Comtech Telecommunications Corp (CMTL) 2011 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Comtech Telecommunications Corp.'s first quarter fiscal 2011 earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded Thursday, December 9, 2010. I would now like the 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 first quarter of fiscal year 2011. 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. With the eventful activities of this past summer behind us, the management at Comtech has been busy, focused on solidifying our core businesses, and identifying and evaluating acquisitions that we believe will be of strategic value to Comtech over the long-term.

During the first quarter, we saw the beginnings of a gradual improvement in overall business. However, as evidenced by the European monetary issues that continue to cause global economic turbulence in our overall markets, the market conditions remain challenging. Our strategy is to continue what has worked in the past. Namely, investing significantly in research and development and marketing activities that we believe will drive future revenue and operating income growth as economic conditions slowly improve.

From a capitalization perspective, we ended the first quarter with approximately $603 million of cash and cash equivalents. And this was after purchasing over $20 million, or approximately 721,000 shares under our $100 million stock repurchase program, and also after completing a small product line acquisition. In addition, just three weeks ago, we distributed the first of what we hope will be many quarterly dividend payments to our shareholders.

And yesterday, we also announced that our Board of Directors approved and declared a second quarterly $0.25 dividend. Before I discuss our first quarter business activities in more detail, and provide updated fiscal 2011 guidance and some comments relating to fiscal 2012, I will turn the call over to Michael our CFO to discuss our fiscal 2011 first quarter financial results. Mike?

Thanks, Fred, and good morning everyone. In summary, our Q1 financial results benefited from earlier than expected MTS deliveries to the US Army. However, our overall consolidated Q1 results were solid. When comparing our results to Q1 of last year, we delivered consolidated revenue growth of 33.2%, and diluted EPS growth of 163.3%.

We are particularly pleased with our operating income as reported, which was 22.5%, a significant improvement compared to the 11.2% that we achieved in Q1 of last year. Excluding the net $12.5 million CPI merger termination fee, we received in Q1, operating income as a percentage of net sales still increased, and would have been 15.5%. Let me walk you through the income statement to put things in better perspective.

Our Q1 consolidated net sales were $178.2 million, of which 73.6% went to the US government. Including prime contractors to the US government, 20.2% were to international end users, and the remaining 6.2% were to domestic commercial customers. Our 33.2% revenue growth, as compared to the comparable period in fiscal 2010, was driven by higher net sales in both our Telecom Transmission and Mobile Data Communications segments, which were offset in part by lower sales in our RF Microwave Amplifier segment.

Our Mobile Data Communications segment was the largest contributor to consolidated net sales. During Q1, it generated $106.2 million of sales, which represents an increase of $52.1 million or 96.3% as compared to Q1 of last year. This significant growth was primarily attributable to the timing of MTS computer shipments related to large orders that we received in fiscal 2009.

MTS sales in aggregate for the quarter were $77.5 million. During the quarter, we were pleasantly surprised that our third party MTS computer supplier significantly exceeded our delivery schedule that we indicated in our year-end conference call. Thus, our original fiscal 2011 revenue and earnings guidance assumed that a portion of these MTS sales would occur much later in fiscal 2011. Although we don't expect any net change for the year, due to the large influence that the timing of MTS shipments has on the entire Company's reported results, we now expect that quarterly MTS sales and overall quarterly consolidated sales for the rest of fiscal 2011 to sequentially decline from current levels.

On the BFT-1 front, sales to the US Army were $18.4 million, which was higher than the amount we reported in Q1 of last year, which was driven by our performance on orders for satellite transponder capacity, and related network services. We continue to expect to receive future BFT-1 orders for satellite and network services. And as such, we expect quarterly sales for BFT for fiscal 2011 to be similar to current levels.

Finally, in our Mobile Data Communications segment, we also saw an increase in sales related to design and manufacturer of Micro Satellites. This product line, which is marketed under the brand name of Comtech AeroAstro, generated significantly higher sales during Q1 of fiscal 2011, as compared to Q1 of fiscal 2010, and was primarily driven by our efforts to deliver a spacecraft bus to the naval research laboratory pursuant to a contract award that we received in March 2010. As AeroAstro continues to gain traction, we are hopeful that this trend will continue, and this product line will continue to contribute to both sales and profits for the next few years.

Now, let me turn to our Telecom Transmission segment which generated net sales of $49.1 million in Q1 of fiscal 2011, an increase of 5.1% as compared to Q1 of last year. Although sales of our satellite earth station products were flat, bookings for our satellite earth station product line during the first quarter of fiscal 2011 were higher than bookings in Q1 of fiscal 2010, and significantly higher than Q4 of fiscal 2010. Based on our belief that the global economy will continue to improve, we expect our satellite earth station product line bookings and related annual sales to be higher than the level we achieved in fiscal 2010.

We did report an increase in over-the-horizon microwave systems which was driven by our performance related to our $35.4 million contract for our North African country-end customer, and our performance an $11 million contract for a transportable troposcatter equipment, which is used by a Middle Eastern government. We expect to continue these efforts throughout the year. As such, we expect annual sales of our Over-the-horizon equipment in fiscal 2011 to exceed the levels of sales we achieved in fiscal 2010.

