Comtech Telecommunications Corp (CMTL) 2009 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Comtech Telecommunications Corp's first quarter fiscal 2009 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. 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 first quarter of fiscal year 2009. With us in 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, and Frank Otto, Senior Vice President, Operations. A news release on the Company's results was issued yesterday afternoon. If you've 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 Files.

I'm pleased to introduce the President and Chief Executive Officer of Comtech, Fred Kornberg. Fred?

Thank you, Stephani. Good morning everyone and thank you for joining us today for our fiscal 2009 first quarter earnings call. I am proud to announce that despite the unprecedented disruption in the financial markets and reported slowdowns in the global economy, our business continues to flourish. Our first quarter was outstanding as we have continued to strengthen our positions in all three of our business segments. Our acquisition of Radyne is a success and is essentially complete. We have a solid foundation upon which to grow in fiscal 2009 and beyond. I attribute our strong first quarter results to the strength and resilience of our end markets, to our distinct leadership in these markets, and the innovative and diligent contributions from our world class employees.

Later in this call, I will provide an update on each of our three business segments and also provide updated guidance for fiscal 2009, but first, let me turn it over to Michael Porcelain, our Chief Financial Officer, who will provide an overview of our financial results for the first quarter of fiscal 2009, as well as provide a detailed update on the status of the Radyne acquisition. Mike?

Thanks, Fred. Good morning, everyone. As Fred mentioned it was an outstanding quarter. Let me review the results for the first quarter of fiscal 2009. I'll start with the top of the income statement and work my way down. Q1 2009 net sales were $191.9 million, an increase of 66.7% versus the $115.1 million in Q1 of fiscal 2008. This 66.7% increase reflects incremental sales associated with the Radyne acquisition and significant organic growth across all three of our business segments. In our Telecommunications Transmissions segment, net sales for the first quarter of fiscal 2009 were $74.6 million compared to $48.9 million last year. This is an increase of $25.7 million or 52.6%. Despite difficult economic conditions, sales of our satellite earth station products increased, due to strong demand particularly for our modems which incorporate our carrier and carrier technology.

Sales also increased due to the inclusion of sales of newly acquired Radyne branded satellite earth station products. Given the complexity of the Radyne acquisition, let me provide some color on some of the individual components in our satellite earth station product line. Sales of both Comtech branded and Radyne branded satellite earth station modems for the first quarter of fiscal 2009 were higher than our expectations. Sales of tune-in branded video encoder and decoder products which we acquired from Radyne were lower than expected primarily due to lower sales to our broadcasting customers, who experienced softness in their end markets. These products are a relatively small portion of our telecommunication transmission segment sales and we do not expect sales of these products to increase from current levels for the remainder of fiscal 2009 and in fact these sales may decrease from Q1 levels.

Turning to our over the horizon microwave system product line, net sales of our over the horizon microwave systems for the first quarter of fiscal 2009 were significantly lower than the first quarter of fiscal 2008 due to lower indirect sales to our North African country end customer and lower sales to the US Department of Defense. Our Telecommunications Transmissions segment represented 38.9% of consolidated net sales for the first quarter of fiscal 2009 as compared to 42.5% for the first quarter of fiscal 2008. In our Mobile Data Communications segment, net sales were $81.9 million for the first quarter of fiscal 2009. This represents an increase of $28.9 million or 54.5% versus the first quarter of fiscal 2008. This increase was primarily attributable to increased sales, including a large amount of mobile satellite transceiver hardware sales to the US Army for orders placed under our MTS and Blue Force tracking contracts. As most of you know, sales to our MTS and Blue Force tracking customers are very lumpy and Q1 results were very strong.

Based on the timing of the current delivery schedule for orders that are in our backlog, and the anticipated timing of orders that we expect to receive for the remainder of fiscal 2009, sales in Q2 2009 are expected to be significantly lower than our Q1 2009 sales; however, as Fred will discuss in a bit, we continue to expect large orders, which we will expect will drive revenue in the second half of fiscal 2009. This quarter, as a result of the Radyne acquisition, net sales in our Mobile Data Communications segment also included sales related to the design and manufacture of Comtech Arrow Astro's micro satellites and from their mobile tracking products that incorporate sensor-enabled notification of SENS technology. Sales of these products were in line with our expectations. Our Mobile Data Communications segment represented 42.7% of consolidated net sales for the first quarter of fiscal 2009 as compared to 46% for the first quarter of fiscal 2008.

Turning to our RF Microwave Amplifier segment, as a result of the Radyne acquisition, we more than doubled our sales for the first quarter of fiscal 2009. Net sales were $35.4 million, an increase of $22.2 million or 168.2%. In addition to incremental sales related to the Radyne acquisition, we also experienced increased sales of our solid state high power broadband amplifiers and high power switches that are Incorporated into defense related systems. Our RF Microwave Amplifier segment represented 18.4% of consolidated net sales for Q1 of fiscal 2009 as compared to 11.5% in Q1 of fiscal 2008. Of our consolidated fiscal 2009 first quarter sales, 28.5% were to international end-users, 61.6% were to the US government, with the remaining 9.9% to domestic commercial customers. Gross profit as a percentage of net sales was 45.3% for the first quarter of fiscal 2009 as compared to 43.9% for the first quarter of fiscal 2008. All three of our business segments contributed to this gross margin increase.

Our Telecommunication Transmission segment experienced a higher gross profit percentage as it benefited from an overall increase in usage of its high volume technology manufacturing sensor, including incremental production of products for our two other business segments. Our Mobile Data Communications segment experienced a higher gross profit percentage due to a more favorable product mix as well as increased operating efficiencies associated with increased sales related to our MTS and Blue Force tracking contracts. As I mentioned earlier during the first quarter of 2009, a greater percentage of our MTS sales consisted of hardware sales, specifically MTS mobile satellite trans receivers. More often than not, MTS mobile satellite transceivers are sold along with other products that have lower gross margins , thus our gross profit percentage in this segment this quarter was high.

