Comtech Telecommunications Corp (CMTL) 2016 Q1 法說會逐字稿

Welcome to Comtech TeleCommunications Corp first-quarter FY16 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded Thursday, December 10, 2015. I would now like to turn the conference over to Ms. Nancy Stallone of Comtech Communications. Please go ahead, ma'am.

Thank you and good morning. Welcome to the TeleCommunications Corp conference call for the first quarter of FY16. With this on the call this morning are Dr. Stanton D. Sloane, President and Chief Executive Officer of Comtech; and Michael D. 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, including among others, the risk that the acquisition of TeleCommunications Systems Inc. may not be consummated and the risk that Comtech's and TCS's business will not be integrated successfully. 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 D. Sloane. Stan?

Thank you, Nancy, and good morning, everyone. Thank you for joining us on the call. As announced yesterday afternoon, we reported our first-quarter results of $64.1 million in revenue, GAAP diluted earnings-per-share of $0.09 and adjusted EBITDA of $7.5 million. Although market conditions remain challenging, we continue to execute on our business strategies.

As we stated in our year-end conference call on September 29, 2015, the first quarter of FY16 is still expected to be our lowest quarter of financial results for FY16. We have many exciting things in the order pipeline and I anticipate that our operating results will slowly improve throughout the year as these orders come in. As such, and as we announced yesterday, excluding the impact of TeleCommunications Systems Inc., or TCS's post-combination results, we are maintaining our FY16 revenue guidance of $300 million to $310 million and our FY16 adjusted EBITDA guidance of $50 million to $54 million.

In addition, including the $1.4 million of pretax expenses we incurred in the first quarter, primarily related to the pending acquisition of TCS, GAAP diluted EPS for FY16 is now expected to be between $1.28 and $1.44. Once we close the acquisition of TCS, our Company will look markedly different and I believe we have put ourselves in position to achieve meaningful, sustainable growth. In simple terms, we expect to more than double our annual revenue base, double our employee base, and our adjusted EBITDA is expected to increase significantly.

I also believe that the acquisition of TCS is a turning point for Comtech and I'm excited about the growth opportunities that are ahead of us. With a combination of experience, careful planning and preparation, we are well on our way to bringing these two great companies together. I look forward to working with all stakeholders to make this acquisition a success.

I'll talk more about the state of the business and TCS later in the call, but first, let me turn it over to Mike Porcelain, who will talk about Comtech and provide some comments on the TCS acquisition from a financial perspective. Mike?

Thanks, Stan, and good morning, everyone. During Q1, we generated revenues of $64.1 million, of which 41.4% were for US government end users, 44% were for International end users, with the remainder being for domestic commercial end customers. Net sales in our Telecom Transmission segment was $35.2 million in Q1 of FY16 as compared to the $51.4 million we achieved in Q1 of last year, representing a significant decrease of 31.5%.

This decrease is attributable to lower net sales in both our Satellite Earth Station and our Over-The-Horizon Microwave Systems product line. This decrease, although admittedly large, was expected, given what is happening in this segment's two product lines.

In our Satellite Earth Station product line, our international customers continue to be impacted by significant economic challenges. Although we do not expect market conditions to meaningfully improve in the short term, we do believe there is some pent-up demand and our Heights product which has been -- has been well received in the marketplace. Given market conditions and our pipeline, we are still expecting annual Satellite Earth Station product line sales to nominally increase in FY16 as compared to FY15 with sales simply heavily weighted toward the fourth quarter of FY16.

In our Over-The-Horizon microwave system product line, sales in Q1 of FY16 were significantly lower as compared to the level we achieved in Q1 of last year. As most of you know, sales in this product line are lumpy and uneven and in this quarter, and this year will be no different. The current quarter decrease is largely attributable to the fact that both of our North African countries are nearing completion.

Although we expect sales in FY16 for this product line to be significantly lower than FY15, and heavily weighted towards the second half of the year, we are expecting a banner year of bookings. FY16 bookings are expected to include large orders from one or more new international customers who have expressed strong interest in purchasing from us, additional orders from the US military for MTTS Terminals and additional orders from our North African end customer for additional products for their communications network.