Turning to our RF Microwave Amplifier segment, we reported net sales of $22.8 million, a 30.9% decrease from Q1 of fiscal 2010. This decline is primarily attributable to significantly lower sales of both our traveling wave tube amplifiers, and solid state high-power amplifiers. Both sales and orders of these products have been negatively impacted by challenging global economic conditions and US and international military budget constraints, which we believe have contributed to program delays and reduced spending. In addition, net sales during the quarter were negatively impacted by the timing of certain shipments for products that are in our backlog, that are expected to be delivered during the remainder of fiscal 2011. Ultimately, we believe that business conditions in our RF Microwave Amplifier end market will improve.

Now let me discuss gross profit. Our gross profit as a percentage of net sales was 36.1% in Q1 of fiscal 2011, which represents a decline from the 37.2% we reported in Q1 of last year, but it represents a significant increase from the 32.1% we reported in Q4 of last year. Our gross margin percentage this quarter was significantly impacted by overall changes in product mix within each individual segment, and an overall higher percentage of Mobile Data Communications segment sales, which traditionally has lower gross margins than our other two segments.

In our Telecom Transmission segment, gross profit percentage for Q1 in fiscal 2011 was lower than Q1 of fiscal 2010, primarily as a result of changes in product mix, including the higher level of sales of lower-margin Over-the-horizon microwave systems. This decline was partially offset by the benefit of cost reduction actions, including manufacturing headcount reductions, to adjust for lower anticipated manufacturing for our Mobile Data Communications segment.

Our Mobile Data Communications segment, which represented almost 60% of our Q1 net sales, experienced an increase in gross profit percentage as compared to Q1 of last year, primarily driven by a favorable mix of MTS products delivered to the US Army. Although we did ship a large amount of low-margin MTS computers this quarter, we also delivered certain MTS products that had unusually high gross margins. Based on the nature and type of orders that are currently in our backlog, gross margins in our Mobile Data Communications segment are expected to be lower than the amount we achieved in Q1 for the remainder of fiscal 2011.

Turning to our RF microwave amplifier segment, we did experience a lower gross profit percentage this quarter, as compared to Q1, primarily due to lower overhead absorption associated with lower net sales. Gross margins in this segment were also impacted by deliveries of developmental-type products to customers, which occurred at lower than traditional RF Microwave Amplifier gross margins, and were unfavorably impacted by the timing of certain shipments.

On the expense side, SG&A expenses of $24 million for the first quarter of fiscal 2011 was $2.3 million higher than the first quarter of last year. SG&A expenses as a percentage of net sales were 13.5%, as compared to 16.2% in Q1 of fiscal 2010. The increase in dollars is primarily attributable to increased cash-based incentive compensation associated with the overall increase in our net sales and profits. Our SG&A expenses for the first quarter of fiscal 2011 also reflect a net impact of cost reduction actions that we have initiated in all of our reportable operating segments to align our staffing with expected future business activity.

Looking forward to the rest of the year, given the expected decline in quarterly sales, SG&A as a percentage of sales is expected to increase from Q1 levels for the remainder of fiscal 2011. R&D expenses were $10.8 million or 6.1% of consolidated net sales in Q1 of fiscal 2011, versus the 8.4% we spent in Q1 of last year. Because our research and development will continue to be a strategic focus of the Company, we expect the dollar amount of research and development expenses for each of the remaining fiscal 2011 quarters to be comparable or slightly higher, as compared to the dollar amount we spent in Q1.

Amortization of intangibles with finite lives in the first quarter of fiscal 2011 was $1.9 million. Amortization in Q1 of fiscal 2011 also includes incremental expense, related to our October 2010 purchase of technology assets from Stampede Technologies. The acquisition is expected to result in incremental amortization of around $900,000 for the year, which was not in our original fiscal 2011 EPS guidance.

As we mentioned in our fourth quarter fiscal 2010 conference call, we received a net termination fee of $12.5 million related to the terminated CPI acquisition. Our Q1 fiscal 2011 operating income reflects the benefit of this fee. Excluding the fee, operating income as a percentage of net sales in Q1 would have been 15.5%.

Looking at fiscal 2011 on an annual basis, our reported consolidated operating income in dollars is expected to be comparable to the level we achieved in fiscal 2010. As a percentage of net sales, we expect it to be higher. Total stock-based compensation expense, which is recorded in our unallocated segment, was $1.5 million, which was slightly lower than the $1.8 million that we had in the first quarter of last year.

Interest expense in the first quarter of fiscal 2011 was $2.1 million, and reflects the expense associated with our convertible senior notes and our $150 million credit line. Interest income was $694,000 in the first quarter of fiscal 2011, which represents an increase due to the increase in cash and cash equivalents that we have on our balance sheet, as well as an increase in period-over-period interest rates that we earned.

