Comtech Telecommunications Corp (CMTL) 2011 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Comtech Telecommunications Corp's third quarter fiscal 2011 earnings conference call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded, Wednesday, June 8, 2011.

I would now like to turn the conference over to Ms. Maria Salerno of Comtech Telecommunications. Please go ahead, ma'am.

Thank you, and good morning. Welcome to the Comtech Telecommunications Corp conference call for the third quarter of fiscal-year 2011. With us on the call this morning are Fred Kornberg, President and Chief Executive Officer of Comtech, and Michael 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 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. Yesterday afternoon we reported quarterly results for our third quarter of fiscal 2011. And despite lower than expected US Army MTS revenues, and despite the ongoing impact of the challenging business environment, we believe we produced solid third-quarter results.

During the third quarter, we repurchased approximately 737,000 shares, pursuant to our previously announced $100 million stock repurchase plan. Cumulatively, through yesterday, we have repurchased approximately 2.4 million shares for approximately $70 million. Last month we also distributed our third straight quarterly dividend payment of $0.25 per share to our shareholders. And yesterday we announced that our Board of Directors declared a fourth-quarter dividend, also of $0.25 per share, payable on August 19, 2011, to shareholders of record on July 21, 2011.

During the third quarter, we continued to focus on a number of acquisition opportunities. We passed on some, and continued to be active on others. Obviously, we will not comment on any market rumors or speculations. As of today, we have nothing to specifically report except to say that appropriate acquisitions remain high on our to-do list, but we remain patient.

As the fourth quarter unfolds, and our fiscal year comes to a close, I am confident that the strategies we are executing today will serve to strengthen our existing market leadership positions for many years to come. Simply stated, I remain optimistic about our future direction.

Later in this call, I will share more of my thoughts as it relates to each of our 3 business segments, as well as to provide updated revenue and earnings guidance. First, I'll turn over the call to Michael Porcelain, our CFO, to discuss our third quarter of fiscal 2011 financial results. Mike?

Thanks, Fred, and good morning everyone. Despite difficult market conditions, our Q3 financial results were solid. We delivered net sales of $131.1 million, and diluted GAAP EPS of $0.47. Our operating margin was 16.7%. Excluding the CPI merger termination fee that we recorded in Q1 of fiscal 2011, this operating margin percentage was the highest quarterly percentage we achieved so far this year.

The increased operating margins reflect a favorable product mix, as well as the success of our cost reduction efforts. Given our overall product mix expectations for Q4, including an increased amount of MTS hardware orders expected to ship, we do expect our operating margin in Q4 to be much lower than the amount we achieved in Q3.

Our Q3 net sales, 49% were to the US Government, 40.2% were to international end users, and the remaining 10.8% were to domestic commercial customers. Given our expectations that future annual MTS and BFT revenues will significantly decline from current levels, this percentage is a reasonable way to think about Comtech's target customer profile mix for fiscal 2012.

Now, let me provide some additional color as it relates to revenue and operating margin for each of our 3 business segments. During Q3, our Telecom Transmission segment generated $62.4 million of net sales, and was the largest contributor to consolidated net sales. We are particularly pleased with our operating margin in this segment, which approximated 24.7%. This percentage is similar to the 24.9% margin we achieved during Q2. And compares favorably to the 22.6% operating margin we achieved during the third quarter of last year. Our operating margin this quarter was highly influenced by the level and mix of sales, and also reflects the benefits of our cost reduction efforts.

As usual, the large majority of our Telecom Transmission sales were attributable to our satellite earth station product line. As Fred will discuss in a bit, we continue to be impacted by overall challenging market conditions. However, based on recent bookings, and the opportunities that are in our pipeline, we expect Q4 sales to be slightly higher than the level we achieved in Q3. Nevertheless, based on our Q4 expectations and year-to-date performance, we are expecting annual sales of our satellite earth station products to be lower in fiscal 2011 as compared to fiscal 2010.

During Q3, we did experience a healthy increase in sales of our over-the-horizon microwave product line, as we continue to perform work related to our 2 large international contracts. We expect to continue to perform and make progress on these contracts, but not at the pace that occurred during Q3. As such, the anticipated Q4 decline in over-the-horizon microwave product sales, a slightly higher Q4 level of revenues in our satellite earth station business, will result in overall Telecom Transmission segment sales in Q4 being lower than the level we achieved in Q3.

