Comtech Telecommunications Corp (CMTL) 2014 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Comtech Telecommunications Corp's third-quarter fiscal 2014 earnings conference call. At this time all participants in a listen-only mode. (Operator Instructions). As a reminder this conference is being recorded, Friday June 6, 2014.

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 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, and the plans, objectives and business outlook of the Company's management. The Company's assumption regarding such performance business 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?

Thank you, Maria. Good morning everyone and thank you for joining us on this call.

As announced yesterday afternoon, we reported our third-quarter results of $88.9 million in revenues, GAAP diluted EPS of $0.32, and adjusted EBITDA of $14.8 million. We are extremely pleased with our third-quarter financial results.

Our third-quarter financial results were solid and bookings during the third quarter were at the highest level all year. Our third-quarter results benefited from increased revenue and profits as a result of our performance on certain large over-the-horizon microwave contracts, some of which we originally expected to be recognized during our fourth quarter.

Based on our year-to-date results and our anticipated fourth-quarter performance, we are increasing our fiscal 2014 revenue guidance to a new range of $342 million to $346 million. We are also increasing our EBITDA guidance to a new range of $58 million to $60 million. And as a result of better-than-expected fiscal year 2014 performance, we are also increasing our GAAP diluted EPS guidance to be in a range of $1.25 to $1.30.

The increase in the EPS guidance is net of $0.02 of dilution related to the impact of the conversion of approximately $50 million of our 3% convertible notes. The remaining $150 million of notes are paid off in full on May 5, 2014. As such, we are now debt-free and our annual interest expense for 2015 will be reduced by $6 million.

During the third quarter of fiscal 2014, we also repurchased approximately 915 shares of our common stock at an aggregate cost of $29 million, pursuant to our current $100 million stock repurchase program as authorized by a Board of Directors. From the inception to date, we have repurchased approximately $436 million of our common stock under our stock repurchase programs and we currently have approximately $14.3 million available for additional repurchases pursuant to our current authorizations.

In light of our long-term expectations our Board of Directors also this week approved the dividend for the fourth quarter of fiscal 2014 of $0.30 per common share. This dividend which is our 16th quarterly dividend is expected to be paid on August 14, 2014 to stockholders of record on July 18, 2014. To date and since the inception of our dividend program, we have paid out approximately $80.3 million of dividends and continue to believe our dividend program is an excellent way to return capital to our stockholders.

Now let me turn it over to Mike Porcelain to provide an overview of our third-quarter financial results and then I will return and talk more specifically about each of our three business segments. Mike?

Thanks, Fred, and good morning everyone. I will walk you through the Q3 results and provide some commentary on our updated fiscal 2014 business outlook.

During Q3, we generated revenues of $88.9 million of which 27.4% were for US government end users, 62.3% were for international end users with the remaining being for domestic commercial end customers. Excluding net sales on our mobile data communication segment, Q3 2014 sales to US government customers were 23.2%.

Net sales on our telecom transmission segment were $61.2 million in Q3 of fiscal 2014 as compared to the $45.4 million we achieved in Q3 of last year representing an increase of 34.8%. This significant increase was driven by higher sales in our over-the-horizon microwave system product line partially offset by lower net sales in our Satellite Earth Station product line.

Let me talk first about our Satellite Earth Station product sales which for Q3 of fiscal 2014 were lower than sales in Q3 of last year. As discussed on our last conference call, order flow for this product line was impacted by volatility in market conditions where many of our customers are located. We were pleased that during the third quarter and through today, we have recently booked a number of large contracts. In fact backlog for this product line at April 30, 2014 was at its highest level in over two years. We expect that bookings for our Satellite Earth Station products in the fourth quarter will be strong and that fourth-quarter sales for this product line will be at a peak level for the year.

Given expected order flow, we expect that net sales for this product line in fiscal 2014 will be slightly higher than the level we achieved in fiscal 2013.