Turning to taxes. Our GAAP-effective tax rate for the first quarter of fiscal 2011 was 33.7%, compared to 31.8% for the same period last year. Our effective tax rates for both periods reflect net discrete tax benefits related to the reversal of previously reported tax liabilities no longer required, due to the expiration of applicable statutes of limitations. For the full year, our estimated GAAP effective tax rate, excluding all discrete items, is expected to be approximately 35.5%. Finally, our diluted GAAP EPS for the first quarter of fiscal 2011 was $0.79, compared to $0.30 for the first quarter of fiscal 2010. Excluding the net merger termination fee, diluted EPS for the quarter would have been $0.57.

Now let me briefly provide some other financial metrics to help provide additional color. Adjusted EBITDA was $46.4 million for the first quarter of fiscal 2011, as compared to $21.4 million for the first quarter of last year. Cash provided by operating activities for the three months ended October 31, 2010 was $19.3 million, compared to $13 million for the three months ended October 31, 2009. As of October 31, 2010, we had approximately $602.7 million of cash and cash equivalents.

Based on what we currently have on the balance sheet, and excluding any additional repurchases or deployment for acquisitions, we are internally targeting cash to approximate $670 million. During fiscal 2011, as we previously announced, we do expect to continue to repurchase our stock, pay quarterly dividends, and focus our efforts to redeploy our cash for acquisitions. The ultimate amount of cash that we will report at any period will be impacted by these activities.

Finally, before turning it over to Fred, I wanted to highlight some good news regarding two class action lawsuits that were previously filed against us. In November, the plaintiffs who filed the July 2009 lawsuit against the Company, Fred and myself filed a motion to voluntarily dismiss the lawsuit which the court ultimately approved. Separately, we were dismissed as the defendant without prejudice in a lawsuit against CPI.

The plaintiffs in theses cases conducted their own investigations and found there was no merit to their claims. We were, of course, disappointed that these lawsuits were filed in the first place, but we are pleased that the plaintiffs apparently agreed with our position that these cases are without merit. Now let me turn it back to Fred, who will discuss our three business segments, our business strategies, and our updated business outlook. Fred?

Thanks, Mike. Starting in our Telecommunications Transmission segment, we once again are seeing a spike in bookings, which we believe reflects some sustainable signs of a slowly improving global economy. Bookings in our satellite earth station product line increased significantly in the first quarter of fiscal 2011, as compared to the fourth quarter of last year, driven primarily by increased bookings from our international customers and from the US government. During this quarter, we also saw increased bookings of RF products within our satellite earth station product line.

At the start of the fiscal year we decided, and we launched, an initiative to increase sales of our RF products in certain international markets where we have had a relatively low market penetration. And our efforts certainly paid off, and we're hopeful that this trend will continue. During the first quarter, also as Mike mentioned, we acquired certain assets from Stampede Technology. This technology is expected to be incorporated into certain of our satellite earth station products that will further enhance efficiency in our modem product line. Sales of these products are expected to be nominal in 2011 but are anticipated to significantly increase in fiscal 2012 and beyond.

Looking forward, we remain cautiously optimistic that sales of our satellite earth station product lines will continue to increase. We believe that increases in global cellular telephone subscribers, and increases in HD TV channels, will require more demand for satellite transmission equipment. In addition, the US government is expected to launch an increasing number of new satellites over the next decade, which should drive additional demand for ground station infrastructure.

Now to our Over-the-horizon microwave product line. Here, we continue to work related to our $35 million contract to provide system design and Telecommunications Transmission equipment for use in a communications network for our North African end customer. We're also working on an $11 million order from an international prime contractor for transportable troposcatter systems in the Middle East.

We're continuing to make solid progress in our negotiations with a prime contractor on our other opportunity with our North African end customers. This has been delayed for quite some time, but we are hopeful that we will be in a position to announce that order during fiscal 2011. Here, too, we remain active on the marketing front, and are pleased with the bid activity for tropo- systems that we have seen of late. We believe we're well positioned to receive additional orders for Track 170 terminal upgrades with the US Government, and orders from other foreign governments and oil and gas companies.

Moving on to Mobile Data Communications segment. While we are disappointed that we did not win the BFT-2 contract, we continue to serve the US Army on the BFT-1 contract, whose available contract ceiling is over $93 million, and which expires in December of 2011. Based on the ongoing importance of the BFT-1 network in Iraq and Afghanistan, we believe that the US government will continue to rely on Comtech to provide satellite airtime and network services for a number of years.

Any estimate on this time line will be a function in part to the time that is required to get the BFT-2 network in operation and the US Army's tactical decisions as to whether it will displace BFT-1 in existing geographies, or only introduce BFT-2 into new regions. However, we do anticipate that BFT-1 will continue to run concurrently with BFT-2 for some period of time. Based on this expectation and discussions with the US Army, we believe the US Army will provide us with an extension of our present contract or issue us a new contract to provide network and services for BFT-1 to run concurrently with BFT-2 for three to five years.

