Comtech Telecommunications Corp (CMTL) 2017 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to Comtech Telecommunications Corp.'s Third Quarter Fiscal 2017 Earnings Conference Call.

(Operator Instructions) As a reminder, this conference is being recorded, Thursday, June 8, 2017.

I would now like to turn the conference over to Ms. Maria Ceriello of Comtech Telecommunications.

Please go ahead, ma'am.

Thank you, and good morning.

Welcome to the Comtech Telecommunications Corp.

Conference Call for the Third Quarter of Fiscal Year 2017.

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'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 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 third quarter results of $127.8 million in revenues, an operating profit of $10.2 million and an adjusted EBITDA of $18.1 million.

I am very pleased with our third quarter performance on many fronts as we march toward a strong finish to what is turning out to be a very successful year.

Our adjusted EBITDA, as a percentage of revenue, in the third quarter was 14.2%, above our fiscal target of approximately 12.0%.

I believe this percentage will even be higher in the fourth quarter with room for more growth down the road.

In this regard, we have just started our fiscal 2018 business planning process, and I'm seeing positive signs across almost all aspects of our business.

We continue to be focused on increasing shareholder value, being more competitive, reducing costs and growing our revenues.

Although there's still work to do, I believe we are on the right path, and I remain very pleased at the progress that we are making.

I will tell you why I'm so optimistic about our future in a bit, but let me first turn it over to Mike Porcelain, our CFO, to discuss our financial results and update on legal matters and our fiscal 2017 guidance in more detail, then I'll come back and leave it up to the questions and answers.

Thank you.

Mike?

Thanks, Fred, and good morning, everyone.

Consolidated net sales for Q3 were $127.8 million, of which approximately 32.0% were generated from U.S. government end customers, 26.7% from international end customers and 41.3% from domestic commercial end customers.

Consolidated backlog as of April 30, 2017 was $461.3 million, and during Q3, we achieved bookings of approximately $135.7 million, a book-to-bill ratio of 1.06, which was led by strong bookings in our Government Solutions segment, which achieved a book-to-bill ratio of 1.39 for the quarter and which is clearly a significant improvement from our last quarter and which bodes well for our future.

Let me provide some color on Q3 sales information by segment.

Net sales in our Commercial Solutions segment were $79.4 million as compared to Q3 of last year, which were 72 point -- $72 million.

This represents an increase of approximately 10.3%.

Sales in the Commercial Solutions segment approximated 62.1% of total net sales.

During Q3, this segment benefited from an additional month of sales of our location and messaging-based platforms and safety and security technology solutions such as wireless and next-generation 911 platforms that we now offer as a result of the TCS acquisition.

In addition, our Commercial Solutions segment benefited from increased sales of traveling wave tube amplifiers, driven by strong demand from the in-flight connectivity market.

Our book-to-bill ratio in the segment was 0.86.

This ratio was lower than the amount we achieved in Q2, primarily due to timing associated with several pending, large multi-year contract awards that we are still expecting and continued softness of bookings in our satellite earth station product line.

Although market conditions for our international satellite station customers are definitively improving and sales to those customers have actually increased, overall sales for our satellite earth station products have been impacted by continued softness from U.S. government customers, which we attribute to ongoing political and budget uncertainty due to the presidential administration change that we mentioned in our last conference call.

Although we are not expecting a significant increase in short-term sales to the U.S. government for our satellite earth station products, we are expecting overall sales and a rebound in bookings of communication technology solutions to increase from current levels.

In fact, we expect that the fourth quarter will be our peak quarter for satellite earth station bookings in aggregate and sales, and we are expecting a large order for our traveling wave tube amplifiers that are used in the in-flight connectivity market.

In addition, we are anticipating that our fourth quarter will also benefit from an increase in orders for our HEIGHTS satellite earth station products, now that it is available.

Our Commercial Solutions segment could really have a banner fourth quarter of bookings.

We are in late-stage contract negotiations for several large multi-year contracts for our safety and security and enterprise technology solutions, and we are awaiting a decision by a domestic state to announce a large next-generation 911 award.

Turning to our Government Solutions segment, despite an additional month of TCS legacy government revenues from field support, space components and cyber training solutions that we now offer as a result of the TCS acquisition, net sales were $48.4 million as compared to Q3 of last year, which were $52.2 million.

This represents a decrease of approximately 7.3%.

Sales in this segment represented approximately 37.9% of total net sales.

