Comtech Telecommunications Corp (CMTL) 2008 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Comtech Telecommunications Corp.'s second-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, March 6, 2008.

I would now like to turn the conference over to Ms. Stephani LaMantia of Comtech Telecommunications. Please go ahead, ma'am.

Thank you and good morning. Welcome to the Comtech Telecommunications Corp. conference call for the second 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 will be happy to send you one.

Before we proceed, I need to remind you of the Company's Safe Harbor language in the following way. Certain information presented in this call will include but not be limited to information relating to the future potential 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 am pleased to introduce the President of Comtech, Fred Kornberg. Fred?

Thank you, Stephani. Good morning, everyone, and thank you for joining us today for our fiscal 2008 second-quarter earnings call. Today, I am extremely pleased to announce the strongest quarterly performance in our Company's history. Based on our outstanding results, for the first half of the year, it gives me great confidence once again to state that fiscal 2008 will be our sixth year in a row of record revenues and profits.

Before I provide updated guidance for fiscal 2008, Mike Porcelain, our CFO, will provide an overview of our financial results for the quarter; and then 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 January 31, 2008. Second-quarter net sales were $152 million compared to $111.4 million in the second quarter of fiscal 2007. This represents an increase of 36.4%.

The increase in net sales reflects significant growth in both our Mobile Data Communications and RF Microwave Amplifiers segments, partially offset by lower sales, as anticipated, in our Telecommunications Transmission segment.

Let me talk about the growth first. In our Mobile Data Communications segment, net sales increased by $48 million to $87.7 million. This was a quarterly record for the segment. This increase in sales was due to the significant increase in deliveries to the U.S. Army and Army National Guard in connection with our new MTS and Blue Force Tracking IDIQ contracts. As a note, last year's Q2 fiscal 2007 net sales for this segment included sales of $3.8 million related to a favorable gross profit adjustment on our original MTS contract.

In our RF Microwave Amplifiers segment, sales increased by $5 million to $14.1 million or 54.9% from last year's Q2 sales of $9.1 million. This increase was primarily due to increased sales of our amplifiers and high-power switches that are incorporated into defense-related systems, including sales associated with our participation in the CREW 2.1 electronic warfare jamming program.

Partially offsetting the increased sales in these two segments were lower sales, as expected, in our Telecommunications Transmission segment. Q2 2008 Telecommunications Transmission segment sales were $50.2 million. This represents a $12.4 million decline when compared to second-quarter sales recognized in fiscal 2007.

Sales in this segment reflect increased sales of our satellite earth station products as we continued to see the benefit from the ongoing strong demand for our bandwidth efficient satellite earth station modems. These sales were more than offset by lower sales of our over-the-horizon microwave systems, primarily due to lower sales of our 16-megabit tropo scatter modem upgrade kits for use on the US DoD's TRC-170 digital tropo scatter terminals as well as anticipated lower indirect sales to our North African country end-customer. We believe this customer is between major phases of a multiyear rollout of a large project.

As a note, our Q2 fiscal 2007 sales for the Telecommunications Transmission segment include sales of $1.2 million related to a gross profit adjustment on a large over-the-horizon microwave system contract.

Of the Company's consolidated fiscal 2008 second-quarter sales, 23.4% were to international end-users; 70.6% were to the US government, primarily related to sales in our Mobile Data Communications segment; and 6% were to domestic commercial customers.

Gross profit increased to $66.3 million in the second quarter of fiscal 2008 from $49.9 million. Gross profit as a percentage of net sales was 43.6% for the second quarter of fiscal 2008 as compared to 44.8% for the second quarter of last year.

As a note, last year's numbers reflects net favorable cumulative gross profit adjustments of $4.5 million relating to certain large contracts, including our original MTS contract. Excluding these adjustments, our gross profit percentage for the three months last year would have been 42.7%.

The increase in gross profit from this 42.7% to the 43.6% that we reported this quarter was driven by increased gross profit percentage in both our Mobile Data Communications and Telecommunications Transmission segment, offset by the impact of a higher percentage of sales occurring within the Mobile Data Comm segment, which typically realizes a lower gross profit percentage than our Telecommunications Transmission segment.

In addition, our Q2 2008 gross margin percentages were impacted by a lower gross profit percentage in our RF Microwave Amplifiers segment.

Our Mobile Data Communications segment experienced a higher gross profit percentage due to increased operating efficiencies associated with increased sales related to our new MTS and Blue Force Tracking contracts and a more favorable product mix during the second quarter of fiscal 2008 as compared to the second quarter of fiscal 2007.

Our Telecommunications Transmission segment experienced a higher gross profit percentage as it benefited from increased usage of our high-volume technology manufacturing center including both incremental satellite earth station product sales and use by our two other operating segments that were partially offset by lower sales of our 16-megabits tropo scatter modem upgrade kits.

Our RF Microwave Amplifiers segment experienced a lower gross profit percentage due to long production times and difficulties associated with certain complex amplifiers and high-power switches that employee newer technology.

On the expense side, SG&A expenses of $21.3 million in the second quarter of fiscal 2008 were $3 million higher than the second quarter of fiscal 2007. As a percentage of sales, SG&A was 14% in the second quarter of fiscal 2008 compared to 16.4% last year.

