Comtech Telecommunications Corp (CMTL) 2014 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Comtech Telecommunications Corp's second-quarter fiscal 2014 earnings conference call.

At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions).

As a reminder this conference is being recorded Friday, March 7, 2014. I would now like to turn the conference over to Ms. Maria Salerno, Comtech Telecommunications. Please go ahead.

Thank you and good morning. Welcome to the Comtech Telecommunications Corp. conference call for the second quarter of fiscal year 2014. With us on the call this morning are Fred Kornberg, President and Chief Executive Officer of Comtech; Michael Porcelain, Senior Vice President and Chief Financial Officer; and Rob Rouse, Senior Vice President, Strategy and M&A.

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.

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 on this call. As we announced yesterday afternoon, we reported our second-quarter results of $85.5 million in revenues, GAAP diluted EPS of $0.32 and adjusted EBITDA of $15.5 million. Although market conditions still remain difficult, we are very pleased with our second-quarter financial results.

During the quarter we benefited from increased revenues and profits as the result of our ongoing work on certain large over-the-horizon microwave contracts, which were originally expected to occur later in the year. On the other hand, bookings in certain areas have been softer than expected in recent months. All things considered we are maintaining our fiscal 2014 revenue guidance of $325 million to $345 million and we are maintaining our adjusted EBITDA guidance of $55 million to $59 million.

However, as a result of the ongoing repurchase of our common stock that we made during the last quarter, we are increasing our GAAP diluted EPS guidance to a range of $1.14 to $1.26. During the second quarter of fiscal 2014 we repurchased approximately 811,000 shares of our common stock at an aggregate cost of $25.5 million pursuant to our current $100 million stock repurchase program as authorized by our Board of Directors.

From inception to date we have repurchased approximately $406 million of our common stock under our stock repurchase programs. And we currently have approximately $44 million available for additional repurchases pursuant to that authorization.

In light of our long-term growth expectations our Board of Directors also approved a dividend for the third quarter of fiscal 2014 of $0.30 per common share. This dividend, which is our 15th consecutive quarterly dividend, is expected to be paid on May 30, 2014, to stockholders of record on May 7, 2014.

To date and since the inception of our dividend program, we have paid approximately $75.5 million of dividends and continue to believe our dividend program is an excellent way to return capital to our shareholders. Now let me turn it over to Mike Porcelain to provide a brief overview of our second-quarter financial results and then I will return and talk more specifically about each of our three business segments.

Thanks, Fred, and good morning, everyone. I will walk you through the Q2 results and provides some commentary on our updated fiscal 2014 business outlook.

During Q2 we generated revenues of $85.5 million, of which 31.2% were for US government end users, 57.5% were for international end users with the remainder being for domestic commercial end customers. Excluding net sales in our mobile data communication segment, Q2 2014 sales to US government end customers were 25.7%.

Net sales in our telecom transmission segment were $56.5 million in Q2 of fiscal 2014 as compared to the $45.8 million we achieved in Q2 of last year representing an increase of 23.4%. This significant increase was almost entirely driven by higher sales in our over-the-horizon microwave system product line.

First, let me talk more about our Satellite Earth Station product sales which were Q2 of fiscal 2014 were slightly higher than sales in Q2 of last year. Given the number of large contracts we have recently booked, a related backlog at the end of the second quarter was at its highest level in over two years. For example, during Q2 of fiscal 2014 we received a $5.4 million order and signed a purchasing agreement with Harris Corporation against which we anticipate receiving additional orders for the supply of our Advanced VSAT solutions.

Our book-to-bill ratio for the quarter for this product line was slightly over 1. However, recent customer order flows appears to be significantly impacted by volatility in market conditions particularly in emerging markets where many of our customers are located as well as the timing of certain large orders that have not yet come in.

For now we are expecting market conditions to improve and are anticipating that order flow will increase from current levels. Ultimately we expect that net sales on this product line in fiscal 2014 to be slightly higher than the level we achieved in fiscal 2013.

Sales of our over-the-horizon microwave systems in Q2 of fiscal 2014 were significantly higher than sales in Q2 of fiscal 2013 primarily related to performance on both our three-year $58.6 million contract and our four-year $57.4 million contract to design and supply over-the-horizon microwave systems and equipment for use in a North African governments communication network. The timing of performance and revenue recognition for our contracts are generally lumpy and fiscal 2014 will not be any different. Our second quarter of fiscal 2014 looks like it will be the peak quarter of sales in fiscal 2014 and our third quarter of fiscal 2014 will be significantly lower than the second quarter.