The period-over-period decrease primarily reflects the impact of the implementation of our tactical shift in strategy, focusing on contracts that have more profitability.

Sales of Comtech legacy products, which include over-the-horizon microwave system products, high-power broadband amplifiers and Blue Force Tracking sustainment support services, were higher than Q3 of last year.

As a reminder, this quarter includes only $1.7 million of BFT-1 intellectual property license fees, and going forward, we will not charge this fee to the U.S. Army going forward.

Our book-to-bill ratio during Q3 in this segment, as I mentioned, was 1.39 and reflects the receipt of several important orders, including a $23.8 million order from a Japanese space agency, initial funding of $3.5 million pursuant to a new $42.7 million 5-year contract to provide the U.S. Army with continued BFT-1 sustainment support and an initial order pursuant to a new $4.2 million firm fixed-price IDIQ contract to provide BFT-1 aviation transceivers to the Defense Logistics Agency.

These BFT contracts were important strategic wins.

As Fred will discuss, we are starting to see the benefits of our tactical change in the segment and continued focus on the U.S. Army.

Looking forward to the fourth quarter of fiscal 2017, net sales in our Government Solutions segment are expected to be significantly higher than our most recent quarter.

Now let me give you some color on our operating metrics.

Our gross profit in Q3 was 41.1%, which is similar to the percentage we achieved in Q3 of last year and higher than our Q2 percentage.

Looking to Q4, we do expect our consolidated gross profit percentage to be slightly lower than the level we achieved in Q3, most of which is driven by the absence of the intellectual property licensing fee as well as other product mix changes.

On the operating expense side, SG&A expenses were $25.9 million in Q3 of fiscal 2017 or 20.3% of consolidated sales.

The $25.9 million reflects a significant reduction as compared to the $31.0 million we had in Q2.

During the quarter, we benefited from a recovery of legal expenses and cost-reduction actions previously initiated.

Looking to Q4 and given our expectations of sales growth, we do expect that SG&A expenses in dollars as well as a percentage will increase in Q4 from the level we just achieved.

Research and development expenses were $13.0 million in Q3 of 2017 or 10.2% of consolidated net sales, and was comprised of $10.7 million of spending in the commercial segment, $2.2 million in the government segment, with the rest constituting amortization of stock-based compensation that is not allocated to our 2 operating segments.

Total stock-based compensation expense, which is recorded in unallocated, as I mentioned, was $1.0 million for the third quarter of fiscal 2017.

We expect amortization of stock-based compensation for the year to range from $6.0 million to $8.0 million.

The final amount of stock-based compensation will be dependent upon the final allocation of incentive compensation and our final stock price and our final fiscal 2017 performance.

Amortization of intangibles was $5.5 million in Q3 of fiscal 2017.

On a GAAP basis, our consolidated operating income was $10.2 million in Q3 of fiscal 2017.

Our adjusted EBITDA, which excludes a $2.0 million favorable legal settlement that I will discuss in a bit, was $18.1 million or 14.2% of consolidated net sales.

Adjusted EBITDA on our Commercial Solutions segment was $15.5 million or 19.5% of related net sales.

In the Government Solutions segment, it was $3.1 million or 6.4% of related net sales.

Given our overall sales and spending plans for the remainder of fiscal 2017, we expect that consolidated adjusted EBITDA, both in dollars and a percentage of our consolidated net sales for Q4, will be the highest of any quarter for the fiscal year.

Let me now talk about taxes, interest expense and our balance sheet.

The company currently expects that its tax rate for the year, excluding discrete items, will approximate 36.0%.

Interest expense was $2.8 million in the third quarter of fiscal 2017 and primarily reflects interest on a secured credit facility.

Our total interest expense, including amortization of deferred financing costs, is expected to range from 4.5% to 5.0% for the year.

Our actual cash borrowing rate, which excludes the amortization of deferred financing fees, currently approximates 4.0%.

Adding it all up, all in all, it was a really terrific quarter.

On the bottom line, we delivered GAAP diluted EPS of $0.19 per share in Q3, and excluding the $2.0 million adjustment related to the litigation settlement, our EPS would have been $0.13.

At April 30, 2017, we had $58.8 million of cash and cash equivalents.

And year-to-date, we have generated cash flows from operating activities of $43.7 million, of which $18.3 million occurred in Q3.

Clearly, this was another spectacular quarter of cash flow generation and reflects an ongoing concentrated effort across our company to better manage working capital and reduce unnecessary spending.

