Comtech Telecommunications Corp (CMTL) 2016 Q3 法說會逐字稿

Welcome to Comtech Telecommunications Corporation's third-quarter FY16 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded Thursday, June 9, 2016.

I would now like to turn the conference over to 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 FY16. With us 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 Comtech's and TCS's businesses 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 Sloane. Stan?

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 $124.2 million in revenue, and adjusted EBITDA of $12.5 million. I'm extremely pleased with these results, which only include two full months of TCS operations. As Mike will discuss during his part of the conference call, this was a complex quarter from a financial perspective, so I'll leave the details of this information to Mike.

To begin with, I believe the acquisition of TCS is already a success, and our integration plans are on track. Additionally, although business conditions are still challenging, we are seeing signs of end market stabilization for our legacy Comtech business, and bookings for both legacy Comtech products and TCS products across most of our product lines were strong during the most recent quarter. With much of the integration work behind us, I look forward to a solid finish in FY16, and I'm increasingly optimistic that FY17 will be a strong year for Comtech.

As a sign of our confidence, I'm pleased to state that our Board of Directors has established a targeted annual dividend for FY17 of $1.20. Although future quarterly dividends and the actual amounts of such dividends are subject to: one, business conditions; two, the terms and conditions of our secured credit facility; and three, ultimately Board approval. Our Board does believe that quarterly dividends represent an excellent way to return capital to our shareholders.

I'll talk more about the state of the Business and TCS later in this conference call, but first I thought it would be good for Mike Porcelain to start with a financial perspective on our new Company. Mike?

Thanks, Stan, and good morning, everyone. I will speak first about Comtech's combined business, before providing remarks on our updated guidance.

During our third quarter of FY16, we experienced strong order flow for Comtech's legacy business, and benefited from incremental bookings associated with new advanced communication solutions that we now offer as a result of the TCS acquisition. In aggregate, we achieved bookings of approximately $139.2 million during the third quarter of FY16, which translates into a quarterly book to bill ratio of 1.12, compared to an average book to bill ratio of 0.81 for the two prior quarters.

TCS sales contributions during the quarter represent roughly two months of operations which began February 23, 2016, the closing date of the transaction, through April 30, 2016. As such, the mix impact on segment sales, gross profit, and other operating metrics does not reflect a full quarter of TCS contributions. Additionally, we continue to integrate our two Businesses, and we have begun to jointly market our products to facilitate future growth. Thus, over time, historical sales patterns and mix trends will become less relevant, and period-to-period comparisons of sales of legacy Comtech or TCS brands will not be meaningful.

With that said, we would expect to provide as much detail as we can in future periods, but for now we would encourage investors to look at overall consolidated results and metrics, until we have reported our results for a few periods. I will point out to you that yesterday afternoon we filed with the SEC a recast of our historical segments, so we hope that this will give you a sense of the sales composition for this quarter, and give you a sense going forward.

Consolidated net sales for Q3 were $124.2 million. These sales include approximately $66 million of sales as a result of the TCS acquisition. On a period-to-period comparative basis, sales of legacy Comtech products, in particular our satellite earth station product line and our Over-the-Horizon microwave product lines, were lower than the comparative Q3 period of last year.

On a segment basis, our commercial solutions segment represented 58% of consolidated net sales for the three months ended April 30, 2016, and our government solutions segment represented 42%. The range between these percentages over time should tighten.

Net sales in our commercial solutions segment were $72 million in Q3 of FY16, as compared to the $47.5 million we achieved in Q3 last year, representing the significant increase of 51.6%. This increase reflects incremental sales of approximately $31 million as a result of the TCS acquisition, partially offset by lower sales of Comtech legacy products.

Although sales of Comtech legacy products, in particular our satellite earth station products, continued to be impacted by extremely challenging business conditions that existed earlier in the year, as Stan mentioned, we do believe that market conditions have somewhat stabilized. During the three months ended April 30, 2016, we saw double-digit order growth for solutions that include our satellite earth station products, as compared to order flow during the three months ended January 31, 2016.

