacturing processes and our recent achievement of the rigorous AS9100 Revision B quality management certification have been factors in winning support from important government decision makers.

With our decision a few years ago to aggressively expand our efforts with the U.S. government, both with powerful products and a strengthened government sales team, we are recognized today as one of the government's primary strategic suppliers of satellite transmission technology.

Now, let's discuss Over-the-Horizon Microwave systems. Over-the-Horizon Microwave systems, the other product line within our Telecommunications Transmission segment, provide highly secure, point to point communications transmission using the troposphere, a layer of the atmosphere seven miles above the earth, to reflect a signal from one terminal to the other. Due to the complexity of the technology, we not only develop and manufacture the hardware but we often act as the systems integrator to ensure the quality of the communication link. We are the de facto market leader, having remained committed to innovation and customer service in this area for more than three decades.

As predicted, sales in bookings for this product line remained modest in Q1 as we wait for additional orders from the U.S. government for the TRC-170 modem upgrade program and the awarding of at least one new contract with our North African end customer. We are in active discussions with two prime contractors and our North African end customer and continue to work towards one or two contract awards by the end of fiscal 2008 that we believe may exceed $40 million each. As mentioned on our last investor call, we expect to see the revenue from these contracts recognized in fiscal 2009 and beyond. While we are disappointed with the longer than expected delays, we remain very bullish on our position with this customer and the potential size of these important opportunities.

With respect to the TRC-170 program, we continue to anticipate additional orders for modem upgrade kits during fiscal 2008. In fact, this morning we announced a $4.9 million order for additional upgrade kits. To date, not including the order we received this morning, we have upgraded approximately 250 TRC-170 terminals and estimate that there are between 200 and 250 terminals yet to be upgraded. It is our understanding that many of these yet to be upgraded terminals are in use overseas today operating at low data rates thereby strengthening our confidence in their importance to the DoD and the value to the end-user of upgrading the modem speeds.

As a reminder, the TRC-170s 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 over the past several years. The U.S. government's decision to re-embrace tropo has been two-fold. First, the significant advances that we have made in throughput speed now allow the transmission of color video and other bandwidth rich applications. And secondly, the ability to offload mid range satellite traffic onto tropo links is critical to the DoD's goal of alleviating some of the shortage in satellite bandwidth supply. We also continue to make solid progress in our goal to develop new international customers for our tropo technology and we will provide more details on these opportunities as they become clearer.

In conclusion, our Telecommunications Transmission segment continues to solidify its position as the clear market leader. We continue to differentiate ourselves with market leading technology and an unparalleled depth of experience.

Now on to our mobile data communications segment. In the period after the August 31, 2007, award of two new IDIQ contracts from the U.S. Army totaling $821 million, we have received a series of orders under our movement tracking system, or MTS, contract, and our Force 21 Battle Command Brigade and below or Blue Force Tracking contract. In addition to the aggregate contract awards being the largest in our Company's history, the aggregate orders received in just this segment in the first quarter were $159.5 million, a clear record. MTS is a $605 million IDIQ contract for the U.S. Army's movement tracking system which, if options are exercised, runs through July 2010. Our product offering here is a satellite-based system that enables position location, vehicle tracking, and near realtime messaging for logistics vehicles. Comtech is the prime contractor and systems integrator on this program and provides a turnkey system including the design and development of hardware and software, the manufacturing of the transceiver, the integration testing and fielding of all system 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.

Blue Force Tracking is a $216 million IDIQ contract with CECOM, Communications Electronics Command, to provide the satellite communications backbone for a battle command realtime situational awareness and control system. Under this contract, whose term is through December 2011, we will provide mobile satellite transceivers, satellite bandwidth, satellite network operations, engineering services, and program management for the BFT system.

Blue Force Tracking is a critical program for the U.S. Army and is recognized as an essential part of the DoD communications infrastructure in Iraq and Afghanistan. It has become one of the higher profile Army programs as a result of its effectiveness in overcoming terrestrial communication distance limitations and its ability to reliably operate in the extreme environmental conditions encountered in the current operational theatres. We are highly focused on further improving the transmission and performance of our satellite network and are investing aggressively in important internal R&D projects to increase network speed, improve bandwidth utilization and add functionality to maximize the value of our products and solutions for the current systems end-users as well as other military and commercial customers that have requirements for increased bandwidth, lower latency and secure data communications.

