Comtech Telecommunications Corp (CMTL) 2011 Q2 法說會逐字稿

Welcome to Comtech Telecommunications Corporation's second quarter fiscal 2011 earnings conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions). As a reminder this conference is being recorded Friday, March 11, 2011. I would now like to turn the conference over to Ms. Maria Salernoof Comtech Telecommunications. Please go ahead, ma'am

Thank you, and good morning. Welcome to the Comtech Telecommunications Corp conference call for the second quarter of fiscal year 2011. With us on the call this morning are Fred Kornberg, president and Chief Executive Officer of Comtech, andMichael Porcelain, Senior Vice President and Chief Financial Officer.

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 and management's assumptions regarding such performance, business outlooks 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.

Although we posted solid financial results in our second quarter, overall business conditions remain challenging. In particular, bookings in the second quarter were impacted not only by the political unrest occurring throughout the Middle East, but also by the lingering impact of the European monetary issues. In addition, we also experienced some government booking delays and funding reductions as a result of overall USmilitary budget pressures that are impacting the entire defense industry. As I will discuss later in this call, based on recent conversations with our USArmy customers, we now have a clearer picture of what our BFT-1 and MTS bookings and revenues might look like in the second half of fiscal 2011 and 2012 and beyond.

As we transition our businesses going forward, we continue to do so from a position of financial strength. We ended the quarter with approximately $593 million of cash and cash equivalents despite returning significant cash to our shareholders. Pursuant to our previously announced $100 million stock repurchase program, we repurchased approximately 908,000 shares during the second quarter. Cumulatively to date, we have repurchased about 1.7 million shares for approximately $50 million.

In addition to repurchasing our stock, we also distributed our second quarterly dividend of $0.25 per share, and yesterday our Board of Directors declared a third quarterly dividend of $0.25 per share payable on May 20, 2011, to shareholders of record on April 21, 2011.

During the past quarter, we remained focused on our core businesses. We executed a number of cost reduction actions throughout the Company, while at the same time making significant investments in research and development to generate future organic growth and strengthen in our market leadership positions. Our focus on acquisitions has never been greater. Although we have nothing to specifically report to you at this time, our goal is to announce at least one transaction before the end of fiscal 2011.

Later in this call, I will provide more details on each of our three business segments, as well as provide updated revenue and earnings guidance. Now I will turn the call over to Michael Porcelain, our CFO, to discuss our second quarter 2011 financial results. Mike?

Thanks, Fred, and good morning, everyone.

Despite difficult conditions, our Q2 financial results were solid. We delivered net sales of $162.8 million and diluted EPS of $0.52. Our operating margin was 15.5%. This percentage was the same percentage we achieved in Q1 2011 after excluding the CPI merger termination fee we received in that quarter. Of our Q2 net sales, 62.7% were to the USGovernment, 29.6% were to international end users, and the remaining 7.7% were to domestic commercial customers.

Our mobile data communication segment was the largest contributor to Q2 consolidated sales. During Q2, its sales were $76.6 million. Operating income margin for the mobile data communication segment was 18.7%. Except for revenue derived from one large US Navy microsatellite contract, the large majority of sales in this segment in Q2 were generated from MTS and BFT-1 contracts. MTS sales on the quarter were $45.1 million, and BFT sales were $21.5 million. For the six months ended, MTS sales were $122.6 million,and BFT-1 sales were $39.9 million. In total, our MTS and BFT sales represented 40.9% of total sales of Q2 and 47.7% for sales for the past six months.

During Q2, we substantially completed deliveries related to large orders for MTS ruggedized computers. As such, revenues expected to be generated from this segment during the second half of fiscal 2011 will significantly decline, with the fourth quarter being the lowest. Given the magnitude of the MTS program, consolidated net sales for the entire Company will follow in the same direction.

