Comtech Telecommunications Corp (CMTL) 2010 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to Comtech Telecommunications Corporation's fourth quarter fiscal 2010 earnings conference call.

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

Later, we will conduct a question-and-answer session.

(Operator Instructions).

As a reminder, this conference is being recorded Friday, September 24, 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 fourth quarter and fiscal year ended July 31, 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.

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, objectives and business outlook, the plans, objectives and business outlook 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?

Thanks, Maria.

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

As you know, the last few months have been quite eventful.

And before I turn it over to Mike, who will discuss our financial results, I'd like to spend a few minutes this morning briefly walking you through some of these events and providing you some background information.

As you are aware, in July we received the notification from the US Army that we were not selected as the vendor for the BFT-2 program.

Obviously, we were very disappointed.

The result was a significant decline in the price of our stock.

As a result of the decline in the price of our stock, CPI's Board of Directors initiated a process to renegotiate the transaction.

As you may recall, the merger agreement signed in May was part cash and part stock with a total value of $16.40.

We decided to step up and address CPI's concerns by proposing an all cash offer of $16.40 per share, thereby eliminating the effect of the decline in the Comtech stock.

CPI rejected our offer, and it was made clear to us that CPI was seeking much more value than was originally agreed upon.

After careful consideration, we decided from our perspective not to overpay, and in the end, both parties mutually agreed to terminate the transaction.

As part of this termination, CPI paid the $15 million termination fee to us.

In light of these two events, we conducted a comprehensive review of our balance sheet and financial outlook, which resulted in yesterday's announcement that we intend to return some capital to our shareholders in a meaningful way.

Let me provide some perspective on these decisions.

We finished the year with over $600 million in cash, which reflects the fact that we generated over $124 million of cash flows from operations during fiscal 2010.

Based on our revenue and EPS guidance that we issued yesterday, we believe that 2011 will be another year of strong cash flow generation.

We believe that all three of our business segments continue to have leadership positions, which will allow us to continue to generate significant cash flows in a sustainable and meaningful way for many, many years.

If all of our businesses reach the potential that we expect, we also believe not only will 2011 be a strong year, but that in 2012 we will be in position to generate significant operating cash flows with an adjusted EBITDA of $100 million or more from our core businesses.

Of course, we also intend to continue to pursue our acquisition strategy.

And if we are successful, the $100 million of adjusted EBITDA that I just mentioned could prove to be conservative.

Thus, given our belief in our strong future prospects and our belief in our ability to continue to generate strong cash flows in the future, our Board determined that this was the right time to return cash to our shareholders in the form of a quarterly dividend.

Separately, our Board also determined that our stock represents an attractive investment opportunity, given the strong prospects that we believe lie ahead.

Our $100 million stock repurchase program, we believe is an optimal way to capture this value for our shareholders.

Now let me turn it over to Mike to provide an overview of our financial results, after which I will share an overview of our business outlook and provide some further color on our fiscal 2011 guidance.

Mike?

Thanks, Fred, and good morning, everyone.

I'd like to briefly address the full year's results because I think it provides helpful context to the Q4 results that we just reported, as well as the 2011 guidance that we provided yesterday.

Revenues in fiscal 2010 were a record-breaking $778.2 million, up 32.7% as compared to fiscal 2009.

Our sales and operating results in fiscal 2010 significantly benefited from deliveries of multiple large orders that we received in fiscal 2009 from the US Army, including a $281.5 million order for third party computers and related accessories.

This was the single largest order in our history.

Based on the size and margin profile of these orders, we delivered GAAP diluted EPS for fiscal 2010 of $1.91 as compared to $1.73 for fiscal 2009, up 10.4%.

Our EPS in both Q4 2010 and the full year includes a non-cash charge of approximately $0.30 per diluted share for the impairment of goodwill.

This charge, which is more fully described in our 10-K filed yesterday, reduced our operating income by $13.2 million and was a direct result of a loss of the BFT-2 program and the related sustained drop in the price of our stock.

Excluding this charge, we delivered EPS of $2.21 for fiscal 2010, and $0.73 for Q4.

Our Q4 revenues were $257 million, which represents growth of 110.7% as compared to Q4 of last year.

Our Q4 operating income, including the goodwill impairment charge, as a percentage of revenue was 10%, an improvement compared to the 8.7% that we achieved in Q4 of last year.

Excluding that charge, our operating income as a percentage of revenue in Q4 would have been 15.1%.

Let me give you some composition to the Q4 sales.

77.1% were to the US government including prime contractors to the US government.

17.4% were to international end users, and the remaining 5.5% were to domestic commercial customers.

Our revenue growth for the quarter as compared to Q4 of 2009, was driven by sales in our Mobile Data Communications segment as well as additional sales in our Telecom Transmission segment.

In our Mobile Data Communications segment, our Q4 sales were $174.2 million, as compared to only $24.1 million for Q4 of last year.

This dramatic growth was primarily attributable to significantly higher MTS sales to the US Army for those ruggedized computers.

Our BFT-1 sales in Q4 2010 primarily reflect sales of satellite transponder capacity and related network and engineering services.

Sales in our Mobile Data Communications segment relating to the design and manufacture of micro satellites although nominal in both periods, were higher during the fourth quarter of fiscal 2010 as compared to the fourth quarter of fiscal 2009.

We currently have approximately $197.3 million of backlog in this segment, of which the substantial portion is related to MTS and BFT-1, which we expect to fully ship in fiscal 2011.

Sales in this segment obviously in fiscal 2011 are expected to significantly decline from the record-breaking levels we achieved in fiscal 2010.

Now let me turn to the Telecom Transmission segment, which generated net sales of $58 million in Q4 of fiscal 2010, an increase of 3.6% as compared to Q4 of last year.

The increase in net sales in this segment was driven by slightly higher sales of our satellite earth station products, offset in part by lower sales of our over-the-horizon microwave systems.