The increase in SG&A dollars is primarily attributable to higher payroll-related expenses including the amortization of stock-based compensation and cash-based incentive compensation associated with the overall increase in net sales and profits of the Company, and to a lesser extent legal and other professional fees. SG&A expenses for the second quarter of fiscal 2008 include $2 million of stock-based compensation expense compared to $1.2 million in the second quarter of fiscal 2007.

R&D expenses were $9.1 million in the second quarter of fiscal 2008, 19.7% higher than the $7.6 million in the second quarter of fiscal 2007. The increase in expenses primarily reflects our continued investment in R&D efforts across all three of our business segments.

Amortization of intangibles was $400,000 and $700,000 for the three months ended this quarter and last year, respectively, and primarily relates to intangibles with finite lives that we acquired in connections with various acquisitions. The decrease in amortization is related to certain intangibles that have been fully amortized.

Operating income for the three months ended January 31, 2008, was $35.4 million compared to $23.3 million in the prior-year period. Operating income for the second quarter of fiscal 2008 includes stock-based compensation of $2.6 million compared to $1.5 million in the second quarter of fiscal 2007. The increase primarily relates 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 associated with our 2% convertible Senior Notes, was consistent between the fiscal quarters at approximately $700,000. Interest income increased from $3.3 million in the second quarter of fiscal 2007 to $4.1 million in the second quarter of fiscal 2008, primarily due to an increase in investable cash since January 31, 2007, partially offset by a decline in interest rates.

The effective tax rate for the second quarter of fiscal 2008 was 34.5% compared to 30% in the same period last year. The increase in the effective tax rate was attributable to the recording of certain net tax benefits last year, primarily the retroactive extension in December 2006 of the Federal Research and Experimentation Credit.

In addition, we recorded discrete tax benefits of approximately $100,000 for the second quarter this year as compared to $200,000 last year relating to disqualifying dispositions of stock options.

On a non-GAAP basis, which excludes the impact of stock-based compensation, the effective tax rate for the second quarter would be 34.5% compared to last year's non-GAAP number of 30.4%. Going forward, and excluding the discrete items I mentioned above, we currently expect that our effective tax rate for fiscal 2008 will approximate 34.75%. Our effective tax rate for fiscal 2008 reflects the fact that the Federal Research and Experimentation Credit has expired as of December 31, 2007.

Because we believe that many investors may continue to measure our operating results before the expensing of stock-based compensation, we intend to continue to disclose on a pro forma basis what our earnings would be if we did not expense stock options. With that in mind, net income for the second quarter of fiscal 2008 excluding stock-based compensation expense would have been $27.1 million or $0.96 per share versus non-GAAP net income for the second quarter last year of $19.1 million or $0.70 per diluted share.

GAAP net income for the second quarter of fiscal 2008 was $25.5 million or $0.91 per diluted share compared to $18.2 million or $0.68 per diluted share.

Earnings before interest, taxes, depreciation, and amortization, or EBITDA, was $40.7 million for the second quarter of fiscal 2008 compared to $27.3 million for the second quarter of fiscal 2007.

Cash flow used in operating activities for the six months ended January 31, 2008, was $1 million compared to cash flow provided by operating activities of $17.2 million in the six months ended last year.

During the first half of fiscal 2008, we experienced an increase in working capital requirements associated with the significant increase in sales activity across our Company. The increase in working capital requirements, primarily for accounts receivable and inventory, was driven by the timing of shipments and related collection of cash from our customers, as well as the necessary investment in inventory in support of current backlog that is expected to be recognized as revenue during the second half of fiscal 2008.

Even with the record sales in Q2, we entered Q3 with a very strong backlog. As of January 31, 2008, backlog was $219.2 million. This compares to $129 million as of July 31, 2007.

Before I turn it over to Rob, I would like to comment on our cash equivalents and provide an update on the Brazil subpoena matter. Our cash balance at the end of the second quarter of fiscal 2008 was $340.9 million. As you are aware, a number of companies have experienced capital losses related to their investment of cash equivalents in preferred auction rate securities or municipal auction rate securities, more commonly referred to as MAR securities. I'm pleased to inform you that, per our investment policy, all of our cash equivalents are invested in money market funds that are rated AAA by Moody's. Furthermore, we do not own any investments in MARs or preferred auction rate securities.

We continue to actively monitor our cash equivalent investments and will continue to invest our cash equivalents cautiously to avoid the issues that other companies have experienced.

At this time, let me also provide a brief update on the subpoena that our Florida-based subsidiary, Comtech Systems, received in October 2007 from the US Immigration and Customs Enforcement branch of the Department of Homeland Security, known as ICE.

The subpoena relates to a Comtech Systems contract with the government of Brazil with potential revenue of approximately $2 million, none of which has been recognized to date. We believe the subpoena is focused primarily on whether or not Comtech Systems was in compliance with export-related laws and regulations as it pertains to this specific contract.

We engaged outside counsel to review this matter. The area of export law is extremely complex, and our investigation to date has found that other than what we believe to be inadvertent administrative errors in obtaining certain nondisclosure agreements, we believe we made a good-faith effort to comply with applicable regulations. We are cooperating with the ICE investigation and intend to continue to do so.

We have also written to the State Department outlining our position and have requested confirmation of our view. Additional detail on this matter may be found in our 10-Q which was filed yesterday afternoon.

With that said, let me turn to Rob, who will discuss recent developments in our three business segments. Rob?

Thanks, Mike. Good morning and thank all of you for joining the call today. I will provide an update on each of our business segments including key programs, markets, products, and trends.