As we stated in our last conference call, we recognize that our 2012 adjusted EBITDA goal of $100 million was highly dependent on the amount of MTS and BFT revenues we could generate in fiscal 2012. Based on our recent conversations with the US Army, we now believe that our mobile data communication segment is likely to achieve revenue of approximately $40 million to $60 million rather than the $120 million to $150 million that we were originally shooting for. As such, excluding the impact of any acquisitions, we were also adjusting our 2012 consolidated adjusted EBITDA business goal to around $75 million. Fred will provide more details on our conversations with the US Army in his part of the call.

Now let me turn to our telecom transmission segment, which generated net sales of $62.3 million Q2 of fiscal 2011. We are particularly pleased with our operating income margin in this segment, which approximated 24.9% for Q2. This amount is the significant increase from the 16.9% operating income margin we delivered just three months ago. Although a large portion of this operating margin improvement is the result of favorable changes in product mix, it also demonstrates the benefit of the cost reduction actions that we took in this segment. The last time we saw operating margins at this level was way back in Q2 of 2009, when we achieved around $70 million in telecommunication transmission sales.

Looking forward in anticipation of lower future production of mobile satellite transceivers for our mobile data communication segment, we will continue to focus efforts on further cost reductions. Assuming we achieve in the future a similar level of sales like we did on our most recent quarter, we believe we can continue to achieve operating margins within a 20% to 25% range for any given quarter. Excluding any one time or unusual items, we believe the actual operating margin percentage that we will be able to achieve in any given quarter will largely be driven by product mix.

This quarter, included in our telecom transition segment of revenues of $62.3 million were revenues generated from our old [horizon] microwave product line, pursuant to our $35.4 million contract for North African country end customer, and our $11 million contract whose end user is a Middle Eastern government. As of today we continue to perform work on behalf of our prime contractors and do not expect our performance to be impacted by recent events occurring in that region of the world.

As normally is the case the large majority of our telecom transmission sales in Q2 were attributable to our satellite earth station product line. When we last spoke to you three months ago, we felt that the trajectory of satellite earth station product sales was headed upwards. In fact, although Q2 sales fell compared to prior year, they actually represented a significant increase in Q2 2011 as compared to Q1 2011, and this increase occurred in various regions of the world. Unfortunately, during the second half of Q2, bookings turned soft and were impacted by the significant political unrest occurring in the Middle East. At the same time, sales to and orders from the US Government were not at the levels we would have preferred. In February we saw bookings start to recover a bit, but we are taking a more cautious view towards the rest of the year in light of current events. Based on current backlog and the anticipated timing of orders we expect to receive, we now expect annual sales of our satellite earth station products to be relatively flat in fiscal 2011 as compared to fiscal 2010.

Turning to our RF microwave, we reported net sales of $23.9 million. Although the amount of sales that we reported in Q2 was higher than the level we achieved in Q1 of fiscal 2011, bookings in this segment were soft. Despite the softness, we did increase our R&D efforts. As such our operating margin in this segment were only 1.7%, which was lower than the 2.8% we achieved in Q1.

Conditions in our amplifier end markets continue to be challenging. Like our satellite earth station product line, we experience what we believe to be order delays. Most of the orders we expected were with prime contractors where our products are ultimately utilized as part of larger, more complicated systems. Because of the critical nature of these systems, we ultimately expect to receive orders for them, given the overall importance of these systems.

On the US Government side we are seeing budget pressures and uncertainties that are causing the DOD and industry to evaluate their overall spending. Some of the programs we have or expected to work on are shifting to the right or being slowed down. Although we expect sales during the second half of fiscal 2011 to be relatively flat as compared to the levels we achieved in the first half, we are still expecting an improved order flow in the second half, as we have several large orders that we believe will come in.

Now let me briefly discuss the rest of the consolidated income statement. I'll start with gross profit and work my way down. Our gross profit in Q2 of fiscal 2011 as a percentage of net sales was 37.4%, an increase from the 36.1% we reported in Q1. This improvement from Q1 was largely driven by lower levels of low margin MTS ruggedized computer sales and the impact of ongoing cost reduction efforts. Given that almost all of our orders for stand-alone MTS ruggedized computers have shipped, we continue to expect that our consolidated gross margins as a percentage of our net sales will increase during the second half of the year as compared to the first half.

