Comtech Telecommunications Corp (CMTL) 2012 Q1 法說會逐字稿

Ladies and gentlemen thank you for standing by. Welcome to Comtech Telecommunications Corp.'s first-quarter fiscal 2012 earnings conference call. At this time all participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions) As a reminder this conference is being recorded Friday, December 9, 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 first quarter of fiscal year 2012. 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'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 on this call. Yesterday afternoon we reported solid first-quarter results of $113.4 million in revenues and a GAAP diluted EPS of $0.47. Despite the challenging conditions, which we expect to continue, we are pleased to maintain our fiscal year guidance for a revenue range of $400 million to $430 million as well as maintaining our adjusted EBITDA range of $70 million to $75 million. At the same time, and largely due to our stock repurchase program and our Q1 performance, we increased our fiscal 2012 diluted EPS guidance range by $0.05 to a range of $1.25 to $1.37.

As we disclosed yesterday, our first quarter results reflect $2.6 million of professional fees related to a contested proxy solicitation that was initiated and subsequently withdrawn by MMI Investments. There was no agreement with MMI, no consideration paid to MMI, nor any accommodation granted to MMI. We believe that MMI withdrew because it came to the conclusion that Comtech was on the right strategic path of creating long-term shareholder value. I am also pleased to say that despite the distraction by MMI, our business units and senior management kept their eye on the ball and delivered what I consider to be a solid first quarter.

With that said, let me provide some updated comments on our capital structure. During the first quarter, we repurchased 2.7 million shares of our common stock for an aggregate cost of $81.2 million. And so far, during the second quarter, we have repurchased an additional 1.3 million shares for an aggregate cost of $43.3 million. In total, since September 2010, and through December 8, 2011, we have repurchased 8.3 million shares for approximately $246 million. As such, we plan to repurchase another $104 million of our stock pursuant to our existing authorization of $250 million.

At the same time, given our business outlook and our expectations of generating solid operating cash flows in fiscal 2012 and beyond, yesterday afternoon our Board approved our second quarter dividend of $0.275 which is expected to be paid on February 22, 2012 to stockholders of record on January 20, 2012. To date, we have paid $32.3 million of dividends to our stockholders over the past five quarters and we believe our dividend program is also an excellent way to return capital to our stockholders. Now let me turn it over to Mike to provide an overview of our first quarter, after which I will share an overview of our business outlook. Mike?

Thanks Fred and good morning everyone. Before I begin, let me just point out that we have provided historical information related to our MTS and BFT sales just like we did last quarter in our investor presentation and in our 10-Q that we filed with the SEC. As most everyone knows, a large portion of our historical annual consolidated net sales have been derived from the MTS and BFT-1 programs and we continue to provide this additional information so it will help provide context to understanding our historical operating results and future business outlook.

Now let me briefly walk you through our Q1 results, which were better than expected. Q1 revenues were $113.4 million and diluted GAAP EPS was $0.47. Our consolidated operating income was $15.8 million or 13.9% of consolidated net sales. As I will discuss in more detail later, our Q1 results benefited from a few items, including the timing of a $0.12 EPS benefit associated with the finalization of certain MTS and BFT-1 orders and a $0.12 EPS benefit associated with the previously announced tax adjustments related to an IRS settlement.

Although we had expected the $0.12 tax benefit in Q1, we previously expected the finalization of the MTS and BFT-1 orders to occur later in fiscal 2012. Of the $113.4 million of net sales in Q1, 48.3% were for US Government end users, 38.8% were for international end-users and the remaining 12.9% were for domestic commercial end users. Looking forward to the remaining quarters of fiscal 2012, these percentages are representative of what we expect to achieve as we move to future periods of materially lower levels of MTS and BFT-1 sales.

Let me provide some color on sales by segment. Net sales in our telecom transmission segment were $56.8 million in Q1 of fiscal 2012 as compared to $49.1 million in Q1 of last year, representing an increase of $7.7 million or 15.7%. Net sales in the segment reflect higher sales of both our satellite earth station equipment and over-the-horizon microwave system product lines. Net sales in our RF microwave amplifier segment were $21.1 million as compared to $22.8 million in Q1 of fiscal 2011. This decline of $1.7 million or 7.5% is primarily due to lower sales to both our US and international government customers, that are under extreme pressure to reduce overall spending.

Turning to our mobile data communications segment, sales in Q1 of fiscal 2012 substantially declined and were $35.5 million as compared to $106.2 million in Q1 of fiscal 2011. This expected decline is primarily attributable to substantially lower sales to the US Army for both the MTS and BFT-1 programs, as well as lower sales related to the design and manufacture of micro satellites. Our Q1 results include $5.6 million of revenues related to an award of $12.2 million of increased order funding associated with the finalization of pricing for certain previously received MTS and BFT-1 orders. At the time we give our prior full fiscal year 2012 business guidance and Q1 assumptions, we expected that this finalization would occur later in fiscal 2012 and therefore, although it represents an upside to our Q1 results, it is neutral to our full-year fiscal 2012 guidance.