Let's begin with our Telecommunications Transmission segment. For those of you who do not know us well, our core capability in this segment is to enable satellite-based and over-the-horizon microwave-based communications in environments where terrestrial communications are unavailable, inefficient, or too expensive.

Our satellite earth station product line is well recognized as a thought leader in satellite modem technology. In fact, we believe we are the clear market leader in this area.

What this means for our end-customers is that using innovative enabling technologies, such as forward error correction and Carrier-in-Carrier cancellation techniques, we are able to maximize satellite transponder bandwidth utilization, thereby directly and significantly reducing our customers' satellite operating costs.

Our satellite earth station product line enjoyed another strong quarter with revenue growth driven by the continued expansion of our market-leading products into international markets such as Asia, Eastern Europe, Latin America, and Africa. Our optimistic outlook for our satellite earth station products continues to be driven by sustained market demand and our clear and compelling product differentiation.

Among the factors supporting this view are the following. Our international customers, who comprise the majority of our revenues in this product line, continue to execute on their growth strategies as evidenced by their strong demand for our products. Although we are cognizant of the impact that the worldwide credit crunch has had on the global economy, our customers appear to continue to have access to capital and remain committed to a growth strategy focused on aggressively building new cellular-based wireless communications networks in emerging markets.

At this time, although we are mindful that economic conditions can quickly change, we continue to see strength in our customer base.

Due to the absence of terrestrial infrastructure in the vast majority these international markets, our customers rely heavily on Comtech to provide satellite-based backhaul products and solutions to transport voice, video and data traffic to Internet points of presence and telephone switches.

The solid demand for satellite transmission is also driven by the significant increase in the usage of video applications by end-users across the globe, as well as the rapidly accelerating rollout of bandwidth-intensive high-definition television channels. Our Carrier-in-Carrier enabled modem continue its market penetration as an even broader array of customers has gained appreciation for the significant satellite bandwidth savings that it offers, as well as other features offered by this game-changing technology.

Because of the efficiency it offers, Carrier-in-Carrier is becoming the de facto solution for major satellite trunking and backhaul networks. In fact, during last week's Satellite 2008 conference, Intelsat announced its new RevLinx cellular backhaul solution, which utilizes our CDM-Qx modem with Carrier-in-Carrier, our Memotec optimization and compression products, and LDPC, our latest forward error correction technology, in order to provide its customers with superior performance at cost-effective prices.

The US government's use of satellite technology continues to grow also, thereby driving the demand for our US government certified modem, the SLM-5650.

During the quarter, we generated solid bookings from contract wins related to the 5650, as well as the 5650A modem. The 5650A 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 TCP/IP traffic.

Despite our demonstrable leadership position in this market, we maintain an unwavering commitment to investing in new technologies that will contribute to driving further efficiency in our modems.

Now let's discuss over-the-horizon microwave systems. Over-the-horizon microwave systems, which is the other product line within our Telecom Transmission segment, provides highly secure, point-to-point communications transmission using the troposphere 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 components, but we often act as the systems integrator for the entire system, to ensure the quality of the communication link and to maximize performance.

We are the de facto market leader, having remained committed to innovation and customer service in this area for more than three decades.

As expected, sales for this product line to the US government and our North African country end-customer remained modest in Q2. Bookings aggregated $9.3 million, including orders from the US government for the TRC-170 modem upgrade program. While we believe there are approximately 200 TRC-170 terminals yet to be upgraded with higher-speed modems, we continue to be disappointed with the slow rollout of additional orders.

The TRC-170s are military over-the-horizon microwave terminals that were initially built 25 or more years ago and that have been used in a reduced capacity over the past several years. The US government's decision to reembrace tropo is twofold. First, the significant advances that we have made in throughput speed now allow the transmission of color video and other bandwidth-rich applications over this type of channel.

Secondly, the ability to offload midrange satellite traffic onto tropo links is critical to the DoD's goal of alleviating some of the shortage and related costs of satellite bandwidth.

With respect to our North African end-customer, there is no significant change from our prior earnings call discussions, where I stated that we were in active discussions with the North African end-customer and two prime contractors relating to two separate opportunities in the range of $40 million each. Although contracts of this nature can always experience unanticipated delays, we continue to believe that there is a reasonable likelihood that we will book at least one of these contracts during fiscal 2008. In any event, we see both contracts as revenue contributors beginning in fiscal 2009.

Like you, we obviously would have preferred a more predictable timetable for these programs. However, we maintain a strong relationship with the end-customer and remain very confident that these orders will come.

In conclusion, our Telecommunications Transmission segment is a market leader and remains committed to investing in technologies that will continue to differentiate our products in this important market.

Now on to our Mobile Data Communications segment. Here, Q2 was an exceptional quarter for our Mobile Data Communications segment. Revenues in the quarter of $87.7 million significantly exceeded the previous quarterly record. Despite the significant concentration of orders that required delivery in Q2, outstanding execution by our world-class high-volume technology manufacturing center in Tempe, Arizona, allowed us to meet our customers' stringent product quality and timing requirements.

For those of you who are not familiar with our Mobile Data Communications business, I will provide some background. We have been providing satellite-based mobile tracking and communications hardware, software, and network services to the US government since 1999. On August 31, 2007, we were awarded two new IDIQ contracts from the US government -- US Army, totally $821 million.

