Comtech Telecommunications Corp (CMTL) 2010 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Comtech Telecommunications Corporation second quarter fiscal 2010 earnings conference call.

At this time, all participants are in a listen-only mode.

And later we will conduct a question and answer session.

(Operator Instructions) As a reminder, this conference is being recorded Thursday, March 4, 2010.

I would now like to turn the conference over to Ms Maria Salerno of Comtech Telecommunications.

Please go ahead, ma'am.

Thank you, and good morning.

Welcome to the Comtech Telecommunications Corp conference call for the second quarter of fiscal year 2010.

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, and Jerome Kapelus, Senior Vice President, Strategy and Business Development.

A news release on the Company's results was issued yesterday afternoon and is posted to our website.

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 performance and financial condition of the Company.

The Company's plans, objectives, and business outlooks, the plans, objectives and business outlooks of the Company's management, and the Company's assumptions regarding such performance, business outlook, 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 you, Maria.

Good morning, everyone, and thank you for joining us today.

Yesterday afternoon, we reported our second quarter fiscal 2010 results.

Before our CFO, Michael Porcelain, presents a financial overview, I'll provide some brief comments.

After Mike completes the financial overview, I will then briefly discuss market conditions in each of our three operating segments, followed by an update to our fiscal 2010 guidance.

Despite the $100 million MTS computer revenue shift from fiscal 2010 to fiscal 2011 and the resulting guidance change in fiscal 2010 revenues and EPS that we reported yesterday, I am pleased to report that we delivered solid performance during the second quarter of fiscal 2010, as we continue to operate our core businesses through difficult times.

I remain confident that we still will achieve record revenues in fiscal 2010 with significant year-over-year earnings growth.

Our balance sheet remains strong.

We have over $500 million of cash and cash equivalents, and we expect to continue to generate significant cash from operations for the remainder of fiscal 2010.

As I look to the rest of the year and as I think about fiscal 2011, I am increasingly confident that our strategy is serving us well and that our long-term prospects look good.

Let me now turn it over to Mike Porcelain, who will discuss financial highlights for the quarter.

Mike?

Thanks, Fred, and good morning, everyone.

In summary, when comparing the results to Q2 of last year, we delivered revenue growth of 18.9% and diluted IPS growth of 10.9%.

Our operating income as a percentage of net sales was 16% in Q2 of 2010, which was a significant improvement as compared to the 13.3% in Q2 of last year.

Let me now walk you through the income statement from top to bottom to put things in better perspective.

Our consolidated net sales for Q2 were $171.1 million as compared to $143.9 million for Q2 of last year.

Of our Q2 2010 net sales, 64.7% were to the US government, 29.2% were to the international end customers, and the remaining 6.1%, which are domestic commercial customers.

Our revenue growth for the quarter was a result of higher net sales in our Mobile Data Communications segment, which generated sales of $84.2 million for Q2 as compared to $38.9 million for Q2 of last year.

This represents an increase of 116.5%.

This growth was primarily attributable to significantly higher MTS sales to the US Army, offset by a significant decline in BFT sales.

The increased MTS sales primarily relate to the large orders we received in fiscal 2009 for both new MTS systems and new MTS ruggedized computers.

Sales relating to the design and manufacturing micro satellites during both the three months ended January 2010 and 2009 were nominal.

Our Mobile Data Communications revenue for the quarter was approximately $15 million lower than what we were expecting at the time of our December 2010 conference call.

At the same time, the mix of MTS products that we actually delivered during Q2 was more profitable than we expected, because it was weighted towards new complete MTS systems, rather than just MTS ruggedized computers.

This mix change did benefit our Q2 margins above our expectations.

During the second quarter of fiscal 2010, and as further discussed in our Form 10-Q filed yesterday afternoon, our third party supplier of MTS ruggedized computers and certain related accessories continue to experience production and technical issues.

These delays, as I mentioned, did result in shipping delays during our second quarter.

Based on the recent deliveries schedules provided to us just two days ago by our third party supplier, our revenues and earnings in fiscal 2010 will be impacted by a shift of approximately $90 million to $100 million of revenue to fiscal 2011.

Based on the timing of orders that we expect to ship, we continue to believe that our fourth quarter of fiscal 2010 will be the peak quarter of shipments.

Now, let me turn to our Telecom Transmissions segment, which generated net sales of $58.4 million, a decrease of 16% as compared to Q2 of fiscal 2009.

The majority of the sales are in Telecommunication Transmission segment during Q2, consisted of satellite earth station products which were significantly lower as compared to last year.

Due to ongoing difficult economic conditions, bookings during the three months ended January 31, 2010 were sluggish.

We are seeing some signs of the global economy slowly improving and we believe that such improvement will ultimately result in our satellite earth station booking programs increasing from the levels we achieved in the first half of fiscal 2010.

The remaining sales in our Telecommunications Transmissions segment relate to over the horizon microwave system product line.

Although net sales for Q2 of fiscal 2010 were modest, they were actually higher than net sales in Q2 of last year.

During the quarter, we also made significant progress with one of our large international opportunities, and we are increasingly optimistic that this product line will report significant revenue growth in our fiscal 2011.

Turning to our RF Microwave Amplifier segment, net sales were $28.5 million, a decrease of $7 million, or 19.7%.