Bookings for our satellite earth station product line during Q4 were lower than bookings in any of the three prior quarters of fiscal 2010, of note, this was the same trend that we saw in fiscal 2009.

However, our Q4 2010 bookings were higher than Q4 of last year.

We continue to believe that business conditions are slowly improving, and that these improved conditions will ultimately result in our satellite earth station product line bookings in future quarters, increasing from current levels.

Hence, we expect that fiscal 2010, both revenues and bookings related to our satellite earth station product line will increase as compared to the levels we reported in fiscal 2010.

Sales of our over-the-horizon microwave systems for the fourth quarter of fiscal 2010 were modest and lower than sales in the fourth quarter of fiscal 2009.

Given our recent contract wins that are currently in our backlog, we have no doubt that this product line will report significant revenue growth in fiscal 2011.

Turning to our RF Microwave Amplifier segment, we reported sales of $24.8 million, a 40.8% decrease from Q4 of fiscal 2009.

This decline was expected, and is attributable to a drop in the level of both commercial and US government bookings that we experienced earlier in the year, including lower CREW 2.1 related bookings.

We believe the marked increase in bookings in this segment during the second half of 2010 bodes well for fiscal 2011.

Given our current backlog and our expectations of receiving additional orders, we expect that sales in our RF Microwave Amplifier segment will be slightly higher in fiscal 2011 than 2010.

Now let me discuss gross profit.

Our gross profit in Q4 of fiscal 2010 as a percentage of net sales was 32.1%, which represents a decline from the 34.6% we reported in Q3, and the decline from the 38.5% we reported in Q4 of fiscal 2009.

This decline in gross profit percentage was expected, and was due to a change in overall product mix related to our Mobile Data Communications segment, which represented 67.8% of consolidated net sales.

Our Mobile Data Communications segment generally has a lower gross profit percentage than our other two business segments, thus this significantly impacted our consolidated gross profit percentage in Q4.

Consolidated gross profit as a percentage of sales in Q4 2010 was the lowest it was all year and was a function of the large amount of MTS third party computers we shipped.

Timing of deliveries for the remaining computers in our backlog remains difficult to predict and actual results in 2011 could differ from our current estimates.

Quarterly fluctuations should be expected, but based on the most recent information available to us, we currently expect that these orders will continue to ship in Q1, then significantly slow down in Q2 and Q3, before ramping up again in Q4 of fiscal 2011.

By the end of the year, we do expect that all the computers will have shipped, and since the total amount of computers that we expect to ship in fiscal 2011 is lower than 2010, it is reasonable to expect that gross margins as a percentage of our sales in fiscal 2011 will increase from the amount we reported in fiscal 2010.

On the expense side, SG&A expenses as a percentage of sales was 11.5% in Q4 of fiscal 2010, as compared to 18.2% in Q4 of fiscal 2009.

This decline as a percentage is attributable to higher net sales in fiscal 2010.

Included in SG&A expenses in the fourth quarter of fiscal 2010 were professional fees of approximately $3.9 million associated with the CPI acquisition that was terminated on September 7.

Research and development expenses as a percentage of consolidated net sales was 4.7% in Q4 of fiscal 2010, versus the 9.8% in Q4 of fiscal 2009.

Amortization of intangibles with finite lives in the fourth quarter of fiscal 2010 was $2 million.

This represents a slight decline as compared to the fourth quarter of fiscal 2009.

As a percentage of net sales, operating income was 10% in the fourth quarter of fiscal 2010, as compared to 8.7% in the fourth quarter of fiscal 2009.

Excluding our goodwill impairment charge, operating income as a percentage of our net sales in Q4 2010 would have been 15.1%.

As we look forward, and including the benefit of the CPI merger termination fee that we received in Q1, it is likely that the dollar amount of operating income will be comparable to the level we achieved in fiscal 2010.

However, as a percentage of our expected 2011 net sales, we expect that operating income will increase as compared to fiscal 2010.

Total stock-based compensation, which is recorded in our unallocated segment, was $3 million in the fourth quarter of fiscal 2010, compared to $2.5 million in the fourth quarter of fiscal 2009.

Interest expense in the fourth quarter of fiscal 2010 was $2 million, compared to $1.7 million in the fourth quarter of fiscal 2009.

Interest income and other increased from $431,000 in the fourth quarter of fiscal 2009 to $482,000 in the fourth quarter of fiscal 2010.

Our tax rate in Q4 was 44.1%, compared to 33.6% during Q4 of 2009.

Our tax rate in Q4 was negatively impacted by the nondeductibility of a portion of the goodwill impairment charge that we recorded.

As we look to fiscal 2011, on a normalized basis, before any consideration of future discrete items, our GAAP effective tax rate is expected to approximate 35.5%.

In summary on the bottom line and including our goodwill charge, our diluted EPS for the fourth quarter was $0.43, compared to $0.21 for Q4 of fiscal 2009.

Now let me provide some financial metrics to help provide some further color.

Adjusted EBITDA was $46.8 million for the fourth quarter of fiscal 2010 as compared to $18.8 million for the fourth quarter of fiscal 2009.

Cash provided by operating activities as Fred mentioned was $124.5 million for the year, compared to $88.5 million for the 12 months ended July 31, 2009.

Our balance sheet remains rock solid.

As of July 31, 2010, we had approximately $607.6 million of cash and cash equivalents and we believe that fiscal 2011 will be another year which we will be able to generate significant cash flows from our operations.

As Fred mentioned, we will use some of this cash to buy back stock, pay dividends and we hope to complete one or more successful acquisitions in fiscal 2011.

And finally, let me turn to consolidated backlog.

As of July 31, 2010, our backlog was $338.1 million, compared to $549.8 million as of July 31, 2009.

Now let me turn it back to Fred, who will discuss our business strategies and our outlook in further detail.

Fred?

Thanks, Mike.