Additionally, bookings during our most recent quarter for our Traveling Wave Tube Amplifier solutions were the highest all year, and we believe this growth will continue. During the three months ended April 30, 2016, our commercial segment benefited from the sales of location- and messaging-based platform, and safety and security solutions that we now offer as a result of the TCS acquisition.

Turning to our government solutions segment, net sales were $52.2 million in Q3 of FY16, as compared to $24.1 million in Q3 of FY15, an increase of $28.1 million or 116.6%. The period-over-period increase reflects incremental sales of approximately $34.9 million as a result of the TCS acquisition, partially offset by lower sales of Comtech legacy products. The decrease in Comtech legacy products in this segment during our most recent quarter reflect significantly lower comparative net sales of Over-the-Horizon microwave system products, partially offset by increased sales of high-powered broadband amplifiers and BFT-1 sustainment support services.

Sales in both periods include $2.5 million of net sales related to a $10 million BFT-1 intellectual property license fee. During the three months ended April 30, 2016, our government solutions segment benefited from a variety of new advanced communication solutions that we now offer as result of the TCS acquisition. These solutions primarily include technical and field support, space components, and cyber training.

Now let me walk you through our gross margin and operating expense line items, and provide some operating metrics. Our gross profit in Q3 of FY16 as a percentage of consolidated net sales was 41.4%, versus the 45.1% we achieved in Q3 of last year. This decrease is primarily attributable to overall product mix changes resulting primarily from the TCS acquisition, in particular the inclusion of sales related to TCS government solutions which have historically had lower gross margins than Comtech's legacy products. We expect that our Q4 gross margin percentage to be meaningfully lower than the 41.4%, given that Q4 will reflect a full three months of TCS sales.

On the expense side, SG&A expenses were $30.4 million as compared to the $15 million we achieved in Q3 of last year. The increase in spending is primarily attributable to incremental expenses associated with the increase in size of our business as a result of the TCS acquisition. As a percentage of consolidated net sales, selling, general and administrative expenses were 24.5% and 20.9% for the three months ended April 30, 2016 and 2015, respectively.

Research and development expenses were $12.6 million or 10.1% of consolidated net sales in Q3 of FY16, versus $8.6 million or 12% in Q3 of FY15. This increase in spending is primarily attributable to incremental expenses associated with the TCS product lines, partially offset by lower spending as a result of cost reduction activities and the completion of several research and development projects.

Of note, I want to inform you that TCS now complies with Comtech's accounting policies related to software development. Thus you will see material declines in capitalization of software, as compared to what TCS historically reported. This quarter, in fact, we capitalized no software cost, and do not currently expect to do so in the foreseeable future. Total stock-based compensation expense, which is recorded in our unallocated segment, was $1 million for the third quarter of FY16, as compared to $1.2 million for the third quarter of FY15.

Our operating expenses this period include approximately $17 million of expenses related to our CEO's focused acquisition plan which culminated with the closing of the TCS acquisition. These expenses include significant amounts for change control payments, severance, and professional fees for financial and legal advisors for both Comtech and TCS. Although subject to change, we currently expect to record additional acquisition plan expenses of approximately $3.9 million during the fourth quarter of FY16.

The Company has completed a preliminary analysis, an assessment of the fair values of the TCS assets acquired and liabilities assumed. Based on this preliminary analysis, $280.9 million was allocated to intangibles with finite lives, and $127 million was allocated to goodwill.

As such, our GAAP operating income in future quarters is going to be significantly impacted by future amortization. Total amortization of intangibles during the fourth quarter of FY16, including amortization associated with TCS assets acquired, is expected to approximate $6 million. Looking forward, based on our preliminary analysis, total annual amortization of intangibles in FY17 is expected to approximate $22.8 million.

Given the acquisition costs, we reported a consolidated operating loss of $13.4 million in FY16. Excluding such amounts, operating income would have been $3.6 million or 2.9% of consolidated net sales. On a segment basis, operating in the commercial solutions segment was 9.2% of related net sales, and operating income in the government solutions segment was 10.7% of related net sales. As a reminder, these metrics will be different going forward once you add in a full year of TCS operations, and a full year of the TCS incremental amortizations. We expect to provide details on these metrics in our Q4 conference call.

