Comtech Telecommunications Corp (CMTL) 2015 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Comtech Telecommunications Corp's first-quarter FY15 earnings conference call.

(Operator Instructions).

As a reminder, this conference is being recorded, Thursday, December 11, 2014. I would now like to turn the conference over to Miss Maria Ceriello of Comtech Telecommunications. Please go ahead, ma'am.

Thank you and good morning. Welcome to the Comtech Telecommunications Corp. conference call for the first quarter of FY15. 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 assumptions regarding such performance in this 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 security and exchange commission filing. 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 in this call.

As announced yesterday afternoon, we reported our first-quarter results of $76.4 million in revenues and GAAP diluted EPS of $0.32, and adjusted EBITDA of $13.3 million. We're pleased with our solid first-quarter financial results and experienced the highest level of quarterly bookings in over a year with strong order flow across all of our three operating segments.

Despite this strength, in light of overall business conditions, we have become more cautious and now believe that the revenues in FY15 will be in the range of $355 million to $365 million in revenue. Despite incurring approximately $600,000 of expenses associated with our strategic alternative analysis, we are maintaining our GAAP diluted EPS guidance which is expected to be in the range of $1.70 to $1.86. We're also maintaining our adjusted EBITDA guidance, which is expected to be in the range of $63 million to $67 million.

On December 10, 2014, our Board of Directors approved a dividend for the second quarter of FY15 of $0.30 per common share. This dividend is expected to be paid on February 18, 2015 to stockholders of record on January 16, 2015. To date and over the past 17 quarters, we have paid out over $90 million of dividends and we continue to believe that our dividend program is an excellent way to return capital to our shareholders.

Let me now provide some brief comments about our announcement yesterday, relating to our strategic alternatives analysis that was initiated by our Board of Directors in August of this year. As you would expect, the Company regularly considers a broad range of strategic alternatives, with the goal of maximizing shareholder value, including a possible merger or sale of the Company.

After conducting a thorough and rigorous process, our Board concluded that the Company is best positioned to maximize shareholder value by continuing to execute on its strategies of enhancing its leadership positions in the markets we serve, participating in emerging technologies and enhance or expand our product portfolio, carefully pursuing the acquisitions of businesses and technologies and returning cash to our shareholders and finally, that the interests of our Company and our shareholders will be best served by our Company remaining independent.

Given the confidential aspects of our strategic analysis, we do not intend to provide any further information on that topic and respectfully request that you refrain from asking questions about it in the Q&A portion of our call.

Now, let me turn it over to Mike Porcelain to provide an overview of our 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'll walk you through the Q1 results and then provide some comments on our updated 2015 business outlook.

During Q1 we generated revenues of $76.4 million, of which 24.9% were for US government end-users, 61.2% were for international end-users, with the remainder being for domestic, commercial end customers.

Net sales in our telecom transmission segment were $51.4 million in Q1 of FY15, as compared to the $54.4 million we achieved in Q1 of last year, representing a decrease of 5.5%. This decrease is attributable to lower net sales in our satellite earth station product line, partially offset by higher net sales in our over-the-horizon microwave system product line.

Our satellite earth station product line sales in Q1 of FY15 reflect lower sales to international customers as compared to Q1 of last year. Given overall global market and business conditions, we do believe it is prudent to be cautious as it relates to this market, and we are now expecting sales in this product line in FY15 to be comparable to FY14. Based on the timing of expected orders and related shipments, including ATIP production units which are in our backlog, we expect sales to be heavily weighted towards the second half of FY15 with Q4 being the peak quarter by far for the year.

Sales of our over-the-horizon microwave systems in Q1 of FY15 were higher than Q1 of last year, primarily due to our performance on a contract with a major international oil company and ongoing performance on our large North African multiyear contracts. Although new orders and contracts are difficult to predict, we continue to expect significant US government orders and sales in the latter part of the second half of FY15, and expect annual net sales in this product line in FY15 to be higher than the level we achieved in FY14.

Net sales in our RF microwave amplifiers segment were $18.7 million in Q1 of FY15, as compared to $20.2 million in Q1 of FY14, a decrease of 7.4%. Bookings for our RF microwave amplifier products during Q1 of FY15 were at the highest quarterly level in over four years and are expected to remain strong for each of the remaining quarters of FY15, although not at the same level we achieved during our most recent quarter. Based on orders currently in our backlog and the timing of certain orders we expect to receive and ship, we expect net sales in this segment in FY15 to be significantly higher than the level we achieved in FY14, with growth expected to occur primarily in the latter part of FY15.

