Comtech Telecommunications Corp (CMTL) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to Comtech Telecommunications Corp.'s fourth-quarter fiscal 2016 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded Friday, October 7, 2016. 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 fourth quarter of fiscal 2016. With us on the call this morning are Fred Kornberg, Chief Executive Officer and President of Comtech; Michael D. Porcelain, Senior Vice President and Chief Financial Officer; and Michael Galletti, our Chief Operating 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' 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 Chief Executive Officer and President of Comtech, Fred Kornberg. Fred?

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

As announced yesterday afternoon we reported our fourth-quarter results of $152.4 million in revenues, adjusted EBITDA of $18.8 million and a GAAP diluted EPS of $0.14. For the year our revenues totaled $411 million and our adjusted EBITDA was $48.1 million. Our GAAP diluted EPS for the full year was a loss of $0.46 per share given the $21.3 million of merger cost and integration expenses associated with our TCS acquisition that we recorded earlier in the year.

I will leave it to Mike Porcelain, our CFO, to discuss our financial results in detail, but first I'd like to comment on the past year and our recent leadership changes. First, I have to admit, I never expected to resume my role as CEO when I stepped down in December 2014. As most of you know, shortly after the Board conducted a strategic alternative analysis Dr. Stanton Sloane, a member of our Board, took on the role of CEO. I was named Executive Chairman with Stan reporting to me and the Board.

Just before Thanksgiving last year we signed a merger agreement to acquire TCS, a company we had partnered in the past on various projects and a company that perfectly fit the profile we were looking for. The acquisition took a tremendous effort. In the midst of the challenging financing conditions we took on approximately $360 million of debt.

We doubled our employee base and eliminated layers of TCS corporate executive management which resulted in making the TCS business units more entrepreneurial but also more accountable. We also expected to more than double our current revenue and are targeting fiscal 2017 revenues at $600 million with an adjusted EBITDA of $70 million.

During our fiscal 2017 business planning cycle I became increasingly more excited about our growth potential. However, as our planning cycle came to a conclusion our Board and I recognized that there were different paths to take to achieve the long-term shareholder growth we all were looking for.

On one hand, we could continue the TCS focus on pursuing large, lower margin government service businesses or we can concentrate on winning smaller scale opportunities where our technology and leadership could command higher margins. During the fourth quarter the right path became apparent. The TCS government business section missed its fourth-quarter booking goal and our top line was impacted.

Recognizing the differences of view, everyone agreed that a leadership change transition was appropriate and I agreed once again to resume the CEO and President's role. At the same time, we also decided to make some management changes in the Government Solutions business of TCS as well as creating a new COO role, bringing in an outsider, Mike Galletti, a skilled executive with impeccable operational skills. I'm extremely pleased that Mike Galletti has joined our executive management team.

With over 32 years of industry experience, including senior executive positions at Northrop Grumman and Harris, he has hit the ground running. Although only here a short time Mike has already met with several key customers, spoken with many of our employees and has taken the operations reins very quickly.

Looking forward, it is fair to say that I don't expect my second term as CEO to last as long as my first term. But let me tell you, I'm not going anywhere soon. I'm a large shareholder with a significant portion of my net worth invested in Comtech. I expect to grow the Company and drive the Company value creation for our shareholders.

With that all said, let me turn the phone call to Mike Porcelain who will review our fiscal 2016 results and provide comments on our fiscal 2017 targets. Then I will come back and give you some additional comments before opening up to questions and answers. Mike, take it away.

Thanks, Fred, and good morning everyone. For the full fiscal 2016 we finished at $411 million of revenue. Our fiscal 2016 includes approximately $151.4 million of sales as a result of the TCS acquisition.

Of the $411 million of sales 40.8% was generated from US government customers, 30% was generated from international end users and 29.2% generated from domestic commercial end customers. Our Commercial Solutions segment represented 60.6% of fiscal 2016 sales and our Government Solutions segment represented 39.4%. For the full-year fiscal 2016 we finished with an aggregate of $451.3 million of bookings which translates into a full-year book-to-bill ratio of 1.10.