The decline in net sales for Q2 of fiscal 2010 as compared to Q2 of last year is primarily attributable to significantly lower sales to the US government, primarily lower CREW 2.1 related sales.

Bookings in RF Microwave Amplifier segment during Q2 of fiscal 2010 were also soft.

In addition to the challenging business conditions, which negatively impacted us, some of the US government bookings we expected in Q2 did shift to the right.

Based on the anticipated timing of shipments associated with our current backlog and orders that we expect to receive, quarterly sales in our RF Microwave Amplifier segment for the balance of fiscal 2010 are expected to be slightly lower than or similar to the sales level we achieved during the three months ended for this most recent quarter.

Like our satellite earth station product line we do see the economy slowly picking up speed and we believe that our order rate in the second half of fiscal 2010 will ultimately do the same.

Now let me discuss gross profit.

Our consolidated gross profit as a percentage of net sales was 37.1% for the second quarter of fiscal 2010, as compared to 41.3% for the second quarter of fiscal 2009.

This decrease was primarily attributable to an anticipated significant change in overall product mix.

Our Telecommunications Transmission segment gross profit percentage for the second quarter was slightly lower than the gross profit we earned last year during Q2.

This decline was primarily the result of a less favorable product mix and lower overall usage of our high volume technology manufacturing center.

The lower usage of our facility was a function of lower satellite earth station product sales partially offset by the benefit of cost reduction actions that were completed in prior periods.

Although our Mobile Data Communications segments gross profit percentage in Q2 of fiscal 2010 was higher than our original expectations, we did experience a significant decline in gross profit percentage as compared to Q2 of fiscal 2009.

This decline was primarily due to the overall change in product mix related to the new MTS ruggedized computers.

As we have mentioned on prior conference calls, the new MTS computers and related MTS systems which incorporate these new computers has significantly lower gross margins than our historical gross margins.

Gross margins in Q2 did also benefit from lower than expected warranty claims on our first MTS contract, whose warranty terms are nearing expiration.

Finally, our RF Microwave Amplifier segment experienced a slightly higher gross profit percentage during the second quarter of fiscal 2010 as compared to the second quarter of fiscal 2009.

Gross margins in the second quarter of fiscal 2009 were negatively impacted by long production times relating to certain complex solid state high power amplifiers and high power switches that employ newer technology.

Looking forward, our consolidated gross margins for the second half of fiscal 2010 are expected to be significantly lower than the percentage we achieved in the first half of fiscal 2010, as we still continue to anticipate shipping large amounts of orders related to MTS ruggedized computers and MTS systems throughout the remainder of the year.

Now, let me go further down the P&L and discuss operating expenses and the rest of the income statement.

On the expense side, SG&A expenses of $22.9 million in Q2 of fiscal 2010 were $3.1 million lower than Q2 of fiscal 2009.

SG&A expenses as a percentage of net sales was 13.4%, as compared to 18.1% in Q2 of fiscal 2009.

The decrease in SG&A expenses is primarily attributable to the benefit we are generating from cost reduction activities, including our fiscal 2009 decision to no longer offer video encoder and decoder products or market fiberglass antennas to our broadcast customers.

In addition, our Q2 2010 benefited from lower professional fees, primarily related to the legal and other matters that are described in our Form 10-Q.

Turning to research and development expenses, they were $11.4 million and $12.5 million for the second quarter of fiscal 2010 and 2009 respectively.

R&D expenses as a percentage of sales were 6.7% as compared to 8.7% in Q2 of last year.

The decrease in expenses is attributed to reductions in spending including lower internal spending related to our next generation MTS and BOT products, which we introduced last year.

We do continue to incur efforts related to customer-funded projects, including our VFDHC transceivers.

Amortization of intangible assets with finite lines was $1.8 million in both Q2 of fiscal 2010 and fiscal 2009.

Operating income for Q2 of fiscal 2010 was $27.4 million compared to $19.2 million in Q2 of fiscal 2009.

As a percentage of net sales, our operating income was 16% as compared to 13.3% in Q2 of fiscal 2009.

Although we do not expect to be able to achieve the same operating income as a percentage of net sales in either Q3 or Q4 of fiscal 2010, we still expect that operating income as a percentage of net sales in fiscal 2010 will be at or near the level we achieved in fiscal 2009.

Interest expense for Q2 of fiscal 2010 was $2 million and primarily reflects interest expense associated with the issuance of our 3% convertible senior notes.

Last year's interest expense of $1.9 million, which has been retroactively adjusted and restated, reflects the imputed borrowing rate of 7.5% for a 2% convertible senior notes, which are no longer outstanding.

Interest income and other decreased from $600,000 in the second quarter to $200,000.

This decrease is primarily attributable to significant decline in period over period interest rates.

Turning to income taxes, our effective tax rate for the second quarter of fiscal 2010 was 36.2% compared to 32.5% for the same period last year.

Our effective tax rate for the remainder of fiscal 2010 excluding discrete tax items is still expected to approximate 36%.

Finally, on the bottom line, our diluted EPS for the second quarter of 2010 was $0.51 as compared to $0.46 for the second quarter of fiscal 2009.

EBITDA was $33.7 million for the second quarter of fiscal 2010 compared to $27.1 million for the second quarter of fiscal 2009.