We recently received FIPS 140-2 validation certification from the National Institute for Standards and Technology for the MTM-203 miniature satellite transceiver module. The MTM-203 is a miniature L-band satellite transceiver module designed for use in conjunction with our worldwide satellite network. The module's form factor and global communications capabilities make it an ideal -- ideal for integration into major communications systems, integration into handheld or dismounted communication products or for use as a standalone transceiver when combined with one of our antennas. The MTM-203 is the cornerstone technology for Mobile Data's next generation, mobile satellite communications products and services including MTS and Blue Force Tracking. Mobile data's exciting technology initiatives are the primary driver behind the significant increase in our overall R&D expense in Q1 and for the remainder of fiscal 2008.

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 and products to new customers in related markets. In a small way, this has already begun as evidenced by our participation in the international arena with contract wins from the Australian Defense Force, Republic of Georgia, and NATO. Based on the unprecedented bookings I referred to earlier in Q1, we believe that a framework is clearly in place for our mobile data segment to generate record sales in fiscal 2008.

The following is an overview of the primary underlying DoD budget and bookings activity that support our strong outlook in fiscal 2008. First, the Army's MTS budget for the government's fiscal 2008 totals $273.1 million, which includes a $73.2 million base appropriation, $69.9 million of global war on terrorism funding, and a significant upward adjustment for global war on terrorism of $129.9 million. It is important to point out that both the original and adjusted global war on terrorism funding budget numbers aggregating approximately $200 million have not yet been appropriated and, therefore, funding requires resolution of certain budget and policy disagreements between the President and Congress which have been well publicized in recent weeks. We believe that the MTS fiscal 2008 base funding alone already appropriated is comfortably sufficient to meet the additional MTS orders that we anticipate booking and delivering and converting into revenue in fiscal 2008. If ultimately approved, the balance of the core funding as well as the vast majority of the global war on terrorism funding will drive revenue in fiscal 2009.

It is also our understanding that the high profile MRAP initiatives are driving meaningful demand for our mobile data communications products and opening up additional discretionary funding sources outside of the core MTS and Blue Force Tracking budget lines.

We announced $42.7 million in aggregate bookings from the U.S. Army National Guard in July and August, the large majority of which will convert to sales in Q2. Our Blue Force Tracking bookings in Q1 alone totaled $55.3 million. And as a result of the concentration of large orders that occurred late in Q4 of '07 and early in Q1 of '08 we currently expect Q2 of '08 to be a peak revenue quarter within fiscal 2008.

In summary we are devoting significant resources to executing on the large Q1 orders we received while spending on R&D to expand our products and solutions further into the U.S. Government as well as with other U.S. allies around the world.

On to our third segment. Based on strong sales and bookings in Q1, we are very confident that our RF Microwave Amplifier segment will experience significant sales growth in fiscal 2008. There are a number of factors driving the growth of this segment. Our strong bid and proposal activity has resulted in a broad number of program wins that has created a well diversified and strong backlog from our global and diverse prime contractor customers. In fact, we end the first quarter of fiscal '08 with the highest quarter ending backlog in this segment's history at $47.8 million.

Crew 2.1 is obviously an important component of our momentum in this segment. Since the the program's inception we have received orders with an aggregate value of $16.6 million for various amplifier and switch products, most of which we received in Q1. And we are cautiously optimistic about future orders based on what we have observed publicly about the strong support for this program. We believe that we continue to benefit from our status as the largest independent provider of high power broadband solid state amplifiers in the market. We sell to prime contractors who its 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 other industrial applications. We believe that our broad product offerings, 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 who will provide our guidance for fiscal 2008. Fred?

