Comtech Telecommunications Corp (CMTL) 2015 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. And welcome to the Comtech Telecommunications Corp's third-quarter FY15 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded, Friday, June 5, 2015. I would now like to turn the conference over to Ms. 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 third quarter of FY15. With us on the call this morning are Dr. Stanton D. Sloane, President and Chief Executive Officer of Comtech; and Michael Porcelain, Senior Vice President and Chief Financial Officer.

Before we proceed, I need to remind you of the Company's Safe Harbor language. Certain information presented in this call will include, but not be limited to, information relating to the future performance and financial condition of the Company, the Company's plans, objectives and business outlook, and 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, Dr. Stanton Sloane. Dr. Sloane?

Thank you, Maria. Good morning, everyone. Thank you for joining us on the call. As announced yesterday afternoon, we reported our third-quarter results of $71.6 million in revenue, GAAP diluted earnings per share of $0.30, and adjusted EBITDA of $11.6 million.

Our third-quarter results reflect the fact that many of our customers continue to face economic headwinds, such as the impact of lower oil prices and the strong US dollar. We do not anticipate meaningful improvements during our fourth quarter.

Based on the Company's year-to-date results and anticipated fourth-quarter performance, we now believe that revenues in FY15 will be in the range of $310 million to $314 million. GAAP diluted earnings per share are expected to range from $1.38 to $1.54, and adjusted EBITDA is expected to be in the range of $52 million to $56 million.

I continue to view certain current market conditions as short-term impediments on the road to long-term growth. We have already begun the process of positioning our Company to better deal with the current business environment, as well as to be able to take advantage of any improvement in market conditions when it occurs.

Let me turn the call over to Mike now, who will provide an overview of our financial results and some additional comments on our business outlook. Afterwards, I will return and talk more specifically about each of our three business segments, as well as provide you an update on my review of strategy and operations that I mentioned during my first conference call with you back in March. Mike?

Thanks, Stan, and good morning, everyone. Let me walk you through our Q2 results, and as I do, I will provide some comments as it relates to our updated FY15 business outlook.

During Q3, we generated revenues of $71.6 million, of which 37.5% were for the US government, 50.6% were for international customers, with the remainder being for domestic commercial customers. Net sales in our Telecom Transmission segment were $45.6 million in Q3 of FY15, as compared to the $61.2 million we achieved in Q3 of last year, representing a decrease of 25.5%. This decrease reflects lower comparative net sales in both our satellite earth station and over-the-horizon microwave system product lines.

Bookings in our satellite earth station product line during the third quarter of FY15 were nominally higher than the second quarter of FY15. At the same time, sales of satellite earth station products were significantly lower during Q3 of FY15, as compared to both Q2 of FY15 and Q3 of FY14.

Market conditions continue to be difficult, and based on our year-to-date net sales and expected fourth-quarter performance, FY15 net sales for this product line are anticipated to be significantly lower than in FY14.

Our second product line in our Telecom Transmission segment is our over-the-horizon microwave system product line. Here, sales in Q3 of FY15 were also significantly lower than Q3 of last year. During Q3 of FY15, we continued our ongoing performance on our two large multi-year contracts to design and supply over-the-horizon microwave systems and equipment for use in a North African government's communication network.

Although both of these contracts are nearing completion, we have multiple large project opportunities, both with US government and international customers, for which we expect to receive orders for. The awards for these potential projects are large, the sales cycles are long, and the timing of actual orders is difficult to predict, But we do believe that we will generate revenue from these anticipated orders sometime in FY16.

Based on expected performance on contracts that are currently in our backlog and the timing of other contracts that we anticipate receiving, we do expect sales for this product line during the fourth quarter of FY15 to be lower than the third quarter, and expect FY15 net sales to be lower than the level we achieved in FY14.

Net sales in our RF Microwave Amplifier segment were $19.7 million in Q3 of FY15, as compared to $22.5 million in Q3 of FY14, a decrease of 12.4%. To date, volatile business conditions have not significantly impacted our RF Microwave Amplifier segment. Although we have seen some orders that we previously expected in FY15 shift into FY16, we have recently received important orders in our Amplifier segment that bodes well for our future. Stan will talk about these orders in a moment.

Given such, bookings for our RF Microwave Amplifier products are expected to be higher in the fourth quarter, as compared to the third quarter, and net sales in FY15 are expected to be higher than the level we achieved in FY14.

Turning to our Mobile Data Communications segment, sales in Q3 of FY15 were $6.3 million, as compared to $5.2 million in Q3 of FY14, an increase of 21.2%. Sales in both periods include $2.5 million in revenue related to our annual $10 million BFT-1 intellectual property licensing fee. For the full year, net sales in our Mobile Data Communications segment are expected to be lower, as compared to FY14.