Based on our expectations associated with the timing of receipt of these orders, we are expecting to generate some revenue from these orders in the fourth quarter of FY16, with most of the revenue expected to be recognized in FY17 and beyond. Net sales in our RF Microwave Amplifier segment were $22.7 million in Q1 of FY16 as compared to $18.7 million in Q1 of FY15, an increase of 21.4%.

Customer reaction to our new SuperPower TWTAs has been positive. We received our first order for new SuperPower TWTAs in FY15, received additional orders for this product during the first quarter and we're expecting significant additional orders throughout the year.

Separately, we continue to expand our presence in the in-flight connectivity market and are expecting significant additional orders in sales in FY16 for these products, too. To date, the adverse global business conditions have not significantly impacted our RF Microwave Amplifier segment and we believe that FY16 will be another year of revenue and bookings growth for this product line.

Turning to our Mobile Data Communications segment, sales in Q1 of FY16 were $6.2 million as compared to $6.3 million in Q1 of FY15, a slight decrease of 1.6%. Sales in both periods include $2.5 million of revenue related to our annual $10 million BFT-1 intellectual property licensing fee. We expect that sales for the remaining three quarters of FY16 in a mobile data medication segment will approximate the same level we achieved in the first quarter as we continue to focus most of our efforts on providing BFT-1 sustainment support to the US Army.

Now let me walk you through our gross margin and operating expense line items and provide some operating metrics, as it relates to the context current business, again excluding the impact of the TCS acquisition. Our gross profit in Q1 of FY16, as a percentage of consolidated net sales was 44% versus the 46.2% we achieved in Q1 of last year. This decline in gross margins is largely attributable to the lower level of sales in our Telecom Transmission segment as well as overall product mix changes.

Looking forward and despite the various mix changes that are described in our Form 10-Q filed with the SEC yesterday afternoon, and excluding the impact of TCS, we believe that our consolidated gross profit in FY16, as a percentage of consolidated net sales, will be comparable to the level we achieved in FY15.

On the expense side, SG&A expenses were $16.7 million, or 26.1% of Q1 FY00 (sic--see press release "FY16") net sales as compared to $15.5 million, or 20.3% we achieved in Q1 of last year. SG&A expenses this quarter reflects $1.4 million of expenses related to our focus acquisition plan, the large majority of which related to our activities which resulted in the signing of a definitive merger agreement to acquire TCS.

Excluding the $1.4 million of expenses and any other potential future costs, associated with our CEO's ongoing business assessment, we believe that SG&A expenses in FY16 in dollars will be slightly higher than the amount reported in FY15. R&D expenses were $7.9 million, or 12.3% of consolidated net sales in Q1 of FY16 versus $10 million, or 13.1% in Q1 of FY15.

The decrease was driven by the cost reduction activities and the completion of several R&D projects that we initiated in prior years. As such, we expect Company-funded R&D expenses for FY16 in dollars to be lower than the amount we invested during FY15. Total stock-based condensation, which is recorded in our unallocated segment, was $1.1 million for the first quarter of FY16 as compared to $1.3 million for the first quarter of FY15.

Amortization of intangibles with finite lives was $1.4 million for the first quarter of FY16 and $1.6 million in the same period last year. Consolidated operating income in Q1 of FY16 was $2.2 million, or 3.4% of consolidated net sales as compared to $8.2 million, or 10.7% in the first quarter of last year.

Given our expectations of sales growth during the next three sequential quarters, as well as our assumptions on product mix, we are targeting operating income as a percentage of consolidated net sales in FY16 to still be approximately 11%. As we stated in our year-end conference call, this sales growth and operating income growth is expected to be heavily weighted towards the second half of FY16 with the fourth quarter expected to be our peak quarter of financial performance. Interest expense was $75,000 in the first quarter of FY16 and $265,000 in the first quarter of FY15. Interest income and other was $112,000 in the first quarter of FY16 compared to $84,000 last year in the first quarter.

Turning to income taxes, our GAAP effective tax rate for the first quarter of FY16 was 34.75%. We expect that our GAAP tax rate in FY16, excluding the impact of potential discrete tax items and the acquisition of TCS, will still approximate 34.75%. Adding it all up on the bottom line, as Stan mentioned, we delivered GAAP diluted EPS of $0.09 in Q1 of FY16.