Switching to our MTS contract, at October 31, 2010 the available unfunded ceiling under our existing MTS contract is $230 million. As you saw from our press release on Tuesday, we announced that the US Army extended the MTS performance period under the contract by six months to July 14, 2011. This allows the US Army to continue to purchase hardware, network service, and satellite time to operate MTS at least through July 14, 2012.

Separately, we're preparing for a possible open competition for the next generation MTS program called the MTS-3. We now anticipate that the Phase I of the MTS-3 down select RFP may be released in early calendar year 2011. But as we have experienced in the past, further slippage could occur. Ultimately we believe, based on the US Army's public statements, that the US Army intends to eventually adopt a single mobile system configuration known as Joint Battle Command Platform, or JBC-P.

It is our understanding that the US Army plans to combine the MTS program with the BFT program under this platform and it could be as early as September 2011. Although we expect to generate MTS and BFT revenue for some time, we believe that because of government budget constraints, the ultimate amount of revenue from these programs will be at levels lower than we have traditionally generated. In anticipation thereof, we have begun implementing cost reduction actions in our Mobile Data Communications segment to ensure that we are appropriately sized for future business activity.

Looking beyond 2011, we're looking to generate revenues in new markets. We continue to believe that our Thoria partnership will open a lucrative growth opportunity for Comtech in commercial maritime satellite communications area. Also, we are expanding our presence in the commercial trucking market, and recently we have introduced our Intellitruck, our trademark solution of our over-the-road platform that we believe offers valuable features and a sound investment proposition for our customers. We are currently negotiating with a large truck fleet that we are hopeful will be a strong reference customer to validate the value of our trucking platform. In this segment, we intend to continue for our research and development in both of these commercial product areas.

With that, I will now move to Microwave Amplifier segment, where we design, develop and manufacture traveling wave tube amplifiers for the government communication market and satellite -- solid state amplifiers for the electronic warfare, jamming, medical, and aviation markets. From a segment perspective, bookings in the first quarter were slower than we had anticipated due to the lagging effect of the economy, and the movement of some of our government programs to the right. We believe conditions will ultimately improve, and that we are well positioned to benefit from some exciting growth opportunities that we see in the future.

In our traveling-wave tube amplifier product line, we remain a key global provider of world class traveling-wave tube amplifiers for the emerging KA-broadband satellite services area. We have seen a surge in demand for high power KA-band PWC amplifiers, that uplink these broadband interactive services and video broadcasts. And we have been selected by Hughes and Buyers Ad. as the supplier of choice for our state of the art 500-watt KA-band high power amplifiers, supporting their emerging high through-put satellite broadband networks.

Furthermore, we continue to pursue other TWTA opportunities for UAV data links and broadcast transmissions, and are well positioned to address the requirements for various expand and millimeter-wave airborne and shipboard opportunities for the US government. In our solid state product line, we have also experienced delays in business activity as a result of the lagging economy and the same government program delays. But we see a promising road map across a number of different applications, and specifically are well positioned to participate in the anticipated upgrades from CREW 2.1 to the next generation CREW 3.2 and 3.3 IED jamming systems.

In fact, during the first quarter, we began to deliver several of the developmental amplifiers required for the CREW 3.3 program to our prime ITT. We also remain in discussions with ITT, related to CREW 3.2. As you know, ITT was recently awarded a $455 million IDIQ contract to provide up to 5,000 CREW 3.2 mounted systems to the US Navy. Timing of that order remains uncertain, and we're not anticipating much in our fiscal 2011 guidance.

Let me now switch to gear -- switch gears and provide updated fiscal 2011 guidance. As is always the case, our guidance is subject to risks, many of which are beyond our control but are described in our SEC filings. In our last conference call, we indicated that we expect that 2011 revenues to approximate $620 million to $630 million. Although we now expect lower RF Microwave Amplifier revenues, stronger bookings in our Telecommunications Transmission segment allow us to maintain our revenue guidance at $620 million to $630 million. On the bottom line, our prior EPS guidance was $1.90 to $2.

Based on our first quarter results and the benefits of the cost reduction actions that we have and will continue to take, we believe we are in a position to increase our fiscal 2011 EPS guidance by $0.04, to a range of $1.94 to $2.04. This new guidance does reflect the lower share count based on our first quarter repurchases of our stock, as well as the incremental amortization associated with the Stampede Technology asset acquisition. But it does not include any potential future repurchases of shares, or the impact of any additional acquisitions that we would hope to complete during the fiscal year.

Looking to 2012, as we stated in our last conference call, we're cognizant that our goal of achieving $100 million of EBITDA in 2012 is highly dependent on the amount of MTS and BFT revenues that we ultimately generate. Although the US government budget remains under pressure, and we have limited visibility into what future MTS and BFT orders will be, the receipt of the MTS contract extensions announced Tuesday is a good start. And we will continue to work with our MTS and BFT customers to obtain better visibility. Our outlook is improving, and we're optimistic that we will ultimately benefit and meet the challenges we set for ourselves. Our efforts remain a work in progress, and we will provide you a status update each quarter.