Now let me turn to our Mobile Data Communications segment, which contributed $45.6 million of sales in Q3. During Q3, operating margin for this segment was 20%, which compares to the 18.7% we achieved in Q2, and 23.6% that we achieved in Q1. Operating margins in this segment primarily reflect the benefit of a favorable product mix, driven in part in Q3 by software license sales for our most recent MTS software version. We do not expect the same level of software license sales going forward. As such, our operating margin percentage in this segment is expected to be lower in future quarters.

For the quarter, this segment's sales were lower than our expectations. The shortfall resulted from a third-party vendor's inability to make timely shipments to us for component parts that are included in MTS systems that we sell to the US Army. These deliveries are now expected to occur during the fourth quarter of fiscal 2011. As such, except for timing differences between the quarters, these delivery issues are not expected to have an impact on our expected Mobile Data Communications segment revenues for the fiscal year.

In total, our MTS and BFT-1 sales represented 27.6% of total consolidated sales for Q3, and 79.4% of Mobile Data Communications segment Q3 sales. The only other significant contributor to this segment's sales relates to our work for the US Navy's JMAPS microsatellite program. As discussed in additional details in our 10-Q, and as Fred will further comment on, we are involved in ongoing discussions with the US Army on a variety of contractual matters and issues. Our current MTS contract expires on July 12, 2011. Our current BFT-1 contract allows us to continue to provide satellite network transponder capacity and network-related engineering services through March 31, 2012.

Because of the US Army's planned Joint Battle Command Platform migration, we believe that it is likely that future BFT-1 orders, as well as some of the orders in our backlog, may be used to support MTS program requirements. As such, going forward, historical sales patterns and period-to-period sales comparisons for the MTS or BFT-1 programs will not be meaningful.

Let me now turn to our RF Microwave Amplifiers segment, which generated net sales of $23.1 million, and is right in line with the level we achieved in Q2. During Q3, our operating margin in the RF microwave amplifier segment was 5.2%, which represents an improvement from the 1.7% we achieved in Q2. Margin in this segment remains under pressure due to planned scheduled shipments of developmental amplifiers, which are still expected to ship in Q4.

Sales and orders in our RF Microwave Amplifier segment continued to be negatively impacted by overall challenging market conditions. In particular, bookings from our US and international government customers have been modest due to the pressures they are under to reduce their overall spending. Based on orders currently in our backlog and the timing of shipments related to orders we expect to receive, we expect Q4 sales in this segment to be similar to the level of sales achieved during Q3. Although sales levels are expected to be similar, we do expect bookings to improve.

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 Q3 as a percentage of net sales was 43.5%. The strong gross margin that we achieved in Q3 was driven by a high percentage of consolidated net sales in our Telecom Transmission segment, and the mix of products sold in all 3 of our segments. In fact, during Q3, all 3 of our business segments experienced our highest quarterly gross margin percentage this year. Based on the nature and type of orders that are currently in our backlog, our consolidated gross profit as a percentage of net sales for the fourth quarter is expected to be lower than the amount we achieved in Q3.

On the expense side, SG&A expenses were $22.6 million for the third quarter of fiscal 2011, or 17.2% of Q3 sales. Similar to Q2, our SG&A expenses include the acceleration of depreciation expense on certain fixed assets utilized by our Mobile Data Communications segment, which are expected to be fully depreciated upon the expiration of our MTS contract in July 2011. Given our expected sales level in Q4, we expect that SG&A expenses as a percentage of consolidated net sales to increase from the 17.2% we achieved in Q3.

Research and development expenses were $10.3 million, or 7.9% of consolidated net sales in Q3 of fiscal 2011. Because research and development activities will continue to be a focus of the Company, we anticipate our research and development spending in dollars during the fourth quarter of fiscal 2011 to approximate what we spent during Q3.

Amortization of intangibles with finite lives in the third quarter was $2.2 million. This amount includes expense related to our October 2010 purchase of technology assets from Stampede Technologies. Total stock-based compensation in the third quarter of fiscal 2011, which is recorded in our unallocated segment and throughout various income statement line items, was $1.1 million.

On a consolidated basis, operating income in Q3 of fiscal 2011 was $21.9 million, and as I mentioned earlier, 16.7% of consolidated net sales. Interest expense in the third quarter of fiscal 2011 was $2.1 million. Interest expense primarily reflects interest related to our 3% convertible senior notes, our $150 million credit line, and the accretion of interest for continued earn-out payments related to our Stampede acquisition. Interest income and other was $600,000 in the [third] quarter of fiscal 2011. The interest rate we continue to earn on our cash was comparable to the rates earned in recent quarters.