On the expense side, SG&A expenses were $23.2 millionfor the second quarter of fiscal 2011, or 14.3% of Q2 sales. During Q2, we recorded incremental accelerated depreciation expense related to certain fixed assets utilized by our mobile data communication segment, which was offset in part by cost reduction efforts. This change negatively impacted Q2 SG&A expense by approximately $700,000 and will increase total depreciation expense for fiscal 2011 by approximately $2 million. Looking forward, because we also expect a lower level of quarterly sales for the remainder of fiscal 2011, we expect SG&A expenses as a percentage of consolidated sales for the second half of fiscal 2011 to increase from current levels.

R&D expenses were $10.5 million, or 6.4% of consolidated net sales in Q2 of fiscal 2011. Because research and development will continue to be a strategic focus of the Company, we anticipate our spending in dollars during the second half of fiscal 2011 to approximate what we spent during the first half. Amortization of intangibles in the second quarter of fiscal 2011 is $2 million. It includes the incremental interest -- incremental amortization expense related to our October 2010 purchase of technology assets from Stampede Technologies. Total stock based compensation, which is recorded in our unallocated segment and throughout various income statement line items, was $1.4 million.

On a consolidating basis, operating income in Q2 of fiscal 2011 was $25.3 million. As I mentioned earlier, as a percentage of consolidated net sales it was 15.5%. In the second half of fiscal 2011, given our expectations of lower level of sales and our expectations that we will continue our planned research and develops efforts, we do expect that our operating income as a percentage of consolidated sales will drop a little more than 200 basis points from the 15.5% amount that we achieved in Q2.

Interest expense in the second quarter of fiscal 2011 was $2.1 million. Interest expense primarily reflects interest related to our 3% convertiblesenior notes and our $150 million credit line, as well as the accretion of interest for contingent earn-out payments related to our small Stampede acquisition. Interest income and other was $600,000 in the second quarter. Compared to recent quarters, this amount reflects an improvement in interest rates earned.

Turning to taxes, our GAAP effective tax rate for the second quarter of fiscal 2011 was 32.4%. Our effective tax rate for the second quarter reflects net discrete tax benefits of approximately $600,000, primarily related to the passage of legislation that included the retroactive extension of a Federal Research and Experimentation Credit, which occurred during the quarter. Given our overall expectations for the rest of the year, our estimated GAAP effective tax rate, excluding all discrete items, is now expected to approximate 35%.

Finally as I mentioned, our diluted GAAP EPS for second quarter of fiscal 2011 was $0.52.

Now let me provide some other financial metrics to help provide additional color. Adjusted EBITDA in Q2 was $32.3 million. We also continued to generate strong cash flow. Cash provided by operating activities for the three months ended January 31 was $24.9 million, and for the six months was $44.2 million. As of January 31 we had $593.3 million of cash and cash equivalents.

Finally, before turning it over to Fred, I wanted to highlight some good news regarding our export compliance efforts. As we previously reported, the US Department of State requested that we have a ITAR compliance audit performed by an independent audit firm based upon an approved plan. In January 2011, the audit was completed and the results provided to the State Department. I am pleased to report that the audit found no violations of ITAR. The audit also found that we have been taking numerous steps to significantly improve our export control processes, and we have made demonstrable efforts in developing an export compliance program. We await the State Department's final review of this audit, but I am certainly pleased with the results and proud of the efforts that we have made on a company-wide basis.

With that said, let me now turn it back to Fred, who will provide additional color on our three business segments and our updated business outlook. Fred?

Thanks, Mike.

As you know, in the past several months we have continued to take steps to transition our Company to a lower level of expected MTS and BFT bookings and revenues from the US Army. At the same time, we have also been executing our business strategies in each of our business segments to improve our future growth and strengthen our market leadership positions.

In our telecommunications transmission segment, after a solid first quarter bookings, bookings in our second quarter for our satellite earth station products were soft, primarily due to delayed orders from international customers and also from the US Government. During the first six months of the year, we sold our satellite earth station products in over 100 different countries. However, despite this global diversification, the recent turmoil in the entire Middle East region resulted in booking delays, including several large orders that we had expected to receive moving to the right. We do believe that these delayed orders will ultimately come in.

