Comtech Telecommunications Corp (CMTL) 2012 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Comtech Telecommunications Corporation's Second 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, March 9, 2012. I would now like to turn the conference over to Miss 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 Second 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 companies 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. During the second quarter, we continued to successfully execute our business strategies. The financial results we reported yesterday, clearly demonstrate that despite challenging global economic conditions our business remains strong and our long-term plans grow and remain on track. Based on our current backlog and expected new orders, we believe the second half of fiscal 2012 is firming up nicely. As indicated in our announcement yesterday, we are raising the low end of our fiscal 2012 revenue guidance to $420 million up from $400 million. Increasing our adjusted EBITDA guidance by $2 million to a range of $72 million to $77 million. And increasing our diluted EPS guidance to a range of $1.34 to $1.44.

During the second quarter we also repurchased 2.3 million shares of our common stock for an aggregate cost of approximately $75 million. And so far, during the third quarter we have repurchased an additional 308,000 shares for an aggregate cost of approximately $10 million. In total, since the establishment of our original stock buyback program in September 2010, and through March 7 of this week, we have repurchased a total of 9.7 million shares for approximately $287 million. Pursuant to our existing stock repurchase authorization of $250 million, we still have approximately $63 million left to go. And we continue to believe that our stock remains a compelling value and anticipate being buyers of our stock during the second half of fiscal 2012.

Yesterday afternoon, given our business outlook and our expectations of generating solid operating cash flows in fiscal 2012 and beyond, our Board of Directors also approved our third quarter dividend of $0.275 which is expected to be paid on May 22, 2012 to stockholders a record on April 20, 2012. To date, we have paid out almost $40 million of dividends over the past six consecutive quarters and believe our dividend program is an excellent way to return capital to our stockholders. At this point, let me turn it over to Mike to provide an overview of our second quarter. After which I will share an overview of our business outlook. Mike?

Thanks Fred and good morning, everyone. As Fred mentioned I'll walk you through Q2 and as I do I'll provide some additional commentary on our expectations for the second half of fiscal 2012. Our Q2 revenues were $99.1 million. Of the $99.1 million of sales 46.5% were for US government end users, 41.4% were for International end users, and the remaining 12.1% were for domestic Commercial end users.

Let me provide some color on sales by segment. Net sales in our Telecom transmission segment were $51.3 million in Q2 of fiscal 2012, as compared to $62.3 million in Q2 of last year representing a decrease of $11 million or 17.7%. As expected, net sales in the segment reflect significantly lower sales of both our Satellite Earth Station equipment and over the Horizon Microwave System Product lines. We do expect sales of our satellite Earth Station Products to slightly increase in the second half as compared to the first half. But as Fred will discuss in a bit, sales of our Satellite Earth Station products continue to be impacted by lower sales to the US government as result of ongoing budget pressures. Net sales on our RF microwave amplifier segment were $22.4 million as compared to $23.9 million in Q2 of fiscal 2011. This decline of $1.5 million or 6.3% is primarily due to lower sales to both our US and International government customers.

Turning to our mobile data communications segment, as expected sales in Q2 of fiscal 2012 substantially declined to and were $25.4 million as compared to $76.6 million in Q2 of last year. This decline was primarily attributable to substantially lower sales to the US Army as well as lower sales related to the design and manufacture of micro satellites. Our gross profit in Q2 of fiscal 2012 versus percentage of net sales was 41.8% which was significantly higher than the 37.4% we delivered in Q2 of last year. The increase reflects the significantly higher percentage of consolidated net sales occurring in our Telecom Transmission segment which generally has a higher gross profit percentage than our other two segments. In addition, both our RF microwave amplifier segment and our mobile data communications segment also achieved high end gross profit percentages in Q2 of fiscal 2012 as compared to last year. We believe that based on our mix of our current backlog and expected order flow our consolidated gross margin in Q3 of fiscal 2012 will be slightly lower than our Q2 percentage and that will increase by Q4.