Our gross profit in Q1 of fiscal 2012 as a percentage of net sales was 45.2% which was higher than the 36.1% that we reported in Q1 of last year. Gross profit during our most recent quarter reflects the $5.6 million benefit I just mentioned related to the MTS and BFT-1 order. Excluding this benefit, our gross profit as a percentage of net sales would have been 42.4% as compared to the 36.1% we achieved in Q1 of last year. As discussed further in our form 10-Q filed with the SEC, our gross margins benefited from an increased percentage of telecom transmission sales, including an overall favorable product mix within the segment and better than expected performance related to our two large over-the-horizon microwave system contracts, both of which are near completion. We are very pleased to see gross margins at the 42.4% level and we expect gross margins to be north of 40% for each of the remaining three quarters of fiscal 2012.

On the expense side, SG&A expenses were $24.1 million or 21.3% of Q1 fiscal 2012 sales as compared to $24 million or 13.5% that we achieved in Q1 of last year. Excluding the $2.6 million of proxy-related fees that Fred mentioned earlier, SG&A expenses in Q1 would have actually decreased by $2.5 million as compared to Q1 of last year. Looking forward, and excluding the $2.6 million of proxy fees related in Q1, we expect that SG&A expenses in dollars for the remainder of fiscal 2012 will approximate the spending level in our most recent quarter.

Research and development expenses were $9.7 million or 8.6% of net sales in Q1 of fiscal 2012 as compared to the $10.8 million or 6.1% in Q1 of fiscal 2011. The increase in R&D expense as a percentage of consolidated net sales is attributable to the lower level of sales in Q1 of fiscal 2012. We expect R&D expenses in dollars in the remaining quarters of fiscal 2012 to be comparable to our Q1 run rate. Amortization of intangibles with finite lives in the first quarter of fiscal 2012 was the $1.7 million. This was a slight decrease as compared to the $1.9 million recorded in the first quarter of last year.

Operating income in Q1 of fiscal 2012 was $15.8 million or 13.9% as compared to the $40.1 million or 22.5% we achieved in the first quarter of last year which included a $12.5 million net merger termination fee. If you exclude the net benefit to our Q1 2012 operating results related to the finalization of the MTS and BFT-1 orders that we discussed and the $2.6 million of proxy-related fees, our Q1 operating income as a percentage of net sales would have approximated of 11.9%. Looking forward, and although we do expect a dip in Q2 and Q3, based on our expected level of annual sales and overall product mix, we expect that our consolidating operating income as a percentage of consolidating net sales for fiscal 2012 will approximate 12%.

Total stock-based compensation expense for the first quarter of fiscal 2012, which is recorded in our unallocated segment, was $900,000 as compared to $1.5 million in the first quarter of last year. Interest expense in the first quarter of fiscal 2012 was $2.1 million. Interest expense primarily reflects interest related to our 3% convertible senior notes, interest expense associated with our credit line and accretion of interest for contingent earn out payments related to our Stampede acquisition. Interest income and other was approximately $500,000 in the first quarter in fiscal 2012 as compared to $694,000 in the first quarter of fiscal 2011. The decrease is primarily attributable to lower cash balances as a result of the repurchase of our common stock as well as our dividend payments.

Turning to income taxes, our GAAP effective tax rate for the first quarter of fiscal 2012 was 10.7% compared to 33.7% in Q1 in fiscal 2011. As we discussed in our last conference call, our effective tax rate for Q1 fiscal 2012 reflects a net discrete tax benefit which actually wound up being $3.4 million, which principally relates to an effective settlement with the IRS relating to its audit of our federal income tax returns for the fiscal years ended July 31, 2007 through July 31, 2009. Excluding discrete tax items, our effective tax rate for Q1 of fiscal 2012 would have been 35%. For the full year, our expected GAAP effective tax rate, excluding all discrete items is expected to approximate this rate and also includes our assumption that the federal research and experimentation credit will not be extended past December 31, 2011.

Finally, and as I mentioned earlier, our GAAP EPS for Q1 of fiscal 2012 was $0.47 compared to the $0.79 we did last year. Our Q1 reflects $0.12 associated with the MTS and BFT orders and a $0.12 EPS benefit associated with the previously announced tax adjustments. Excluding these amounts, EPS in Q1 2012 would have been $0.23. Excluding a $12.5 million net merger termination fee, diluted EPS in Q1 of fiscal 2011 would've been $0.57.

Now let me share a few financial metrics to help provide additional color on our results. Adjusted EBITDA in Q1 of fiscal 2012 was $23.4 million as compared to $46.4 million for the first quarter of last year. Our adjusted EBITDA in Q1 and for our updated fiscal 2012 guidance is derived from the same definition that we have used in prior periods, however our adjusted EBITDA reflects an add back of the $2.6 million of professional fees related to the withdrawn proxy context. These atypical costs were not in our 2012 EPS or EBITDA guidance that we first provided back in September 2011.

Now let me turn to our balance sheet which remains very strong. As of October 31, 2011, we had $474 million of cash and cash equivalents. This cash balance does not reflect the use of $4.5 million of cash to settle outstanding Q1 stock repurchases, the use of $43.3 million of our cash for stock repurchases that we have made so far in Q2 of fiscal 2012 and our Q1 dividend payment that was paid in November and which approximated $6.1 million. We actually had slightly negative cash flows from operations in Q1. However this amount was better than planned and primarily relates to the timing of various items which normally occur under Q1 period.