Going forward for the remainder of fiscal 2009, we do not expect the same product mix, as such our gross margins for our Mobile Data Communication segment is not expected to be as favorable for the remainder of fiscal 2009 as it was in this first quarter. In addition, because our mobile satellite transceivers are manufactured by our Arizona manufacturing facility, whose results are part of our Telecommunications Transmission segment, we currently do not expect to achieve the same level of operating efficiencies for the remainder of fiscal 2009 in that segment as we did in Q1 2009.

Our third segment, our RF Microwave Amplifier segment, achieved a higher gross profit margin percentage as well as it benefited from a more favorable product mix, primarily as a result of the Radyne acquisition. Our RF microwave product line now includes Comtech Xicom Technology's satellite earth station traveling wave tube amplifiers and other products which were sold at higher gross margins than those of our legacy product line. As mentioned on prior conference calls, margins of our legacy high power solid state amplifiers in Q1 of 2009 were lower than normal as we continued to ship certain complex amplifiers with very low gross profit margins. These low margins primarily resulted from prior technical issues and long production times which we believe we have put mostly behind us.

On the expense side, SG&A expenses were $29 million in the first quarter of fiscal 2009. This was $8.6 million higher than the first quarter of fiscal 2008; however as a percentage of consolidated net sales SG&A expenses was 15.1% in Q1 2009 as compared to 17.7% in Q1 2008. The decrease as a percentage of net sales is primarily attributable to the successful implementation of our Radyne restructuring plan and the resulting achievement of significant operating synergies. R & D expenses were $14.1 million in the first quarter of fiscal 2009, 28.2% higher than the first quarter of fiscal 2008. R & D as a percentage of sales was 7.3% in Q1 2009 versus 9.6 in Q1 2008. As a reminder, in Q1 of fiscal 2008, we significantly increased our R & D spending in our Mobile Data Communications segment that resulted in a large jump in our Q1 2008 spending. in addition to normal R & D expenses and as a result of the Radyne acquisition, during Q1 2009 we recorded a one-time, $6.2 million charge for acquired in process R & D. This charge was not deductible for income tax purposes.

Amortization of intangibles with finite lives for the first quarter of 2009 was $1.8 million. This represents an increase of $1.4 million as compared to the first quarter of fiscal 2009. Almost all of this increase is attributable to the Radyne acquisition. Operating income for Q1 2009 was $35.9 million compared to 18.7 in Q1 2008. As a percentage of sales, operating income was 18.7% in Q1 2009 versus 16.2% in Q1 2008. Excluding the one-time charge for acquired in process R & D, operating income as a percentage of sales was 21.9% in Q1 2009 compared to 16.2% in Q1 2008. This increase as a percentage of sales reflects the higher gross profit rate I discussed earlier, as well as the overall operating efficiencies we achieved during the quarter. Operating income for the first quarter of fiscal 2009 also includes stock based compensation of $2.4 million compared to $2.7 million in the first quarter of fiscal 2008. 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 and other decreased from $4.4 million in the first quarter of fiscal 2008 to $1.3 million in the first quarter of fiscal 2009.

The decrease was primarily due to the significant reduction in our cash and cash equivalents primarily due to cash payments for the Radyne acquisition as well as a significant decline in period to period interest rates. As everyone knows, these are very turbulent times in the financial markets. As of October 31, 2008, we had over $211 million of cash and cash equivalents and as discussed in our last earnings call, we believe we are taking a prudent approach to managing our cash and cash equivalents. During Q1 2009, there was a substantial increase in principal risks associated with maintaining cash and cash equivalents and commercial based money-market accounts. As such, we shifted our investment strategy to an even more conservative approach that now includes investing primarily in government based money-market accounts and purchasing US Treasury obligations. As many of you know, these investments on some days earn virtually no interest. As a result, we expect interest income in each of the three remaining quarters of fiscal 2009 to decline significantly from the amount we earned in Q1 2009.

Turning to taxes. Our effective GAAP tax rate for the first quarter of fiscal 2009 was 38.7% compared to 34.5% for the same period last year. The higher tax rate in Q1 2009 reflects the fact that we recorded a $6.2 million amortization charge for acquired in process R & D which I mentioned is non-deductible for income tax purposes. In addition and partially offsetting this charge was a discrete tax benefit of approximately $800,000 principally related to the passage of legislation that included the retroactive extension of the federal R&D credit from December 31, 2007, to December 31, 2009. For the remainder of fiscal 2009, and excluding the acquired in process R & D charge and the discrete tax benefit I just mentioned, our effective tax rate for fiscal 2009 is expected to approximate 35%.

Our EPS on a year-over-year basis was significantly higher. Excluding stock based compensation and the one-time amortization charge for in process R & D, non-GAAP EPS for Q1 of fiscal 2009 was $1.07 as compared to $0.59 in Q1 of 2008. On a GAAP basis, including amortization of the acquired in process R & D, and including amortization of stock based compensation expense, EPS was $0.80 per diluted share in Q1 as compared to $0.54 in Q1 of last year. Earnings before interest, taxes, depreciation, and amortization or EBITDA was $50 million for the first quarter of fiscal 2009 compared to $23.9 million for the first quarter of fiscal 2008. Cash flow provided by operating activities for Q1 of 2009 was $2.7 million compared to cash used and operating activities of $9.7 million for Q1 of 2008.

Now, let's turn to backlog. As of October 31, 2008, reported backlog was $219.1 million compared to $201.1 million as of July 31, 2008, and $248.9 million as of October 31, 2007. As a reminder, on our August 1, 2008, as a result of the Radyne acquisition, our backlog increased by approximately $51.4 million. Thus, our adjusted July 31, 2008 backlog on a combined basis heading into Q1 was approximately $252.5 million.

Before discussing the Radyne acquisition further, I would like to provide a brief update on certain legal matters all of which are more fully described in our 10-Q filed yesterday afternoon. As discussed on prior earnings calls, back in October 2007, Comtech Systems, or CSI, our Florida based subsidiary, received a subpoena from the US Immigration 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. Customs detained the inventory until they completed their investigation. As we have mentioned in the past, the area of export law is extremely complex. We believe we made a good faith effort to comply with applicable regulations; however in November 2008 the US Customs and Border Protection Agency of the Department of Homeland Security informed us that it was seizing the previously detained inventory because they believe we did not obtain the proper license from the Department of State. CSI has chosen not to dispute the ruling.