Despite the buildup in accounts receivable attributable to the timing of shipments related to our MTS contract, cash provided by operating activities for the six months ended January 31, 2010 was $28 million compared to $24.4 million for the six months ended January 31, 2009.

Our balance sheet remains strong.

As of January 31, 2010 we had approximately $514.2 million of cash and cash equivalents.

Although we expect to generate additional cash during the remainder of fiscal 2010, the exact year end amount is difficult to predict and will be significantly impacted by the timing of deliveries, collections, and vendor payments related to our overall performance on our MTS contract with the US Army.

Our backlog position as of January 31, 2010 was $446.8 million as compared to $549.8 million as of the year end last year, and $462.1 million as of January 31, 2009.

We still expect that a substantial portion of our current backlog, except as we mentioned, will be recognized as sales during fiscal 2010.

Now let me turn it back to Fred, who will provide additional color and insight into our three operating segments, as well as some additional comments related to our updated financial guidance that we issued yesterday.

Fred?

Thanks, Mike.

Let me begin with our Telecommunications Transmissions segment and more specifically with our satellite earth station product line, by four of the largest product line within the segment.

If you remember, this product line saw the effects of the global recession far later than we had expected, and as one might guess, we're seeing a similar lag on the recovery side.

Without question, we remained a clear market leader and continue to believe that the profound efficiency of our market leading modems that incorporate both our forward correction technology, as well as double talk carry and carrier technology, will drive our industry leadership.

Recently, we introduced our new CDM-750 advanced high speed trunking modem, which was designed be the most efficient, highest throughput, point-to-point trunking modem available.

The CDM-750 accommodates the most demanding internet service provider, or ISP and TELCO back haul links, by offering users the most advanced combination of space segment savings, while minimizing the need for unnecessary overhead.

Our CDM is an industry first, and simultaneously supports VVBS2 advanced coding modulation G zip compression and double talk carry and carrier.

Also, the 2010 World Cup will be hosted in South Africa.

The VVBS2, standard and Comtech EF data CDM-710 broadcast satellite modems, were selected to power the video uplink services between 10 stadiums and the broadcast hub, enabling the bandwidth efficient transmission of that tournament's HDTV coverage to billions of viewers globally.

We believe all the fundamental long-term growth drivers in the satellite earth station markets remain firmly intact, specifically the combination of satellite bandwidth shortage, long-term global demand from both commercial and government markets, and the compelling cost saving capabilities of our modems, provide a strong and tangible long-term growth opportunity for our Comtech modem products.

In our over horizon microwave or troposcatter product line, we discussed a number of business opportunities last quarter, both in the US markets and overseas.

Let me now provide an update.

The fiscal 2011 budget that recently came out includes line item funding for an additional $20 million to $25 million to upgrade certain components of the track 170 troposcatter systems.

This is about -- this is above the $20 million to $25 million funded for fiscal 2010, which we believe we will be receiving in order shortly.

We expect the large majority of the revenues from both of these orders, however, to be recognized in fiscal 2011.

Internationally, we continue to work with two US primes on two separate contract opportunities in Algeria.

Related to building out the next phase of the communications network.

As I reported to you in the last conference call, visibility in both contracts is better.

During quarter two, we substantially completed direct negotiations with one prime contractor.

In fact, we have agreed upon our statement of work and believe that this contract, when signed, will approximate around $35 million.

This contract is expected to contribute a meaningful amount of revenue and related profit, again, in fiscal 2011.

The second opportunity, although becoming clearer, remains a little further out.

We are currently scheduled to begin another round of negotiations with a second prime contractor in mid-July, and based on the current time line, it looks like this contract will also contribute revenue-related profit sometime in our fiscal 2011.

Given the business opportunities that we are seeing in over horizon microwave product line, I am optimistic that we will experience significant bookings growth in fiscal 2010 and significant revenue growth for this product line in fiscal 2011 and beyond.

In summary, our Telecommunications Transmission product lines continue to be market leaders and we continue to see a path towards more meaningful improved results.

Now for a further update on our Mobile Data Communications segment.

As we announced yesterday afternoon, the amount of expected sales in our Mobile Data Communications segment in fiscal 2010 is anticipated to be lower than we previously expected.

As we have previously discussed on our prior conference calls, our third party supplier has and continues to experience production and technical issues, which impacted our quarter two results and will impact our 2010 results.

Just two days ago, we received an updated delivery schedule from our MTS computer supplier, and we determined that a third party supplier was not going to meet our prior expectations.

As such, we have lowered our revenue and EPS guidance accordingly to recognize the shift of revenue and associated profit from fiscal 2010 to fiscal 2011.

While we are disappointed that this occurred, we are in the midst of a number of exciting initiatives.

First, we have reviewed and responded to the MTS draft RFP that was issued in December and now anticipate that the MTS program office will release a final RFP very shortly for the next generation of MTS contract.

Considering that it's March, with the current contract expiring in July 2010, and availability under the contract saling at only $14.7 million, we believe -- we still believe that an extension and increase of the current contract is likely before the end of this fiscal year.

Second, let me provide an update on BFT, where we serve as the US Army's -- where we serve the US Army under a contract which was recently increased to $243.5 million from $216 million.

In the past few months, our BFT team was engaged intensely in preparing a substantive response to a December RFP to our BFT2, which is the next generation Army's BFT2 system.