Net sales for this product line in the second half of fiscal 2014 are expected to be slightly lower than the first half of fiscal 2014. For the full year we expect that over-the-horizon microwave system sales to be significantly higher as compared to fiscal 2013.

Net sales in our RF microwave amplifier segment were $22 million in Q2 of fiscal 2014 as compared to $20.4 million in Q2 of last year, an increase of 7.8%. We experienced a significant period-over-period and slight sequential quarterly increase in bookings in Q2 and our book-to-bill ratio for the second quarter of fiscal 2014 was slightly below 1.

Based on discussions with our customers we believe that end markets for our RF microwave amplifier products have stabilized and we are optimistic that bookings in the second half of fiscal 2014 will be significantly higher than the first half with the large majority of these bookings expected to ship in fiscal 2015. Although overall market conditions remain difficult based on the current level of our backlog and the timing of orders we expect to receive we expect sales in the segment in fiscal 2014 to be slightly higher than the level we achieved in fiscal 2013.

Turning to our mobile data communications segment, sales in Q2 of fiscal 2014 were $6.9 million as compared to $8.4 million in Q2 of fiscal 2013, a decrease of 17.9%. This anticipated decrease is primarily attributable to a decline in BFT-1 sustainment sales to the US Army. Sales in both periods include $2.5 million of revenue related to our annual $10 million BFT-1 intellectual property license fee.

As Fred will discuss in a bit we are expecting to receive a new BFT-1 sustainment contract by March 31, 2014. Based on our assessment and anticipated timing of performance related to expected BFT-1 sustainment orders, sales of our mobile data communication products in the third quarter of fiscal 2014 will be lower than our most recent quarter.

For the year, and discussed on prior conference calls, we expect mobile data communication segment revenues to be significantly lower in fiscal 2014 as compared to fiscal 2013. Now let me walk you through our gross margin and operating expense line items and provide some operating metrics to give you some perspective on our results.

Our gross profit in Q2 of fiscal 2014 as a percentage of consolidated net sales was 43.7% versus the 43.2% we achieved in Q2 of last year. Our gross profit percentage this quarter reflects changes in overall sales mix when compared to prior periods.

Looking forward, and despite all the various mix changes that are more thoroughly described in our Form 10-Q filed with the SEC yesterday afternoon, we believe gross profit as a percentage of consolidate net sales in fiscal 2014 and except for a slight dip in Q3 will be comparable to the percentage we achieved in fiscal 2013. On the expense side, SG&A expenses were $6.3 million, or 19.1% of Q2 of fiscal 2014 net sales as compared to the $15.4 million, or 20.6% we achieved in Q2 of last year. As a reminder, during Q2 of fiscal 2013 we recorded a benefit of $900,000 associated with a change in the fair value of a contingent earn out liability associated with Stampede Technology and also recorded a benefit of $200,000 related to the reversal of previously accrued costs associated with the wind down of our microsatellite product line.

Excluding these amounts in Q2 of fiscal 2013 SG&A expenses would have been $16.5 million, or 22.1% of sales. The decrease from 22.1% to 19.1% is primarily related to an increase in consolidated net sales in our ongoing efforts to contain costs.

In light of expected consolidated sales growth, SG&A expenses in dollars are expected to be higher in fiscal 2014 as compared to fiscal 2013. SG&A expenses as a percentage of consolidated net sales in fiscal 2014 are expected to be comparable.

Research and development expenses were $8.3 million, or 9.7% of consolidated net sales in Q2 of fiscal 2014 versus $9.3 million, or 12.5% in Q2 of fiscal 2013. We expect that R&D expenses in dollars for the remainder of the year will be lower than the amount we reported during fiscal 2013. As a reminder, both periods do not reflect customer-funded R&D projects which approximated $3.6 million in Q2 of 2014 as compared to $800,000 in Q2 of last year.

The increase in customer-funded R&D projects is largely driven by our ATIP development work for the US Navy. Total stock-based compensation expense, which is recorded in our unallocated segment, was $1.1 million for the second quarter of fiscal 2014 as compared to $800,000 for the second quarter of fiscal 2013. Amortization of intangibles with finite lives was $1.6 million for both second-quarter periods.