Turning to our mobile data communications segment, sales in Q1 of FY15 were $6.3 million, this compared to $8.8 million in Q1 of FY14, a decrease of 28.4%. This decline in sales is largely attributable to the absence of sales in our most recent quarter of certain SENS technologies and products. Sales in both periods include $2.5 million of revenue related to our annual $10 million BFT-1 intellectual property license fee.

During Q1 of FY15, we received additional funding from the US Army for our BFT-1 sustainment contract, which fully funded the base year of our three-year contract. During the second half of the year, we expect that the US Army will exercise its option for the performance period beginning April 1, 2015 through March 31, 2016 and that we will receive incremental funding.

For the year, given the discontinuation of sales of certain of our SENS products, net sales in our mobile data communications segment are expected to be lower in FY15 as compared to FY14.

Now let we walk you through our gross margin and other data to give you some additional perspective on our results.

Our gross profit in Q1 of FY15, as a percentage of consolidated net sales, was 46.2% versus the 43.6% we achieved in Q1 of last year. This increase is largely due to the period-over-period higher percentage of overall consolidated net sales occurring in our telecom transmission segment which generally has higher gross margins than our RF microwave amplifiers segment and the cost plus fixed fee, BFT-1 sustainment services that our mobile data communications segment performs for the US Army.

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 that our consolidated gross profit in FY15, as a percentage of consolidated net sales, will be slightly lower than the level we achieved in FY14.

On the expense side, SG&A expenses were $15.5 million or 20.3% of Q1 of FY15 net sales. As compared to the $16.2 million or 19.4% we achieved in Q1 of last year. Excluding $600,000 of expenses related to our strategic alternative analysis during Q1 of FY15, SG&A expenses would have been $14.9 million or 19.5%. Excluding the $200,000 benefit relating to a change in the fair value of a contingent earn-out liability in Q1 of last year, SG&A expenses would have been $16.4 million or 19.7% of consolidated net sales. The decrease in SG&A expenses both in dollars and percentage is primarily related to our ongoing efforts to contain operating costs and lower spending associated with lower consolidated net sales.

Total stock-based compensation expense, which is recorded in our unallocated segment, was $1.3 million in Q1 of FY15 as compared to $900,000 in Q1 of FY14. Based on the amount and timing of outstanding equity awards, stock-based compensation in FY15 is expected to be higher than FY14. In light of consolidated net sales growth expected in FY15, SG&A expenses in dollars are expected to be slightly higher in FY15 as compared to FY14. As a percentage of consolidated net sales, we expect it to be lower in -- slightly lower in 2015 as compared to FY14.

Research and development expenses were $10 million, or 13.1% of consolidated net sales in Q1 of FY15, versus $8.5 million, or 10.2% in Q1 of FY14. As a reminder, both periods do not reflect customer-funded R&D projects which approximated $2.3 million in Q1 of this year, as compared to $3.1 million in Q1 of 2014. We expect company funded research and development expenses for FY15 in dollars, to be comparable to the amount we invested during FY14.

Amortization of intangibles with finite lives was $1.6 million for the first quarter of both FY15 and FY14.

Consolidated operating income in Q1 of FY15 was $8.2 million, or 10.7% of consolidated net sales, as compared to $10.1 million, or 12.1% in the first quarter of last year. Excluding both the expenses related to the strategic alternative analysis and the $200,000 of benefit related to the change in the fair value of the contingent earn-out liability, operating income for the first quarter FY15 and FY14 would have been $8.8 million and $9.9 million respectively and, as a percentage of consolidated net sales would have been 11.5% and 11.9%, respectively. This decrease in operating income both in dollars and as a percentage of consolidated net sales is primarily due to lower consolidated net sales during the first quarter of FY15.

Excluding the impact of $600,000 of expenses associated with our strategic alternative analysis, we are targeting operating income, as a percentage of consolidated net sales, in FY15 to be approximately 13%.

Interest expense was $300,000 in the first quarter of FY15 which represents a significant decrease compared to last year when we had $2 million of expenses that was driven by our 3% convertible notes. As announced in May, none of our 3% notes are outstanding any longer and we expect interest expense for FY15 to be significantly lower than FY14. Interest income and other was $84,000 in the first quarter FY15, compared to $273,000 in the first quarter of FY14.