The first, MTS, is a $605 million three-year IDIQ contract for the US Army's Movement Tracking System which runs through July 2010. MTS is a satellite-based communications system providing logistics and combat support units with a secure real-time, global positioning system, vehicle location, and tracking capability. MTS provides secure two-way text messaging between stationary base locations and mobile vehicles, enabling ground commanders to monitor and track resupply items, thereby reducing total asset -- thereby providing total asset visibility within the operational theater.

Comtech is the prime contractor and systems integrator on the MTS 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 our customer; and the management and operation of a worldwide satellite network that facilitates tracking and communication for thousands of mobile assets.

Through Q2 of fiscal 2008, we have received orders totaling $59.7 million against the $605 million contract.

The second contract, Blue Force Tracking, is a $216 million IDIQ contract with CECOM, the Communications Electronics Command, to provide the satellite communications backbone for a battle command real-time situational awareness and control system. Under this contract, whose term is through December 2011, we 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's 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 operational theaters.

Through Q2 of fiscal 2008, we have received orders totaling $95.9 million against this $216 million contract.

As I have discussed at length on previous calls, we are in the midst of a substantial R&D investment initiative focused on upgrading and improving the performance of our satellite network and are investing aggressively in important internal 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, low latency, and secure data communications.

We have begun to market our MTM-203, 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 ideal for integration into major communication systems; integration into handheld or dismounted communications products; or for use as a stand-alone transceiver when combined with one of our improved antennas. The MTM-203 3 is a cornerstone technology for our Mobile Data Communications segment's next-generation mobile satellite communications products and services.

Based on Q2's strong results and the visibility through the remainder of fiscal 2008, we expect that our Mobile Data Communications segment for the first time will surpass our Telecommunications Transmission segment as our largest segment in terms of revenue in fiscal 2008.

On our last call, we sought to provide a roadmap for you to better understand the underlying DoD budgets supporting our MTS and BFT programs. I will now provide an update to last quarter's overview.

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 Terror funding; and an upward cost adjustment for Global War on Terror of $129.9 million.

To date, however, it is our understanding that only $16 million in MTS-specific Global War on Terror funding has been appropriated. It is also our understanding that a decision related to the potential appropriation of some or all of the remaining $183.9 million in GWOT funding will be deliberated on by Congress over the next few months.

Nonetheless, the majority of our fiscal 2008 MTS sales will be funded from the Army's fiscal 2007 and prior budgets.

Total bookings in our Mobile Data Communications segment were $48.4 million in Q2, including hardware as well as satellite airtime and services. We expect that a significant portion of these hardware orders will be delivered during Q3 and Q4 of fiscal 2008.

As we look ahead and anticipate future demand for our Mobile Data Communications segment products, we were certainly pleased to note that the proposed fiscal 2009 Army budget that was recently released includes $142 million of line item funding for MTS, a significant increase over the initial 2008 line item funding.

However, it is our understanding that the government's initial fiscal 2009 budgets have been increased to reflect Congress's goal of reducing GWOT supplemental funding and addressing those needs in the core budget.

We continue to deliver on the $53 million Blue Force Tracking order we received in Q1 for our satellite transceivers. During the quarter, we also received a $17.7 million order for a six-month provision of satellite communications and professional support services, as well as a $23.4 million order for additional hardware. In fact, in aggregate, the orders received during fiscal 2008 already represent a substantial increase compared to fiscal 2007.

As we look ahead, we are not able to pinpoint the budgeted fiscal 2009 line item for our portion of BFT, as it is lumped into a larger FBCB2 budget. We will look to provide additional visibility to our shareholders when it becomes available.

In addition to our outstanding financial results, we are extremely proud of the significant accomplishments achieved by our Mobile Data Communications segment in ensuring that we continue to provide the U.S. Army with reliable and innovative tools to maximize the safety of American soldiers in warfare environments.

Our RF Microwave Amplifiers segment enjoyed very strong year-over-year sales growth driven by the delivery of amplifiers and switches in support of the CREW 2.1 program.

The healthy increase in bookings during the quarter was also attributable largely to additional CREW 2.1 orders as well as orders from Raytheon for the EPLRS radio program and from an international customer to support a communications jamming program.

We are pleased with the significant growth in this segment and ended the quarter with a record backlog of $55.9 million, providing strong visibility for the next 12 months.

Profitability in this segment has been impacted by a number of complex new programs that are being worked on at the same time and the simultaneous quick ramp-up in CREW 2.1 production. As Mike mentioned earlier, we continue to experience some difficulties and associated development costs with certain of these products. However, we expect that these issues will be fully addressed during the second half of the year and that we can return to more robust margins in this segment.

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 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.

We believe that our broad and expanding product offerings, proven track record for quality and reliability, and high-volume manufacturing capabilities are clear and compelling differentiators for us in the RF Microwave Amplifiers segment.

Now back to Fred, who will provide guidance for fiscal 2008. Fred?

Thanks, Rob. 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.

These factors include, but are not limited to, the timing of bookings and related revenues on large contracts such as MTS, Blue Force Tracking, CREW 2.1, as well as on our North African over-the-horizon microwave end-customer.

Two, the uncertainty particularly in today's environment regarding US government funding priorities and budget constraints. And finally on economic conditions, particularly in the current uncertain economic environment that we are operating in.

That said, I will provide updated 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, we are tightening our fiscal 2008 revenue guidance range to $520 million to $530 million from our previous guidance range of $515 million to $530 million.

