Comtech Telecommunications Corp (CMTL) 2017 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

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

(Operator Instructions) As a reminder, this conference is being recorded today, Thursday, September 28, 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 fourth quarter of fiscal year 2017.

With us on the call this morning are Fred Kornberg, Chief Executive Officer and President 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.

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 we announced yesterday afternoon, we reported our fourth quarter results of $147.8 million in revenues and operating profit of $14.8 million and an adjusted EBITDA of $29.1 million.

I'm very pleased with our fourth quarter performance on many fronts.

We solidified a strong finish to a very busy and ultimately successful year for Comtech.

We enter fiscal 2018 with a solid backlog and a large pipeline of opportunities, and I'm seeing positive signs across all aspects of our business.

The integration of TCS -- of our TCS acquisition and focus on gross margin is largely complete.

We have now shifted our focus from integration to growing our business and focusing on increased shareholder value.

I believe we are on the right path, and I remain pleased with the progress that we are making.

I will tell you why I'm so optimistic about our future in a bit, but first, let me turn it over to Mike Porcelain, our CFO, who will provide a discussion of our fourth quarter financial results, a summary of fiscal 2017 financial results and our fiscal 2018 guidance in more detail.

Then I'll come back before opening up to questions and answers.

Mike?

Thanks, Fred, and good morning everyone.

Our Q4 fiscal 2017 results, in almost every respect, was terrific.

Consolidated net sales for Q4 were $147.8 million, of which, approximately 31.5% were generated from U.S. government end customers, 27.0% from international end customers and 41.5% from domestic commercial end customers.

Net sales in our Commercial Solutions segment were $93.2 million as compared to Q4 of last year, which was $83.3 million.

This represents an increase of approximately 11.9% versus last year.

Sales in this segment represented approximately 63.1% of total net sales.

During Q4, international market conditions for our satellite earth station customers continue to improve, and sales to those customers were relatively strong.

Turning to our Government Solutions segment, net sales were $54.6 million as compared to $69.1 million in Q4 of fiscal 2016, a decrease of approximately 21.0%.

Sales in this segment represented approximately 36.9% of total net sales.

I want to remind you that Q4 consolidated and Government Solutions segment results, both sales and adjusted EBITDA, does not reflect any quarterly benefit associated with the $10.0 million of annual Blue Force Tracking intellectual property licensing fee, which we previously earned.

Going forward, future quarters will not have this fee.

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

At July 31, 2017, our backlog was $446.2 million.

During Q4, we achieved bookings of approximately $132.7 million and our consolidated book-to-bill ratio was 0.9, led by strong bookings in our Government Solutions segment, which achieved a book-to-bill ratio of 1.26 for the quarter.

Our book-to-bill ratio in our Commercial Solutions segment in Q4 was 0.69, which, for this quarter, does not accurately portray the actual level of business activity that is occurring.

We are working on a number of large commercial opportunities, many of which we have been verbally told will be awarded to us, and we are finalizing the terms of those orders with our customers.

As such, we expect to announce these orders shortly and are targeting a book-to-bill ratio over 1.0 in this segment for fiscal 2018.

Our gross profit in Q4 of fiscal 2017 as a percentage of consolidated net sales was 40.9%; similar to the percentage we achieved in Q4 of last year.

On the operating expense side, SG&A expenses were $26.5 million in Q4 of fiscal 2017 or 17.9% of consolidated net sales.

Research and development expenses were $13.9 million in Q4 of 2017 or 9.4% of consolidated net sales, which comprised of $11.3 million of spending in the Commercial side and $2.1 million related to the Government Solutions segment with the rest constituting amortization of stock-based compensation.

Total stock-based compensation was $5.5 million for the fourth quarter of fiscal 2017 as compared to $1.0 million for the fourth quarter of last year.

I want to point out that in fiscal 2017, the company paid fiscal 2017 annual non-equity incentive awards in the form of share units whereas in fiscal 2016, such annual incentives were paid in cash.

Although the share units are vested, employees who receive them cannot sell them for a 1-year period.

We believe this change is positive as it fully aligns our employees with our shareholders.

Amortization of intangibles was $5.3 million in Q4 of fiscal 2017.

On a GAAP basis, our consolidated operating income was $14.8 million in Q4 of fiscal 2017 and our adjusted EBITDA was $29.1 million or 19.7% of consolidated net sales.

Adjusted EBITDA in our Commercial Solutions segment was $22.6 million or 24.2% of sales, and our Government Solutions segment was 4.8% or 8.7% of related net sales.