Interest expense was $3.5 million. The Company's interest expense for the third quarter reflects, and going forward will continue to reflect, the cost of borrowings, in part for the TCS acquisition and the discharge of TCS debt that we assumed.

As of April 30, 2016, total debt outstanding, net of $6.2 million of deferred financing cost, and including capital lease expenses -- capital leases -- was $351.2 million, of which $17.8 million was current. The blended interest rate during the fourth quarter on our debt is expected to approximate 5%, and looking forward to FY17 will represent the same 5% on total debt.

Our income tax this quarter and this year has been and will be impacted by various items, including the final determination of what items are non-tax-deductible in connection with the TCS acquisition. As such, our GAAP effective tax rate for FY16 may ultimately change. Looking forward, however, the Company currently expects that its FY17 effective tax rate, excluding discrete items, will approximate 37.5%. Adding it all up on the bottom line, we delivered a GAAP diluted EPS loss of $0.89 in Q3 of FY16.

Now let me provide some additional financial metrics. Adjusted EBITDA, as defined at the end of our press release that we issued yesterday, was $12.5 million in Q3 of FY16. Adjusted EBITDA as a percentage of our consolidated net sales was approximately 10%.

At April 30, our backlog was $433.6 million, compared to $130 million at April 30, 2015. Our backlog at April 30, 2016, includes the backlog that we acquired from TCS.

At April 30, 2016, we had $69.1 million of cash and cash equivalents. This cash balance does not reflect our Q3 dividend that was paid in May 2016, which approximated $4.9 million. After payment of these dividends and payment of certain merger and integration expenses that occurred after our Q3, we currently have approximately $50 million in cash and cash equivalents.

Also, as announced yesterday, our Board of Directors approved a dividend for the fourth quarter of FY16 of $0.30 per common share. To date, and over the past 23 consecutive quarters, we have paid out over $119.1 million of dividends.

Finally, before turning it over to Stan, let me now provide some comments on our guidance. Yesterday we announced that we were updating our FY16 revenue guidance to a new range of $425 million to $435 million, and our FY16 adjusted EBITDA guidance to a new range of $44 million to $46 million.

The Company's updated FY16 financial guidance reflects an updated assessment of the timing of expected orders; anticipated shipment delays related to Over-the-Horizon microwave equipment orders currently in our backlog; as well as additional legal expenses associated with legacy TCS intellectual property matters, which are discussed in more detail on the Company's Form 10-Q filed with the SEC.

With respect to EPS, we currently expect our GAAP diluted EPS for FY16 will range from a loss of $0.90 to a loss of $0.81. And as I mentioned earlier, our tax rate for FY16 may ultimately change, as we still need to finalize several aspects of purchase accounting. As such, don't be surprised if our actual GAAP EPS for 2016 differs from our current estimates.

Normally we don't provide annual guidance for the next fiscal year until September, when we file our annual results with the SEC in our Form 10-K. However, in light of the complex financial aspects of this transaction, we believed it was better to give you a sense of what we are thinking about at this particular point for next year.

We have begun our annual planning process, and we are currently targeting FY17 adjusted EBITDA to range from $70 million to $80 million. These adjusted EBITDA targets include 12 full months of TCS operations, a full year of synergies, and earnings growth, partially offset by incremental legal expenses related to TCS legacy intellectual property matters.

On the synergy front, we are taking what we believe to be a conservative but realistic view of the synergies that we can achieve. In this regard, we are anticipating total annual synergies of at least $8 million next year. And as we finalize the next phase of our integration plans, we hope to achieve our goal at $12 million, and we will let you know when we do.

TCS is a large acquisition, and we obviously want to do it right. Our goals in year one are to achieve the reduction of duplicate public company costs, reduce spending on maintaining multiple information technology systems, and obtain increased operating efficiencies throughout the combined Companies. In summary, we believe the financial aspects of this deal are compelling, and we are confident that we will be able grow the combined Business and achieve our expected operating synergies.

