Comtech Telecommunications Corp (CMTL) 2009 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Comtech Telecommunications Corporation's third quarter fiscal 2009 earnings conference call.

(Operator Instructions).

As a reminder, this conference is being recorded Thursday, June 4th, 2009.

I would now like to turn the conference over to Ms.

Maria Solerno.

of Comtech Telecommunications.

Please go ahead, ma'am.

Thank you, and good morning.

Welcome to the Comtech Telecommunications Corp.

conference call for the third quarter of fiscal year 2009.

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 and Frank Otto, Senior Vice President, Operations.

A news release on the company's results was issued yesterday afternoon.

If you have not received a copy, please call me and I will be happy to send one to you.

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, 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.

I am pleased now to introduce the President and Chief Executive Officer of Comtech, Fred Kornberg.

Fred?

Thank, Maria.

And good morning, everyone and thank you for joining us today for our fiscal 2009 third quarter earnings call.

Yesterday afternoon, we reported third quarter results that continued to demonstrate our ability to perform well in what has already been a long period of sustained global economic challenges.

Our overall performance this quarter was above our expectations and is generally attributable to our managements team successful business execution as well as the implementation of a number of cost reduction initiatives.

Our telecommunications business appears to have stabilized.

In fact since we last spoke, our total telecommunications segment backlog has grown largely attributable to bookings in our satellite earth station product line.

Our RF microwave amplifier segment revenues have also been growing, and our government business remains strong with record bookings in our mobile data communications segment.

In aggregate this solid booking momentum resulted in a record backlog of over $591 million as of April 30th, 2009.

Before I give you an update on our operating segments and provide updated guidance for fiscal 2009, I would like to make a few comments about our recent capital raise.

We were able to raise capital on what we believe very favorable terms because we went to the market from a position of strength.

With our deployable cash position of over $450 million, we have an exceptional opportunity to capture incremental long-term value through acquisitions that are additive both financially and strategically.

Our highest priority targets, some of which have been developing for a number of years, would accomplish a number of our core acquisition objectives such as further strengthening our leadership positions in our existing segments, contributing valuable new technologies, diversifying our customer base, and where we can, provide further leverage of our manufacturing infrastructure expertise.

We have been asked numerous times how we intend to use our cash to drive shareholder value.

Well, the highly successful acquisition of Radyne is a good example of how.

Over the years, we have identified a number of attractive targets that meet the acquisition criteria I just described and we intend to be patient and conduct exhaustive diligence so as to insure that we maximize long-term value for our shareholders.

In the meantime, we will continue to focus on business fundamentals and execute our core strategy which we expect will continue to result in strong free cash flow from our core operations.

Now, let me turn it over to Michael Porcelain our Chief Financial Officer to provide an overview of our financial results for the quarter.

Mike?

Thank, Fred.

Good morning, everyone.

As Fred mentioned our Q3 results were generally solid and above our expectations.

Let me review the results for the quarter and I will start with the top of the income statement and work my way down.

Q3 of fiscal 2009 net sales were $128.5 million which represents a decrease of 7% versus Q3 of fiscal 2008.

Our results this quarter reflect growth in both our telecommunications transmission and our RF microwave amplifier business segments, all of which was offset by an anticipated significant decline in sales of our mobile data communications segment.

All three of our business segments benefited from incremental sales associated with our Radyne acquisition.

In our telecommunication transmission segment, net sales for the third quarter were $54.1 million.

This represents an increase of $5.7 million or 11.8% from Q3 of fiscal year 2008.

In this segment, sales of satellite earth station products increased, primarily as a result of the inclusion of Radyne branded satellite earth station products as well as an increase in period over period sales of our satellite earth station modems that incorporate our Double Talk carrier-in-carrier technology.

Sales of our video encoder and decoder products which we acquired from Radyne, were lower than the levels we achieved in Q2.

Turning to Over the Horizon microwave systems product line, net sales for the third quarter of fiscal 2009 as expected were significantly lower than the third quarter of fiscal 2008 primarily due to lower sales to the US DOD and lower indirect sales to Algeria.

Sales of some of our smaller Legacy product offerings embedded within our Satellite Earth Station product line and our Over the Horizon microwave systems line, although historically and currently nominal, have been impacted by global economic conditions.

For those not familiar, our smaller Legacy product lines include data compression chips we sale to copier companies such as Konica and Sony as well as fiberglass antennas that we sell to broadcast customers.

These small Legacy product lines have been significantly impacted by the economy as we mostly sell them to commercial customers.

Our telecommunications transmission segment represented 42.1% of consolidated net sales for the third quarter of fiscal 2009 compared to 35.1% for the third quarter last year.

In our mobile data communications segment and as anticipated, net sales declined.

During Q3, our mobile data segment generated $32.2 million of revenue a decrease of 53.9% compared to last year.

We attribute this period to period decline primarily to timing, as a significant portion of our mobile data communications segments record backlog is not expected to ship until fiscal 2010.

In addition, and as a reminder, sales during Q3 of last year included sales to the Army National Guard which were funded by a supplemental defense appropriation bill commonly referred to as the Leahy-Bond Amendment .

Sales for Q3 of 2009 included incremental sales associated with the Radyne acquisition.

Our ability to forecast specific customer fielding schedules amounts and timing of received and anticipated orders and product mix requirements continues to remain difficult.

To that point, as a result of short-term shipping delays by the supplier of our new MTS ruggedized computers, we now anticipate a shift of approximately $15 million of revenue from Q4 2009 to fiscal 2010.

As a result, we now expect sales in our mobile data communications segment to be significantly lower during the fourth quarter of fiscal 2009 as compared to sales for the three months ended April 30th, 2009.