Turning to taxes, our GAAP effective tax rate for the third quarter of fiscal 2011 was 29.9%. As discussed further in our 10-Q, our effective tax rate for the third quarter of fiscal 2011 reflects net discrete tax benefits of approximately $1 million, which primarily relates to a reduction in expenses that were previously deemed to be non-deductible for tax purposes. Given our expectations for Q4, our GAAP effective tax rate, excluding all discrete items, should approximate 35%. Finally, and as I mentioned earlier, our diluted GAAP EPS for the third quarter of fiscal 2011 was $0.47.

Let me provide just a few financial metrics for additional color. Adjusted EBITDA in Q3 was $28.9 million. We also, during the quarter, continued to generate strong cash flow. Cash provided by operating activities for the 3 months ended April 30, 2011, was $24.7 million, and for the full 9 months of fiscal 2011, was $68.9 million. As of April 30, 2011, we had $588.9 million of deployable cash and cash equivalents.

Finally, before turning it over to Fred, I wanted to highlight the disclosure that we made in our 10-Q related to our export compliance. I am pleased to report that during the quarter, we were finally notified by the US Department of State that they have closed a review of our compliance with ITAR without assessing any fines or penalties. Clearly, we are pleased by this final outcome.

With that said, let me now turn it back to Fred who will provide additional color on our 3 business segments, and provide an updated business outlook. Fred?

Thanks, Mike. As you know, throughout fiscal 2011, we've taken steps to transition our Company to a lower level of anticipated bookings and revenues relating to our US Army MTS and BFT programs. At the same time, we're continuing to execute our business strategies in each of our business segments, in order to position ourselves for future growth and strengthen our market leadership positions.

I'll begin my comments with our Telecommunications Transmission segment. Although we are pleased that bookings in our satellite earth station product line did improve slightly, we believe that bookings and sales continue to be impacted by the challenging market conditions. These conditions include the continued political unrest in certain of our end markets, and a spotty international economic recovery, which we believe are contributing to the absence of large orders from our usual customer base. In addition, we're also experiencing lower levels of orders from our US government customers, who are under pressure to delay or reduce spending. But despite these headwinds, bookings in the month of May were strong.

Looking forward, we continue to believe that the growing need for cellular backhaul in our international markets, and the continued demand by the US government for satellite transponder capacity, will remain important growth drivers for years to come. We believe that the projected increases in global cellular telephone subscribers, and the expected increase in high definition TV channels by broadcasters, will result in more demand for higher efficiency satellite transmission equipment.

On the US government front, depending on funding availability, we also remain bullish. As you know, the US government is expected to launch an increasing number of new satellites over the next decade, which is expected to drive demand for satellite ground station products. Ultimately, we expect that funding will eventually open up, and we expect to benefit from strong demand from various government satellite programs.

On our over-the-horizon microwave product line, we're making solid progress in our negotiation on another $40 million-plus opportunity for end use by our North African end customer. We're hopeful that we will be in a position to announce an order very soon.

On the US government front, we believe we are well positioned to land a variety of different contracts for our transit case and trailer-mounted tropo platforms. Just Monday, we announced that we received an order for $2.3 million for our transit case modular transportable troposcatter system from a US Defense prime contractor. Although this order is relatively small, it is a critical order, as it provides a transit case tropo system solution, a first to the US Army. Depending on funding levels and availability of funding, we believe there are many more opportunities for future orders in this area. Overall, the product lines in our Telecommunications Transmission segment continue to be leaders in the markets they serve.

Moving on to our Mobile Data Communications segment, sales in this segment have historically been driven by sales to the MTS and Blue Force Tracking, or BFT-1, programs. As you already know, in July of 2010, we were advised by the US Army that we were not selected as the vendor for the next generation BFT program, known as BFT-2. And as we discussed in our last conference call, the US Army has also formally cancelled the release of an open solicitation for the next generation MTS program, known as MTS-3. And is in the process of combining the MTS program with the BFT program. This combination is a result of the US Army's adoption of a single mobile system configuration known as Joint Battle Command Platform, or JBC-P.

Despite these events, we believe that the Army will continue to require certain MTS and BFT-1 related products and services for several years, although at significantly lower revenue levels than we have experienced in recent years. The exact length of the sustainment period for these programs, and the related product mix in fiscal 2012 and beyond, will be a function, in part, of the speed of the transition and the adoption of the JBC-P platform, and the Army's operational needs.