Let me begin with our Telecommunications Transmissions segment, and more specifically with our earth station product line.

The fourth quarter was a continuation of the bumpy ride that we've seen for our satellite earth station product line in the last 12 months.

While bookings in the fourth quarter were the lowest for the year, they were higher than the fourth quarter in fiscal 2009.

We believe that steady market improvements that we have seen in the past few months will result in respectable growth in this product line in fiscal 2011, with strength primarily coming from international customers and from the US government.

We remain a clear market leader and technology innovator in the satellite earth station modem market, as we continue to develop new satellite modems that provide a quick and substantial financial return to our customers.

With continued increases in satellite bandwidth demands from the commercial broadcast market, from the global telecommunications markets and from the US and certain foreign governments, we remain confident that the underlying long-term growth drivers for this product line remain intact.

As a result of a recent modem development, we won a notable order in the fourth quarter from an Asian cellular operator for our newly released CDM 750 advanced high speed trunking modem.

This modem provides a significant cost savings for customers and supports DVBS-2, adaptive coding and modulation and our double talk carrier and carrier bandwidth compression and we have great expectations for this modem.

In our over horizon microwave or troposcatter product line, we are experiencing strong order momentum and expect significant year-over-year sales growth.

The majority of our revenues in fiscal 2011 in this product line are expected to come from the $35.4 million North African contract, which we were awarded in fiscal 2010.

Additionally, we expect to generate some revenues from a $31 million purchase agreement that we have with a prime contractor to upgrade up to 152 of the Marine Corps track 170 troposcatter terminals with our next generation troposcatter antennas.

We made a great new customer breakthrough in the fourth quarter, when we received a $11 million order from an international prime contractor for transportable troposcatter systems to be used by a Middle Eastern government.

This is our first important troposcatter equipment contract with this new international prime contractor, which could result in future troposcatter contracts.

The pipeline beyond the announced orders also looks strong.

We continue to work an opportunity of approximately $23 million with the US Marine Corps for troposcatter electronics that are currently in the Marine Corps' fiscal 2011 budget.

Separately, we continue to work with a major US prime contractor on a project for our North African government end customer.

Based on the current status of negotiations, we believe that finally we are on track for an order in the $35 million to $50 million range, sometime during fiscal 2011.

Overall, we are once more getting excited about the state of this product line, and look forward to capitalizing on this momentum and expanding our opportunities into other foreign governments.

Now I will provide insight into the recent events affecting our Mobile Data Communications segment.

As I mentioned previously, in July 2010, we announced our bid was not selected by the US Army for BFT-2, the next generation BFT contract.

Although we believe we had developed a compelling, high performance, backward compatible solution that insured minimal disruption during the transition, the US Army awarded the contract to another vendor because that vendor submitted a total evaluated price that was approximately 50% lower than our proposed $500 million price.

Not much you can do when someone underbids you by 50%.

Even if we had known beforehand exactly what this vendor's pricing would be, our bidding approach would not have been significantly or meaningfully different, because we don't think the contract would have been profitable at a 50% lower price.

Subsequent to the US Army's decision, we met with the US Army and decided not to protest the award.

Rather, we determined that it was in our best long-term interest to continue to work with the US Army as they plan the transition to their new system.

Should the vendor stumble, we will be in a position to supply our backward compatible BFT-2 transceivers into the network which is already in place today and uses our Comtech BFT-1 transceivers.

Based on the ongoing importance of the BFT network in Iraq, Afghanistan and to a limited degree in other areas of the world, we believe the Army will continue to rely on Comtech at a minimum to provide satellite air time and services for a number of years.

This time line is a function obviously in part of the time frame required to get the BFT-2 network up and running.

We also believe that BFT-1 will continue to run concurrently with BFT-2 for some period of time.

In fiscal 2010, we generated total BFT-1 revenue of approximately $53.6 million.

As we look to fiscal 2011, we expect BFT-1 revenue to be slightly higher than the fiscal 2010 amount.

There's currently $121.2 million of available ceiling under our $384 million BFT-1 contract, which expires in December 2011.

As such, it is still quite possible that we could receive large orders both for hardware and services until BFT-2 is fielded, which currently is expected to occur at the earliest in mid-2012.

As I mentioned before, we would not be surprised to see an extension to our present contract or a new contract to provide network and services for BFT to run concurrently with BFT for three to five years.

Now let me switch to MTS.

Of obvious concern is the potential impact of what I just discussed on MTS and the MTS-3 competition.

We are looking forward to solid MTS revenues in fiscal 2011, albeit significantly below the $369.6 million of MTS revenues we generated in fiscal 2010.

As Mike discussed, a significant portion of the fiscal 2010 revenues related to a one-time shipments of the third party computer upgrades.

At July 31, our MTS backlog was a healthy $146 million, and the available unfunded ceiling under our existing MTS contract is $230.4 million.

As you can see, there's plenty of available contract ceiling remaining for additional orders to be placed by the January 13, 2011, expiration of our contract.

We also expect another six month extension to be exercised in the future which will allow for performance to go to July 2012.

Looking forward, in July 2010 an MTS-3 down select approach solicitation was issued.

In order to solicit comments from potential vendors for the proposed contracting approach to be used in the recompetition of MTS.

The solicitation stated that the recompete will consist of two phases and the outcome of the recompete process will ultimately result in the award of a single IDIQ contract.

The Phase I selection process will revolve around the selection of vendors who best demonstrate the potential for their existing commercial system to be militarized into a fully capable movement tracking system.

After a down selection, Phase II will require delivery of a prototype of a militarized system to be first article tested for a number of months, leading to an award of an IDIQ final contract.

We now anticipate that the Phase I RFP may be released in early calendar year 2011.

We know that there may be concern that Comtech will not win the MTS-3 competition based on the BFT-2 outcome.