The inventory remains officially seized; however, it has now been returned to CSI's facility in Orlando, Florida. CSI has officially petitioned the US Customs and Border Protection Agency for relief from forfeiture and has requested the goods be officially released. With the State Department's knowledge, CSI has filed an amended license referred to as a technical assistance agreement with the US Department of State and has requested a license for the hardware. If successful in all of its efforts, CSI is hopeful that it may be able to shortly reshift the Brazil inventory to its end customer. CSI also believes that there are a number of circumstances including the good faith effort we took to comply with applicable regulations that may mitigate the imposition of any potential fines or penalties in connection with the Customs ruling.

In addition to the Brazil matter, and as previously disclosed in our SEC filings, the enforcement division of the US Department of State continues to confirm our companywide ITAR compliance for the five year period ending March 2008. We engaged outside counsel to review our compliance and provided our findings to the US Department of State. In December 2008, we received feedback from the US Department of State and were requested to provide them with additional information as it related to our findings. In addition we have decided to have an independent export compliance audit performed and we will submit those results to the US Department of State for their consideration. Our assessment of internal controls in this area is ongoing and we continue to make improvements in our controls throughout fiscal 2009. In addition to both export matters there are two other items that I would like to briefly mention. In November 2008, the Telecommunications and Media Enforcement of the Anti-trust Division of the US Department of Justice informed the Company that it opened an inquiry into Comtech EF Data Corps $3.9 million July 2008 acquisition of the network backhaul assets in certain products line of Verso Technologies. The acquired product lines are now owned by Comtech EF Data Corps Canadian subsidiary, Memotech.

Given the small size of the acquisition, there was no mandatory notification or reporting requirements imposed by law or regulation on the Company. The anti-trust division has not served a subpoena in connection with this inquiry and to date the Company had only preliminary discussions with the anti-trust division. The Company intends to voluntarily meet with the anti-trust division this month to further discuss the matter. Putting this into some perspective, combined Worldwide Sales of Verso and Memotech for the three months ended October 31, 2008, were approximately $5.6 million. Of that amount, Verso Product Sales were less than $1 million , most of which was overseas.

On the second item, in December 2008, our wholly owned subsidiary Comtech PST Corp. And its Hill Engineering Division each received a subpoena from the Department of Defense requesting a broad range of documents and other information relating to a third party's contract with the DOD and related subcontracts with a specific, for the supply of specific components by Hill to the third party. We can tell you that the subpoenas do not allege any specific violations of law, either criminal or civil. We have just begun an internal investigation and we intend to fully cooperate and provide the requested documents and other information. Given the early stage of this matter, we are unable to predict the outcome of the DOD's investigation. Additional details on all of these matters may be found throughout our 10-Q which was filed yesterday afternoon.

Now, let me provide an update on the acquisition of Radyne and the status of our restructuring plan. We believe our Radyne acquisition is on track to be a resounding success. Without getting into specific revenue splits within each business segment, I will tell you that on an overall basis, sales of Radyne's legacy products in Q1 were generally in line with our original expectations. We believe that with the exception of lower sales of Radyne's tune in branded video encoder and decoder products, the inevitable disruption that came with the acquisition and restructuring initiatives that we undertook, our execution has been nearly flawless. Our restructuring timetable is ahead of schedule, as we sit here today, we have vacated Radyne's Phoenix, Arizona manufacturing facility and moved their satellite earth station Operations into our Tempe, Arizona based high volume technology manufacturing center. We have also fully integrated Radyne's corporate functions into our existing mobile corporate office.

Although there are minor things still open, the completion of our restructuring activities came about three to four months ahead of our schedule. As it relates to the facility itself, we completed our negotiations with the subtenant for Radyne's Phoenix, Arizona facility and have now sub leased a building for a substantial portion of the remaining lease term. As discussed in our year-end conference call, we capitalized all of the unrecovered cost of the remaining lease as well as severance for terminated employees as part of purchase accounting. Thus, with the exception of the $6.2 million expense for acquired in process R & D that we recorded in Q1, we do not expect that our P & L for the remainder of Fiscal 2009 will be impacted by any other one-time charges associated with the Radyne acquisition.

In summary, we remain diligently focused on maximizing value from our Radyne acquisition. I have no doubt that the acquisition was a success and was an efficient and compelling use of our cash. Now, let me turn it back to Fred who will provide additional color and insight into our three business segments and also provide an update of our financial guidance for fiscal 2009. Fred?

Thanks, Mike. Let's begin with the business update with our Telecommunications Transmissions segment, where our two major product lines, our satellite, earth station products and over the horizon microwave systems. As Mike described earlier, our satellite earth station product line, the significantly larger product line in this segment, achieved outstanding results in the first quarter, despite the difficult global economic environment. We attribute the resilience of this business in the first quarter to a number of factors. First, there remains a shortage of transponder space relative to the current demand and as a result the cost for our customers to transmit via satellite remains relatively high. This dynamic has sustained the strong demand for our satellite modems as their superior efficiency offers a clear and substantial cost savings for our customers.

Secondly, our technology remains a key differentiator. The combination of carrier and carrier technology and our patented forward arrow correction technology enables us to provide our customers with an extremely cost efficient modem. The payback on the purchase of a modem which is often three months or less can be calculated by our customers in advance of a purchase by using a proprietary software application that we make available to them. Thirdly, our commercial business continues to benefit from one, the continuing subscriber growth, the transition to a Hi-Definition video, and the growth of IPTV. Our US government business also remains strong, due to our ability to solve the most challenging aspects of government satellite communications and that is increased bandwidth capacity.

Our carrier and carrier enabled modems allow the government to increase satellite bandwidth capacity by maximizing existing satellite transponder capacity by almost better than a factor of two-to-one. We are continuing to move forward with our technology leadership by incorporating this carrier and carrier technology into our flagship model SLM 5650 A government specified modem. We're also doing the same with the Radyne government and commercial modems and expect these initiatives to be completed during fiscal 2009 and finally the Radyne acquisition added a large installed base of satellite system customers to our already formidable install base and to which we are able to sell our new products. We remain the go to provider of one stop shop satellite earth station products with the ability to offer existing and new customers a compelling wide range of products and technology.