Given our year-to-date financial performance and our strong operating cash flows, we have successfully reduced the level of our total indebtedness.

In fact, for the 9 months ended April 30, 2017, we have reduced total debt by $28.8 million, of which $18.4 million occurred in Q3 alone.

As of April 30, [2017] (corrected by company after the call), our total debt, excluding deferred financing costs, was $235.4 million.

Given our expectation that operating cash flows will continue to be strong, I am pleased to say that we have entered into a first amendment of our secured credit facility that is expected to result in increased operating and acquisition flexibility, while at the same time simplifying the calculations of our financial covenants as compared to the original terms.

In summary, these changes provide us relief from the steep step-downs required in the original net leverage ratio and more closely aligns the bank's definition of consolidated EBITDA with our own definition of adjusted EBITDA.

It simplifies the financial covenant calculations and provides us increased operating and acquisition flexibility, as I mentioned.

For those interested in the full details, I refer you to our Form 8-K filed with the SEC, which contains the first amendment in full.

Although it took some time to get this amendment finalized, I am pleased with the outcome.

We were able to obtain this amendment from a position of strength as we were fully compliant with our covenants at the end of Q3 and would have been in compliant as of Q4 and likely 2018 prior to this change.

Given our current business projections and this amendment, I am comfortable that we will be able to maintain compliance with our financial covenants for the foreseeable future.

Now let me update you on the TCS litigation matters that we have been working our way through, throughout the year.

As discussed on our last quarterly conference call, we favorably resolved 3 different TCS legacy intellectual property matters.

In connection with one of these final settlements, we recorded a favorable $2.0 million contribution, net of estimated legal fees, to operating income in the third quarter.

As of today, we have made almost all cash payments required as part of these 3 settlements, including making significant cash payments in Q3.

As such, I want to point out that our strong Q3 cash flow from operating activities reflects payments for these settlements.

We still have one more case, which we refer to as the vehicle IP matter, and here too, we have made some good progress and have good news.

Vehicle IP was a TCS case that went back to 2009.

And just recently, on May 30, 2017, the District Court issued a supplemental claim construction order in our favor, and the parties have agreed to enter into a stipulation that the defendants, TCS and our customers' products, do not infringe the plaintiff's patent under the District Court's current revised construction of the disputed patent claim term.

In very simple terms, at the moment, there is no infringement.

Although we expect that the plaintiff will appeal the matter, if this decision is upheld, we may not have to go to trial or pay any monetary damages.

At the moment, the parties have agreed to postpone the July trial.

As such, we are not expecting any significant legal costs for this matter or related cash payments in our Q4 results.

Given where we were at the beginning of the year with these 4 legal cases, we are clearly pleased of the overall progress we have made.

Finally, before turning it back to Fred, I would like to provide some additional comments on our fiscal 2017 guidance.

First, we did update our revenue guidance to a new range of $555.0 -- $550.0 to $555.0 million.

This is a reduction of approximately $22.5 million from the midpoint of our guidance and largely reflects our latest assessment of the impact of our tactical shift in strategy in our Government Solutions segment as we deemphasized, pursuing large commodity-type service contracts that produce little or no EBITDA margin.

Our revenue guidance also reflects an updated assessment of the sales cycle related to our HEIGHTS products.

As Fred will discuss in a bit, we are really excited about this product line going forward, but the long sales cycle that we originally expected is taking a bit longer.

We also firmed up our adjusted EBITDA guidance to a range of $68.0 million to $70.0 million.

We believe our $70.0 million goal is obtainable, but the ultimate amount will be partially dependent on our final product mix and the timing of a few items.

From our perspective, no matter how you slice it, we believe our Q4 will be the strongest quarter of performance and will firm up 2017 as a solid year.

As we exit the year, we are pursuing a number of awards for large multi-million dollar and multi-year contracts, and there is some uncertainty regarding contract awards and order timing.

As such, it is difficult to predict our fourth quarter book-to-bill ratio.

If some of these orders are booked in the fourth quarter, our fourth quarter bookings could be almost twice the level we achieved in Q3.

That said, some or all of these orders may slip into fiscal 2018.

But either way, these orders, if booked, are expected to benefit fiscal 2018 financial results.

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

Fred?

Thanks, Mike.

As I mentioned earlier, I'm really excited about the growth opportunities that lie ahead of us.

Let me give you some color on what is happening in each of our segments.

