Comtech Telecommunications Corp (CMTL) 2012 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Comtech Telecommunications Corp's third-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, June 8, 2012.

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

Thank you and good morning. Welcome to the Comtech Telecommunications Corp conference call for the third quarter of fiscal year 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. And good morning, everyone, and thank you for joining us in this call.

During the third 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. As indicated in our press release that we issued yesterday, we are tightening our fiscal 2012 revenue and adjusted EBITDA guidance and increasing our diluted earnings per share guidance. As such, revenue now is expected to be in the range of $420 million to $425 million, adjusted EBITDA is expected to be in the range of $73 million to $76 million, and diluted EPS is expected to range from $1.40 to $1.48.

Because we believe that our stock remains a compelling value, we continue to repurchase shares of our common stock, and during the third quarter we repurchased approximately 1 million shares of our common stock for an aggregate cost of $32.3 million. And so far during the fourth quarter, we repurchased an additional 434,000 shares for an aggregate cost of $13 million. Since the establishment of our original stock buyback program in September, 2010, and through June 6, 2012, we have repurchased a total of approximately 10.8 million shares for approximately $322.7 million. Pursuant to our existing stock repurchase authorization of $250 million, we have approximately $27.6 million left to go. And given our current stock price, we expect to continue being buyers of our stock during the fourth quarter of fiscal 2012.

In light of our business outlook and our expectations of generating solid operating cash flows in fiscal 2012 and beyond, this week our Board of Directors also approved our fourth-quarter dividend of $0.275, which is expected to be paid on August 20, 2012 to stockholders of record on July 20, 2012. To date, we have paid out almost $43 million of dividends over the past seven 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 Porcelain to provide an overview of our third quarter results, after which I will share an overview of our business outlook. Mike?

Sure. Thanks, Fred, and good morning, everyone.

In summary, our Q3 P&L results and related income statement metrics were very similar to our Q2 results. As Fred mentioned, I'll walk you through Q3, and then as I normally do, I will provide some additional commentary on our expectations for the fourth quarter of fiscal 2012. During Q3, we generated $99.8 million of revenues. Of the $99.8 million, 48.6% were for US government end users, 39.7% were for international end users, and the remaining 11.7% were for domestic commercial end users.

Let me provide some color on sales by segment. Net sales in our telecom transmission segment were $48 million in Q3 of fiscal 2012 as compared to $62.4 million in Q3 of last year, representing a decrease of 23.1%. Net sales in this segment reflect significantly lower sales of our Over-the-horizon microwave system product line, and to a lesser extent, lower sales in our Satellite Earth Station product line.

As Fred will discuss in a bit, although overall telecom transmission segment sales did decline, we did experience a year-over-year and quarter-to-quarter increase in related bookings, including the receipt of a number of important bookings. Net sales in our RF Microwave Amplifier segment were $28.1 million as compared to $23.1 million in Q3 of fiscal 2011. The increase of $5 million, or 21.6%, reflects higher sales of both our traveling wave tube amplifiers and solid state high power amplifiers.

Turning to our mobile data communications segment, as expected, sales in Q3 of fiscal 2012 substantially declined and was $23.6 million, as compared to $45.6 million in Q3 of fiscal 2011. This decline is attributable to both a substantial decline in MTS and BFT-1 sales to the US Army, and lower sales related to the design and manufacture of micro satellites. Our gross profit in Q3 of fiscal 2012 was 41.8%, and 43.5% during the comparative period of last year. Given our expectations of higher Satellite Earth Station bookings and the recording of one full quarter's worth of the BFT-1 intellectual property licensing fee, we believe that gross margins, both in dollars and as a percentage of net sales in Q4 of fiscal 2012, will be higher than the gross margins we achieved in Q3 of fiscal 2012.

On the expense side, SG&A expenses were $20 million, or 20% of Q3 fiscal 2012 sales, as compared to $22.6 million, or 17.2%, that we achieved in Q3 of last year, representing a decrease of $2.6 million, or 11.5%. This decrease was primarily driven by lower compensation-related expenses, and lower depreciation expense related to certain mobile data communication segment fixed assets that are now fully depreciated as a result of the July, 2011 expiration of the MTS contract. Based on the expected increased level of sales activity and the timing of certain planned expenditures, SG&A in dollars are expected to increase during the fourth quarter of fiscal 2012, as compared to the third quarter of fiscal 2012.