With Radyne now substantially integrated into our existing satellite earth station business, from both a sales and technology sharing perspective, we are now positioned as one Company with the widest array of satellite earth station products to meet the varying needs of our customers. Although our first quarter satellite earth station results were strong, we are taking a cautious approach as we look out to the remainder of the year. Due to the strains apparent in the global economy; however based on our market leadership and the strong market characteristics I just discussed, it would not surprise us if the business remains more resilient than we currently anticipate. We're also taking a cautious approach in our over the horizon or troposcatter product line where we believe we are the world's leading supplier. This product line allows highly secure, point to point communications transmission by bouncing a signal off the troposphere, a layer of the atmosphere seven miles above the earth. We sell this technology to the US government, foreign governments and oil and gas companies.

As highlighted in our last earnings call, we have a number of large US government program opportunities in our pipeline, but we continue to be disappointed as these opportunities keep moving to the right. We do expect to book one of these opportunities in fiscal 2009. This confidence is based on a number of factors. First, we are the sole provider of high data rate digital Troposcatter modem technology to the government having won the track 170 competition two years ago and we believe we are well positioned to be the supplier of choice to upgrade a number of other important components in those terminals. And secondly, the government's committment to troposcatter technology has a core communications medium is directly related to the acute shortage of satellite transponder capacity available to meet the government's military needs. This technology is an ideal solution by which to offload short to medium range traffic from bandwidth limited satellite networks to Troposcatter systems.

Internationally, as we also discussed on prior earnings calls. The three foreign government opportunities each with a potential contract value of at least $40 million or more remain promising and substantial; however each has experienced lengthy delays. Based on our current assessment and although obviously difficult to predict, we anticipate receiving at least one of these orders in the latter part of fiscal 2009. We don't, however, expect any revenue contribution from these opportunities in fiscal 2009 and expect this revenue to shift completely into fiscal 2010. Based on our leadership position in this market, our innovative technological improvements and the products that have expanded our growth opportunities and the expanding appeal of Troposcatter as a compliment to satellite transmission, we continue to be bullish and confident in our growth prospects in this important product line. Timing, as I mentioned, however, remains difficult to predict.

Moving on to our Mobile Communications segment, this segment now includes our mobile data integrated solutions area, by far the larger business of this segment, and our recently acquired micro satellite business. Our mobile data integrated solutions business is driven by our US Army customers where we have provided satellite communications equipment and services for almost 10 years, and significant majority of our Mobile Data Comm revenues are generated from two Army IDIQ contracts. The first contract is MTS, which is a $605 million, three year IDIQ contract, where we provide an end-to-end satellite based communication system providing logistics and combat support units with a secure realtime global two-way messaging vehicle location and tracking capability. Through this network, we enabled the US Army to enhance troop safety as well as enable total asset visibility within any operational theatre. MTS remains a critical high priority program for the US Army, as demonstrated by the continuing financial committment through the program. To date, we have received over $140 million in orders under this $605 million MTS contract.

While the MTS orders received to date have been significantly lower than the amount of currently available funding, we believe that this is a short-term timing issue rather than a decline in end-user demand and which we expect will be corrected shortly. In fact, we believe that overall demand for our Mobile Data Communications products and services has never been stronger. In the past few months, we have been in active discussions with the MTS program office, concerning their strategic initiative to seek an upgrade to the existing MTS computer. This initiative we believe is the reason for the delay in placing new orders. We believe that a decision will be reached soon and we expect that orders will resume at a robust rate which means that our MTS revenue will be back end loaded for fiscal 2009 and a good amount will spill over into fiscal 2010. Funding for the MTS program remains significant and unchanged since our last conference call.

Based on public US Army documents, we continue to believe an aggregate of $329.6 million of approved and appropriated funding remains in the Army's budget to fund the MTS program orders in fiscal 2009 and beyond. The $329.6 million includes the following. $186 million in aggregates still unused from the fiscal 2008 budget, including both base and supplemental budget funding, and $143.6 million in aggregate from the Fiscal 2009 base and supplemental budget that was signed into law in September 2008. In addition to the demand by the US Army, I pointed out during our last earnings call that the National Guard recently made MTS a Top 10 priority. We believe that the National Guard fielding levels are significantly short of their initial fielding goals, which were established in 1999. To date we're not aware of any specific current fiscal year funding that the National Guard has received; however we believe some of the current MTS budget funding may be used to meet the National Guard demands.

The second contract underpinning our mobile data integration solutions products is Blue Force Tracking, a $216 million, five year IDIQ contract with CECOM, the Communications Electronics Command. Here, Comtech provides the satellite communications back bone for FBCB2, the battle command realtime situational awareness and control system. We provide mobile satellite transceivers, satellite bandwidth, satellite network operations and engineering services for the BFT system. To date orders received from BFT total $161.6 million against the $216 million contract ceiling. Because of the strong demand from our BFT customer we are nearing a contract ceiling issue with orders received to date aggregating almost 75% of the current contract ceiling, with three more years to go in the contract.

In order to address this impending contract ceiling issue, as well as to insure the long term seamless continuity of this program, the FBCB2 program office issued an important public notice on November 18, 2008. Through this public office, BFT is conducting a market survey seeking resources necessary to provide engineering, test, and hardware support for the BFT Operations centers, as well as satellite services and additional hardware to support the worldwide BFT satellite network. The date of an award is anticipated to be no later than December 2009. In addition to the performance period extension, the notice stated that the government may increase the Comtech BFT IDIQ contract value by $617 million, an increase of almost 300% from the existing $216 million contract value, and expects to extend the contract by two years to December 2013. Assuming the new contract that comes effective in December 2009, as anticipated in the BFT notice, average annual funding under the remaining contract term would increase from approximately $50 million today to approximately $154 million annually which translates into a tripling in demand for the contract period beginning December 2009.