If the fiscal 2008 MTS GWOT, or Global War on Terror funding that Rob spoke about earlier, had already been approved, we would most likely have raised our revenue guidance for the year. Should that funding be approved in the near-term, some revenue increases could still be possible.

At the same time, we are maintaining our estimated non-GAAP diluted earnings for share for fiscal 2008 of $2.77 to $2.82. Here I should point out that this guidance not only reflects the GWOT funding delays, but also reflects approximately $0.06 worth of lower interest income expected in fiscal year 2008 -- this, because of the significantly reduced interest rates on our investable cash balances.

That is the bad news. The good news is that the $0.06 decline was offset by additional operating efficiencies, thereby resulting in our maintaining our fiscal-year 2008 EPS guidance. This guidance equates to a GAAP diluted EPS range of $2.53 to $2.58.

Our strong results for the first half of fiscal 2008 and the underlying strength of our businesses continue to provide me with great optimism about the future of Comtech. We are generating these strong results at the same time that we are continuing to increase significantly our R&D spending to ensure that we remain market leaders.

We are continuing to experience further delays in the receipt of the next phase of orders related to our North African over-the-horizon microwave customer. We are getting reduced interest income on our cash and cash equivalents as a result of the lower interest rate environment. We are also experiencing only modest approval and appropriation of GWOT funding by Congress for the MTS program.

We believe strongly that this is only a timing problem. While we prefer funding and orders to come in earlier and in larger amounts, the delay of the orders potentially offers a positive framework as we look forward to fiscal 2009.

While our first priority continues to be the organic growth of our core business, we continue to actively pursue an acquisition strategy in order to complement our core businesses and to add additional growth. We continue to be selective and patient.

Once again, fiscal 2008 is well on its way to being another record year for our Company, our sixth year in a row. As I mentioned before, the 2009 framework is beginning to take shape.

Now, we will be happy to answer your questions. Operator?

(OPERATOR INSTRUCTIONS) Tim Quillin at Stephens Inc.

Good morning. I think, Rob, you went through this; so I just want to confirm the backlog by segment. $55.9 million in Telecom Transmission; $107.6 million in Mobile Data; and $55.7 million in Amp?

You've got it slightly -- Tim, the Telecom is $55.7 million and RF is $55.9 million.

Okay, okay, thank you. In terms of the Telecom Transmission segment, your guidance of a flat year versus FY '07 presumes a pretty big pickup sequentially in revenue from 2Q to 3Q.

Is that a function of a pickup in shipments of TRC-170 kits? Or is there something in the satellite earth station business that is changing?

Tim, it's a little bit of both. Obviously, we do expect some level of TRC-170. In fact, we have received some orders in that regard in Q2. So it is sequentially getting to the statement we made in our Q about the revenues being consistent between the periods.

There is a little bit of both. Some of it is the TRC-170, and some of it is the earth stations.

Okay, now would you be able to comment on what you are expecting at this point in terms of TRC-170 sales for the year, in some fashion, compared to FY '07?

I would not want to get into that level of granularity, Tim. I can tell you -- and correct me if I'm wrong, Mike -- that the sales in Q2 were virtually zero.

That's about right.

So if you remember, Q2 of last year had a very, very strong level of TRC-170 in them. So, just to give you some order of magnitude, it is closer to zero than it is a million.

Okay. That was also the case in the first quarter, is that right? It was close to zero as well, TRC-170?

That's correct.

Great. In the 10-Q -- and this has been the case actually over the past four quarters. The US commercial business has been down quite a bit. I think in this most recent quarter, US commercial business was down about 40%.

What is in that? What does that reflect? Because the satellite earth station business looks like it is growing well. Is that more Amplifier or where is that decline coming from?

That piece, as you know, Tim, is a relatively small part of our business. But certainly on the Mobile Data Comm side, it is virtually all US government. There are slivers of it in the Amplifier business and in the earth station business.

I don't have in front of me the breakout of that, that particular area. But I'm sure there is a bit of a piece of it in both. But again, it's not a primary growth driver for us.

Right, it's a relatively small piece. Understood. Just one more question if I may and I then I will get back into the queue. But could you talk about what is happening on the Blue Force Tracking program, both in terms of the development effort that ViaSat is working on, and also any impact of this move to [JVCP] and how that might impact what you sell into that customer? Thank you.

On that note, once again all I would say is that our guys at Mobile Data Comm are very focused on this area and we are pleased so far with the progress that we have made in terms of our approach.

Again from a competitive point of view, I don't want to say much beyond that. But in terms of our platform, I just would point out, as I did during my comments, that they've spent -- I guess, Mike, that number was $95 million or so -- we booked this year.

So I think the importance of this technology and the infrastructure is very much entrenched. We are very focused on making sure we're there for the long-term by investing R&D, and we are pleased with the progress that we're making.

Thank you.

Mark Jordan, Noble Financial.

Good morning, gentlemen. First question relative to the RF group, could you discuss what margins that organization should be able to derive once you have ramped up? Again, obviously, through the second quarter taking care of your design and ramp up costs.

I mean, going into fiscal '09 what kind of operating margin should we expect to see from that group?

Mark, I think if you look at that segment over the past few years, when we worked on the Warlock Program, for example, as I said back then, those margins were unusually high.