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

Interest expense was $2.7 million in the fourth quarter and primarily reflects interest on a secured credit facility.

Our total interest expense is expected to reflect the rate of approximately 5.0% next year, and our actual cash borrowing rate, which excludes the amortization of deferred financing costs, currently approximates 4.1%.

Adding it all up, it was a great quarter.

On a bottom line, we delivered GAAP-diluted EPS of $0.31 per share in Q4.

At July 31, 2017, we had $41.8 million of cash and cash equivalents.

And in fiscal 2017, we generated cash flows from operating activities of $66.7 million, of which, $23.0 million occurred in Q4.

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 fiscal 2017 financial performance and our strong operating cash flows, we have successfully reduced the level of our total indebtedness.

In fact, for the 12 months ended July 31, 2017, we have reduced total debt by $63.7 million, of which, $34.9 million occurred in Q4 alone.

As of July 31, 2017, total debt, excluding unamortized deferred financing cost, was only $200.6 million.

Let me now give a recap on fiscal 2017 as I think it really represents the best way to look at our company.

Fiscal 2017 represents the full first fiscal period of combined Comtech and TCS operations.

Despite the quarterly lumpiness and back-end loaded nature of our financial results, when you look at 12 months of operations you get a better picture of the company's earnings dynamics.

For fiscal 2017, we finished at $550.4 million of revenue, with 32.7% from U.S. government customers; 28.4% from international customers and 38.9% from domestic commercial customers.

Our Commercial Solutions segment represented 60.1% of fiscal 2017 net sales, and our Government Solutions segment represented 39.9%.

For the full fiscal year 2017, we achieved bookings of approximately $512.6 million, which translates into a full year book-to-bill ratio of 0.93.

As discussed earlier, if we had closed on certain commercial opportunities, our book-to-bill ratio would have been significantly higher.

Our gross profit for the full year fiscal 2017 as a percentage of consolidated net sales was 39.6%, and we reported consolidated operating income for fiscal 2017 of $37.0 million.

On a segment basis, operating income in the Commercial Solutions segment was $33.2 million or 10.0% of sales, and operating in the Government Solutions segment was $9.4 million or 4.3% of related segment net sales.

Our unallocated expenses were $5.6 million, and when you remove $18.8 million of favorable adjustments, our unallocated expenses in fiscal 2017 were $24.4 million.

The favorable adjustments which aggregated $18.8 million included $12.0 million of previously announced favorable adjustments related to the settlement of certain TCS intellectual property matters as well as a number of small favorable adjustments, which ultimately aggregated $5.5 million, most of which related to recovery of legal expenses from the third party.

Excluding the $18.8 million of favorable adjustments, operating income in fiscal 2017 would have been $18.2 million or 3.3%.

Adjusted EBITDA was $70.7 million or 12.8% of total sales, and we are really pleased that, given all of the puts and takes during fiscal 2017, we were able to exceed the original target we set back almost 1 year ago on October 6, 2016.

If you look at the adjusted EBITDA margins by segment, we achieved 18.4% in the Commercial segment and 8.0% in the Government segment.

Finally, before turning it over to Fred, I would like to provide some comments on our fiscal 2018 guidance.

Our initial revenue guidance for 2018 is a range of $550.0 million to $575.0 million.

Fiscal 2018 will represent the first year without BFT-1 IP licensing fees.

So from a comparative perspective, we are -- if you remove the $6.7 million IP licensing fee from 2017 numbers, we are targeting a growth rate in the low single digits.

This growth rate reflects the shift in our Government segment away from large commodity-type contracts with an emphasis on higher-margin contracts.

Our initial adjusted EBITDA guidance is a range of $68.0 million to $72.0 million despite the absence of BFT-1 intellectual property licensing fees in fiscal 2018.

Again, if you adjust the 2017 numbers to remove the $6.7 million of IP licensing fees, we are targeting a growth rate in the 9% range.

We think that is pretty impressive in this environment.

Based on our current spending plans for fiscal 2018, we expect both SG&A and research and development expenses as a percentage of consolidated net sales to be comparable to the percentages we achieved in fiscal 2017.

We expect amortization of stock-based compensation in fiscal 2018 to range from $9.0 million to $10.0 million.

The final amount of stock-based compensation will be dependent upon the final allocation of incentive compensation, final stock price and our final fiscal 2018 performance.