In addition to the highly favorable implications of significant funding and performance period increase, the government's notice included a number of vendor requirements that we view as a very encouraging item to Comtech and its efforts to maintain our incumbent position. As BFT primary satellite equipment and telecommunications service provider. First, the notice states that and I quote, "Comtech hub equipment or their operational equivalent must continue to be used to allow the current FBCB2 BFT network to continue to operate without interruption. Secondly, the notice states, and I again quote, the contract that will be responsible to develop a plan that provides continuous support to the user. In our view, these two statements demonstrate the critical importance of the BFT network to guarding safety of our troops in theatre and the complete intolerance to any potential risk during a transition period. This position by the customer is highly consistent with a view that we have shared with our investors over the past 18 months, and our comments we have emphasized our belief that our established incumbency and proven experience are key elements in our efforts to retain and build our program presence.

We believe strongly that Comtech offers the BFT customer a low risk technology proven partnership, uniquely able to meet their evolving operational demands. There are several key factors substantiating this belief. First, our six years of experience as the provider of satellite transceivers, network hardware and telecommunications services to the BFT program. Second, our significant organizational and financial investment in both improving the current BFT network and our transceiver capability. Third, our ability as the incumbent to eliminate the program's expected transition risk as they move towards deploying and implementing the next generation system and finally, our ability to provide low cost, low risk, new and forward-looking technology that is fully backward compatible to an existing installed user base that we estimate could exceed more than 100,000 transceivers by 2011. Considering the unprecedented budget challenges for all federal programs, the costs we believe will become even more important factor.

These facts, we believe, position us very strongly with the BFT program to continue to provide long term support as a key program partner and to successfully capture future competitive awards and in particular any follow on contracts released by the program office. In that regard, our BFT upgrade initiative remains on track with a series of important accomplishments achieved in the past quarter. We have leveraged our in-depth knowledge of the BFTs program, demanding hardware, network and operational requirements and developed a Next Generation transceiver and satellite network that we are confident offers the BFT customer a compelling solution that compares favorably to any other solution that may be considered. While we appreciate that our investors are eager to glean more specific facts about our progress on this, we believe that the most professional and sensible approach in this situation is to continue to fly under the radar, to keep our heads down, and focus on the task at hand. Historically, we have found this approach to be the most effective.

The last segment I will discuss today is our RF Microwave Amplifier segment. Substantially all of our growth in our RF Microwave Amplifier segment this quarter was the result of our Radyne acquisition. We more than doubled the size of our microwave amplifier segment by becoming a leader in the satellite earth station high power traveling wave through amplifier market. We believe that our fiscal 2009 order flow will continue to be strong. Our high power product line which consists of traveling wave tube amplifiers and solid state amplifiers continues to demonstrate tangible success addressing the satellite communications markets in the US and overseas. In particular, we continue to experience strong demand from the US government either directly or through sales to US prime contractors including among others L3, Harris, and Raytheon.

In addition, non-government demand remains strong, driven by domestic and international sales in a direct to home, signal news gathering and KA band up link markets. During this quarter we announced a follow on order of $2.9 million for the ground multi-band terminal program or GMT, as well as an order from the Air Force for KA band amplifiers to support US Air Force airborne platforms. Our KA band solid state amplifiers are poised for continuing growth due to the DOD's opening up of KA band satellite frequencies. This is a result of excessive demand on the military's [X-band] satellite channels and of the high cost to the military of using commercial KU band satellite transponders. This means that the existing satellite ground station infrastructure, which addresses the CK and KU band must be upgraded to also offer the KA band frequency. We have won significant business related to these KA band upgrades by offering a compelling line of traveling wave tube amplifiers and solid state amplifiers. More generally, we expect to continue to benefit from the US government's multi-year initiative to upgrade and add significant satellite capacity to alleviate demand on its overtaxed network. Our non-satellite wide band solid state amplifier product line also enjoyed a strong start to fiscal 2009.

While Crew 2.1 or a counter remote control IED electronic warfare program orders provided the foundation for the third quarter, we continue to experience success with other companies and customers in the electronic warfare and counter-mission markets. While we believe that we will continue to benefit from follow-on orders related to the Crew 2.1 program in fiscal 2009, we also believe that a substantial portion of future 2009 orders for a variety of applications, both military and commercial will come from the broader group of blue chip customers. Our two amplifier product lines are expected to generate incremental value over time by sharing new technology, development, and cross-selling of each others product and this endeavor has already started and is under way.

Before I turn to guidance, let me conclude by reiterating the remarkable performance by all three of our business segments. During this unusually turbulent market environment. This I believe is a testament to our strong market leadership positions. Now let's move on to guidance 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 , the Blue Force tracking, Crew 2.1, as well as our large opportunities and our over the horizon microwave commercial and government markets. Two, the uncertainty, particularly in today's economic environment of potential US and foreign government budget constraints, and three, the economic conditions particularly in the current uncertain economic environment in which we are operating, which could have a material impact on capital intensive communications expenditures.

On the revenue side there's no question that in the first quarter we skirted the challenging global economic environment. Although our results so far have been strong for now, we're taking a cautious approach as we look out to the remainder of the year. Thus, we intend to tighten our fiscal 2009 revenue guidance to $740 million to $748 million from 740 to $755 million. Our caution is related to the strains apparent in the global economy which have already and are expected to negatively impact the sales of Radyne's video encoding and decoding products that are in 2009, to tighten guidance also reflects the fact that we are pushing out any large over the horizon international revenue opportunities into fiscal 2010 and finally, we also expect a portion of the expected US government over the horizon order and some of the MTS orders to shift into fiscal 2010.

Despite our cautious revenue guidance and the fact that we're significantly reducing our estimates of interest income for the remainder of fiscal 2009, we feel comfortable increasing both our GAAP and non-GAAP EPS guidance by approximately $0.05 per share. This $0.05 per share net increase is primarily attributable to incremental operating efficiencies across our businesses as well as the benefit from the passage of the retroactive R & D tax credit. This was partially offset by a lower interest which Mike mentioned earlier. Thus, when you bake everything in, our updated report, diluted GAAP EPS guidance is $2.87 to $2.91. If you exclude the one-time in process R & D charge of $0.22, our diluted GAAP EPS guidance would have been $3.09 to $3.13. Our updated non-GAAP EPS which excludes both the acquired in process R & D charge and stock based compensation is $3.31 to $3.35.