As Fred will discuss in more detail, based on the overall expected shipping schedule associated with our backlog, we still expect that sales in our mobile data communications segment in fiscal 2010 will be significantly higher than our total expected sales in fiscal 2009.

Through April 30th, 2009, we received $530.8 million in total orders on our $605.1 million MTS contract and $211.3 million in total orders under our $216 million BFT contract.

Our mobile data communications segment represented 25.1% of consolidated net sales for the third quarter of 2009 as compared to 50.6% last year.

Now turning to our RF microwave amplifier segment.

As a result of the Radyne acquisition, we more than doubled our sales for the third quarter of fiscal 2009 as compared to the third quarter of fiscal 2008.

In addition, we also experienced increased period over period sales of our solid state high power broadband amplifiers and high power switches that were incorporated into defense related systems.

Net sales for the third quarter of fiscal 2009 were $42.2 million or 113.1% increase compared to last year.

Fiscal 2009 is expected to be a record year of sales on profitability for our RF microwave amplifier segment.

However, as we stated in our last conference call, as a result of the current difficult economic conditions we are operating in, sales and bookings in our RF segment for the remainder of the year are expected to be driven by the US military.

Based on the timing of orders that is are in our RF backlog and that we expect to receive for the remainder of fiscal 2009, we believe that sales that if final quarter of 2009 will be slightly lower than sales in Q3.

Our RF microwave amplifier segment represented 32.8% of consolidated net sales in Q3 as compared to 14.3% in Q3 of last year.

Of our consolidated fiscal 2009 third quarter net sales, 33.9% were to international end user, 54.5% were to the US Government, with the remaining 11.6% to domestic commercial customers.

Turning to our gross profit, as we expected, our gross profit this quarter was significantly impacted due to lower consolidated net sales.

Gross profit as a percentage of net sales decreased to 37% for the third quarter of fiscal 2009 as compared to 43.8% last year.

Despite the synergies we achieved as a result of the Radyne acquisition, our gross profit percentage declined in both our telecommunication transmission and our mobile data communications segment offset by increased gross margins in our RF microwave amplifier segment.

Declines in both our telecom transmission and mobile data com segments are primarily attributable to lower sales and lower production of mobile satellite transceivers.

Gross margins in our RF microwave amplifier segment was unusually strong as it benefited from an overall more favorable product mix.

Our RF microwave amplifier product line if Q3, 2009, includes the benefit as a result of the Radyne acquisition of sales of Satellite Earth Station, Traveling Wave tube amplifiers which were sold at higher gross margins than those of our Legacy product line.

On a company-wide basis, in an effort to improve gross margins from current levels, we have and are continuing to implement a number of cost reduction activities.

To date most of our actions have been head count related; however, we are look at ways to prune our product portfolio particularly in our smaller product offerings.

On the expense side, SG&A expenses were $23.1 million in the third quarter of fiscal 2009 or $1.1 million higher than last year.

Our SG&A-- our SG&A expenses for Q3 include incremental spending associated with the Radyne businesses in addition, incremental expenses associated with the various legal matters described in our 10-Q.

As a percentage of consolidated net sales, SG&A expenses were 18% in Q3, 2009, as compared to 15.9% in Q3, 2008.

The increase in SG&A as a percentage of net sales is primarily due to the fact that SG&A expenses for the three months ended were negatively impacted by the lower level of consolidated net sales that we [inaudible] experienced as well as the fixed nature of certain overhead costs.

In addition Q3 2009 includes incremental selling and marketing costs associated with promoting our next generation MTS and BFT AC products and services to the US Army.

We have and, as I mentioned before, are continuing to implement cost reduction activities in an effort to reduce SG&A expenses as a percentage of our consolidated sales.

Research and Development expenses were $11.4 million in the third quarter of fiscal 2009.

This represents 8.9% of sales in Q3 as compared to 7.5% last year.

The increase in dollars primarily reflects our continued investment in Research and Development efforts as well as incremental investments associated with the expanded product lines that we now offer.

Amortization of intangibles with finite [lies] for the third quarter of fiscal 2009 was $1.8 million.

This represents an increase of $1.4 million compared to last year and all of this increase is primarily attributable to the Radyne acquisition.

Operating income for the third quarter of fiscal 2009 was $11.2 million compared to $27.8 million for the third quarter of fiscal 2008.

As a percentage of consolidated net sales, operating income was 8.7% in the third quarter of fiscal 2009 versus 20.1% for the third quarter of fiscal 2008.

Operating income for the third quarter of fiscal 2009 includes stock-based compensation of $2.3 million compared to $2.6 million in the third quarter of fiscal 2008.

There was nominal interest expense in this third quarter of fiscal 2009 as compared to $668,000 in the third quarter of fiscal 2008 which primarily represented interest associated with our 2% convertible senior notes.

These notes were fully converted into shares of our common stock on February 12th, 2009.

Interest expense for Q4 of 2009 is expected to significantly increase from current levels as a result of our May 8, 2009, issuance of our 200 million, 3% convertible senior notes.

Interest income and other decreased from $3.1 million in the third quarter of fiscal 2008 to $400,000 in the third quarter of fiscal 2009.

The period over period decrease of $2.7 million was primarily due to the significant reduction in our cash and cash equivalents from last year primarily due to cash payments for the Radyne acquisition as well as significantly lower period over period interest rates as well as a change in our investment strategy which I have previously discussed.

Turning to taxes our GAAP effective tax rate for third quarter of fiscal 2009 was 29,5% compared to 36.1% for the same period last year.

During Q3 of 2009, we had a total benefit of $0.5 million including a benefit related to the change in our estimated fiscal 2009 effective tax rate.

Excluding any discreate items and the nondeductibility of the in process R&D charge associated with our Radyne acquisition that was recorded earlier in fiscal 2009, our effective tax rate is now expected to approximate 34%.