We believe it is still reasonable to expect that our Mobile Data Communications segment will generate approximately $40 million to $60 million of revenue in fiscal 2012. This level is largely supported by orders currently in our backlog, which primarily relate to satellite air time and network-related services for the period through March 2012. Beyond this date, we expect that the US Army will request an extension to our current BFT-1 contract, or issue us a new sole-source contract to provide required network and related services for both the BFT-1 and MTS networks for an additional 3 to 5 years. The US Army has also requested quotes for certain Comtech IP that is needed for the Army to continue to operate both the MTS and BFT-1 networks. We expect to be in negotiations with the US Army on this by late calendar-year 2011.

Beyond our traditional US government market, we are repositioning ourselves to generate commercial revenue in new markets. Although this effort will take some time, we continue to invest and make progress on our marine satellite transceiver, and we believe that our Thuraya partnership will open up growth opportunities for us in the marine satellite communications market.

Switching to our Microsatellite product line, we are in full swing executing on the $38 million JMAPS contract, whose mission is primarily intended to update the star position catalog for critical national security and civil applications. We've also successfully completed a number of task orders for our advanced plug-and-play technologies contract from the Air Force Research Laboratory. This is an IDIQ contract with a maximum value of $200 million, and an ordering period of 5 years. So far, we have received and delivered on approximately $2 million of orders. We believe that our strong performance to date positions us well to win the next phase of this contract for approximately $30 million to $40 million, to build a space vehicle.

Moving on to our RF Microwave Amplifier segment, where, in spite of the challenging market conditions, our third-quarter bookings were the strongest of the year so far. In our Traveling Wave Tube Amplifier product line, we remain a key global provider of the world-class Traveling Wave Tube Amplifiers for the emerging broadband satellite services market. We continue to see demand for our 500-watt Ka-band amplifiers that uplink these broadband interactive services and video broadcasts. Furthermore, we continue to see TWTA, or Traveling Wave Tube Amplifier, opportunities for UAV data links, and HDTV broadcast transmission. And we believe we're well positioned to address the increased emphasis on airborne and shipborne programs.

In our Solid State Amplifier product line, we also remain well positioned to participate in the upgrade to CREW 2.1, and for the next generation CREW 3.3 programs. During this year, we began to deliver several of the developmental-type amplifiers required for the CREW 3.3 program, which is the next generation counter IED jamming system. We believe we will be the prime CREW 3.3 amplifier provider. There are also numerous other high dollar value jamming and electronic warfare programs that we are well positioned to win.

Finally, let me now switch gears to 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 fiscal 2011 revenues to be in the range of $620 million to $630 million. As we enter the fourth quarter of fiscal 2011, based on our overall revenues to date, and expected order flow, we now expect our annual revenues to come in at around $615 million.

Although our revenue guidance is slightly lower, I'm pleased to say that given the overall benefits of the cost reductions that we have and will continue to take, we are increasing our EPS guidance by $0.08 from a range of $2.04 to $2.10, to a new range of $2.12 to $2.18. This new guidance does not reflect any potential future repurchases of shares.

Looking at 2012, we believe that fundamentals across our Company remain solid, and that we will ultimately benefit from an improving economy, and meet the challenges and goals we have set for ourselves. Our efforts remain a work in progress, and we look forward to updating you at our year-end conference call in September.

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

(Operator Instructions) Tyler Hojo with Sidoti & Company.

Yes, good morning. I was hoping that you could first maybe provide the backlog by segment.

Sure. Our backlog at the end of Q3 was $196.2 million, of which $50.5 million is in our Telecom Transmission segment, $99.1 million is in our Mobile Data Com segment and $46.6 million is in our RF Microwave Amplifier segment.

Okay, great. In terms of last quarter's conference call, I think you guys provided a fiscal '12 EBITDA target of $75 million. Does that still hold? I didn't hear any mention of that.

We are continuing to shoot for our target of $75 million. We obviously are a little disappointed by our satellite earth station sales and bookings this quarter, given the events that are occurring in the Middle East. But internally we are shooting for that as a goal and we think that there's multiple ways that we can get there.

Okay. And just on that satellite earth station market, certainly get that it's been a difficult environment, but maybe if you could just talk about the long-term outlook there. I think Fred mentioned some kind of favorable themes that should drive growth but are those themes going to lead to revenue growth in fiscal '12? Or how should we be thinking about the next 4 or 5 quarters?