Finally, overall we're pleased with our first quarter results, and we believe fundamentals across our company remain solid. While it is too early to predict any outcome, acquisitions are high on our to-do list for the current fiscal year. Our acquisition initiative is currently focused on a number of opportunities that we believe would complement our existing businesses, and align with our long-term business strategy and provide us with possible upside in both fiscal year 2011 and 2012. With that, I would like now to turn to the question and answer period.

Absolutely. (Operator Instructions) We'll move first to the site of Mark Jordan with Noble Financial. Your line is open.

Good morning, gentlemen. Question on the two (inaudible) products. At least historically it's taken six months to a year from receipt of the awards to having those contracts generating meaningful revenue on profitability. When do you see those contracts kicking in? Is this -- should we assume that that should be an incremental impact on the second half of the current fiscal year?

I think both of those, Mark, both of the ones that I mentioned, which is the Mideast one and the North African contract that we're working on, both are kicking in right now and should kick in substantially in the second half. The third one obviously, as you know, we've had that dragging along for a number of years now, but at least our customer is in negotiations. We don't know how long that will take, but we do anticipate at least booking it this year. Whether that has any impact on this year's earnings, probably most of it we should assume will go into 2012 and beyond.

Okay. Michael, given that the movement -- seeming movement on tax policy in Washington, what impact on your 35.5% tax rate assumption might we see if we get action relative to R&D tax credits, et cetera?

Sure, Mark. The framework that the President announced related to the R&D tax credit would favorably impact the Company. As it's been announced in the framework, that it's a retroactive piece, so we'll actually get the benefit not only for 2011 R&D spending, but also 2010. And if it's passed, as is currently in the framework, if it occurs in fiscal 2011, let's say even in December which we're hopeful, it would probably have an upside of about $0.015 to our EPS, and it would probably make our tax rate roughly around 34.75% for the rest of the year, excluding the retroactive piece. But we'll -- we're trying to see how the final legislation works its way through. But it would be upside to the EPS guidance that Fred provided earlier.

Okay. And finally, could you give us a breakdown by segment of backlog and also in the Mobile Data backlog component. How much is remaining on the terminals, or is that virtually done now?

Sure. Let me give you the backlog by segment first. In our Telecom segment, we had $86.1 million in our backlog, $124.4 million in Mobile Datacom and $56.9 million in our RF amplifier segment for a total of $267.4 million. Of the $124 million in backlog at Mobile Datacom, a significant portion of that does relate to the computers that we do anticipate, really by the end of December, to be fully shipped to the customer. So you're going to see that backlog really go down when we report back, in I guess it would be in March, for our Q2 numbers.

All right. And then just primarily reflect whatever airtime and services you would have in backlog, that would be just a pure services and airtime kind of number then, moving forward?

Yes. There will be some hardware, minor peripherals and stuff like that so it won't be 100% pure. We do anticipate getting additional orders from MTS, not material ones, but we do expect them. And then we also have other hardware orders to our commercial customers as well as all the government customers. So it won't be 100% services, but a significant portion would be.

Okay. And then just looking sequentially for Mobile Data, so you would assume a fairly significant decline. And then would the third and fourth quarters be relatively flat or similar and lower, or the lowest of the year?

Yes, I think Q3 and Q4 will be very close to each other, but Q4 would be lower than our Q3.

Okay. Thank you very much.

And our next question will come from the site of Rich Valera with Needham & Company. Your line is open.

Thank you. Good morning. Question on Telecom Transmission. When you say you expect it could be higher than overall in fiscal '11 and fiscal '10, wondering if you can just help put some bounds around that.

It seems like you would need to see a pretty significant pickup from 1Q levels to get to even flat for the year, so just wondering if you could give us any help on what is higher? Is it any percentage range, and just what kind of trajectory should we expect? Should we expect a pretty significant sequential uptick in Telecom Transmission or a gradual acceleration throughout the year?

It will occur throughout the year. We expect a ramp-up, a slow ramp-up from Q1 to Q2, with Q4 probably going to be the highest in our Telecom segment. And clearly it's over 10% growth that we're expecting in telecom on a consolidated basis, including our over-the-horizon. But I think if you back into the revenue guidance that we have for the year, using the midpoint, you'll find it's a percentage well north of 10% on the consolidated number.

Okay. So that supposes a significant acceleration I guess in the back half of the year?

Well, yes, as Fred mentioned, we saw it occur in Q1. We had a pretty significant increase in bookings from Q4 to Q1, so yes, we are expecting that to continue throughout the year. Right now, that's consistent with what we're seeing.

Sure. And could you say if you think it could be flat year-over-year in the second quarter?

Versus last year?

Yes. Do you think it could be flat or up or down?

No, we would expect -- put it this way. I think the way last year worked, our Q2 was a little bit higher. You might recall in Q2 last year we had that big spurt in Q2, but looking at Q3 and Q4 comparatively, we would expect our Telecom segment to be significantly higher than last year's reported Telecom segment sales. And that would be a function of two things, the satellite earth station bookings that we are expecting to increase throughout the year, and then as Mark Jordan mentioned earlier, the over-the-horizon contracts are kicking in.