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

Thanks, Mike.

With the acquisition of TCS now closed, our Company looks markedly different. However, at our core, we are a provider of advanced communication solutions. These solutions deliver proven high levels of reliability, security, and availability.

The TCS acquisition positions us for sustainable growth. In simple terms, we've more than doubled our annual revenue base, doubled our employee base and our adjusted EBITDA in FY17, and expect it to grow in coming years.

I believe our Business is at a turning point, and I'm excited about the growth opportunities I see ahead of us. With a combination of experience, careful planning, and successful execution, we will be able to drive significant shareholder value for many years ahead. The TCS acquisition was a significant step in our strategy of entering complementary markets, and expanding our domestic and international commercial offerings.

In connection with the acquisition, we began managing our combined businesses through two segments: commercial solutions and government solutions. Let me first talk about commercial solutions, which serves commercial customers and smaller governments, such as state and local government, that require advanced technologies to meet their needs. The segment also serves certain government customers, including the US government, when they have requirements for off-the-shelf commercial equipment. I believe this segment is a leading provider of satellite communications, such as satellite earth station modems, traveling wave tube amplifiers, public safety systems such as next generation 911 technologies, and enterprise application technologies such as messaging and trusted location-based technologies.

This segment on a long-term basis should approximate 50% of our revenue, and it's aligned with several large growing end markets. Our satellite based communication products serve satellite backhaul and services market, which, based on third-party reports, is predicted to grow at better than 10%. We remain the undisputed leader in the satellite earth station SCPC modem area, driven primarily by our ability to deliver the most bandwidth efficient modems, and highest efficiency amplifiers to our end customers.

Currently, many of our legacy Comtech products are sold to international customers, including many in developing countries that have been negatively impacted by challenging business conditions, including the strong US dollar and relatively low energy prices. That said, during our most recent quarter we experienced double-digit bookings growth as compared to Q2. So it appears that some stability has returned to these markets, and sales of our products should increase next year.

Our satellite-based products include our new Heights solution, which is 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 satellites, as well as the new generation high throughput satellites.

While Heights is new to the market, we are already investing in enhancements to the platform that can be used in markets that we have not historically served. To date, customer reaction to our Heights platform has been very positive. We believe that Heights and our advanced VSAT products will contribute meaningful sales in the future.

We have also seen very positive customer reaction to our new Super-Power Traveling Wave Tube Amplifiers, which were introduced in March 2015. Our Super-Power Amplifiers will not only allow our customers, such as broadcasters, to build out new infrastructure, it will enable the replacement of 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. 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 believe should contribute significant revenue for the next several years.

Our commercial solutions segment includes two new product lines that we acquired in connection with the TCS acquisition. Let me first talk about public safety solutions. 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 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 state and local public safety operations. Given all that's going on in the world, it's easy to see how this market should afford growth. We currently route approximately 50% of all wireless 911 calls, and are currently chasing several large contracts with new and existing customers that bode well for future business.

The deployment of 911 technology for Wi-Fi calling is also growing fast. Wireless carriers are eager to offer this service, due to the cost efficiency that they can realize by offloading traffic from their wireless networks in congested urban areas, and a key part of the offering is making 911 services available.

As with their LTE and older networks, operators are turning to Comtech to 911 enabled Wi-Fi voice calling service. During Q3, one of our customers launched their voice over Wi-Fi 911 enablement service, and we received an $8 million contract related to this.

We believe we are also a leader in providing text to 911 technology for network operators who must comply with SEC rules or voluntary commitments. We've now completed PSAP deployment in over 800 of the nation's public safety answering points, with a presence now in 37 states, Puerto Rico, and DC.

We believe the next-generation 911 market will grow when we see an increase in statewide and local opportunities as agencies work toward upgrading their 911 systems to become next-gen 911 compliant. We also believe that the next-gen footprint is growing in Texas, California, Connecticut, Florida, Iowa, and Tennessee.