As we previously stated, we continued to invest in R&D activities at a healthy pace. Research and development expenses were $9.5 million, or 9.5% of net sales, in Q3 of fiscal 2012, as compared to the 7.9% of sales that we spent in Q3 of last year. We expect to continue our investments in R&D. As such, we anticipate that R&D expenses in dollars in the fourth quarter of fiscal 2012 will be slightly higher than the level we invested during the third quarter of fiscal 2012.

Amortization of intangibles with finite lives in the third quarter was $1.6 million, as compared to the $2.2 million comparative period last year. Consolidated operating income in Q3 of fiscal 2012 was $10.6 million, or 10.6% of net sales, as compared to the $21.9 million, or 16.7%, we achieved in the third quarter of last year. The 10.6% operating margin is slightly lower than the amount we achieved in Q2 of fiscal 2012, which was 10.8%.

Looking forward to Q4 of fiscal 2012, it does remain a bit difficult to predict the exact product mix, and because pricing on certain of our BFT-1 orders has not yet been finalized, it is difficult to precisely estimate operating margins as a percentage of related net sales. Nevertheless, based on the orders currently in our backlog and the orders we anticipate receiving and shipping, we believe that our consolidated operating income as a percentage of consolidated net sales for fiscal 2012 in total will approximate 12%.

Total stock based compensation in the third quarter of fiscal 2012, which is recorded in our unallocated segment, was $800,000, as compared to $1.1 million in the third quarter of fiscal 2011. Interest expense in the second quarter of fiscal 2012 was $2.2 million, compared to $2.1 million in Q3 of last year. Interest income and other was $400,000 in the third quarter of fiscal 2012, as compared to $600,000 in the third quarter of fiscal 2011. The decrease is primarily attributable to lower cash balances as a result of the repurchases of our common stock, as well as our dividend payments.

Turning to income taxes. Our GAAP effective tax rate for the third quarter of fiscal 2012 was 30.6%. During the quarter, we did record a small discrete tax benefit of approximately $400,000. For the full year, our expected GAAP effective tax rate, excluding all discrete items, is expected to approximate 35%. This rate reflects the expiration of the federal research and experimentation credit on December 31, 2011. Finally, our diluted GAAP EPS for Q3 of fiscal 2012 was $0.29, compared to the $0.47 we delivered last year.

Now let me share a few financial metrics to help provide additional color on our results. Adjusted EBITDA in Q3 of fiscal 2012 was $15.4 million, as compared to $28.9 million for the third quarter of fiscal 2011. As a reminder, our adjusted EBITDA for the nine months, as well as our fiscal 2012 adjusted EBITDA guidance, is derived from the same definition that we have used in prior periods. As of April 30, 2012, our backlog was $137.4 million. This is our highest level of backlogs as of any quarter in fiscal 2012, and includes the benefit of our new BFT-1 contract. The strong level of backlog was also driven by a book-to-bill ratio of 1.1 for Q3.

Now let me turn to our balance sheet, which remains very strong. As of April 30, 2012, we had $367.6 million of cash and cash equivalents. This cash balance does not reflect the use of $13 million of cash for stock repurchases that have occurred so far in Q4, or payment of our Q3 dividend which was paid in May, 2012, which approximated $5.1 million, and it does not reflect the collection of $10 million of intellectual IP licensing fee from the US Army, which occurred in May. We generated $17.2 million of positive cash flows from operations during the first nine months of fiscal 2012, and expect to continue to generate net cash from operating activities in the fourth quarter of fiscal 2012. At the same time, for the year, we anticipate capital expenditures to be less than $10 million.

Given our expectations that we will continue to generate significant free cash flow in fiscal 2012 and beyond, in June 2012 we did amend our secured revolving credit facility. As disclosed in more detail in our 10-Q that was filed with the SEC, the amended agreement allows us to borrow up to $100 million, has lower fees, provides an option to extend the agreement beyond April 30, 2014, and continues to provide us the flexibility to repurchase additional shares of our common stock. As Fred mentioned, during Q4, we do expect to continue repurchases of our common stock. So as we sit here today, we have approximately $360 million of cash to execute this program as well as our acquisition program.

