Comtech Telecommunications Corp (CMTL) 2008 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Comtech Telecommunications Corp.'s third quarter fiscal 2008 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.

I would now like to turn the call over to Ms. Stephani LaMantia of Comtech Communications. Please go ahead.

Welcome and good morning, welcome to the Comtech Telecommunications conference call for the third quarter of fiscal year 2008. With us on the call this morning are Fred Kornberg, President and Chief Executive Officer of Comtech; Michael Porcelain, Senior Vice President and Chief Financial Officer; Jerome Kapelus, Senior Vice President, Strategy and Business Development; Frank Otto, Senior Vice President Operations; and Robert Rouse, Executive Vice President and Chief Operating 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. 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 Company's plans and objectives, 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. In addition, I want to remind you that the Tender Offer discussed during this conference call is neither an offer to purchase, nor a solicitation of an offer to sell securities. Investors and Radyne security holders are strongly advised to read the Tender Offer statement, including an offer to purchase letter of transmittal and related Tender Offer documents and the related solicitation recommendation statement that was filed by Radyne with the SEC. These SEC filings contain important information and are available at no charge on the SECs website at www.SEC.gov. With that, I'm pleased to introduce the President and Chief Executive Officer of Comtech Fred Kornberg. Fred?

Thank you, Stephani, and good morning, everyone. And thank you for joining us today for our fiscal 2008 third quarter earnings call. Today, I'm pleased to announce another strong quarter for Comtech and based on our outstanding results for the first nine months of this year, I can say with great certainty that fiscal year 2008 will be our sixth year in a row of record revenues and profits. I also believe that we have formed the solid foundation upon which to grow 2009 and beyond.

The common thread underpinning our success, not only this quarter, but for the past six years is our investment in new technologies combined with the ability to productize those technologies to drive market leadership in all three of our business segments. The acquisition of Radyne that we have recently announced adds another piece to our growth strategy. Although it has only been slightly more than three weeks since the transaction was announced, I'm growing even more confidence based on our initial planning and ongoing discussions with Radyne employees that this acquisition will result in significant long-term benefits for our Company and our shareholders.

Later in this conference call, I will provide an update on each of our three business segments and also provide updated guidance for fiscal 2008. But first, let me turn it over to Mike Porcelain, our Chief Financial Officer, who will provide an overview of our financial results for the third quarter. Then Jerome Kapelus, our Senior Vice President of Strategy and Business Development, will also provide an update on the status of our planned acquisition of Radyne. Mike?

Thanks, Fred. Good morning, everyone. As Fred stated, our third quarter was all around a strong quarter. Let me start with the top of the income statement and work the way down.

Third quarter net sales were $138.1 million compared to $119.4 million in the third quarter of fiscal 2007. This represents an increase of $18.7 million or 15.7%. The increase in net sales reflects significant growth in both our mobile data communications and RF microwave amplifier segments, partially offset by lower sales as anticipated in our Telecommunications Transmission segment.

Starting with our Mobile Data Communications segment, net sales increased by $14.9 million to $69.9 million, or 27.1%. This increase was due to a significant increase in deliveries to the U.S. Army for orders placed on under our new MTS and Blue Force Tracking contracts. Deliveries to the Army National Guard, whose orders are placed under the MTS contract were significantly lower during Q3 of fiscal 2008 as compared to Q3 of fiscal 2007. In addition, Q3 of fiscal 2007 for this segment included sales of $4.6 million related to a favorable gross profit adjustment on our original MTS contract.

In our RF microwave amplifiers segment, sales increased by $11.6 million, or 141.5% to $19.8 million from last year's Q3 sales of $8.2 million. This significant increase was due to higher sales of our amplifiers and high power switches that are incorporated into defense-related systems, primarily sales associated with our participation in the CREW 2.1 program. For fiscal 2008, Q3 sales are expected to be the peak quarter in our RF microwave amplifiers segment. Partially offsetting the increased sales on these two segments were lower sales as anticipated in our Telecommunications Transmission segment. Q3 of fiscal 2008 Telecommunication Transmission segment sales were $48.4 million. This represents a $7.8 million or 13.9% decline when compared to third quarter sales recognized in Q3 of fiscal 2007. Although sales in our Telecommunications Transmission segment as expected were lower, sales of our Satellite Earth Station products were higher in the third quarter of fiscal 2008 than the third quarter of fiscal 2007, as we continue to benefit from the ongoing strong demand for our bandwidth efficient Satellite Earth Station modems, including modems that incorporate our Carrier-in-Carrier technology.

Sales of our Over the Horizon microwave systems, however, were significantly lower, primarily due to lower government sales of our Tropo Scatter modem upgrade kits and lower indirect international sales. Of our consolidated fiscal 2008 third quarter sales, 24.2% were to international end users, 69.1% were to the U.S. government with the remaining 6.7 to domestic commercial customers. Gross profit as a percentage of net sales was 43.8% for the third quarter of fiscal 2008 as compared to 43.2% for the third quarter of last year. Gross profit for the third quarter of fiscal 2007 was favorably impacted by a cumulative gross profit adjustment in our Mobile Data Communications segment of 4.6 million, primarily resulting from improved operating efficiencies relating to our original MTS contract. Excluding the impact of last year's Q3 MTS contract adjustment, our gross profit percentage for Q3 of fiscal 2007 would have been 40.9%.