Thanks, Rob. Once again, as I have stated before and will restate again today, our ability to provide revenue and EPS guidance accurately is dependent upon a number of factors, many of which are beyond our control. These factors include but are not limited to the timing of bookings and related revenues and large contracts, the uncertainty, particularly in today's environment, regarding U.S. government funding priorities and budget constraints and, three, the economic conditions in general. That said, I will provide updated guidance as I've 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, we're increasing our fiscal 2008 revenue guidance to a range of $515 million to $530 million from our previous September guidance range of $500 million to $515 million. We're also increasing our estimated non-GAAP diluted earnings per share for fiscal 2008 to be in the range of $2.70 (sic -- see slide presentation) to $2.82 from our September guidance of $2.72 to $2.78. I should also point out that our revised guidance assumes approximately $0.09 worth of additional R&D spending from what we assumed in our September guidance. This rise in our R&D spending is due to our ramped up efforts on key and existing programs and technologies. In fact, despite the significant increase in sales forecasted for fiscal 2008, R&D as a percentage of revenue is expected to increase to approximately 8%, a solid, tangible investment in our future. The non-GAAP EPS guidance equates to a GAAP diluted EPS range of $2.53 to $2.58, again, as compared to our September guidance of $2.48 to $2.54.

As I stated earlier, our strong Q1 results and the underlying strength of our business provide me with great optimism about the future of Comtech. We are generating these strong results and at the same time increasing significantly our R&D spending to ensure that we remain market leaders in the segments we operate in. While our first priority is the organic growth of our core businesses, we do continue to actively pursue an acquisition strategy to also add additional future growth. Once again, fiscal 2008 is well on its way to becoming another record year for Comtech, our sixth year in a row.

And now, we will be happy to take your questions. Operator?

(OPERATOR INSTRUCTIONS) We'll take our first question from Richard Valera. Go ahead, sir. Thank you, good morning.

Good morning, Rich.

On your Over the Horizon discussion, I think you alluded to a second $40 million potential type of award. Can you describe that? I mean, sounds like that's something in addition to the potential award from your North African customer; is that correct?

Yes, let me just clarify also quickly Rich. When Fred went through the non-GAAP earnings per share, it's 2.77 to 2.82, it's a $.05 range to clarify in case it was unclear. On the Over the Horizon side, yes, we have two opportunities with the same end customer but they're with two different prime contractors. One of them is kind of the continuation of the water related contract that we've been talking about for some time. The other one is unrelated to that but with the same end customer country-wise. So we have two of them, as I said, it's possible that we could book both of them this year. It's possible maybe one of them shifts into next year, but we are pursuing two fairly sizeable opportunities with that end customer.

Great, and in your discussion of mobile data you mentioned you thought that would be the -- that the second quarter would be the peak revenue quarter for mobile data this year. Do you expect it will be the peak overall revenue quarter for Comtech as well this year?

Well, Rich, just given the fact, again, when you look at the bookings as I mentioned, $159.5 million just in that segment in one quarter, it's obviously going to drive a lot of revenue in the quarter after that and as we've said before, the mobile datacom business can be lumpy in that regard and that the timing does vary between years. Each year, the peak quarter can be a different quarter within the year. So given the significance of mobile datacom to our total revenues I think that would be a fair assumption as well, just given the amount of backlog that we have going into the quarter.

Great, and with respect to the increase in R&D spending, obviously, you're sort of in a a competitive situation on the Blue Force Tracking front and it sounds like you're spending pretty aggressively to upgrade your offering. Can you give us a sense of where you think things stand and what kind of timeline we might see in terms of how that competitive situation plays out at Blue Force Tracking?

Yes, I think what we're trying to do, Rich, is trying to get our solution in front of the customer as quickly as possible. I don't want to go into specific tactical timeline type things for obvious reasons, but some of the technology that we're spending on now are things that are going to help us throughout that segment, not just as it relates to this product in terms of throughput, density, and things like that, so all I could tell you right now is we think we're on track to have a product or a solution in front of the customer and a timeline that's consistent with what they're looking for at this point. I really, just tactically wouldn't want to discuss it beyond that.

Just one quick one for me. The RF amplifiers, the margins were a little bit lower despite the higher revenue and you mentioned apparently some -- sounds like you're getting used to production of certain new production technologies. Do you think that as you sort of come up the learning curve there that the margins in that RF amplifier business should improve throughout the year?

Yes I think there, Rich, what you're going to see happening is that we do have a few newer type technologies that are going through the plant now and they've been delivered over the last three to six months and will continue during the year. On those contracts the margins are obviously what they are so that will continue during the year. Obviously if we get any add-on work with those customers we would hope to be past the growing pains if you will of some of the newer technology there, but I would expect the margins overall for that business for the full year to be a bit lower than they were last year.

Okay, thank you.

Sure.