Finally on the bottom line, our EPS for the third quarter of fiscal 2009 was $0.29 compared to $0.70 for the third quarter of fiscal 2009 -- 2008.

Our non-GAAP EPS which excludes stock-based compensation was $0.34 for the third quarter of fiscal 2009 as compared to $0.76 for the third quarter of fiscal 2008.

EBITDA was $18.4 million for the third quarter of fiscal 2009 compared to $33.2 million for the third quarter of fiscal 2008.

This quarter we did what we believe to be a solid job as it relates to managing our balance sheet.

Our combined accounts receivable and inventory balances are down in total by approximately $17.6 million since Q2 of 2009.

Cash provided by operating activities for the nine months ended April 30th, 2009 was $49.6 million compared to $22.1 million for the nine months ended April 30th, 2008.

Including the net proceeds of our 3% convertible notes, we now have approximately $450 million of cash heading into Q4 2009.

Finally, turning to consolidated backlog as of April 30th, 2009 reported backlog was $591.1 million compared to $201.1 million of July 31st, 2008 and $185.9 million as of April 30th, 2008.

As we have mentioned a significant portion of this backlog is expected to ship in fiscal 2010.

Before turning it over to Fred, let me take a few seconds here and briefly walk through the changes to our income statement model going forward relating to the recently issued convertible notes.

Although the accounting rules for convertible notes may sound complex, the accounting for our notes is, in fact rather simple and will be based on the if converted method as required under SPAS No.

128.

As such, for purposes of EPS modeling, you would only include the assumed conversion of the notes issuance, if it is actually diluted for the period being calculated.

In our case, assuming no other equity or tax rate changes, a simple way to think about it is that the conversion of the notes should only be assumed in the model quarterly basic EPS exceeds $0.21.

This is a simple test which is the result of dividing the after tax net interest expense of approximately $1.134 million by the 5.488 million shares that is underlie our convertible notes.

Note that the pretax quarterly interest expense of the notes includes the amortization of $6 million of transaction costs beginning in Q4, 2009 Interest expense on a reported basis will increase from the level we reported in Q3 by approximately $1.8 million on a pretax basis.

At the end of our call we will post a presentation on our web site at www.comtechtel.com that will show the impact that the shares had on the guidance that Fred will provide in a few moments.

I will be more than happy to take questions off line, if anyone has any additional detailed questions on how the accounting treatment for the convertible notes work.

Now let me turn it back to Fred who will provide additional color and insight into our three business segments as well as provide an update of our financial guidance for fiscal 2009 and some updated comments related to fiscal

Thanks, Mike.

Before I provide updated guidance, I want to update you on what is happening in our three business segments.

Starting with our telecommunications transmission segment.

Our satellite earth station product line including our flagship modems is holding its own in a very challenging market and based on current bookings, it looks like commercial demand, although soft, has somewhat stabilized.

However, as Mike mentioned, some of our smaller product lines such as our fiber glass antenna product line and our video encoding and decoding product line, which we acquired from Radyne, are and continue to struggle.

Offsetting the overall commercial softness has been continued demand by the US Government that so far has exceeded our expectations.

In an environment where satellite transponder costs continue to rise, due to the demand for satellite capacity, our band width efficient modem product line, we believe, positions us for a rebound in growth once the economy recovers.

Our position is supported by [Futron] an independent research firm that forecasts that satellite transponder utilization, will increase to 84% in 2012 from 60% today.

And another independent research firm, according to Northern Sky Research, total satellite transponder demand for cellular back haul via satellite is also forecasted to increase at a 12% compounded annual growth rate between 2009 and 2013.

Driving the demand for band width are commercial trends such as cellular subscriber growth in emerging markets, the transition to high definition video, and the growth of internet protocol television.

The demand for satellite transponder capacity is further exacerbated by the enormous increase in the past few years of satellite transponder utilization by the US Government, the largest user of satellite transponder band width in the world.

On the commercial front, we've recently launched a new modem, CDM-740 that offers our patented turbo product code band width efficiency as well as advanced network capabilities for broadcasters and enterprise end markets.

On the government front, we expect that demand will continue to remain strong.

Our flagship government modem, the SLM 5658 which is now carrier and carrier enabled, enhances band width efficiencies by up to 50%, thereby opening up additional use of transponder band width capacity for the government to use or for cost reduction.

We have also just completed adding advanced features such as LDPC, forward error correction, eight quam modulation, and carrier in carrier functionality to our Radyne DND 2050 government modem to enhance it's value to its existing customers.

In our Over the Horizon microwave strobo scatter product line, where we remain the defacto leader, we continue to work diligently to negotiate new contracts and pursue both midterm and longer term business opportunities.

Due to the unique characteristics of this point to point transmission technology including its ability to operate over and in unfriendly terrain, to provide highly secured links, and it cost-free nature after the initial purchase, we continue to generate strong interest from our core customer constituencies.

On the government front, our 16 megabits modem continues to be fielded in Iraq and Afghanistan, and we recently designed the next generation tropo terminals that will enable data tropo speeds up to 44 megabits per second.

We will be show casing this technology to the military this year.

On the international front, based on current pace of negotiations on two new contracts for end use in Algeria which clearly have taken far longer than we expected, we now anticipate that at least one of these contracts which we estimate at approximately $4 million each will be finalized some time in fiscal 2010.

We would not be surprised if the other contract was also signed in fiscal 2010 but, as you know, while timing has and continues to be a difficult item to predict, we believe that winning these contracts is not a question of if, but a question of when.

Now let me turn to our mobile data communications segment where there have been numerous noteworthy events since our last earnings call in both our MTS and BFT programs.

As a reminder, Comtech has been the sole provider of satellite-based mobile asset tracking and communications networks to the US Army Movement Tracking Systems or MTS since 1999, and to Blue Force Tracking or BFT since 2004, and to date, we have delivered more than 20,000 transceivers to MTS and over 60,000 BFT transceivers to BFT.