On the expense side, SG&A expenses were $19.6 million or 19.8% of Q2 fiscal 2012 sales as compared to $23.2 million or 14.3% that we achieved in Q2 of last year representing a decrease of $3.6 million. Selling, general, and administrative expenses during the three months ended January 31, 2012, were lower than anticipated due to the timing of certain expenses. Right now given the related timing, including incremental legal expenses we are expecting a bump up in SG&A expenses during Q3 as compared to the spending level we experienced in Q2. As such, we believe that SG&A expenses in dollars for the second half of fiscal 2012 will approximate the total spending level we incurred during the first half of fiscal 2012. Looking forward, we continue to focus efforts on cost reduction activities to minimize or SG&A spending in future periods. ¶ Research and development expenses were $9.4 million or 9.5% of net sales in Q2 of fiscal 2012 as compared to $10.5 million or 6.4% in Q2 of fiscal 2011. We expect to continue our investments. As such, we anticipate that R&D expenses in dollars in the second half of fiscal 2012 will be comparable to the level we invested in during the first half of fiscal 2012. Amortization of intangibles with finite lives in the second quarter of fiscal 2012 was $1.7 million as compared to the $2 million we achieved last year. Consolidated operating income in Q2 of fiscal 2012 was $10.7 million or 10.8% of net sales as compared to the $25.3 million or 15.5% we achieved in Q2 of last year. The decrease is primarily attributable to the significantly lower level of net sales we achieved in Q2 of fiscal 2012. Although we are uncertain of the exact product mix, we may be requested to supply to the US Army for the BFT-1 Sustainment Contract that we are negotiating and although we do expect our Q3 operating margin percentage to be lower than our Q2 operating margin, we do believe that our consolidated operating income as a percentage of net sales for the full fiscal year 2012 will approximate 12%.

Total stock-based compensation in the second half of fiscal 2012 which is recorded in our unallocated segment was $1 million as compared to $1.4 million in the second quarter of fiscal 2011. Interest expense in the second quarter of fiscal 2012 was $2.2 million compared to $2.1 million. Interest income and other was $400,000 in the second quarter of fiscal 2012 as compared to $600,000 last year. Turning to income taxes, our GAAP effective tax rate for the second quarter of fiscal 2012 was 34.6% compared to 32.4% in Q2 of last year. For the full year, our expected GAAP effective tax rate including all discrete items is still expected to approximate 35%. This rate reflects the expiration of the Federal Research and Experimentation Credit which occurred on December 31, 2011. And finally, as we announced yesterday, our GAAP EPS for Q2 of fiscal 2012 was $0.27.

Now let me share a few financial metrics to help provide additional color on our results. Adjusted EBITDA in Q2 was $15.7 million as compared to $32.3 million for the second quarter of fiscal 2011. As a reminder, the adjusted EBITDA for our six months as well as our updated fiscal 2012 guidance which we announced yesterday is derived from the same definition that we have used in prior periods and which also reflects an add back of the $2.6 million of cost we incurred in the first quarter of this year related to the withdrawn Proxy Contest. As of January 31, 2012, our backlog was $126.3 million including in this amount is $28.2 million of firm orders related to MTS and BFT-1.

Now let me turn to our balance sheet which remains very strong. As of January 31, 2012 we had $400.2 million of cash and cash equivalents. This cash balance does not reflect the use of an additional $10 million for cash that was used for stock repurchases that we made so far in Q3, and it does not reflect our Q2 dividend payment which was paid in February which approximated $5.4 million. We did generate positive cash flows from operations during the first six months of fiscal 2012 of $11.2 million and expect to continue to generate strong net cash flows from operating activities for the remainder of fiscal 2012. The ultimate amount of cash we generate in any specific quarter will be largely impacted by the timing of working capital requirements associated with our overall sales efforts. As Fred mentioned, we do expect to return capital to our stockholders in the form of stock repurchases from our existing cash balances. Now, let me turn it back to Fred who will discuss our business strategies and outlook in further detail. Fred?

Thanks, Mike. At this point I'd like to provide a brief update on each of our core product lines. Update you on where things stand on the MTS and BFT programs and then say a few words about our fiscal 2012 guidance.