First, let me discuss our Commercial Solutions segment.

Here, we are a leading provider of satellite communications networks and products such as satellite modems, up-and-down frequency converters and solid-state and traveling wave tube power amplifiers.

We're also a leading provider of public safety systems such as the next-generation 911 networks and enterprise applications such as messaging and trusted location-based technologies.

Our Commercial Solutions segment is focused on several large, growing markets.

Our satellite-based communication products participate in the satellite backhaul and network services market.

In the satellite modem area, we continue to be the undisputed leader in single channel per carrier, or SCPC, driven primarily by our proven ability to deliver the most bandwidth-efficient modems.

Our strategy in the past few years has been focused on developing and marketing our new, what we call, HEIGHTS network solution for use with the new high-thru-put satellites.

Last month, we announced the general availability of our new HEIGHTS Dynamic Network Access, or HDNA, technology.

The HEIGHTS solution is intended not only to meet the demands of traditional fixed satellite but also provide distinct advantages for those system users considering migrating to the high-thru-put satellite systems.

This is an entirely new market for us, but one which is much larger than our traditional single channel per carrier market.

Last month, we also announced that 3 different customers have now installed, and are now using HEIGHTS to support their business needs.

To date, customer reaction has been positive, and we have a growing sales funnel of our HEIGHTS opportunities.

We anticipate that we will benefit from an increase in orders for our HEIGHTS satellite earth station products in the fourth quarter.

As I mentioned on our last conference call, HEIGHTS has a sales cycle that is longer than our traditional SCPC products.

Given the longer sales cycle, as Mike mentioned, the complexity and sophistication of the HEIGHTS system and our experience since our launch of HEIGHTS, we are shifting some of our initial expected HEIGHTS orders and sales to fiscal 2018.

As such, we now anticipate that fiscal 2018 will be the breakout year for orders and sales of HEIGHTS.

Another area we continue to be excited about is the IFEC market, or the in-flight satellite-based 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 this area will be a significant revenue contributor for Comtech in fiscal year 2018.

During the past quarter, we saw a continued strength for our satellite communications, TWT or traveling wave tube amplifiers, and received a $6.6 million contract from a U.S. Military integrator to provide high-power SATCOM traveling wave tube amplifiers.

On the public safety side, our solutions include 9-1-1 call routing for wireless, 9-1-1 routing for voice-over-internet networks and next-generation 9-1-1 network solutions for state and local public safety operations.

We have built partnerships with key system integrators such as Motorola and General Dynamics, and we are actively participating in multiple RFP responses.

We believe we are seeing the benefit of our overall strategy as our pipeline is full, and we're in the final contract negotiations for several large, multi-year contracts for our safety and security and enterprise technology solutions.

While we continue to bid on new opportunities, we continue to roll out the multi-year, next-generation ESInet deployment for the State of Washington.

We're also continuing to deploy next-generation systems in California, Tennessee, Indiana and Florida.

We believe that this market will continue to grow for many years ahead and that the current political environment will be helpful to facilitate such growth.

Turning to our enterprise trusted location solution product line.

Here, our solutions include GPS-enabled software, which we provide for Verizon's navigator services, which makes it easier for users to find, locate and get directions to various points of interest.

We also offer text messaging solutions and believe we are one of the leading providers of text messaging in North America.

We offer carrier-grade platforms and high-performance short messaging service, or SMS, routing for cloud messaging centers, wireless intelligent gateways and feature-rich operator-grade messaging platforms.

During the third quarter, we received 2 key contracts for our enterprise technology products, including a $4.5 million agreement for navigation and telematics services from a major mobile network operator in the Republic of China, who will use our location studio platform in their navigation and telematics applications; and a 2-year renewal agreement worth $7.3 million with a tier-1 North American telecommunications company for the use of a customized location position gateway that manages all location requirements and access technologies, including CDMA, GSM, LTE and WiFi.

We expect this platform will be extended to include location of IoT or of Internet of Things devices.

We also continue to market products and solutions and are pleased with our customer feedback from our newly released location studio, which was recognized by the Cellular Telecommunications Industry Association, or CTIA, as the winner for the industrial IoT product of the year.

Looking forward, we expect to provide location studio-enabled applications in the connected car, the mobile OEM and data analytics domains.

At this point, let me switch to the government markets and our Government Solutions segment, where we serve large government end users that require mission-critical technologies and systems.