Looking forward, we do expect, beginning in Q2, to generate positive cash flows from operations for the remaining nine months of fiscal 2012. We expect to use a portion of this cash flow to fund quarterly dividend payments and capital expenditures which are still expected to approximate $8 million to $10 million for the year. And of course, as Fred mentioned, we expect to continue to return capital to our stockholders in the form of stock repurchases from our existing cash balance. As of October 31, 2011, our backlog was $127 million compared to $145 million as of July 31, 2011. Our backlog at October 31, 2011 includes $27.1 million of firm orders related to MTS and BFT-1.

Let me provide some additional comments on our Q1 performance and our updated fiscal 2012 guidance. The last time we spoke, we expected that, excluding MTS and BFT-1 sales, our core businesses would be able to achieve a similar or greater revenue growth percentage in fiscal 2012 as they did in fiscal 2011. At the time, we said that in light of the challenges of the economic environment, this goal would not be easy. That said, during Q1 of fiscal 2012, our businesses, excluding MTS and BFT-1, achieved consolidated revenues of approximately $87.7 million, as compared to $82.4 million in Q1 of fiscal 2011. This represents revenue growth of 6.4%.

Although we did achieve our goal in Q1, recent business and economic indicators have become even more volatile. And we believe that various global macroeconomic issues are now resulting in further uncertainty throughout our customer base. At the same time, increasing US government budget pressures and the resulting spending delays have made it even more challenging to predict our business outlook for fiscal 2012 as compared to just a few months ago. We have experienced some reductions in customer spending so far. This has occurred most notably in our microsatellite product line, where additional program funding for our large micro satellite contract has become more uncertain.

In our satellite earth station product line, we really don't see as many large opportunities in our short-term pipeline as we did in Q1. In addition, we believe as available government funding declines, increased competition for funding is expected to result in a greater number of and potentially lengthy protests related to government contract awards. For instance, although we have received and ultimately expect to begin shipments in fiscal 2012 of a multimillion dollar CREW 3.1 order, for certain high power amplifiers, our customer's contract is under protest and we are not certain if and when we can begin shipping this order. These are just examples of why, despite the solid performance we achieved in Q1, we have become more cautious in our business outlook for the remaining nine months in fiscal 2012.

For now, until things meaningfully improve, we are assuming that this environment will presist. And without upside surprises, it is unlikely that we will be able to achieve core business growth in fiscal 2012. Nevertheless, as we see things today, we still believe that we can achieve fiscal 2012 consolidated revenues in the range of $400 million to $430 million, albeit with a higher level of MTS and BFT-1 sales than we last expected.

As of October 31, 2011, we had approximately $27.1 million of MTS and BFT-1 backlog and achieved revenues for these programs in Q1 of $25.7 million. Subsequently in November, we received an order for $3.8 million. Thus, revenues from MTS and BFT-1 programs are now expected to be at least $56.6 million in fiscal 2012. Although it is virtually impossible to predict the amount and type of additional MTS and BFT-1 orders that we will receive in fiscal 2012, we believe, based on our discussions with the US Army, it is reasonable to assume additional MTS and BFT-1 orders in the remainder of our fiscal 2012. Such orders can include satellite services and related network engineering or other sustainment services as well as a fee for use of our intellectual property.

Our updated EPS guidance of $1.25 to $1.37 reflects our more cautious outlook related to our non-MTS and BFT product lines and the various mix changes in revenues that we are now expecting. Based on future expected order flow, including the anticipated timing of shipments related to our multimillion dollar CREW RF microwave amplifier and our expected performance related to our long-delayed $40 million-plus order that we expect to receive for our North African government end customer, we currently anticipate that our Q4 revenues and diluted EPS in fiscal 2012 will be higher than the levels we expect to achieve in Q2 and Q3.

In addition, it is important to note that our EPS guidance does not reflect the impact of any additional stock repurchases that we may make subsequent to this call. It does not reflect the impact of any potential acquisitions that we may make or any one-time restructuring items or other unusual cost items. As always, we will report these items to you on a quarterly basis. And now, let me turn it back to Fred who will discuss our business strategies and outlook in additional detail. Fred?

Thanks Mike. At this point, I would like to share an overview of our business outlook and provide a brief update on where things stand on the MTS and BFT programs. Let me start with our telecommunications transmission segment which is the backbone of our current business and the undisputed leader in satellite earth station equipment and over-the-horizon microwave troposcatter systems. Despite adverse global economic conditions, our satellite earth station bookings picked up towards the end of fiscal 2011 and continued through a solid first quarter of fiscal 2012.

However bookings in the second quarter are expected to be lower than the first quarter, in part due to a more cautious outlook and the timing and size of orders that we expect to receive. While it is difficult to pinpoint when global conditions will meaningfully improve on a sustained basis, we continue to believe that the growing need for cellular back haul and the continued growing demand for satellite capacity will provide important growth opportunities in the years to come for this product line. Our earth station product line is primarily commercial but we do sell products to various US government entities. So in addition to the ongoing economic conditions affecting our commercial customers, it is also becoming increasingly more difficult to obtain funding for our products and therefore more difficult to forecast bookings from the US government.