I'll start with our telecommunications transmission segment. Which is the backbone of our current business and where we remain the undisputed leader in both Satellite Earth Station products and over the Horizon Microwave Troposcatter systems. As we anticipated during our last investor call, our Satellite Earth Station product bookings were lower in the second quarter than they were in the first quarter. As you know, our Satellite Earth Station business is a book and ship business. And as such, bookings in the second quarter were in the short-term primarily impacted by lower US government activity. The general paralysis in the government's decisions and procurement processes have presented stiff headwinds on the government side of this product line.

On the other hand, our Commercial and International Satellite Earth Station product bookings remains strong. In fact, bookings both in the second quarter and year to date have increased in every single International market that we serve. In aggregate, our International bookings are up double digits. And we believe this trend will continue and we continue to believe that the growing need for cellular back haul and the growing demand for satellite capacity will provide important growth opportunities for us in the years to come for this product line. The strength in our International bookings combined with a bit more clarity on the government side now that the fiscal 2013 US budget has been published, makes us more confident that bookings in the second half of fiscal 2012 will be higher than the first half. At the same time that we're navigating our way through the challenges in today's markets, we are also positioning our Satellite Earth Station products to more fully meet our end customers needs.

We have historically focused on establishing Comtech as the world leader in the satellite Earth Station Products market with particular emphasis on the modem product line. In recent years, we have developed integrated network solutions and added to our offerings our Vipersat and SkyWire managed bandwidth products. This year, we've also introduced products targeted at specific end markets such as our Maritime family of products and network solutions which provide cost effective, efficient and flexible satellite communications connectivity including higher service availability and seamlessness when oceanic vessels are roaming between satellite footprints.

Turning to the other component of our telecommunications transmission segment, we remain bullish in the long-term about our over the horizon microwave product line. On the International front, we continue to be focused on marketing our products to foreign countries that have challenges in communicating over difficult terrain. We're still very confident that we will receive a contract award in fiscal 2012 in excess of $40 million relating to our North African country and customers, albeit later in the year than we had originally anticipated. We've also made headway with various new potential customers in the Middle East, Africa, Asia. However, as you can imagine, political unrest in certain Regions makes lead times longer than usual. We are cautiously optimistic about these opportunities because all of these potential customers have definite Tropo requirements in various stages of preparing specifications, negotiating with us, or waiting for government approval for their projects.

On the US government front, we recently received orders for long lead items for approximately 40 terminals that will allow a prime contractor that is using its antennas and our radios to offer the US military a Troposcatter system in a transportable flyaway configuration which is capable of providing seamless communications compatibility with Legacy fielded over the Horizon Microwave systems. We believe additional orders for these products may be forthcoming as there are hundreds of potential units to be deployed. Over the past several years, our government over the Horizon Microwave Systems including upgraded to track 170s have been fielded by US military in Iraq, Afghanistan and other parts of the world and have proven to be an important link in critical communications channels. Overall, we believe that our telecommunications transmission product lines are weathering the current adverse economic, geopolitical, and government spending environments and are poised for growth as conditions improve.

Moving onto our RF Microwave Amplifier segment, our traveling wave tube amplifiers or TWTAs, and solid state power amplifiers or SSPAs serve critical needs in both the commercial and defense markets. Our TWTAs are used exclusively in the satellite communications market enabling vital services such as traditional broadcast, direct to Home broadcast, satellite news gathering, and the emerging satellite broadband communications area. Among our more recent Commercial TWTA 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 WGS or wide band Global satellite constellation, the Milstar system, and the wind T system. On the solid state amplifiers side in addition to commercial applications such as aviation, medical, and instrumentation testings, our SSPAs are used in a number of electronic warfare applications including counter IED systems. In fact, during the past few years a significant portion of our SSPAs sales have come from our participation in counter IED programs. We are currently working on the development contracts in support of the DOD's next generation counter IED program most notably CREW 3.3, and believe that we will receive the lion's share of such work when the funding becomes active in the years starting in 2013.