Our government solutions are primarily sold to U.S. Department of Defense agencies and primarily consist of C4ISR, or Command, Control, Communications, Computers, Intelligence, Surveillance and Reconnaissance solutions.

Our solutions include satellite, line of sight and tropospheric ground terminals, management and sale of satellite bandwidth, information technology outsource services and RF power and switching technologies.

As we announced back in March, we continue to implement a tactical shift in this segment's strategy, to focus less on commodity service contracts with more emphasis on contracts for products with higher margins.

We believe that we are starting to see some early benefits of this strategy.

We had a very busy third quarter in the Government Solutions segment.

We received several key contracts.

Our fourth quarter and fiscal 2018 will certainly benefit from the award of a $23.8 million contract to support the Japanese Space Exploration Agency, or JAXA, for the design, development and installation of multiple launch vehicle tracking stations in the South Pacific.

These stations will provide mission supports for newly developed launch vehicle technologies.

We were also awarded a 5-year contract with a not-to-exceed value of $42.7 million to continue to provide the U.S. Army with BFT-1 sustainment support and received initial funding just recently of $3.5 million.

We were also awarded a separate indefinite delivery / indefinite quantity, or IDIQ, contract to provide BFT-1 aviation transceivers to the Defense Logistics Agency with a 5-year ordering period through April 2022 and a maximum value of $4.2 million.

We believe the U.S. Army has a requirement for a next-generation system referred to commonly as BFT-3.

And based on our recent developments with the U.S. Army, we're becoming increasingly confident that we will be able to participate in future BFT program awards.

Some of the large opportunities we see include a large, multi-million dollar and multi-year draft RFP, which was issued in April by the DoD for the supply of tropospheric communications equipment to replace hundreds of the AN/TRC-170 troposcatter terminals.

And as you know, we have been waiting for this opportunity for a long time.

We have been a supplier of over-the-horizon troposcatter systems to the U.S. government and commercial applications for many years.

We have a large, worldwide installed base of over-the-horizon microwave systems, and our systems can transmit video and broadband data at throughputs over 50 megabits per second.

I believe our field-proven technologies are ideally suited to meet the government needs, and we are actively pursuing this opportunity.

Award is expected late calendar year 2017 or early fiscal year 2018.

In addition to this large over-the-horizon microwave system opportunity, we are currently responding to a large multi-million dollar competitive solicitation from the U.S. Army to provide sustainment services to its AN/TSC-198 family of satellite communication systems.

We are the incumbent here, and we believe our customer understands the value we bring to this very successful program.

Award of this sustainment contract is expected to occur sometime in the early part of fiscal 2018.

Additionally, on the cyber training front, we continue to see interest from the DoD and select national intelligence entities for our cyber training solutions.

Unfortunately, recent events have demonstrated that cyber threats continue to escalate.

To help the DoD and other customers respond, we provide a variety of cyber security training products and services.

This includes our PerformanceScore scoring tool, which enables real-time performance-based training.

We are also expanding this capability to interested commercial customers.

All in all, we see very positive signs and broad opportunities for future growth across all of our business segments.

Now let's proceed to the question-and-answer period.

Operator?

(Operator Instructions) And we can take our first question from Stanley Kovler with Citi Research.

I just wanted to ask you about your views on -- about spending in terms of the release of the budgets recently and the outlook for defense spending overall.

And I have a follow-up.

I think our expectation is for defense spending, obviously, to rise.

However, the gridlock in Congress at the moment and the White House, I think, is pushing that a little bit out into the, let's say, next quarter or the following quarter.

We're really -- it's hard to anticipate.

But I think, overall, certainly, the expectation is for a rise in government spending.

And then on the HEIGHTS platform.

Can you help us understand also, I guess, the size of the funnel you started off with?

You said 3 customers.

What's the potential market opportunity and the eventual revenue opportunity of this market size?

If we can get a better feel for that as well.

And similar question for the in-flight WiFi market.

I'd be curious to get your take on the pace of the deployments within various airline fleets and how quickly that ramp could happen.

Sure, Stanley.

It's Mike.

On the HEIGHTS products, I mean, this is a product that, for all intents and purposes, we have $0 in revenue earlier in the year.

So from our perspective, we're talking in the double-digit millions in terms of where we expect this product to be in a very short-term time period.

And we did shift double digits into next year from what we see in terms of the opportunities.

So it is growing.

And as Fred had mentioned, this is a market in total that, again, is going from 0 to what could be hundreds of millions of dollars over the next few years.