Consolidated operating income in Q2 of fiscal 2014 was $11.2 million, or 13.1% of consolidated net sales as compared to $5.9 million, or 7.9% in the second quarter of last year. Based on the level and composition of sales that we expect to achieve in fiscal 2014, we anticipate that operating income as a percentage of consolidated net sales will slightly increase from the 10.8% we achieved in fiscal 2013. Given expected product mix changes and the expected lumpiness of our sales, we expect operating income as a percentage of net sales in Q3 of fiscal 2014 to approximate 8% and reach its peak for the year in Q4.

For the full year we are still targeting to deliver operating income as a percentage of net sales of at least 11%. Interest expense was $2 million for both the second quarter of fiscal 2014 and 2013. Assuming our 3% convertible senior notes are converted, redeemed or repurchased in Mat of 2014, interest expense will decline in Q4 as compared to the first three quarters of fiscal 2013.

Interest income and other was $228,000 in the second quarter of fiscal 2014 compared to $315,000 last Q2, second quarter of last year. Turning to income taxes, our GAAP effective tax rate for the second quarter of fiscal 2014 was 36.4%. Excluding the impact of any discrete tax items or estimated effective tax rate for fiscal 2014, it is expected to be 36.5%.

This rate reflects the expiration of the federal research and experimentation credit on December 31, 2013. Adjusted EBITDA as defined at the end of our press release that we issued yesterday was $15.5 million in Q2 of fiscal 2014. Adding it all up on the bottom line, and as Fred mentioned, we delivered GAAP diluted EPS of $0.32 for the quarter.

At January 31, 2014, our backlog was $168 million compared to $189.7 million at July 31, 2013, and $126.4 million at January 31, 2013. Our balance sheet remains strong. As of January 31, 2014, we had $318 million of cash and cash equivalents.

Cash flows from operating activities during the second quarter of fiscal 2014 were positive and we continue to expect to generate significant positive net cash from operating activities for fiscal 2014. The ultimate amount we generate will largely be dependent on the impact of timing associated with the overall sales effort including our efforts related to our two large over-the-horizon microwave system contracts.

Finally before turning it back to Fred, I just wanted to provide two additional comments relating to our fiscal 2014 EPS guidance. First, given the lumpiness of our expected sales and the timing of anticipated orders, we expect that Q3 consolidated sales will be south of $80 million before increasing significantly in Q4. Second, our guidance does not reflect any additional stock repurchases that we may make pursuant to our share repurchase plan, or any one-time items, and assumes that our 3% convertible senior notes, which have a May 1 put date and a May 5 call date, are redeemed or repurchased for cash in May.

If the 3% convertible senior notes are converted into common stock in May, 2014, our full-year fiscal 2014 GAAP diluted EPS guidance would be reduced by approximately $0.08 to reflect the issuance of additional shares of common stock. Either way, if the bonds convert or are redeemed or repurchased in May 2014, they will save us about $6 million a year in annual interest expense.

Our Board has not made any decisions related to our call rate and if it does, we will make an appropriate announcement. Now let me turn it back to Fred who will discuss our business and outlook in further detail. Fred?

Thanks, Mike. At this point I will discuss some of the growth drivers and recent developments in each of our three business segments, which will add some color regarding our updated outlook for the balance of the year.

As always, let's start with our largest business segment, telecommunications transmission. This segment is comprised of two product lines Satellite Earth Station products and over-the-horizon microwave systems.

We remain the undisputed leader in the Satellite Earth Station area driven primarily by our proven ability to deliver the most bandwidth efficient modems to our end customers. We have maintained our reputation as the innovation leader in this space by introducing groundbreaking technologies that have enabled applications for our end customers that were not considered possible.

Our carrier-in-carrier technology allows our modems to use satellite bandwidth over both transmit and receive links simultaneously thereby potentially doubling bandwidth efficiency. We continue to offer more carrier-in-carrier enabled modems every year. And since this game changing technique was introduced during the economic downturn we believe there is also a pent-up demand for this product offering, which should be realized once the economic conditions improve in a more meaningful way.

We are increasingly excited about our new product lines, one of them which is called Advanced VSAT. These products combine a variety of technologies within our IP portfolio to provide an integrated solution including advanced forward error correction, advanced coding modulation, header and lossless payload compression, and managed bandwidth technology. By listening closely to our end customers we have been able to offer our Advanced VSAT solutions into markets that have traditionally been served by TDMA solutions.