We have historically focused on establishing Comtech as the world's leader in the satellite earth station products market, with particular emphasis on the modem area. In recent years, we have expanded our product line to include integrated network solutions such as our Vipersat and SkyWire-managed bandwidth products. We have also introduced products targeted at specific end markets, such as our Marathon family of hardware products and network solutions which provide cost effective, efficient and flexible communications connectivity including higher service availability and seamlessness when oceanic vessels are roaming between satellite footprints.

Turning to the other product line in our telecom transmission segment, we remain bullish in the long-term about our over-the-horizon microwave troposcatter system products. On the international front, we are focused on marketing products to foreign countries that have challenges in communicating over difficult terrain. We continue to be confident that we will receive the long-delayed North African contract in excess of $40 million in the latter half of fiscal 2012. We have also made headway with various new customers in the Middle East, Africa and Asia, but political unrest in certain regions continue to make lead times longer than usual.

On the US government front, we recently received an order from a prime contractor that is using its antennas, our modems and our radios to offer the US military a troposcatter system in a transportable flyaway configuration which is also capable of providing seamless compatibility with legacy fielded TRC-170 over-the-horizon microwave systems. To date, we have received orders for 28 terminals and believe additional orders for this product may be forthcoming as there are hundreds of potential units to be deployed. Over the past five years, our over-the-horizon microwave systems, including Comtech-upgraded TRC-170s, have been fielded by the US military in Iraq, Afghanistan and other parts of the world and have proven to be an important link in communications channels. Overall, we believe that our telecommunication transmission product lines are weathering the current adverse economic geopolitical and government spending environments and are poised for growth when conditions improve.

Moving to our RF microwave amplifier segment, our traveling wave tube amplifiers and solid state power amplifiers serve critical needs in both the commercial and defense markets. On the commercial side, our SSPAs are used in communications, aviation, medical and instrumentation applications. Our TWTAs are used exclusively and extensively in the satellite communications market enabling vital services such as traditional broadcast, direct-to-home broadcast, satellite news gathering and the emerging KA satellite broadband communications area. Among our more recent commercial TWT wins, are contracts for our new industry-leading 500-watt KA band amplifiers, which are key components in the vast majority of North American and European high throughput broadband satellite systems.

On the defense side, our TWTA products are used to support high-capacity US military satellite communications systems such as the wide band global satellite constellation and the Milstar system. Our SSPAs are used in a number of electronic warfare jamming applications. In fact, during the past few years, a significant portion of our SSPA sales have come from our participation in counter-IED programs. We're currently working on various development contracts in support of the DOD's next-generation counter-IED programs, most notably CREW 3.3 and we believe that we will receive the lion's share of such work once the funding is in place.

We have also been impacted in this segment by the effect of the uncertain US government spending environment. As an example, in the second quarter, we received a multimillion dollar production order and subsequently right after, a stop-work order for SSAPA's used in electronic defense jamming applications. The award for the prime contractor is obviously being protested. Although we believe that this matter will be resolved, we have not yet placed this order in our backlog. Unfortunately, this serves as a reminder of how difficult it is today to project the amount and the timing of revenues relating to US government programs as protests and delays are increasing.

Moving on to our mobile data communications segment, revenues in fiscal 2012 relating to MTS and BFT will be substantially lower than those reported in the past few years and the reduction can clearly be seen in our first quarter results. Let me provide a quick update on where things stand with MTS and BFT. The US Army has informed us that it may place three- to five-year sustainment contracts with us for certain services after March 31, 2012. And our team is working with the program assets office to outline the type and level of assistance the Army may require from us going forward.

We have informed the Army that we are amenable to continuing our support of the program if the issue of how we will be compensated for the use of our intellectual property is addressed and parallel negotiations are continuing with the US Army now and we are hopeful that our future involvement can be addressed in a mutually acceptable way. Given that our efforts at this time will be limited to sustainment of our MTS and BFT-1 networks, the simple fact is going forward, this part of our business is going to be smaller and less consequential than our other businesses. But it is not going away.

The rest of the segment, which is primarily comprised of our microsatellite product line, performed well in the first quarter. But also during the first quarter, our customer informed us that it may not be able to fund the completion of their spacecraft bus. We are actively working with our present customer and other prospective customers to obtain additional funding so that we can complete this spacecraft bus. In the longer term, we continue to believe that in an environment where government and scientific budgets are under pressure, the market for smaller and less expensive micro satellites will grow as end users seek to launch more cost-effective platforms to meet their core operational goals.

Now since I have already discussed our updated fiscal 2012 guidance, let me say a few words about our acquisition strategy. We believe our Board has struck the right balance between returning significant cash to our stockholders and retaining the ability to be opportunistic in pursuing acquisitions, which will create stockholder value. We remain firm in our long-held belief that strategic acquisitions make sense for Comtech. They have served us exceedingly well in the past and we expect they will in the future as well. Our focus has always been and will continue to be on doing the right acquisitions, not necessarily the best ones that may be available in any given point in time. During the past year for instance, we evaluated several acquisitions that we rejected because the valuations were excessive and not supportable. Simply put, we continue to refuse to overpay. Given our balanced approach and notwithstanding the challenges of operating in an unprecedented environment of economic and US government budget pressure, I believe we are on a right path to achieve future revenue and operating income growth when economic conditions improve.