Turning to income taxes, our GAAP effective tax rate for the first quarter of FY15 was 35%. We expect that our GAAP tax rate in FY15, excluding the impact of any discrete tax items, will approximate 35%, as well. Adding it all up on the bottom line, as Fred mentioned, we delivered GAAP diluted EPS of $0.32 in Q1 of FY15.

Now, let me provide some additional financial metrics to help add color. Adjusted EBITDA as defined at the end of our press release that we issued yesterday was $13.3 million in Q1 of FY15.

At October 31, 2014, our backlog was $149.3 million, compared to $133.4 million at July 31, 2014.

Our balance sheet remains strong. We had $144.5 million of cash and cash equivalents and no long-term debt as of October 31, 2014. This cash balance does not reflect our Q1 dividend that was paid in November 2014, which approximated $4.9 million.

During the first three months of FY15 we had an operating cash outflow of $4.7 million, which is primarily related to overall changes in net working capital requirements, most notably the timing of billings and payments related to our larger over-the-horizon microwave systems contracts. Although we expect to generate positive cash flows in FY15, the amount is currently expected to be lower than FY14, almost entirely due to timing and expected performance on our two large over-the-horizon microwave system contracts.

Before turning it back to Fred, I just want to provide some comments on our FY15 guidance.

Our revenue, EBITDA and EPS guidance will be significantly weighted towards the latter half of FY15 for the reasons I addressed in my comments. To give you a sense of this weight, we are expecting our financial results for the second quarter of FY15 to be similar to our first quarter of FY15 and our fourth quarter of FY15 is expected to be our highest both in terms of revenue and operating income by far.

Finally one last comment. Our FY15 guidance provided yesterday does not include any additional stock repurchases that we may make or any other one-time expense items. Now, let me turn it back to Fred who will discuss our business and outlook in further detail. Fred?

Thanks, Mike. Now, let me discuss some of the recent developments in each of our three business segments.

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 SCPC modem area, driven primarily by our proven ability to deliver the most bandwidth efficient modems to our end customers.

We are increasingly more excited about our new line of products, called Advanced VSATs. These products combine a variety of technologies within our IP portfolio to provide an integrated solution. 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. And recently, we have seen certain TDMA users move away from that technology, since many of their ultimate customers are demanding more efficient, more dedicated, reliable bandwidth and are unwilling to tolerate the latency issues associated with TDMA.

It's important to note that certain of our new products, such as Advanced VSAT have longer lead times than our more traditional products, since these products represent the more integrated solution for our customers. We have received -- we have recently also started to offer professional services to our customers and expect this new part of our business to be a meaningful growth contributor over the next few years.

In addition to the introduction of new product lines, we have recently refreshed our core, low, middle and high-end modem lines and as a result, our modem portfolio, today, offers greater bandwidth efficiencies than ever before. On the US government side of our satellite earth station product line, we beginning to see some return to normalcy. In fact, we're seeing a lot of proposal activity for government, terminal applications and upgrades and are awaiting some significant US government related orders.

Here again, orders for NRE and production generally have longer lead times than our more traditional, commercial book and ship product lines. For example, as you know over the past year and a half, we have developed and will be manufacturing the advanced time division multiple access interface processor or ATIP for the space and naval warfare systems command.

In the first quarter, we announced the receipt of our first production order and related engineering services for $5.5 million. We're expecting additional orders in FY15 and the production phase will provide a solid revenue stream for the next few years. The ATIP contract is also strategically important as it enters us into the protected milsatcom market, where there are several sizable opportunities both in the Navy and other branches of the military, as well as for our MODs.

During the first month of our second quarter, we did see a slow-down in bookings which we attribute to the recent volatility in global business conditions, such as the sudden plunge in oil prices. Although, bookings in quarter one were very strong, we're taking a more cautious view for the rest of the year and believe that year-over-year sales of our satellite earth station products will be comparable. We continue to be conservative, but we believe that we're nicely positioned to capitalize on market opportunities as economic conditions further stabilize and improve.

Turning to the other component of our telecommunications transmission segment, FY15 is expected to be another strong year for our tropo business. Anchored by backlog from programs with our North African end-customer, we entered the year with a strong base and just last week we announced additional orders relating to this end customer, aggregating $5.5 million. In the longer-term, there are also additional large opportunities with this end customer which we expect will materialize in the years ahead.

Beyond our traditional customer base, we're addressing, and in some cases have already bid on, large opportunities in the Middle East, Australia, Asia, South America and Africa. We are increasingly confident that some of these opportunities will result in substantial contract awards in FY15 and beyond. In fact, earlier this week we announced additional orders aggregating $7.4 million relating to an ongoing project in Brazil. Ultimately, our goal is to find a few large, long-term customers that can serve as significant and steady revenue contributors similar to our North African end customer.