The increase in gross profit percentage from 40.9% to 43.8% was driven by increased gross profit percentages in both our mobile datacom and Telecommunications Transmission segments, offset in part by the impact of a higher percentage of sales occurring within the Mobile Data Communications segment, which typically realizes a lower gross profit percentage than our Telecommunications Transmission segment. Our gross profit percentage was also negatively impacted by the lower gross margins that we continued to experience in our RF microwave amplifiers segment.

Our Mobile Data Communications segment achieved a higher gross profit percentage due to increased operating efficiencies associated with increased sales related to our new MTS and Blue Force Tracking contracts, as well as a more favorable product mix during the third quarter of fiscal 2008. Our Telecommunications Transmissions segment experienced a higher gross profit percentage in the third quarter of fiscal 2008, as it benefited from increased usage of our high volume technology manufacturing center, including incremental satellite Earth Station product sales, as well as usage by other operating segments. Our Telecommunications Transmissions segment gross profit percentage this quarter was also favorably impacted by a $700,000 reduction in our estimated reserve for warranty obligations due to lower than anticipated claims received on contracts whose warranty periods have expired.

Our RF microwave amplifier segment experienced a lower gross profit percentage due to technical problems and long production times we experienced on contracts for certain complex amplifiers and high power switches that employ newer technologies. We believe that the production issues we faced and discussed on prior conference calls are now pretty well behind us. However, we do expect that as we continue to shift these amplifiers, our gross margins in Q4 will decline modestly from Q3 levels. On the expense side, SG&A expenses of $22 million in the third quarter of fiscal 2008 were $3.4 million higher than in the third quarter of fiscal 2007. As a percentage of consolidated net sales, SG&A expenses were 15.9% in the third quarter of fiscal 2008 compared to $15.6 in the third quarter of last year.

The increase in SG&A expenses was 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 our net sales on profits and to a lesser extent, legal and other professional fees, including costs associated with the Brazil subpoena and export matters. SG&A expenses for the third quarter of fiscal 2008 include $2 million of stock-based compensation compared to $1.5 million in the third quarter of fiscal 2007. For the full fiscal year 2008, SG&A expenses as a percentage of net sales are expected to be similar to fiscal 2007.

R&D expenses were $10.3 million in the third quarter of fiscal 2008, 27.2% higher than the $8.1 million in the third quarter of fiscal 2007. The increase in expenses, primarily reflects our continued investment in research and development initiatives across all of our business segments. For the year, as a percentage of revenues, research and development expenses are expected to approximate 8% of revenues for fiscal 2008, almost 100 basis points higher than the rate we experienced in fiscal 2007. Amortization of intangibles was $400,000 and $700,000 for the three months ended April 30, 2008 and 2007, respectively and primarily relates to intangibles with finite lives that we acquired in prior acquisitions. The decrease in Amortization is related to the fact that these intangibles have been fully amortized.

Operating income for the three months ended April 30, 2008, was $27.8 million compared to $24.2 million for the three months ended April 30, 2007. Operating income for the third quarter of fiscal 2008 includes stock-based compensation expense of $2.6 million compared to $1.9 million in the third quarter of fiscal 2007. This 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 decreased from $3.4 million in the first quarter of fiscal 2007 to $3.1 million in the third quarter of fiscal 200, primarily due to a decline in interest rates, partially offset by an increase in investable cash since April 30, 2007. As a note, and as we discussed in our previous earnings call, all of our cash and equivalents are invested in money market funds that are AAA rated by Moody's and we do not own any investment in MARS or preferred option rate securities.

Going forward, the interest rate on our cash and cash equivalents are expected to continue to be comparable to money market instruments, which commonly range from 2% to 2.5%. These rates assume no further interest rate action by the Federal Reserve bank. Our effective GAAP tax rate for the third quarter of fiscal 2008 was 36.1% compared to 29% for the same period last year. Q3 of fiscal 2007 included discreet tax benefits of approximately $1.6 million. Excluding these adjustments, our tax rate for Q3 of last year would have been 35%.

During Q3 of fiscal 2008, we partially settled our IRS tax audit and we slightly increased our estimated effective tax rate for fiscal 2008. We now estimate that our full year GAAP tax rate for fiscal 2008 excluding discreet items will by 35.25%. Our estimated effective tax rate for fiscal 2008 reflects the fact, among others, that the R&D credit has expired as of December 31, 2007. On a non-GAAP basis, which excludes the impact of stock-based compensation, the effective tax rate for the third quarter of fiscal 2008 would be 35.9% compared to a non-GAAP effective tax rate for the third quarter of fiscal 2007 of 29%. If the R&D credit is not renewed, we do expect our GAAP estimated effective tax rate for fiscal 2009 to increase at the same revenue levels, approximately 50 basis points from the estimated effective tax rate before discreet items of 35.25% than we expect for fiscal 2008.

Because we believe that many investors may continue to measure our operating results before the expensing of stock-based compensation, we intend to continue to disclose on a pro forma basis what our earnings would be if we did not expense stock-based awards. With that in mind, non-GAAP net income for the third quarter of fiscal 2008 excluding stock-based compensation would have been $21 million, or $0.76 per diluted share versus non-GAAP net income for the third quarter last year of $20.5 million, or $0.75 per diluted share. As reported, our GAAP EPS was $0.70 per diluted share for the three months ended April 30, 2008, compared to $0.71 per diluted share for the three months ended April 30, of last year. And as a reminder, Q3 of last year included the MTS favorable adjustment and a tax rate that favorably benefited from discreet tax benefits and other items.