Long term, we remain bullish. We continue to believe that the growing need for cellular back haul in our international markets will remain an important growth driver for years to come. We also believe that the expected increase in global cellular telephone subscribers and the expected increase in high definition TV channels by broadcasters will result in more demand for satellite transmission equipment.

We also remain bullish on the US Government front. The government is expected to launch an increasing number of new satellites over the next decade, which are expected to drive demand for satellite ground station infrastructure. Although funding currently remains difficult, we believe that funding will eventually open up, and we expect the benefits from a broad demand from various government satellite programs.

In our over-the-horizon microwave product line, we continue to perform work related to our two large international contracts. We're also making solid progress in our negotiations with a prime contractor on another large $40 million-plus opportunity with our North African end customer, and we are hopeful that we will be in a position to announce an order that will allow us to begin generating revenue during fiscal 2012. Here too, based on our strong capabilities in this vertical market and the credibility we have learned from our government customers, we are well positioned to receive additional orders for the TRC-170 terminal upgrades.

Let me now spend a few minutes providing an update on our mobile data communications segment. While we are disappointed that we did not win the bid for the BFT-2, we continue to serve the US Army on the BFT-1 contract. In order to obtain better visibility as to how we can help the US Army transition to its new system, we've had several conversations with the US Army since our last conference call. Based on the ongoing importance of the BFT-1 and MTS programs, the US Army has reiterated to us that it will continue to rely on Comtech to provide sustaining network and engineering services for a number of years.

Based on these conversations, we believe that annual MTS and BFT-1 revenues in fiscal 2012 will likely range from $30 million to $40 million. The exact length of the sustainment will be a function, in part, of 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 the BFT-1 in existing geographies or only introduce BFT-2 into the new regions.

We expect shortly to receive an order to provide BFT-1 satellite air time and network related services to cover the period from April 1, 2011, through March 2012. Beyond March 2012, we believe that the US Army will request an extension to our current BFT-1 contract or issue us a new sole source contract that will run concurrently with BFT-2 for up to five years. It is also our understanding based on these discussions that the Army will combine the MTS and BFT programs during the government's 2011 fiscal year. Just yesterday afternoon, the US Army finally, in fact, announced that it is canceling the MTS recompete. Thus, although we could be surprised by a MTS contract extension, we believe it is more likely that our existing MTS contract will expire in July 2011, and future MTS sustainment requirements will be performed through the extension of or the new sole source BFT-1 contract.

Looking beyond 2011, we're positioning ourselves to generate commercial revenue in new markets. We continue to make progress on our marine satellite transceiver, and we believe that our Thuraya partnership will open up lucrative growth opportunities for us in the marine satellite communications market.

Switching to our micro satellite product line, we are in full swing, executing on the $38 million JMAPS contract that we announced in fiscal 2010. The JMAPS mission is primarily intended to update the star position catalogue for critical national security and civil applications. We are optimistic about the success of this program and expect to generate additional revenues from future requirements that we expect to be added to this contract. However, uncertainty regarding government budgets makes it difficult to predict the time line.

Looking ahead, we have successfully completed a number of task orders for the advanced plug and play technologies contract we were awarded in 2009 fromthe Air Force Research Laboratory for space missions. This is an IDIQ contract, with a maximum value of about $200 million and an order period of five years. So far we have received and delivered an approximately $2 million of orders, and we believe that our performance to date strongly positions us to win the next phase of this contract, which would result in an order for approximately $30 million to $40 million to build a new space vehicle.

Moving on to our RF microwave amplifier segment. In our traveling wave tube amplifier product line, we remain a key global provider of world-class traveling wave tube amplifiers for the emerging broadband satellite services market designed around a new generation of wide band satellites. We have seen strong demand for a high power 500 watt KA band amplifiers that uplink these broadband interactive services and video broadcasts. Furthermore, we continue to see opportunities for UAV data links and HDTV broadcast transmission, andare well positioned to address the higher emphasis on airborne and shipborne programs. Our expanded activity and focus in Asia and in Europe, enhanced by greater sales and marketing investments, gives us high expectations for future growth.