Now let me provide some financial metrics to help add color to Comtech's results. Adjusted EBITDA, as defined at the end of our press release that we issued yesterday, was $7.5 million in Q1 of FY16. On October 31, our backlog was $107.9 million compared to $149.3 million at October 31, 2014. We generated $5.1 million of positive cash flows from operations during the first three months of FY16.

Looking to the rest of FY16 and excluding the impact of TCS, we do expect reductions in our working capital requirements, primarily due to the fact that both of our large Over-The-Horizon microwave contracts are nearing completion. As such, although FY16 revenue and operating income are expected to be similar to the levels achieved in FY15, we do expect that cash flows from operations to be higher this year as compared to last year.

At October 31, 2015, we had $150.7 million of cash and cash equivalents. This cash balance does not reflect our Q1 dividend that was paid in 2015 which approximated $4.8 million.

Yesterday, our Board of Directors approved a dividend for the first quarter of FY16 of $0.30 per common share. This dividend is expected to be paid on February 17, 2016, the stockholders of record on January 15, 2016. To date, and over the past 21 consecutive quarters, we have paid out over $109.4 million of dividends.

Let me now provide some comments on the pending acquisition of TCS from a financial perspective. But before I do, let me first just say thanks to the many Comtech and TCS folks as well as to our financial, accounting and tax advisors and our legal team who helped pull this all together. And I would be remiss not to say a special thanks to the finance and accounting staff at both Comtech and TCS, who worked tirelessly and were critical us being able to announce this acquisition.

No doubt like Stan, I am excited about this transaction. The financial and strategic benefits are strong and we look forward to working together with our colleagues at TCS. Under the terms of the merger agreement, Comtech, just this past Monday, initiated a first step cash tender offer at $5 per TCS share.

Once the first step cash tender offer is completed, it will be followed by a merger at the same price. All TCS debt, with a book value of approximately $143.6 million, is anticipated to be repaid upon the closing of the transaction. Comtech will fund the acquisition by redeploying approximately $149.9 million of the pro forma combined cash balances and has received committed funding in the form of a $400 million credit facility from a major financial institution for the remainder of the purchase price.

The exact terms of the credit facility have not yet been finalized yet but we are looking at what is commonly referred to as a Term Loan A structure, variable interest rates based on the pricing grid and typical banking covenants. The basic terms of such have been filed with the SEC.

Once the transaction closes and although the final amount will be dependent on the timing of the close as well as the timing of merger and integration expenses, Comtech is expected to have approximately $52.7 million of cash and cash equivalents. The acquisition has a transaction equity value of approximately $339.7 million and an enterprise value of approximately $430.8 million. The purchase price of $430.8 million represents an implied transaction multiple of approximately 8.9 times the last trailing 12-months of reported TCS adjusted EBITDA plus approximately $8 million of first-year identified synergies.

The transaction is subject to customary closing conditions, including the tender of at least a majority of outstanding shares of TCS common stock and an expiration of the applicable waiting period under Hart-Scott-Rodino. The transaction is expected to close no later than March 2016. Maurice Tose, Chairman, CEO and President of TCS, and Jon Kutler, a Director of TCS, each a significant stockholder, have entered into support agreements pursuant to which they have agreed to tender their shares subject to terms and conditions to demonstrate their strong support of the proposed transaction.

From a financial modeling perspective, going forward, almost 90% of TCS sales were derived from the United States, if you look at TCS for the trailing 12 months numbers. This includes sales to the US government and US-based wireless and voice over IP providers. As such, we believe this will reduce Comtech's exposure to volatile and challenging international markets on a pro forma combined basis.

Additionally, we believe that TCS brings repeat type revenue from hosting systems such as Next Generation 911 solutions. As Stan will discuss, we believe many of TCS markets are at growth inflection points. We expect growth will happen and are looking forward to seeing this play out.

We are thinking about grouping and reporting the combined company, based on the type of solution being offered to the end customer. In this regard, we are envisioning reporting sales via two segments, Commercial Solutions, which may include our Satellite Earth Station products, our RF Microwave Amplifier products, and TCS's Commercial business.

The second segment may be called government solutions and may include TCS's US government business. Our Mobile Data Communications business, which today largely consists of providing BFT-1 sustainment services to the US Army, and our Over-The-Horizon microwave product line, which is largely sold to US and international government end customers.