Earnings before interest, taxes, depreciation and Amortization, or EBITDA, was $33.2 million for the third quarter of fiscal 2008 compared to $28.7 million for the third quarter of fiscal 2007. Cash flow provided by operating activities for the nine months ended April 30, 2008, was $22.1 million compared to $65.4 million in the nine months ended April 30, 2007. The decrease in cash provided by operating activities was driven by an increase in working capital requirements associated with the significant increase in sales activity in our Mobile Data Communications and RF microwave amplifier segments. 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. We expect that our cash balance at July 31, 2008, should be north of $400 million. This amount, of course, does not include any possible payments that we may make if the Radyne acquisition closes before our year end.

Turning to backlog, as of April 30, 2008, backlog was $185.9 million. This compares to $129 million as of July 31, 2007, and $153 million as of April 30, 2007. Before I turn it over to Jerome, I would like to provide a brief update on the Brazil subpoena matter.

As discussed on prior earnings call and as disclosed in our 10-Q, our Florida-based subsidiary, Comtech Systems, received a subpoena on October 2007 from the U.S. Immigration and Custom 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 engaged outside counsel to review this matter, as well as to perform an assessment of our internal controls.

The area of export law is extremely complex and our ongoing investigation of the Brazil matter to date has found that other than what we believe to be inadvertent administrative errors in obtaining certain non disclosure agreements we believe we made a good faith effort to comply with applicable regulations. In February 2008, we requested that the State Department confirm our view. In March 2008, the Enforcement Division of the U.S. Department of State informed us that in addition to reviewing our request, it sought to confirm our Company-wide ITAR compliance for the five-year period ending March 2008. As such, we are assembling responsive information that will be provided to the U.S. Department of state and are evaluating that information as part of our ongoing self-assessment process.

To date we have noted opportunities for improving procedures to comply with export laws and regulations and we expect our self assessment process and any necessary remediation of our internal controls to be completed by the end of fiscal 2008. In the past few days, we received what we believe to be good news on this matter. In late May 2008, the U.S. Attorney's office in the middle district of Florida informed us that based on its conversation with the ICE agent who initiated the subpoena, it was closing its investigation into the Brazil matter. In June 2008, the ICE agent informed us that he would recommend that the detained inventory be released back to us upon the U.S. Department of State confirming our position that a State Department license for the hardware shipped was not required. Based on these conversations, we are cautiously optimistic that the U.S. Department of State, as it relates to the Brazil subpoena will shortly issue a favorable ruling so we can reship the inventory to the end customer. The details on this matter may be found in our 10-Q, which was filed yesterday afternoon.

With that said, let me turn it over to Jerome, who will provide a brief update on the status of the Radyne acquisition and again provide a high level overview of the strategic rationale for the transaction. Jerome?

Thanks, Mike, and good morning, everyone. As most of you know, on May 12, 2008, we announced that we were acquiring Radyne for $11.50 per share in an all-cash transaction. Per the terms of the agreement with Radyne, on May 22, 2008, we launched a Tender Offer that is currently scheduled to expire on June 20, 2008. Once the Tender is completed, an appropriate regulatory approval is received, the tender will be followed by a merger at the same price. However, it is possible that the expiration date of the tender will be extended.

On the regulatory side, we are working closely with experienced counsel to navigate this process, this process needs to run its course and as such we will respectively decline to provide additional information on the regulatory process at this time.

Those of you who have followed Comtech over the last few years know that we have diligently evaluated strategic acquisitions to further strengthen our leadership in the sectors we address. We know the Radyne business well and during the diligence process, we completed an exhaustive, but highly productive evaluation understanding of the Company. The long-term strategic fit is compelling and multifaceted.

On the Satellite Earth Station equipment side, Radyne provides an immediate expansion of our Satellite Earth Station product portfolio. Our one-stop shop strategy has been historically successful and this acquisition further enhances that strategy. We also believe that the combination of Radyne and Comtech's engineering and sales teams will drive further innovation that will position us to deliver exciting new Satellite Earth Station products for both Radyne and Comtech customers. On the amplifier side, the acquisition will immediately position Comtech as a leader in the Satellite to Earth Station traveling wave cube amplifier sector. Xycom line of TWTs and solid state amplifiers are a strategic complement to our existing high power solid state amplifier product portfolio. We look forward to working with the Xycom team to drive further revenue growth through our combined customer base.

As we stated on our May 12, investor call, we believe that we will be able to achieve operating synergies -- operating efficiencies from a combined Radyne and Comtech ES data Satellite Earth Station product line by eliminating overhead functions and related expenses. Excluding one-time transaction and restructuring costs and the impact of purchase accounting, we expect the acquisition to be accretive within the first 12 months after closing and significantly accretive thereafter. Due to the uncertainty and timing of the closing of the acquisition, the complexity of purchase accounting rules, and our having only preliminary estimates of anticipated restructuring costs, we are not in a position today to provide more specific guidance on the EPS impact of the acquisition. We will have a better sense of these moving parts as the transaction progresses. We expect to be able to provide more specific guidance on the EPS impact of the transaction at a later date.

Because Radyne remains a stand-alone independent public Company, I cannot provide any additional information or interim results other than the information we provided on our acquisition conference call and in this call today. We have formed our own internal integration planning team and we are working to ensure that day one puts us on track to maximize the benefits for our shareholders. Based on our ongoing planning, we remain confident in our ability to achieve our synergy goals and continue to be excited about this transaction. In case you missed our special acquisition conference call on May 12, I will refer you to our website at www.Comtechtel.com, where you can access the original call and investor presentation. With that, let me turn the call back to Fred, who will discuss recent developments in our three business segments and provide updated guidance. Fred?