So we are really excited about this market.

In terms of the rollout of the in-flight interconnectivity market, we can't really talk specifics because we have certain confidentiality agreements with our customers.

But that all being said, I think if you just look at the public statements by the airlines of what they're doing with their old planes and every single new plane, that's the best gauge for where the market is and where it's heading.

And Mike, I just have one clarification on the expense line.

I wanted to better understand your comments about the SG&A trending up into next quarter, especially given the lower legal expense that you seem to be expecting going forward.

Sure.

A couple of -- 2 things to talk about, right?

Our Q3 did have a benefit of a recovery of legal expenses, so you got to kind of think about adding some back when you want to normalize it.

And then just the fact that our Q4 is going to be significantly higher and we are chasing a bunch of opportunities, our SG&A, in total, in dollars, is going to be higher.

I think if you're looking for a dollar kind of framework for where things could be, despite having significantly higher sales expectations in Q4, I think if you look at our Q1 SG&A, that may give you a sense of where we kind of think the dollars would be.

We'll take our next question from Mike Latimore with Northland Capital.

Very nice quarter, and good to see the credit agreement.

On the tropo opportunity, you mentioned sort of replacing hundreds of legacy terminals.

What roughly would that be in terms of revenue opportunities?

I think if you just look at the replacement of the AN/TRC-170 terminals, there were 350 terminals that the Army had and another 150 that the Marine Corps had.

And it's an old terminal, obviously.

It's been around for a number of years.

I think this is a program probably that will, for us, mean 15 to 20 years of revenue.

I'd say, best estimate that I can give you is probably over $600 million over that spend.

Got it.

Great.

And then I'm just thinking about the EBITDA contribution, commercial versus government.

I think it was $15.5 million commercial, $3 million government in this quarter.

How do you see that playing out over time?

I know you've talked about revenue, I think, getting back to sort of 50-50 split.

But how about EBITDA?

Where might EBITDA go?

It seems like commercial -- it's heavily weighted to commercial right now.

Well, there's a couple of things as we look at the metrics going forward.

First, from a percentage perspective, is the way I would tell you to think about it, we did 14.2% in Q3, and we almost hit 20.0% EBITDA margins in the quarter.

And I know a lot of folks were questioning the -- how fast we could ramp that up.

But if you could see what the progressive pace, we did 13.0% or so in Q1, increased to 15.0% and now a little under 20.0%.

We expect our Q4, as a percentage, to continue to increase.

On the government side, we are still working through this tactical change, and so I would almost tell you that the 6.4% we did as a percentage is certainly a low point.

We are expecting that percentage to increase.

So then you kind of come back to the dollars and the contributions.

As the sales come in and as the opportunities are closed, obviously, the dollars will increase.

But for the moment right now, the commercial side is driving profit, but the government is not far behind in terms of coming back with some significant increases in dollars.

And if these opportunities that we're seeing in the government space come to fruition, that dollar number contribution will increase.

And then, obviously, you are optimistic about fiscal '18.

And I guess, did you kind of indicate that you think EBITDA margins continue to improve next year?

Or what was your comment around -- just on EBITDA margins, say, next year?

Well, we think, in total, for the year, for FY17, we're going to be around 12.0%.

I think if you do the math, it's a little bit higher than just 12.0%, like 12.3% and change or something like that.

So when we look at next year, we're going to see that same quarter-to-quarter issue that we had in this year where we had a ramp-up going from Q1 to Q4.

And we've seen that trend for this year as well as the prior year, so we do expect to have significant back-end loaded nature to next year as well.

And even some of these opportunities that we're seeing, we're thinking our Q1, just in terms of EBITDA contribution in dollars as well as -- dollars could be -- actually be lower than Q1 of this year.

So in terms of the ramp, we have to kind of see how it plays out.

But all in all, if you think about just 12.0% being this number, our expectation, without giving a number, is that we should be able to beat 12.0% next year.

We give our guidance in the September time frame for FY18.

We're going through our fiscal 2018 planning process.

So we're not -- we don't want to give out a number that we don't think we can achieve.

But our kind of internal planning target is just to give a sense, is we hope to be higher than 12.0%.

Our next question is from Kyle McNealy with Jefferies.

This is Kyle here for George Notter.

Given the positive commentary around potential bookings for Q4 for the HEIGHTS platform and I guess into Q1 as well, does this suggest that there's some pent-up demand awaiting the product?