In our solid state amplifier product line, we remain well positioned to participate in the government counter IED jamming systems, such as upgrades to CREW 2.1 and for the next generation CREW 3.2 and 3.3 programs. We believe opportunities for us for CREW 3.2 are very strong based on the $455 million IDIQ contract that ITT was recently awarded for up to 5,000 CREW 3.2 mounted systems. Although funding has somewhat shifted to the right, we ultimately expect to receive awards to participate in these programs in a significant way. Of note, that during quarter one and quarter two, we also began to deliver several of the developmental type amplifiers which we are under contract for that are required for the CREW 3.3 program, which is the next generation counter IED jamming system.

Finally, let me switch gears and provide updated fiscal 2011 guidance. As is always the case, our guidance and business outlook are subject to the risks, many of which are beyond our control but are described in our SEC filings.

In our last conference call, we indicated that we expected fiscal 2011 revenues to be in the range of $620 million to $630 million. Given the light level of bookings we achieved in second quarter, we're tightening our overall revenue guidance to a range of $620 million to $625 million. On the bottom line, however, our prior diluted EPS guidance was in the range of $1.94 to $2.04. And here, based on our strong quarterly results and the benefit of the cost reductions that is we have taken and will continue to take, we believe we are in a position to increase our EPS guidance to a new range of $2.04 to $2.10. This new guidance reflects repurchases of our stocks to date but does not include any potential future repurchases of shares.

Let me now conclude by saying that although fiscal year's 2011 and 2012 will be transformative years for Comtech, I have the utmost confidence that we will be able to grow our core businesses, successfully complete one or more acquisitions and, once again, resume reporting revenue and earnings growth.

With that, I would like to turn to the question-and-answer period for our call. Operator?

Thank you. (Operator Instructions). First we'll go to Jim McIlree with Merriman. Your line is open. Please go ahead.

Yes, thank you and good morning.

Good morning.

Could you give us the bookings by segment and the backlog by segment, please.

Sure, Jim. Let me give you how thebookings laid out -- the backlog laid out for the quarter. Total backlog at the end of Q2 was $199.7 million, of which $68.1 million was in the telecom side, $82.5 was in our mobile data comm side, and RF was $49.1 million.

Great. And, Mike, I think you made -- I can't remember if it was you or Fred -- a comment about the fiscal 2012 EBITDA goal being impacted by the changes in Blue Force Tracking and Movement Tracking Systems. Can you just repeat that again? Are you saying that because the -- because of the changes in the programs now you think it will be challenging to hit the $100 million? Did I hear that correctly?

Yes, Jim. What we're projecting right now from a goal perspective is revenue in mobile data comm segment to only approximate $40 million to $60 million for the segment for the year. Fred also indicated that we believe our MTS and BFT program revenue will range somewhere between $30 million to $40 million.

Okay. And that is lower -- and that is based on the changes that have taken place over the past few months, that's lower than previously, so it obviously has an impact on EBITDA.

Yes. We were really shooting for $120 million to $150 million of total segment revenue and about a $100 million EBITDA or so, and based on the way everything models out, it looks like we'll be around $75 million.

Okay. That's great. Thank you very much. I'll get back in line.

And we'll take our next question from the [side] of Tyler Hojo with Sidoti & Company. Your line is open. Please go ahead.

Hi. Just to follow up on the mobile data line of questioning, do you expect to -- I mean what's the profit dynamic for mobile data look when sales are running at $40 million to $60 million? I mean, are we still positive there? How do we think about that?

Yes, if you look to 2012, there's really two revenue lines. Our MTS and BFT would categorize as one. I think we use the phrase sustainment. We haven't negotiated the pricing at this point. We're not certain whether it's going to be a cost-plus type business next year. We're certainly waiting on the order for satellite service time, so we are taking a conservative view of what that margin is going to look like.