Thanks, Jerome. Let's begin with our Telecommunications Transmission segment, which includes our Satellite Earth Station and Over the Horizon microwave product lines. Our Satellite Earth Station product line, the larger product line within this segment, has differentiated itself in the market by incorporating innovative, enabling technologies into our family of modems, frequency up and down converters and satellite amplifiers. Among others, these technologies include forward error correction, daisy chain redundancy switching and Carrier-in-Carrier cancellation techniques that significantly increase the efficiency and system availability of the satellite ground station.

Just a few weeks ago, we announced the general availability of our next generation satellite modem, our model CDM-625 advanced satellite modem. The CDM-625 builds on our tradition of providing bandwidth and power efficient satellite modems. It is the first industry satellite modem to combine our low density parity check, or LDPC forward error correction technology with our Double Talk Carrier-in-Carrier technology. The combination of our LDPC and Double talk Carrier-in-Carrier technologies delivers the highest savings in satellite transponder bandwidth and savings in Earth Station transmit power, as well as a complementary reduction in Earth Station prime power requirements.

Our Satellite Earth Station products continue to be widely used for video, voice, data transmission, by television broadcasters, wire line telecommunications providers, cable television providers, ISPs, satellite service providers, and satellite integrators. The primary factors that drive our continued optimism about the long-term growth of the commercial Satellite Earth Station market include the unrelenting demand we are experiencing for video and Internet content by end users across the globe, the continued rollout of bandwidth intensive HDTV that requires more bandwidth and therefore increased transmission capacity, the continuing economic strength of our end markets, and the resulting access to capital by our end customers, the satellite cellular back haul market, which has become one of our largest addressable markets continues to grow as wireless carriers in emerging markets build new networks to increase wireless penetration. Because these emerging markets generally have a poor existing terrestrial communications infrastructure between cities, satellite is often the only communications medium quickly deployable to back haul the growing cellular traffic.

And finally, the current satellite bandwidth capacity shortage, over a number of regions in the world is requiring the replacement of older, less efficient satellite links with more bandwidth efficient satellite solutions. This market condition is currently a major driver for upgrading or replacing many of the older satellite ground station products and we don't see this trend changing for the foreseeable future.

Similarly to the sustained business strength we are experiencing in the commercial market, we are also benefiting from strong demand from the government sector. We believe that this is attributable to the crucial role which satellite communication continues to play for the U.S. military and government. Our flagship products here are our model SLM-5650 and SLM-5650A government modems. These modems are prequalified and are fully compatible with the SIPS 140-2 government security standard. The value of our Satellite Earth Station franchise also continues to grow and strengthen. We will continue to vote -- to devote R&D resources to further that growth by advancing our satellite modem technology, as well as our technology in our full satellite ground station product offerings. Our recently launched CDM-625 modem is one tangible example of our effective monetization of our R&D investments.

Turning now to our Over the Horizon microwave systems product line, our products here are highly secure, point to point communications transmission, capable of using the troposphere as a layer of atmosphere 7 miles above the earth to reflect the signal from one terminal to the other. Due to the complexity of this technology, we not only develop and manufacture the core transmission hardware, but here we often act as the systems integrator for the entire system, procuring other third party equipment and other components such as antennas, amplifiers and radios, to ensure the quality of the Tropo Scatter communications link as well as the entire system. Our long-term commitment to this product line has been rewarded with a strong leadership position and as importantly, we have demonstrated to our global customers that we have an ongoing commitment to improving the throughput speeds, efficiency and reliability.

As previously discussed, sales of our Over the Horizon microwave system in fiscal 2008 are lower than in fiscal 2007, due mainly to fewer orders of our TRCs-170 modem upgrade kits from the U.S. government and lower indirect sales to our North African country end customer, where our $77 million contract is now almost complete. Despite this lower growth in fiscal 2008 and the continued movement to the right of some of our pipeline opportunities, we remain confident that we will land one of these opportunities in the near term, and this product line will again experience growth in fiscal 2009. Let me tell you why.

On our prior earnings call, we discussed two large opportunities with our North African country end customer, as well as some additional opportunities with the U.S. government. The two large opportunities with our North African country and customers relate to two separate opportunities to supply equipment and services towards the next phases of a multi-phase telecommunications infrastructure buildout. Currently our North African end customer has selected two different system integrators for each of the two opportunities and is having ongoing negotiations and discussions with both of these integrates. We are the communications supplier to both of these integrators and we believe that the value of each of these opportunities for us is in the $40 million-plus range. We're confident that both of these contracts will eventually be received by us, but continue to have a difficult time pinpointing the exact timing.

In addition to the North African opportunities, we're also making good progress with one other such end customer and have entered into discussions with a new prime contractor who is working with this foreign government. This is the first time we're dealing with this end customer and also believe the overall opportunity could also be in the excess of $40 million-plus range. All three of these opportunities are large and involve different prime contractors. As you can understand, we cannot finalize our related subcontracts until the prime contractors successfully conclude their negotiations and discussions. That notwithstanding, we continue to believe that we could be awarded one or more contracts relating to these large opportunities in either late fiscal 2008 or fiscal 2009. That said, we do not believe that any of these potential contracts will begin to contribute to net sales in our Telecommunications Transmission segment until fiscal 2009.