Our gross profit for the full year of fiscal 2016 as a percentage of consolidated net sales was 41.7% and we reported a consolidated operating loss for fiscal 2016 of $600,000 as compared to operating income of $34.1 million for fiscal 2015. Excluding $21.3 million of expenses related to our acquisition plan, which culminated in the acquisition of TCS, operating income for fiscal 2016 would have been $20.7 million or 5% of consolidated net sales.

On the segment basis, operating income in the Commercial Solutions segment was 9.3% of related segment net sales and operating income in the Government Solutions segment was 14.2% of related segment net sales. Consolidated adjusted EBITDA was $48.1 million or 11.7% of sales. At July 31, 2016 our backlog was $484 million.

Given the size of the TCS acquisition I believe our fiscal 2016 full-year results and historical trends are not meaningful. As such, I will focus the rest of my remarks on our Q4 2016 results because it includes a full quarter of TCS. And I believe when you annualize it, it provides a good perspective to understanding our initial fiscal 2017 targets.

Consolidated net sales for Q4 were $152.4 million. These sales include approximately $85.4 million of sales as a result of the TCS acquisition. Of the $152.4 million approximately 39% were generated from US government customers, 26.3% from international end users and 34.7% from domestic commercial end customers.

During our fourth quarter we experienced strong order flow for Comtech's legacy business which excludes TCS and benefited from incremental bookings associated with TCS product line. In aggregate, we achieved bookings of approximately $202.8 million during the fourth quarter which translates into a quarterly book-to-bill ratio of 1.33.

Net sales in our Commercial Solutions segment were $83.3 million or 54.7% of total net sales. During Q4 our Commercial Solutions segment benefited from sales of location and messaging-based platforms and safety and security solutions that we now offer as a result of the TCS acquisition. Sales of TCS products in this segment during Q4 were a proximately $41.9 million.

Bookings in this segment include a $45 million five-year contract to provide ESInet services to the state of Washington. This was a nice strategic win for Comtech.

On the Comtech legacy side, although sales continued to be impacted by challenging international business conditions we do believe that market conditions have somewhat stabilized. In fact, during Q4 bookings for our communication technology solutions, which include satellite earth station products such as modems and our traveling wave tube amplifiers, were the highest all year. We achieved a book-to-bill over 1.0 for this product line for the second quarter in a row.

Turning to our Government Solutions segment, net sales were $69.1 million in Q4 of fiscal 2016 or 45.3% of total net sales. During Q4 our Government Solutions segment benefited from a variety of new advanced communication solutions that we now offer as a result of the TCS acquisition. These solutions include technical and field support, space components and cyber training. Sales of TCS products were approximately $43.5 million.

Now let me walk you through our gross margin and operating expense line and also provide some operating metrics. Our gross profit in Q4 of fiscal 2016 as a percentage of consolidated net sales was 40.8%. Our Q4 reflects a full quarter of sales related to TCS products such as TCS Government Solutions which have historically had lower gross margins than Comtech's legacy product line.

Given the tactical shift in strategy in our Government Solutions segment that we announced last week, it remains difficult to precisely predict revenue and product mix. Nevertheless, it is reasonable to assume that our fiscal 2017 gross margin percentage will be similar or slightly lower than the 40.8% we achieved in the fourth quarter.

As a reminder, our fiscal 2017 Government Solutions segment adjusted EBITDA will also be negatively impacted by lower BFT-1 intellectual property fee of $3.3 million. On the operating expense side SG&A expenses were $34.1 million in Q4 of fiscal 2016 or 22.4% of consolidated sales. Research and development expenses were $14 million in Q4 of 2016 or 9.2% of consolidated net sales.

Total stock-based compensation expense, which is recorded in our unallocated segment, was $1 million for the fourth quarter of fiscal 2016. This amount does not include any of our fiscal 2017 awards which were issued in August. As such, amortization of stock-based compensation expense in fiscal 2017 will likely approximate $5 million.

During Q4 of fiscal 2016 we did incur an additional [$600,000 million] of acquisition expenses related to the TCS acquisition. At the moment, we believe that fiscal 2017 will be free of any additional acquisition-related charges as most of the work we were originally thinking of is nearly complete.

That said, given the leadership change we are looking at a few new things that might result in additional synergies down the road. Any potential charges associated with such actions are not reflected in our guidance.