We'll take our next question from Tim Quillin. Go ahead, sir.

Hi, good morning.

Good morning, Tim.

Rob, could you go through the backlog by segment, please? I know you provided the amplifier already.

Sure. The amplifier as I said, Tim, was 47.8, Telecom was 54.3, and mobile data was 146.9. Also I'll point out if you do the math you could obviously calculate the bookings by segment and when you calculate the bookings by segment, the Telecom may not look that impressive but keep in mind, our Over the Horizon bookings in the quarter were virtually nothing as we wait for these large jobs, so really, almost all of our bookings in the first quarter were the Satellite Earth Station business and they were very impressive.

Right, yes, exceptional bookings there. Can you just comment on any economic sensitivity that you might have in the Satellite Earth Station business? Clearly you're not seeing all the bookings yet, but if we have kind of a global economic slowdown, what do you think happens with that business?

Well, I mean, it's really, Tim, more tied to the Telecom infrastructure buildout. For example, right now as you know, we're focused, let's say in the cellular backhaul area wherein many parts of the world, infrastructure is just starting to be built out so could that be somewhat tied into economic activity? Possibly, but it's infrastructure for the future that we see continuing for many years, so -- and keep in mind in that business, a very small percentage of our business is with domestic U.S. customers because obviously in the United States, we have a robust terrestrial and wireline infrastructure. So I don't see it directly impacting it but obviously if there's a complete international global economic meltdown that impacts what a lot of people do, but as you could tell from the bookings, we're not experiencing any of that at this point in time.

Right, that sounds good. What's your ability to, what's the capacity to shift in the mobile data business? The bookings were very strong and you expect a strong quarter in terms of revenue in 2Q, but how much can you ship in a given quarter?

Well, all I could say is that capacity even at this level with some of that spiking in Q2 is just not an issue for us.

Okay. On the amplifier margins, do you expect -- is this related to CREW 2.1 and is -- or is it something different?

It's something different. There are a bunch of other newer, higher power type jobs we have going through the plant that have had some learning curve associated with them, and certainly in terms of the first few batches of CREW, we've made a bunch of investments in there so obviously, as CREW 2.1 were to ramp up, we would expect to do better in higher volume in the learning curve behind us.

Okay.

So it's a little bit, some of it is CREW 2.1 but there are other programs in there as well.

Okay, very good. And just lastly, on the export licensing issue, I mean, what's -- outline a worst case scenario there, if you could?

Well, Tim, I would just point out obviously as we say in there that this relates to a $2 million potential shipment here. I think the 10-Q provides a good summary of what's happening and as you know, the export laws and regulations, especially for some of our technology is dual use, are extremely technical and complex but we've done a pretty full review of this and believe that we'll be able to demonstrate that our employees made a good faith effort to comply with the rules and we'll be discussing with them in the months ahead and we'll see where we come out, but given the nature of it I really don't want to comment much beyond what the in our 10-Q at this point to just point out the size of it and that we are taking it seriously and doing an investigation and believe that we took every step that we could to try to make a good faith effort to comply.

Okay, thank you. Great quarter.

Thanks, Tim.

We'll take our next question from Tyler Hojo. Go ahead, sir.

Hi, good morning. I guess my first question, just in regards to kind of a follow-up on that, on the subpoena related to Brazil, what kind of maybe legal expenses is contemplated in your updated guidance as kind of as we progress through the fiscal year?

Tyler, I don't want to go through it. They aren't at a material enough nature where they're going to impact your model for the year. We obviously given the matter is ongoing have some baked in there for Q2 but they are not going to drive when you look at our guidance for the year, the numbers one way or the other in terms of the legal expense side of it.

Okay. Maybe one more on that topic, just have you guys run into issues similar to this in the past? And if so, kind of how did they play themselves out?

Certainly not in recent years, Tyler, we have not run into any similar issues.

Okay. All right that's fine. And going back to the RF segment, I was kind of curious, I guess I can understand why margins are coming down a little bit but I guess a little bit longer term, are kind of the midteen type margins that you saw back in 2005, 2006, I mean is that a level that's not attainable for the future or maybe if you could just walk us through that?

Talking operating margins?

Yes, yes, sir.