On the U.S. government side, there's a lot to discuss with respect to the TRC-170 digital tropo scatter terminals. As most of you know, in the past 18 months, we have delivered and installed approximately 270 modem upgrade kits for existing the TRC-170 terminals. The TRC-170 target -- terminal targets for the Marine Corps and Army have now been fulfilled. While there are an additional 200 or so terminals that still need to be upgraded for the Air Force, we have been informed that the Air Force is not likely to upgrade approximately 100 of these 200 terminals because they are a large, quadruple diversity terminals, which are not viewed as mobile, as compared to the smaller, dual diversity terminals that we have been upgrading.

Looking forward, we see three promising revenue opportunities related to the TRC-170s. First, the Air Force is in possession of approximately 100 of these smaller dual diversity terminals that are candidates to receive modem upgrades in the future. Second, the Air Force is also considering new small suitcase-type quadruple diversity terminals that are easier to ship and set up. Third, due to our strong performance in executing on the modem upgrade program, we are now discussing certain exciting opportunities to upgrade other legacy components of the TRC-170 terminals and we hope to report progress on these areas throughout fiscal 2009. In summary, in both our Satellite Earth Station and Over the Horizon tropo scatter microwave product lines, we continue to be a market leader and we remain committed to investing in technologies that will continue to differentiate our products and the markets that we serve.

Turning now to our Mobile Data Communications segment, here we had another outstanding quarter, with almost $70 million of sales, split almost evenly between our MTS and Blue Force Tracking programs, with the small contribution from the final component of the National Guard orders. As most of you are aware, Comtech has been providing satellite-based mobile tracking and communications, hardware and software, and network services to the U.S. government since 1999. In August 31, 2007, we were awarded two new IDIQ contracts known as the Movement Tracking System contract and the Blue Force Tracking contract, totaling $821 million.

The Movement Tracking System, or MTS, is a $605 million, three-year IDIQ contract that runs through July 2010. MTS is a satellite-based communication systems providing logistics and combat support with the secure realtime global positioning system for vehicle location and tracking capability. MTS also provides secure two-way text messaging between stationary base locations and mobile vehicles, enabling ground commanders to monitor and track, resupply items, and providing total asset visibility within any operational theater. Comtech is the prime contractor and the systems integrator on the MTS program and provides a turn key system, including the design, the development of hardware and software, the manufacturing of the transceiver, the integration, testing, and fielding of all system components, the procurement of satellite air time for customer -- for our customer and the management and operation of worldwide -- of a worldwide satellite network, our network today facilitates tracking and communications for thousands of mobile assets. Through May 31, 2008, we have received orders totaling 86.2 million against the three-year $605 million IDIQ contract.

From a government budget and funding perspective, little has changed for MTS since our Q2 update. We believe that there is approximately $380 million of potential funding available to support the MTS program through the final two years of the current contract. This 380 million of funding is comprised of the remaining fiscal 2008 funding, the 2008 G-watt funding and preliminary 2009 base funding and does not include any potential 2010 funding. While the majority of the funding has not been appropriated at this time, it is our belief that the majority, if not all of this funding will eventually be appropriated. As you may be aware, in May, the Senate approved the version of our fiscal 2008 G-watt Supplemental Appropriation Bill. It is our understanding that shortly the House will also conclude its G-watt supplemental deliberations and this month a joint final bill is expected to be sent to the President. However, there may be continuing delays during this political process.

Blue Force Tracking is a $216 million five-year IDIQ contract with C-Com, the communications electronics command to provide the satellite communications backbone for a battle command realtime situational awareness and control system. Here we provide mobile satellite transceivers, satellite bandwidth, satellite network operations, engineering services and program management for the BFT system. As you know, 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 our highest profile programs. Although less than one year into our five-year contract orders received to date total $107.9 million against this five-year, $260 million IDIQ contract.

Because we share the BFT budget with other companies providing products to this program, it is difficult for us to provide specific budget and funding information. However, the BFT continues to be well funded and has been the recipient of additional G-watt funding similar to the MTS. We continue to make excellent progress in upgrading and enhancing the performance of our BFT transceiver and of our satellite network. While our R&D investment in this endeavor has and continues to be substantial, we are pleased with the meaningful strides we have made to ensure that we're well positioned to continue to provide the highest quality mobile satellite network to our important Blue Force Tracking customer. On the technology side, our miniaturized L-band transceiver module know as the model MTM 203 received its second FIPS 140-2 certification in the past few months. This time, for its military-specific communications capabilities. That is good news.

The MTM 2003 is the cornerstone of our next generation transceiver technology. We have incorporated our miniaturized MTM 2003 module into several new products, including our model MT 2011-G mobile ground transceiver, as well as our model AVX 06 aviation transceiver. Both of which are form, fit and function replacements for our current transceivers and when adopted will become our first FIPS certified transceivers for the government market. We believe that the large contracts and significant available funding for both our MTS and BFT programs demonstrate their importance to the U.S. Military and we remain committed to provide all necessary resources and technology to ensure that we continue to provide both MTS and BFT with a high quality, reliable satellite network and products that provides maximum value and utility to U.S. soldiers.

The last segment I will discuss today is our RF microwave amplifier segment, where we design, develop and market high power broadband power amplifiers to a large and growing group of customers across the defense, electronic warfare and communications and medical sectors. We are very pleased with our Q3 performance. Two important programs continue to be strong contributors to our record sales. These are the CREW 2.1 program, an important improvised explosive device jamming program, where we provide multiple high power amplifiers and switches, and the FLAWS radio, where we provide integrated radio frequency assemblies. We also continue to market our products and capabilities to blue chip primes, with the goal of winning their captive business which these primes normally perform in-house.