Can you give us any sense of how much more over-the-horizon you'll have in the back half versus the first half?

It's very difficult. You have to remember, the product line itself is probably less than $50 million of revenue a year, so it's not going to materially change how you look at things.

Sure. And I guess not to harp on this, but it seems like virtually every quarter for the last several quarters the trajectory and momentum within Telecom Transmission, particularly within satellite earth station, I should say, has been sort of all over the map and sort of one quarter looking very good and one quarter significantly weaker. Just wondering what, at this point, gives you conviction that a couple quarters from now you're going to be seeing what appears to be significant strength, looking at your guidance.

Yes, I think the characterization of what we see and what we have seen is correct. I mean, we've had ups and downs and starts and stops. There's no doubt about it. At this point, it's just an overall subjective feel. This is a business where we don't have 10% of our revenues coming from one customer so when we look at it on a very broad base, what we see in back -- what we've seen in bookings in Q1, and what we're hearing from most of our customers, gives us that sense.

As of today we're not seeing any change in that. Could things change? Of course. But right now we feel pretty confident that what's happening in our marketplace of strength and continuing increases will continue. And I think what also gives us better comfort is that you do see that improvement in the overall global economy when you add it all up.

Great. And moving on to Mobile Data, you had some language in your Q which I think is new language, saying that it's possible that the Army could cancel its previously announced intention to hold an MTS-3 competition. I'm wondering what -- obviously anything's possible, but is there anything that triggered that new language in the Q?

I think, Rich, we've heard right along that the Army intends to move to the JBC-P platform. And just the timing of it and the delays that the MTS program has had in issuing the RFP makes us think that maybe that's what they're thinking, that they want to wait. Obviously, there's a lot of hardware out there that we have supplied over the last few years, and since Iraq has kind of down-sized, there's a lot of hardware in both the MTS and the BFT-1 programs. So timing as you can see, the Army is just not ordering any hardware now for some time, and we don't expect much of the orders in the future.

Certainly, they're planning to go to the BFT-2 platform and eventually into the JBC platform. But if things just flatten of out in terms of budget constraints or ordering necessity, we could see them directly go into the JBC platform with both programs. So we're kind of in the dark until the government really determines what path they want, we really don't know. But we thought it was prudent to mention it, that that's one possibility.

Great. That's helpful. Just one final one on, sort of, the acquisition landscape, if I could. Obviously, CPI ended up getting a higher offer, materially higher offer than you guys had put on the table and just looking at a small sampling of other acquisitions that have happened out there it seems like 8 to 10 times EBITDA is kind of the norm which is obviously a significant premium to where you guys trade. Just wondering how you're thinking about acquisition valuation. How attractive do you think the overall M&A landscape is out there, if you could put any comments on that.

I guess we've always been very slow and methodical in our evaluation of targets that we have for acquisitions, and maybe after the CPI experience, you can call us cheap. But I think CPI received a pretty good price from us. Unfortunately, it didn't happen. They certainly made out well. I think obviously the ratios are going higher than we anticipate, and so we're relooking at our situation with all of our targets and we'll do an appropriate.

Okay. Thank you.

We'll move next to the site of Tyler Hojo with Sidoti & Company. Your line is open.

Good morning. I was hoping, Fred, maybe you could provide a little bit more color. You said in your prepared remarks that you were negotiating with a large commercial truck fleet, I believe, with some of your Mobile Data products. Just wondering what you think the market is for, perhaps, more commercial applications of your technology, and if -- I guess what the margin profile of such products would look like.

Well, I guess I would rather not mention who the trucking company is. We've been around the periphery of the commercial trucking area and we've always had an eye on it as we were very busy in the -- obviously in the government area. But we have been interested in that area. It's a huge market as I can point out. Just look at Qualcomm and what they do in that area.

Not to say that we intend to compete with Qualcomm definitely in that area, but we have our own technology and our own, let's say, performance capability for certain areas of the trucking industry, probably more so in the middle market area rather than the high-end market area. We're also into the -- call it the government area, with the Homeland Security area kind of asking people that when they have trucks full of hazardous gas or gasoline or other materials, they need to have a tracking system and a location system. So I think we see that market as increasing, certainly, in certain niche areas, and we're finally, I think, there in our development where we can state that we have an offering, we've demonstrated it, and I think we're going to get some business there.

Okay. Now, my understanding in the past, in terms of what's kept you out of that market, is that the profitability was significantly lower than what you were doing with the government. Obviously I get that the government business that is legacied for you guys is going away, but I mean, is it fair to say that if you do pursue some of these commercial opportunities that we will see some fairly substantial margin pressure within this business?

I think the answer to that in the medium term would be no. I think what you might be referring to is when we had a company called Tolt Technologies, they were basically a VAR and a reseller business which was the low-margin business. But part of what we salvaged, if you will, from our Tolt acquisition was we did, and were able to, successfully build out a very small, very nichey commercial business which we retained.