In January 2009, we received a $281.5 million order from MTS for new computers.

And in April, 2009, we received orders totaling $102.1 million predominantly for new MTS systems.

This was a pleasant surprise for us and clearly demonstrated to us the long-term critical need for our technical equipment and solutions as our troops shift from Iraq into Afghanistan.

As Mike mentioned earlier, we had originally anticipated that approximately 15 million of the computer order which shipped late in the fourth quarter of fiscal 2009.

However, recent indications suggest our computer supplier is experiencing delays, that most probably will result in these shipments shifting into fiscal 2010.

Clearly the timing and nature of MTS orders has impacted our second half of 2009 revenues, and it's impacted it negatively.

However, on the positive side, bookings, although late, are at a record level which should produce record segment revenues in fiscal 2010.

On the funding side we believe recent army disclosures clearly demonstrate continued support for the MTS program.

First, the Army's 2009 supplemental budget confirmed new funding of $92.9 million.

And last month the Army released its preliminary fiscal 2010 budget for aggregate MTS funding is planned to increase from fiscal 2009 to fiscal 2010 by approximately 12% or from $222.3 million to $248 million.

We are very pleased that funding environment for MTS continues to be strong and we believe that this strength will translate into further strong MTS orders in fiscal years 2010 and '11.

That said, our current $605.1 million three-year IDIQ MTS contract is set to expire in July 2010.

In February of this year, the Army issued a request for information or RFI in anticipation of putting forth a formal RFP for a new MTS contract competition.

The RFI states that the Army's future operational systems developed under the next contract, must be able to communicate with existing fielded equipment.

As we have stated many times before, backwood compatibility we believe is something only we are uniquely capable of providing.

We expect that the Army will issued a competitive RFP in the next few months and feel confident that we are strongly positioned to win that competition.

Now let discuss some recent activities on our BFT program where we currently serve the Army under a $216 million contract which expires in July 2011.

Again as a reminder, the BFT system addresses the Army's war fighter's need to track and communicate with mobile assets.

In November 2008, the BFT program office and the public RFI indicated its intention to extend our present $216 million five year IDIQ contract from 2011 to 2013 and to increase its contract value by $617 million to a total new ceiling of $833 million.

The RFI also stated this is expected to be finalized in 2009 and no later than December 2009.

Funding to support the significant proposed BFT contract increase, we believe will come in part from the fiscal 2010 Army budget where FBCB Two funding of which BFT is an important subset, is anticipated to increase from $378 million in fiscal 2009 to $515 million in fiscal 2010 or approximately a 36% increase.

Importantly, this preliminary fiscal 2010 Army budget also specifies orders of 9,720 BFT systems for which we presently supplied-- for which we presently supplied these satellite transceivers that are known as BFT 1, as well as orders for 3,150 next generation high capacity BFT systems, the transceivers we call our BFT HC systems.

Our confidence in our next generation high capacity solution was just recently validated by the receipt of a highly strategic $8 million order to provide and test 45 of our new high capacity BFT HC transceivers in a real fielded test environment.

This important win was the culmination of a intensive and significant two year Comtech R&D investment to develop a highly advanced feature-rich next generation transceiver and network that is fully backwood compatible and designed to meet the Army's next generation operating and performance requirements.

In April 2009 the BFT program office issued a public survey where it stated that it intends to issue new contracts for a five year period beginning 2010 and extending through 2015 for the next generation transceivers, the BFT HC.

The stated goal here is to order over 100,000 transceivers with a total revenue opportunity Comtech estimated at $477 million.

That the Army contemplates fielding the next generation BFT systems as early as fiscal 2010, we believe is highly positive for Comtech based on the ease of integrating our next generation transceiver and network known as BFT HC or high capacity into the Army's existing BFT platform.

Here we believe we are uniquely positioned to offer backwood compatibility due to the proprietary nature of the weight form in our existing network and transceivers.

Keep in mind that approximately over 60,000 transceivers with Comtech's proprietary weight form have been sold to the Army already.

With over ten years of battle hardened experience and over 80,000 units sold to the BFT and MTS programs, we continue to be extremely confident in our ability to continue as the Army's primary satellite transceiver and network provider for both the BFT and MTS programs.

Finally, let me provide an update on our RF microwave amplifier segment which today continues to have an outstanding year.

Our two product lines in this segment are solid state high power broad band amplifiers, primarily for electronic warfare communications and medical markets, and our traveling wave two power amplifiers which are primarily used for satellite communications market.

Each have carved out strong leadership positions within their markets and each product line stronger than expected sales into military or government end markets has offset soft commercial markets.

In our solid state product line, we continue to be the beneficiary of the strong bookings related to the 2.1 program that is an improvised explosive device jamming program.

We are one of the key suppliers of both solid state amplifiers and switches to this program which is considered a tremendous success by the US army based on its direct impact in reducing troop fatalities and severe injuries from IEDs.

We are optimistic we will continue to receive follow-on orders from this program.

Our TWT or traveling wave two product line remains strong due to ongoing strong demand from the US Government.

Our compelling government growth opportunities are twofold, the ever increasing demand for band width that is driving an anticipated increase in spending by the US military on new satellite infrastructure and our belief that we are winning more than our fair share of new business.

This is based upon our superior performance capabilities of our amplifiers both solid state and TWT.

Recent new orders we received for the TWT amplifiers included the deployment of multiband communications system or DMCS programs and the light weight multiband satellite terminal or LMST program.

The commercial markets for our TWT amplifiers continue to be challenging.

However, here too, we have made important breakthroughs with the major US direct to home providers such as DirectTV and Equistar replacing older technology such as expensive (plastron) amplifiers with more cost effective TWT amplifiers.