During our call in December, I discussed a $7 million award for jamming amplifiers that we received in the first quarter. And as you recall, our prime contractor's award was protested by another bidder and we were issued a stop work notice. The good news is that the protest was resolved favorably and we were authorized to recommence our work. Although we are pleased as to how this specific matter was resolved, it serves as a reminder of how tight things are in the US government spending arena. Overall, given the strength in bookings that we have experienced in this segment during fiscal 2012 and our role related to CREW 3.3, we believe that this business is positioned to grow over the next few years.

Moving on into our mobile data communications segment, as I've discussed previously, 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 results for the first half of this year. Let me provide a quick update on where things stand with MTS and BFT programs. To begin with, the Army's plans have changed and continue to change several times since we last updated you in December. We have now received and continue to receive requests for quotes with various or different assumptions, various and different time frames and structures. The most recent implies that the US Army intends to award at least one contract for BFT and MTS support and services. It's also possible that this award will also include some amount of satellite bandwidth. We expect that the US Army will pass a fee for the use of our intellectual property effective April 1, 2012. Once this is done, it is our understanding that the Army then intends to award is a multi-year IDIQ Sustainment Contract for three to five years. We're hopeful that at least one contract can be put in place before the expiration of the current contract performance period on March 31 of this year.

The rest of this segment which is primarily comprised of our micro-satellite product line, performed well in the first half of this year. But once again, the US government budget pressures have caused funding to move out to the right and related program activities to stretch out and proceed at a slower pace. In fact, revenues relating to our JMAPS program are declining as related funding has been reduced. We are however actively working with our customer and other prospective customers to obtain additional funding to complete the spacecraft bus and generate new orders. In the longer-term, we still believe that in an environment where government and scientific budgets are under pressure, the market for smaller, faster and less expensive micro satellites should grow as end users seek to launch more cost-effective platforms to meet their core operational goals.

And finally, let me provide some additional comments on our updated fiscal 2012 guidance. Obviously, business conditions remain challenging. We continue to be impacted by US government budget pressures and resulting spending delays. As such, our updated financial guidance for fiscal 2012 that we provided reflects more conservatism in our Satellite Earth Station product line for the second half of fiscal 2012 as compared to the guidance we provided just three months ago. At the same time, given the positive traction we have seen in our BFT-1 contract negotiations and orders we have received to date, our updated guidance reflects higher revenue and earnings contributions from the BFT-1 program. However, the expected timing of shipments for orders already in our backlog or future orders and related product mix will likely result in revenues, adjusted EBITDA, and diluted EPS to be significantly skewed higher towards the fourth quarter than the amounts we expect to achieve in the third quarter.

Although we are uncertain of the exact product mix which will ultimately be provided to the US Army, our financial guidance for 2012 assumes that we will be successful in negotiating at least one BFT contract before April 1, 2012. Our financial guidance for fiscal 2012 also assumes that effective April 1, 2012, we will begin to recognize revenue for a pro rata amount of the annual IP license we expect to charge the US Army. For obvious reasons, we do not intend to publicly disclose the amount of the intellectual property license fee that we have proposed to the US government. And finally, it is important to note that our EPS guidance does not reflect the impact of any stock repurchases we may make subsequent to this call, the impact of any potential acquisitions we may make during the fiscal year or any one time restructuring items or other unusual cost items. As always, we will report these to you on a quarterly basis. With that I would like to proceed to the question and answer part of our conference call. Operator?

(Operator Instructions). Richard Valera with Needham & Company.

Thank you. Good morning. Last quarter you said you didn't expect to achieve growth in your core business at least you said it would be tough to achieve growth. Given it sounds like some puts and takes in the core business, can you update that? Do you think you can achieve growth in that core business this year?

Yes, I think the answer is that it's still going be tough for us to do for the year. I would say we're really not expecting it to occur in the way we're thinking about the year. It still could happen. Based on how the bookings come out. But I think what we've seen in the first half is really going to continue into the second half of the year.

Okay. That's helpful. And then with respect to the -- you gave a little more color on the payments you're expecting, hoping that you'll receive for IP. So it sounds like you would be looking for an annual sort of fixed IP payment from the government and then you'd -- that would be ongoing and [ferpituity] is that a fair way to look at that?