I think that that's certainly a goal we shoot for. I think in the longer term, it's achievable. I think in order to achieve that, we'll have to have a few programs that are in a real production stage that are kind of more normalized. The last year and a half, Tyler, we've had a lot of, obviously in doubling in size over the last couple of years we've had a lot of new technologies, new development programs in there that which have brought it down somewhat, so I think it's possible that we can get back to that level. I don't see it for the full year just based on where we were for the first quarter and some of the, again, programs that are going through the plant now are going to carry those margins with them until the end of the program. So for this year, I would say that would be a bit of a stretch but going forward that's what we're shooting for.

Okay, all right and just in terms of the R&D, I guess certainly understandable that there's some additional costs specifically on the MTS and the Blue Force Tracking, but I guess what I'm curious about is at what point do you think that the R&D starts tracking down? Do you think it's well into 2009 or how do you look at that?

Well, as I said to I think it was Rich earlier, some of the R&D we're doing as it relates to the Blue Force Tracking, we're really trying to get the customer everything they could possibly ask for so we are accelerating some of our normal R&D, but at the same time, we want to continue to grow and to continue to grow we're going to have to continue to invest more in our technology. So what I would hope happen is that our R&D spending in '09 assuming we grow continues to go up because that's the investment that we need to make to continue on that trend and as Fred said, almost all of our growth has been organic over the past few years, so as long as that top line is growing and we're introducing new products and as you could see our gross margins also in the quarter, it's going to be very situational, Tyler, so I would like to think that we'll continue to spend more in R&D going into next year. Obviously it would be a bit of a lower percentage given the higher sales if we were to continue to grow, but really, we really need to continue to look at it based on a situational basis as it relates to where we are in a product life cycle, so that's just the investment we need to make to continue to grow.

Okay, well, I guess maybe just in terms -- I know last quarter you guys had thought that R&D spending would taper down a little bit. I guess what's changed kind of in the last three months since we've had that conversation on R&D? I guess now you're looking at more of an $11 million type run rate as opposed to maybe a little bit lower than 9.5?

Yes, there are certain new activities we've launched. We're trying to take a little bit of advantage of the higher margins we've been generating to reinvest quicker. There are certain discrete projects in the mobile datacom area that we've really accelerated again to try to be as responsive as possible to our customer, but again, I don't want to go into specific R&D projects that we're working on but I think as I said as long as we can continue to grow the revenue, we're going to make those investments that we see appropriate. Now, if we're able to accomplish everything that we need to earlier on in the year, might we tail it off a little at the end? Possibly, but there could be a new R&D project. So the numbers that Fred went through there are where we see what we need to accomplish this year based on the guidance we told you and position us well for next year, which is my primary focus right now.

Absolutely. All right, very good. Thank you.

Sure.

We'll take our next question from Mark Jordan. Go ahead, sir.

Good morning, everyone. Quick question on Tropo. You had stated that, on the last call you were also marketing or trying to market to other customers, other countries. Could you update us on where you are in that endeavor? And secondly, do you see any competition, effective competition in the marketplace as you start broadening your net?

Sure, Mark. On the first point, as I said last time, there are certainly more opportunities that we believe are out there, but as I also said, these international opportunities do take time. This isn't just the hardware sale. There's an education process. As I always say what's Tropo? So all I would say there is, to reiterate my comments, preprepared comments that we continue to make progress but there's nothing at this point I want to talk about publicly just given the fact that they do tend to take some time. There's nothing we have baked into our '08 number but we think in '09 and '10 that we would be disappointed if we didn't breakthrough to at least one or two new markets. In terms of competition, we really don't see that in a big way. I know there's another Company out there that has talked about making a few sales and the like, but we really haven't seen it be a big factor for us at this point in time.

Okay. I guess back to the to the Brazilian issue, can you talk about the specific product group that this was in? Was this a Tropo related? And secondly, it was a $1.9 million piece of business, but I don't think I saw that announced.

Yes, first of all, Mark, this was a satellite based offering and it was announced as part, I believe, Mark, as part of a--.

Yes, I think we did issue a public press release earlier in the year.

Okay.

Might have even been at the end of '06, calendar '06.

Given the fact that you do extensive work internationally in the satellite arena, what is it that caught the eye of the regulators about this specific issue?