Although we just started our major marketing efforts relating to these products about a year ago, we have begun to see our efforts pay off. In fact, recently we have seen certain TDMA users move away from that technology since many of their ultimate customers are demanding a more dedicated, reliable bandwidth and are willing to tolerate, are unwilling to tolerate the latency issues associated with TDMA.

In fact, just last week we made another announcement which further solidified our relationship with Harris CapRock. We have entered into an agreement which will provide our Advanced VSAT solutions to some of Harris CapRock's energy, maritime and government customers.

We also received the first order against this agreement for about $5.5 million and we are proud of our relationship with Harris CapRock and expect it to grow in lockstep with their end-user demands. Ultimately we expect to receive additional significant orders pursuant to this agreement.

As you know the majority of our commercial Satellite Earth Station product sales are outside of the United States and certain of our international markets have continued to be impacted by microeconomic conditions and in some cases political and civil unrest. Europe has been particularly impacted and in recent months certain emerging markets in Latin America and Asia have also been hit hard by anticipated changes in global central bank policies.

As a result Satellite Earth Station bookings during the past couple of months have been softer than we expected. On the US government side of the Satellite Earth Station product line, procurement of our products practically came to a dead stop in the middle of fiscal 2013. Congress has agreement on an overall federal spending budget and to extend the debt limit should help to facilitate such a return to normalcy in the coming months.

In fact, we are seeing a lot of proposal activity for government terminal upgrades and are awaiting some significant US government related orders which we expect to receive before the end of fiscal 2014. Despite the overall downward pressure on government spending during the past year, we did receive a very significant contract from the US Navy with a potential value of almost $30 million, which we will be developing and then manufacturing, the Advanced Time Division Multiple Access Interface Processor, or otherwise known as ATIP, for the Space and Naval Warfare Systems Command.

This contract is strategically important as it enters us into the protected MIL-SAT comm market. So in the Satellite Earth Station area we have experienced economic, political, regulatory and market specific headwinds for the past year. We have adjusted our operating expense levels accordingly while continuing to invest heavily in R&D.

As a result, we believe that we are nicely positioned to capitalize on market opportunities as conditions further stabilize and eventually improve. Turning to the other component of our telecommunications transmission segment we believe fiscal 2014 will be a banner year for our tropo over-the-horizon business. Anchored by very strong backlog we see a significant increase in revenues over fiscal 2013.

There are also additional large opportunities with our North African customer, which we believe will materialize in the years ahead. Beyond our traditional customer base we are addressing and in some cases already have bid on large opportunities in the Middle East, Asia, South America and Africa. We are increasingly confident that one or more of these opportunities could result in sizable contract awards in our fiscal 2014 and 2015 years.

Our goal is to find the few large long-term customers that can serve as a significant and steady revenue contributors similar to our current North African end customer. On the US government side of the tropo business, bookings have been very soft for the past year or so. However, our tropo system is now undergoing additional network integration evaluation, or as it is called, NIE testing, by the US military, which could significantly increase the potential number of future deployable tropo units by standardizing the DoD on our product portfolio.

On the commercial front, we continue to receive orders from industry-leading oil companies for tropo systems that are used in drilling and exploration platforms. Our optimism about our tropo business in fiscal 2014 and beyond is based on the substantial amount of backlog we have relating to our large end customer as well as significant additional international opportunities that we have bid in the pipeline and two, our government business has nowhere to go but up.

All in all, we remain confident that our telecommunications transmission segment will return to growth in fiscal 2014. Turning now to our RF microwave amplifier segment, here too we expect revenues to be slightly higher in fiscal 2014 as compared to fiscal 2013. However, we are expecting to receive certain large awards before fiscal yearend which should provide solid backlog going into our fiscal 2015.

In our traveling wave tube amplifier product line, or TWT, in December we received our first order relating to WIN-T Increment 2 for about $7 million. We're optimistic that the FAB-T winning bidder will also be announced in the near future. We are the amplifier supplier to both the FAB-T finalists, Boeing and Raytheon.