Now I will provide our fiscal 2009 guidance and provide some comments about fiscal 2010.

Before I do that as we've said 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.

That said let me now provide a fresh set of guidance for remainder of fiscal 2009.

As a reminder, we previously provided revenue guidance of 610 to $615 million.

However, as Mike mentioned, primarily as a result of the shift of approximately $15 million of MTS computer shipments from fiscal 2009 to fiscal 2010, as well as some lower anticipated revenue from our smaller product lines, we are reducing our fiscal 2009 revenue guidance to a range of $590 million to $595 million.

This implies a revenue range for Q4 of 126 million to $131 million.

Given our recent note offering, I will provide updated EPS guidance both with and without the impact of our notes offering so you can have an accurate understanding of that guidance.

Our prior GAAP EPS guidance was $1.77 to $1.82.

Despite the $15 million shift of MTS revenue to fiscal 2010 as well as lower revenue from our smaller product lines, our new EPS guidance and the new guidance is before considering the impact of the 3% notes is $1.74 to $1.76.

This updated guidance includes cost reduction efforts we have achieved but excludes the dilution impact of our notes.

Had we not had the delay of the MTS revenues into fiscal 2010 or issued the notes, we would have today been able to increase our guidance to you.

Including a 4% diluted impact of the notes in fiscal 2009, our updated GAAP EPS guidance is $1.70 to $1.72.

In our updated non-GAAP guidance which excludes stock-based compensation in our in process R&D development charge is $2.13 to $2.16.

Our updated GAAP EPS guidance of $1.70 to $1.72 implies guidance for Q4 of about $0.15 to $0.17.

Excluding the .04 EPS dilution of the 3% notes, our fourth quarter GAAP EPS guidance would have been $0.19 to $0.21.

Our Q4 EPS reflects anticipated product mix changes and anticipated higher R&D spending on MTS and BFT HC next generation products as compared to our third quarter.

Although we have slightly decreased our EPS guidance due to the revenue shift of MTS and interest expense associated with our notes, we are not at all concerned the shift of MTS revenue is purely timing related and will certainly benefit fiscal 2010.

In addition, our decision to raise capital while short term dilutive we believe puts us in a strong position to further enhance shareholder value for the long term.

Of course fiscal 2009 has clearly been disappointing.

We attribute this to the impact of the worst global economy in over 50 years and also to the direct results of the change in nature and timing of orders.

However, looking forward I can tell you without material reservations that our record backlog positions us for a return to dramatic year-over-year growth in revenue, EBITDA and EPS in fiscal 2010.

From a balance sheet perspective, we are rock solid and hope to be in a position to redeploy a large portion of the $450 million of cash that we have today.

Any meaningful acquisition would provide-- would obviously provide additional revenue EPS and EBITDA growth beyond our organic growth plans.

We intend to provide, at this time in September specific and strong fiscal 2010 revenue and EPS guidance for you during our normal year-end earnings call which is expected as I mentioned to occur in September.

With that said let me turn to the question-and-answer portion of our conference.

Operator?

(Operator Instructions).

First we will take our first question from Mr.

Tim Quillin of Stevens.

Please go ahead.

Good morning.

Good morning.

First, could you go through the backlog by segment?

Sure, Tim.

The backlog of $591.1 million consists of telecom transmission backlog of $62.2 million our mobile data com backlog is $444.7 million, and our RF amplifier backlog is $84.2 million.

Great.

Thank you.

And in terms of the MTS computer delay, how much of the delay is caused by the, the government review of the bid process?

I don't think it has anything to do with that, Tim.

The delay is primarily kind of almost the silly part, but the computer-- the computer supplier is not only supplying a computer but it is also supplying the-- what we call the mounting station that mounts the computer and our transceiver to the vehicle.

And believe it or not, it is the-- it is the mounting kit that is actually being-- causing the delay.

It is not the computer itself.

Okay.

That's, that's helpful.

And just doing my math here, on the telecom transmission bookings implied with your backlog it looked like bookings improved quite a bit quarter to quarter.

Is that correct?

Absolutely.

As Fred mentioned we had a pretty terrific quarter of bookings in our satellite (inaudible) station product line.

That's great to hear.

I'm sorry, kind of diverted me, with regards to the MTS computer though, and the risk factors section of your 10-Q you talked about the potential for cancellation of that.

Is that more of a standard risk factor not something you are seeing as part of the government review process.

That's correct.

That's absolutely true.

Every single government contract has termination for convenience clauses and so in light of the government review which started back in Q3, we just thought we would rehighlight that but it is a standard clause in every government contract.

And I think what makes us feel pretty comfortable about where things are is the supplier of the computer just recently issued a press release publicly that they have got, in essence an order for us.

So the fact that they did that kind of indicates things are well on the way to moving.

Okay.

Yeah.

That's the way we interpret that as well.

Thank you.

Mike just a couple of quick detail questions.

I guess one is do you expect a 34% tax rate in 4Q?

Yes.

That's correct excluding any kind of one-time events benefits and so forth, you can use 34% in Q4.

Okay.

And then also you said basic EPS of $0.21 is kind of the decision point, and how we assume conversion.

In 4Q then are we not assuming conversion to get to the EPS guidance?

In essence you would just really look at your EPS modeling and your P&L model and using the guidance we provided.

The interest expense line would obviously show the amortization of the interest expense both on the 3% as well as the deferred financing costs.

You wouldn't do the add back calculation unless your model showed more than $0.21 basic EPS.

I agree with your statement.

Okay.

So it is $1.8 million in interest-- additional interest expense we should put in there and then whatever modest interest income you might be able to get from that additional cash?

That is correct.

Perfect.

Thank you.

I appreciate it.

Thanks.