I think what we've told the government and obviously we're still in the process of negotiating this feature, but we intend to charge an IP license on an annual basis for the sustainment contracts that the Army will place with us.

Obviously you've had a lot of negotiations there but does that seem like something that they're agreeable to at this point?

I think our position is pretty clear. I think we need to be paid to go forward and I think the Army understands that.

Rich, we've proposed numerous structures to the government. They've known about this for several months and we are in negotiations with them on a initial contract as well as a -- they've told us that they intend to do a multi-year contract as Fred mentioned, three to five years. So we think all the facts are on the table and certainly our guidance assumes that the way the structure is ultimately going to be is on some type of annual recurring basis.

Okay. That's helpful. And can you give us how much NTS/BFT revenue is baked into your annual guidance?

Well, we mentioned on the last conference call we do think our mobile data comp business in the second half is going to continue to wind down as compared to the first half. But at this point, our contract still expires on March 31, 2012 for the satellite stuff. It's very, very difficult for me to say but I think directionally in the second half it will be a little bit down from what we did in the first half. But it's just tough to put an exact number on it right now.

But it sounds like you expect more revenue today than you did three months ago for NTS/BFT, is that correct?

That's definitely fair. In January we got a bunch of orders including roughly $12 million of new mobile satellite transceivers and as we talked about in our 10-Q that we filed yesterday afternoon, some of that $12 million we actually expect to actually ship in fiscal 2013. But yes the bottom line is, as compared to last time we were sitting here we do think our MTS and BFT business will generate more revenue in 2012 than we did the last time.

Great. And I know it is tough to look this far ahead, but can you give us any sense of where MTS/BFT could be next year? It sounds like you've had maybe some unusually strong stuff this year, I know you had I think an adjustment that was probably not recurring. But can you give us any sense of year over year how we might be able to think about this business in fiscal 2013?

I think it's really too much of a fluid situation, as you can anticipate. We've really got three weeks to finish our negotiations. And as I mentioned, things have really been going back and forth and changing to a large degree. I think we could get one contract as I kind of alluded to. We could actually get two contracts. The surprise recently for us was that certainly the contract or the contracts will have now an additional bandwidth requirements. Which we didn't expect three months ago. So, things are just changing too much for us to really be able to predict.

Okay, fair enough. Thank you very much.

Tim Quillin with Stephens Inc.

Good morning. Could you just go through the backlog by segment?

Sure. Hello. Good morning. Our backlog for the quarter ended at $126.3 million of which $55.4 million came from our RF amplifier segment. $36.5 million is in our Telecom transmission segment, and $34.4 million is in our mobile data communication segment.

Got it. And would you be able to tell us what the split on the Satellite Earth Station equipment business, what the split is between government and commercial right now?

No, we don't really put out those percentages. Most of our backlog, I could tell you in our Telecom segment is mostly with the Satellite Earth Station side of the camp. But I think directionally, the way to think about it as Fred mentioned, in our International markets we're seeing double-digit growth in almost every single one of our International markets. So we're seeing increased International sales and you could assume the same going down on the US government side. But we don't want to put a number on there.

Right. Is it fair to say that the significant -- the majority of revenue is in commercial markets though?

Yes.

I wasn't quite -- so you were pretty clear in terms of 3Q versus 2Q that 3Q margins will be lower. Do you expect 3Q revenue to be lower as well?

Tough to say. I think we are looking at Q4 revenue to be higher. I think we should be able to do over $90 million of revenue in the quarter for Q3. But that's directionally is the way to think about it. $90 million plus and where that comes in we'll see.

And so, explain the different factors maybe that would drive the stronger fourth quarter. It sounds like maybe the amplifier business would have an especially strong fourth quarter. Maybe you expect the Satellite Earth Station equipment business to be a little bit at higher in the fourth quarter, but it's a pretty significant step up is the delta -- is the bigger part of the difference coming in the mobile data side in 4Q versus 3Q?