It is important to say that we have not yet made any financial -- final operating segment disclosure decisions and continue to study and assess the best way to report as well as manage the combined companies on a go forward basis. On the synergy front, we are taking what we believe to be conservative but realistic view of the synergies that we can achieve. In this regard, we are anticipating total annual synergies of $12 million with $8 million expected to occur in the first 12 months after close.

TCS is a large acquisition and we obviously want to do it right. Our goals in year one are to achieve the reduction of duplicative public company costs, reduce spending on maintaining multiple information technology systems, and obtain increased operating efficiencies throughout the combined companies.

On the financial side, I encourage you to read TCS's recent SEC filings, which I believe provide a good description of their results and an excellent basis for understanding their business. Obviously, TCS's SEC filings are written from their perspective based on a standalone, independent basis.

In their last earnings conference call, which was held on October 31, 2015, TCS provided revenue guidance of $380 million to $400 million of revenue and adjusted EBITDA guidance for the fiscal year ending December 31, 2015, of $42 million to $44 million. These numbers excluded certain items that TCS management considered to be nonrecurring.

TCS has only one more month to go in their FY15 and given the distractions that normally come with an acquisition process, and the fact that their guidance did not contemplate subsequent events, such as the recent terrorism that has occurred in the US, we have to see how their full-year numbers will play out. However, once TCS is combined with Comtech, and without the noise and distractions of an acquisition, we believe it is realistic that their annual revenue run rate will approximate $364.1 million and they should be able to achieve an annual run rate of adjusted EBITDA somewhere around the $40.4 million which is what TCS actually achieved for the past 12 months ended September 30, 2015. This $40.4 million adjusted EBITDA number does not include our estimate of first-year synergies.

How these revenue and adjusted EBITDA figures plug-in to Comtech's fiscal year and financial model is a bit more complex and is dependent on timing. Once the transaction closes, we will have a better sense of it. Either way, and going forward, we do believe that the revenue and adjusted EBITDA metrics will increase in the years ahead.

As is typical of a transaction of this type and size, we expect to incur substantial merger and integration-related expenses that, pursuant to purchase accounting rules, may no longer be capitalized as part of the cost of the acquisition. In aggregate, merger and integration-related expenses are currently estimated to be approximately $27.5 million.

Post-acquisition, we expect that our GAAP EPS will reflect substantial, recurring non-cash charges related to the amortization of TCS's identifiable and tangible assets that we acquired in the transaction. We have not yet completed an analysis of the purchase accounting treatment associated with these assets.

Additionally, there may be certain estimate changes and/or accounting policy changes related to items such as capitalized software development and deferred revenue that we may make. Although these items are not expected to impact cash flow, we are still reviewing these items accordingly. So accordingly, we are not yet in a position to comment on the GAAP EPS impact of the TCS acquisition.

As we think about our forward-looking financial performance, we expect adjusted that EBITDA, as we define it in our press release, will become an even more important and key metric for investors as such metric is anticipated to highlight the earnings power of the combined entities. In summary, I believe the financial aspects of this deal are compelling and I am confident that we will be able to grow the combined business and achieve our expected operating synergies.

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

Thanks, Mike. Given the fact that not much has changed in our existing business since we announced our initial 2016 guidance back in September 2015, I will briefly discuss our three business segments and then talk a little bit about TCS.

Let me 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. Market conditions remain tough and have not improved.

Given the August 2015 retirement of our subsidiary President for this product line, we decided to make several personnel changes, including in our sales and marketing team, to expect to produce improved bookings, particularly on the international side which has been weak for several quarters. I do believe there's pent-up demand and based on our funnel of opportunities, I'm optimistic that we will achieve sequential order and revenue growth for each of the next three quarters as compared to our most recent quarter.

I'm also enthusiastic about our new Heights solution. Heights is a scalable networking platform designed with the service provider in mind. It leverages a single user interface with powerful a 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 enterprises using traditional satellites as well as HTS, or High Throughput Satellites. Heights is a successor to our Advanced VSAT product line; it will take a little time to establish itself in the market. However, we continue to invest in enhancements so that this platform can be used in markets that we have not historically participated in.