Sales of our over-the-horizon microwave systems in Q3 of fiscal 2014 were significantly higher than sales and Q3 of last year primarily related to our ongoing 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 government's communications network. Some of the Q3 revenues related to these contracts as Fred mentioned were previously expected to occur during the fourth quarter of fiscal 2014.

The timing of performance and revenue recognition on our over-the-horizon contracts are generally lumpy and as result of the significant timing change, sales during the fourth quarter of fiscal 2014 for this product line are expected to be significantly lower than the third quarter. Despite this quarterly fluctuation and change from our last conference call, we still expect overall net sales for our over-the-horizon microwave systems product line to be significantly higher as compared to fiscal 2013.

Net sales in our RF microwave amplifier segment were $22.5 million in Q3 of fiscal 2014 as compared to $16.2 million in Q3 of fiscal 2013, an increase of 38.9%. Bookings for our RF microwave amplifier products during Q3 were at the highest quarterly level in over two years. A large majority of these bookings are expected to ship in fiscal 2015.

We are optimistic that bookings in the fourth quarter of fiscal 2014 will be similar to our most recent quarter with a large majority of these anticipated bookings also expected to ship in fiscal 2015. Based on orders currently in our backlog, our year-to-date performance and the timing of certain orders we still expect to receive and ship, we still expect net sales on this 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 Q3 of fiscal 2014 were $5.2 million as compared to $8.3 million in Q3 of fiscal 2013, a decrease of 37.3%. This anticipated decrease is primarily attributable to lower funding and the timing of work performed related to BFT-1 sustainment services. Sales in both periods include $2.5 million of revenue related to our annual $10 million BFT-1 intellectual property license fee.

As discussed in our 10-Q filed yesterday with the SEC effective April 1, 2014, we were awarded two new three-year contracts aggregating $68.2 million to continue to provide BFT-1 sustainment support for the U.S. Army including the licensing of certain of our intellectual property. The first contract consisted of a new three-year BFT-1 sustainment contract which has a not to exceed value of $38.2 million and the second contract is in the form of a BFT-1 intellectual property license agreement with a potential value of $30 million.

In accordance with our policy when we receive funding against these contracts we will add them to our backlog. In this regard, we received initial funded orders during the quarter ended April 30, 2014 against these contracts of $12.5 million in aggregate including the $10 million IP license fee for the base year which ends March 31, 2015. We expect to receive incremental funding for the base year and beyond and in fact, subsequent to the end of our third quarter, we received an additional $5 million in funded orders for a total of $17.5 million of funding under these contracts so far.

For the year, and as discussed on prior conference calls, we expect mobile data communications segment sales to be significantly lower in fiscal 2014 as compared to fiscal 2013.

Now let me walk you through our gross margin and operating expenses line items and provide some operating metrics to give you some perspective on our results.

Our gross profit in Q3 of fiscal 2014 as a percentage of consolidated net sales was 43.1% versus the 44.9% we achieved in Q3 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 mixed changes that are more thoroughly described in our Form 10-Q filed with the SEC, we believe that our fiscal 2014 consolidated gross profit in dollars will be higher than the level we achieved in fiscal 2013 and as a percentage will be comparable to what we achieved in fiscal 2013.

On the expense side, SG&A expenses were $17.3 million or 19.5% of Q3 fiscal 2014 net sales as compared to $15.4 million or 22% we achieved in Q3 of last year. The increase in SG&A expense in dollars is primarily related to additional sales and marketing efforts to support future anticipated growth.

In light of expect a 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 our consolidated net sales is expected to be comparable to last year. As a reminder though, last year's SG&A expenses were reduced significantly due to the reversal of a liability as a result of a change in the fair value of a contingent earnout associated with our acquisition of Stampede. After considering such, our SG&A expenses as a percentage of expected sales for fiscal 2014 on an apples-to-apples basis would be lower when compared to fiscal 2013.