From a GAAP operating income perspective and GAAP EPS perspective, I have to remind you that fiscal 2018 will actually be a sequentially down year because fiscal 2018 will not reflect the $12.0 million of favorable adjustments associated with the settlement of legacy TCS IP matters.

It is one of the reasons why we encourage you to look at annual adjusted EBITDA, which eliminates the noise of those settlements.

On the tax side, the company currently expects its fiscal 2018 effective income tax rate, excluding discrete items, to approximate 34.75%.

There could be some variation in the reported rate due to the new stock-based compensation rules, but we think that 34.75% is the right number to start from.

Finally, the quarterly financial lumpiness that the company experienced in fiscal 2017 is expected to repeat in fiscal 2018.

Based on the anticipated timing of shipments and performance related to orders currently in the company's backlog and the timing of expected new orders, net sales and adjusted EBITDA for our first and second quarters of fiscal 2018 are expected to be significantly lower than the comparable quarters in fiscal 2017.

Just to give you a sense of magnitude, our Q1 adjusted EBITDA in fiscal 2018 is likely to be somewhere between $2.5 million and $3.0 million; lower than the $10.0 million we achieved in Q1 of last year before significantly growing in Q2 and Q3 and Q4.

Likewise, given a straight-line amortization expense associated with intangible assets, the company expects to report an operating loss in both the first and second quarter of fiscal 2018 with each of the third and fourth fiscal 2018 quarters achieving significant operating profits.

The company's fourth quarter of fiscal 2018 is expected to be the peak quarter for both net sales and adjusted EBITDA as it was in 2017.

The quarterly fluctuations we experienced and back-ended nature of our fiscal year's results is something that it's just part of our business.

Given our pipeline and the business opportunities that we see, we are confident that fiscal 2018 will be another successful year.

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

Fred?

Thanks, Mike.

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

First, let me discuss our Commercial Solutions segment, which is focused on several large growing markets.

Here, we are the 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 satellite-based communications 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, and what we call, HEIGHTS network solution for use with the new High Throughput Satellites.

During our fourth quarter of fiscal 2017, we announced the general availability of our HEIGHTS Dynamic Network Access, or H-DNA technology.

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

This is an entirely new market for us and one which is much larger than our traditional SCPC market.

Recently, we announced that 3 different customers are now using HEIGHTS to support their business needs.

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

We believe that fiscal 2018 will be a breakout year for orders and sales of our HEIGHTS network products.

Our commercial satellite products are also utilized by various U.S. government agencies.

As discussed in earlier conference calls, this market area in fiscal 2017 was soft.

However, we believe the lull in ordering is finally over and look forward to some strong government bookings in fiscal 2018.

In fact, during the fourth quarter, the U.S. Space and Naval Warfare Systems Command publicly announced its intention to sole-source a 5-year indefinite delivery, indefinite quantity, or IDIQ, contract to procure our model SLM-5650B satellite modems.

There are over 800 older-generation modems of this type currently utilized by multiple Navy programs, which will have to be replaced by our new modems and related upgrade kits.

We're expecting to receive an IDIQ contract award in early fiscal 2018 of double-digit millions with related shipments occurring in the latter part of the second half of fiscal 2018 and through fiscal 2020.

Another area we continue to be excited about is the IFEC market, or in-flight satellite-based connectivity market.

Our solid-state 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 and beyond.

In fact, we recently announced the receipt of a $7.5 million follow-on order from GoGo for our solid-state amplifiers.

We're also seeing continued strength for our satellite communication amplifiers and recently announced the expansion of our series high-power GaN solid-state power amplifiers to fill out the top frequency spectrum of our industry-leading solid-state power amplifier product line.

The new compact and rugged amplifiers are significantly more efficient, making them ideal for transportable and mobile applications where size and power draw matters.

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 solutions for state and local public safety operations.

We have built partnerships with key system integrators, such as Motorola and General Dynamics.

Although we recently learned that our partners are not successful in 2 bids that we are working with them on, we continue to actively participate in multiple RFP responses and are waiting on responses on bids already outstanding.

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.

And we're also continuing to deploy the 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 in facilitating such growth.

Turning to our enterprise and Trusted Location Solution product lines.

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, providing such service to Verizon and others for many years.

As part of our text messaging solutions, we offer carrier-grade platforms and high-performance short messaging services, or SMS routing for cloud messaging centers, wireless intelligent gateways and feature-rich, operator-grade messaging platform.

During the fourth quarter, we received a $3.7 million order from a major U.S. mobile network operator for advanced location platforms supporting the customer's 4G/LTE network.