Perhaps leading that concern for many is the fact that the Army previously stated that it intends to eventually converge both systems onto a single mobile system configuration known as joint battle command platform or JBCP, with a goal of unifying tracking and battlefield situational awareness.

Let me share some thoughts on this important topic.

First, the MTS transceiver performance requirements are different than the BFT-1 or the BFT-2 transceiver performance.

Second, unlike BFT, the MTS program office has not funded any vendor to design a next generation transceiver or network and in fact is suggesting the potential vendors adapt a commercial product for MTS-3.

As a result, we expect that even after the RFP is released, a final decision on MTS-3 is not likely in the near term, based on the need to provide new vendors with ample time to respond to an RFP, militarize the commercial transceiver and network infrastructure, meet MTS-3 RF specifications and to develop a roll-out plan.

Our expectation, therefore, is that the MTS program office will need to authorize at a minimum, the second six month performance period extension of our current MTS contract to allow orders under the current MTS contract to be delivered through July 2012.

Here too, it would not surprise me if additional extensions are required since I believe the time line for an MTS contract placement is more likely to occur sometime in fiscal 2013.

While we stated that fiscal 2011 MTS revenues are reasonably visible based on our current backlog, we do not have meaningful visibility in fiscal 2012 other than to know that the continuation of the MTS network functionality will require a minimum of satellite air time and services and potentially additional satellite transceivers, depending on the demand in the field.

We expect to submit a proposal for MTS-3 and despite not being selected for BFT-2, we remain confident that we can retain this program.

However, should we again experience a low ball bid proposal, we again could be surprised.

I will now move to our Microwave Amplifier segment, where we design, develop and manufacture traveling wave tube amplifiers for the government and commercial satellite communication markets, solid state amplifiers for the electronic warfare, jamming, medical and aviation markets.

We are expecting sales in this segment in fiscal 2011 to be slightly higher than the 2010 levels.

As we look forward, there are a number of opportunities both commercial and defense that could provide some upside.

We're pursuing a number of TWTA opportunities in fiscal 2011 across different markets, including satellite, UAV and broadcast and consumer broadband.

We continue to see a strong performance of KA band opportunities and have positioned ourselves for continued growth in this market.

Our European and Asian presence has been enhanced more recently and we are seeing more activity from those markets.

In addition, we are pursuing a large KA band opportunity in Australia.

In our satellite solid state product line, we continue to work closely with primes in the US and abroad to develop new designs to meet ever more complex customer requirements for electronic warfare, jamming and radar.

Here too, we are seeing a fair amount of activity in our markets.

First, in the IED jamming area, we are currently in initial production of a new integrated power amplifier assembly in support of an upgrade for the CREW 2.1 program.

We believe that we will receive meaningful production orders for this amplifier assembly in fiscal 2011.

Additionally we have a contract to develop and deliver several of the amplifiers required for the CREW 3.2 program.

Which is a next generation counter IED jamming system.

This program received a significant boost in August, when ITT was awarded a $455 million IDIQ contract to provide up to 5,000 CREW 3.2 mounted systems to the Navy, with work to be completed by September 2014.

Based on our role as a major strategic supplier to ITT on this program, we believe that orders related to CREW 3.2 could be meaningful for the next three years.

Finally, we are also working under a development order with a prime contractor on CREW 3.3, which is another next generation counter IED jamming system, designated as the system of systems, and are well positioned as a primary amplifier and switch supplier on this program.

In addition to these high visibility and critical US-based jammer programs, we believe we are also well positioned to benefit from the anticipated increased defense spending from the Gulf region for our other high power broadband communications jamming and IFF equipment product lines.

Finally, let me discuss our announcement yesterday relating to our initial fiscal 2011 guidance.

As is always the case, our guidance is subject to many risks, many of which are beyond our control but are described in our SEC filings.

In fiscal 2010, we delivered over $200 million of one-time retrofit MTS third party computers and related accessories to the Army.

Thus, it became virtually impossible for our consolidated revenues in fiscal 2011 to exceed that amount we recorded in fiscal 2010.

When considering all of the factors that we know today, we expect that our fiscal 2011 revenues will approximate $620 million to $630 million, and that our diluted EPS will approximate $1.90 to $2.

This translates into an adjusted EBITDA of approximately $125 million to $130 million.

We believe these numbers to be achievable and conservative.

Upside to these numbers could come with unexpected material BFT or MTS hardware orders or a faster recovery within our commercial end markets.

Our guidance does not reflect the impact of the stock buyback or an acquisition we hope to accomplish during this fiscal year.

We will report on the impact of these items during the year.

In summary, I would just like to say that the balanced combination of the initiatives we described today will help Comtech to optimize its utilization and deployment of capital, continue to pursue the Company's growth strategy, and provide consistent returns to our shareholders.

With that, I would like now to turn to the question-and-answer period of our call.

Operator?

Certainly.

(Operator Instructions).

We'll go first to the site of Tim Quillin with Stephens, Inc.

Your line is open.

Please go ahead.

Good morning.

First of all, Mike, do you have the backlog by segment?

Sure, Tim.

Good morning to yourself.

The backlog we reported for Q4 in total was $338.1 million.

That consisted at year end of $81.1 million in the telecom segment, $197.3 million in the mobile data com segment and $59.8 million in the RF segment.

Great.

Thank you.

And Fred, you had talked about $100 million or more of adjusted EBITDA in fiscal 2012.

What are the assumptions that you're making regards to the retention of the MTS contract and kind of revenue potential there and the long tail that you discussed on the Blue Force tracking contract?

I think generally what you described is really the answer for it.

I mean, we see both BFT and MTS, Comtech's participation in both of those programs I think will continue for a number of years.

It could be three, it could be up to five years as we run concurrently with BFT-2, BFT-2 at the earliest is probably somewhere in the mid-2012 area.

So we expect continued revenue from both of those programs.

Certainly for 2011, certainly for 2012 and beyond that.