To date, customer reaction to the Heights platform has been very positive. We have some initial orders and we are expecting Heights and our Advanced VSAT products to contribute meaningful sales in the second half of FY16.

On US government side of our Satellite Earth Station product line, we continue to perform work on our Advanced Time Division Multiple Access Interface Processor, or ATIP contract and anticipate sales in FY16 from shipments of ATIP production units to the US Navy. In addition, we anticipate new development production contracts to further improve the Navy's communication system's performance. We're also pursuing similar programs with other US military customers.

On the Over-The-Horizon front, interest in Troposcatter Communication Systems, both with US government customers as well as new international customers continues to be strong. However, as you all know, predicting the timing of these potential contract awards is very difficult. As previously announced, we have received orders valued at $4.8 million for MTTS Troposcatter Terminals, solid state amplifiers, and associated parts for use by the US military.

At the heart of the MTTS System is Comtech system's industry-leading CS67500 Digital Troposcatter modem, which provides the highest data capacity of any Troposcatter modem available. Our modem features Turbo Code forward error correction, ethernet-based band conductivity with variable rates up to 50 megabits per second. We do expect to book and ship additional orders for MTTS Terminals before FY16 is over.

Also, we're bidding on international opportunities in the Middle East, Australia, Asia, South America and Africa. Although timing remains difficult to predict, I still believe that we will be awarded one or more of these contracts in FY16 and that we will generate related revenue and operating income in the latter part of second half of 2016.

Turning to our RF Microwave Amplifier segment, I expect that FY16 will be another year of revenue and operating income growth. We've seen extremely positive customer reaction to our new SuperPower Traveling Wave Tube Amplifiers, which were introduced in March 2015. Our SuperPower amplifier will not only allow our customers, such as broadcasters, to build out new infrastructure, it will enable the replacement of aged, inefficient equipping in the current infrastructure with a 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. Our solid-state power amplifiers help enable commercial airlines to provide in-flight connectivity services to their passengers. This is a new and growing market for us and we expect additional orders and we believe that this area should be a significant revenue contributor for Comtech over the next several years.

On the US military front, we remain well-positioned regarding our Traveling Wave Tube Amplifiers that 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-power solid-state power amplifier side, business remains steady. We continue to develop new products that will ensure we remain at the forefront of this technology.

In our third segment, Mobile Data Communications, the largest revenue contributor remains our BFT-1 sustainment work for the US Army. This work is tangible evidence of the important role our technology plays with the Army. Our primary goal in the Mobile Data Communications segment continues to be providing the Army with outstanding support; in doing so, should position us well to participate in Next Generation platforms.

Now let me provide some commentary on the TCS acquisition. As far as Mike said, I want to express my sincere thanks to the many Comtech and TCS employees who made this announcement possible. I'm very excited about the future prospects of the combined company and we look forward to welcoming TCS's talented and dedicated employees to the Comtech team.

I believe we will make the TCS acquisition a rewarding transaction for our customers, our employees and our shareholders. As most of you know, for the past several years, Comtech has had to reposition itself from the loss of the BFT-2 contract and it's had to deal with difficult market conditions, particularly in the international market.

Additionally, we conducted a strategic alternative analysis which included a potential sales process. Ultimately, our Board decided that the best path forward was to remain independent.

During our last conference call in September, I informed you that I believed our customers love our products and our technical prowess. At the same time, they told us they wanted to do more to meet their needs. As result, we embarked on a focused acquisition plan to expand our global footprint and further diversify our business.

As such, I'm pleased that we were able to announce the TCS acquisition. It's a large step forward in our growth strategy. Comtech has viewed TCS as an attractive acquisition candidate for many years.

TCS is a business we're comfortable with. We believe we understand it very well. During the last few months, I've gotten to know not only the company but its leadership and I'm convinced that TCS is an excellent fit for us.

TCS is a technology company that generates significant IP, has a portfolio of over 300 granted patents worldwide, and nearly 400 patent pending applications. Combined, we represent significant technical competence.

Let me walk you through some key TCS solutions and tell you why I'm excited about the growth opportunities I see ahead of us. As Mike referred to in his portion of the call, we think about TCS Solutions in two groupings, commercial solutions and government solutions. There is some overlap in synergy between the two but we believe this grouping is the right way to think about the TCS business.