In conclusion, I am confident that we are on track for another record year in fiscal 2009, our seventh record year in a row. Now we will be happy to answer your questions. Operator?

(OPERATOR INSTRUCTIONS]. Our first question comes from Tim Quillin of Stephens, Inc. Please go ahead, sir.

Good morning. Nice results. Could you go over the backlog by segment?

Yeah, sure, Tim. We finished Q1 2009 with $219 million of backlog, 67.5 in the Telecom segment, $69.6 million in the Mobile Data Comm segment and $82 million in the RF Microwave Amplifier segment.

Okay, that's great, thank you. And is there anything you can tell us about the Radyne revenue contribution in the quarter? I think maybe your original full year expectation was 140 to $145 million. Should we divide that by four and I think that 35, $36 million in first quarter is about right?

Yeah, I think what we would kind of guide you to is on an overall basis the Radyne revenue was sort of in line with our expectations. Back then we had better sales with the Radyne modems as I mentioned offset by declines in the video encoder product lines but on a quarterly basis going forward, we don't think it's meaningful to start looking at the Radyne modem sales as a benchmark if you will, as Fred had mentioned we've combined our sales forces in our satellite earth station business so whether or not folks buy a Comtech data modem or Radyne branded modem to us it's going to be not meaningful.

Right and can you remind us how big Tiernan is or what the contribution there is?

Yeah, when we had purchased Radyne, we were sort of estimating anywhere between 15 to $20 million of revenue for that product line.

And it's going to be lower than that though?

We think for fiscal 2009 it's not going to increase from the Q1 levels and it's a good chance given the economy and the impact in their customers' end markets, sales will be lower.

Okay, and I think in the 10-Q, you said regarding the satellite earth station business that it may be hard to achieve the levels that you had in first quarter, and you discussed it with some caution this morning but is it just that you're assuming that the global macroeconomic situation eventually will impact it or are you seeing something particular in that business that gives you reason for pause?

No, in fact when we gave our guidance back in September we kind of made an assessment of where the market was going to be for the year, so at that time, we didn't see any weakness in our satellite earth station business and kind of just sort of assumed that consistent with our prior year, we'd have some seasonality quarter to quarter, so Q1 we kind of knew it was going to be a little strong and as normally our Q4 is higher than Q2 and Q3, so sitting here today, with the economy deteriorating from the last time, we just, our results in Q1 were spectacular and it's going to be real tough to see if we could achieve them in Q2 but we're kind of sticking with our original plan in that business but as Fred mentioned, we could be surprised if sales increase.

Okay, and then just lastly, Mike, what are your cash flow expectations for the year, what was it, 75 to $90 million in free cash?

Based on the timing of our anticipated orders from the MTS program office, on the cash flow side, we're probably looking at cash generating back in Q4 of 2009 and some of that cash will slip into 2010 so we look at cash in total to be a range of about 250 to $265 million at year-end.

Okay. Thank you.

Our next question comes from the line of Tyler Hojo of Sidoti & Company. Please go ahead.

Hi. A follow on to that last question. What do you plan on doing with that cash? I know it's a question that comes up to you guys often, but you have the converts coming due in February, and then maybe just if you could generally talk about potential share repurchases at this level?

I think, Hojo, we probably will continue with our cash position for a while looking for acquisitions and also we've discussed share repurchases in the past and we will continue to do so, but for the moment, I think we will be kind of courting that cash and looking for some more acquisitions.

Okay, that sounds fair, and then just in regards to kind of the push out on some of the large over the horizon opportunities, I guess first, my impression from I guess some of your last comments on the last conference call was that that was basically a miniscule portion of what you were looking for in the guidance, so I guess first, why is that getting pushed out? I mean, what are you seeing that's leading to a little bit more conservatism there, and then is the reduced sales guidance maybe a little bit more to kind of some of the other uncertainties as opposed to the push out?

No, I think as we mentioned the uncertainties continued to be mainly in the over the horizon area. We've addressed this in a number of telephone calls in the past. We're obviously disappointed that things keep moving to the right. The opportunities are still there. We haven't last them. In fact, we're a subcontractor to some large primes in those areas and we depend upon them to finally negotiate their contracts and that's just taking longer. Large contracts just take a long time. So between our caution really is A, we've moved out some of that revenue that we had in 2009, most of it now is in 2010 and also as Mike mentioned, some of the weaknesses in our Tiernan business has caused us to be kind of conservative on the top line area. The good news is that we are still able to increase our EPS guidance and the good news is that a lot of these revenue possibilities are really kind of falling into 2010.

Thanks.

Our next question comes from Mark Jordan of Noble Financial.

Good morning, everyone. I'd like to talk a little bit about operating margins on the Telecom group, if you add back the in process charge, you would have been about 29.7% on the operating margin. You did say that it clearly benefited from a higher throughput related to the manufacturing of MTS. If MTS had been at say last quarter's rate of about $50 million, what would have been the operating margin at Telcom ?

Very difficult in this room to tell you that. I think what I would kind of guide you to is our annual guidance that we both gave you last time as well as here. This was more of a timing issue between the quarters as well as product mix throughout the year, so on a year to year basis, Mark, we continue to see operating margins going down slightly but due to the overall product mix change in that segment, so looking at last year for the full year, our Telecom transmission was about 27% and we would expect it to be a couple of points lower than that for the full year.

Okay. Relative to the MTS contract, you said that there was seemingly a delay potentially tied around getting the approval of a new computer terminal for that system. Are you providing that terminal or is that coming from another party and how much visibility do you have on the timing of that decision?

We will be providing the computer as we have in the past, as part of our system, and unfortunately, this computer development has taken longer than anticipated. It is a directed procurement by us, I should say it's a directed procurement by the government for us to buy this particular computer so the government has chosen that computer and it is not fully developed and the delays have been there to try to incorporate this new computer rather than using the old computer and this has taken some time, but I think we're there. We're almost there. I would certainly expect something in the next 60 days.

Okay. Final question if I may. You started the first quarter with about $111 million in backlog if you throw in the Radyne piece at mobile data. You converted about 73% of that to sales. You're coming into this quarter with a backlog of $69 million. If you apply kind of that similar ratio that would imply you'll be 45 to $50 million in revenues in the current quarter at Mobile Data. Is that a reasonable way of looking at it?