We don't talk about it because it's not material on a consolidated basis, but we do have a very niche -- a very good niche in oil and gasoline companies. And as Fred mentioned, when you're tracking gas and oil in your truck, that's something that you need instantaneous coverage. We have that capability. That's what we did with the US Army and we've been very slowly focusing our efforts on that.

We just from a resource perspective, haven't put the resources down there because it's much easier for us to try to go after the resources with the government. Now that we have -- we're not going to be working on BFT-2, we have shifted some of the resources into those markets, and we think, because we have a very good product, and we're going to be able to expand the sales in that area. Although initially when you're trying to get into a market you may have some low pricing to try to get those customers, certainly we don't see that -- we don't see it as a low margin business at all.

Okay. That's fair. Just to kind of go back to the last question, in regards to acquisitions, just wondering if maybe you could talk to how big you would be willing to go in terms of acquisitions? Would you be willing to do something kind of similarly sized to like CPII or your original bid for CPII? And would you do a deal that was not accretive from a GAAP perspective in the first 12 months? Thanks a lot.

I think the answer to that is, as we mentioned before in a number of telephone conferences, I think we're prepared to do acquisitions from little tuck-in acquisitions, to the level of the CPI or maybe even a little bit higher. That's well within our capability to pull the trigger on.

What about the accretive part?

Oh, the accretive part. I'm sorry. I think, again, the accretive part, obviously on a large acquisition, we would want to make sure it's accretive. On small, tuck-in acquisitions, we're really -- it would be fine if it was accretive but we look at more as technology and product line acquisitions that will work for us on a future basis, not necessarily in the near-term.

Great. Thanks a lot.

And our next question comes from the site of Tim Quillin at Stephens, Inc. Your line is open.

Hi. Good morning.

Good morning.

In the Telecom Transmission bookings or the implied bookings from your backlog of $54 million, was that all the satellite earth station business?

I'm sorry -- the $54 million of bookings implied in Telecom? Is that your question?

Yes, the question was there any trope owe scatter bookings in the quarter?

Very little.

And would you be able to give us a sense of when the current service orders for BFT-1 and MTS end? In other words, when will you need to get additional orders for the network service and maintenance?

We are expecting additional -- in our guidance and we are expecting additional BFT-1 satellite service orders for 2011, so whether that comes January, February, March, it should come before the end of our fiscal year 2011. It really has to do with the last couple of months. I want to say April or May is what we currently have in our backlog that runs out, but we certainly need the last couple of months of orders to come in which we would expect.

Okay. And anything on MTS? Or where does your service, your current service agreement run out there?

I believe, Tim, we've got orders pretty much through the end of our fiscal year for the service piece.

Okay. And you may have talked about this, Fred, but on the previous conference call you talked about $120 million to $150 million in revenue in Mobile Data in fiscal '12, and it sounds like there's been a lot of incremental information you've received in terms of how the MTS-3 process might go. So is that still the right way to think about that, or is there a possibility that that's lower because it's less likely that you get hardware?

Well, as you know, the MTS unfunded ceiling is $226 million to $228 million, and the BFT is about $80 million. So that's about $300 million that's available of unfunded ceiling of which we have no bookings against right now. We are continuously talking to the Army.

We know they want to do certain things, but timing is just impossible to predict. So -- and that's one of the results that you've just seen, is a first extension of six months and now a second extension of six months, and nothing happened in the first six months. So it's difficult timing-wise, but at this point in time I still see the bookings coming in, yes.

Okay. So that $120 million to $150 million is still a good range or should it be wider?

It could be -- I wouldn't call -- I wouldn't do it wider, but on a conservative basis. What I'm trying to say to you is if delays continue, it could be lower.

Right. And just with regards to recent acquisitions in the industry, and I tend to agree, it seems to be high single digit EBITDA valuations. I mean, what's the argument against exploring a sale of Comtech versus trying to make acquisitions in an industry where the multiples are that high and you're trading at 5 times EBITDA? Just seems hard to create value that way versus maybe exploring a sale of the Company. Thanks.

Well, I think the age-old argument is, yes, obviously you don't want to acquire someone with a ratio of 10 when your ratio is 5. But on the other hand, I think we have to look at the technology that we're acquiring, and the growth of the target. It's not only a one-year situation. Obviously, if it was only that measure, we would be buying more of our stock back.

But I think we want to do, as we said, a little of both. Give some money back to our shareholders in terms of dividends, buy some stock back and as well, do some acquisitions. As far as the Company, the Company putting itself up for sale, I don't think we're ready to do that. On the other hand, if we have somebody that wants to talk to us, we'll certainly be happy to talk to them.

Thank you.

And we'll take our next question from the site of Jim McIlree with Merriman Curhan and Ford. Your line is open.

Thank you. Good morning.

Good morning.

On the guidance you talked about, it does not include future buybacks. Did I hear that correctly? So in your guidance you're just assuming that the current share count is flat for the rest of the year; is that right?

Yes, we've purchased about $20 million worth of stock or 721,000 shares in the first quarter and that's the only part that's included in the guidance.