Finally before turning it over for questions, I would like to wish our senior management team, our Board of Directors, all of our employees, our stockholders and those listening to this call a happy and safe holiday season. With that, I would like to proceed to the question-and-answer part of our conference. Operator?

(Operator Instructions)

Rich Valera, Needham & Company.

Thank you good morning. Was hoping you could clarify how much revenue and EBITDA is baked into your guidance this year from MTS and BFT?

Difficult to kind of call out exactly which but if you look at EBITDA by segment for what we reported in Q1, you'll see that the mobile datacom segment did about $10 million by itself including our AeroAstro and some of our miscellaneous smaller product lines. We do expect that number to significantly decline. We have got the orders in backlog in Q2. Keep in mind that that $10 million number that I gave to included the $5.6 million benefit that we recorded. So the number really in Q2, Q3, Q4 is going to go significantly lower. But at this point we are not really breaking out EBITDA by segment. But you can get a sense that -- it was $10 million in Q1 including the $5.6 million benny and will go a lot lower in the remaining quarters.

Is it safe to say that it is materially north of $10 million? You have got the $12 million benefit, right, from the adjustments. I presume that is included in the number. And presumably some other sort of operating EBITDA. Is that fair?

Yes. It's certainly north of $10 million. That will be the math. Just to clarify too, Rich, the $12 million is not all profit. The $5.6 million was really a catch-up in terms of prior periods and so forth, like that. But the remaining piece of that contract will kind of be recognized at regular gross margins.

Okay. So north of $10 million though is a safe statement?

Yes.

And just to clarify the revenue, I think you give a minimum number you are expecting from MTS, BFT -- I think you said $56.6 million. But is that all that is baked into your guidance? Or are you assuming some additional orders as you had alluded to?

Right now the way we're thinking about it, we have roughly the $56.6 million sort of in the bag from the revenue and the backlog. And as we look at events past April, we are thinking that on a combined basis, MTS and BFT, if we get the solid air time could range around $3 million per month is sort of the way that we are thinking about it. But at this point, it could go up and it could go down and we can get into intellectual property fees. At this point it is just difficult to tell you how the final negotiations are going to play out.

Right. Understood. And then, I was wondering if you could give us any additional color, Mike. Thanks for the help on the contour of the revenue; it sounds like you expect it to be up in the fourth quarter relative to Q2 and Q3. Can you give us any sense of the magnitude delta there? $5 million, $10 million, any help there?

Yes. I don't think, with everything that we are projecting, kind of think about it this way. Our over-the-horizon contract is really not going to be starting a revenue stream, assuming that we get it this year, until Q4. We are being conservative on our timing of our amplifiers shipment which would be in Q4 and maybe some Q3 depending on how it shakes out in terms of the protest. So given our low bookings that we expect in Q2, Q2 will really be low. I think we'll be more than $90 million, but we won't do $100 million and then the rest of the quarters at this point, it is difficult to say. So that is the way I would be thinking about it is more of a $90 million-ish type for Q2 and see how it plays out the rest of the year with Q4 being a peak. But I would still want to comment to you -- it is very, very difficult to predict.

Great. And then one final one if I could. With respect to M&A in the sense of folks looking at you guys. I'm sure you saw the Reuters article awhile back citing sources close to the Company that there were numerous companies involved or interested in potentially looking at you guys as an acquisition. Is there anything you can say about any discussions you've had or any approaches you have had from third parties with that regard?

I think at this time we can safely say that we have really had no approaches at all.

Okay. That's clear. Thank you very much Fred.

Tim Quillin, Stephens Inc.

Hey good morning. First of all Mike, could you go through the backlog by segment please?

Sure. Our backlog in our telecom segment at the end of Q1 is $45.6 million. Our mobile datacom backlog is $31.7 million, which includes the MTS and BFT portion that I spoke about earlier. And then our RF segment is $49.6 million which is a total backlog of $127 million.

Great, that's helpful. Thank you. And then in terms of the guidance and the contour of revenue, I think you also said during the prepared comments that margins would dip lower in 2Q and 3Q and then pop back up I guess with revenue in 4Q. I guess that implies in 2Q and 3Q that margins -- we should expect margins below 12%?

On an operating income line?

On an operating line, yes.

Yes definitively so. We think for the year, we will get about 12% operating income line, is the way that we are thinking about it. So when you back out the proxy costs that we had in Q1, you kind of get to a number. But really for the year, we are shooting for 12%, which we think is achievable on the operating income line.

And how much lower should we expect in 2Q and 3Q relative to what you reported in 1Q excluding the one-time issues?

It's certainly going to be a function of exactly what you guys assume in your revenue. I think certainly, we are looking at double digits for all quarters, but Q4 will be higher.

Okay. And then in the satellite ground station equipment business, you had some good commentary around the government market versus commercial. But is there anything else you can say maybe in terms of geography or where you are seeing strength and weakness? And it has been a spotty market or in kind of fits and starts for while. But where are the trouble areas and where are the positive areas there?