No, almost all of it's in our Telecom segment and our RF segment. If you look at the backlog in our Telecom segment, it's a book to ship business. If you recall, the last time we spoke to you in Q2, we saw the slowdown in the US government side of the business. It happened. We're still working through that. We do think it's going to take some time for US government spending to return to our Satellite Earth Station business. So we're looking at Q3 to be kind of close to what we did in Q2 in that part of the business. And then on the other part of that business and our Over the Horizon business, we're expecting the contract by Q4. So yes some of it's timing. Some of it's related to the mobile data communication business in terms of the other segments. But there's a lot of pluses and minuses right now between what we see. But directionally, that's kind of the way we're thinking about it right now.

On the Over the Horizon contract though that you anticipate, you expect that to come at the end of the fourth quarter. So I'm presuming there's really not anything in your guidance related to that?

I would say nominal.

Okay.

We do have, and Fred mentioned, we got an order for long lead parts for 40 terminals for the mobile Troposcatter systems that we're producing so we are expecting to get a nice order from that. And we do have that in our Q4.

And I know this is a little hard to parse out, but how much of the anticipated 4Q jump up in revenue versus 3Q is related to the belief that the government business on the Satellite Earth Station equipment business will come back?

I'd just say a good portion. Again, we do have strong backlog in our RF amplifiers segment, Tim. So you're going to see that growth coming and we are anticipating additional orders in that segment to be very strong in the second half. And we do feel confident that we're going to see that pop. It's just has some timing. If you remember the -- back at the beginning of Q2 we're in a continuing resolution. The budget wasn't released. All of those things have now happened and so again it takes the government call it 60 to 90 days to rejigger what they're going to rejigger. We are starting to see some of that now, not at the pace that we would like, but eventually we do think that the string purses will open up.

That's fair enough. And then just one last question, I didn't fully understand the IP fee. It sounds like you're going to start taking I guess recognize a certain amount ratably over the course of the year whether negotiations are finalized or not. Is that true?

Yes.

Okay. Does that indicate some kind of confidence will be done or just some -- by hook or by crook it's going to be done?

I think both of the above.

Okay. Okay. Well thank you.

Tyler Hojo with Sidoti and Company.

Yes, hello. Good morning. Just first, you mentioned your favorable prospects to the J CREW 3.3 program. I was wondering if you could talk a little bit about that. Maybe you could give us a little bit of color just in regards to content and if you're not willing to give actual numbers, maybe you could just talk relative to some of the Legacy systems where you're content is?

Well, let me say on CREW 2.1 and CREW 3.1 we were one of two suppliers for the IED amplifier systems. On CREW 3.3, which I can say that at the moment with the budget being approved for 2013, the plan on CREW 3.3 is for approximately 275 or approximate 300 units to be fielded in 2013. And approximately 1000 units for '14, '15 and '16. To us, as the sole source supplier of this particular unit at this point in time, it represents roughly $20 million to $25 million a year.

Okay, great. Thanks for that color. And then just to go back, not to beat a dead horse, but your guidance now [insumes] some sort of contribution from a licensing fee for the IP that goes into the BFT contract, is that correct?

That's correct.

Okay.

Tyler, if I could. On our last conference call too, we told folks and just to be very clear, our guidance the last time did include some level of the intellectual property fee in terms of whether it's going to be satellite service revenue or whether it is going to be IP. There's some element in the guidance as well last time. I think our point to you this time is we're making it clear we do feel confident that if we are successful in negotiating the BFT-1, one or more sustain the contracts that the IP will be a part of that contract. So that's really the message here today. It's not anything different than what we said last time, but from a mix perspective, we do feel confident that the IP will be a part of it.

Now, at the same time, as we'll put the caution on there, things are changing every day with the US Army and we are in some negotiations and their requirements seem to change. But we've exchanged it. It's been on the table for a long time. We seem to be down a good path with them and ultimately what the mix maybe, that's still being determined.

Okay. So at what point do you think you'll have a little bit better visibility into I guess the longer term contribution from those contracts as we look into 2013, 2014? Is it when you actually have the contracts in hand? Or I'm assuming they would be IDIQ sort of contracts so when do you have better visibility there?