Let me start with commercial solutions at TCS. They include public safety solutions, such as Enhanced 911 systems, location-based wireless infrastructure applications and solutions, telematics and navigation, and text messaging infrastructure for wireless operators. Since deploying the first US wireless E911 solution in 1998, TCS has been a leader in providing public safety solutions.

TCS is a pioneer and continues to improve the methods by which US Public Safety Answering Points, or PSAPs, can receive a wireless or a Voice over Internet protocol subscriber's location during calls for emergency assistance. Public Safety Solutions include 911 call routing for wireless and Voice over Internet protocol network operators and next-gen 911 solutions for federal, state and local public safety operations. Given all that's going on in the world today, it's easy to see how this market should grow.

TCS also provides location-based wireless infrastructure applications and solutions which support the generation and distribution of location information for both indoor and outdoor environments as well as telematics and navigation solutions. TCS's location-based solutions and telematics and navigation solutions can cover the entire value chain and is backed by over two decades of experience. TCS's navigation applications include GPS-enabled software, such as Verizon's Navigator Services, which make it easy for users to find whatever they need to get directions to nearby restaurants and other points of interest.

While it is true that there are free mapping solutions such as Google and Apple, TCS offers a concept called Trusted Location, which offers location aware applications to receive a precise location, using a unique and patented set of libraries which leverage cellular, satellite, Wi-Fi and other data sets. Unlike other mobile location services, this Trusted Location is not dependent on carrier networks and calculates a Trust Score to report back the level of certainty associated with location and authenticity. Whether it's for credit card, security, enterprise mobility management, or cross-border compliance, for such markets as online gaming, we believe the demand for this type of service is going to grow rapidly.

TCS also offers text messaging solutions. We believe they are one of the leading providers of text messaging in North America. The comprehensive message solutions provide carrier grade platforms and high-performance short messaging services, or SMS, routing. These solutions include APIs for cloud messaging centers, wireless, intelligent gateways and a feature-rich operator grade messaging platform, designed to support both traditional networks and new LTE networks.

Given continued investment by carriers in their networks, we believe this business will bring repeat type revenue to Comtech, in that we could potentially bring these technologies to some of our current international mobile carriers.

TCS has several strategic initiatives underway to monetize its proprietary commercial software, including licensing of location toolkits and API solutions. I do believe success in this area has been achieved and look forward to future announcements.

As Comtech and TCS both sell into the US government, I believe we can offer differentiated tracking solutions and hope to incorporate some of this technology into our Next Generation BFT offering, for example, somewhere down the line. This is just one example of the synergies that still excites me about the acquisition.

TCS and Comtech have decades of combined experience working with the US government. Many of you know about Comtech solutions. Let me talk about TCS's Government solutions.

TCS's government solutions are primarily sold to US Department of Defense agencies and primarily consist of C4ISR solutions. They include wireless ground terminals, related support, management and resell satellite bandwidth, and information technology outsourced services. TCS furnishes and supports ground terminals used for secure satellite-based and other line of sight and beyond line-of-sight communications as well as related components incorporating government-approved cryptological devices and other hardened components for aerospace and defense.

Additionally, TCS provides cybersecurity services to support in-training. I'm excited about the growth opportunities as it relates to C4ISR solutions. For example, TCS provides a deployable, Very Small Aperture Terminal, or a VSAT ground terminal, called Secret Non-secure Access Point, or SNAP, to the Army. This continued -- they continue to support and upgrade these systems.

TCS is also a prime vendor under two five-year indefinite delivery/indefinite quantity defense contract vehicles, the Army's Global Tactical Advanced Communication System, or GTACS contract, which has 20 prime contract awards and a maximum value of $10 billion, and the Defense Information Systems Agency's Custom SATCOM solutions, or CS2 contracts with eight prime awards and a maximum value of $2.6 billion. In 2014 TCS was one of the awardees of the Department of Homeland security's $22 billion Enterprise Acquisition Gateway for Leading-Edge 2 or EAGLE II contract. The contract enables the purchase of full range of TCS IT services, technical and management expertise, and solution-oriented products. I'm confident that the TCS's sales force, customer relationships and contract vehicles will provide growth opportunities for us.