Amortization of intangibles with finite lives was $6.1 million in Q4 of fiscal 2016. For fiscal 2017 total annual amortization of intangibles is expected to approximate $22 million to $24 million.

We reported consolidated operating income of $7.5 million in Q4 of fiscal 2016. This operating income reflects a full quarter of amortization of TCS intangibles.

On a segment basis, operating income in the Commercial Solutions segment was 11.1% of related net sales and operating income. And the Government Solutions segment was also 11% of related net sales. When adding in unallocated expenses our consolidated operating income was 4.9% of total consolidated net sales in Q4.

Interest expense was $4.1 million in the fourth quarter of fiscal 2016 and principally reflects interest on our secured credit facility. Based on the type, terms and amount of outstanding debt, including capital leases that we currently expect to be outstanding, we estimate that our effective interest rate, including amortization of deferred financing cost, will range from 5% to 6% in fiscal 2017. On a cash basis, this amount will be lower.

Looking forward, the Company currently expects that its fiscal 2017 effective tax rate, excluding discrete items, will approximate 33%. Adding it all up on the bottom line we delivered a GAAP diluted EPS of $0.14 in Q4 and we delivered adjusted EBITDA as defined at the end of our press release that we issued yesterday of $18.8 million.

Adjusted EBITDA as a percentage of our consolidated net sales was approximately 12.4% in Q4. Given the finalization of our business plan we are currently targeting fiscal 2017 consolidated adjusted EBITDA to be somewhere between 11% to 12% of our consolidated net sales next year.

At the moment, we are not providing specific revenue or adjusted EBITDA targets for each of our two segments because we continue to make tactical changes and are adjusting our spending plans accordingly. But ultimately we feel comfortable at the $70 million consolidated adjusted EBITDA target.

Additionally, based on the anticipated timing of shipments and performance related to orders currently in backlog as well as expected orders, the Company anticipates its financial performance to be heavily weighted toward the second half of fiscal 2017 with the fourth-quarter net sales, operating income and adjusted EBITDA expected to be the peak quarter by far. As a result, the Company expects to report an operating loss in the first quarter of fiscal 2017 with each of the subsequent fiscal 2017 quarters being profitable.

On the balance sheet side at July 31, 2016 we had $66.8 million of cash and cash equivalents and had total debt of $264.2 million. This results in a net leverage ratio of 2.5 times as such term is defined in the credit facility. This cash balance of $66.8 million does not reflect our Q4 dividend that we paid in August 2016 which approximated $7 million.

Based on spending plans we do expect to utilize cash during the first half of the year. And as a result the leverage ratio is expected to increase from current levels before trending down.

Finally, our Board of Directors also approved a dividend for the first quarter of fiscal 2017 of $0.30 per common share payable on November 22, 2016 to shareholders of record at the close of business on October 21, 2016. Although the Board of Directors is currently targeting fiscal 2017 dividends aggregating $1.20 per share the Board has begun assessing the Company's capital needs generally and the appropriate level of future dividends. Future dividends also remain subject to compliance with financial covenants under the Company's secured credit facility as well as ultimate Board approval.

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

Thanks, Mike. With the acquisition of TCS our Company looks markedly different today. However, at our core we still continue to provide advanced communication solutions for commercial and government applications.

I believe our business is at a turning point and I'm excited about the growth opportunities that are ahead of us. With a combination of experience, careful planning and successful execution I believe 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. I expect to continue to manage the business through two segments: Commercial Solutions and Government Solutions.

I believe that the Commercial Solutions segment is a leading provider of, one, satellite earth station products such as modems and solid-state and traveling wave tube amplifiers; two, public safety systems, such as the next-generation 911 technologies; and, three, enterprise application technologies such as messaging and trusted location-based technologies. This segment on a long-term basis should approximate about 50% of our revenues and it is aligned with several large growing markets.

Our satellite-based communication products participate in the satellite cellular backhaul markets and in the single channel per carrier or SCPC modem area. We remain the undisputed leader in the SCPC market, primarily driven by our proven ability to deliver the most bandwidth-efficient modems and highest efficiency amplifiers to our end customers.