I think the answer in that area is really pretty simple. First of all, I think it's the environment. I think if you look at our telecommunications, especially the satellite earth station product line, I think we are the modem leader. We have a flagship modem with carrier-in-carrier capability. We haven't lost any contracts. It's just been moving to the right. What we've seen as developments, because of the tsunami and the earthquake in Japan, because of the unrest in the Middle East, our business is primarily international and so we obviously have been affected by it. However, I think this will all hopefully come to a close and we look forward to some growth in 2012.

Mark Jordan with Noble Financial.

Thank you. First question, or series, relative to tropo. Has the unrest in the Middle East had any impact on your current contracts that you're executing on? And secondly, you did mention the one large contract that's been out there for a long time finally getting close to being signed. Could you talk about what other pipeline opportunities you might have in the international arena?

I think as we've always tried to report, these are long-term marketing programs. On the $40 million plus opportunity for our end customer in North Africa, I think the unrest there, at least certainly to date, has not affected that particular country. So I think we're hopeful that we can get into a contract mode very, very shortly because at this point in time, the contract has been signed by our customer in the States. So it's just a matter now of finalizing some negotiations and getting it through the State Department. As far as other opportunities, unfortunately we had a number of programs that we were chasing. And I don't want to get into exactly where and how, but I'll just mention one, which is Libya and which obviously has gone by the boards. So that's an opportunity that's gone today. But we are chasing a number of opportunities in that area.

Okay. You commented, I think in the Q at least, that you saw the Army potentially transferring, or having you transfer the network operating center to an Army facility and co-mingling it with BFT, and that the Army might be starting to purchase the air time directly. Should we assume in fiscal '13 and beyond that the flow-through of air time revenue would not be there and that all we will see is just the technology licensing revenue? And secondly, is the profit opportunity from that package still the same if you're not handling the air time?

As far as the air time is concerned, Mark, it's always been the Army's intent to eventually go through DSR and purchase their own air time. Will that happen and when will that happen? I'd say we really are not in a position at this point to know exactly how that will affect us. We have, however, assumed for the purposes of our planning that the Army will buy it for '13 and forward, that they will buy the air time. And obviously that was a large component of our revenue, so as I mentioned in my part of the presentation, it certainly will affect our future revenues.

Okay. Final question on R&D. As you said, you're continuing to make significant investments. Is there a time where there will be a step function down in R&D spending from the $10 million to $11 million per quarter range with the scaling down of the mobile data unit?

I think we've already scaled it down substantially in the numbers that you're seeing. I think we've got a little bit more to go in that area, but certainly in all of our other business units I think probably the R&D will creep up.

Okay. Again, final one, CREW 3.3, when do you think that might go into an LRIP?

I guess the best way to put it, it keeps changing on a daily basis. At this moment, I would say that it's probably late 2012, and more likely to be 2013.

Joe Nadol with JPMorgan.

Thanks, good morning. I was wondering if we could break out, to the degree you're willing to do so, the Telecom Transmission backlog and sales into the 2 components. Or at least give us a sense, how much of that $50 million backlog is satellite earth stations and how much of the $62 million of sales in the quarter is satellite earth stations.

Joe, we obviously don't want to provide any specifics, but when you look at the backlog change from Q1 to Q3, almost all of that decline is attributable to the work that we're performing on the over-the-horizon microwave contracts. Which is what we've said is that, that's winding down in terms of what we did in Q3 and we are certainly expecting to go to a much lower level in Q4. But that gives you a sense of what caused the delta in our backlog was really the over-the-horizon microwave work that we did during the year.

So your satellite earth station backlog has been stable the last 2 quarters?

Yes, we are expecting slightly higher level sales in Q4 of our satellite earth station. And as a reminder, our satellite earth station business is a book-to-ship business. So that comes in quarter to quarter anyways.

Yes, okay. Could you talk a bit about, in any detail you're willing to share, you mentioned you had some bookings pick up in May but you really talked more about expected opportunities for the quarter. Are these commercial customers that are international? Is this US government business? Where are you seeing the pick-up?

I think we're seeing the pick-up that we're hoping for primarily in the international area. I think the government is still a little bit difficult for us to predict because of the budgeting problems.

Okay. Fred, just on the Middle East and the unrest there, I imagine your sales have, of course, been impacted, as you noted. Will there be a point when the unrest settles over whatever period of time it takes, where there's going to be a catch-up?

We certainly believe that, that's true. And we've had experiences like this in the past where there's been a pullback and a hold-back and then all of a sudden the dam breaks loose and we have a catch-up mode. So, yes, I think we definitely expect it. We just don't know when.