R&D expenses were $8.9 million or 10% of consolidated net sales in Q3 of fiscal 2014 versus $9.1 million or 13% in Q3 of fiscal 2013. The decrease in research and development expenses as a percentage of consolidated net sales is attributable to both lower internal spending and increased net sales. As a reminder, both periods do not reflect customer funded R&D work which approximated $3 million in Q3 2014 as compared to $1 million in Q3 2013.

The increase in customer funded R&D work that we are performing is largely driven by our ATIP development work for the U.S. Navy. We expect that Company-funded R&D expenses in both dollars and as a percentage of expected net sales in fiscal 2014 will be lower than the amount we reported during fiscal 2013.

Total stock-based compensation expense which is recorded in our unallocated segment was $1.1 million for the third quarter of fiscal 2014 as compared to $700,000 for the third quarter of last year. Amortization of intangibles with finite lives was $1.6 million for both quarters in 2014 and 2013.

Consolidated operating income in Q3 of fiscal 2014 was $10.6 million or 11.9% of consolidated net sales as compared to $5.4 million or 7.7% in the third quarter of last year. This significant increase in operating income both in dollars and as a percentage of consolidated net sales is primarily attributable to the higher level of consolidated net sales we achieved period over period. Based on the level and composition of sales that we are expecting to achieve in fiscal 2014, we are now targeting operating income as a percentage to approximate 12% in fiscal 2014.

Interest expense was $2 million for both the third quarter of fiscal 2014 and 2013. As Fred mentioned, and as more fully described in our 10-Q as of May 5, 2014, none of our 3% convertible senior notes remain outstanding. As such we expect interest expense for the fourth quarter of fiscal 2014 to be significantly lower than our most recent quarter.

Interest income in other was $256,000 in the third quarter of fiscal 2014 compared to $287,000 in the third quarter of fiscal 2013.

Turning to income taxes, our GAAP effective tax rate for the third quarter of fiscal 2014 was 33.5%. Excluding the impact of discrete tax items, our estimated effective tax rate for fiscal 2014 is expected to approximate 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 was $14.8 million in Q3 of fiscal 2014. Adding it all up on the bottom line, as Fred mentioned, we delivered GAAP diluted EPS of $0.32 for the quarter.

At April 30, 2014, our backlog was $160.7 million compared to $189.7 million at July 31, 2013 and $130 million at April 30, 2013. Approximately 22.5% of our backlog at April 13, 2014 consisted of orders for US government end customers.

Our balance sheet remains strong. Although we had $295 million of cash and cash equivalents and $191.5 million of our 3% notes outstanding as of April 30, 2014, there were certain subsequent events that significant changed this amount. As we have discussed already, as of May 5, 2014, none of our 3% convertible senior notes remain outstanding. We utilized approximately $150 million of our cash to redeem and repurchase them and approximately $50 million were converted into 1.5 million shares of common stock. We also repurchased 12 million of our common stock since April 30, 2014 and we also paid a dividend of $4.9 million to our shareholders.

After accounting solely for these items, cash and cash equivalents approximates $128 million and we are now debt-free. This cash amount does not include the benefit of significant positive cash flows from operating activities that we expect to occur during the fourth quarter of fiscal 2014. The ultimate amount of cash we generate during the fourth quarter will largely be dependent on the impact of timing associated with our overall sales efforts including our efforts related to our large contracts. In this regard, although we are expecting significant positive cash flows in Q4, the $15 million of unbilled receivables at April 30, 2014 related to our North African end customer are expected to be billed to our large domestic prime contractor during the fourth quarter and largely collected in fiscal 2015.

Finally, before turning it back to Fred, I just want to provide you an update on our DCAA matter which has been outstanding for some time. During the quarter, the U.S. Army contracting office responsible for the original BFT contract agreed with our conclusion that the pricing on the contract was not defective. As such, and as more thoroughly described in our Form 10-Q, we currently consider this matter closed.