This order is part of a multi-year development, deployment and support contract valued at more than $7.0 million.

We are pleased with customer feedback from our newly released location studio product suite, which was recognized by the Cellular Telecommunications Industry Association, or CTIA, as a winner for the Industrial Internet of Things or IoT product of the year.

We also recently announced the development of a real-time location web-based portal for tracking multiple search and rescue aircraft simultaneously for the Civil Air Patrol or CAP, a volunteer organization of citizen airmen and an auxiliary of the United States Air Force.

This tracking portal gives CAP complete visibility of their search and rescue squadrons, allowing them not only to track the real-time location of multiple aircraft simultaneously but track historical data as well where they can view and compare previous search routes.

This helps them narrow down and adjust the designated search area as needed as well as provide them with better tools for monitoring the conditions of planes in flight and pilot safety.

Looking forward, we anticipate the future announcements for location-enabled applications in the connected car, mobile OEM and data analytics domains.

At this point, let me talk about 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 sold to the U.S. Department of Defense agencies and international government agencies and primarily consists of C4ISR solutions.

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

As previously stated, we continue to execute 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're starting to see tangible benefits of this strategy.

During the quarter, we booked, among others, a number of important orders.

A $14.5 million contract modification from the Defense Information Systems Agency, or DISA, which exercised an option under an existing contract that enables us to continue to provide Ku satellite bandwidth and support services for the U.S. Marine Corps tactical communications network, an $8.6 million contract modification to provide enhanced communications infrastructure for U.S. forces in the central command area of responsibility; a $6.9 million in orders for Cyber Training solutions; and $4.1 million in orders for high-power amplifiers and control components from multiple domestic original equipment manufacturers.

In addition to these funded orders, we were named a final awardee on a 10-year, $2.5 billion IDIQ contract, commonly referred to as a Complex Commercial SATCOM Solutions, or CS3, from the General Services Administration, which provides U.S. federal agencies a contract vehicle to purchase end-to-end satellite solutions.

Our Government Solutions segment's strategy to focus efforts on supporting the U.S. Army on a possible next-generation Blue Force Tracking program also appears to be gaining ground.

As we announced in our last conference call, we continue to provide the U.S. Army with sustainment support to a new 5-year, $42.7 million contract we received in the third quarter and have received $7.7 million of funding to date.

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

These 2 contract awards, in our view, demonstrate the quality of our BFT-1 system and our expertise in the BFT area.

As we enter fiscal 2018, it is more than 7 years since the U.S. government awarded BFT-2 to a competitor.

Nevertheless, our BFT-1 systems remain deployed and continue to be used as the workhorse of the BFT-1 program.

In addition to BFT support, we are currently responding to a large multi-million dollar competitive solicitation from the U.S. Army to provide sustainment services for the SNAP satellite earth terminals deployed by the U.S. Army.

SNAP terminals provide quick and mobile satellite communications capability to personnel in the field.

For example, today, our SNAP terminals are being used to provide vital satellite communications support of hurricane disaster recovery efforts in Texas and in Florida.

We are the incumbent in this program, and as such, we're optimistic that the U.S. Army will select us to continue to perform this important work.

In addition to the SNAP program, we're also preparing to respond to an expected large multimillion-dollar and multi-year RFP for the supply of tropospheric communications equipment to replace hundreds of the AN/TRC-170 troposcatter terminals.

A draft RFP has been circulated to perspective vendors, and we believe a final request for proposal will be issued sometime in fiscal 2018.

As you know, we've been waiting for this opportunity for a long time.

Although an award of this program will likely not affect fiscal 2018 revenues or perhaps even 2018 bookings, we would expect it to make significant contributions to revenue in subsequent years.

As you know, we have been a supplier of over-the-horizon troposcatter systems to international and to U.S. government agencies and customers for many years.

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

Our pipeline today is full of opportunities in this area.

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

During the fourth quarter, we were awarded $6.9 million in orders for our Cyber Training solutions, and we currently are working with several different government and commercial customers, and we expect to announce additional large orders for these products very shortly in fiscal 2018.

All in all, we continue to see very positive signs and broad opportunities for future growth for full of our business.

I would like to thank at this time our employees for a successful 2017, and I'm very optimistic that fiscal 2018 will be an even better year.

Now I would like to proceed to the question-and-answer part of the conference.

Operator?

(Operator Instructions) And we'll take our first question from Mark Jordan with NOBLE Financial.

First question will be on the HEIGHTS program.