Is there any reason to believe that the stock purchase won't continue?

I think we can say at this point that we have continued, and we're probably over the $30 million point at this point.

Okay. And then secondly, can you talk about the focus of your R&D spending right now?

Well, the focus is obviously different in the different segments. In the Telecom area it's primarily into the -- into what we believe is our niche, and that is the niche of having the efficiency, the bandwidth efficiency usage of the satellite network. And so even with the latest acquisition, that fits right in to what we do well. So we spend a lot of money there and we will continue to do that.

In the Mobile Datacom area, we're obviously not spending any more money on the government area because of disappointing loss of BFT-2. But we are spending on our maritime and our trucking area, so we're spending money there, and we will continue throughout the year. In the RF amplifier area, both in the TWT areas and in the solid state area, we will continue to what we've been spending in that segment to date, and we'll continue to grow that R&D spend in both areas.

Thank you very much.

Okay.

And we'll move next to the site of Chris Quilty with Raymond James. Your line is open.

Thanks, gentlemen. A question first for Mike. Mike, can you give us -- what was the actual MTS rugged computer shipments in the first quarter?

Chris, I don't have that here, but I'm going to tell you it was north of $50 million, and probably between $50 million and $75 million, so it was a pretty significant number.

I think the number we had talked about previously was about $80 million less in fiscal '11. So presumably, the amount left for Q2 is somewhere between $10 million to $30 million that we would see?

Let me answer your question this way. I think we're expecting our Mobile Datacom revenue in Q2 to have the complete shipments of the DRS computers, and with that you're probably going to wind up with Mobile Datacom revenue right around the $70 million mark or so is what we're expecting with Mobile Datacom then flattening out in Q3/Q4 at a much lower revenue number. That's pretty much how we see it as of today and there's only, what is it, 22 more days or 23 more days left in the month, and we're on track as of today with our DRS shipments.

Okay. Good. Telecom, the margins obviously well below what they should be in a steady state, and I assume that's primarily due to over-the-horizon. Is there any reason to believe you still can get to the types of low- to mid 20% margins on a -- well, low 20% on a full year basis and mid-20% on a longer term basis?

We're very comfortable with that. We expect our Telecom Transmission operating margins to be north of 20% for the remaining quarters of the year. In Q1, we reported what was around roughly 17% operating margin. That was a part function of mix in the quarter, but given the expected orders that we expect from our satellite earth station modems and our rest of our satellite earth station business, we expect that with the additional volume that we'll put through our factory, that the operating margins in the Telecom Transmission segment will increase for the remainder of the year.

Okay. And mobile data margins were the best in a couple of years, and I think you said it was the favorable MTS mix shipments. It's a moving target because the drop in revenue base here, but is it fair to assume that on a go-forward basis we might expect margins to fall back to the, sort of, low- to mid- teens on a go-forward basis?

Well, the way we're thinking about Mobile Datacom, certainly we expect operating margins for each of the remaining quarters to sequentially decline from the levels that we experienced in Q1. As you mentioned, Q1 certainly had a big pop related to a certain product set that we delivered to the US Army for MTS. But we are anticipating continuing spending in the area, in the commercial market on the R&D side of things right now. And with that, given that -- until the revenue comes in in that marketplace, it's possible that you'll wind up looking at a run rate of operating margins probably around 12% or so in our Mobile Datacom segment and that's before we would get, let's say, the order flow from the commercial side.

Once we see that orders start to increase and the revenues, we would expect our margins to increase from that level. But currently, we're not anticipating a whole bunch of commercial revenue in our model in '11 but we do have the R&D spend in there right now. If it comes in a little bit earlier, our margins will be higher than that.

I didn't think about it, but the trucking opportunity for you, is that direct sales, or are you trying to build some kind of a channel to sell those products through?

No, right now we're looking at direct sales only.

Okay. And SG&A, I think, in the Q, you said is down as a -- or up as a percent of sales but obviously because the revenues are coming down, what should we expect with SG&A on a dollar basis?

I think you're going to find it's going to be pretty consistent from a dollar basis through the rest of the year. It's going to be dependent on exactly where the cost reductions are going to come from, but I don't think we're going to be too far the dollar amount that we're currently doing.

Did you pick up the full benefit of the headcount reduction in the first quarter, or is there incremental pickup in Q2 and beyond?

No, there will be incremental pickup in the rest of the year.

Okay. And presumably most of the headcount was in Mobile Data, but what order of magnitude were these 2% cuts or 10% cuts in terms of headcount?

We would rather not put a target on it but certainly it was big enough to talk about.

Okay. I think that answers my questions. Thanks, guys.

Thanks.

We have no further questions at this time. I would like to turn the call back over to Comtech for any closing remarks.

Okay. Let me take this opportunity to wish all of our friends, shareholders, and employees a happy holiday season and a happy New Year. Thanks again for joining us today and we'll speak to you again in three months.

And this does conclude today's teleconference. Thank you for your participation. You may disconnect at any time and have a wonderful day.