I think it is, Mark.

Okay. Thank you.

Okay.

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

Thank you. Just to revisit the MTS upgrades. So to be clear, there's no competitive element there? This is purely at this point you're dependent to some degree on a third party delivering a computer terminal that's been chosen by the DOD? Is that a fair characterization?

That's correct.

Great. And in RF amplifiers, it looks like you actually had no operating margin there this quarter. Obviously I guess due to the low margin products from your historic business there as you work through that low margin inventory, can you give us a sense of how you expect the operating margin trajectory of RF amplifiers to trend in the remainder of the year?

Sure. Let me first address something. The amplifier margin itself reports a negative operating margin but that negative margin includes an allocation of the in process R & D charge and as disclosed in our 10-Q, the charge that hit the amplifier segment was $3.3 million. The other piece went into the Telcom Transmission group so when you look at the RF operating margin without that charge , the segment did about 9% operating margin and that 9% included the low gross margin amplifiers, so year-over-year, if you look at our last year operating margin which was about 7%, Q1 we did 9%, we do expect operating margin in the RF Microwave Amplifier segment to increase from that 9% throughout the year, as we continue to ship out those low margin amplifiers so really by the second half that stuff will be cleaned out of the back and we will be close to the 10%, 11% range on the operating side.

Great. And with respect to the MTS order sort of push out if you will, it sounds like that may be sort of the third factor in your somewhat revenue caution here. I mean it sounds like OTH push outs maybe being the first one, I think you mentioned more conservative outlook on Tiernan, and then MTS push out the third most significant factor in sort of a somewhat more cautious back half revenue outlook? Is that a fair characterization?

I think what I was trying to say there is that it's back end loaded for this fiscal year 2009 but it will, we expect the orders to be probably larger than anticipated and some of it probably will go into 2010.

Okay, that's helpful and just finally, on the government, US government OTH opportunity, is there any that you said you expect you could land in opportunity order in this year. Can you put any bounds around the potential size of that as you have for the international opportunities?

We would rather not, obviously as you can imagine, this is highly sensitive and competitive area and it hasn't been fully negotiated yet, so rather than give you a number, let me say that it's not as large as the Algerian opportunities but certainly large.

Okay, that's helpful. Thank you.

And our next question comes from the line of Chris Quilty from Raymond James. Please go ahead, sir.

Good morning gentlemen. Most of my questions have been answered so I only have a couple nitpicks for you. On the Telecom business and specifically I guess earth station, you talk about the ROI characteristics associated with the carrier and carrier technology. Do you have any sense of maybe a percent basis what percent of your sales are being driven by the sort of upgrade ROI directed activities versus just normal ongoing customer buildouts?

No. Certainly, we can't, we really couldn't address that right now. It's very very difficult to break that out because in any given contract the variety of modems may include the carrier and carrier and non-carrier and carrier enabled modems so it's very very difficult to actually predict the portion of sales that go into that area.

Well let me rephrase it then. Do you think given the current economic back drop those ROI characteristics may help you to offset market softness, capture market share, or grow the business in any way?

Oh, absolutely. I think we've said that many times in the past. I think the ROI aspects of that particular technology essentially gives the customer, I think I mentioned the pay back of three months or less, and it's just a great cost effective way to communicate.

Okay.

And I think in terms of the times that we have right now, cost obviously is a factor and it's turbulent out there, and it has in the past given us market share capture from our competition and I believe that will continue.

Got you. Follow-up question in the area of BFT and the possible contract expansion. I think the survey notice says the proposed contract is anticipated to be awarded in December of '09 so we've got about a year before we hear anything definitive but would you expect to get some other indications that we can hang our hat on between now and then, in terms of a specific RFP or what would the process look like?

I think our experience with these types of notices from the past is December '09 I think is the outer limit and that's, I think we expect the contract to be no later than December '09, so it could be much earlier as well. It depends really how many people answer that notice.

One, besides you.

So far we hope it's one.

Got you, and a final question here with regard to the Radyne acquisition and product line consolidation. I haven't seen, and maybe I missed it, any announcements of product lines that have been out right cancelled. Can you just comment on whether there have been and just give us a sense of what the customer reaction has been to of course there was the initial reaction to the announcement but now that you've been able to go out there and talk to the customers, what their general feedback is on the transaction in the products that they are seeing?

I think the first part of the question is we have told all the Radyne customers that we will fully support the Radyne product line as they are using and now have planned to use and we will continue to build that product line for their systems as they exist today. Obviously in new systems, we would be promoting some of the Comtech products, specifically in the carrier and carrier area; however as I mentioned in the presentation, we are putting that technology into some of the Radyne modems as well, both military and commercial, and will continue to offer those products to those customers.

Got it. Thank you, gentlemen.

Okay, thank you.

Our next question comes from the line of Michael Ciarmoli of Boenning & Scattergood. Please go ahead.

Hi, guys, thanks for taking my call. Nice quarter. Mike? Just on the expenses with SG&A, can you give us some context around how these various legal issues are maybe listing your overall expenses?

Well, the way we're looking at it, obviously we're a much bigger company than we were a year ago and the company has grown so as we get bigger our legal expenses have increased in the last two years, so we had the export issues last year so year-over-year, there's not a real significant change in our legal expenses from year to year, and I don't expect us from a legal expenses, to have any material increase in our spending. That will be reflected in our SG&A so we're looking at it as a bucket of spending and I think the way we would point you to look at it is, as a result of the Radyne acquisition as a percentage of revenues it's going down.

Okay, are you also bundling in there these internal control measures or audits you guys are conducting?

Yes, we are.

Okay, and then I guess just sticking with the financials, it looks like there was a big jump in receivables in the quarter. Anything going on there to read into?

Yeah, don't forget that on August 1, we had all of the receivables from the Radyne balance sheet that were included and I think in the Q, we talk about maybe 50% of the total receivables being from the US government at 10-31-08.

Okay. And then you provided a sort of EBITDA guidance on the last call of 164 to $166 million. Do you have an update for what we can look for for EBITDA?