Now let me turn it back to Fred, who will discuss our business strategies and outlook in further detail. Fred?

Thanks, Mike. I'd like to provide a brief update on each of our core product lines, update you on the BFT-1 contracts we received in late March, and then say a few words about our updated fiscal 2012 guidance.

Starting with our telecommunications transmission segment, which is the backbone of our current business and where we remain the undisputed leader in both the Satellite Earth Station modem and RF products and Over-the-horizon microwave tropo systems. As expected, Satellite Earth Stations product bookings improved in the third quarter of fiscal 2012, compared to the second quarter of fiscal 2012, as well as compared to the third quarter of fiscal 2011. However, also as expected, sales during the third quarter of fiscal 2012 were lower than those same comparable quarters, as backlog was relatively low entering the third quarter.

We continue to be optimistic about long-term growth, as our products are our key enablers in making satellite networks more efficient by addressing severe bandwidth shortages. Specifically, our product advantages provide economic benefits when new cellular networks are being rolled out using satellite for back haul, and we believe ours is the preferred solution to moving voice, video and data back to central switching stations.

As always, we continue to invest heavily in R&D, resulting in new product introductions, such as our advanced VSAT product line, which we introduced earlier this year. During the third quarter, we were rewarded with a $3.5 million order from Harris CapRock for our advanced VSAT products. These products will be used by Harris CapRock's maritime customers, including the Royal Caribbean Cruise Lines. This we believe is a significant order, as it enters us into the large market for maritime communications solutions and positions us to take market share from some of the entrenched players in that market. Our KU-based solution offers maritime customers the total lowest cost of ownership, while at the same time, the increased data throughput satisfies even the most tech-savvy crews and passengers.

On the government side of our satellite business, we received our first US government order for modems using our Carrier-in-Carrier technology. This is important, since it is the first time the US government has purchased this feature, and it allows us to sell our most attractive product feature to the various potential buyers within the US government. We are hopeful that we can displace some of our competitors on the government side of this business by offering this unique industry-leading feature. So from a competitive point of view, we expect to grow our future core business in line with expected market growth, and we believe that we are also well positioned to take market share from our competitors.

However, as we discussed on previous calls, we are experiencing paralysis in the government's decision and procurement process, which does continue to present stiff headwinds in the government side of our market. And although we continue to operate in this very uncertain economic and political environment, we do expect bookings in the fourth quarter to increases from the third quarter levels, based on the overall activity that we see in our pipeline. Last month, we also entered into a settlement relating to various lawsuits involving our Carrier-in-Carrier technology that we licensed from Raytheon, formerly Applied Signal. The settlement allows us to continue to use this important technology in our satellite modems.

Turning to the other component of our telecommunications transmission segment, we remain bullish about our Over-the-horizon microwave systems product line. On the international front, we are focusing on marketing our products to foreign countries that have challenges in communicating over difficult terrain. We are very confident that we will receive a contract award during the fourth quarter of fiscal 2012 in excess of $45 million, relating to a phase three of a major project with a north African country end customer. Although we have been discussing this award with our investors for some time, we now can state that our direct customer, a major US prime contractor, has now received its signed contract and we believe it is a matter of weeks before we receive our subcontract. In addition, the north African country end customer has already asked our prime contractor to bid on the next phase of this project, which could be a booking of approximately $50 million, and which could be awarded within the next 12 months. But history has shown lead times in that area of the world are very difficult to predict.

We've also made headway with various new potential customers in the Middle East, Africa, and Asia. Although we understand that political unrest in certain of these regions may make lead times longer than usual, we are cautiously optimistic about these opportunities as well. In the intermediate to long term, all of these potential customers have a requirement for tropo and are preparing specifications, negotiating with us, or waiting for government approval for their projects.

On the US government front, we recently received a $5.5 million order from a prime contractor using its antennas and our tropo radios to offer the US military a troposcatter system in a transportable, fly-away configuration which is capable of providing seamless compatibility with legacy fielded Over-the-horizon tropo microwave systems. This order brings the total number of systems booked to date to 48. We've also received funding from this customer for long lead items for an additional 20 systems. We also believe that 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 our upgraded track 170s, have been fielded by the US world wide 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 and government funding frees up.