New in the quarter was an award to expand our call handling footprint into Guam under a three-year contract with a large US government agency. As a result of TCS acquisition, Comtech now provides ESInets, that is National Emergency Number Association I3 standards compliant emergency services IP network infrastructure. We are seeing a significant increase and interest in building channel partnerships for these ESI product lines. And during Q3 [we renewed] a statewide ESInet contract with a midwest state, and received orders for new call handling deals for several counties in the midwest.

Our last solution set in our commercial segment relates to enterprise and trusted location platform markets. Here too we believe this is a niche but growing market. As a result of the TCS acquisition, we now provide location-based wireless infrastructure applications and solutions which support the generation and distribution of location information for both indoor and outdoor environments and telematics and navigation solutions.

Our location-based solutions and telematics and navigation solutions can cover the entire value chain, and is backed by two decades of experience. These solutions include GPS-enabled software, such as Verizon's Navigator service, which makes it easy for users to find, locate, and get directions to nearby restaurants and other points of interest.

While it is true that there are free mapping-based 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 significantly over time. During Q3 we received a patent for identifying the reliability of mobile location by generating location trust score. This technology is a powerful tool for identifying fraud, preventing false positive denials of service, and confirming location compliance for regulated industries such as financial services and online wagering.

The first of its kind technology, Comtech's location trust score addresses spoofing issues by reporting the level of certainty associated with the location and authenticity of the device, and ensuring that a device location is in a compliant location for financial services and online wagering applications. We believe this market is poised for significant growth.

We now also offer text messaging solutions, and believe we are one of the leading providers of messaging in North America. We offer carrier grade platforms and high-performance short messaging services, or SMS, routing, including 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 brings repeat revenue to Comtech, and that we can possibly bring certain of these technologies to some of our international mobile carriers.

At this point, let me talk about the government markets and our government solutions segment, where we serve large government end users, including those of foreign countries that require mission-critical technologies and systems. Our 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 resale of satellite bandwidth, and information technology outsourcing services.

We engineer, furnish, and support 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 applications. Additionally, we provide cybersecurity services support and training.

We believe this segment is also a leading provider of communication system elements, such as digital multiplexers, troposcatter modems, amplifiers, and frequency converter systems. And our [FN] power switching technologies, such as solid-state high-powered broadband amplifiers used in electronic warfare applications, and identification friend or foe amplifiers, or IFF. This segment on a long-term basis should approximate 50% of our revenue.

Like our commercial solutions segment, this market is aligned with several large growing end markets. We sell many of our solutions into what we would call the global C4ISR market, which many third-party market studies indicate will grow in the low-single digits. We believe our portion of the market has a higher growth rate, because many of the products we offer relate to satellite- and wireless-based communication solutions, which we believe is growing faster than the overall market.

Additionally we believe there is tremendous demand by emerging countries for advanced communications solutions, including troposcatter technologies. We also offer cybersecurity training solutions.

Let me discuss some of the programs to give you a sense and type of the opportunities in this market. The Army's SIPR NIPR access point program, commonly referred to as SNAP, continues to be a source of business for Comtech. During the quarter, we received orders for $10.8 million, bringing total funded orders to $40 million, out of the $91 million task order that TCS was previously awarded.

We believe it is likely that the program office is considering an increase in contract ceiling, given their need to acquire additional SNAP equipment and logistic support in the foreseeable future. We believe the Army intends to purchase new SNAP equipment, as well as maintain currently fielded SNAP systems for the next several years. We anticipate that the Army will initiate a follow on acquisition for SNAP systems and support in FY17.

Comtech and TCS have been jointly marketing SNAP 3T TROPO solutions to the Department of Defense for some time. In the past, sales had been mostly small-scale to select operational units, and to certain test and procurement organizations. Although timing is always difficult to predict, we are optimistic that the Army will begin purchasing these systems in earnest. The Army has released an RFI for 200 systems, with a formal acquisition expected to be released in the fall.

Separately, we have some indications that the US Marine Corps will use the Army contract vehicle to purchase TROPO systems, and we understand that both the Marines and the Army are collaborating on requirements as well as acquisition strategies.