On the US government side of the tropo area, bookings have been very soft for the past year and a half or so. However, our tropo system has recently completed additional network integration evaluation or NIE testing. This is expected to significantly increase the potential number of deployable tropo units, by standardizing the DoD on our product portfolio. As a result, we expect significant orders and shipments for our US government end customer in the latter part of the second half of our FY15.

Also on the 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 our tropo business is based on the significant amount of backlog we have, the significant additional international opportunities that we have in the pipeline and the successful completion of the US Army NIE testing. All in all, we remain confident that our telecom transmission segment will continue to grow in FY15.

Turning to our RF microwave amplifiers segment, although FY14 was not a standout revenue year, we received important, large awards and so far in FY15, this continues, which provides a strong base for FY15. In our traveling wave tube amplifier, our TWT product line, we have recently received orders relating to the FAB-T and WIN-T programs which, when combined with additional FOT and SWAN orders in backlog, will provide a strong base of US government related revenues for the next several years.

On the commercial side of the TWT product line, we see the broadband high throughput satellite Ka-band market and the direct-to-home TV market as very exciting opportunities for us. We have already 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.

In particular, we believe that 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 with high-power, more efficient broadband TWTA's to support high-definition and ultra high-definition program offerings in their existing networks. 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 amplifiers side, our SSPA product line, our business has been dramatically impacted by weak US government spending, as well as the -- a receipt of certain international orders as a result of the end customers being in areas in the world that are experiencing unrest. However, activity is heating up again. During the first quarter of FY15, we booked $6.7 million in SSPA orders from international customers.

Also in the first quarter of FY15, we signed a master purchasing agreement with a major domestic OEM for identification friend or foe or IFF solid-state power amplifiers. The master purchasing agreement is valued at $6 million and so far we have received funded orders totaling $3.7 million. Although a smaller part of the SSPA business, our commercial product line serving the aviation and medical communities have continued to do well.

During the past year, we have made significant inroads into the inflight entertainment and communication space, which is expected to grow exponentially over the next decade and we're very excited about this development. As of today, a significant amount of our projected RF microwave amplifier sales for FY15 is already in backlog, and we see this segment growing significantly in FY15.

In our third segment, mobile data communications, the largest revenue contributor remains our BFT-1 sustainment work which we are performing for the US Army. During FY14, 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, 2014 to March 31, 2015, and the government has two 12-month period options that it can exercise. The total value of the base services contract is $13.6 million, which has been fully funded.

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

In addition to our sustainment activities on BFT-1, there are other well-defined opportunities that we are pursuing, both in the US military and certain international military markets, and we expect to receive orders relating to some of these new opportunities during the second half of FY15. Our primary goal in the mobile data communications segment continues to be to provide the US Army with outstanding support. Doing so should position us well to participate in the next-generation BFT platform. In fact, we have recently responded to two government RFIs that effectively are requesting alternatives to the BFT-2 transceiver.

One RFI is for a BFT-2.5 L-Band transceiver to replace the current BFT-2 transceiver and second RFI is for a dual frequency BFT-3 transceiver, operating at both L-Band and X-band. We have responded to both RFIs and we believe we are uniquely qualified to offer the best, most cost-effective solutions in responding to the government's requests. We look forward to continuing to support the Army for many years.

Finally, given the holiday season and upcoming new year, I would like to wrap this up of the portion of the call by saying thank you to all of our employees for their tireless efforts, as well as thanks to our suppliers, and customers for their support. Happy holidays, everyone. With that, I would like to proceed to the question-and-answer part of our conference call. Operator?

(Operator Instructions)

Joe Nadol with JPMorgan.

It's Chris on for Joe. Mike, on the balance sheet, you do have a large net cash balance. I'm curious if you think this is the best capital structure for the business going forward or if you might move toward something more traditional with some net leverage?

I think right now we're happy where we are. We obviously have an existing stock repurchase program that we'll continue to look at, and our dividend target that was established by the Board. But right now, the balance sheet does give us flexibility to do the things that our business plan calls for.

I know you've been interested in M&A. Are you seeing anything on that front right now?

I think there are things that we are considering. That's all we'll comment.

Okay. Then, on the share repurchase, I know you just had your Board meeting and the authorization wasn't increased. It seems like it won't be anything significant on that front. Do you guys ever get consideration for special dividend?