Moving on to 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 extensively 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 KA band systems. On the defense side, our TWTA products are used to support high capacity US military satellite communication systems, such as WGS, WIN-T and the Milstar systems.

One potentially large US government opportunity for our TWTA products in fiscal 2014 and beyond is the Fab-T program. The Fab-T is the Air Force's key strategic terminal for manned aircraft and we have a sole source position on that program. We have worked with Boeing on this program for many years and have delivered development units to them. And during the past year, the Air Force has also decided to develop a second source to Boeing, and Raytheon appears to have emerged as the only other viable alternative. The good news is that Raytheon has also chosen Comtech as its amplifier provider.

On the solid state side, in addition to commercial applications, such as aviation, medical and instrumentation testing, 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 SSPA sales have come from our participation in counter-IED programs. We're currently working on a number of government development contracts in support of the next generation of counter-IED programs, most notably CREW 3.3. However, based on recent discussions with our customer, it appears that orders relating to CREW 3.3 may slip further to the right than we were anticipating, probably as late as into the late area of fiscal 2013. We believe that we're navigating through this difficult economic environment more effectively than most of our competitors, and expect to grow both our RF Microwave Amplifier bookings and revenues in fiscal 2012.

In our mobile data communications segment, as I've discussed on all our calls during the past year or so, revenues in fiscal 2012 relating to BFT-1 and MTS 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 nine months of the year. On a positive note, some of the short-term uncertainty has been resolved, in connection with the sustainment and air time contracts that we received in the third quarter. We are currently providing both MTS and BFT-1 sustainment services pursuant to a three-year IDIQ contract that we were awarded in late March. This contract has a not to exceed value of $80.7 million, and a base performance period that began on April 1, 2012, and ends on March 31, 2013. The contract provides for two 12-month option periods and, except for a fixed annual IP intellectual property license fee of $10 million, the undefinitized contract value is subject to finalization. Payment of the $10 million annual IP license fee beyond the base year is contingent upon the US Army's exercising the optional performance periods.

In order to operate the BFT-1 and the MTS networks, the US Army must provide satellite bandwidth, and we are currently supplying satellite bandwidth through June 30, 2012, pursuant to a three-month contract awarded to us in March 2012. Funding for this contract, which has yet to be definitized, was initially set at $18 million; however, we expect this to be definitized lower by a couple of million dollars, due to some cost savings we were able to pass on to the customer. We now understand that the US Army intends to procure satellite bandwidth through the Defense Information Systems Agency, DISA, effective July 2012. As such, additional bookings for satellite bandwidth are not likely.

The rest of this segment, which is primarily comprised of our micro satellite product line, continues to be impacted by US government budget pressures. In fact, revenues relating to our JMAPS program have been declining, and will cease during the fourth quarter. The program has now lost its funding, and as a result of extreme government pressure to reduce spending on programs and technologies that are not currently fielded or in use. We have been actively working with the customer and other prospective customers to obtain additional funding to complete the space graft bus and generate new orders. Although we have tentatively identified a new customer, it is unlikely that we will receive funding before the beginning of the next government fiscal year, or sometime after October 2012.

In the longer term, we still believe that 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. But this will only happen once some normalcy is established in the government's procurement strategies. As such, we are repositioning the micro satellite business to withstand the uncertainty expected in the near term and continue to take cost reductions to align our staffing and expenses with expected future business activities.

Before going to the Q&A portion of the call, let me provide some additional comments on our updated fiscal 2012 guidance. Despite entering the fourth quarter with the highest level of backlog that we've had all year long, market conditions remain challenging and it remains difficult to predict the timing of additional orders. Thus, after considering all of these factors, we believe that it was appropriate to tighten our consolidated revenue and earnings guidance and increase our diluted earnings per share. And finally, it is important to note that our EPS guidance does not reflect the impact of any stock repurchases we make subsequent to this call, the impact of any potential acquisitions we make during this fiscal year, or any one-time restructuring items or other unusual cost items that may occur in this fourth quarter. 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) We'll go first to Rich Valera out of Needham and Company. Please go ahead.