Assuming no further changes in the required submission deadline, we expect to submit our response shortly.

We received a strong boost through our prospects in January when we announced that we successfully completed the US Army sponsored fuel testing of our BFTHC ground mobile and aviation transceivers and network solution, meeting or exceeding all JCR and BFT2 specifications.

We remain highly confident about our position in this competition.

In addition to addressing future operational needs of the US Army, our solutions are unique in providing backward compatibility, which we believe enables the Army to leverage its existing technology investment by continuing to use over 100,000 currently deployed transceivers and a worldwide support infrastructure, while simultaneously transitioning to the next generation BFT systems.

Last week, we announced a $27.5 million ceiling increase to our current BFT contract, taking the total contract, as I mentioned, to 243.5 million.

Because the existing BFT contract had almost reached its ceiling, last week's ceiling increase and this week's announcement of a $20.6 million order for satellite air time and service, will enable Comtech to continue to provide uninterrupted satellite air time capacity, as well as communications, equipment, and network management services, and related support for BFT.

We also believed that there will be future contracts ceiling increases to continue to provide a full spectrum of equipment and satellite air time services required to meet the BFT's program needs until such time that the transition of BFT2 takes place, or until the end of the calendar year 2011 when our current BFT contract ends.

As everyone knows, the defense budgets are under pressure and our programs are no exception.

While we would obviously have preferred that the recently released MTS budget line funding of $78.4 million in fiscal 2010 and $93.7 million for fiscal 2011 were higher.

These amounts indicate to us that the MTS program remains critical to the US Army and despite budget pressures, our BFT program is also included in the subset of FBCB2, was provided line item funding of $514 million in fiscal 2010 and $175.3 million in fiscal 2011.

As we have stated in the past, budgets are subject to change.

Given the dynamics and challenges of the Iraqi and Afghanistan military conference and the critical role of the MTS and BFT program, I would not be surprised if tactical changes require an increase at some point in these budget amounts.

Finally, let me discuss the RF Amplifier segment, where we designed, develop, and manufacture traveling wave tube amplifiers for the government and commercial satellite communications markets and solid state amplifiers for the electronic warfare, jamming, medical and aviation markets.

As a market leader in traveling wave tubes, we believe the market trends are highly supportive of a long -- strong long-term business prospect.

In the government market, drivers include the strong expected growth in DOD satellite infrastructure to support its ever-increasing needs.

Currently we are bidding on a number of new government opportunities, including a KU band fly-away terminal and a KU band manpack.

The commercial market for TW2 amplifiers continues to be driven by the consumer direct to home market, as more channels move to high-definition TV, which is a significant bandwidth user.

The amplifier requirements for the KA band launches also provide us with meaningful opportunities, since we are a market leader in KA band TW2 amplifiers.

In our solid state product line, we believe we are experiencing a haze in CREW 2.1 related sales and we will not have any meaningful CREW 2.1-related sales in the second half of fiscal 2010.

We are, however, working on multiple near-term and longer-term next generation IED amplifier opportunities beyond CREW 2.1.

Specifically, these relate to CREW 3.2 and CREW 3.3 next generation IED amplifiers.

While we do not expect orders from CREW 3.2 and 3.3 in the near-term, we believe our proven experience in building high quality amplifiers and solid state high power switches has earned Comtech a clear place at the table for this overall initiative.

Because of our deep and proven experience in capabilities, in designing and building IED system jamming amplifiers and switches, we believe we have an important competitive advantage as we look to exploit future market opportunities.

As a conclusion to this segment, while our RF Microwave Amplifiers segment revenues in fiscal 2010 will be significantly lower than our revenues in fiscal 2009, which were record revenues, we believe the combination of market leadership, technology, custom base and market credibility position us enviably for what we believe are exciting long-term growth markets.

Finally, before opening up the conference call to questions and answers, let me reiterate the guidance that we provided in yesterday's press release for those that have not had a chance to read it.

Based on our third party MTS computer suppliers revised delivery schedule provided to us just two days ago, we expect fiscal 2010 revenues to range from $740 million to $760 million and fiscal 2010 diluted earnings per share to be in the range of $1.85 to $1.95.

As usual, our guidance is subject to many factors, many of which are beyond our control, just like the MTS computer shipment delays.

In conclusion, I'm proud of our core business performance and our second quarter results, and while disappointed with the surprise shift of the MTS computer revenues, I believe that our leadership in each of our core product lines remains competitive -- remain key competitive advantages and position us to rebound strongly as our markets strengthen.

We also remain in active pursuit of compelling acquisitions that we believe would significantly strengthen our existing market leadership positions, and provide new opportunities for additional growth.

I would like now to turn to the question and answer period of our conference call.

Thank you.

Operator?

(Operator Instructions) Our first question comes from Tyler Hojo with Sidoti & Company.

Morning.

First question, just in regards to the updated delivery schedule for MTS, what gives you confidence that this is actually going to be, kind of the delivery schedule.

Well, first, maybe I can give you some color on it.

Number one, we've had deliveries of the computer, the computer throughout the first and second quarter.

It's just not been to the original delivery schedule that we had anticipated.

Obviously our delivery schedule for the beginning was much more modest than later in the year.

And so our surprise at this shift was really a shift from the -- from the third and fourth quarter basis into 2011.

We actually had some deliveries in Q1.