I think, again, from a strategic process and where we are, we think the things we're doing are the right things at the moment.

Okay. One last one. Could you just provide some color on the timing of the RFPs for BFT-2.5 and 3 and maybe size what the revenue opportunity for each one looks like?

It's difficult to define the timing for the actual RFPs. Right now, all that has happened is two RFIs which are requests for information.

The government is looking to replace the BFT-2 transceiver with the BFT-2.5. I suspect that one will probably be funded certainly earlier than the BFT-3 transceiver RFI. However, for us to really know exactly when the funding will occur, it's very, very difficult with the government funding environment right now.

Okay. Do you have a size of what the revenue opportunity might be for 2.5 based on the number of units they're looking for?

All we can say is, we have approximately over 200,000 transceivers out in the field for BFT-1. If the government chooses to replace every single one of them, and I should qualify that because the requirement, this time, is for the BFT-2.5 transceiver to be backwards-compatible with the BFT-1 transceiver.

So the government will have the option to buy not only the full 220 to replace the BFT-1, but also, some mix of the two. But, going the full gamut of 220,000 transceivers, approximate cost, one can use approximate cost of a transceiver of somewhere between $5,000 to $10,000.

Okay. Thanks, guys. Appreciate it.

Mark Jordan with Noble Financial.

Earlier, you talked about over-the-horizon opportunity with the government, potentially being very significant in the second half of the year as you completed the NIE. Could you give a little more color as to, one, is that small form factor modems for portable earth stations terminals? Or, is this upgrading some of the larger tropo systems?

And secondly what specifically gives you the visibility to expect meaningful volumes in the second half?

To answer the first part of your question, Mark, just recently, as a matter of fact, the US Marines, who control most of the AN TRC 170 terminals, have come out with an RFI to replace all of the TRC 170 terminals with new transportable tropo systems. There are approximately 400 of TRC 170 terminals out there being in use by both the Marines, the Army and the Air Force. So, that gives you kind of a feeling of what the requirements will be.

Again, that's very difficult to see, timing wise, what and when that will occur. But, the NIE testing has actually put us in a position as the only tropo transportable, and these are in suitcase, suitcases that the tropo system is in and can be readily constructed within 30 minutes anywhere in the world. This NIE testing has concluded that we're the only one that met the spec.

The other fact is, if you remember, we retrofitted most of the TRC 170 tropo terminals with our modems and the RFI states unequivocally that the new system must communicate with the present TRC 170. They're replacing it, but they still intend to use it and, be compatible with it. I think we're the only modem and that is compatible, obviously, because that's our modern in the TRC 170.

Okay. Relative to your comments on buyback, you obviously noted that in your press release, that the amounts you had remaining, are there any broad guidelines as to how sizable the buyback activity may be moving forward, say, in relationship to annualized free cash flow you generate or any other metric?

I think, as far as the buyback's concerned, the only authorized Board action, right now, is the remaining $13.7 million that we have for buybacks. Obviously, we will be looking at the opportunity and pulling the trigger if we see that it's something that we want to do.

Okay. Final question for me. Do have a CapEx expectation for FY15?

Sure. Including what we did in Q1, we are expecting a range at this point of $5 million to $7 million of capital expenses for the year.

Thank you very much.

Tyler Hojo with Sidoti.

In the prepared remarks, you mentioned bookings for satellite earth station in the past month being kind of soft and that was one of the reasons why you lowered expectations for the full-year. I'm just curious, is your expectation that the book-to-bill for satellite earth station will be below one in your second quarter? How do we think about that?

I think it's very difficult for us to predict anything on a quarterly basis, if not a monthly basis. So, at this point, given what we saw in November, the way we're looking at the company as a whole, we're thinking Q2 will be very similar to what we did in Q1.

It is possible, it might be slower lower than what we did in Q1. At this point, it's just tough for us to say. For the year, as of the moment, given what we see, we're expecting it to be comparable for the year.

You're talking about revenue, right?

And everything. Bookings and revenue and income, as well.

Okay. So, how do we square the fact that you're coming off of the book-to-bill that's at a four-year high? I get the uncertainty. But, presumably for just the book and ship nature of this business, presumably if your expectation for the year is lower, your expectation for bookings would be lower in the coming quarters, right?

I think, again, we look at it on an annual basis and won't give some color on the color as it relates to booking. Certainly, our bookings in Q1 were terrific. You couldn't have asked for anything better.

The market conditions have changed. Oil prices have suddenly come down and we did see that impact in our most recent month.