Thanks. Good morning, gentlemen. First, Mike, I was wondering if you could give us the backlog by segment.

Sure. We finished backlog in total with $137.4 million, as I mentioned, of which $39.3 million is in our Telecom segment, $47.8 million is in our Mobile Data Communications segment, and $50.3 million is in our RF Amplifier segment.

Great. That's helpful. And then with respect to the MTS, BFT segment, was trying to think about how we should model that next year. You've got the $81 million contract which gives you a baseline, including, I guess, the $10 million of license fee. What should we think about in addition to that for next year? Is there any help at all you can give us in terms of how to think about that business?

I think all we can say at this point is that it's a three year IDIQ, and being IDIQ means that we have funding for the base year, which is the year between April 1 and March 31 of 2013. Do we expect that the US Army will pick up that option for 2013? I'd say yes, we do. I'd say the program is very important, and we obviously got a three year contract, so the Army does expect to pick it up. But there are no assurances that they will do that.

Sure. How about how much of your backlog in mobile data do you expect will carry into next year and ship, which might be incremental to what you'd get from that contract?

Well, you know, a couple of comments, Rich, is that our backlog would likely, given the run-off of the satellite earth, the satellite bandwidth that will expire on July 1. That will kind of tail off and we're not expecting any additional satellite bandwidth orders. At the same time, in our backlog is a portion of the $10 million intellectual property fee which will also run off, as we kind of recognize that. And then we also have some hardware shipments that will ship out actually in Q4, some of it will also occur in Q1. So I would expect the backlog in that segment to significantly decline over the next few quarters until we would get the next option renewal, which would be likely occur, I guess it would be sometime in April, which would line up with the end of this base year contract. So I think we have a little bit of cloudiness and lack of visibility as to the finalization of the pricing and the margin, so it's difficult for us to give you anything, other than what Fred and I just said, in terms of how to look at it next year. We need to figure out what the pricing's going to be and see ultimately what these orders come in at.

Fair enough.

Just to add to that, Rich. You recall that the Army went out on a bid with -- DISA actually went out on a bid for satellite time a number of months ago, and it was expected that DISA would have the contract already in place for long-term satellite bandwidth availability. As it happened, that contract was disputed and terminated, and we were one of the subcontract bidders on that program. DISA is now in process of doing it again, and we expect to be a subcontract bidder. No assurances that we'll be the successful bidder and our partner will be successful, but it is something that we will be involved in. But we just can't tell what exactly will happen.

Got you. And then the BFT-1 audit, I saw that brought up again in your Q. Anything to talk about there? I mean, expectations for when that might be resolved?

They did inform us that they pretty much completed their audit and that they were likely to issue some type of audit report, as we disclosed on our SEC filing, sometime in September of 2012.

Okay. And the OTH order you referenced, the $45 million order, sounds like you're pretty close to getting that. Can you give us a sense of your expected delivery timeframe for that?

I think the way it stands right now, Rich, the order is actually a little bit higher than $45 million, but it's -- I would expect the deliveries to be over the -- over a three-year span, with major deliveries really starting in '13.

Got you. And then I know it's early and you're not giving guidance for the out year at this point, but looking at the MTS -- I'm sorry, the Telecom Transmission and RF segments, sounds like telecom transmission, you'll certainly have the incremental contribution from over-the-horizon, which should have a nicely up year. So should we think about that segment as probably growing next year, perhaps solidly? And then RF amplifiers, you've had some bookings momentum there, so wondering if, again, we should think about that as probably growing next year, if there's any color you could add there?

Yes, I think, Rich, at a very high level, that is a fair way to look at it, that we'll have growth in our Telecom segment. As we talked about, Mobile Data Com, we would expect that revenue to be significantly down versus 2012. And then in our RF, as Fred mentioned in the call, CREW has -- CREW 3.3 has sort of shifted to the right a bit, so it's difficult to say whether that will be an up year in that segment or not. But certainly, we'll give some more guidance as we get closer to our fiscal 2013 guidance, which we'll do in September.

Okay. That's very helpful. Thanks, gentlemen.

We'll go next to the site of Tim Quillin with Stephens, Inc. Please go ahead.

Good morning.

Good morning.