But if you look at our operating margins over and let's say the past five to six quarters, this past quarter we were in the 7.5% range. I think operating margins in that 10% to 12% range are appropriate, unless we have a large project going through the plant at one time, where we have more operating leverage there.

But if you look out over time, that is where it should be when you take some of the startup costs out of the way and the large contracts coming in. That general range.

Okay. Second question relative to cash flow. Obviously, you have significantly increased accounts receivable and inventory to address the surge in orders that you had in the first fiscal quarter.

What kind of cash flow from operations would you expect to have by the end of the year?

I think in total, '08 will look at -- we should be north of $400 million on the balance sheet by the end of the year, and we are shooting for between $400 million and $420 million.

Okay. Lastly, could you talk about, give some guidance? You had said last quarter that while you don't give quarterly data you gave a little bit of a sense of expecting a surge in sales here.

One, could you give us some sense of how you see sort of the topography of sales moving forward?

Then secondly, address what should be the operating margin at Mobile Data. It was phenomenal in the second quarter here at 32%; if you back out the adjustments, that is 800 basis points probably better than you had on a pure basis in the past. Where should this settle as volumes come back down to more normal rates from the third and fourth quarter?

Yes, I don't think there's any doubt, Mark, that there was some benefit obviously from leverage in this quarter. That is why we always tell people -- even like in this quarter, where it is to our benefit -- that you really need to look at the business on more of an annual basis.

I would just guide you to do that. Go back over the last 12 months or so to give you a general sense of where it would be.

Now at the same time, as revenues go up for the year, that leverage still exists, but not at the rate it would for the spike in the quarter.

So when you look at the operating margin for Q2 of this year, it was over 30%. I think it would be at some number between where we were in the first quarter and where we are in the second quarter, closer to where we were in the first quarter for the full year, just given the leverage in the model.

Thank you very much.

(inaudible) quarter, Mike, we were at 24%?

That's right.

In terms of the -- in my ongoing effort, Mark, to avoid giving quarterly guidance, if you remember last quarter I specifically said in my comments that we would expect the second quarter to be kind of out of the ordinary.

So by not talking about that, we don't really see for the rest of the year one quarter as being unusual one way or the other. But understanding that we can have fluxes between the quarters just based on deliveries and the like. But we don't see an unusually high or low quarter out there for the rest of the year.

Thank you.

Tyler Hojo, Sidoti & Company.

I want to follow up on the TRC-170 question that was asked earlier. I guess if you could help me maybe, Rob, understand what is causing some of the delays in getting that or having that stay at kind of a high level of shipments on the TRC-170.

Well, if you just follow, Tyler, the order flow over the last I would say nine to 12 months, as I said in my comments we've been disappointed. We did get some orders in last quarter, but we can ship those pretty quickly so it's just really a funding type issue. Nothing really more than that.

So we're hoping that once the funding is finalized for this year it starts to loosen up a little bit. But we ship those very quickly after we get the orders in. So it's really no more complicated than that from our perspective.

We certainly are working with the customer to try to get the funding released, but beyond that, I can't really comment much.

Okay. Out of the 600 that are available to be retrofitted, you have 200 remaining. Did I hear that correctly?

Yes, we have always said that we believe there were about 600 produced; but there's probably some of them that are either badly damaged or misplaced or whatever. So our number has always been around 500.

At this point in time we are probably in the 250 to 270 range in terms of what we either have orders for or have replaced. We're at about approximately 200, maybe a little bit north of that.

Okay, and maybe just a quick update on TRC-175. Haven't heard you talk about it recently.

Yes, as we talked about, that program, Tyler, has kind of been put on the back burner. Because what they are trying to do is deploy as many units as possible, and TRC-170 is a more cost-effective way of doing that. Because all they really need to do is replace the modem upgrade kit.

So if you look at the price of the modem upgrade kit versus a fully loaded up terminal, it is much more cost-efficient for them to do that. So we don't really see that as a growth driver for us until they are done with the TRC-170 program.

Okay, that's fine. Just one more quick one. Just the R&D expense obviously up quite a bit year-over-year, but sequentially it was off a little bit. I guess I know you're trying to stay away from giving more quarterly type guidance, but is this more of a range going forward that we should expect?

Or is it maybe more of a combination of the first and the second quarter?

Sure, fair question. In fact, the R&D in the second quarter, Tyler, was a bit of an aberration at least for this year, on the low side, as it related to the timing of certain things.

You can expect R&D as we see it now for the rest of the year to be more in line with the first quarter run rate than the second quarter run rate.

Very good. Thank you.

Rich Valera, Needham & Company.

Thank you. Rob, could you just go over the numbers for -- what was the base level of MTS funding in fiscal '08? Also how much of the GWOT funding has been approved so far?

Sure, the baseline funding, Rich, in the '08 budget now was $73.2 million. We believe based on what we see going through the system that, of the $69.9 million plus the $129.9 million, almost $200 million of GWOT funding -- that about $16 million of that looks like it was approved back in December.

The other $184 million or so is in the bill that the House and Senate will be conferencing on over the next couple of months.

Okay. Fred, I think --.

I will point out that when you look at the contribution of the '08 funding, no matter what the GWOT turns out to be, there is a relatively small amount of '08 budget funding even driving our '08 revenues this year, the way it turned out.

Are you completely funded with what has been approved for your '08 numbers at this point?

There are some additional orders that we are waiting for, but those would all come out of funding that we believe has already been appropriated.