Okay. And you've noted this is all market conditions. The way that you track market share for satellite earth stations, has there been any change?

No, not really. As I tried to point out, I think everyone is fully aware that we are the market leader in the satellite modem ground stations including the RF that goes along with it. So it's not a matter that -- we have a flagship modem. It is full of, let's say, full of bells and whistles, I'll call it, and terrific performance and priced accordingly. So what's wrong with this picture? The market right now is just not buying.

Joe, if I could also just add some color to the remarks about how we see things. Our US government sales, just like most communication companies that sell into the DOD, are down year over year. And we've, I'll use the phrase, we've been hit hard in that area. Everyone is waiting for program decisions to be made. So our sense is a lot of these large US government program communication projects, which are ultimately critical to the US military, will come in at some point. So as Fred mentioned, we're the market leader in single carrier modems so we know what all the opportunities are. It's a question of getting the order and obviously shipping it. But we continue to see those things get pushed out and we're not getting them in tangible bookings.

Joe, just to add. I think maybe take you off a little bit off the satellite earth station into the tropo area. I think the announcement we just made of the transit case tropo, we tried to point out, that's a very important event, almost very similar to in the past of what we did with the TRC -170 modem retrofit kit. I believe this is a first for the US Army and I think we again will be in a position to lead in that area for the US Army for the next few years.

Can you put some numbers around the opportunity, then, given the importance?

I'll say it this way. There are some terminals, and I won't give you the name of the terminals, but there are over 1,000 satellite earth terminals that have been in the past provided to the US Army. This is a transit case tropo system that is supposed to give the satellite terminal both capabilities, satellite and tropo. Now, will every single satellite terminal be equipped with a tropo solution? I don't know. I don't know. That's one of the Army plans that we're trying to determine. But on an assumption, on a bullish assumption that, that could happen, you could see approximately 1,000 terminals.

Okay. And then Fred, just one more for you. On the M&A, you've been very patient. You had 1 deal that was derailed but you've been very patient with the cash and are not rushing into anything. And of course that's a good thing. It's obviously been difficult for you to find opportunities, though, that you see as suitable uses for the cash. And with interest rates where they are, this arguably is a wasting asset, all the cash on the balance sheet. I'm wondering how long you'll be patient with the cash before you might decide to pursue another strategy.

As we've mentioned previously, yes, we are patient. Yes, we have looked at some, and yes we're patient. We certainly don't want to, A, overpay and, B, buy an asset that is a wasting asset. So it's not for lack of trying. However, given the position that we're in, I think you've already seen some steps that we've taken. We've taken steps to provide our shareholders a dividend and we've also taken steps to buy back some of our stock. Should we not spend that money in some near term or far term period, I think you might expect to see us buy some more shares.

Tim Quillin with Stephens, Inc.

Hello, good morning. You talked about in both the 10-Q and mentioned a little bit on the call about the Army potentially switching to buying satellite air time directly, but then this notion of licensing some IP. And I think in the Q you talked about working with somebody to figure out the value of that IP. But can you just talk about what that IP encompasses and how critical that might be to the Army?

I think, Tim, as we've mentioned many times in the past, we've taken the decision right from the beginning of the MTS and the BFT-1 program that we would not provide the Army with the IP as long as we were providing the services and the equipment. Now that the Army has switched to a different vendor for BFT-2, BFT-1 and MTS is going into a sustainment period. So we obviously now don't need to hold back on the IP and so we're willing to sell the IP requirements to the US Army and they've asked us to provide them a quote. Yes, as you saw in the documents, we are working with a firm to see what value we can negotiate with the US government. And, as I mentioned, we expect that to happen sometime before the end of the calendar year.

But is this the wave form on the transceiver? What exactly would you be licensing?

I don't want to get into exactly. Wave form is one of them. There's a beam forming network that we provide. There's what we called AMD, which is another algorithm that we provide for bandwidth reduction in the thing. There are numerous IP products. This is a large network. And so it's just not one thing.

Okay. Fair. Also in the Q you mentioned that DCAA is going to audit the BFT-1 contract. First of all, if you could just talk about how routine or not routine that is. And then, I think you said when they might start but if you had any sense of when they might finish that audit.