I think, to answer the question, we historically have been very strong in Europe, well, really around the world and so forth in our modem area. And I think we are seeing a tremendous effect in Europe and surprisingly as much in China as well. So it is kind of a slowdown around the world.

Thank you. And then on the diluted share count, Mike where are we as of today in terms of diluted share count. What should we expect in the current quarter or next quarter? And after -- as you have been buying back a lot of stock, you have $100 million left on authorization, would you or do you plan to do another authorization after that? Thanks.

Sure. I will address the [shakeout] and let Fred handle the buyback piece. We're kind of looking at it at a basic share count of roughly 20.34 so roughly 20.34 million-some-odd, is the basic calculation if you look at all the stock repurchase that we have done to date. So if you look at the traditional delta that you see between basic and diluted you can kind of come up with your number on a quarterly basis. Some of the diluted will be dependent on what the stock price does. But I think the delta that you saw in Q1 is a good sense of what the diluted number would be.

Okay thank you.

As far as any further repurchase programs, I think I mentioned that we really believe that we have struck the right balance between returning significant cash to our shareholders through repurchase programs and dividend programs. But we also would like to retain the ability of any possible acquisitions. Obviously the acquisitions today would be much smaller than what we were anticipating when we had the large cash horde. So that is kind of a roundabout answer to you. But assuming that we finish this repurchase program, and we see no opportunities that we can pursue, we will certainly entertain going further with our repurchase.

Okay great. Thank you.

Mark Jordan, Noble Financial.

Good morning gentlemen. A question on cash flow for fiscal '12. Do you have an estimate as to the cash flow from operations and what should be the CapEx for the year

Yes Cap Expense, Mark, it is in10K. I think we had out there $8 million to $10 million for the year. And we think that is a good sense of where we will be. Could come in on the lighter side of that number, rather than a 10. We do expect significant cash flows beginning in Q2.

And not to put a precise number in there, but the way -- we expect a good chunk of that cash flow to really fund not only the dividend payment, but our Cap Expense number as well. And there will be some leftover is the way to think about it. But in light of the timing of our [Algerian] contract of when it would come in and how the ramp-up would start, I don't really want to put a precise number on there except to say we will be generating positive cash flow throughout the year for each of the remaining quarters.

Okay. Relative to the small flyaway tropo systems that you're going to be supplying antennas and modems to -- I believe that contract was for $5 million. I think your partner announced a $15 million contract for those terminals. Is it fair to assume that your content therefore is about a third of the total cost of those flyaway terminals?

Yes Mark. It really depends on the configuration being bought for that particular program. You know that they have been supplying hundreds and hundreds of satellite snap terminals and this is an equivalent tropo addition to the snap terminal. So our portion will always kind of be the same tropo systems. But their a portion may vary by the size of the antenna cost and other costs that they have. So I think a good rule of thumb may be a third, but it could vary.

Okay. Final question, relative to your negotiations with the Army. Was I correct in reading in the Q that you are building a network operating center for the Army in their facility that will be ready around midyear? In the past you had talked about that being a point of leverage in your negotiations as you were the only operator for NOC. If you come to an impasse, what is your recourse with the Army after the end of March if they decide not to honor your intellectual property?

Okay. First on the NOC basis, as you know, we originally ran the NOC and the network for the MTS program. And for the BFT-1 program, the NOC was being run by the Army war fighters, not by Comtech. We were supplying the network but not the NOC for that one. Now since the MTS program has been rolled under the BFT programs, the Army wants to combine the two NOCs together in one location at Aberdeen. So instead of having the NOC at our facility, the NOC will be moved to the Aberdeen facility where their previous NOC is located and will be co-located, but it will still be manned by our people. So that's the story on the NOC.

As far as our negotiations right now, as I mentioned, we are negotiating on kind of two fronts. One are the sustainment contracts and the level of the work that we will be needed for or receive from the Army for the next three to five years, whatever they finally choose. I believe the Army today is interested in not having two networks, but having one network. And what I think we are finally going to see in the end is one network that is capable of supporting the BFT-1 and the BFT-2 systems simultaneously and both will have to be operating together.

That can be accomplished by our IP being given to the BFT-2 system and the BFT-2 system IP being loaded on our system. And I think that is where the Army appears to be headed. Not really clear whether this will happen or not. A lot of things depend upon obviously the budget constraints today. But March 31, we hope is finally -- we should be able to settle something hopefully before that. But the Army does have until March 31. That is when our performance ends.

Thank you.

Joe Nadol, JPMorgan.

Thanks good morning. On the telecom transmission margins, you mentioned that there was some benefit from mix. And I am wondering is that within the earth stations or is that between over-the-horizon and earth stations or what?

Yes it was really -- we just had a super quarter in our satellite earth station business line. So we had very favorable product mix within the segment related to that and we also just had what I would consider to be an unusually strong favorable mix within the quarter. Since that is such a book-to-ship business, it is difficult to say -- normally, do you get it more evenly spread out, let's say a mix of digital versus an RF-type of a product mix. But it was a very good quarter. We're not really baking that into our Q2 assumption of the mix, because it should kind of normal out a little bit. But it is within the segment and within our satellite earth station product line itself.