And on BFT-1, would that include -- do you think that will include over a long period of time continued fielding of BFT-1 hardware or is it mostly the service tail?

I think we definitely see the service tail and the infrastructure being there for us for the next couple of years.

Hardware-wise, it's hard to tell because as you know, a lot of the equipment that went into Iraq now has kind of come back.

So the government really has plenty of equipment out there, so we may not see necessarily new transceiver orders.

On the other hand, there could be an upside to that.

And we're not counting on that.

We could see an upside to that if those transceivers were mutilated in some form and require refurbishment or require replacement.

And in regards to the MTS computer shipments, you kind of laid out some timing on those throughout fiscal 2011 and I think your total MTS backlog is something like $146 million.

What is the -- how much of that is computers?

Yes, we shipped probably about $200 million of the computers in 2010, so if you just look at that large $281 million number that we got, just on that order alone, $200 million of that shipped in 2010.

So we're really talking about the balance of that order, plus any of the new MTS systems also contain that order.

So we really see a concentration in Q1 and then again in Q4 and Q2 and Q3 will kind of be equal to each other.

And is that the way that earnings should trend as well?

Q1 relatively high, Q4 relatively high and Q2, Q3 lower?

I think the way we see it, Tim, is kind of along that way.

Our Q1 is probably going to look a lot like Q2 of last year from a directional perspective, with Q4 again being the highest quarter in terms of revenue and shipments of the computers themselves.

I mean, those computers have a big, big impact.

So Q4 again will be the highest quarter for the year in terms of revenue and then Q2 and Q3 will be pretty much equal to each other and they'll be the low points for the year.

Okay.

Mike, in terms of cash flows, strong cash flows but payables went up in the year.

Is that just that you haven't paid the computer vendor yet, and so what should we expect in terms of free cash flow in fiscal 2011?

Yes, you kind of see two things.

You see the AP going up directly related to the computers and you also see our accounts receivable is up at year end too, simply for the same reason.

So that will come into the cash flow in 2011.

We're at this point given that a lot of the computers are going to ship in Q4, it's difficult to know exactly what's going to appear on the balance sheet at year-end in terms of whether or not it will make it into the cash account.

But I think we're shooting -- it's fair to say we would like to be at the $700 million number before the impact of the dividend, before the impact of the repurchase program.

But it could swing $670 million, $680 million, maybe up to $700 million, where we're going to be shooting for a goal and we'll see what happens.

That's pretty strong cash flow.

Just lastly, Fred, you had talked about the move to KA band satellites and the opportunities you're seeing on the amplifier side.

Is there any impact or anything you're pursuing more on the satellite earth station business with this move to KA band?

Thanks.

Yes, as you probably are aware, we pretty well have been supplying the KA band amplifier.

We've developed a 500-watt KA band amplifier that now we've gotten orders from Hughes Network Systems for their Jupiter system and others in that area that we've gotten.

So we've been already supplying that amplifier.

We've been supplying that also to the new Viasat network as well.

So it's more that we expect the whole KA band area to really take off.

Okay.

And we'll take our next question from the site of Joe Nadol with JPMorgan.

Your line is open.

Please go ahead.

Thanks, good morning.

Like to dig into maybe some hypotheticals, if it's possible.

If MTS goes the way of BFT, I know you don't expect that and you gave all the reasons for that, but if there's another low ball bid or if the procurement situation changes, if the strategy changes, can you help us understand what the margins would look like on the remaining business?

Clearly, there's a lot of R&D in there that would come off but you gain a lot of -- a lot of the overhead in your factory is absorbed by MTS.

So any sense you can give us there would be helpful.

Joe, the way I'd like to -- when you want to look at that answer to the question, I would tell you to go look at our Q3 and Q4 of fiscal 2009.

Those were what I call the worst points for Comtech in terms of the operating income, which was a function of strictly getting absolutely no MTS hardware and no BFT.

That was just strictly satellite service and network time in our Q3, Q4 and it included all of the R&D and all of the infrastructure necessary to support not only the MTS contract, and the BFT-1, contract, but the BFT-2 proposal.

So the way I would tell you is kind of back into your own margin assessments.

We have not obviously gone through an exercise to reduce those costs because we don't expect that to happen.

We feel we're going to be doing the MTS and the BFT for quite a long time.

But if you wanted to come up with your own model, I would tell you start with Q3 and Q4 of 2009 and kind of just back out the expenses that you would see.

I think you would see considerable improvements to the operating margin and it would be quite possible you could probably get back up to a 19% or 20% consolidated operating margin.

Obviously at a much lower revenue.

That's a very strongman type of approach.

How much of that R&D, that $11 million to $12 million a quarter is related to NDC?

The numbers are actually disclosed in the 10-K for the last year.

I don't have them offhand but they're in there.

Okay.

Along similar lines, how much of the $100 million of EBITDA, adjusted EBITDA in that 2012 sort of number that you threw out there is related to MDC specifically?

In terms of Fred's comment about the $100 million of EBITDA, we're not going to provide specific kind of tangible numbers.

The way I would tell you to look at it is look at our telecom, transmission segment, our RF and just kind of grow them because we still think that those business will grow, given the economy.

Mobile data com I think it's fair to say would be somewhere between $120 million and $150 million of revenue and you can kind of come up with your own EBITDA assumptions.

You have to remember, we have a micro satellite division, we have commercial mobile satellite transceivers, we have all the customers beyond US Army so it's not going to drop to zero but clearly if MTS and BFT go to zero, that number would be lower than the number I just tossed out to you.

Okay.

And then just looking at that NDC, I mean, again, if things go the way that you don't want them to go there, it seems like you could be left with obviously a small revenue number and declining over time for the services but a tremendous amount of IP investment that you've made historically so a business without a contract, or without a really significant revenue source.

Is there anything else that -- any other way of extracting value in theory besides just sort of hoping and trying your hardest to win the next generation of MTS?