Yes, on that point, Mark, again, just try to appreciate the fact that we are trying to investigate it so on and so fourth. We think we tried to make the good faith effort. I really don't want to go into the specific nuances of the issue at this point in time.

Okay.

But it's something that we're still looking at but we, as we said in our 10-Q, we think we took a good faith effort to get it right and we think we'll be able to demonstrate that point.

Okay. Final question, in the Q, when you're talking about inventories, you stated that you had a couple of million dollars worth of inventories related to a contract manufacturing relationship you have with a third party. Could you give a little color in terms of how significant that is and is this something that has some opportunity to grow over time?

At this point in time, it's really not that significant a revenue stream for us, Mark, but what we've been trying to do is, as you know, we've tried to really use our EF data facility out in Arizona as kind of a manufacturing center of excellence for us. In fact, if you look at our 10-Q, you'll see that most of our manufacturing of our mobile datacom products is done out there. We even have components in our RF Microwave Amplifier done out there. We have some Tropo modems done out there. So given the core competencies that our team have developed out there, there's no reason why we can't provide similar work for other companies and we're just starting to work on that area at this point, but up until now it hasn't been a major revenue driver for us.

Okay, thank you.

Sure.

We'll take our next question from Jim McIIree. Go ahead, sir.

Thank you. Good morning.

Good morning, Jim.

You talked about MTS funding and I just want to make sure , are you including the global war on terror funding and potential MRAP related MTS in your guidance?

No, Jim. Let me just walk through it just to make it clearer for you. First of all as far as MRAP goes, MRAP is a separate funding bucket so we don't even see, it's impossible for me to quote those numbers because we don't see them, so the $273 million that I referred to earlier is actually in the Army budget identified as MTS.

As you may know right now, President Bush and Congress are kind of at odds as to the conditions that he will be willing to sign the budget under, so the baseline budget, the $73 million that's been appropriated but there's $200 million of funding in the global war on terror, the supplemental, if you will, that's identified specifically for MTS that no one at this point seems to have an issue with, what Bush is fighting about now is the terms, for example, when we are going to withdraw troops from Iraq, the definition of torture, those types of things, why the budget is not completely signed yet.

So what I meant to say in my comments is that our revenue guidance for the rest of the year doesn't include anything in there for the $200 million that's in the global war on terrorism at all, and it only includes a pretty modest amount related to the $73 million in base funding because some of that we may receive too late in the year to recognize revenue. So if the entire $273 million budget were to be approved, we're only assuming a piece of the $73 million actually gets recorded as revenue in fiscal '08.

Right.

So we view the '08 budget as more of a driver going into '09.

That's very helpful and you talked about Q2 this year being a peak in the mobile data. Does that imply that there's a big fall-off in the second half or is it just a modest fall-off or you peak at Q2 and flatten out after that?

Well, certainly, Jim, when we say peak, it's a peak within the year. It doesn't mean it's the peak for forever.

Right, I understand that.

So when you have 159 million in bookings in Q1, no matter how they run out after Q2, Q2 is going to have more than any other quarter. I don't say that they're going to fall off the cliff, so to speak, but I don't expect them to be as high as Q2. The only way that could happen would be if the entire budget was approved and they decided to accelerate some of these orders which we aren't baking in at this point in time because from our understanding it may take some time for the budget to work its way through the debate going on between the President and Congress, and it just wouldn't be prudent at this time to do that. So I would expect Q2 to be higher, and then Q3 and Q4 are going to just de be derivatives of how much a peak are in Q2.

So of that 159 I assume you shipped part of it in Q1?

Yes.

And then are you saying that most of or over half of the remaining would be shipped in Q2? I'm just trying to get a feel for when you talk about peak Q2 and up substantially, I'm just trying to get a feel for what those mean? What that commentary means.

I understand, Jim. I just, again, we're trying to avoid the quarterly, trying to focus more on the year.

I understand.

Some of it was shipped in Q1 and there are pieces of it that do have schedules that go out to Q3 and Q4 but it's a meaningful peak. I don't want to get into specific revenue estimates by quarter, but it's meaningful.

Okay. And I think I'll just try to beat the R&D horse a little bit more. When you talk about growing throughout the year, you're talking about this $11 million level staying at that $11 million and rising or kind of flattening out at this $11 million for the rest of the year?