Now let me walk you through our gross margin and other data to give you some further perspective. Our gross profit percentage in Q3 of FY15 was 45.1% versus the 43.1% we achieved in Q3 of last year.

Our gross profit percentage during the third quarter of FY15 benefited from better-than-expected performance on the two large over-the-horizon microwave system contracts we're working on. Both of these contracts are nearing completion, as I mentioned. In addition, our gross profit also benefited from a $0.5 million reduction in warranty obligations, due to lower-than-anticipated warranty claims on the contract, for which the warranty period expired on April 30, 2015. Looking forward, based on our anticipated Q4 performance, we anticipate that our consolidated gross profit percentage in FY15 will be slightly higher than the level we achieved in FY14.

On the expense side, SG&A expenses were $15 million or 20.9% of Q3 FY15 net sales, as compared to the $17.3 million or 19.5% we achieved in Q3 of last year. For the year, excluding any potential charges resulting from Stan's ongoing assessment of operations, we expect SG&A expenses and dollars in FY15 to be lower than FY14, but as a percentage of sales, to be slightly higher.

Research and develop expenses were $8.6 million or 12% of sales versus $8.9 million or 10% in Q3 of FY14. As a reminder, both periods did not reflect customer-funded R&D projects, which approximated $2.5 million in Q3 of FY15, as compared to $3 million in Q3 of last year. We expect Company-funded R&D expenses for the year, both in dollars and as a percentage, to be higher as compared to FY14.

Amortization of intangibles with finite lives was $1.6 million for the third quarter of both FY15 and FY14. Total stock-based compensation, which is recorded in our unallocated segment, was $1.2 million in Q3 of FY15 versus $1.1 million in Q3 of FY14. Based on the amount and type of outstanding equity awards, stock-based compensation expense in FY15 is expected to be higher than in FY14.

Consolidated operating income in Q3 of FY15 was $7.2 million or 10.1% of consolidated net sales, as compared to $10.6 million or 11.9% in the third quarter of last year. The 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 third quarter of FY15, as compared to the third quarter of last year. Exclusive of any potential one-time charges, we are targeting operating income as a percentage of consolidated net sales in FY15 to be approximately 11%. Interest expense was $100,000 in the third quarter of FY15.

As announced in May 2014, our 3% notes are no longer outstanding. And as such, we expect interest expense for FY15 to be significantly lower than FY14. Interest income and other was also $100,000 in the third quarter of FY15, as compared to $300,000 in the third quarter of FY14.

Turning to income taxes, we recorded a discrete tax benefit of $300,000 or approximately $0.02 of diluted EPS in Q3 of FY15. Which resulted in a GAAP effective tax rate for the third quarter of FY15 of 31.1%. This tax benefit related to the reversal of tax contingencies no longer required, due to the expiration of applicable statutes of limitation. Excluding the impact of any discrete tax items, our effective tax rate in FY15 is expected to approximate 34.75%. On the bottom line, as Stan mentioned earlier, we delivered GAAP diluted EPS of $0.30 in Q3 of FY15.

Now let me provide some additional financial metrics to add color to our results, and also provide you with some data on dividend payments and stock repurchases that we made during the quarter. Adjusted EBITDA, as defined at the end of our press release that we issued yesterday, was $11.6 million in Q3 of FY15. At April 30, 2015, our backlog was $130 million.

Our balance sheet remains strong. We had $142 million of cash and cash equivalents, and no long-term debt as of April 30, 2015. This cash balance does not reflect our Q3 dividend payment that was paid in May of 2015, which approximated $4.8 million.

Also, yesterday our Board of Directors approved a dividend for the fourth quarter of FY15 of $0.30 per common share. This dividend is expected to be paid on August 18, 2015, to stockholders of record on July 17, 2015.

To date, and over the past 19 consecutive quarters, we have paid out approximately $99.7 million of dividends. And we continue to believe our dividend program is an excellent way to return capital to our stockholders.

During the third quarter of FY15, we repurchased approximately 176,000 shares of our common stock at an aggregate cost of approximately $5 million, pursuant to our current $100 million stock repurchase program, as authorized by our Board. Pursuant to this program, we are currently authorized to repurchase up to $8.7 million of additional shares of our common stock.

For the nine months of FY15, we had operating cash inflow of $7.7 million. Given our expected fourth-quarter FY15 sales level and our expectations that we will invoice and collect a significant amount of receivables related to our two over-the-horizon microwave system contracts. We do expect to generate significant positive net cash flow from operating activities during the fourth quarter of FY15, although the exact amount is difficult to predict. Given our expected overall FY15 sales level, we expect operating cash flow in FY15 to be lower than the cash flows generated in FY14.