Also just a reminder that our fiscal 2014 EPS guidance provided yesterday does not reflect any stock -- additional stock repurchases that we may make pursuant to our share repurchase plan or any one-time items.

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

Thanks Mike. Now let me discuss some of the growth drivers and recent developments in each of our three business segments which will provide some color regarding our updated outlook for the balance of the fiscal 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 at one time were not considered possible.

Our Carrier-in-Carrier technology allows our modems to use the same satellite bandwidth over both the transmit and receive links simultaneously. Thereby potentially doubling the bandwidth efficiency. We continue to offer more Carrier-in-Carrier enabled modems every year. We believe there continues to be a pent-up demand for this product offering which should be realized once economic conditions improve in a more sustained and meaningful way.

We are increasingly more excited about our new line of products 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, RAN and WAN optimization and our 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 a little more than a year ago, we have already begun to see our efforts pay off. Recently we have seen certain TDMA users move away from that technology since many of our ultimate customers are demanding more dedicated, reliable bandwidth and are unwilling to tolerate the latency issues associated with TDMA.

A few months ago 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 key energy, maritime and government customers. We also received the first order against this agreement for $5.4 million in our second quarter. We are proud of our relationship with Harris CapRock and expect it to grow in lockstep with their end-user demands for more bandwidth and higher service level performance. Ultimately we expect to receive additional significant orders pursuant to this agreement.

The majority of our commercial Satellite Earth Station product sales are outside of the United States and as you know, certain international markets have been impacted by macroeconomic conditions and in some cases, political and civil unrest. During our conference call in early March, I mentioned that at the time Satellite Earth Station bookings were softer than expected. I am pleased to say that such a trend has reversed itself since then and bookings since then have been much stronger.

On the US government side of the Satellite Earth Station product line, a return to normalcy in the US government communications equipment procurement process should also serve as an additional catalyst for growth. Agreement on overall Federal spending levels from September 30, 2015 should help facilitate such a return to normalcy. In fact, we are already seeing a lot of proposal activity for government terminal upgrades and are awaiting some significant US government related orders.

Despite the overall downward pressure on government spending during the past year or so, we did receive a very significant contract from the U.S. Navy with a potential value of $29 million. We are developing and will be manufacturing the Advanced Time Division Multiple Access Interface Processor, or ATIP, for the Space and Naval Warfare Systems Command. We expect additional sizable orders for ATIP in fiscal 2015. This contract is strategically important as it enters us into a new protected MIL-SATCOM market.

So in the Satellite Earth Station area, we believe we have weathered economic, political, regulatory and market specific headwinds for the past few years. 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 improve.

Turning to the other component of our telecommunications transmission segment, we believe fiscal 2014 will be a banner revenue year for our tropo business. Anchored by very strong backlog primarily relating to the more than $100 million in orders we have received during the past two years from programs with our North African end customer, we see a significant increase in revenues. Our sales for fiscal 2014 third quarter include a significant amount of quarterly tropo revenues as we continue to perform on these two large programs.

There are also additional large opportunities with this end customer which we believe will materialize in the years ahead.

Beyond our traditional customer base, we are addressing and in some cases have already bid on large opportunities in the Middle East, Asia, South America and Africa. We are increasingly confident that some of these opportunities could result in substantial contract awards in fiscal 2015. Our goal obviously is to find a few large long-term customers that can serve as significant and steady revenue contributors similar to our current North African end customer.

On the US government side of the tropo area, bookings have been very soft for the past year or so. However, our tropo system is undergoing additional network integration evaluation as they call it, or NIE testing by the US military which could significantly increase the potential number of deployable tropo units by standardizing the DOD in our product portfolio.

As a result, we expect significant US government tropo orders in fiscal 2015.