We had some deliveries in Q2, although we had a shortfall in Q2 obviously.

First of all, this may be a long answer, but I think it's worthwhile.

DRS is our computer supplier.

Right.

It's not a small rinky dink company.

It's a $3 billion to $4 billion company.

The computer selection for the MTS program was a government-directed selection to Comtech, because DRS was already supplying a computer to the BFT program and the Army wanted to be able to interface both the MTS and the BFT programs.

Unfortunately, what was supposed to be only a mechanical package change some how morphed into an additional technical performance challenge as well.

Obviously had we been aware of this problem we would have had shipments moved over from fiscal 2010 and into 2011, but the schedule that was requested by the Army was as it was.

The shift only at this point takes the revenue from 2010 to 2011 and the government is now fully aware and has agreed with this change.

Are we very confident that DRS will be able to complete the change and continue now with this new schedule?

I have to be honest and say we're wary.

We will be watching it very closely.

But certainly the expectation is that the shift is only into the fiscal 2011 Q1 and Q2 area.

Could it shift into possibly Q3?

Yes, it could.

But I think from what we understand now, most of the problems have been solved, and I think rather than handling each computer on a tuning black magic basis, I think we're into the so-called manufacturing phase.

I hope that answers your question.

That's helpful.

Do you have any sense of whether the government is looking to perhaps dual source the tablet?

I really don't know.

Obviously the government -- as you know, we had previously on the MTS program used a different computer and the reason I mentioned it is because the DRS we're supplying the computer for the BFT program.

And that was protested correctly?

And that was protested.

Okay.

And we got into this situation that way.

And it obviously made sense from the Army's point.

Okay.

All right.

Last question for me and then I'll hop off.

Could you just maybe speak a little bit about the guidance?

The top line's down 12.

The bottom line's down a little bit more than that.

And if you look at the MTS that's slipping out, my understanding is that's relatively low margin pass-through type sales.

I'm just trying to try and understand why the earnings impact is quite a bit more significant than kind of the top line slippage.

Sure, Tyler.

One of the things to keep in mind, we just became aware of this issue two days ago.

Right.

And we obviously have direct folks that handle the software that goes with these computers and there's all sorts of other administrative and variable-type costs that when you get a shift such as this, you're just not able to reduce those costs as quickly as you may like.

So given the news and given our -- we're still in a reaction stage internally and that's kind of where we came out.

We're going to continue to look at ways to reduce these costs over the next six months with the lower level of revenue that's going in there.

That's just sort of where the numbers came out.

That's the impact that we're modeling right now.

Okay, great.

Thanks a lot.

Thank you.

Our next question comes from Mark Jordan with Noble Financial.

Go ahead, please.

Good morning, gentlemen.

I was looking, reading through the Q last night and under your segment of status of the BFT contract, the specific terms that RFP put forward basically was for a turn key product, one vendor.

These terms seem to be quite a bit different from the market survey of over a year ago.

Could you explain, is this in reaction to the fact that in essence you have brought the only viable turn key game to the table?

You're referring to the BFT2 market surveys, and then --

That's correct.

Yes, that is correct.

I think we've always believed, if you go back to the original thing, the Army had stated they were going to buy from two vendors and they have shifted, where they have clearly identified a desire to purchase from one vendor.

And I think we agree with your comment that we believe we're uniquely positioned given the operational risks that would exist in the field in terms of having two vendors deliver such a critical system to the US Army really never made sense to us and we think the US Army in terms of how they drafted the final RFP that's out and that we're responding to, positions us extremely well.

And related to that, the initial, or draft RFP for FTS, again, reflects what Blue Force Tracking looked like a year ago, requesting open source environment, full government purpose, purpose rights, et cetera.

Do you think that -- is that more of a wish list, or would you assume that there's the possibility that that request will morph more towards like the BFT2 RFP has morphed?

No, Mark, I think the very initial RFI that they came out with, I think you probably characterized it accurately.

It was more of an overall wish list of performance that they would love to eventually.

I think the more likely situation, especially with the delays encountered is that the -- what we feel right now is that the systems will almost very much resemble what we have been supplying right now with very minor changes.

We could be surprised, but I think that's the way we see it now.

Okay, and I guess one final question, relative to the surge in Afghanistan, we see significant orders for MRAPs, you look at a company like Harris has received very large radio orders to equip some of the MRAP vehicles in January and December.

We've not seen any meaningful transceiver and hardware sales.

I guess the question is, one, would those types of vehicles have BFP on them and secondly, do you have a sense of, is there inventory in the field that can fulfill that need, or would it be logical at some point in time hardware would have to be purchased for those vehicles?

I think it's a complex situation that's developed in our little niche here.

I think absolutely, the answer to your question is all those vehicles will eventually have a BFT2 system and also an IED system that we supply.

Yet we see hardly any bookings in that area.

On the MTS and BFT side, we can pretty well explain the situation because both of our contracts are in the topped out area.

And so the government finds itself with a difficult problem in giving us some of those, some of those orders.

And as you saw with the recent decrease of some odd $27 million for the BFT program, that was really allocated to the, to the space segment and only for six months.

The contract runs through 2011 and yet it's only for six months.

And that's why we feel there's got to be more extensions.

But what it shows you is the underlying funding problem that exists right now, and coupled together with the need for the government to compete everything, it really has slowed down things dramatically and I think we're not the only ones that are suffering from this.