With regards to the Mobile Data segment, so you have the $10 million licensing fee, and the first part of the services contract is the $7 million, and I think you had a potential $8.6 million upon finalization. What does that $8.6 million consist of, and how likely is it that you receive that?

The piece of the order that has not yet been funded, that order is a cost plus job, so really as we're trying to work through and finalize our cost including the repositioning in the new cost structure that we have in our Mobile Data Com segment, we've obviously put some pricing into the US government for what we hope to. The contract is written in such a way that we could potentially get all of that increased funding, but right now that's not in our backlog. And until we're able to finalize our agreement with the US government, we're not recognizing revenue on that. So we have to kind of just really nail down our costs, have the government agree to our overhead rates and so forth going forward; and once we do that, our hope is that we could certainly recognize a piece of that as revenue, if not the entire amount. But at this point, we just don't know.

Right. And then so we have some certainty around the run rate on that $17 million. How about in the micro satellite business, how big of a revenue contributor was JMAPS to trailing revenue, and what would be kind of a good baseline for additional revenue, if there is any, on top of the $17 million?

We've previously announced that contract and disclosed it was a 45-some odd million dollar contract. I don't remember the precise number in our 10-Q. That revenue was really over a two-year period. So we're really talking about that much of revenue contribution leaving the micro satellite product line. Obviously, we have some small jobs and various miscellaneous contracts, and so forth like that. But it would be significantly down unless we get a new large contract. And at this point, given the procurement issues and the government budget pressures, as Fred mentioned, we're in the process of really repositioning our staffing and our business expense level to align with pretty low amounts of revenue.

Right. And will Mobile Data continue to be a reportable segment if it gets down in that $20 million revenue level, or $25 million?

Yes, it will.

Okay. And what -- so how do you think about operating costs as you look at fiscal '13, with what looks like it will be an $80 million-plus drop-off in revenue. Are you already making the plans to take out additional operating costs?

Yes. Yes. As I mentioned, we are looking at certainly the micro satellite area and actually have instituted some layoffs.

Okay. And do you have a target margin that you would cut costs to achieve for the overall company in fiscal '13?

Tim, just one quick comment. I'm not really sure where you're getting an $80 million drop-off in revenue. But let me just answer your second part of the question here. In terms of our operating margin, I guess our expectation is assuming the intellectual property fee license is renewed at the end of the contract and assuming the MTS, BFT-1 sustainment contract is picked up for year two, given our expectations over the horizon, we're hopeful that we're going to be able to deliver operating margins higher than the 12% than we're expecting to deliver in 2012, for the year in total and for the Company. So I think we're hopeful that we could see continued improvements in our operating margin level.

Okay. Okay. Thank you.

We'll go next to the site of Mark Jordan with Noble Financial. Please go ahead.

Yes. Good morning, gentlemen. Michael, a question relative to adjusted EBITDA in the fourth quarter. Are there any extraordinary kind of, or changes in the depreciation and amortization run rate or the stock comp run rate in the fourth quarter from the third, or is there anything else that's additive there?

Since the last time, in terms of our kind of guidance and the way we were thinking about depreciation expense, I think given the lower levels of capital expenditures that we've done so far in the nine months, we've taken our capital expenditures down from, I guess it was around $10 million to $12 million or so. We expect to finish the year lower than $10 million. And so we really lowered our depreciation expense estimates for the fourth quarter, and that is reflected in our EPS numbers. So when you look at EBITDA, nothing's really changed on the EBITDA level.

Okay. And stock comp?

Stock comp, same thing. No expected changes.

Okay. Have you seen any emergence of BFT-2 in the field, or do you know if it's being, at the NIEs, is it being utilized or -- so is there a sense of any timing of when the next generation will be available more broadly?

I guess, as you can expect, we're probably kind of shut out of some of the information. But what we can say that we know right now, that it is approximately two years later. The qualification tests have not been completed and no fielding has been occurring.

Okay. Relative to the IPT, is there any expenses that go against that? And I guess that would be the first question, is there any capitalized expenses or anything that will be charged against the $2.5 million per quarter that you're going to be realizing?

No.

And then I guess secondly, one would assume that you would be structuring your service revenues relative to the mobile -- BFT-1 as being profitable on a stand alone basis.