On a commercial front, we continue to receive orders from industry-leading oil companies for tropo systems that are used on drilling and exploration platforms. Our optimism about the tropo business is based on the significant amount of backlog we have relating to our large end customer, the significant additional international opportunities in the pipeline, the successful completion of the NIE testing being a catalyst for additional US government buying and our US government business having nowhere to go but up. All in all, we remain confident that our telecommunication transmission segment will return to growth in fiscal 2014 and beyond.

Turning to our RF microwave amplifier segment, we expect revenues to be slightly higher in fiscal 2014 as compared to fiscal 2013. Although fiscal 2014 is not shaping up to be a banner revenue year, we have recently received certain important orders and are expecting to receive additional large awards which should provide solid backlog going into our fiscal 2015.

In our traveling wave tube amplifier or TWTA product line, we received our first order relating to WIN-T Increment 2 for $7 million. We also expect to receive an order for the FAB-T program in the near future since we are on the winning bidder's [team]. On the commercial side of the TWTA product line, we see the broadband high throughput satellite market most notably the Ka-band area and the direct-to-home TV market is 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 bidding on the next generation platforms with the same customers as well as new 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 TWTAs to support high-definition and ultra high definition programming offerings.

In addition, these broadcasters as well as other new entrants to the DTH market are looking to emerging markets as significant growth drivers as these same 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, or SSPA product line, our business has been dramatically impacted by the weak US government spending environment. Throughout the year, we have also experienced delays in the receipt of certain international SSPA orders as a result of the end customer's being in areas of the world that are experiencing volatile political conditions and in some cases unrest.

However, we are seeing signs that activity is heating up again in certain of our foreign markets. For example during the third quarter, we received $3.7 million in orders from an international OEM for communications jamming amplifiers and we expect to receive even more in orders from the same OEM during the fourth quarter.

Although a small part of the SSPA business, our commercial product line serving the aviation and medical communities have also continued to do well.

The vast majority of our projected RF microwave amplifier sales for fiscal 2014 are already in backlog and based on orders already received and those expected to be received in the near term in the fourth quarter, we see this segment growing significantly in fiscal 2015.

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

During the third quarter as Mike mentioned, we received two new three-year BFT-1 sustainment contracts aggregating $68.2 million. The first contract which has a not to exceed value of $38.2 million relates to our ongoing engineering and satellite network operation services. The base period for this service contract is from April 1 to March 31, 2015 and the government has two 12-month option periods that it can exercise. The total estimated value of the base year is $13.6 million.

The second contract as Mike mentioned is a continuation of our IP licensing agreement. This agreement requires the Army to pay us $10 million annual license fee for the period of April 1, 2014 to March 31, 2015 with two 12-month option periods exercisable by the Army.

In addition to our sustainment activities on BFT-1, there are other well-defined opportunities that we are now pursuing in the US military and certain international military markets. We expect to receive some orders relating to these new opportunities during fiscal 2015.

However, our primary goal in the mobile data communications segment continues to be to provide the U.S. Army with outstanding BFT-1 support and in doing so should position us well to participate in any next-generation BFT platform if and when the U.S. Army pursues that path.

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

(Operator Instructions). Mark Jordan, Noble Financial.

Thank you. A question relative to cash, use of cash now that you've finished obviously the major repurchases of the $150 million of bonds and also about 1.3 million shares over the last four months I think. Has the Board taken a position with regards to what percent of free cash flow moving forward they plan to disseminate to shareholders via buybacks and your dividend?

I think, Mark, in terms of the cash outstanding at this point, I think we are going to take a breather from the purchasing program and look at our opportunities out there with our present cash and our line that we have plus that we are debt-free so we can always raise some more cash for some more opportunities and providing further dividends to our shareholders.

Okay. Mike, could you give us also a breakdown of backlog by segment?

Sure Mark. Backlog for the quarter in total was $160.7 million. And then telecom was $102.7 million, RF was $46 million, and the remaining $12 million was in our mobile data communications segment.