Right now, every US government contract, the government has the right to audit for any, let's say, cost differentials at the end of the contract. This has been a long contract and probably long expected for them to audit this. Since the contracts in both areas are coming to a close on that particular network, I think the government -- and this is the DCAA part of the government, not the office, the program office that we work with. So that's a standard procedure, we believe. On the other hand, I think you should know that we have another negotiation with them on our recent $50 million order, that is also ongoing at this point. That's from the program office and that's a negotiation and the price of that $51 million contract order.

Right. It just hasn't been definitized yet. And why hasn't it been definitized?

I hate to say this but as you've see our history with the US government, it seems like our contracts are extended or new ones are given to us, and it's usually at the 11th hour, towards the end of the contract. And the same thing with some orders. This just came late. It came late. The part of the order that was really critical was the extension of the satellite time. Because if we didn't get a contract on that, the satellite time would be shut off. So the government had to put that order in quick and we just had no time to negotiation with them. It just seems to be par for the course.

And in terms of the timing of the DCA audit, do you have any sense of how long that process might take?

I don't think we have any idea. They've just given us a letter saying that they want some information and they'll let us know.

Fair. And then on the buybacks, are you still inclined to buy back shares? And what is the current share count right now?

I think our basic shares for the quarter were 26.6 million shares, so you could see the number. We have about $30 million left to go on the program. And obviously during Q4 we're going to continue to monitor market conditions and buy back appropriately. I think it goes hand-in-hand with our ability to execute an acquisition, whether or not that occurs. And I think as Fred mentioned earlier, if we're not able to look at an acquisition, you would expect us to continue our efforts on the repurchasing of our stock, given the strong cash flow that we expect not only in Q4 but in fiscal 2012 and beyond.

Jim McIlree with Merriman.

Thank you. Good morning. Fred, in your comments you talked about $40 million to $60 million in fiscal '12 and I just need some clarification. Was that the combination of MTS and Blue Force Tracking or was that MTS, Blue Force Tracking and the micro satellites?

I think the way things have developed, Jim, since the contract for the MTS program is ending on July 12, they will be buying everything under the BFT-1 contract. So whatever is necessary for MTS or BFT-1 will be bought under the present contract which expires in March. And that's part of that $51 million that we already started to negotiate and definitize. There are certain things already in there which are in our backlog that pertain to both contracts. I might tell you something, to follow up something that I probably should have mentioned with Tim. We had a condition with MTS that they wanted to place an order for about $30 million to $40 million with us but we had to deliver on July 12. And we just couldn't take that order because we were not in a position to deliver by July 12. So that's what's really happening. So that order, for instance, for $30 million, $40 million, sometime in the future will show up under the BFT-1 contract.

Okay. So the $40 million to $60 million, again, does that include the micro sats?

Yes.

It does. Okay. But everything's going to run through BFT. Okay. And so the --

Jim, if I could help you out here a little bit. Right now, our current contract with the BFT-1 program ends on March 2012. So we are anticipating MTS and BFT program to sort of merge. The recent order that we got from the BFT program, they can utilize let's say field support services that they're currently using for the BFT program, they effectively will share that with the MTS program side. So the metrics that we've given out, $40 million to $60 million in our Mobile Data Com segment is for the whole segment. MTS and BFT combined we're thinking $30 million to $40 million. We gave that number out a couple of quarters ago. We actually have a good piece of that in backlog already. So as Fred mentioned, if we get a very, very large order from the BFT-1 program, that will be an upside to the numbers that we are talking about. And what we don't really know is what happens between March, April, May and June, July next year, with the satellite program, whether or not they'll buy it directly from the satellite operator or not. And we're obviously taking a low view of that from a revenue perspective, some of that's in there, but we just don't know exactly what's going to happen.

That's very helpful. And is it fair to say that in the potential licensing agreement that you would have with the Army that you're looking at all the options, a one-time fee, an ongoing fee? Is that reasonable to think that you're looking at all of those options?

Yes, I think that's true, Jim, because we do expect certainly minimum of 3 or maximum of 5 year sustainment contracts. So depending upon what the Army requires under that contract will also guide our decision in terms of how much of the IP we will charge for. At some point we will either give it to them all in 1 shot or maybe at the end of the 5-year period.

Got you. Great. And Mike, you talked a little bit about some accelerated depreciation that's being run through the SG&A line. And I think you related that to the MTS contract. It sounds like that completes in fiscal '11. Is that right? And if it does, how much is that dollar amount that would then no longer be in SG&A?

Certainly if you look at our Q1 depreciation expense in total, Jim, for the Company, we did $3 million of depreciation expense in Q1. And our Q3 run rate was $3.7 million. So you can back into the numbers. I'd rather not provide a precise number on that. But clearly, our depreciation expense will clearly go lower in fiscal 2012.