The WIN-T and FAB-T programs are expected to provide us with multimillion dollar revenue streams for several years to come. On a commercial side of the TWT product line, we see the broadband high throughput satellite market most notably the Ka-band area and then direct-to-home TV market, or DTH, has a very exciting growth opportunities for us.

We have sold our products into most of the large North American and European Ka-band platforms and are now bidding on the next generation platforms with the same customers such as Hughes, with their Jupiter program and ViaSat with ViaSat-2, as well as opportunities with new customers in new geographies. The direct-to-home, or DTH market, is poised for dramatic growth in the next few years as broadcasters are looking to replace aged bandwidth deficient klystron amplifiers in their existing networks with high power, more efficient broadband TWTs to support higher definition and ultrahigh definition program offerings.

In addition, these broadcasters as well as other new broadcasters to the DTH are looking for emerging markets as significant growth drivers in these same services as the services are rolled out to a brand-new group of potential end users. We believe that our product offerings will be uniquely positioned to serve these dynamic market opportunities.

On the solid-state power amplifier side, our SSPA product line, our business has been dramatically impacted by the weak US government spending for IED amplifiers. We have also experienced delays in the receipt of certain international SSPA orders as the result of the end customers being in the areas of the world that are now experiencing volatile political conditions and in some cases unrest. However, we see signs that activity may be heating up again in certain foreign market and we remain optimistic that we will receive some sizable amplifier bookings in the second half of fiscal 2014 although a smaller part of the SSPA business, our commercial product line servings, the aviation and the medical communities have continued to do well.

Much of our projected RF microwave amplifier sales for the remainder of fiscal 2014 are already in backlog and similar to our telecommunications transmission segment, we have a reduced operating expenses while at the same time maintaining our R&D investments. As such we believe we are well positioned to benefit as market conditions improve.

In our third segment, mobile data communications, the largest revenue contributor remains the sustainment work we are performing for the US army under the BFT-1 contract. These activities continue to be funded despite ongoing government spending pressures which is a continuing intangible evidence of the important role our technology plays with the US Army.

We are providing these sustainment services pursuant to a two-year contract which expires at the end of this month. Under this contract we have received a $10 million annual fee for the Army's ongoing use of our intellectual property as well as just north of $10 million of engineering and other support services per year, which are billed on a cost-plus basis.

Although we have not yet received the contract we have been formally now notified by the US Army that it intends to award us a new multiyear contract for BFT sustainment services including the $10 million annual IP that will be effective when our existing contract ends at the end of this month. Our primary goal of the mobile data communications segment at this point continues to be to provide the US Army with outstanding support and doing so should possession us well to participate in any next-generation BFT platform if and when the US Army pursues that path.

With that I would like to proceed to the question-and-answer part of our conference call. Operator?

(Operator Instructions). Joe Nadol, JPMorgan.

So just on the, and Fred thanks for all that commentary at the end on end market demand, but just on the emerging market demand for Earth Stations, is this about currency volatility in particular, or is economic volatility in particular, or is it economic volatility in a particular customers. Is there any, I know it's a whole bunch of different things, but is there anyone underlying condition that is really giving you a bit of a slowdown here?

I think it's a little of all that that you mentioned. I think probably at the top of the list what we seem to see is a funding problem.

As you probably realize, a lot of the Satellite Earth Station funding for Latin America, Africa comes from Europe, and as Europe goes, not only for Europe but for those two areas in particular, things slowed down and that's I think what we are experiencing right now, the kind of a slowdown. I know Europe is going through, going into a stress test mode, hopefully the next few weeks and maybe that will reverse the trend. That's what we're seeing right now.

Okay. It's a change from last quarter, a little bit, and your numbers look, your bookings certainly have been better, so I guess it is a little surprising to hear that.

I think just to add some more color, if you look at our bookings, if you look at the last part of fiscal 2013 and the beginning of fiscal 2014, we saw a very nice booking trend going kind of in the upward direction. And we kind of hit the bump in the road right now and bookings trend reversed itself in the second quarter and it's kind of down.

This is not unusual. It has happened before. We were hoping that this trend would finally continue and some stability would come into this market but it doesn't appear that it is just there yet.

However, we feel that this trend will again reverse in the second half of this year and we are hoping that the bookings will kind of catch up. We have a lot of various large programs in the satellite area that are in the pipeline, some that should've been booked in the second quarter and will hopefully be booked in the second half of the year, and some that may actually float into FY15. So it's difficult to tell on timing.