Now, as Fred had mentioned in his prepared remarks, we might be conservative, but we're certainly being prudently cautious at this point. Lots of things in the pipeline, certainly on the US government side, but our international business is not growing at the moment and we need to see things flush out. At this point, we think it's appropriate to think about satellite earth station sales being comparable.

Got it. Okay. That's fair. On the OTH MS business, could you maybe size how much of that revenue base today stems from the oil and gas industry?

I think we would characterize it as it keeps the lights on. It's not a material portion of our over-the-horizon business, but certainly as we get orders, it is positive to the revenue and operating income. And, I'm specifically, I'm assuming you're talking about the shipments of OTH products to the oil exploration companies for offshore development?

Yes, that's right Okay. The last thing I wanted to ask was kind of in context with Fred's comments on professional services being a driver. Again, I'm curious. How big a piece of the business is that today in satellite earth station and what kind of differentiates your offering relative to some of the competitors in the space?

To characterize, for 2015, that's going to be a small contributor to the satellite area. What we've found, especially with the Advanced VSAT product line, that we have come up with, that there is a tremendous, tremendous need for professional services for integrated solutions. Since we're now in that business area, we said to ourselves, this is a good area of growth for us and so we're going to expand that into other product areas, as well.

Thanks a lot.

(Operator Instructions)

Chris Quilty with Raymond James.

Wanted to touch on the North American commercial business, which looks like it was down about 27% in the quarter, and I think there's been a there's been a weak trend there for a while. Can you help us understand where, specifically either in end markets are products, you're seeing the weakness and what you see as the outlook here for the balance of the year?

Chris, if you could, could you repeat the first part of your question. It didn't come clear on our end.

Sorry. The North American commercial business was down about 27%, I think, in the quarter and you've had a bit of a weak trend there. I was just trying to identify what specific end markets or product lines or underlying trends are driving that softness, given the US is actually doing well economically relative to other parts of the world.

Sure. More of a timing of sales. When you look at our domestic business, on our satellite earth station business, Chris, as you know, we don't sell a whole heck of a lot of products to the US commercial customers, anyways. So, where we do see sales is in our amplifier side on the direct TV market and again, I think that's just from a timing of sales perspective.

We see lots of opportunities in the direct home market, as well as in-flight entertainment market on our amplifier side. So, I would characterize it as a timing of sales than anything.

Got you. Just to clarify, on the statement about concern with energy markets, do you have any exposure beyond the oil rig business you talked about and you've got, obviously, over-the-horizon customers internationally that are dependent upon oil revenues. Is there any other exposure that we should be concerned about?

I think it's a global issue. Clearly, we sell to countries such as Russia and even Algeria. Revenue is based on oil prices for those countries.

So, there is that global risk that we have to deal with. So, I think the answer to the question is, yes. It kind of goes into our cautiousness.

Okay. Final question on the Advanced VSAT. I know you had a sort of an initial announcement a while back with, I believe it was Harris Corp and Royal Caribbean. Could you give us an update on how that's progressing?

And, a clarification. My understanding was the Advanced VSAT product was more of a integrated bundle, but you almost seem to imply that there are service revenues attached to the product line?

Yes. That's true.

First, for the Royal Caribbean, I think the system is being rolled out and so far, very successfully. As far as the professional services, that's really become part of the Advanced VSAT portfolio that we're now offering. As I mentioned before, partly because our customers have really asked us to do this and we've decided that this is something that we want to go with forward, not only in Advanced VSAT but other products, as well.

Is there an actual service contract, long-term service contract attached to that? Or, is there just a service component of the initial sale?

There is a services support contract that we do with our customers. For us, and I think for appropriately characterize it, it's not a meaningful part of our business in 2015.

We introduced the services in 2014. We had a pretty significant growth year over year, although again I characterize it as being not material, yet. But, it is an annual type services.

So, it's something that for us, the earth station product line, not only will we generate the revenue in the first year, but we're very optimistic that will become a recurring type revenue stream as we look forward. We're structuring on these renewals with our customers.

The typical 10% to 15% type of attached -- attachment on the service contract?

We're actually selling almost a one for one as we roll out the advanced VSAT products for the customers, which we're doing well, and so it's really a one for one as opposed to a 15% attach rate.

That's good stuff. Thank you gentlemen.

It appears we have no further questions at this time. I will turn it back to the Company for closing remarks.

Okay. Thanks for joining us today. We look forward to speaking in with you again in March. Thank you very much.

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