Okay. And then on the over-the-horizon projects, did you have sort of pickups there as you retired some risk on those programs. Did I catch that right?

Yes. Yes. It is better performance as the contracts wind down. We have one contract that is quite close to the end and one that will continue for the remaining portion of fiscal 2012. But, yes, we basically, as the contracts come to an end and we don't have any risk, those risks will go away and our contract performance will get better.

Yes. Mike can you quantify that at all just so that we can get a better sense as to the run rate here of margins in the segment?

Yes. Joe, the way I would tell you -- we did 22.9% operating margin in our telecom segment as a whole and we do expect to be north of 20% for the year. So it is not of a magnitude that is really worth talking about. It does kind of pop out in Q1 given everything. But, from a dollar amount, there really was not material.

Okay. And then on the acquisition front Fred, you talked about sort of the cloudy environment out there on the government and on the commercial side in terms of your markets and things have gotten worse over the past few months in terms of the outlook in a lot of ways, certainly on the government side. How are you thinking about acquisitions in that context? Is that an opportunity? Does that make you look at acquisitions with a little bit less enthusiasm? How is that impacting your framework?

I don't think it is affecting our enthusiasm. We have always had that. But I think what we are seeing is, unfortunately, a lot of the companies in the government space going on the market. And obviously this is a rough time for anybody in the government space. So we are kind of threading very carefully. I think if there is any emphasis at this point, we would probably like to look at something more commercial and certainly we always look at technology or product line acquisitions.

Okay. And then finally, it seems like you're heading towards resolution here hopefully with the Army on your programs and getting basically, a better sense as to what the size of the business is going to look like going forward. As you think about your capacity, your R&D spend and getting a better sense now of how big the Company's going to be going forward, obviously, ex any acquisitions. Are there opportunities to take cost out? How are you thinking about right sizing the Company?

Well, we have obviously, since we lost the two major contracts, we have downsized quite a bit. And we have taken those actions. I will tell you that there is probably more to be done. But we have taken a good chunk of our cost base out of it.

Okay.

Joe, just to put some additional color to that. Right now we do have -- we are expecting to get some multi-year sustainment contract with the government. And so we are -- we have some staff and we're going to keep our staff there to support the Army and in anticipation of getting a successful resolution to that. If something that does not happen, I think we would be looking at a different type of cost reduction action. But we are not really expecting that to happen. We're not going to lose good people and we're going to keep them around right now until it all gets resolved.

I'm also thinking that in addition to MDC, thinking about the RF business, which really isn't generating much of a profit over the last 1.5 years. How are you approaching that?

Those actions have pretty well been taken to date already. That has been clear and we have taken that action that is necessary there to improve costs. And as Mike mentioned, the only problem with mobile datacom and the MTS and BFT programs is the changing environment with the Army. Things change almost on a weekly basis as to where those programs are going. As you are aware, the Army's first intent was to replace BFT-1 with BFT-2. It appears that the Army now wants BFT-1 to be around for a number of years. So it is very, very difficult until they finally determine where they want to go.

And Joe, on the RF side, it is certainly fair to say in our RF segment, that our operating margin in that segment is much lower than it has been historically. But if you go back to '09 and '10, you will see probably average of about a 10% operating margin. And as we mentioned in '11, we took a huge initiative to develop these next-generation CREW amplifiers. And we actually just completed shipments of them this quarter which is why we're able to show profit at the segment level, albeit still at a low level. But we did, as Fred mentioned, we got this multi (inaudible) top order; then it got suspended. So once we think that the protest gets resolved, we do think that the operating margins in that segment will start to begin to climb again.

We're not going to hit the 10% operating margin this year but as the mix change becomes more favorable, we definitely see operating margins in that segment at a positive level and at an improving level. One thing that has changed in the environment and we discussed on our last conference call is that the government pressures have caused companies such as Comtech in that particular business to spend more money up front to really get the work, and that is a change in the business that has occurred over the last couple of years, but we have done that and it has been successful and we've got the orders. And now, as soon as the protest comes -- gets resolved, we hope to be shipping that and you'll see some margin improvement in our segment.

All right. Thanks Mike and Fred.

Chris Quilty, Raymond James.

Good morning gentlemen. I was hoping you could clarify for us what exactly is your exposure to the European market? I guess specifically in the first station product line?

Well Chris, the only thing you can really say -- the exposure is what the environment really is at the moment. There is a definite slowdown because of the European economy problems. We are seeing that definitely in Europe, whereas I mentioned we are also seeing in other parts of the world. Probably the only place that we may not be seeing it is in Latin America. But even China has seemed to have a slowdown in at least the ordering now. Is that a trend, a one-month trend, a two-months trend? I don't know.

We have seen, as I mentioned, the last one -- let's say the fourth quarter or even the third quarter of the prior year there was an uptick in all around earth station business and even including a solid backlog quarter for the first quarter. But again, two months, three months do not make a trend. And we have seen this before. We get two months of trend up and then all of a sudden, there's two months trend down. I don't want to make too much of the trend downward right now, because again, it could turn very quickly in the third quarter.