Okay. Final question from me, in the RF amplifier space, at one point in time the next generation crew system was potentially going to be a significant program for you. Is that program given the budget cuts and the pulling out of Afghanistan completely dormant or do you think that there is an opportunity for the DoD to add some systems to inventory?

I think for the present time what we see is that the program because of the funding issues is pretty well dormant. Not to say that it can't come back. The Army seems to be evaluating their path forward. And I'm not exactly sure exactly where or when and how that path will be finally determined.

Okay. And a final question from me. Fred, you alluded to the expectation that you would have some meaningful international tropo orders outside of your primary customer in fiscal 2015. Do you believe that those will be major installations of the type that you are currently doing which would be three- to four-year type large installations or are these still in the phase of sort of initial trial transactions?

I think we can safely say that in our pipeline we have a number of large programs similar to our North African customer programs that you have seen that we have booked periodically from year to year. So I think the answer is yes, we have some large programs and we do expect to book these, at least one of these in 2015.

Saying that, given our experience in the past, you know how those things go and stretch out here and there but I think we are confident that one of them will come in.

Thank you.

Joe Nadol, JPMorgan.

Thanks, good morning. I'd like to start out just on the earth station bookings and sales. So I think your book-to-bill has been over 1 for six straight quarters and your backlog is at a high, a recent high, but your sales were down during the quarter. And I just wanted to delve into why that would be since bookings have been pretty strong consistently? Is it just customer timing and when they wanted their shipments or what else might it have been?

Sure Joe, yes, some of the programs that are in backlog are a little less traditional than we normally see. Let's say for example, the ATIP contract from the US government you know extends over multi periods and some of the orders with Harris CapRock, you know these things will ship out over multiple quarters. So as we move to more increased sales of Advanced VSATs, our book to ship percentage in any given quarter will likely go down but we are still a true book to ship type business is the way to still view the business.

And your expectations for growth next fiscal year, I think you said are driven by telecom, the segment. Is that mostly because of your specific enthusiasm regarding over-the-horizon or does that also extend to Satellite Earth Station? Does your visibility go out that far?

I think our answer to that is really in both. We certainly see as I mentioned the tropospheric scatter is really booming at this point and lots of opportunities out there. And we do see the bounce back in the Satellite Earth Station area as well.

Okay. And then just one more sort of nitty on the quarter and in over-the-horizon, so the timing pull forward, Mike, is that just recognition of sales and earnings because of a subcontractor buy or is that actual labor that you executed in the quarter that led to the timing switch?

It is really both. We do use cost to cost method in the percentage of completion so most of the work we do is we are using a lot of internal labor as well as third-party components as well as our own stuff. So it is really just a combination but we are making good progress on the contract and we had earlier customer acceptance than what we really anticipating. So work just got shuffled ahead from Q4 to Q3 which was really good news from all aspects.

Okay. And then following up on the question about cash deployments. Fred, I thought I heard in your answer, I didn't quite understand but I thought I heard that you are looking more at acquisitions now? Is that the case? And could you maybe if that is the case give us a little more context for what at this point you'd be looking at and what you think are valuations out there? Just a little more color.

I don't think I intended to kind of give you that feeling but to say that we have always looked at acquisitions for the past few years. We have looked at a number of targets and obviously have not pulled the trigger on any of those targets. So we are still in that same mode that we have been for the last couple of years. But obviously in a much more conservative manner than some of the items out there.

Targets being what they are, things are expensive out there. So we'll be looking at it but I think at this point in time, I don't mean to give you the impression that we have something in the pipeline.

Just to make sure I fully understand, is it more that you have now in your view reached the right capital structure for the Company at this time and you are going to continue your dividends which is a good chunk of your earnings but you are not looking at really shrinking in a material way your net cash position at this point?

That is correct. I think I mentioned that I think we are going to take a breather right now and just see what things develop in the near term. And we may come back to some further stock purchase programs but at the moment, I think we will just take a breather.

Okay, thank you.

Tyler Hojo, Sidoti.