Many of our Comtech satellite products are sold to international customers. These customers have recently been negatively impacted by challenging business conditions including a strong US dollar and relatively low energy prices. That said, during the fourth quarter of fiscal 2016 we experienced strong bookings in this area, so it appears that some stability has returned to these markets.

Our satellite-based products include our new Height solution. It's a scalable networking platform designed with the service provider in mind. Heights leverages a single-user interface with a powerful traffic analytic engine that allows simplified overall network design, implementation, monitoring, control and optimization of networks using our hubs and gateways.

The Heights platform is designed to support the traffic load demanding of premium enterprise users on traditional satellites as well as the new HTS or high throughput satellites. Heights is also a successor to our advanced VSAT product line and is just starting to establish itself in the market.

As we do in all of our products we continue to invest in enhancements so that this platform can also be used in markets that we have not historically participated in. I'm happy to say that to date customer reaction to our Heights platform has been very positive and we believe that Heights and our advanced VSAT products will contribute meaningfully to sales in the future.

We've also seen very positive customer reaction to our new Super-Power Traveling Wave Tube Amplifiers which were first introduced in March 2015. Our Super-Power Amplifiers will not only allow our customers, such as DIRECTV and DISH and other broadcasters, to build out new infrastructure, it will also enable the replacement of aged klystron and/or TWT equipment in current infrastructure.

During the past year or so we've also made significant inroads into the high-growth in-flight satellite-based connectivity market. Our solid-state power amplifiers help enable commercial airlines provide in-flight connectivity services to the passengers. This is a new and growing market for us.

We believe this area will be a significant revenue contributor for Comtech over 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 the new public safety solutions that we now offer. This is a niche market and we believe we have acquired a solid base of business which we believe will grow over the next several years.

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 the US public safety answering points, known as PSAPs, can receive a wireless or voiceover Internet subscriber's location during calls for emergency assistance.

Public safety solutions include 911 call routing for wireless and 911 routing of voiceover Internet networks and our next-generation 911 solutions for state and local public safety operations. Given what is going on in the world it's easy to see how this market should certainly grow.

We currently route approximately 50% of all wireless 911 calls. The deployment of 911 technology for WiFi calling is also growing. Wireless carriers are eager to offer this new service due to the cost efficiencies that can be realized by offloading traffic from their wireless networks in congested urban areas and with their terrestrial networks operators are turning to Comtech for 911-enabled WiFi calling service.

We believe we are also a leader in providing text 911 technology for network operators who must comply with FCC rules. We've now completed PSAP deployments in over 800 of the nation's public safety answering points with a presence now in 17 states, Puerto Rico and DC. We believe the next-generation 911 market will grow and we see an increase in statewide and local opportunities as local and federal agencies work toward upgrading their present 911 systems to become next-generation 911 compliant.

Also as a result of the TCS acquisition Comtech now provides ESInets that are standards compliant emergency service IP networks. We are seeing a significant increase in interest in our ESInet product line.

As you know, during the fourth quarter we were awarded a $45 million contract for five years to provide statewide ESInet to the state of Washington. This contract includes geospatial redundant call routing and advanced reporting capabilities.

Our last solution set in our Commercial Solutions 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 acquisition we now provide location-based wireless infrastructure, which supports the generation and distribution of location information for both indoor and outdoor environments including telematics and navigation solutions.

Our solutions include GPS-enabled software such as Verizon Navigator services which make it easy for users to find, locate and get directions to nearby points of interest. This business unit 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 and WiFi 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 to the level of certainty associated with location authenticity.

We also offer text messaging solutions and we believe we are one of the leading providers of text messaging in North America. We offer carrier grade platforms and high performance short messaging services or SMS routing including application programming interface or APIs for cloud messaging centers, wireless intelligent gateways and a feature-rich operating rate messaging platform. Given the continued investment by carriers in their networks we believe this business brings repeat-type revenues to Comtech and that we can also bring certain of these technologies to some of our international mobile carriers.

At this point let me talk about our government markets and our Government Solutions segment where we see larger government end users that require mission-critical technologies and systems. Our Government Solutions are primarily sold to the US Department of Defense and primarily consist of C4ISR: command, control, communications, computers, intelligence, surveillance and reconnaissance solutions.