Okay.

You mentioned two tropo -- DOD tropo opportunities, one that funded in fiscal 2010 budget, the other in fiscal 2011.

Do you believe that one or both of those would be realized revenues in fiscal 2011?

As it looks, as it looks like right now, we've actually made our proposal for the first, for the first part of it and as we understand, we're the only bidder on it, but sometimes being the only bidder isn't the fastest way to get the program, because there's lots of justifications that the government has to come up with.

We believe that that one is probably, let's say within 60 days of booking.

The second one isn't actually a line item in the 2011 budget.

Now, whether that stays in the budget or not, that's something out of our control.

But if that stays in our budget, I think we probably should realize a booking hopefully before the end of this fiscal year, which should result in 2011 revenues.

Thanks very much.

Okay.

Thank you.

Our next question comes from Joe Nadol with JPMorgan.

Go ahead, please.

Hi, good morning.

Actually it's Seth on for Joe today.

Just a couple of questions about the budgets for BFT and MTS.

On MTS, the $78 million for FY 2010 was significantly below the requests, and I wonder if you could talk about why you think that was the case.

Unfortunately, we don't know.

We really don't know why they took some money away from the program.

Again, that's what I meant when I mentioned that I wouldn't be too surprised that the budget's changed back and forth.

Money is given out to other programs from MTS, and just as well as we've seen in the past, where other programs supply money back into the MTS program.

We really don't understand where it went to, but it went.

Okay, thanks.

And then on the BFT side, you talked about the money in the budget for FBCB2 in fiscal 2011.

Then when we look out beyond there in the [fit up] that declines dramatically and then goes away by FY 2013.

And I was wondering, what, if anything, you would read into the future of BFT with regard to these budgets, how much -- how concrete are they and what does that say about BFT to you?

I think unfortunately when you look at $500 million at one time and then $90 million for another year, it's very difficult because that's the budget for the FBCB2 program, of which BFT is only a small portion.

And so in one year you could have $500 million, but lots of it going to vehicles, for instance.

And another year you could have that, all the money directed towards transceivers.

It's a matter of how the Army decides to spend within any given year.

We don't look at it as a major perturbation, we think that all the buys, as Mark Jordan mentioned, for all the vehicles out there eventually have to get loaded with BFTs and IEDs.

Great, thanks.

And just as a final question for Mike, looking at the Mobile Data, we just looked sequentially at the incremental margins from Q1 to Q2.

Looks like about 30% incremental and presumably you had more shipments of the tablet computers in Q2 and that seems like pretty good margin.

I was wondering, is that correct, or did the tablet shipments go up from Q1 to Q2, and if so how are you able to keep the incremental margins so high?

Sure, Seth.

Yes, couple things to say.

First, the revenue in our mobile data com segment in 2010 from Q1 to Q2 significantly increased.

We did about $54 million in Q1, driving it to $84 million.

With that by itself happening, you do get some overhead absorption just by that nature.

But what really drove the mix was -- what really drove the margin was the mix of what we ship related to the MTS.

There were two major orders we received last year.

One was the order just for 20,000 MTS ruggedized computers which were used to upgrade the units in the field and then we had a $97 million or so order that was for new MTS systems.

In Q2, as I mentioned earlier, the mix of what we expected to ship in Q2 changed from let's say what we had in December.

So during Q2, we actually shipped many of the MTS transceivers of related to the $97 million order, and what shifted was many of the stand-alone computers.

That's sort of why margins in our -- in the mobile data com segment in Q3 and Q4 won't hit the level that we did in Q2.

It really was just the mix of what went out in Q2.

Some of that was supposed to be spread out throughout the year and kind of got bunched up in Q2 because of all the issues we've been dealing with.

Okay, great.

Thanks very much.

Thank you.

Our next question comes from Tim Quillin with Stephens, Inc.

Good morning.

Good morning.

I think maybe first of all, I think the previous caller was talking about the out year budgets for FBCB2 going down, but I think there's also a JVCP ramping up and so you probably have to look at both of those in aggregates, is that correct?

That's correct.

And then can you go through the backlog by segment?

Sure, Tim.

Our Telecom Transmission finished the quarter with $42.7 million.

Our Mobile Data com finished the quarter with $358.6 million.

And our RF made up the rest, which was $45.4 million for a total of $446.8 million.

Great, thanks.

And then with regards to the satellite earth station business, and we're seeing kind of a little bit of fits and starts, and some encouraging bookings in one quarter and then a little bit less encouraging bookings in the current quarter, and what are you seeing -- I know a lot of this is capital availability and developing markets, but what are you hearing for your customers in terms of what's driving those fits and starts?

I think it's all a matter of, like you said, the capital expenditures that our customers have in their plans right now.

As you mentioned, we kind of saw one month, two-month pickup and we thought here we go.

Then it reverted back to kind of the flat bookings again.

It's difficult to really predict in terms of when those customers will actually loosen up those capital dollars.

We obviously, we obviously hear that their plans are there, but the timing is very difficult.

And when you talk about the potential for bookings to improve, is that just more relative to a potential improvement in the macroeconomic environment rather than any specific feedback you're getting from customers?

Absolutely.

I think in that area, the economy drives that business.

Right, right.