On the cyber training front, we received $13.2 million in orders in Q3 for continued support to the DOD and select national intelligence entities. We also completed development of the next release of our cyber training scoring tool, PerformanScore, which we believe is revolutionary in enabling real-time performance-based training. It's being adopted by a large trade organization known as ISACA, a major certifying agency for IT and cybersecurity. As such, we expect orders for this product to increase over the next 12 months.

On the BFT-1 front, in Q3, the US Army exercised option year two of the Company's three-year Blue-Force Tracking or BFT-1 sustainment contract, and related BFT-1 intellectual property license agreements. Bookings were $20.3 million, of which $10 million was from the first intellectual license -- final intellectual payment. $10 million was continued support, and $300,000 was for equipment orders. We continue to work with the US Army and ultimately expect to receive additional sustainment contract work to continue to perform services beyond March 2017.

Additionally, we believe that the US Army will ultimately purchase a next-generation system. Our primary goal now is to continue to provide the US Army with outstanding support. Doing so should position us well to participate in next generation platforms.

Finally, as it relates to our Over-the-Horizon Microwave solutions, shortly after Q3 closed, we received a $7 million contract to design and install a number of fixed troposcatter terminals for a foreign customer. We're bidding on additional international opportunities in the Middle East, Australia, Asia, South America, and Africa. We've shifted our timing of some of these contract awards to FY17, and obviously timing always remains difficult to predict. Nevertheless, I believe we will receive some significant orders during FY17, which will contribute to next year's results and beyond.

All in all, let me conclude the conference call by saying I believe our Business is poised for growth in 2017 and beyond. I want to express my sincere thanks to the many Comtech and TCS employees who made the acquisition possible. I'm very excited about the future prospects of the combined Company, and believe we'll make TCS acquisition a rewarding transaction for our customers, our employees, and our shareholders.

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

(Operator Instructions)

Mark Jordan, Noble Financial.

Thank you. A question relative to the integration expenses in your press release, I think you stated that you're estimating $24.6 million acquisition expenses through the fourth quarter or through the end of this fiscal year. I believe when the acquisition was made you were estimating acquisition related expenses in excess of $40 million.

I guess my question is twofold. One, are you, do you have any expenses that will fall into FY17, if so can you quantify it? And secondly, if it's all contained here in the current year, what has changed that calls for a [lowball] of acquisition related expenses?

Sure, Mark, yes, let me just, to clarify and confirm, we are still expecting $48 million of total merger and acquisition expenditures. As we talked about in the press release, some of those expenditures are effectively capitalized as part of the purchase price accounting, so for example, we've had a little under $10 million of costs with our secured credit cost the facility which would be capitalized on the balance sheet as part of deferred financing costs.

And a portion of those costs were incurred by TCS prior to the acquisition closing, so in the January and early February timeframe, some of those expenses were effectively recorded on the income statement of TCS. So when you add everything up it's about $48 million from a modeling perspective.

But you're correct. What you see in the P&L for Q3 and $3.9 million is our current estimate for Q4, that would be it, in terms of what's going to hit the P&L for 2016. At this moment we're not expecting any of the transaction cost to roll into 2017. So that would kind of wrap up by the end of our Q4, everything would sort of be wrapped up in a bowtie.

Okay, thank you for clarifying that. So then simplistically that $10 million of capitalized interest cost will flow through, included in your 5% average fully loaded cost that you talk about in the press release.

Absolutely.

Okay. Final question for me relative to the satellite modem business, that's a [turns] business, book and ship business. Clearly you saw an uptick in order rates. What gives you a feeling that the stabilization or improvement in order rates in the most recent quarter is reflective of a longer term trend that will show improvement?

So I would point principally to oil, which the oil prices are back up a bit. And it seems to me, observation is that we seem to be very sensitive to the oil prices. So I think that's probably the most encouraging sign. I think the dollar exchange rate has stabilized a bit. Those are probably the principal things.

And I guess related to that, how much of those orders are to some extent non-deferrable, because your customers are running up into capacity issues? Is that also something, since you've had a lot of delays that they be impacting also?