The last time we gave you EBITDA guidance of about 164 to $166, we gave it to you just to kind of give you a sign of the power of the year-over-year change with the Radyne acquisition. We're not going to give quarterly updates on EBITDA but obviously we are raising our EPS so you guys can kind of do the math and come up to something yourself.

Okay, fair enough and then just getting back to the Blue Force Tracking opportunity in this market survey, is it too early to tell if the government, since the size of the opportunity, the ceiling is being lifted by a good amount, that they would go with some sort of dual source two vendor approach or do you guys not have that insight right now?

I think we're taking this synopsis that the Army put out as just at as raise in our contract, and obviously, they are and they have to go out and see if there are any interested parties to avoid any difficulties in placing this contract with us, so we just see that as just an addition to our contract.

Okay, perfect. And then with I guess other talk out there from the DOD about a troop surge in afghanistan, do you guys have a sense as to what your I guess replacement or repair opportunities might be from transceivers that have been in Iraq that are going to move to Afghanistan. Any context around what that opportunity could look like or again too early to tell?

We see it as an opportunity but we really at this point, at this time, we can't quantify it.

Okay. All right, I think most of my other questions were answered. Thanks guys.

Thanks.

It does look like we have a follow-up question from the line of Tim Quillin, Stephens, Inc.

Yeah, just a couple quick follow-ups. Mike, how low is interest income going to be? What kind of rates are you getting right now?

Well, the other day I bought a $5 million US Treasury and earned $18 of interest for the month. It's one of the reasons, that we're not going to give EBITDA guidance on a quarterly basis. We just really don't know how these interest rates are going to go over the next couple quarters but certainly it's going to be a lot lower than it was in Q1 of 2009. I think we gave you a percentage for the year but you guys can watch the rates and see where they are but I think it's fair to say it will be way under 2% for the year.

Right, okay. And then I think you're able to potentially buy in your convertible notes in February. Is that something you're considering and what would be the mechanics of that?

We obviously haven't made any decision on what we're going to do. We are evaluating it both for December and January. If we were to do a call for cash, which is our only option from the indenture, more than likely given the stock price of where it is today, the noteholders would be in a conversion period and more than likely they would exercise their conversion option, which would result in the Company having to make a decision of whether or not we pay cash or stock, and it's probably more likely that we would convert into stock than it would be into cash, but we just haven't made those decisions yet.

Okay, that's great, and just lastly, is there anything that you can tell us about the DOD subpoena? I know sometimes it's a little difficult to figure out what they're doing but by the type of paperwork or what they're looking at, do you have any sense of what they're after?

Well, the matter's really at a very early stage. We had some preliminary discussions with the DOD about the information they would like to obtain and we certainly can tell you that we intend to cooperate with their investigation. I think the thing that's important to us as of today, we can tell you that the subpoenas do not allege any specific violations, either criminal or civil, concerning our contract with our third party, and that said, we've just begun an internal investigation to determine what the issues may be with the subcontract.

Got you, thank you.

We do have another follow on question from Mr. Mark Jordan of Noble Financial. Your line is open.

Good morning again. Mike, your guidance of cash of 250 to 265 at year-end I guess that obviously assumes that you do not call the converts and if you did call the converts that that could possibly be $105 million lower?

If we wound up calling it for cash, that would be correct.

Okay. Last question, relative to the Brazilian issue, on the last call it kind of seemed like you were getting, you had gotten good informal comments from the investigators there and now, the hardware was seized and it's now back in your warehouse. Could you give us a little more detail as to what has transpired and do you see some time frame for final resolution of this issue?

The way I would tell you to think about it is we've had some very open dialogue with both the State department as well as the ICE agent for a long time. The conversations have been pretty cooperative both on their end and our end. We've just ultimately chosen not to dispute the ruling that the customs and State department took here. It was a voluntarily agreed that they would return the equipment to us so I think we're very hopeful of getting that equipment released and be able to ship that to the Brazil end customer. I think the time frame we use here internally is shortly.

Okay. Thank you.

I think Operator we'll have one last question if you can. If there are any.

Our last question comes as a follow-up question from the line of Chris Quilty of Raymond James.

Made it under the wire. Clarification, I think you indicated from your explanation but on the BFT survey document, although it didn't specifically talk about second generation capabilities with improved response times and data or bandwidth, presumably when you look at a large contract extension, it would include those developments that you're actively doing for the customer?

Well, again, we can't really say. Obviously, it is one possibility that something like that could be added to the contract for the next generation but I think if you read into the contract where it specifically quoted, and I quoted that Comtech network, the Comtech transceivers and the Comtech wave form should be used, I think that pretty well tells you that it's the present generation. Now, could there be additional line items put into the $617 million contract? Yes, there could be for additional let's say prototypes or additional development of the Next Generation.

Okay, but I mean, it seems pretty obvious that they aren't going to want to stick with legacy equipment in a long term, given that they're paying money through Northrop to buy a sat to develop next generation and you guys have been spending a lot of money on next generation that there's got to be a way to migrate this contract.

Well, you have to really understand the next generation is a very much more robust system and with more data throughput and more capability comes the higher price and it's a matter of funding. It's a matter of what will do the job for what time period. Certainly, after 2013, I think we all expect to be in the next generation.

Okay, and follow-up to the NATO question or Afghanistan, we're obviously going to be pulling troops out of Iraq at some point, maybe slower than people expected, as they shift into Afghanistan. You have a great position in the Iraqi theatre because of the dominance of US forces but you've got a lot more NATO forces in Afghanistan which if I'm correct are using a different Blue Force tracking technology than you supply today; is that correct? And how does that impact you in the long term as that shift happens?

As you know, we're also part of the NATO BFT tracking system, so we supply capability technology in that area, but I think that what we're all looking for really is not a NATO surge but an American surge of troops, and the Americans will be using their BFT system.

Right. But at some point, we don't want to shoot them and we don't want them shooting us, so these things need to work together.

I think that's already there. I think the two systems do work together.

Okay. Very good. Thank you, gentlemen.

Okay. Thank you very much for joining us today and we'll talk to you in about three months.

Thank you for joining us. This does conclude your teleconference and you may disconnect at any time.