Let me close this portion of the conference call by saying that we did have numerous opportunities to push forward on several acquisitions. After careful analysis, I felt strongly that this acquisition was the right one to pursue and I believe that all our stakeholders will benefit from the transaction in years ahead.

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

(Operator Instructions)

Mark Jordan, Noble Financial.

Yes, good morning, gentlemen. Mike or Stan, I would like to just on a top -- from a high level, looking at this acquisition incrementally, if you have a base adjusted EBITDA rate of about $40 million, and if you were to exclude in the first 12 months integration, and assume that your $8 million of synergies were in place at the start of the year -- so, if you were to do that, you would have about a $48 million base.

Is it fair to say that the interest expense of this transaction should be -- of what you are borrowing -- $15 million, $16 million? I know that TCS was at about a $15 million [GAAP] tax run rate, so would this imply that you would have incremental positive free cash before changes in working capital and the $15 million positive impact, again, giving the assumptions that all the synergies or first-year synergies were realized?

Yes, I think, when you use the phrase cash flow, I'll caution you that there's always differences between EBITDA and cash flow. So, certainly, if you just want to use EBITDA as a proxy, our view would be, you have $40 million-some odd of adjusted EBITDA, plus there's synergies. And then, of course, you've got the interest expense, which, I think, Mark, you even had in your report somewhere between $15 million and $17 million or so per year, depending on what the final terms or conditions are and the final loan amount that we go with.

Okay, so, that thought process is reasonable then?

I think so.

[Okay. A little bit of nuts and bolts: Can you give the backlog by segment], and just compare it to the fourth quarter also?

Sure. Certainly our backlog in our Telecom segment is down. We went from $54.9 million in Q4 last year to $49 million. Our RF amplifier backlog actually grew, given the expected growth that we have, and then we finished at $45.8 million. And our mobile data com, as we run off the BFT-1 sustainment option year went -- is about $13.1 million for the quarter.

So, if you take $49 million, $45.8 million, $13.1 million -- we finish with backlog of $107.9 million. Obviously, we do expect to get the next phase, if you will, of the BFT stuff, and our backlog is expected to grow as we get these large orders, especially on the Over-the-Horizon side later in the year.

Okay. Question relative to TCS: I know that, at least TCS had sized that business opportunity as a $200 million, their five-year opportunity for them, which obviously would incorporate your modems. Do you have a sense -- or do you think that is a [reasonable estimate from your standpoint? And secondly, can you give a little bit] better visibility, revenues coming from that product line over the next 6 and 12 months?

So, I can't comment on their -- on how they've sized -- I can tell you that, based on the number of terminals we think that are going to be deployed, the number doesn't sound unreasonable. But that's about all I can tell you.

They do more than just the terminal. They do support, maintenance, training, other things. I would have to defer to them on the details of how they come up with that estimate at this point.

Mark, just to add to Stan's comments as well is, obviously, from when you combine the two Companies, you'll lose the -- some of the duplicate revenue because as some of the revenue will flow through both Companies on a stand-alone basis, but with one company, it will be one number. But obviously, the revenue number will be lower, but the margin percentage will be higher.

You will still retain the same profit. But one of the things we're still working through is, TCS has a fiscal year of December 31 and we're 7/31, so the timing of some of these things, we just need to sort through. But I think I agree with Stan's comments.

Okay. Question relative to accounting: You mentioned that there's a probability that you are going to re-cast the way you report results. Would you assume that that would be done with reporting of your fourth fiscal quarter, or do you assume that that may be done at the end of the April quarter?

Well, it will really be dependent upon the timing of close, so if we do close in the March period, our hope would be to get it done in the Q3 period. But we will see if we could do that. There's some systems things we've got to go through, and we need to obviously finalize our decision in terms of how the segments work, but that would be our goal.

Okay. Final question for me: Relative to the integration opportunities, your Tempe manufacturing facility has -- I know, especially with mobile data [usage] almost set up to do -- act as a contract manufacturer for outside opportunities, and mobile data use them. Is there the opportunity to derive some significant efficiencies using that as a larger -- a manufacturing base that you could leverage TCS activities off of?

I would anticipate that the answer to that is yes. Obviously, at the moment, TCS is outsourcing some things that we see as potentials to bring in-house, so I think so. We haven't worked through the details obviously.