And finally, one last comment. Our FY15 EPS and EBITDA guidance provided yesterday does not include any stock repurchases that we may make pursuant to our repurchase plan, or any other one-time items. Now let me turn it back to Stan, who will discuss our businesses in further detail. Stan?

Thanks, Mike. Before I discuss our three business segments, I want to provide you with an update on my review of strategy and operations, which was briefly discussed in my first conference call back in March. I continue to spend a great deal of time meeting with our management team, our employees, our customers, and believe that our products and technologies are second to none. I do believe we're on the right path to long-term growth.

At the same time, we can continue to improve our current performance. In March, I initiated an assessment of our operations to determine what changes in our business approach or operations could help us better serve our customers and potentially reduce operating expenses. As a result, I've made some changes, and will continue to consider others.

First, in light of the market conditions that have impacted our satellite earth station product line, we have significantly reduced staffing to a level that we believe is commensurate with current business activity. Second, we have expanded and we expect to continue to expand our corporate marketing and business development function to enhance our focus on existing and untapped market opportunities.

The benefit of this expansion will take some time to produce results. But I believe that the additional investment in this area will result in demonstrable returns down the road.

Third, I've made some organizational changes to leverage our strong product portfolio. For instance, as many of you know, we have multiple legal subsidiaries, each of which have traditionally marketed their products and services separately from each other. During the third quarter, we formed a legal joint venture, consisting solely of our domestic subsidiaries, which will allow us to propose on new opportunities -- including several large US government solicitations -- with a unified approach.

During the quarter, we submitted our first bid to the US government using this entity. And we have several other opportunities we are pursuing that we believe will ultimately bear fruit. I'm continuing to review a number of other areas which I believe may be candidates for improving efficiency and reducing costs, and I will keep you posted on these future changes.

With that background, let me now discuss some of the recent developments in each of our three business segments. I'll start with our largest segment, Telecommunications Transmission, which is comprised of two product lines -- satellite earth stations 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 and highest efficiency amplifiers to our end-customers.

We continue to be excited about our advanced VSAT product line, which combines a variety of technologies within our IP portfolio to provide integrated solutions to our customers. Just a few days ago, we announced that our advanced VSAT solutions are now being deployed to support multiple customer installations, using O3b Networks' innovative satellite systems. Our advanced VSAT product line continues to be well-received and will contribute to long-term growth objectives.

For the past year or so, despite the market conditions, we've pressed ahead with certain R&D investments in our satellite earth station product line. In March, we began previewing our new HEIGHTS solution, a scalable network platform designed with the service provider in mind. HEIGHTS leverages a single user interface with a powerful traffic analytics engine that allows simplified design, implementation, monitoring, control and optimization of networks, using our hubs and gateways.

The HEIGHTS platform is designed to support the traffic load of demanding premium enterprise users on traditional, as well as HTS, or high-throughput satellites. HEIGHTS also supports dynamic remote-to-remote connections, which we call dynamic mesh, which eliminate double-hop latency.

To date, customer reaction to our HEIGHTS platform has been very positive. Like our advanced VSAT, our new HEIGHTS platform will take a little time to establish itself in the market, but we do believe it will contribute to growth over the next few years.

On the US government side on our satellite earth station product line, we continue to perform work on our Advanced Time Division Multiple Access Interface Processor, or ATIP, contract. During the third quarter, we began shipping ATIP production units to our customer, and we continue to perform development work related to adaptive coding, which will further improve the Navy's communication system performance.

The ATIP contract is our entry into the protected MILSATCOM market, a strategically important market for us, where there are several sizable opportunities, not only with US military, but with our US allies overseas as well. All in all, despite difficult near-term market conditions and lower revenues, I believe our satellite earth station product line is well-positioned for long-term growth.

On the over-the-horizon front, demand for our over-the-horizon microwave systems, both with US government customers and with new international customers, continues to be strong. However, as you all know, predicting the timing of potential contract awards for these opportunities is difficult. That said, we still expect to receive orders for a modular tactical transmission system, or MTTS, a high-capacity over-the-horizon microwave system designed for easy and rapid deployment, with related revenue to be recognized in FY16.

In February, we demonstrated MTTS to the US Army, successfully establishing and maintaining a 50-megabit-per-second communications link between two systems separated by approximately 100 miles. Also, we are bidding international opportunities in the Middle East, Australia, Asia, South America and Africa.

I am hopeful we will be able to announce one or more of these potential contract awards before our FY15 closes. I anticipate we will generate revenue and related operating income from some of these potential contract opportunities in FY16.

Turning to our RF Microwave Amplifiers segment, we believe that FY15 will be a year of revenue and operating income growth. While we have seen some orders shift to the right, we have, on the other hand, seen extremely positive customer reaction to our new Super-Power Traveling Wave Tube Amplifiers, which were introduced in March 2015. In fact, on June 1, 2015, we announced our first $1.1 million order from a domestic integrator, and believe this order will be the first of many.