As you know from the last quarter and as reflected in our Q3 results, our profitability in this segment was hampered in the past few months by the difficulty of executing on a number of complex new program wins while simultaneously ramping up for our CREW 2.1 production. We believe we have addressed these issues and have made important progress in Q3 in solving both our design and production challenges. While we are pleased with our results in Q3, we hope to improve our gross margins in fiscal 2009, with a long-term goal of returning to our historical levels of operating margins, within a range from 10 to 12%.

In summary, Comtech continues to be positioned for growth. We continue to execute at a high level in all our core businesses. This, I believe, is a testament to the value we engender every day from our strong technology, our excellent products, our broad base of customers, and the end markets we serve.

With that, let me turn to the guidance for the remainder of fiscal 2008 and provide some closing remarks. As I have 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, one, the timing of bookings and related revenues on large contracts such as MTS, Blue Force Tracking, CREW 2.1, as well as with our opportunities in our Over the Horizon microwave commercial and government markets. Two, the uncertainty, particularly in today's environment regarding U.S. government funding priorities and budget constraints. And three, economic conditions, particularly in the current, uncertain economic environment that we're operating in.

That said, I will provide updated guidance, as I have done in the past on both GAAP basis, as well as a non-GAAP basis, which excludes Amortization of stock-based compensation. During our May 12, call regarding the Radyne acquisition, I informed you that we were on track to achieve fiscal 2008 revenues in the range of 520 million to $530 million and a GAAP EPS in the range of $2.53 to $2.58. At that time, I also mentioned to you that we offset the loss of lower interest income to the tune of about $0.02 with operating efficiencies.

Now that the books are closed, I'm pleased to be able to state that we are increasing and tightening our EPS guidance for the year. And tightening our revenue forecast. We now expect revenue to be in the range of 525 million to $530 million, while our GAAP diluted EPS is now expected to be in the range of $2.58 to $2.62. We're also increasing our estimated non-GAAP diluted earnings per share to the range of $2.81 to $2.85. This updated EPS guidance reflects anticipated lower interest income, which negatively impacted our EPS by about $0.03 from our previous earnings call in March. This is offset by additional actual and anticipated operating efficiencies of approximately $0.07 of EPS.

As we head into the final stretch of 2008, I look forward with optimism at the growth opportunities within each of our three business segments. Although we are mindful of the tough economic conditions in various markets we serve and are cognizant of the potential impact that may have with our customers, we believe that we have a positive framework in place as we look forward to fiscal 2009.

As we normally do, we intend to provide specific fiscal year 2009 guidance during our year end conference call, which will take place in late September. At that time, we also hope to provide an updated funding outlook for our MTS and BFD contracts, as well as a status update on the three large Over the Horizon microwave opportunities I discussed earlier in this call. Although September is a few months away, and things can always change, from where I sit and without any benefit or impact from the Radyne acquisition, I am optimistic that fiscal 2009 is shaping up to be another year of record revenues and profits for Comtech. And now we are happy to answer your questions. Operator, we're ready for the Q&A.

(OPERATOR INSTRUCTIONS) Our first question comes from Mark Jordan of Noble Financial. Please go ahead.

Good morning, gentlemen. And before my question, I would like to wish Rob well. I think that Comtech has definitely benefited from his tenure there. Moving on to a question, looking at inventory, you noted in the Q that your Blue Force and MTS inventory at the end of the quarter was $26.5 million versus $6.5 a year ago. That's clearly a significant increase and I was wondering if you could comment why that has moved up and do you expect -- what level do you expect that to be at overall inventory in that segment as you exit the year?

Well, we do expect a significant decline in inventory, I would say over the next six months. We were anticipating some orders from the government sometime in Q3 that have kind of been pushed out that we expect to get shortly. So, it was a decision that when we get an opportunity to buy parts, we take advantage of it. So it was a build-up of inventory that we expect a decline over the next six months.

Okay. Could you detail any specific transaction costs that flowed through here relative to Radyne in the third quarter, and do you expect any in the fourth quarter?

We do at this point, given where we are with the tender at this point to be in a capitalization stage. So, our Q4 kind of reflects the fact that we do anticipate capitalizing most of the costs. It is fair to say in Q4 that there will be less than $0.01 or $0.01 or so of expenses that you can't capitalize to hit the balance sheet. But at this point, most of the transaction costs will be the balance sheet. In total for the transaction, we're expecting about $5 million of transaction costs itself at this point and I believe, as the beginning of June we had about $1.4 million that we spent so far.

Okay. And Fred's comments, he's talking about development of next generation transceiver that's FIPS certified. Would you envision that that would be a catalyst for a, an upgrade cycle for the installed base, or would that be just bled in over time?

It's hard to say right now, Mark. I think it could be either way. We're obviously trying to do it as an upgrade, but it may, it may have to wait for the next generation.

Okay, and could you give us the segment, or backlog breakdown by business line, please, by the three business groups?

Sure, sure, Mark. In Q3, the telecom transmission was $62.5 million. In RF amplifiers, it was $48.4 million. In our mobile datacom for Q3 was $75 million.

Okay. And the final question relative to RF, you stated a longer-term goal of getting back to the 10 to 12% operating margin range, which you obviously haven't been operating at for the last couple of years. Also noted that Radyne/Xycom group has achieved operating margins I believe in the low teen area. Do you believe with the combination of those, is there synergistic benefits that should be derived for the combination of those two units that should potentially, in the 2010 timeframe move the combined RF into the low teens or--?