We certainly will have a better visibility on March 31 of this year. Three weeks from now. In terms of the contracts, I have to repeat, we've gone from negotiating a sustainment contract for three to five years which was an IDIQ contract, to a separate fixed contract for one year for just services and some hardware. To an additional contract for satellite bandwidth, and then combined on a basis, combining those two contracts. So we are kind of in a very fluid situation. If I were a betting man I'd say that we probably are going to have -- get one or more of fixed one-year contracts because of the time frame involved. We are three weeks away from determination of our present contract obligation. So I would say that the best bet that we're thinking of is that we will get one or two one year definitized contracts, and then a subsequent sustainment contract for three to five years which would be an IDIQ contract.

Got it. And just one last follow on to that. Just within -- there was a pre-solicitation on the fed biz op site and I was a little bit surprised that the government's intending on awarding you guys the satellite air time contract. Could you talk about that and maybe the duration of how long that would be in effect?

Yes, actually I think it is all pretty well public. The government has for a long time and we've mentioned it in numerous of our calls, the government for a long time has wanted to go and consolidate their bandwidth purchase through DISO, which is a government agency. And they obviously started to do that and they had an RFQ and actually made an award to a Company to provide that bandwidth for BFT-1 and MTS going forward. There has been a protest. And this was a one-year award. And the bandwidth will always be a one year award situation for the government. There has been a protest and you could say that we've benefited from that protest because the protest is in process and they need that bandwidth starting April 1. So they've come back to us and asked us to renegotiate our obligations to include bandwidth for -- and we've heard it for six months with a three-month option. We've heard it for a full one year. We can't tell you exactly how it's going to come out. But the need is there for at least one year.

Okay, got it. And just one more, I'm sorry. Were you the party that protested the award?

No, we weren't.

Okay. Great.

No we actually were a subcontract bidder to four out of the five parties that did the satellite time. So we were hoping to be involved in it regardless.

Great. Thanks for all that color.

Chris Quilty with Raymond James.

Good morning, gentlemen. I wanted to follow-up with a question on the Telecom business. Specifically, I think Mike, you mentioned that the Earth Station business should be flat going towards the back half of the year. The question is what does that imply for the Over the Horizon business?

I think again, plus or minus it 's very difficult to say. We are expecting the Algerian contract to come in in the second half of the year and that we are expecting what I call nominal contributions. It's -- I would really say Chris, your question is too precise at this point given the levels that we are.

The question is you've got two long-term contracts that are winding down, are they still going to provide a similar level of contribution in the back half that they did in Q2?

We are expecting the order in the Over the Horizon business for the additional snap terminals. So we do expect revenue in that part of the business during Q4. Q3 will be very close to what it was in Q2, which is why we are thinking that the mix of revenue and the SKU of revenue is going to be towards Q4.

Okay. And when that new North African Over the Horizon contract is awarded, typically it takes some period of time, six months before those things get turned on or is this a continuation program that should roll immediately?

Well, a lot of the -- the way I would say is, are accounting for those things is a percentage of completion. So almost immediately as we start to incur costs we'll be able to recognize revenue on that. So we've really been ramped up and we've been asked to proceed and do some work already. We've taken a mom and pop approach to it and we're really just want to get the contract signed with our prime contractor before we really do anything. But at the same time I can tell until you within a few minutes of the contract being signed we'll be working hard towards progress.

Okay. And you had previously said you expected Telecom margins to be North of 20% given the puts and takes here on the business, is that still likely?

I think we're still shooting for the 20% operating margins. It's a little bit difficult and a little bit more challenging than it was to achieve since our last call. Some of that is due to some of the legal matters and incremental expenses that we're expecting to have happen in the second half. But if you exclude them, we would have easily have achieved that number. But adding them all and in given our expectations, we still think that the 20% is our target and we think it's still achievable.

Okay. And could you give an update on the margin trajectory for the other two segments?

Yes. The RF you saw it happen as we said it would. Our operating margin went from 1.5% to over 5% in Q2. We do see that business getting back close to an 8% to 10% over time. So that's the way we think about that business segment. And you can plug the mobile data com for the rest.

Okay. And for RF, is that based solely on the bomb jamming, which historically has had a 10, 15 percentage point positive contribution relative to the core business? Or is it because the core RF business itself is seeing margin improvement?