I guess in terms of exposure I was actually meaning either percent of revenue out of that product line. Or its it fair to assume that it is number two behind North America?

Most of the revenue in our product line comes from the emerging markets and the BRICs. But it is probably in the double digits in terms of revenue. But we are not going to break that out for competitive reasons. But as Fred said, it is enough that if it comes to a grinding halt, it is going to impact the numbers, which is kind of the way we are thinking about it. We are going to see some softness in this, certainly in Q2.

And what you seeing in terms of the overall health in demand for cellular backhaul?

I think cellular backhaul again -- we see not as much as we are seeing definitely in the overall satellite area. But I think we're seeing a softening in that area as well.

But still positive growth?

Oh, still positive growth, no doubt about it.

Okay. Do you guys still intend to place a bid in for the BFT-3 contract?

Well we certainly would if we knew the timing and if it is really real. Again, I have to say that there was a moment in time that BFT-3 was kind of on the table and in the planning stages. And in fact, I think the Army came out with an RFI, not an RFI, but a statement that they would like to have a couple of bidders going in there and placing two contracts. If you have noticed, there has been no further discussion. And I think because of the budgetary problems, it has really taken a backseat.

Okay. And was that the BFT-3 X-band or was that a separate solicitation?

That was going to be X-band. Primarily because BFT-1 and BFT-2 are on L-band and the government is paying for satellite bandwidth at L-band because those bands are commercially supplied. The X- band is becoming more available as the government programs are moving to the higher order satellites in the KA-band and the HF-band and V-band. So that frees up the X-band space and what happens there, it is there. The bandwidth is there, it is free, it's essentially free to the government. So it really is probably the best solution for the government, but whether the implementation takes place today or in three years from now, is difficult to say.

Okay. You have mentioned you are still interested in looking at acquisitions. But if I flip that around, when you look at your current portfolio today, are there any pieces of the business, either the mobile data business of the RF amplifier business, that might make sense as a sale?

That's an interesting question. I think we have kind of been operating in these three segments and I think we probably want to continue to do that. And I think we would rather add to it. Certainly we have had our rough time in the mobile data communications segment, but I think we are at the bottom of the throw and I think we can make it grow in the future.

With regard to the RF business, that is pretty competitive, somewhat commodity. You have struggled to get margins. We know there is at least one private equity buyer out there that is willing to pay a good multiple for that type of business. Would cleaning that business off to grow in other areas, specifically telecom make sense?

I would have to answer you that it might. It certainly might make sense. I certainly have not been approached by any potential buyer that is interested in any portion of our business, specifically the RF part. So I kind of find that surprising that anybody is really out there interested in that particular business.

I guess I was referring to the one that stole your intended acquisition a year ago. (multiple speakers)

If you're referring to Veritas, I think what you'll find is -- you have got to remember that we were involved with a public acquisition of CPI and certainly they paid a lot more for that than we contractually agreed to pay for them. But you might recall that there was a second request by the government to do an antitrust. So whether or not, even a transaction like that could even be done, there's a whole set of other questions that you have to think about. So when you talk about there being somebody that would pay, it is a very, very small market which is something why we think it is very good to continue to grow.

Great. Thank you gentlemen.

Tyler Hojo, Sidoti & Company.

Hello, good morning. Thank you for squeaking me in here. So just a quick question on the North African over-the-horizon contract. Are you anticipating shipments within kind of your unchanged sales guidance range? And if so could you quantify that?

We are expecting some to occur in say, late Q3, Q4 timeframe. But certainly the contract is usually a three-year contract. So we're talking about it being $40 million to $50 million or so depending on exactly what is ultimately finalized. But it is a handful of revenue is what we are thinking about for this year.

Okay. And what about the CREW 3 contract? Is that a fairly meaningful contribution into your growth plan for fiscal '12?

Right now we are expecting that if the protest get successfully resolved, we also think that would be probably about a handful of revenue in our fiscal 2012 way of thinking.

Okay great. And I was also -- just lastly, I was hoping that you could maybe provide a little bit more detail into some of the funding issues on the micro satellite product line. As it stands right now, has worked completely stopped on the IDIQ contract that you received, what was it, last year? And what your thoughts are in regards to kind of the longer-term outlook there?

As we mentioned in our presentation, I think our customers come to us and tell us that it is getting difficult to find funding to finalize the contract. We definitely have funds for most of -- no all of our fiscal year '12 and some into '13 as well since the government and our fiscal year are at different dates. The outlook I think, it is still pretty good. As I mentioned, small satellites I think will become the economic solution I think under these economic times that we are experiencing. And we also I think strongly believe that the customer will eventually -- they've been working with us pretty closely, and will eventually find some funds to complete it. It's just a warning that we have been kind of given, or early statement for planning purposes. We are obviously working with them and other customers, as I mentioned, to find the solution to that.

Okay. But you are covered in backlog through fiscal '12?

Oh yes.

Okay fantastic. Thanks a lot.

Okay.

And there are no further questions in queue. I would like to turn it back to the Company.

Okay. Well thanks again for joining us today. And we look forward to speaking with you again in March. Thank you very much.

This concludes today's teleconference. You may now disconnect and enjoy the rest of your day.