Our products include supplying wireless ground terminals, sale of satellite bandwidth and information technology outsource services. We also engineer, furnish and support ground terminals used for secure satellite and line of sight LOS terminals and also beyond line of sight communications terminals known as BLOS.

This segment is also a leading provider of communication system elements such as digital multiplexers, troposcatter modems, solid-state power amplifiers, frequency converter systems and RF power and switching technologies, which are used in electronic warfare and application friend-or-foe applications.

Let me discuss some programs to give you a sense of the type of opportunities in this market. The Army satellite SNAP VSAT program continues to be a source of business for Comtech. We believe that the Army intends to purchase new SNAP terminals and maintain fielded SNAP systems for the next several years.

Comtech and TCS have also been jointly marketing SNAP TROPO solutions to the department of defense for some time. Although timing is always difficult to predict, we are optimistic that the Army will begin purchasing these SNAP TROPO systems in the next 12 to 24 months.

On the BFT-1 front we continue to work with the U.S. Army and ultimately expect to receive additional sustaining contract work to continue to perform services beyond March 2017. Additionally, we believe that the U.S. Army will ultimately purchase our next-generation system. Our primary goal here is to continue to provide the U.S. Army with outstanding support. Doing so should position us well to participate in the next-generation platform.

All in all, let me conclude this 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 TCS acquisition possible. I remain very excited about the future prospects of the combined Company and I believe we will make the TCS acquisition a rewarding transaction for our customers, our vendors, our employees and our shareholders.

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

(Operator Instructions) Mark Jordan, Noble Financial.

Good morning, gentlemen. A question relative to your investment plans for fiscal 2017. What are you expecting to do with regards to capital expenditures and also R&D?

I think, Mark, on the capital, although we're not specific with a number at this point, it's going to be somewhere between $10 million and $15 million for the year. And on the R&D side I think you are going to still continue to see significant investments on the R&D side pretty much across all our product lines. So I think if you look at Q4 as sort of a sense, you might see it increase from the level we did in Q4 but, obviously, that number is impacted by timing of projects and so forth.

Okay. Fred ended up with comments on the TROPO market. I guess there are two segments for that. Any update with regards to what your expectations are on the international TROPO orders that have been floating around for a while?

Secondly, with the domestic opportunities with the Army and the Marines, Fred mentioned something in the next 12 to 24 months. Do you know if there is funding in the fiscal 2017 budget for TROPO-enhanced SNAP terminals?

There is funding for SNAP terminals as they presently exist for the satellite area. There is also some funding that's being included in the next budget for the SNAP version of the TROPO terminal.

As you know, Mark, we've supplied a number of these terminals now, I think it's probably in the order of 20 to 30 terminals together with TCS into Afghanistan and into the U.S. Army inventory. These are small numbers, but the Army does have a plan that they at least are in the process of getting funding for fiscal, government fiscal 2017 to procure, I believe, it's about 200 terminals.

On the international side, I think we have a large pipeline of bids out there into various international countries and so forth. But there, again, as I mentioned in terms of the strength of the US dollar and the low energy price value of oil these days, this is a difficult area for some of our customers to provide funding for these systems. So they have been pushed to the right.

At some point I think the oil will stabilize and the dollar will stabilize. And these projects must continue at some point.

What do you have in your estimates of revenue for fiscal 2017 for these large international TROPO and the domestic sales to the Army? Do you have much in there in that $600 million guidance?

No, no. And in fact, most of it, as Fred said, most of the projects we're thinking about might be booking in late Q4 2017 but we don't have large amounts of revenue in the 2017 target that we're giving.

Now, obviously, things could come in a little bit earlier and that would be nice. But I think given the difficulty of predicting stuff our view is to not include that number in our $600 million target.

Okay. Last question for me.

Just talking about the next-generation 911 market, obviously, the five-year contract you got from the state of Washington is a very interesting one. Could you talk about the pipeline of opportunities that you have that might be similar to the Washington decision and what might you expect to see decided here in the current fiscal year?

Obviously, you know it's in the pipeline that are primarily domestic states other than the state of Washington. We believe that the state of Washington gives us the entree as being the primary supplier in the next-generation 911 contracts.

But many of those are, again, very difficult to predict, almost similar to the international situation in terms of the funding for these programs and also for the regulations that also appear to be changing in some of these.