Hi, good morning. Just firstly I was hoping you could maybe quantify some details just in regards to the OTHMS product line. I think you guys said in your prepared comments that you saw a pull forward out of 4Q into the third quarter. Could you quantify what that was?

It was significant. We don't want to put -- obviously the revenue in the contracts are subject to confidentiality but it was a significant pull in for us to talk about and when you look at the change in annual EPS, you could kind of see that the extra EPS we had was just new business performance and new contracts and the rest was just a shift.

Okay, that makes sense. And I guess when we talk about your North Africa contract, that is a three-year contract I believe. Is it possible that we are going to see additional pull forward? Is that contract moving at a faster clip than one might have anticipated a couple of months ago?

Definitely for this year. You know as I mentioned earlier on the Q&A, we definitely had earlier customer acceptance on the contract. But once we did that and we are performing that work in Q3 and Q4, things should more be steady state for the rest of that contract.

Got it. Okay. And then I guess on something else, just in regards to ATIP, could you maybe provide a little bit more detail in regards to where we are on the development of that? And I guess it has been a bit of a headwind in terms of telecom segment profitability. I don't know if you could maybe quantify what the headwind was from that program?

I am not sure it is a headwind. I think we are in the development phase of the program which obviously has a lower gross margin than usual since it is NRE. We expect to be finished with the development probably by the end of July and we expect production orders in 2015.

Okay. All right great, thanks for that. And just one more I guess, included in the updated EPS guidance, what is the diluted share count for 4Q?

Well there will still be a little bit of weighting Tyler from the shares. You know we had one month of the converts outstanding. So you will have to kind of weight the quarter but I think if you looked at the front page of our 10-Q, we have a basic share of about 16 million of shares or so. So when you do the averaging for Q4, you will probably come up with a diluted share of a little bit over 18 million shares for the quarter you know given the dilution of the stock awards which is disclosed in our footnote in our 10-Q.

So we have about 300,000 to 400,000 of dilution from existing stock options that are out there. But you just have to do the weight properly in your Q4.

Got it. Okay, thanks.

And obviously if you look at -- think about 2015, we will get the full benefit of the elimination of the convertible notes in both our basic and our diluted EPS calculations.

Understood. Thanks a lot.

Chris Quilty, Raymond James.

Thanks. Mike, a clarification, I think the book-to-bill in the telecom was about 0.6 which the weakest you have seen in years. And I think that just reflects the order timing on the over-the-horizon side. But can you give us a sense of where more specifically the earth station bookings have been on a book-to-bill basis both in the quarter and sort of relative over the last several quarters?

Sure. I thought we may have said it in the script but maybe not but our book-to-bill and in Satellite Earth Station for Q3 was over 1. And if you go back, it has been a number quarters that we had consecutively book-to-bill over 1 and our backlog in that segment as I mentioned is almost at a two-year high. So the disconnect as you said between the book-to-bill for the segment is solely attributable to the OTH, over-the-horizon work you know as that contract pulls out of backlog and as we recognize the revenue.

Okay. And can you talk about the Advanced VSAT product line. You have got one very good anchor customer there but what sort of interest or uptake uptake are you seeing from other customers out there?

I think generally on a broad basis we are seeing a lot of interest from all of our customers that traditionally use SCPC and TDMA. And for the most part it seems to be having a replacement effect for some of the TDMA applications that are out there. So the interest has been high and as I mentioned, it is relatively early but having at least the Harris connection as a first step has given us some real confidence.

And specifically on the product line, the chief attribute that customers are looking at are price point, performance, cost per bit, you know transmission capability, raw throughput?

It is really all of the above but the main performance issues really are the higher throughput that they can get versus a TDMA system, the lower latency effect or the nonexistent latency effect. So it is really performance issues and price points.

Got you. Thanks gentlemen.

I would like to now turn the call back over to the Company for any closing remarks.

Okay well thank you very much and we will speak to you again in three months.

Thanks.

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