On the other side, we do have our microsatellite business, which is a cost-plus business. We are seeing the overall budget reductions that the industry is occurring. So when you kind of add it all up, I think we're looking at certainly south of 10% next year in terms of the operating margin at this point. At the same time, we're going to continue to look at the cost reduction efforts overall, so hopefully when we report back to you when we provide our actual 2012 guidance, we'll give you a better sense of what it's really going to look like.

Okay, butis it safe to say that there's quite a bit of overhead that could be pared within the segment?

Certainly on the government side, we expect to reduce this. We are continuing to spend on the commercial side of the business and certainly not anticipating any significant or material revenues in that segment in 2012 at this point, but we do have the spending there.

Okay. Great the last question may be for Fred. If you could perhaps talk about the commercial opportunities within mobile data. I mean what kind of market opportunity are we talking about, and how long do you think it would take to kind of have some sort of real market presence there?

Well, as you know, we announced our Thuraya partnership for the maritime terminal that we have developed. We are presently in demonstration testing with various customers and distributors, as well as with though Thuraya. We think that market is a pretty nice market for mobile data comm. Expectation-wise, I think it will probably take at least another six to nine months before we see any real revenues coming into play here. Eventually, I think we're probably looking at something that maybe two years from now could be in the $30 million to $50 million annual basis.

Okay. With kind of a comparable margin profile to where you were running this quarter? Or how do we think about that?

That's a commercial product area. It should have a good margin, but it's difficult for us to really see what that margin will be until we finish our demos and also finish our pricing structure for the various distributors.

Okay. Thanks for the color.

(Operator Instructions). We now go to Chris Quilty with Raymond James. Your line is open. Please go ahead.

Good morning, gentlemen. I just want to see the telecom business, now that you're looking at lower volumes in your high volume manufacturing facility coming through the mobile data side. Are you still seeing the opportunity for sustainable low to mid 20s EBIT margins in that business?

Yes, certainly on the operating income line, Chris, we certainly expect to be north of 20%. We really reduced our factory load. And you can see at this quarter we did 25% operating margins in Q2, and we do expect that the low levels of hardware revenue that we're doing now for MTS -- we do have some hardware revenue for MTS in Q3 and Q4 of this year, but given the anticipated growth that we expect in our satellite earth station business, at this point that increased revenue will offset the lost MTS and BFT revenue that we'll see next year. So as we look to next year, I think the range that we're looking at, given a similar amount of revenue, in the $60 million range or so for the segment, we think we can do between 20% and 25% or so on any given quarter on the operating margin line.

Okay. And with regard to the mobile data business, when you're running at a $30 million to $40 million run rate, is that primarily just the service component?

Yes, what we're seeing -- right now we don't have a lot of visibility as to what the satellite service revenue is going to be post, let's say, March 2012. The Army has made some indications that they are going to go outside and purchase the satellite service time themselves directly, andprobably furnish that to us as GFA or something to that effect. At that point we may have lower revenues, but we may have higher margins simply because we'll just reprice the contract accordingly to recoup our investment. So in terms of a margin, we are certainly -- I would certainly say it's somewhere between 5% and 10% at those levels on a conservative basis on an operating margin. But a lot of that's due to the fact that we do have a lot of spending there for the commercial side of the business, as well as just kind of waiting the budget answers on the government side of our business.

Okay. So the overall mobile data business is going to be $30 million to $40 million of MTS Blue Force Tracking. You've got some incremental revenues in there from the nanosatellite business, and then potentially down the road, you've got some commercial tracking applications that get folded into there. And all in, you're looking at a 5% to 10% EBIT margin?

On the op margin, yes.

Okay. Speaking of the commercial business there, Thuraya, obviously a regional player, L-band frequency. There's a lot of stuff happening this that maritime space with higher frequency and more global networks. Is that something where you might look to expand your portfolio of technologies and products, either through acquisition or development?