And then on the MTS RFP that's going to come out here shortly, is it your belief that it's going to come out with the full bundled solution as the draft RFP implied?

As I mentioned before, we don't think so, because of the lateness of the RFP, but on the other hand, we could be surprised.

I guess what I'm asking is the structure of the contract going to be similar to what the current program is?

I think as far as the structure is concerned, if you're getting it to the question of whether the computers, for instance, will be part of it, yes.

We see the structure being pretty well identical to what our prior contract was.

Okay, and then just lastly, with regards to your big pile of cash, what is the pipeline acquisitions?

Is it such that you would expect to make an acquisition over the next three months?

And is it going to be a relatively small acquisition or relatively big, and if you can give us any sense of how you're thinking about that, that would be great.

I think to give you some color on it, we're obviously looking at small and large at the same time.

We always think that we're pretty close to something, but things change.

I would say that today, today, I think we are very hopeful that we could pull a trigger, let's say certainly within the next 60 to 90 days.

And it could be a small one.

Could be a large one.

Thank you.

Thank you.

Our next question comes from Rich Valera with Needham & Company.

Go ahead, please.

Thank you.

I would like to address something brought up before the incremental margins on the $100 million that you're pushing out into next year.

We compute them at around 18%, which is actually above your corporate average on what is supposed to be revenue that is sharply below your corporate average.

Trying to understand what are the costs that you are incurring that you can't get rid of quickly enough for this lower volume of upgrade shipments?

Well we talk about DRS being a multibillion dollar company, but given the issues and the production issues and the technical issues that we have to deal with them, we've got lots of resources that are working with them and managing the process, which is one of the reasons why you kind of say the Army prefers to work with us because we kind of control the whole solution here.

So the fact is, we're still going to be shipping MTS computers and they expect to continue to ship things out in Q3, Q4, and unfortunately, have resources with lower revenues.

So you're just going to lose that margin.

But did you have to increase your resources?

Because if you have the same resources, but lower revenue by $100 million, I would have thought the incremental margins on that revenue were commensurately lower than your corporate average.

I'm still a little confused whether you actually have to staff up anything here more than you thought before.

Well, I would -- I'm not sure how you're modeling it, Rich, but if you go and you look at our Q1 margin in our Mobile Data Com segment, it was about 14.9% and I think for the year, what we did in Q2 when you look at what we're doing in Q3, Q4, you plug in the numbers.

You'll find out that the overall operating margin is really about the same if you take Q1 and Q2 and you average it out.

So I -- it's just really just the math.

Okay, and then I just want to address the satellite earth station segment.

Your commentary, at least with respect to bookings for that segment, is notably more cautious this quarter than it was a quarter ago.

If you didn't specifically attribute any of your revenue reduction this year to satellite earth station.

So trying to understand what are your assumptions for a pickup in satellite earth station that are baked into your current numbers.

Sure.

We are pretty much assuming a flat revenue in our Telecom Transmission, really for the rest of the year.

We think obviously if the bookings come in a little bit stronger in Q3, that might help our Q4.

But really the bookings we see coming in, not only with the over the horizon projects that we're working on, but even on the satellite earth station, we think that will benefit 2011 more than it will 2010 at this point.

But it's going to be a function of timing and the economy.

And you say flat, you mean relative to the second quarter level?

Yes.

Okay, and then finally, just wanted to -- there's been a lot of discussion about the sort of form that the MTS formal RFP will take, but just wanted to revisit that with respect to the reference you made in your Q to the joint battle command platform, which you seem to imply would suggest that the MTS ultimate form would be quite similar perhaps to what's being done by you and BFT2.

Could you just elaborate on that a little bit, on how you see this joint battle command platform initiative, if you will, affecting the ultimate form of MTF.

I think, Rich, what we are seeing as a, as an Army wish is to combine the efforts on MTS and BFT.

Not to say definitely into one program, but at least have the two programs working very closely together.

The first step was the computer, for instance, the computer buy.

Excuse me.

The joint battle command platform is just an extension of that into all communications programs that will utilize the same software to communicate.

It will not change necessarily the type of transceiver or the type of hardware, but it is a software platform that all the transceivers and all the radios will eventually be working with and being able to interface and communicate with each other.

So we see a lot of this all coming together.

It may take a few years, but I think eventually the Army will have the joint battle command platform working with all of the different programs.

Okay.

That's helpful.

Thank you.

Thank you.

Our next question comes from Michael Ciarmoli with Boenning & Scattergood.

Please go ahead.

Good morning.

Question, this order has caused some issues for some time now and I just want to make sure we don't get into a similar issue looking out into fiscal 2011.

So can we just comment -- it sounds like you obviously have some costs associated with this quarter and the margins are still low.

So if we look out to 2011, I just want to get your take, if it's right or wrong, sounds like we can safely push out $90 million to $100 million in the top line next year, but the bottom line, say, it's really only maybe a $0.07 to $0.12 EPS slideout, because it is going to be those pass-through margins.

Is that the right way to look at this?

Mike, I would strongly caution you and everybody else not to kind of do the same thing that happened last year.

The Company has not put out any 2011 revenue or EPS guidance.

At this point, there's just too many moving parts and clearly we certainly feel comfortable to say that this $90 million to $100 million order is expected to be in 2011.