Okay, just one more detail on that. Could you characterize your average size order?

Are you more dependent on larger orders than you used to be? Has this changed over time just specifically in terms of a commercial emerging market demand for Earth Stations?

As far as Earth Stations are concerned, yes, I think the problem that we are seeing right now is the large orders tend to be moving to the right.

Okay. And then just one more for me, which is taking a look at the balance sheet. Obviously you guys have a couple of important dates coming up over the next couple of months for your convert.

I understand you are not, haven't made any decisions yet and obviously it is not all in your hands because it is in the hands of the convert holders to some degree as well, but can you give us a sense of when you come out the other side of these dates here in May what you think the appropriate capital structure for the Company should look like. Should we be thinking about less for the cast balance than we've been carrying for the last several years, or just give us some sense on what you are thinking.

Yes, a couple of comments, Joe. We have about $44 million or so left of our buyback program, so I think there's really just simply two ways to really look at it is we have, as of January 31 we have a $317 million in cash, so if you assume that the bonds are going to be netted out, $317 million minus the $200 million you are looking at a balance sheet of $117 million in cash.

And when we do have a program of $44 million left to go, how fast we proceed against that, that is something that we will take a look at it. I think if you reversed it and you said the convertibles are going to convert and we will have the cash, I think the $317 million cash number would be in excess of what the Company needs on a day-to-day basis outside of an acquisition need, and we will continue to look at buyback and dividend programs accordingly.

But it is a decision that we'll have to make in the future. We haven't made any decisions yet.

Okay. Thank you.

Tyler Hojo, Sidoti & Company.

Firstly, I just wanted to touch on the OTH MS opportunities, Fred, appreciate the color that you provided there. But maybe you could provide us the little bit of detail in regards to the scope of these opportunities. I guess you are thinking in terms of timing sometime in the back half of this year, maybe 2015.

I think as you have probably seen our systems, our tropo business is kind of lumpy and it comes in big chunks. I think one country that I will mention, I think we expected another $35 million order from our North African customer. Hopefully, that will be in the second half of the year but most likely it will come into FY15.

We have about three or four other countries, which I would rather not name, but where we have opportunities that go anywhere from $10 million for projects that start at $10 million and some go as high as about $200 million. When and where those come in, I think the $10 million ones that are likely to come in in the second half are going to early in the FY15 timeframe.

The $200 million, as you have seen, any of the large contracts from emerging countries take some time. Now, we may be wrong, they happen quicker than we think, but we are kind of saying that that is an FY15 situation.

So the real emphasis that we are having right now and doing right now is to try to have those countries that will start at $10 million eventually turn out to be like our North African customer and lead to $50 million chunks on an annual basis. And so if we can turn another one or two of those countries into those kind of customers, we would be very happy.

Okay, great. Thanks for that.

And then just moving over to ATIP, could you just update us in terms of delivery timing? I think you guys were indicating expected shipments on that program starting late this year. Is that correct?

Yes. I think it is expected that it will be shipped by the end of this fiscal year.

Okay, great. Maybe just lastly for me, just in regards to cash generation, free cash flow has been negative over the last couple of quarters and I guess, Mike, you indicated in your prepared remarks expectations for a big ramp in the back half. Could you just maybe go over some of the puts and takes in terms of achieving that goal?

Sure. Tyler, just to be -- put things in perspective -- in Q4 of last year we did generate significant cash. Our only quarter of negative cash flow was in Q1 of 2014, which is traditionally the quarter that we would have a negative cash flow.

So in Q2 we did generate I think about $1.5 million of significant positive cash flow. So when you look at the six months, call it a breakeven $54,000 worth of cash flow from operations, but we have started to generate cash in Q2 of 2014 and we have a few things on the balance sheet.

We made some large payments to some of our vendors that will kind of run off the end of the year. So we won't have cash use, we will have the expense and you'll start to see the balance sheet turn around and we will generate cash flow I think what I would say the same way I said last year, look at last year's free cash flow from operations and given where we are on guidance, call it plus or minus.

Got it. And actually just one more, Mike, do you have the backlog by segment handy?

Sure. As of Q2 our backlog in our telecom segment was $124.8 million, our backlog in RF was $39.5 million and our backlog in mobile datacom was only $3.7 million.

Perfect. I'll hop back in the queue. Thanks a lot.