Great, and --.

Stuff that we are waiting for that we expect to come out of GWOT funding that we have in our guidance for now.

Right. I think Fred, in your comments regarding the guidance, you said you strongly felt that the MTS funding issues were a matter of timing and that you felt confident of actually getting those.

Can you give any color on what sort of underpins your confidence that these numbers or this funding will eventually get approved?

Well, I can't definitize what Congress will do in the next few months, but I think what we are hearing in terms of our customers' expectations is that that funding will be approved.

It may be reduced by a certain percentage, but I think for the most part it will be approved.

Great. Then just on fiscal '09, Rob, you mentioned that the base level of funding was significantly higher. Is there any visibility at all in terms of what kind of GWOT funding might accompany that?

Or is the intent really to have no sort of GWOT funding with this higher level of baseline?

Well, it is very difficult to say, Rich, because if we use 2008 as a case study, there were 73 (inaudible) and then there was $70 million of GWOT funding put on the table. If you add, the $70 million plus the $73 million is $143 million. That is not very far away from the $142 million that is in next year's budget.

Again it's very early on in the 2009 budget process. But then on top of that last year in '08, there was another $130 million request. So there is a lot of moving parts here, Rich.

But to be fair about it, as I said, we do believe that the $142 million does include some amount that maybe in the past would have been in GWOT. But it's impossible for us to say how much that may be.

Okay, that's helpful. Finally just with respect to the cash balance, I think you mentioned in the prepared remarks that you are still aggressively looking at acquisitions. But we're going on roughly a year now from your last analyst day, when you kind of suggested within I think nine months -- I think actually six months at that point, that you hoped to do something definitive with either doing an acquisition or something else with the cash like a large buyback or dividend or something.

Is there any further update you can give us there? Is it just that you have got so much in the hopper from an M&A perspective that you don't want to do anything? Or when can we expect sort of some sort of decision on the large cash balance.

I would say, Rich, that last summer when the credit markets started to deteriorate, that did two things for us.

First of all, it makes us a little bit more cautious about our cash position, because debt financing is not as available now as it was back then.

Secondly, I think what it's done during that period is that strategic buyers like ourselves probably have more opportunities to buy assets at more reasonable prices than we were at this time last year.

But so those are two factors that are under consideration. But it is something that we are -- we actively look at. The Board addresses it on a regular basis. But we think the amount of cash that we have right now is still prudent. But it is something that we look at regularly.

I say prudent in light of those two points that I mentioned in my remarks, given the credit markets and the M&A market as we see it today. But it is something that I can assure you our Board is very focused on that we will continue to assess.

Okay, thank you.

James McIlree, Collins Stewart.

Great, thank you. Good morning. Just one question. In the Q1 10-Q, you were indicating that you thought Teleco would be up year-over-year, and now you are saying flat. So what is the delta? What came out of the Teleco expectations?

For the most part, Jim, it gets back to the question earlier on the TRC-170s. As I said in my comments, we have been disappointed that we haven't received orders earlier. But in terms of the delta, in terms of that language, that was the primary driver.

Terrific. Thank you very much.

Marc Balcer, Bluefin Investment Management.

Morning. Just a question for Fred or perhaps Rob. Can you walk through in your satellite earth station business which your best understanding is, how much of your sales go to kind of new-build networks as supposed to really almost adding more contact product to a network that already exists?

I'm not sure that we can really answer that question, Marc. A lot of our new work with the Carrier-in-Carrier modem that has really caught on very, very well is kind of both new and old networks. So it's really difficult to kind of give you a percentage of one or the other.

Sure. You probably know what is coming next, because I think your primary competitor in this space is perhaps up for sale, or they are exploring strategic options. Have you seen and impact in the competitive environment where customers perhaps are leaning towards you because they don't know about the future of Radyne?

I can't say that we have seen any impact of that decision that they seem to have made. But I would think that the competitors probably are looking at it, and there may be some in the future. But I don't think we have seen anything yet.

Sure, fair enough. I wonder -- another question you may or may not be able to answer, on the Mobile Data Com business.

What is your best understanding of the penetration you have on logistics vehicles for MTS and perhaps on the combat for Blue Force Tracking?

Do you have any numbers?

On that, Marc, on the MTS side the numbers do move around. But I can tell you that we believe we are less than 50% penetrated to what they would like to do.

Again, that is just within the MTS office. So there could be other commands that have the need that are not in those numbers.

On the Blue Force Tracking side, we have even more limited visibility in that. As you know the number of type -- or the types of vehicles that this could potentially be used on is increasing. For example, MRAV. But we don't know the specific number of units that those would go on.

We are really selling into that office, so on that one I wouldn't even venture to make a guess, other than it's a relatively low percentage.

Great, great. I must commend you on your transparency with respect to your cash position. Because you probably spent more time on it than companies that have bumped into problems with cash.

But what interest rate are you assuming going forward, reflected in your guidance on your cash positions?

Without getting into too much granularity, Marc, we are assuming another reasonable rate cut. Obviously, the amount of interest income is impacted by our cash balances as well.

But all I can say is that we are assuming another cut going forward, of reasonable size, that is baked into our guidance.

Great. Thanks for your time.

Michael Ciarmoli, Boenning & Scattergood, Incorporated.

(technical difficulty) tracking. You said your visibility there with funding is somewhat limited. It looks like the line items through 2013 are about $2.5 billion. If I am correct, you guys just are not sure how much is allocated to your specific component of that Blue Force Tracking system?