But at this point we would caution anybody just to look at what people had on their last analyst sheet for 2011 and just slap this revenue on top.

We have not provided any kind of commentary or kind of view on what we think 2011 is going to be from a revenue and EPS perspective.

So we think it's too premature to talk about 2011 in terms of specifics.

Lots of things need to happen.

We need to get our contract ceilings increased for BFT.

We need to get our contract ceilings for MTS.

We need to kind of figure out exactly when the government will pass its 2010 and 2011 budgets.

We need to get the over the horizon contracts that we're dealing with, the $35 million contract opportunity to figure out the timing, the RF CREW.

There are lots of opportunities that could make that number real good or go the other way, but we just think it's too premature to comment and we would kind of guide you not to just slap on a number.

Okay.

Fair to say, then, I've always looked at Mobile Data as sort of being a $250 million to $300 million run rate business.

You've obviously got the spike here in fiscal 2010.

That will be maybe a little bit more subdued with this order slideout, but it's assuming, we're going to assume you get ceiling increases.

That would maybe be a fair assumption that that general run rate continues than, which would include this $90 million to $100 million slideout.

Mike, I'm not so sure what's fair.

You could look at it another way.

You could look at it as the 2010 funding for MTS is $78 million.

Assume we get that, and $100 million, add the $40 million of BFT2 air time, which only gets you to $200 million.

So you have to see what kind of flows out in terms of are you going to get the BFT HC transceivers, are they going to order 20,000 transceivers, are they -- we just don't know.

And obviously the $78 million needs to be spent in terms of translatable orders.

At this point, it's just too early for us to tell you what's fair.

Okay, fair enough.

On over the horizon, it sounds like then you've got two orders from the government that you're tracking, that you're hopeful you book and you've got the international order.

Is it safe to say you're looking between maybe $40 million to $60 million of revenue in fiscal 2011 from that product line?

Yes, Mike, I'm not --

Yes, I think in terms of the government programs are really shippable almost in a matter of 12 to 18 months.

So given that there's two of them and if we're fortunate with both of them, it's $40 million to $50 million, so certainly 25 of that will be shipped.

The remaining business of the onesie twosie stuff like that will add a few million and the Algerian contract, I think definitely one of them, I think we feel very confident definitely will have some major revenues.

I would say your number is pretty good.

Okay.

That's helpful.

If I could, just on the recent BFT award.

Reading the fine print it looks like there was a software upgrade in there.

One of the channels in there is running for nine months, while some of the other channels are running for six months.

Is there any way we can read into that?

Is that extra -- can you comment on what that extra channel being procured for nine months is or what that supports?

Actually, the only reason that that one channel went out for nine months instead of the six months, is they just had enough money to do it, just one channel.

Okay.

It's as simple as that.

Okay.

Fair enough.

Thanks.

Thanks, Mike.

Thank you.

(Operator Instructions) And our next question comes from Chris Quilty with Raymond James.

Good morning, gentlemen.

Just a follow-up again on the MTS order.

Do you know from DRS whether the issues they are dealing with are hardware or software related?

I just ask the question because if it's hardware, those things tend to take longer to resolve.

If it's software related, they could ostensibly build inventories and the shipping process much quicker.

I think as I tried to kind of allude, it originally -- this was supposed to be a mechanical packaging change for a similar computer that DRS is supplying to the BFT program.

It was supposed to be the same electronics, let's say, electronics hardware just packaged in a different package for MTS.

I think as it turned out, yes.

There are some electronic or hardware problems that cropped up in doing that change.

I believe most of them are pretty well under their belt.

On the other hand, we could be surprised again.

I can't tell you anything different than that.

I will only say this is a good computer company and this program has been in their hands for over a year.

One would think that the problem should be settled pretty shortly.

Also, a clarification.

Just with the previous questions stated about $40 million to $50 million in OTH potential revenues, 12 to 18-month time horizon.

That was referring to the government programs, not the Algerian.

And if I remember correct, Algeria tends to be more like a three-year implementation horizon?

Right.

It's -- it really assumes, if we're very fortunate and we get both programs in a timely manner on the government side, both of those are relatively short delivery orders, and so I kind of added those up.

And as far as Algeria, we know one of them that we've already negotiated is $35 million.

It will probably, with time, go up with some changes and so forth.

But one third of that for, like you say, it's a three-year program.

One third of it is another $10 million to $12 million.

So you're getting into the $40 million to $50 million.

Okay, and historically at least on the Algerian program, you've always booked all the profits in the back third of the contract period.

Well, we run it as a three-year program with an estimated completion accounting basis.

So in the past, I guess it has to kind of turned out with more profit towards the back end and that the front end.

That's just our conservative nature.

And final question, kind of encouraging that you see significant order growth in the telecom earth station business.

Where is this specifically in terms of end market, do you expect that to come from?

Is it primarily cellular back haul, is it DTH broadcasting?

Is it across the board?

I think the answer is across the board.

We're obviously very heavily involved in cellular back haul, but I think with the hold back on the capital equipment buy side, I think it's probably going to be more widespread.

Okay, great.

Thank you, gentlemen.

Okay.

Thank you.

At this time, there are no further questions in queue.

I would like to turn it back to the Company for any closing remarks.

Okay.

Well, thank you very much for joining us today, and we look forward to speaking with you again in about three months.

Thanks for joining us.

Bye.

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