Yes.

Excluding the gain of -- excluding the IP payments, stand alone.

The answer is yes, Mark. I think you have to understand that the $87 million IDIQ contract is for services, and it has an option for some hardware as well. But the numbers for the first phase that we have funding for are strictly for the service part.

Okay. All right. Thank you very much.

(Operator Instructions) We'll go next to Chris Quilty with Raymond James. Please go ahead.

Good morning, gentlemen. It looks like this was the first time in almost pushing two years that your telecom book-to-bill was over 1.0, so a positive trend there. Two questions related to that. One, can you give us a sense of where the order strength was in the quarter of over-the-horizon versus the earth station modem business? And more specifically in the earth station business, what end markets seem to be driving the order growth?

It really was in our Satellite Earth Station product line. Despite the budget pressures that we're seeing in the US government, we actually had a pretty good quarter of US government bookings. As Fred mentioned, we did get that first order that had Carrier-in-Carrier in there for the US government. So we've actually seen -- and we expect that, based on our pipeline, to continue into Q4. It was really on the US government side, our Satellite Earth Station business, that picked up pretty good.

And on the commercial side, was the Harris CapRock order reflected in the orders in book-to-bill for the quarter, or was that post quarter?

That was within the quarter.

Okay. And regarding the intellectual property, you mentioned that you have retained the right to use the technology, but can you broaden the outcome of that litigation to let us know are there any increased license fees that you or other potential users of the technology might bear, or what was the general outcome of the litigation?

I guess, by the terms of the settlement agreement, we're actually limited in what we can say about it publicly. However, there were no real changes in any of the terms of our licensing, and I guess we can say we remain very comfortable with our market position today and don't see this settlement significantly changing that.

Okay. Switching gears. In the RF business, obviously very strong margins. Is it fair to assume you've overcome all the development program cost overruns or are there still some of those running through the P&L?

We're definitely passed through the development issues that we had in the last year or so. The 9% operating margin we did in Q3, some of that, I would say, is product mix. I don't expect that to happen again in Q4, but we are moving towards that 10% operating margin, dependent upon the revenue that we get. We really need to see what the order flow looks like, certainly beyond Q4, for us to give you a snapshot of what that margin profile is going to look like next year. But I would say 8% to 9%, really for the next quarter, and we'll see what 2013 looks like in September.

Okay. And you've historically seen a positive contribution from CREW program work. Was there any contribution in this quarter, or is there expected in the next couple of quarters?

There was some on the earlier program, not the 3.3, and there will be some in Q4.

But no substantial change in the mix?

That's correct.

Perfect. Okay. Thank you, gentlemen.

Thanks.

And we'll go last to the site of Tyler Hojo with Sidoti and Company. Please go ahead.

Hello. Good morning. Just going back to the JCREW 3.3 question, I totally get that RF growth is contingent on that. I was just kind of wondering, how far out has it slid? When were you originally anticipating seeing some shipments from that program?

I think, as I mentioned during the last call, Hojo, we were expecting some orders in 2013. We now understand that those will probably slip out, could be late 2013 or early 2014.

Okay.

It's a five-year program from then on.

So maybe a quarter is all that you're thinking it slipped at this point?

Yes.

Okay. Great. And then I just wanted to go back, certainly encouraging, the order in terms of the marine market. Could you maybe update us in terms of what you kind of think the market potential is there, and perhaps if you think there's some additional orders over the near term to hit?

I think at this point we're really not in a position to quantify the market with any intelligence. We do think there are some additional orders that will be coming for our VSAT product line in that area. As you know, the amount of data requirements aboard cruise ships is literally increasing exponentially. And the Royal Caribbean is actually switching from TDMA solutions in this market -- TDMA has historically been the area that's been used for maritime communications, but TDMA has a lot of overhead, which reduces the amount of actual cost and actual user content that can be transmitted. So we're pretty bullish that our solution, our VSAT solution, is going to take some market share there.

Okay. Thanks a lot.

Okay.

There are no further questions at this time. I would like to turn the program back over to our presenters for any final remarks.

Okay. Thanks again for joining us today and we look forward to speaking with you again in September. Thank you very much.

This does conclude today's teleconference. You may now disconnect and have a wonderful day.