It's really the latter. If you recall for the last few quarters, and going through fiscal 2011, we shipped out a lot of those developmental amplifiers. Not only for the CREW program but other programs as well. So we're coming back to what is a normal margin profile. If we can get over 10%, get to you number of 10% or 15% that's going to be based on the volume in any given quarter. And if we're able to get a really good efficient or production run, something like that could happen in a given quarter and if they really need to get it out because of some military issue that occurs in the world, that would be great for us from a business perspective. But we do think 8% to 10% overall is where that business will achieve and we think we're headed there.

Okay. Great, thank you very much.

Mark Jordan with Noble Financial.

Good morning gentlemen. A question relative to the converts, I think the first call period is in 2014. Do you have any sense that they'll be either put a call on those bombs? And do intend to maintain the $200 million liquidity through that timeframe?

Well the bombs have a conversion price that's -- it's in the queue-- I think it's like $34 million and change, Mark. So we're thinking about it as we expect to continue to pay our dividend payments by 2014. The conversion price on those shares will roughly be $32 million and change. So it's more like equity than it is data at this point. It's the way we're thinking about it. And of course, those shares, the dilution from those shares are already in our share count. So that's not going to effectively change. So, yes effectively we have access to the $200 million on the balance sheet side is the way we are looking at it.

Okay. Secondly, relative to BFT program, do have a sense of the roll out schedule for BFT-2? And how does that impact your view of how meaningful the sustainment could be and the sort of the out years of potential three to five-year sustainment contract?

Yes, Mark. The best we can tell you is that we really don't have that much information on the BFT-2 program for obvious reasons. The Army doesn't really share that with us. We can say that it is 1.5 years later and we certainly have followed the qualification requirements for that for BFT-2 and they have not qualified the transceiver portion of that system. So obviously without first article qualification there can be no production. So we don't see any roll out certainly in the near-term.

Mark, I would also add to what Fred is saying, is just on the first week of January the government did place an order for $12 million for new mobile satellite transceivers. And they've even requested a portion of those satellite transceivers which are going to be deployed we assume in the field not to occur until 2013. So as we go through these negotiations that we've been with the government certainly in the last month and certainly yesterday and the day before, they're asking for new hardware. So we'll get a better visibility as to what that hardware will be, if at all. When we sign the contract, or if we're able to sign that contract come March. But our expectation is that we're going to even to get some hardware numbers we just don't know the amount. But yes we feel that we use the phrase we're getting positive traction on our BFT-1 sustainment contract and our business going forward.

Okay. Final question relative to the International Tropo opportunities you alluded to. Customer opportunities outside of your historical customer. Could you add a little color in terms of the number of specific companies that you -- countries that you think are serious potential buyers of that technology and some sense of what you think you might be able to penetrate over say a 24 month period?

I think overall we've always been in the oil platform business and that's been a $1 million, $2 million type of order that we've always received. And we get three to five of those a year on a continuous basis. What we really meant and our focus on the International area is more like the our Algerian customer. We -- as you probably know, in the past 12 or 18 months we actually broke through in Saudi Arabia and had a $10 million contract for some preliminary Tropo systems. Obviously we feel very strongly that, that will lead to a similar situation as we've had in Algeria and could lead for us to have major programs in the $40 million to $50 million area. So that's just one example. I'd rather not get into any of the other specific countries, but we have about four or five of those type of opportunities. Kind of in the pipeline. Now as I mentioned with everything that's going on in that part of the world, delays are probably to be expected.

Okay. Just a follow-up relative to those four or five opportunities that are out there, Are you marketing those as the prime or are you jointly marketing with a large defense prime?

I think for the most part we're now marketing them by ourselves as primes. We do have opportunities with major contractors that we're also teaming with.

Okay. Thank you very much.

We have time for a final follow up Tim Quillin with Stephens Inc.

Yes, I'm sorry, I tried to withdraw my question but I'm all good, thank you very much.

Okay, Tim. Thanks.

All right, there are no further questions. We'll turn it back to the Company for closing remarks.

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

This concludes today's teleconference. You may now disconnect and have a great weekend.