Your next question comes from Mr.

[Peter Armond] of American Technology Research.

Please go ahead.

Good morning, Fred, Mike Jerome.

Just quickly on the-- the note offering and now that you have really substantial cash position, Fred, maybe can you just talk about some of the size of the opportunities that you may be thinking about and you talked about extending your leadership and some new technologies, maybe if you can giver as much color as you probably could without giving anything away there.

I guess the last comment of your is probably the answer there.

We hate to discuss any of this stuff publicly.

I will just give you kind of a range.

I mean we are not at all against buying a very small technology company for the sake of a good technology.

We have done that before, and certainly we have enough cash to go to a pretty large company, and as I mentioned in our script, we have a number of them that we have been kind of following the last few years.

Okay.

So there's no specific timing here, you've indicated user been pretty patient in the past but are you-- is your goal to have a deal announced within the next 12 months?

Well, I would hope so, that we could.

But if you can judge us by our past, we are very patient and very conservative and we certainly do some exhaustive due diligence on any targets.

And that is not necessarily one of speed.

But we have been working on a number of them for a number of years.

So something could happen.

Sure., and Pete, just to add what Fred is saying.

I think it is fair to say that we saw the opportunity in the capital raise market that provided very favorable terms to us and had we not had a number of opportunity that is we were working on one or two or both of them could happen or three of them all at the same time.

We are working them.

They're very difficult to predict but certainly to have the cash on hand and from fr a position of strength is the right thing.

But if you look at the history of Comtech, we're going to continue to be methodical and patient in doing due diligence.

We are not just going to spend cash for the sake of spending cash, we will do it right way and from a position of strength.

I appreciate those comments, Mike.

Just quickly on the RF segment the margins continue to be impressive here, and I know you are getting a lot of benefits from volumes of (inaudible) 2.1.

How should we expect that going?

I mean I know this next quarter you will have down a little bit in terms of top line, but just in general, should we expect double digit margins continuing here?

We are at the point where if you remember some of those problematic jobs that we had going back maybe 12 to 18 months, those seem to be cleared out of the backlog.

There's very little in there.

Q3 we actually just got a pop in terms of the reported operating margin from the mix of sales that went out the door.

That is expected to go a little bit lower in Q4 obviously but if you look on a longer term basis I think it is fair to assume that we will be between 10 and 12% operating margin on a given quarter and that will fluctuate depending on the mix.

We are trying to get that up above the 12% operating margin and it is a longer term goal of ours and we are putting in actions to do that.

But I think it is safe to assume between 10 and 12% right now.

Okay.

Just one last one.

Is there any final read on when you might see the BFT extension?

I know there was discussion you might see this happening sooner than what was previously released that it would happen by the end of this year.

But you had made some comments last quarter that it could happen some time this summer.

Do you still stick with that.

Interestingly enough we certainly last quarter thought it would come much earlier than December which is the army quoted date but unfortunately the army's commands and program offices and contract offices are in the process of moving.

And specifically their contracts office which was in Fort Monmouth, New Jersey, is moving out of Fort Monmouth.

Sot that has kind of put a little delay in the situation.

But they still hope to do that before obviously before December.

We are hoping that the latest that this could possibly be is probably somewhere in October, November.

Okay, Thanks very much, Fred.

Your next question comes from Mr.

Mark Jordan of Noble Financial.

Please go ahead.

Good morning, gentlemen.

First question relates to carrier-in-carrier modem.

I have seen the Paradise Datacom has started to ship a modem that uses VMS paired carrier multiple access technology which sounds similar to carrier-in-carrier.

How competitive is that product to your flagship product offerings?

And is that the patent suit that Applied Signal referred to on its conference call?

Let me answer it in two different ways.

First Mark the offering that Paradise has out there is actually a via set box.

This box operates at a IF frequency of 70 megahertz.

We also have a box that's similar to that carrier-in-carrier capability, but our main offerings are in the RF area.

We actually have our carrier-in-carrier embedded in our modems but it will supply a total RF link type of carrier-in-carrier So it is a subtle change of the two different products.

We have, as I mentioned we have the IF product as well but it is not as, as popular as the other product that is within our modems.

As far as your second part of it, is this part of the applied signal litigation, possibly yes it is.

We don't know whether-- whether that box really-- whether that patent application is strong enough to eliminate that box from any future.

But this is just about started.

So, and we are not part of that, we are not part of that litigation at this point.

Okay.

Relative to the MTS computer push out,, it was my understanding that that program was-- or the installation cycle was scheduled to start mid July.

'09 and continue for 12 months to mid July 2010.

With the postponement or the delay of initial shipments, is the in date of the install cycle still mid July 2010?

So therefore you will patch up or is the whole schedule slide?

And when do you start to expect installations.

Right now-- right now it definitely as far as the customers concerned, he wants all of that shipped by July 31 of 2010.

The start of the shipment that's obviously, as we mentioned, kind of up in the air.

But it should start in the first quarter of '10.

Okay.

Relative to the RF backlog, you state it is $84.2 million.

Historically the your PSP side has been a significant backlog business [Zycom] since they sell into the modem market, is their backlog much more similar to the modem business that you have which is more of a book and ship and that therefore the majority of that backlog would be PSP and Zycom would be relatively low backlog reflecting a book and ship business?

No.

Actually Zycom it is more like the PSP backlog situations.

Their programs and their amplifiers are very sophisticated high power amplifiers that take time to ship out.

There will be some that we will always build for inventory so we can ship in a matter of 30 to 60 days to the customers needs but for the most part you can consider that backlog similar to PSP.

Okay.

Last series of questions on Tropo, I believe it was this time last year you mentioned that you were marketing to an additional international customer outside of the Algeria opportunities, and it was stated at the time that you thought you shall mention it because it might be relatively close on award.