So I'll answer that two ways. One is that our customers over time have to replace equipment. They just have to. Things wear out.

So what happens when things slow down is there's a build up in demand, there's pent-up demand for it. So some of what I think we're seeing is the result of people just [at a] point when they've got to start replacing stuff.

The oil price is a catalyst for that. I think probably, oil prices, it's more about stability than it is the absolute number. And so the outlook for the oil price I think is better than it's been quite some time, so I think it's a combination of those two things.

Okay, thank you very much.

Chris Quilty.

Thank you. Gentlemen, I was hoping you could comment a little bit about the troposcatter over-the-horizon pipeline, and how you view that, and additionally if you can talk about the current projects you have running right now, where they stand in the typical sort of two- to three-year deployment schedule, and what you have in terms of visibility for the next year?

So on TROPO we have an existing customer in the Middle East that we continue to provide support for, that's been ongoing for some time.

On the new orders front, there are several. I talked about SNAP, so I won't dwell on that one. But on the international front, there are several significant orders that we have been pursuing for a while, one of which we just mentioned in the call and we're hoping for a couple of those will come through.

Those are typically direct contracts. There was one that we were pursuing that was a [FMS] sale, but for the most part they're direct commercial. Typical period of performance on those things is like two years, two to three years, and then they typically have a sustaining tail for logistics that goes on for several years after that. So that's sort of the outlook.

The dynamic in the TROPO arena that I would mention to you is the fact that we now have modems that are capable of running at much higher bandwidth, and that enables TROPO for a lot of applications that previously they weren't viable for. So what we've seen lately is an increase in interest from a lot of places that, in mostly international, and the problem is converting that interest into contracts. So that's sort of where we are in the cycle. Some places can do that very quickly, some places take a long time, because they have to go through extensive procurement bureaucracies, but that sort where things stand.

On the SNAP front and military, I mentioned the RFI, so that's a pretty good indicator that the US government is going to move out one on procurement, so that one's pretty encouraging.

Got you. And it looks like this the last BFT license rolling through. Can you talk about what you see in the opportunities in that business area? I know a couple of years ago, you talked about looking at potential commercial applications for the core technology, and with the TCS acquisition, I think you pick up either some products or capabilities there, that is, there's something you plan on trying to reconstitute and target?

So on BFT, a couple of things. One, irrespective of the license fee, the government is going to operate BFT for some years. We anticipate to continue to support that product for the US government.

We are also pursuing a couple of international programs that would include a version of the BFT-1 transceiver. Those are in competition, so I don't want to talk too much about them. But we are pursuing those, and they could be significant.

You mentioned commercial, I don't know if you would call those commercial. Those are direct sales to a foreign government.

Other than that, I think the biggest opportunity on the BFT arena is whatever is the follow on with US government. The government is going to have some sort of follow on. They have had a couple of programs, BFT-2, 2.5, and what we're trying to do today is to be positioned for whatever the follow on is. It's not defined as a particular procurement program at the moment, but we know it's coming.

Great. And final question just on the Heights platform. You seem to have had some success. Can you characterize, either by type of customer or vertical market, domestic, international, where you're seeing traction?

So Heights is applicable for a variety of verticals. It's intended for operators, whereas we traditionally had sold components. This is more of a system application, so it enables the operators to control all of the peripheral devices on the network, optimize network traffic, and do that through a single platform that we provide. That's how to think about Heights.

So it's applicable in all verticals that we serve, so that's M&O, maritime, whatever. And that's the way that we're going to market with it.

We've gotten several initial expressions of interest, appears to be very much have a lot of customer interest, has been to a couple of shows. We have a couple of demo systems that we're showing to customers, so that's sort of where Heights is that.

Perfect, thank you.

You bet.

(Operator Instructions)

And there are no more further questions. I would like to turn it back to the Company.

Great, thank you. Thanks again for joining us today. We look forward to speaking with you again in September. Have a great day.

And this concludes today's program. Thank you for your participation. You may now disconnect.