Thank you very much.

Stanley Kovler, Citi Research.

Thanks for taking the question. I just wanted to focus a little bit on the changes in your business mix here in Q4. If you could just help us understand what happened more specifically between the government business and the commercial business.

It seems like the government business actually put up decent revenue growth quarter over quarter. And then the commercial side grew.

And then also if you can help us understand for just the TCS versus Comtech on the commercial side it looks like Comtech year over year was down, so excluding seasonality there. And what your outlook is on cash flow from operations for the year for 2017? Thank you.

Sure, Stanley. I think from our perspective the numbers came in on the commercial side exactly where we were thinking. And on the government side, as Fred mentioned in his portion of the script, they did not achieve their bookings goal.

So, in fact, we had a little bit more optimistic revenue assumptions in the way we were thinking about it on the government side. That being all said, I think Q4 does reflect this tactical shift that we've been assessing and dealing with over the last few months. We certainly believe the government business is going to grow next year and, as well as the commercial side.

And we think it's pretty much blended across all of our product lines. So at this point, we don't believe that there's a meaningful difference to discuss legacy product lines or TCS product lines on a go-forward basis because whether it's by coincidence or just the nature of the timing we think low single digits is what we are going to achieve across almost all of our product lines.

In terms of mix profile it, again, just by coincidence the government business is roughly going to be about 40% we think going next year plus or minus a couple of points. Same thing, commercial will make up that difference.

Obviously, mix and timing is going to change those numbers. But we think over the long term if we get some of these over-the-horizon contracts in 2018 and some of that stuff you might see the government percentage increase from the current level to get to that 50/50 target on a long-term basis that we're thinking about.

Thanks. If I could just follow up on the cash, I just want to understand what the outlook is for cash flow for 2017. You've paid down a portion of the debt with the proceeds from your offering, and you have a debt repayment schedule for the principal payment of the loan going forward with that covenant that you mention, the 275 net debt to adjusted EBITDA covenant.

Marry that for us with the commentary in your 10-K about the dividend outlook. You had some language in the 10-K that was also released where you say you would begin to further assess your capital needs and what the appropriate level of dividends are.

Can you help us understand how we should think about that? Thank you.

Sure. You know I think the way, again, we're thinking about 2017, is Q1 is going to be the lowest quarter of the year. It's traditionally that for Comtech in terms of our business and the TCS looks like it plays out that way, as well. So we think that we're going to consume some cash during Q1 and Q2 before from an operational perspective we start generating cash.

So how much of that comes into the operating cash flow by the end of the year that's difficult to say because it's always a Q4-type issue. But when we take a step back and look at cash on a longer-term basis I think you look at $70 million adjusted EBITDA target and you subtract out the interest expense, which on a cash basis is call it roughly 4.5%, and you back out any assumed purchases of capital equipment, and right now we're targeting somewhere between $10 million and $15 million a year, then you subtract the dividend from it and that's what we have to go with.

Now we have $60 million some odd of cash on the balance sheet. And so our goal here at the end of the day is right now the Board has set a target of 2017 which is the language we have in our 10-K, yet at the same time we are pretty excited about our growth opportunities.

And as everyone knows, we certainly didn't expect to sell our stock at $14 a share, so there is additional more shares that are outstanding since the $1.20 dividend target was established. So I think the Board very prudently is now assessing the dividend payment and what it should be on a go-forward basis and we will report back to you with any changes.

Thank you very much.

Mike Latimore, Northland Capital.

Great, thanks a lot and congratulations on the good profitability and bookings in the fourth quarter there. Just you talk a little bit about revenue splits, commercial versus government. Should we think of EBITDA splits being similar to revenue splits or would one generally tend to be a little higher margin long term?

That's a good question, Mike. I think the government adjusted EBITDA margin in Q4 was actually pretty good. It was 14.6% and I'd love that to continue.

That does include a full quarter of the intellectual property fee, which comes in at 100%. So, obviously, that's not sustainable next year.

So I think on an annual basis we should be in the double digits for the government segment. We don't want to put out specifics but the remaining difference would be in commercial.