Has that potential business opportunity gone away or what's the status on that?

That's one.

And then number two could you talk a little bit about your opportunities with regards to the army?

There had been conversations again in the past of track 170 rebuilds of the nonmodem parts and then secondly any new system opportunity like the air force, where do those things stand?

Okay.

Let me talk on international front.

Obviously we have had delays upon delays upon delays, and we are obviously very disappointed that things have gone to the right.

Although we have always been saying it is not a matter of when not a matter of if we win it is a matter of when.

Now I know we have said it before and we said it just this morning that we expect those things to happen this year.

The only reason that I think we are much more confident this time is that, we are kind of at the mercy of our prime contractors and at least at this time both prime contractors are in negotiations for those overall systems.

So, we anticipate that this will probably happen in the matter of maybe this calendar year.

So that's one on the Algerian side.

On the other opportunities, there again I think we thought we had another possibility that would come in relatively quickly, but as it turned out with Algeria, it too is just moving and moving to the right so we've just decided not even to mention it.

If it happens it will be great, we'll report it and it will be an up side, but at this point, I think it is just not worth mentioning.

On the government side, yes, it is a very exciting time in the government time.

We have a number of products that we're obviously trying to promote to the army.

As I mentioned we have a new Tropo terminal capability that can go up to 44 megabits in a second which is more than doubled in the present capability.

So we're going to be showcasing that.

We have a number of other product opportunities as well and-- that go from-- various products that go into the track 170 or other terminals and so forth.

Again I don't want to give too much color in that area but there are some good indications that some of these will pop within the next 12 months.

Okay.

Let me cheat and get one more.

The $8 million test for the 45 test unit, that seems to be an exceptionally large amount of money for 45 units to be tested in the field even if you assume a full fledge of 25,000, I mean that's-- that's a million dollars.

So what is the incremental $7 million being spent on in term of testing the system?

We charge a lot.

Well good.

Hopefully you will have good margins then.

All kidding aside, Mark.

It doesn't only include the 45 transceivers.

Obviously that will be a much lower number but there are some R&D components that is the army wants us to modify some of the stuff and put it into their performance specs.

We see no problem with that.

It also consists of a lot of, as I mentioned, in-field testing which is going to take some months, and that testing actually includes a lot of dollars.

Okay.

Any of that done overseas?

That is we don't know really where it is going be.

But it could be overseas because most of the systems are out there.

Okay.

Thank you very much.

Our next question comes from Mr.

Rich Valera of Needham and Co.

Please go ahead.

Thank you good morning.

Question with respect to mobile data, wondering how much of the backlog we can assume ships in fiscal 2010?

I mean obviously we can subtract what we expect will ship in the fourth quarter here, but you said yourself that I think the upgrade is really expected to ship within your fiscal year, don't really see any reason why the sort of system order you got, the nearly 100 million system orders shouldn't ship in the year as well as the year time which is unusually an annual number.

Just wondering if we should assume much if any of that backlog drift into fiscal 2011 at this point?

I would say there is some revenue, I guess on the way to think about it, contractually, the MTS contract ends on I think it is in June of 2010.

We already are experiencing some short term shipping delays with the MTS.

The government always has delays, I think in our thinking, it will some eventually slip into 2011.

We would anticipate getting the MTS contract extension, .

So obviously the performance period will allow us to get into '11.

I think there's always-- there's always going to be delays at some point.

So will some of this ship into 2011?

I think the answer is yes, but I think the majority of our backlog that we currently have is expected to ship in fiscal

I think, Mark, you can assume that 85 to 90% of that backlog will be shipable in 2010.

That's right.

That's helpful.

And then with respect to telecom transmission, last quarter when you talked about 2010, you talked about a flattish year in 2010 for telecom transmission.

Obviously, there have been some changes since then I think your smaller Legacy lines maybe have weakened.

But maybe we have a little bit easier comp because the back half might be a little lighter than you assumed here in fiscal 2009.

I was just wondering how we should think about telecom transmission in fiscal 2010 at this point.

We are going to save the, those more detailed comments for the September call, Rich.

I think what we could tell you,though, is we see stabilization and we sort of see some of the areas around the world.

We are seeing increased bookings some, we're seeing declines at this point.

It is going to be tough.

I think it's going to be dependent on how the economy stabilizes or if not starts to begin to increase.

I think at this point we are looking at the fact that Q3 we up had increased bookings in our satellite station product line as a great sign.

That's a way for us to think about it as we look to fiscal 2010.

But other than that, we would want to kind of save '10 for September.

Just another way of looking at that-- (inaudible) you guided for a slight increase in telecom transmission in the fourth quarter also the third..

Is that a reasonable baseline to use entering 2010?

Yes.

Okay.

That's great.

And then one final one on expenses.

You saw a very nice reduction in OpEx this quarter, certainly sequentially and it sound like you guided for some level of increase on the R&D side which will give us a somewhat higher baseline exiting the year, just wondering again looking into 2010, how should we think about OpEx?

Do you plan on any major R&D initiatives to think about that going up relative to fourth quarter numbers and how tightly do you plan to manage the SG&A line?

I think we certainly initiated some cost reductions throughout the company which impacted R&D.

We continue as from a business strategy to spend R&D, both on our satellite earth station product line as well as mobile data com next generation.

That spending is going to continue in fiscal 2010.

So, I wouldn't expect to see changes from a percentage of sales perspective going into fiscal 2010.

But you do expect significantly higher revenues.

So that would imply higher, higher absolute dollar expenses?

Depending on what we ultimately decide to do, yes.

R&D continues to be a major focus, of the business, it is investments for the future for 2010 and 2011.

Again without giving some specifics, we are going give you those numbers in '10 but R&D will continue to be a major piece.