Chris, I think we're certainly looking into that area. Right now we're concentrating on the L-band solution. But we're aware of the VSAT possibility going there. The two obviously play together, so we have the products for a VSAT solution. It's just a matter of getting our feet wet with the L band first. Santa Ana

Okay. Very good. Thank you, gentlemen.

And we'll go next to the side of Joe Nadol with JPMorgan. Please go ahead.

Hi this is actually Rica Mendoza for Joe. Good morning.

Good morning.

I just wanted to ask a follow-up on the telecom transmission margin. Could you give a little bit more color in terms of product mix within the segment? And then do you think that you could go higher than that range that you've provided?

I would love to say we would be able to go higher. I think that would be a function of the revenue that we would get. We are taking somewhat of a cautious approach for the rest of the year in that segment. And so as we look out for the second half of the year, we would expect operating margins in the telecom segment to pretty much be what they are now, maybe a little bit lower, maybe a little bit higher, depending on the actual product mix.

We're currently running at a $60 million rate right now as we continue to work through our over- the-horizon contracts. As Fred mentioned, we are expecting our second Algerian contract next year. So we do expect when that comes on board and the growth that we have, we'll have higher revenues in that segment, but lower MTS and BFT contribution. And when you net it all out, we'll somewhere be between 20% and 25% in the operating margins, probably right in the middle.

Great. Thanks. And then I just wanted to ask a question on your thoughts on the overall M&A landscape, and how are you seeing the pricing environment, and would you consider making an acquisition in sort of a new market?

I think we've pretty well stated in the past that we will obviously start looking at the periphery around our present markets. But we certainly would look to a new market. We've kind of always talked about three legs to a stool going into a fourth possibility, fourth leg for a stool. At this time, we are looking at a number of targets and evaluating those targets. As far as your comment in terms of pricing, you probably know better than I. Pricing's pretty high out there.

Okay. Great. Thanks a lot.

And we'll take our next question from the side of Mark Jordan with Noble Financial. Your line is open. Please go ahead.

Thank you. First question on the over-the-horizon. It's nice it see you're moving forward on a second Algerian contract. You did mention briefly that, there is -- the TRC-170. upgrade is still out there. Can you give us a sense as to when the timing of that decision, when that might occur?

On the TRC-170, Mark?

Yes.

Okay. As you recall, in the past we've mentioned that the upgrades that we have done to the TRC-170 have been primarily for the Marine Corps and also for the US Army. And that there were -- and that was about in the 200-plus units. There are an additional 200-plus units that the Air Force has control over, which they have not upgraded as of this time. They were kind of considering going either to a new terminal or upgrade, and I think what we see right now is they're leaning towards going to the upgrade. Timing-wise, with the budget constraints, very difficult to tell.

Okay. I've seen that at least you've got an agreement or some of your equipment is being used in a small aperture portable system that's similar to a VSAT terminal. Is this a developing market that's going to become meaningful for you?

I guess I don't know which market you're referring to, but as I mentioned to a prior question on the maritime basis, we have VSAT capability. We have all the products it make up the VSAT terminals. It's a very competitive terminal area, and we have kind of stayed away from providing systems as such. But on the maritime basis, I think we expect to eventually get into the VSAT supply. Primarily we're playing right now with our Thuraya partnership at L band, since Thuraya only provides L-band frequencies in their satellites. The VSATs have to go to the higher frequency, such as KU band and higher. So those will be other than Thuraya partnerships that we will develop

[It was a] TeleCommunications Systems press release stating that they were marketing a small portable tropo system that incorporated I guess your modem. I guess that's a transaction --

Who --

A question relative to the litigation --

I'm sorry.

Relative to the patent litigation --

Yes.

Relative to the patent litigation, in the queue you state that from a defense point that you don't -- however it shakes out, it would not have a material adverse impact. I guess the question would be is this something that if, in fact, everything goes in your favor, could it have a material positive impact?

I don't think we see any positive impact from that area. I think if you're referring to the Applied Signal patent situation, we're on a team with Applied Signal in terms of the litigation in that area. I think -- as any litigations, I think, eventually what will happen is the benefits will probably go to Applied Signal. We hope, anyway, that they will get some royalties out of this, and they obviously will get -- continue to get royalties from us. But it will allow us to continue to have the dominant role in the carrier to carrier base.