And I guess the question after that would be, how lumpy might it be going forward?

Is there some big initial bulge that happens and then trails off slightly going forward?

Or does the momentum continue to carry through 2018?

How should we think about that shape?

I think what we've mentioned is that we were finding this to be kind of a longer sales cycle.

To answer your question, there is a pent-up demand primarily because, a, we announced it early, and nobody wants to buy the serial #1.

So that's the usual problem.

But there is a pent-up demand.

I don't think it's going to be very broad in the fourth quarter, but certainly, in '18, I think we expect that to be the breakout year, not only for the commercial but also for the U.S. government applications.

Okay.

And I know they're different products, the HEIGHTS versus your single channel per carrier platforms, but is there any kind of impact on -- I know you mentioned softness in this quarter, is there any kind of wait for effect or transition from those users of single channel per carrier that are kind of migrating to the high-thru-put satellite in the HEIGHTS platform?

It's -- I think the migration is just about starting to go to the high-thru-put satellite systems, and I think a lot of customers are planning to do that.

So we see that as happening in '18 and beyond.

Great.

And one last one.

Your typical seasonality in the first quarter is generally down.

How should we think about that relationship to the ramp in HEIGHTS?

Does it track better than historical?

Or should we think of the Q1 sequential comps to be kind of generally in line with what you've seen historically?

I think what you probably saw in '17, I think it seems to be seasonal aspects to our business, and I think we see the same type of transition from first quarter to fourth quarter kind of a -- hopefully, a softer ramp.

(Operator Instructions) We'll go next to Glenn Mattson with Ladenburg Thalmann.

Can you just talk about some of the dynamics at play that are elongating the sales cycle for HEIGHTS and why you have such confidence that you're -- you'll convert those opportunities in the first part of '18?

I think our great feeling on the opportunities are really based on some of the trade shows that we've had our people go to and the, really, interest that we've seen in it.

It is a longer cycle because it's a network.

It's a -- whereas the SCPC market that we were a dominant figure was really a box, a product supply.

This really -- HEIGHTS is a network product.

So as such, it's much more value-added, and it's a larger market that we're addressing than the SCPC market that we had traditionally addressed.

And finally, the funnel and in discussions with our potential customers, the funnel right now is pretty large.

But in terms of timing, as far as early '18, perhaps converting some of those orders, what -- is it simply just maturation of the process?

Or what makes you confident in that ability?

Well, again, it's a longer sales cycle because it is a network, and it is a longer cycle for our customers as well in terms of planning their systems and how they go forward.

So what we're really seeing is probably not the expectations that we wanted to in the fourth quarter.

We see that more happening in fiscal 2018.

Glenn, just to add to what Fred is saying and elaborate a little bit, once -- we're seeing 2 things, right?

We're seeing a longer sales cycle in terms of the orders.

But -- so we have this big buildup of funnel.

So if you look at the funnel, if you think about our sales funnel from Q2 to Q3, we have a much higher sales funnel of customers that we're actively talking with about the product.

So that sales cycle overall is just taking longer, but the funnel is also growing.

So then we have the actual initiation of the order and getting that order in.

And I would also say to you, the second piece that we also have is that these are all sort of customized boxes, so the order flow of getting out of the facility also is probably a little bit longer.

So the entire process takes a little bit longer.

So when we're thinking about the ramp next year, we may have this big increase in bookings and where we traditionally have a higher book to ship, right?

That percentage may get down because we may have the order in backlog, and it takes us some extra 30 days, 40 days to get the product out the door.

So the entire process is longer than our traditional just shipping boxes because, as Fred had mentioned, it's a network.

So the orders are expected to start to come in, more than they did in Q3, in our Q4 and in Q1, and we expect that trajectory to increase throughout the year and then with the sales being a little bit more weighted towards Q3 and Q4 simply because of a longer cycle time.

Okay.

That's helpful.

And just last thing on tropo, is there any other opportunities outside the U.S. government that are moving along at all?

Yes.

We continue to have the opportunities in offshore oil platforms and also international, various countries with their defense systems or radar systems that require tropo for their communications or their C4ISR needs.

So that market continues to be strong.

And it appears we have no further questions at this time.

I'll return the floor to our speakers for any closing or additional remarks.

Okay.

Well, thank you very much for joining us today, and we look forward to speaking with you again in September.

Thank you very much.

And this will conclude today's program.

Thanks for your participation.

You may now disconnect.