And then you are talking a little bit about a change in strategy from more high volumes of deals with high margin, maybe smaller size deals versus these larger government contracts. I just want to be clear, when you talk about maybe deemphasizing something, are you talking about the government services? And I guess that would be the first question.

And the second, where would government services tend to trend over time? If that is the right way to think about it.

I think what you just said is really correct. What we're intending to do is really minimize the services business because of its low margin. We, I think, are going to focus our attention on maybe lower volume or lower cost programs that are more niche-y in our technology sector and get us a nice or better gross margin.

Mike, to put some color on that and just make sure there's no confusion in what we're saying, we are still going to be in the services business and the integration business. And our value here is taking Comtech's hardware or satellite agreement or amplifiers and integrating it into solutions and services that the government would need. So if the government needs us to install stuff or maintain it and operate the stuff we are going to continue to do that.

I think what we're talking about a shift in is on the commodity side. So if we're doing something that doesn't include our hardware or doesn't include our value, and I will just give you a very simple example, if we are just going to go up but up a tent in Afghanistan we are not going to be putting up a tent. We are not getting any value added for that that's not going to drive long-term competitive advantage to us.

So there were things that the historical business was doing that we just don't see a lot of value in it and a lot of margin. So Fred is going to shift the effort going forward into the areas that we are good at doing and good at executing.

It is primarily the pass-through business. The pass-through business that TCS has had in the past I think we will deemphasize. Where we have products that we can sell along, whether it's Comtech legacy products or TCS products, obviously those services will be fine.

Got it. So who is your tent supplier?

Pardon me?

I'm just kidding. I said who is the tent supplier, but I'm just kidding.

Do you need some camels?

There you go. And then you talk about some stability in I guess the traditional Comtech business. Is the number one macro factor there just the price of oil or can you elaborate on what might be causing stability?

I think what we've seen in the last number, last couple of years, this is not a new problem but has been a problem for us in the last couple of years is really the strength of the dollar making it difficult for our international business, which is primarily some of our modem legacy business as well as the oil dropping to one-half of what those countries, the oil-producing countries were used to. So all of their plans came to a halt.

Now slowly I think I see a beginning of the contracts being lit but in a small way rather than still being at the old numbers. Sooner or later the plans have to be initiated and that growth will come back.

Great, and just last question. In the fourth quarter did the telecom systems commercial services business grow year over year?

When you say services business commercial, are you referring to the over-the-horizon business or the TCS safety security side?

Safety security side.

Yes, the answer is, yes, it did grow.

Great, thank you.

(Operator Instructions) Glenn Mattson, Ladenburg Thalmann.

Hi, a lot of things have been covered already. Curious, though, with the change in strategy towards reducing some of the low margin business, does that use or can that help free up some working capital? Is there some reductions you can expect there which could help with the balance sheet?

Absolutely. That's going to take a little time to happen but, yes, we would expect to see, certainly in 2018 a different, a reduction in some of what I will call the unbilled receivables and like. And that is one of the things that we are targeting to do, but it's not going to happen overnight.

Right. And I guess, secondly, perhaps you covered this and I missed it, but you talked a little bit about the Heights and the Super-Power TWTA. Can you talk about the trajectory of the market acceptance there and maybe with regards to what kind of expectation you have for those products for 2017?

First let me say, traditionally we've been in the SCPC business and not in the time division multiple access business. So as such there is a market for both of these technologies. We've traditionally been in the SCPC long-haul, high-throughput market.

Now there's, obviously, a middle ground between these two systems. And this is what we're trying to attack with both our advanced VSAT that we introduced a couple of years ago and also the Heights platform.

We believe the Heights platform will cover that middle-market which is a larger market for both the SCPC market and the time division market. So it's kind of a thrust that we are doing to capture that middle-market in between these two.

The Heights platform is a derivation of the advanced VSAT and as such it has many rollouts that we are in the process of doing. We are actually supplying the Heights platform today, but yet we still have a number of iterations and solutions that are in development which will roll out in 2017.

Okay, great. Thanks for that.

It does appear we have no further questions. I will return the program to our speakers for any additional or closing comments.

Okay, thanks again for joining us today. And we look forward to speaking with you again in December.

This will conclude today's program. Thanks for your participation.

You may now disconnect. Have a great day.