Thank you.

Okay.

And we'll go back to the side of Jim McIlree with Merriman. Your line is open. Please goahead.

Yes. Thanks again. Could you help us understand the size of the over-the-horizon revenues? And then secondly, can you help us understand how that -- how the two contracts that you have right now map out in terms of peak revenues for those contracts?

Sure, Jim. We've always talked about, even at a peak level, the over-the-horizon business was under $50 million on an annual basis. And when you look at the difference between what we did in Q1 and Q2 of this year, most of that was the full upswing of both of the contracts that we have working. So given that we do expect flat telecom revenue, you can kind of assume with $10 million, $12 million number a quarter with the current set of contracts that we have. That's just a math on that. As those contracts start to wind down in the second half of next year, we do expect to get the other contracts and the other revenues. So depending on exactly how that works out, I would tell you to still think about it being somewhere between the $35 million and $50 million number next year. But at this point, it's just way too early for us to put some preciseness around it.

Right. Okay. That's very helpful. And then secondly on the microsat area. You have two major initiatives there, the JMAPS and the plug and play. Are they both at full revenue contributions right now, or is -- or are they still ramping up?

Right now the JMAPS is pretty much maximum funded for this year. So it's really humming this year and doing quite well. We certainly in our assumption next year for mobile data comm segment revenues, at this point just given the overall uncertainty of the budget and the budget pressures that are occurring, we are expecting reduced amount of funding next year for the contract. It's more likely that instead of it being at the level it is today, it probably will be spread out over another year, 13, 14. So we are expecting lower revenue.

The plug and play contract is really just so immaterial in terms of the revenue contribution this year, the real surprise, if you will, is if we're able to secure that $40-some-odd million contract for the space vehicle, that would all just be upside to what we're thinking about. We're taking a very, very conservative view on that given we only have a limited history with AeroAstro. We think that we have a good and high probability of getting that contract, but normally when we kind of think about our outlook, we normally wait until we get much closer to a potential award before putting it in our guidance.

Okay. If we assume the best on that, and you win it, does that require another facility or some significant facility expenses in order to satisfy that contract?

No. We think we could handle it within our shop down there.

Okay. Great. Thank you.

And we'll go back to the side of Tyler Hojo with Sidoti & Company. Your line is open. Please go ahead.

Hi. Just on the RF microwave business, I get the lack of visibility in terms of the timing on the CREW orders. But I'm just trying to understand if the margin dynamic within that business segment has changed at all. Certainly, I guess in your prepared remarks, you mention that R&D funding had increased in that segment. But assuming the volumes come back, can you still do north of a 10% operating margin in that segment?

Tyler, there's really two things that are happening -- really three things are happening in that segment. We do have low revenue in total so we're not getting the overhead absorption, if you will, on the inventory side. But we also are shipping the CREW 3 development amplifiers that Fred mentioned in his part of the speech. And those early development amplifiers really go out at zero percent gross margins for the most part, and we're shipping them -- we shipped some in Q1. We shipped some in Q2. And as those things go out the door, the margin profile in the segment will just go up simply because we're not shipping stuff out at 0% gross margin. And as revenue comes back, we think the targeted range that we'd like to get back to is the 10% number. And if we get any just unusually amount of volume in any given quarter, it is possible to hit the 12% number that we talk about in the past. But we really shoot for about 10% operating margins in that segment on a long term basis.

What about back in '06, '07, time frame, when the CREW 2.1 shipments started going out in volume? I mean weren't you close to 20% at one point back then?

I think we did have a quarter or so that was pretty high, and I tell you I would love to do that if it comes in. But we first like to get the order in house and figure it out. But could it get high? Sure.

Okay. All right. Great. Thanks a lot.

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

Okay. Well, thank you for joining us today, and we'll speak to you again in three months.

This concludes today's conference call. You may disconnect at this time. Thank you, and have a wonderful day.