I think the answer to that is one of the areas that I think we already publicly made, is we are quite heavy into the maritime satellite transceiver effort with Thoria, which is a satellite supplier.

So along those lines, we have a number of commercial initiatives that we started last year.

They will take some time, but we hope to grow those pretty substantially in the next 12 months.

Okay.

Just one more.

On the acquisition outlook here, we have -- if you assume that you do the entire repurchase and pay the dividend, we're still talking about well over $500 million of dry powder just with cash on the balance sheet.

So Fred, I mean, obviously there were some things which still aren't entirely clear I don't think to all of us, popped up with your merger agreement this summer.

Strategy has changed a little bit here in terms of cash returned to shareholders.

You're making a pretty big I think statement with the dividend but obviously you're still out there looking to do a deal the size of CPI.

So what can you tell us about I guess the year ahead as you continue to look for acquisitions?

I think as you said, I think our strategy in terms of acquisitions hasn't really changed, it's just that in the past year we -- when we started CPI we also generated over $124 million in cash.

And so that was one of the reasons that we decided to give back some of that cash to our shareholders.

So we still like you say, we will have certainly over $550 million of cash available for acquisitions.

Will we make an acquisition the size of a CPI?

If you recall, CPI was -- the way we handled it it was half stock and half cash.

So we didn't use all of our cash obviously for CPI.

We finally decided that we would do it with cash, but the offer was rejected.

However, we see no problem in doing acquisitions of $250 million to $350 million quite easily.

And are you seeing opportunities out there of that size?

Is pricing good?

What's the environment like now?

Pricing is never good, but as you can imagine, there are a number of targets that we have been looking at and some actually in discussion as well.

Obviously, having the CPI deal going longer than we anticipated and finally breaking up kind of put us back a step or two.

But I think we'll recover pretty quickly.

Okay.

Thank you.

And we'll go next to the site of Mark Jordan with Noble Financial.

Your line is open.

Please go ahead.

Thank you.

Clarification.

I think, Mike, in your presentation you gave some guidance relative to first quarter operating profits, I think.

Did you say that the first quarter should be similar to the fourth quarter if you exclude the goodwill write-off?

And include the gain from the termination in the first quarter?

The way -- Mark, the way we see directionally the quarter is we look at Q1 of fiscal 2011, similar to Q2 of last year.

That's just because of the level of shipments and the computers and the mix.

What will probably be around that number and then Q2 and Q3 of FY 2011 will be down sequentially versus Q1 fiscal 2011 and then Q4 will be higher, will be the highest quarter of revenue and right now probably the highest quarter of EPS and that's strictly just based on the assumptions of how we're modeling in the MTS shipments.

We continue to work and we have an expectation that some of that may shift eventually into Q2, Q3, but that's kind of where we sit today.

So Q1 will look like Q2 of last year.

Q4 of 2011 will be higher than our Q1 and Q2 and Q3 will be the low points.

Okay.

Question relative to the mobile data units.

In the K you say you've got $105.7 million of assets in that subsidiary.

Could you look at just the investments you have in current assets, minus current liabilities, so in that group so you have sort of net cash invested?

You're referring to the mobile data com segment?

Yes, that's correct.

We don't have a whole bunch of capital in terms of PP&E tied up in that segment.

We do have the network operations center and we have a total of $35 million, $33 million of PP&E in our balance sheet as well.

Most of that PP&E is over in our factory in Arizona.

So it's going to ultimately get to zero, the working capital reductions would occur and generate a lot of cash.

A big portion of our accounts receivable, I think it's over $50 million, $60 million of that is coming from the mobile data com and our US government customer.

The AP as well which is up, also relates to our mobile data com.

So yes, a big portion of our balance sheet does relate to that segment and certainly does require a higher level of working capital than any of our other business segments, strictly as a result of the functioning of the contracts.

Again, if you were to have the negative sense where that business would wind down, how much cash out of the balance sheet would that generate?

Mark, we certainly just haven't gone through the exercise of that.

We don't believe that that's going to happen, so I don't think I could really articulate an answer to you.

We just haven't performed the exercise.

Okay.

And relative to the tropo marketplace, you stated you had -- you expect at some point in time in the next 12 months your second North African contract from your long-standing customer.

Could you talk about what opportunity you see domestically beyond just the Marine contract you referenced?

Longer term, do you see the military either adding a new system or what kind of opportunities is there beyond the sort of the retrofit of the electronics?

I think we probably don't want to talk specifics in this area, but we do see a number of US government initiatives right now for some future new troposcatter systems.

However, given the budget constraints, timing is almost impossible to determine.

But we do see some nice future possibilities.

Okay.

Thank you.

(Operator Instructions).

We'll go next to the site of Rich Valera with Needham & Company.

Your line is open.

Please go ahead.

I'd like to circle back to the potential for margins in the telecom transmissions segment.

Assuming that your transceiver businesses there then surely went to zero.

Hypothetically.

In the 3Q, 4Q of 2009 quarters you referenced the margins the in that segment went to sort of mid to upper teens when apparently you had very little transceiver business.

The question is, would you take the actions necessary to ensure that that business moved back up to its historical range, in the 20% range, if in fact it became clear that you wouldn't get any more BFT or MTS transceiver business?

Yes, I think that that's right.

If you look at what we did in Q4, without a whole bunch of new hardware orders in Q3 and Q4, our telecom operating margin was over 20%.

I mean, we did 22% in Q3, 21% in Q4.

That is a function of also the Telecom Transmission revenue itself and in Q3 and Q4 and as that telecom business grows, you're going to see some of that lost hardware and BFT satellite transceiver revenue be replaced by new production of our satellite earth station modems.

So yes, I absolutely think that it's fair to look at our telecom segment as moving up into the 20% and it could be quite possible we'll hit 25% or higher back to those levels.