I also think there's opportunities for us to provide components and other things which are currently not being purchased from us. So, I think there's potential synergies. I can't quantify it for you yet; we just haven't got to that level of detail.

Okay. Thank you very much.

(Operator Instructions)

Chris Quilty, Raymond James.

Thanks. This is a little bit of a follow-on to Mark's question, but, Stan, could you give us perhaps your top two or three areas where you think there are operating synergies with TCS, either on product line, customers or projects?

There's the obvious ones, right -- the [core] public company costs. Then there is some obvious duplication in some of the corporate functions which are potential synergies.

Once you get past that, then Troposcatter is probably an easy one to look at. We are each marketing independently on Troposcatter, so I've been getting that together; it will provide synergy. We have access to some markets where TCS doesn't have marketing coverage necessarily. So, I think there's synergies there.

The other one I think that's pretty exciting -- we've talked about the public safety stuff, the 911 call routing and next-gen and those sorts of things. We have customer relationships in a lot of places in the world with -- particularly with mobile carriers that are potentials for us to provide entrees to TCS folks. So, that, to me, looks like some good synergies.

There's the manufacturing stuff we talked about. There's some of the engineering things that I think we can do for TCS that would provide some synergy as well.

Great. On the Troposcatter, do you anticipate any issues there with Hart-Scott-Rodino? Because I don't think, other than Raytheon, you've got a whole bunch of other companies out there offering solutions?

Yes, I do not. There are, in fact, several companies offering Troposcatter modems. Raytheon is one. There's others outside of the US, and there's one or two other US manufacturers as well. I don't think there's going to be an issue there.

Got you. On the RF amplifier or an in-flight connectivity opportunity, can you talk specifically about how you are sizing and attacking that market, and what you're doing different in terms of product?

So, the amplifier for that is very challenging technically. It has to be very compact. Obviously, the technical performance has to be very good. But you have size, weight, power and other issues associated with mounting it structurally in the aircraft, having it qualified for flight. So, those are not just your father's amplifiers; they are pretty technical.

The efficiency is really where we think we have the advantage; that's in terms of power output and in the package. So, we are going to continue to do that, looking at other potential frequencies and other providers of the end system. So, we expect that to be a good area for growth.

Did that answer your question?

I was going to ask a quick question for Mike. I know you haven't yet done the purchase accounting, but do you have any sense of two things -- what the split between goodwill and tangibles might look like, and just a clarification. Is it fair to assume the deal intangibles will probably be amortized over, like, a seven-, eight-year time frame?

Well, there's -- we have not completed the analysis, Chris, and I would even say it is very preliminary. I've always used the rule of thumb when I do my initial modeling, and I'd almost say, if you look at the net tangible book value of TCS today, you will find that almost all of the purchase price will be ascribed to either the intangibles or the goodwill bucket.

So, we are talking about a pretty large bucket that will be allocated to those two groupings. And then from a rule of thumb, yes, I think if you just rule of thumb it for the time being, at 50% going to intangibles and 50% going to goodwill, that's our initial straw that we are using for our modeling. Once we go through the process, we will obviously adjust that.

That could change significantly. It's just a straw-man number. But I think if you look at what the norm is, and what acquisitions of this size and this type of technologies, I think if you look at a six- or seven- or eight-year life, that's probably a good guess.

That's it, and can you also talk about the deal financing? I think you said you have at least an initial commitment for $400 million. How would you look to structure the long-term financing for the deal?

Sure. We have a $400 million committed credit facility that we've entered into. It consists of two types of structures -- a $250 million term loan, and with the remainder being a revolving credit line. The term loan will be pretty much filled up when we close the transaction. The remaining piece is going to be what comes out of the revolver.

We're looking at a few other things to see if it makes sense to get lower interest cost, but we do think that the -- we have a LIBOR-based interest rate that we think is pretty reasonable. The total number will be in the 4%s by the time we get -- so, somewhere around 4.5% or something like that we will wind up with. But we're still trying to work through some of the final details and final structuring, and we will do that before close.

Got you. Thanks, guys.

(Operator Instructions)

It appears we have no following questions at this time.

Great. Thanks again for joining us today. We'll look forward to speaking with you again in March.

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