Mark Jordan, Noble Financial.

Two questions on the mobile data unit. Number one, you talk about supporting the Army to be around for the next generation. Is BFT-2 dead in your view?

And second question on mobile data is, once we back out of Afghanistan here later this year, will that impact the level of the $10 million-plus services that you are currently on an annualized run rate?

I don't think so, Mark, I think from what we understand from the US Army, they expect to use BFT-1 through we have heard anywhere between 2018 and 2022. So I think we expect to continue it.

Obviously, if they leave Afghanistan a number of units will obviously be put into the warehouse similar to what happened with Iraq. But I think the sustainment services whether it's 100,000 units or whether it's 20,000 units, they need those, they need the bandwidth and they need the sustainment contract to operate.

Specifically one of the large areas where we are very strong and still needed by the US Army is the aviation part of the BFT-1 situation. That area has just not been serviced yet by BFT-2 and it doesn't look like it is going to be serviced by BFT-2 for quite a while, so we are pretty strong in that area.

That's an area that needs some special transceiver work and specifically in the antenna area because you have to cut holes in the helicopters. So I guess too many words here, but I think we are in for a ride for at least another five to almost eight years.

Okay. You mentioned that the US Army is utilizing your tropo equipment for NIE testing. Is there other competitive units out in that NIE process or are you the only vendor?

From what we understand, last year's NIE had a team of General Dynamics and Raytheon trying to compete with us in the NIE testing last year. Since that was not successful what we have heard to date, and that could change tomorrow, but the NIE testing right now on the tropo area is solely on the Comtech equipment.

Okay. Final question for me.

You mentioned that you are expecting significant orders in the latter part of this fiscal year on RF. Could you tell us the applications that these orders would relate to?

As I mentioned two major programs, or actually three major programs, that we are looking at for the second half are the WIN-T, the FAB-T and the Jupiter 2 system. ViaSat-2 kind of rolls into FY15. But I think if you look at the WIN-T, FAB-T and the Jupiter programs alone, I think you are looking at approximately $15 million of bookings, that's just in the second half of the year for Xicom, for instance.

Okay. Thank you very much.

Chris Quilty, Raymond James.

Was hoping you could give a little more color on the Advanced VSAT product line. I know you explained some of the capabilities, but can you talk about where that is positioned relative to other products in the market and does it have any kind of a distinct either price or margin profile relative to your traditional products?

It's a new product. It's really meant, the Advanced VSAT is really meant to kind of get us into the markets that we have not been in similar to what I mentioned in passing there, primarily the TDMA market.

We have traditionally been in the SCPC type of market. The TDMA market is something that we haven't entered into; however, we think we have developed the product that actually solves some of the TDMA problems of, for instance, just latency and other performance parameters that makes that product superior to TDMA in certain applications.

In a very small system basis I think TDMA is still probably the better way to go. But SCPC has been the wideband, broadband, high data rate transmission system, so is the Advanced VSAT.

Got you. And switching gears on the tropo product line. Are you looking at any enhancements or upgrades to the existing systems to try to increase the data rate or in some other way improve the attractiveness of it relative to your more traditional VSAT systems?

You are talking about the tropo business, right?

Correct.

Obviously we have historically had the leading modem design in that area. We started out at 2 megabits, went to 8 megabits, went to 22 megabits right now and obviously I'm not going to give you a number but we are in the laboratory producing some higher numbers.

So when and where we will actually introduce that, I think we haven't decided yet. But, yes, we do have some additional firepower that we can introduce and make these systems even more efficient than they are today.

Okay, great. And final question, you haven't talked about the M&A market and potential there either areas you are looking at or relative opportunities that you are seeing versus a year ago. Can you just bring us a little bit up to speed?

I think we are continuing to look at the M&A market obviously. As you probably know there is not many assets out there at least not in our sphere.

We are continuously doing some M&A acquisitions of product lines. And that is more likely to happen in the second half of the year than some outstanding acquisitions for a large dollar value. On the other hand, if something does pop up and it makes sense for us, we certainly will look at it.

Great. Thank you very much.

(Operator Instructions). It appears we have no further questions. I'd like to turn the conference back over to the speakers for any closing remarks.

Okay, well, thank you very much for joining us today and I guess we will speak again in three months. Thanks again.

This concludes today's conference. You may now disconnect and have a wonderful day.