And to your point about the pop in '10 revenue relate today the MTS computers, yes that might impact the ratio but, excluding that we will continue to spend at the levels we are spinning.

Okay.

That's helpful.

Thank you.

And our next question comes from the site of Mr.

Jim McIlree.

of Collins Stewart.

Please go ahead.

Thanks.

Good morning.

You talked about strength in carrier-in-carrier.

Could you talk about how much carrier-in-carrier is as a percent of the total satellite earth station shipments or alternatively how much of the installed base has been upgraded to date to the carrier-in-carrier technology?

Let me answer that, Jim in kind of an oblique way.

We certainly don't want to quote some numbers but actually give you some color in terms of that.

What we have been able to accomplish obviously in these last 12 months is put more carrier-in-carrier capability into more of our modem product line including the Radyne product line that we-- that we purchased.

So at this point, most of our modems have that capability.

So obviously the carrier-in-carrier functionality or that piece in itself is definitely growing within our product line.

And put that doesn't necessarily mean that the product,-- that the total product line has the same functional growth.

It is just that the, that the carrier-in-carrier is such an important piece that we are putting it in every modem that we can.

I hope that answers your question.

Yes.

I want to make sure I understand it correctly, but that doesn't mean every modem going out the door has the carrier-in-carrier.

No, for instance in a broadcast situation there's no need for it.

Carrier-in-carrier is only capable of giving you the advantage of the bandwidth advantage.

If you have an operation within the same beam of the satellite.

If it is a narrow beam satellite situation as there are in certain cases, satellite-- carrier-in-carrier just doesn't apply.

So then we have other modems we will supply because there's no need to put that cost in that modem.

Right.

Okay.

In my notes I have there was an install base of 150,000 modems that could be upgraded.

I'm not sure if that was in a conference call or, or some filings.

I don't remember the number but that sounds about right.

But again, yes, anything out there that is an installed base is the market for us.

Jim, the way that I kind of think about it is our CDM 600 we have sold in essence for almost seven to eight years and continue to sell that.

But that's, that's how long of an install base we have on our CDM 600 that's a good proxy for how long we anticipate the carrier-in-carrier cycle to continue.

We are in the very early stages of carrier-in-carrier upgrade.

That's my real question.

It seems like we are still in the very, very early stage of that cycle.

Oh yes.

Okay.

I think as Fred mentioned we are even, because of the Radyne acquisition, we are able to basically take their-- their-- the existing modem and put in carrier-in-carrier technology and go after that install base as well.

So if anything the Radyne acquisition probably moved us back an inning or so.

I'm going to try the fiscal '10 question a little bit differently.

If you ignore the push out of the $15 million from fiscal 2009 into fiscal '10.

It sounds like to me that fiscal '10 looks a little bit better than it did three months ago.

Is that a fair characterization.

That's very fair, yes.

Okay.

Great.

Thanks a lot.

We have another question from Mr.

[Kevin Shevatoni.

] of Boning and Scattergood.

Please go ahead.

Going back to OpEx, you talked a little bit about R&D, can you elaborate on the restructuring efforts a little bit, give us color there and how to look at the SG&A part of OpEx when revenues start to ramp up next year?

Not really, I mean in Q3, you're seeing the benefit of the operate expense cost reduction that is we have achieved.

So if you look at Q3 I think as Fred mentioned in essence we would have been able to raise guidance had we not done the notes.

So the cost reductions that we have achieved to date are in, the Q3 numbers that you're looking at.

And that again gives us the strong operating performance that are we kind of expect to trail into fiscal 2010.

If you look at the Q4 guidance we're giving you, we are telling you we are increasing R&D for BFTHC relative to Q3.

That's how we see the model going forward.

We are looking for more cost reductions and we haven't obviously initiated them to put them in guidance yet but Q4 we are looking hard and continuing to look hard at areas and if we're successful in doing so, we will report back to you in September the results of those efforts.

Okay.

And the, you see any material implications from the legal proceedings in the Q?

I think the state department issue hasn't changed since last quarter and I would refer you to the language in our 10-Q filing, one minor new event that happened, but it substantively doesn't change the issues here.

We had a new item related to a request for indemnification from our customer, but as the language in our 10-Q says at this point given what we know and given the stages we don't anticipate any material impact to our financials but obviously litigation is always difficult.

I would refer you to the 10-Q for more detailed language.

Okay, thanks.

One last one you talked about the ceiling lift on the BFT contract forthcoming.

Any other color you can add on the MTS front in terms of when or what you think that will be?

Well, as I mentioned the MTS program office is out with an RFI soliciting information for their new, what they want the new updated next competitive contract.

I think that is in the process right now.

Timing is a little critical here because our contract expires in July '10.

So there's not much time.

But at this point in time they have just come out with the RFI.

They will get answers from I believe many, many people, I suspect.

And they hope to at least that's what they have been telling us, they hope to come out with an actual RFP, some time in the next couple of months.

Now that's to us that looks like a very, very aggressive schedule.

If you want some color on it we would be surprised if that is accomplished in the next three months.

So it is going to be kind of an interesting situation in the next couple of months.

Okay.

Thanks.

That's all I have got.

Okay.

Thanks.

We have another question from the site of Mr.

Mark Jordan of Noble Financial.

Please go ahead.

Good morning.

One last question, I mean simplistically looking at fourth quarter mobile data, would it be realistic just to look at the third quarter level back out the $5 million worth of old legacy computer terminals that you sold and that's kind of the base you shall assume for Q4?

From a revenue perspective, Mark, I think that's a very fair way to look at it.

Okay.

Thank you.

It appears we have no further questions at this time.

Okay.

Well, thank you very much for joining us today.

And we hope to speak to you in about three months again.

Thank you very much.

Bye.

This concludes today's presentation.

We thank you for participating and you have a great day.