Mark, on the cost side, the answer would be no. We do expect on the longer term synergies to grow on the revenue side, as those groups work together. But, Xycom will remain an independent business unit and our current group will continue to work. We don't expect to see margin expansion as a result of the acquisition itself for those two groups.

Okay. Thank you very much.

And our next question comes from Tyler Hojo of Sidoti & Company. Please go ahead.

Hi, good morning. Quick question, just in regards to the 10-Q filing that came out last night. In regards to the Brazil subpoena issue that's been ongoing, you guys also mentioned that the state department is investigating your ITAR compliance over the past five years and I think the spirit of what you guys were trying to say was basically that you thought there were some things that you could be doing better when you were internally investigating that. I was hoping you would provide a little bit more color into that.

Yes, I, I think what our Q kind of speaks for itself. The State Department, we initiated a request to them to try to move this thing along from our perspective, our customer is eager to receive the goods. We did what we believe to be a pretty thorough investigation. We've been pretty transparent with the government. So, at this point, based on what we've learned in the last few days we're certainly optimistic that we expect to receive some favorable news on the Brazil. As it relates to the request by the State Department, that's just something that the government does and, we're not the only ones that we know of in this industry that continue to be -- get held to a higher scrutiny, given what's happening in the world today. So it's just something that we're going to go through and we'll be cooperating with the government as they do their review.

No, I understand that, but you indicated that there were some things that maybe you could be doing better, just in terms of complying with ITAR. I was wondering what those things are specifically?

Not to go into any detail, I mean it's a five-year review so it goes back a long time and it's certainly no company's going to be perfect.

Okay. All right, thanks. And just one more for you. Going back to Mark's question just in terms of the RF margins, I guess you noted 10 to 12 going forward. I guess, and I know you guys have talked about this in the past, but I mean a couple years back, you guys were running kind of in the high teen level, in that segment. And now that you're kind of at a level just in terms of revenue volumes above where you were back then, and I guess what I'm wondering, is I always thought it was kind of a volume issue in terms of getting the margins back up. What am I missing? And I guess what's changed in that business to kind of justify the lower profitability?

I think as I tried to explain, we are having a rough patch right now in terms of some real complex development programs that are just taking longer to develop and longer to deliver and as such, the costs are larger. So those margins are kind of what we hope differential now maybe for another quarter or two, but I think it's past us, as I mentioned, I think we'll get back to the original margins.

Okay. All right, thanks.

Our next question comes from James McIlree of Collins Stewart. Please go ahead.

Great, thank you. Good morning. I'm trying to understand the guidance a little bit. If I take the high end of both the top line and the bottom line -- let's just look at the top line. The high end of the top line implies about $125 million for the last quarter. So what would be falling $13 million quarter to quarter to get you to the high end of your guidance?

Clearly we're not going to have the margins that we had earlier in the year both from Q3 perspective and earlier in the year and it is really going to be on the margin side. If you recall Q2 was a peak quarter for mobile datacom in terms of the revenue that was going through our factory that provides benefit in the margin line in Q1 and in Q2 and the mix of products in Q3 were favorable. We did have a shift from Q4 to Q3 of some revenue both in terms of dollar amount as well as higher margin mix. So, what you're really seeing is revenue and mix and lower inner Company efficiencies because the volume is going through our factories a little bit lower than it was earlier in the year.

You said that the RF amps business is probably peaked in Q3 so that -- that goes down in Q4, but is the remaining portion of the decline then coming from mobile data? It's hard to see it coming from Telco, but I mean I guess it's possible.

We do expect both lower margins in our RF amplifiers as we ship out some of the stuff that Fred mentioned that we had production issues. Then in our mobile datacom side, we are expecting probably Q4 to be the lowest revenue for the year in terms of quarterly revenue.

Okay. If it's the lowest revenue for the year, then -- well -- if it's the lowest revenue for the year, then it's like less than $53 million, which would get you to even lower revenue number. So it's just not kind of triangulated--?

Jim, you got to remember that a lot of our products from mobile datacom are manufactured in-house, which will result in just lower margin as you get lower efficiency at that number. But quite frankly, some of our amplifier products are almost zero gross margin.

Right, but I keep talking about revenue and you keep answering margins, so I'm just, again -- it's very difficult to get to those numbers unless you're assuming some incredible drop in something, and it sounds like you're saying mobile data.

Well, we do expect mobile datacom revenue to decline from the level of revenue it was at Q3. RF amplifier will be slightly south of the number that we did in Q3 and the rest will come from telecom.

Okay, thank you.

And our next question comes from Chris Quilty of Raymond James. Please go ahead.

Good morning, gentlemen. A follow-up on Jim's question there with regard to the RF amplifier. Is it fair to assume you pulled through some volume shipments on the CREW 2 and you're just seeing lumpiness in that and that's driving some of the downside?

In terms of what we did in Q3?

Yes.

Yes.

Okay, and what do you see in terms of visibility for the orders there? I know a lot of that was related to MRAP shipments, which are going to slow down in the future here. Can you give us any indication of what your longer-term outlook is there and your involvement on the CREW 3 program?

Yes, I would say to you Chris, with respect to that topic, you guys have pretty much as much visibility as we do. As you know, there are almost news alerts every day with respect to MRAP and we are subject to the same lack of visibility as you are on that topic, so as you realize, we're not a prime. We sell into prime and so we're removed from the customer. And so we're really not in a position to give you better data than you're going to get from your other sources into the public domain.