(Operator Instructions) Rich Valera with Needham and Company.

Thanks, Mike. Just wanted to clarify. Is the 26.6 million basic shares the ending share count for the quarter or the average?

I believe that was the average, and you could tie that right to the income statement.

Right. So do you actually have the ending share count?

I believe that number's right on the balance sheet, if you want to pull that up. I don't have that number in my head exactly but I can give you that number after the call.

Okay. Fair enough. And then with respect to the $75 million EBITDA target for fiscal '12, can you say how much of that is associated with MTS, BFT?

Of our total sales?

No, of the EBITDA, how much of that EBITDA do you expected to be contributed from the combined MTS, BFT programs?

I think if you look at our operating income segment note for the Mobile Data Com segment for the 3 months or 9 months you could assume a good chunk of it is.

A good chunk of it is what?

From the MTS and BFT.

The $75 million fiscal '12 target?

I'm sorry, I thought you were talking about the '11. At this point we're not getting into those precise numbers. There's too many moving parts to our fiscal 2012 EBITDA target goal.

Okay. You've talked about $30 million to $40 million of revenue you're expecting from the combined MTS, BFT in fiscal '12. Can you say how much of that is air time that may go away if that portion of your contract is changed?

Yes. As I mentioned earlier, we have a very low amount of satellite air time revenue from, let's say, April, May, June, July in terms of the late Q3 and Q4 period of fiscal 2012 in our $30 million to $40 million number. So most of that number that's in there today is just exactly that, satellite network air time and network engineering services.

So would the network engineering services go away as well? What would that number look like?

We don't believe it will. If the Army is asking us to bid on moving the network operations center to their facility, including in that is us actually doing the work for them in their facility. So we still expect them to continue to use the system. And given our skill and operating the system during the sustainment mode it wouldn't make sense for them to train their folks on it, we continue to believe we're going to be doing that, hopefully not only for fiscal 2012, but for many years ahead. But we just have to let it play out.

Right, okay. And trying to get a sense for what your expectations are for 0TH in fiscal '12. It sounds like you're winding down maybe the pace of production on 1 of your large contracts right now but it sounds like you have another $40 million 1 that should be signed fairly quickly, based on what you've said. So just wondering how you're thinking about OTH in fiscal '12 versus fiscal '11, if we think that could be a flat number. Any ballpark for that would be helpful.

We certainly have more marketing folks on the ground than we've ever had before, since I've been with the Company, so the number of opportunities are there. We've got this 1 contract in the Middle East that Fred mentioned that we expect to be delivering revenue in fiscal 2012. We had this recent $2 million order from the US Army for the transportable modem. And if we get more orders, it's going to be a good number higher. So we are hopeful directionally that the number will ultimately increase next year but it's way too early for us to give you specifics.

That's helpful color. And finally on the micro satellites, it looked like if you backed out the contributions from BFT and MTS, which I think were around $36 million combined in the most recent quarter, that, that would have been around a $10 million number for the third quarter. Is there anything else I'm missing there or is that the right number for micro satellite in the quarter? And if so, why is that such a big number.

In terms of our revenue contribution?

Yes, revenue can contribution from micro satellite in the third quarter.

We're really running on the JMAPS program, similar to the over-the-horizon contracts. We had a lot of strong performance in Q3 on that. I think we mentioned in our last conference call, we're probably not looking at the same level of JMAPS revenue next year simply because of the budget pressures. And we're thinking about that going to be, instead of being originally a year ago we would have expected more revenue in '12 from that JMAPS program but we're thinking it's going to be spread out between '12 and '13. We are on a delta basis expecting micro satellite revenue to go down from '11 to '12.

Tyler Hojo with Sidoti & Company.

Hi, just to clarify. Did you say the updated sales guidance was $650 million? I'm not sure if I heard that right.

No, we think it's $615 million is what we're shooting for.

All right. That makes a lot more sense. Okay, great. And then just a clarification. Someone asked you a question in terms of when you guys thought the timing of the CREW 3.3 LRIP would start and I think you said 2012 or 2013. Were you talking about the government fiscal year, your fiscal year, or the calendar year?

It's probably calendar year.

At this time, we have no further questions. I would now like to turn the call back over to the Company for any closing remarks.

Okay. Thanks again for joining us today and we'll speak to you again in 3 months.

This concludes your teleconference for today. Thank you for your participation and you may now disconnect.