Our Super-Power Traveling Wave Tube Amplifiers will not only allow our customers, such as broadcasters, to build out new infrastructure. It will also allow our customers to replace aged, inefficient equipment in their current infrastructure with the high-power, high-efficiency broadband amplifiers necessary for high-definition and ultra-high-definition broadcasting.

During the past year or so, we've also made significant inroads into the high-growth in-flight connectivity market. Just this week, we announced an order of $4.3 million for solid-state power amplifiers that will help enable commercial airlines to provide in-flight connectivity services to their passengers. Most, if not all, of this order will be recognized as revenue in FY16.

This is a new and growing market for us. We expect additional orders, and we believe that this area should be a significant revenue contributor for Comtech over the next several years.

On US military front, we remain well-positioned, where our Traveling Wave Tube Amplifiers support both the FAB-T and WIN-T programs. That, plus opportunities we see in tactical communications enabled by our X-band products, will provide a strong base of US government-related revenues for the next several years.

On the broadband high-powered solid-state amplifier side, business remained steady, and we continued to develop new products that will ensure we remain at the forefront of this technology. As of today, a significant amount of our projected RF Microwave Amplifier sales for the balance of 2015 are already in backlog, and we see the segment growing significantly. I'm optimistic we'll see future growth here as well.

In our third segment, Mobile Data Communications, the largest revenue contributor remains our BFT-1 sustainment work for the US Army. These activities continue to be funded despite ongoing government spending pressures. That work is tangible evidence of the important role our technology plays with the US Army.

We continue to support BFT-1 program pursuant to two multi-year contracts that have a combined contract value not to exceed $68.5 million. During the three months ended April 30, 2015, the US Army exercised its first 12-month option, which will allow us to continue to provide services through March 31, 2016.

In addition, we received initial funding of $19.8 million, including funding of our $10 million annual license fee. Total funding received to-date for both contracts approximates $43.4 million. And we're optimistic that we will receive additional orders before March 31, 2016.

In addition to our sustainment activities on BFT-1, there are other opportunities we are pursuing, both with the US military, as well as international military customers. Although we're optimistic about these opportunities, and that they will develop into sizable orders, it's difficult to predict timing.

Our primary goal in the Mobile Data Communications segment, for the moment, continues to be providing the US Army with outstanding support. Doing so should position us well to participate in next-generation platforms.

With that, I'd like to proceed to the Q&A part of the conference call. Operator?

(Operator Instructions)

Mark Jordan, Noble Financial.

Good morning, gentlemen. A question in the Tropo sector -- a couple. The MTTS product -- as I understand it, you have a partner in that program. What percent of the content of MTTS is Comtech-provided versus your partners?

Mark, to be honest with you, I'd have to refer you to the prime contractor, because there's other elements to those programs that we have no insight on. So, I really can't answer it. We're providing a trunk of the system, but not all of the services and the logistics and all the other stuff that go with it.

Okay. And will the MTTS replace the TRC-170s, or will they remain in the Army's inventory for the longer term, and remain an upgrade opportunity for you?

Again, I'd have to refer you to the Army for what their plans are. But that is our -- from a technical point of view, that's what we believe makes sense. The current system would replace the TRC-170s.

Okay. You mentioned foreign military sale opportunities with MTTS. If you take a parallel, like, Harris Corp. has been very successful selling their next-generation radios into friendly countries. Do you believe that there will be -- with the Army adopting MTTS as a mainstream communications methodology, that should have a parallel opportunity to what Harris has done internationally?

I guess words are important. When you say mainstream, obviously this is one piece of a communications architecture that consists of a whole lot of other things. Obviously, Tropo is one element. But they have all sorts of other radios and communication systems.

The opportunities internationally are -- in addition to FMS, we think there's opportunity for direct sale to other governments -- not only military, but commercial sales overseas as well. We're pursuing all of that. At the moment, we don't have anything to announce. But as I said, we're hoping that some of these things will come to fruition in the near term.

Okay. Question for Mike, relative to accounts receivable in the inventory: You mentioned some significant milestones, I think, in the Tropo area. If you look at the balance sheet, inventories in accounts receivable is up about $20 million versus the start of the fiscal year. Is that the order of magnitude of accounts receivable on inventory that could convert to cash in the fourth quarter when certain milestones are hit?

Mark, I don't know if it would be that high. But it would certainly be in the $10 million to $15 million range. And it will be depending on progress and exact timing of the billings. But it should be north of $10 million.

Okay. Thank you very much.

(Operator Instructions)

It appears we have no further questions at this time. I would like to turn the call back over to the Company for closing remarks.

Thanks again for joining us today. We look forward to talking with you again in September. Have a great day.

This does conclude today's program. You may now disconnect at any time.