Yes, that's correct. The Blue Force Tracking platform itself is actually a terrestrial-based platform where satellite is used as a backup. So we certainly have become an important part of it as it relates to dealing with terrestrial limitations.

But unlike MTS where we are a line item, we don't have direct visibility there. But for example, if you look at this past year, year-to-date, Mike, I think the number was $95 million of orders we've received. There is no way you would ever come up with that number looking at the budget as it stood this time last year.

So all we look to there is ongoing discussions with our customer and fielding plans and the like. But it is hard to correlate that number to what it means to us.

Okay, fair enough. Just I mean, obviously this was an exceptional quarter as you stated and as we have seen with the Mobile Data Com segment. Do you get any sense that this might've been sort of not pent-up demand but maybe just more aggressive spending by the DoD in anticipation of a potential election change? And they just wanted to kind of flush these orders through before any kind of noise happens in November?

Just trying to give at that you guys might experience some sort of slowdown in maybe the first half of fiscal of '09 depending on that election.

Well, a couple of things to point out, Mike. On one hand, keep in mind that many of the orders that drove the revenue in Q2 were received in Q1. If you recall, there was a bit of a delay when we were speaking in the spring and early summer at least, we were waiting for these contracts to be signed.

So I kind of view what we experienced in Q2 as more kind of the aftermath of what we experienced last summer, with some of that pent-up demand and the like.

But again it's one of the reasons we ask you guys to look at things on an annual basis, because sometimes that is just the way they order.

Going in the other direction, if you look at our fiscal 2008, as I mentioned earlier, we have really received a very limited amount of funding out of the fiscal '08 budget so far for MTS. So on that hands, that bodes well for the future, because we are still waiting on a lot of that stuff. Obviously, GWOT hasn't even been appropriated.

So it's one of the reasons we caution people to try to look at it on an annual basis, because when you do that you get some of those peaks and valleys out of the equation.

Okay, fair enough. I guess just more on sort of that you guys certainly have a high level of concentration to a handful of programs. The government-related revenues are very high.

Is there some concern on your part? I mean there is a lot of noise around defense spending, and I know the funding looks to be there for '08, '09, and certainly beyond.

But I mean maybe related to the acquisition front, are you looking more at a commercial augmenting or diversifying the revenue streams into the commercial segment?

As always, Mike, we try to focus from an acquisition point of view on leadership. So that is always going to be the first criteria.

But sure, we certainly would like to diversify as much as we could. But if there was a defense play that was very well positioned, had a strong leadership position, in a technology that looked like it wasn't any particular conflict specific, we would look at it.

But certainly this segment has done so well and grown so much that looking at the M&A area we certainly would like to diversify, but it's really more based on leadership prospects than the revenue diversification.

Okay, fair enough. Then just one last question on the -- sort of relating to Telecom Transmission segment. What are you guys seeing in sort of the global telecom capital expenditure outlook from the carriers? I have seen reports that say that spending might peak in sort of 2010, '11.

Are you seeing any material changes from the carriers out there?

We haven't seen that so far, Mike. Again as I mentioned in my comments, our telecom work certainly in the earth station area is really in emerging markets where they are really building infrastructure to make those areas more competitive and to connect people.

So we have not seen that so far. Obviously, things can change quickly. But we have not seen a deterioration in our satellite earth station customer base at all, quite frankly, at this point.

Okay, great. Thanks for taking my questions, guys.

Tim Quillin from Stephens Inc.

Thank you. I forgot the obligatory -- nice quarter, guys. Because it was a great quarter.

I thought that was all you were calling back on.

Yes, that's all. No, I just had one other question. I know this is a difficult question, but I get this question all the time.

To what extent is your MTS and Blue Force Tracking revenue tied to the US presence in Iraq? I think specifically, maybe, is the service piece. How do you think about the service piece of that business over the next three years with a potential decline in troop levels in Iraq? Thank you.

As I think, Tim, we've spoken about before, I will point out that the funding numbers for '08 that we talked about earlier, those were vetted I believe in the, let's say, late spring, early summer time frame last year. Which was a period, if you go back in time, where everybody wanted us out of Iraq. All the Democratic presidential hopefuls, even President Bush was talking about significant drawback.

So I would point out that those were vetted and increased at a time where the sentiment was that we would be out of Iraq, which I think supports our view that MTS is more of an infrastructure issue than it is a conflict-specific issue.

But obviously, we are no different than anybody else. We're subject to changes in defense spending and the like. But I think this program has fared very well and stood up very well (inaudible) environments where there has been talk about leaving Iraq.

Change in administration, obviously anything could happen. But once again I hear much more in the last few months about we probably need some level of presence there.

Specifically, Tim, what that means to the level of satellite bandwidth they need, it's impossible for us to predict that. But we once again still believe at this point that this is more of an infrastructure play.

Based on my comments earlier we believe they have a long way to go. As Fred said, there is always uncertainty there. But given the amount of ordering and the budgets that we are seeing, we still believe as of today that that is intact.

Thank you.

I'm showing no further questions at this time. I will turn the conference back to presenters for any closing remarks.

Okay, well, we want to thank all of you for your interest in Comtech. We certainly look forward to speaking with you again very soon. Thank you very much for attending.

This does conclude today's teleconference. Have a great day. You may disconnect at any time.