And that's even with minimal BFT and MTS transceiver business?

Yes, yes.

Okay.

That's very helpful clarification.

The other thing I was trying to get a handle on is how to model your unallocated overhead.

That number I guess it jumps around and kind of jumped up big in the fourth quarter probably because of deal related expenses but wondering how we should think of that number on an ongoing basis as it is today which is you know you still have significant business in BFT and MTS and if you would be willing to -- any guidance or where that number might go if it turned out that in fact you didn't win MTS so that whole segment sort of went into winddown mode.

Could we expect that unallocated overhead number to drop materially?

There's a few components in that number which we discuss in our 10-K.

The first, Rich, is that there's a component of the unallocated stock-based compensation so that number we kind of disclose and that's sort of a fixed number for a while and then it's replaced by the expiration of old grants with new grants.

But that number's probably going do be a function of how many employees are left if some kind of event such as what you described happens.

The second is our corporate infrastructure here in Melville, which is pretty much where we are today and that may or may not change, depending on exactly what happens.

We run pretty lean and mean up here and so most of the divisions with those expenses in their numbers and the third component is legal and deal related expenses which we continue to plan to grow the business through acquisition so that number won't go down.

But ultimately, if we lost, it's fair to say that number would go down by some number.

That's helpful.

Speaking of stock comp expense, it did jump up there in the fourth quarter.

Could you give us a sense of what you're expecting in your fiscal 2011 guidance for stock comp expense?

We actually think our 123-R expense will be comparable or slightly lower than what we did for the year.

In 2010?

Yes.

Great.

And in your K you describe the micro satellite business as nominal revenue, yet if you do the math, with what you've described for the MTS and BFT programs last year, looks like it was around $22 million, $23 million.

So just wanted to, one, confirm that the math is right, and if so, what are the prospects for that business.

Because that would seem to be actually decent growth from when you got it from Radyne when it was doing $15 million, $16 million.

Any color on the if in fact that's the right revenue number for that business and what you think the prospects are for it.

We're not going to -- I will tell you that the business has grown since we've acquired it.

And it's running well.

It's a very small nichey market and I wouldn't want to put out a revenue number for competitive reasons but I can tell you that the business has grown.

We've reached profitability into that business segment and we think 2011 is going to be a real good year.

When we look at 2012 and 2013 there are a couple big contract proposals that division is working on and if they're successful like they were with the J-map contract it could really be incremental to what we're thinking about.

We have reached profitability in that business segment.

We certainly have turned it around from the way it was previously operated.

Those guys in Virginia are doing a terrific job and things are going well for us.

Okay, that's helpful.

And one final one from me if I could.

On your satellite earth station bookings and the volatility there, seems like each of the last several quarters things have either been significantly better or significantly worse than the last quarter and just kind of trying to understand sort of the contour of this because you typically report a good five to six weeks into your quarter and last call you were significantly more bullish on this business than you were the previous quarter.

It sounds like things had really sort of turned the corner and then it seems like in the second half of the quarter things must have turned down pretty markedly for you to have lower bookings in 4Q and 3Q.

Just trying to get more color on the dynamics there and sort of why it's so volatile and seems to turn on a dime the way it does.

I think you described it perfectly.

Things have been very bumpy in that business.

Certainly demand's not falling off the cliff but there's a spurt and then it pulls back a little bit and that's sort of what we see.

We definitely see increased opportunities and increased conversations and we obviously have to turn them into tangible orders but given the overall discussions out there that the business environment is improving, it's consistent with what we see, we feel that ultimately that it will drive that revenue growth up from the current levels we're reporting.

Okay.

Thank you.

Thank you.

And we'll go next to the site of Jim McIlree with Merriman.

Your line is open.

Please go ahead.

Thanks.

Good morning.

Just a follow-on to Rich's question about unallocated corporate overhead.

In fiscal 2010 it was $28.8 million.

And I know that that included some CPI related expenses.

But what's a good number in fiscal 2011?

Yes, I mean, we're not going to break that out.

We don't get into specific numbers.

I would tell you, Jim, if you want come to back into some type of a number, I think we expect our operating income as a consolidated percentage to increase from the level we reported in fiscal 2010, excluding the impairment charge.

So we did operating income was 15.1%, so you kind of know what those margins are.

We do expect operating margins on a consolidated basis to increase in 2011.

So you can kind of plug in your assumptions for the segments and back into a number.

And I just want to make sure, the operating income I think you spoke of being flat in fiscal 2011 or flattish or comparable I think is the word that you used versus fiscal 2010 but that includes the $12.5 million or $15 million CPI settlement.

Yes, sir.

Thank you.

I'm showing we have a few more questions in queue.

We'll go next to the site of Tyler Hojo with Sidoti & Company.

Your line is open.

Please go ahead.

Good morning.

Just a quick question on the RF microwave business.

You mentioned perhaps CREW 2 and CREW 3 could be incremental to your outlook for fiscal 2011.

Just trying to get a sense of where you play on CREW 3.3.

Given the relationship with ITT.

I mean, it seems obvious you're on their offering on 3.3, but are you on the competing offering as well?

And then maybe if you could just discuss the margin dynamics in terms of what those incremental orders would mean to the op margin in that segment.

Thanks a lot.

I think in the first part of your question, I think we really don't want to get into that.

I think as I mentioned, we have a very strong relationship with ITT.

So if you follow ITT, you'll pretty well follow our possibilities.

In terms of margin, Mike, -- ?

Certainly, the RF business as a whole we target operating income about 10% to 12% is sort of what we shoot for, so it's kind of in that range.

But back when you saw kind of the EDO volumes increase several years ago you were doing kind of well in excess of the level you're indicating.

What's kind of changed?