I would anticipate, Jim, that it will be on or about that level for the full year. If you look at it on an annualized basis, if you annualize that number you should be within 2 million to $3 million of the estimate.

Does the guidance contemplate any sort of stock buyback?

It does not.

Great. Thank you very much.

Thank you, Jim.

We'll take our next question from [Michael Komali]. Go ahead.

Hi, good morning, guys. Most of my questions have already been answered, but as it relates to the Telecom transmission business, sounds like you've got some new products that are opening the door for the U.S. market and that's been, I guess your sales have been predominantly overseas on the commercial side. What are your expectations from domestic telco sales going forward? Given some of these new products?

Well, again, Mike, in the Earth Station product line, our key markets are really international for commercial and then U.S. Government on domestic side. The need for satellite domestically in the U.S. is somewhat limited by the fact that most people are using wireline or terrestrial wireless infrastructure, so we don't see that as a huge market. Our primary customers are there. Our customers who, like DirecTV are using our equipment to send out broadcast type content, so the exciting thing about some of our new products is in, I would use two areas as an example.

A, in the commercial area in the cellular backhaul area, carrier and carrier for example, basically enables them to be 50% more efficient. That's a very very compelling ROI model that we could sell to our commercial customers, and then the same thing applies for the DOD. They look at it a little bit differently and they're less concerned about the cost than they are if we can get 50% more through the same pipe. So when you're talking about that type of proposition to a customer, be it commercial or defense, it's very very compelling.

Okay.

And I think the bookings numbers that I pointed to earlier really solidify our view on that.

Okay. What about the -- if you've seen, it seems like there's a big push for broadband access on all new commercial aircraft business jets. Do you think that strong demand plays into your product sales?

The area there where we would have the most connectivity is in our RF Microwave Amplifiers group. We do sell amplifiers that are used in part of air to ground communications and we do sell to some of the larger avionics type companies that sell into the large and small aircraft markets, but again, in the context of our overall revenues that's not a major major chunk of our revenues but certainly would drive revenue within that segment.

Okay, and shifting to MTS. You talked a little bit about the MRAP and it seems like that program is coming under some pretty intense scrutiny. How would the, I don't even know if you've taken this outlook in terms of the joint light tactical vehicle or some of the unmanned ground vehicles, how might that affect the MTS segment?

Sure, well, for us, Mike, as I said earlier, we're not focused directly on MRAP. MRAP is a program that could use our technology, so any vehicle that could potentially need satellite as a back up channel when terrestrial isn't available would be a potential opportunity for us, but again, there, we're not selling necessarily directly to our normal customers. We would be getting orders from other commands that were responsible for funding the MRAP. So anything in that area that were to accelerate would help us, but we have less visibility there.

Okay, and then finally, in terms of your guidance, your revenue guidance I assume that doesn't include any of the opportunities related to the North African customer or any of the other OTH opportunities?

That's right. That includes 0 revenue from any new international customers, that's correct.

Okay, great. Thanks, guys.

Sure.

We have a follow-up question from Tim Quillin. Go ahead, sir.

I can't believe you almost got through the conference call without talking about uses of cash. Can you talk about where you are in terms of the acquisition pipeline and what your posture is regarding share repurchases as well? Thank you.

Tim, I think we're kind of in the same place we were at the end of last quarter. I think the pipeline is a bit more robust than it was three months ago. But no definitive decisions being made in the buyback area and we are continuing to look at it, but there are M&A activities that we're actively looking at.

Thank you.

Sure.

We have a follow-up question from Jim McIIree. Go ahead, sir.

Thanks again. On the Track 170 you're expecting, in addition to what you got this morning, you're expecting further orders throughout the year; is that correct?

That's correct, Jim.

So does that just get you kind of a flat Track 170 year or is that ramping for them yet?

It certainly, given that last year was a strong year, I mean, if you look at the numbers they did about half of the upgrades last year that I would not expect that particular opportunity as it relates to to the modem upgrade kits to ramp this year.

Okay, great. Thank you.

Sure.

We appear to have no further questions at this time, sir. I'll turn it back to Mr. Kornberg.

Okay, well, thank you very much in your interest in Comtech and we certainly look forward to speaking with you again soon in three months and the next quarter. Thank you so much for attending.

This concludes today's teleconference. Thank you for your participation and you may disconnect at any time.