Okay, and if you scratched out the military business, how is the remaining commercial business performing?

You still talking about -- are you talking about on the RF?

On the RF side.

Yes. As far as that's concerned, we actually continue to look for opportunities, have found opportunities to diversify the business and it's important for people to understand, I'm glad you asked the question, that this is a business that is very broad and has grown significantly over the last two or three years in terms of number of customers and at bats that we have. So we do -- we have seen new opportunities. I can't get into any specific customers, but we have seen opportunities on the medical side on some cargo inspection opportunities. We are certainly moving forward with some opportunities in the commercial aviation sector, and of course the news has been dominated in the last couple quarters by CREW 2.1 which we understand, but this is a business that has done an excellent job at broadening out and outside of CREW 2.1 the concentration is limited.

Okay, and in general, I mean you reported a step-up in your R&D Company-wide. Can you give us an indication of how much of that was related to your second generation Blue Force Tracking, and just when generally thinking you think you'll have a deliverable there, is it sort of first half of next fiscal year, back half of next fiscal year, and should we see a non concomitant stepdown in the R&D spending?

I think we really don't want to be in a position to cite our R&D expenses in this area. We can tell you that we obviously have no deliverables of the new stuff and we're making good progress for the next generation, both transceiver the New Wave form that we're developing and the new network. We hope to have basically all of this done sometime towards the end of this calendar year.

Oh, great. And I guess the question for Mike in terms of the gross margin adjustments on the legacy or the original MTS contract, there were none in this quarter and I can't remember how much less we might have under that original contractor basically are we at the point now where we've passed through most of those gross margin adjustments and we're unlikely to see any in the near-term?

Yes. The accounting for the old contract finished up at the end of last year. So, we're not expecting any more adjustments related to the old contract.

Okay, and for the existing contract, it's likely that you're only going to see gross margin adjustments once you get into the latter stages, the final third of that contract, or is it possible you could recognize some in the earlier parts of it?

It's possible that we'll always get some type of adjustment, but given that the old contract was a longer-term contract we had a lot of start-up costs that had to be spread out over the period. As of this point, when our new contracts were kind of at the margins that we're earning on these products as we deliver it, so, we're not anticipating any margin adjustments on these contracts, up or down, at any point.

Okay, and finally, on the Over the Horizon product line, I think in the last couple of quarters, you've mentioned that you specifically had zero revenues associated with that program. Is that fair to assume you were in the same situation this quarter?

That's correct. It was actually a little bit lower this quarter than last quarter as well. We do expect to begin shipments of some of the stuff in Q4, so you'll see that in the telecom segment hopefully when we report to you at year end.

Okay, and clarification, you mentioned on the third new international customer that you're dealing with a third prime contractor. Is that a totally new third prime contractor, or is it one of the two existing for your North African customer?

No, I think I mentioned in my portion that this was a new customer, one that we have not had any prior work with or history with. So it's kind of a brand-new situation for us.

Right, but I was referring to who the prime contractor is. Is it someone you've worked with before?

No, both the end customer and the prime contractor are both new.

Okay. Great. Thank you, gentlemen.

And I am showing that our last question today comes from Michael Ciarmoli of Boenning and Scattergood.

Hi, guys. Thanks for taking my call. I might have just missed it, but did you give the update, I know you were sinking a lot of money into R&D on the next gen system, you were competing with ViaSat out there. Can you give us a sense of where things stand? Is that what you were just saying, it was going to be hopefully concluded by the end of the calendar year?

Yes, I think -- I guess we're kind of happy with our progress to date where we are and I think we, we hope to be finished with some demonstrations to our customer, as well as all our finalization on both the transceiver and the network components by the end of this calendar year.

Okay, perfect. And then it looked like recently there was a order out there in the news that BAE had received about a $1.6 billion order to supply medium tactical vehicles and cargo trucks. Is this something -- they were talking upwards of 10,000 vehicles to be delivered by 2010. Is this something that could be a catalyst to the MTS program? I mean do you guys anticipate seeing your transceivers being factory installed on those vehicles?

I think if you look at any vehicle supplied to the Armed Forces, it's a potential vehicle for our system. Funding being what it is will determine the number of units that will get those transceivers. So it's hard to say exactly which ones will get it. It's the same story with MRAP. MRAP is a new vehicle. This one, we know, is getting the transceiver, but we really don't know what the government's planning in any additional vehicles.

Okay, fair enough. And then just shifting gears, to the Satellite Earth Station products, it seems like you're having a tremendous success in international markets. What's really the gating factor from driving shipments into the U.S. market? Is it just installed base with existing customers, they are using other vendors? I mean can you give us a little context as to why, if those products do have such superior and compelling offerings, why they are not being adopted more in the domestic market?

I think there, the explanation is simply that satellite communications is just one form of communications. Its ability is to provide the immediate communications, whereas in the United States, we now have a pretty built-out infrastructure which is both cable and terrestrial communications heavy. As such, we do have satellite communications for long haul purposes in the U.S., but most of the satellite communications today is going international, particularly into those areas that have no infrastructure and so they don't, they don't have the time to build a terrestrial infrastructure and as such, satellite communications can go on almost in there immediately and provide that.

Okay. Fair enough. Thanks, guys.

And at this time, I am showing that there are no further questions.

Okay. Well, thank you very much for listening to us today and we hope to speak with you again in a couple of months. Thank you very much.