In terms of any specific quarter, if we had gotten a bunch in a specific quarter and were able to ship it out at higher volume in any given quarter, you're absolutely correct, that the margin in that given quarter would certainly be above that and if we get an order of significant size which we're not really anticipating in our guidance at this point, if we were to get that, and were able to ship it out over a number of a couple of quarters in a row, most definitely it would increase our RF Microwave Amplifier segment operating margins.

Very much understood.

Appreciate it.

(Operator Instructions).

We'll go next to the site of Chris Quilty with Raymond James.

Your line is open.

Please go ahead.

Mike, could you give a little clarification.

In the K you indicate SG&A R&D up as a percent taming percentage up.

Directionally on a dollar basis, where do you expect those two to move?

I think the plug is going to be in your SG&A line.

We continue to spend R&D at a healthy rate and we're going to continue to do that as a business strategy.

Even in our mobile data com segment which I know Joe was asking about earlier in the call, our R&D expenses in mobile data com were about $11 million in fiscal 2010.

It will be slightly lower than that in 2011 but the total amount of R&D dollars right now is probably going to be about the same that it was in 2010 and we're still playing around with trying to finalize certain projects that we're going to do throughout the year.

But from a straw man view that would be a way to look at it with SG&A sort of being the plug and I think you would expect the dollar amount to be lower than 2010, simply because 2010 had a lot of CPI related expenses in there and so I'm kind of -- in my mind, I'm excluding the CPI termination fee in that number but if we have a large transaction that kind of ramps up in 2011, we are required pursuant to new accounting rules to expense those costs as we go.

So we could see a bump depending on the level of due diligence and the level of activity that actually occurs.

We have some of that in our plans but obviously everything is a situational thing but that's kind of the best I can give you.

I don't see the numbers drat particularly changing in total in terms of total dollars between the two.

And Fred talked about the network satellite air time and services on the MTS business and the sort of run rate on that.

Too many numbers here today.

I don't know if you gave sort of the run rate for that business or the components that back into what that should be on a run rate.

We obviously have it for BFT because you're getting discrete contracts for air time.

In terms of our BFT, I mean, we tossed out numbers in the past between $30 million and $40 million to $50 million in terms of satellite and related network services time.

That is a function of what the government ultimately does in any given year.

Our MTS satellite time is lower than that at times we talked about it being anywhere between $10 million and $20 million depending on exactly what happens but the MTS because it's a different system as Fred mentioned, they have different needs from time to time and they always usually give us engineering and other type contracts to handle the network.

So it is kind of very difficult to say and separate the two but it's -- if you're looking for a number, you could probably look at MTS on a baseline as probably being $25 million and $30 million in terms of total revenue, excluding let's say any hardware numbers.

Got you.

Okay.

Final question here, just regarding the BFT program and the fact that you lost the BFT-2.

Presumably there's government purpose rights that should allow you to use the arc light technology that's going to be embedded in the BFT-2 but given what you know about Viasat's bid on the program and presumed level of profitability, is it a program that you would want to compete on terminal hardware shipments or basically backing into the numbers they're using, is that an attractive business to even go after for you?

Well, I would answer your question this way.

At the pricing that they have submitted for this program today, this would not be an attractive program for us.

I think we don't see any means of making a good gross margin on those type of prices.

Given that, I mean, if they low ball it, that's great.

It's unfortunate for us.

On the other hand, if they can actually meet those numbers and do the job, more power to them.

They know something more than we do.

Okay.

And is there any way you could perhaps leverage your installed base and what they offer in terms of BFT-2 migration to go to the customer either today or at some point in the future and offer sort of a dual mode capability that they wouldn't be able to, to utilize the installed base?

Yes, I think that's really something that we're looking at, obviously.

We have a BFT-1 system and we've always said that we have a compatible BFT-2 system that's compatible with BFT-1, has the same wave form and can talk to the BFT-1.

So should the government decide to, for instance, I'll use as an example, the Iraq system, it's installed.

It's installed with BFT-1 transceivers.

With the pull-out of the troops from 150,000 soldiers to 50,000 soldiers, and a less of a war fighting capability, one could see that BFT will never go into Iraq.

So I think we see concurrent running of BFT-1 and BFT-2 in a number of areas.

In new places, should there be a new place, obviously the Army will try to use the BFT-2 system.

On the other hand, one can take a look at it and depending upon the data rate required, any given situation, I think we have the BFT-1 system is much cheaper than the BFT-2 system and so could be used in special applications.

So it's kind of wide open.

As far as what we will do in the future, obviously we're not closing down mobile data com and we will be around.

We have a number of commercial initiatives.

We do expect to win MTS-3.

We will be around for the government to let me call it have an insurance policy.

If the government needs a subcontract sometime in the future sometime between now, certainly, and July 2012, we can be there with the equivalent BFT-2 system.

Great.

Thank you guys.

And we'll go back to the site of Rich Valera with Needham & Company.

Your line is open.

Please go ahead.

Mike, can you hear me?

Yes.

Mike, just wanted to clarify, the comparison you're making between the first quarter of fiscal 2011 and the second quarter of fiscal 2010, does that exclude the breakup fee gain?

No, that would include it.

Okay.

So similar profit including the gain, is that fair?

Yes, sir.

That would imply some significantly lower profitability in the underlying business?

What would that be attributed to?

Just mix, when you compare it.

Okay.

So similar revenue but almost $12 million difference in operating income?

Yes.

I use Q2 as a comparison to kind of get you directionally.

Right, right.

We're not giving out specific numbers.

Sure.

Our Q1 EPS and earnings will probably be higher than the Q2 numbers that we did last year.

Okay.

But directionally that should help you get there.

But don't get too caught up on product mixes with any given quarter comparison.

Okay.

Just wanted to clarify that it in fact does include that.

Okay.

Thank you.

And I'm showing no questions in queue at this time.

Okay.

Well, thanks again for joining us today and we certainly look forward to speaking with you again in December.

Thank you very much.

This concludes today's conference.

You may disconnect at any time.

Thank you and have a wonderful day.