Would you talk if -- is -- when you're making a sale into the HEIGHTS arena, to what extent is this potentially cannibalization of your existing customer base where HEIGHTS would work closely to fulfill their needs?

Or how much of the sales do you have in this area are actually new sales that would not have been potential customers for your existing product line?

Mark, I think our position on that is, obviously, there could be some cannibalization of the SCPC market.

The SCPC market, as we have explained in many, many past conferences, is the top-of-the-line very broadband throughput system that is used on a single channel per carrier basis from point A to point B. We have been in that market and have dominated that market for a long, long time.

That is the smallest market of the markets for satellite communication ground stations in this area.

The market that we are addressing with HEIGHTS is really the market that is the lower end.

Today, kind of the market is dominated by iDirect and Gilat.

We feel that the HEIGHTS platform will take that market share away from those 2, and we should capture that.

That is by far a bigger market than the SCPC market.

Okay.

Mike, do you have an estimate of capital expenditures for fiscal '18?

Yes.

I think it's going to be maybe $1.0 million or $2.0 million higher than what we did for fiscal 2017.

And the ultimate number will be based on how many large programs that we get by the end of the year and the timing of those things.

But at the moment, it's pretty close to 2017, maybe a couple of million dollars higher.

Okay.

Final question for me.

In the international tropo area, there's been thoughts of follow-ons from some of your larger customers that seems to have been delayed for years.

Is there any visibility of when you may see a next phase or 2 out of some of your existing large international customers?

We have a large -- as I mentioned, we have a large pipeline in that area.

But unfortunately, as we've said many times in the past, things do move to the right, especially in the international arena.

However, having said that, I think we are in a position today that we can probably say that 1 or 2 of those contracts will probably drop out in early 2018 and we should be able to book it.

All right.

And are those contracts in your sales assumptions for the year?

Yes.

And we'll take our next question from Tim Long with BMO Capital Markets.

Two questions if I could.

Could you just elaborate a little bit on some of those contracts in the commercial business that you think were going to hit, that are verbal?

Any color on kind of which areas and how big those could be?

And then secondly on the government business, a lot of talk from companies about slowdowns, given all the drama in Washington.

So I understand we got a correction for the one contract.

But maybe Fred, if you could just talk a little bit higher level about how you think the government spending will be in linearity for the next 12 months, that would be helpful.

Okay.

I think as I mentioned, certainly 2017, and even 2016, prior to that, were pretty soft years for our government business.

I think, however, we see a turnaround in that.

We see, whether it's the environment today, something is moving the government areas now, at least to start buying some programs.

So we're kind of bullish that things will turn around, and we'll see some good bookings coming on.

Okay.

And then just on the contracts that were verbal.

Any update, any more color there in what areas they're in?

On which contract?

You said the book-to-bill is a little low because some contracts weren't signed, but you've got verbal agreements.

Just curious what areas they were in and maybe just a rough idea on the scale of them.

Well, some -- they were really across the board.

We're -- it's probably okay at least for us to talk.

We are on the 911 wireless area discussing with a major supplier there and major partner of ours for an add-on for 2 to 3 years to our present contracts that we have in that area.

That's probably in the order of -- let me just use a range of $30.0 million to $50.0 million in total bookings.

We've been kind of talking about that one and negotiating it probably for at least 3 months.

On the government side, there's been the SNAP terminals, which we expect to win.

This has been delayed and delayed and delayed.

We expect it momentarily but, however, we have been expecting it momentarily for a couple of months.

We got notice of the modem job that I mentioned in this presentation.

It's a very, very large job.

It's a great opportunity.

We've been selected for the next -- literally for the next 5 years as a supplier for that program.

However, the funding has got to wait until the government funding for -- starting with October 1. So we expect that to drop pretty quickly as well.

And so, these are the type, among others that we have, that should drop.

One in particular that I'd like to mention, which I didn't really mention in the presentation, is the BFT program, for instance.

We've been working on the BFT program for 15, 20 years, starting with the BFT-1 program and then continuing even in support of the BFT program office when they selected another supplier for the BFT-2 program.

As I think everybody knows today, that program has not been successful and BFT-1 continues to be the workhorse of the BFT systems.

So we have been talking to the customer, we have been supporting the customer.

I think we're back in the position when BFT-3 is the program of record that will come in.

And that's not going to happen until probably late '18 or '19, so it's not an immediate near-term situation.

But I think one of the things that I can mention is we expect the program.

In fact, we have been told that we have been awarded this but, somehow, the bureaucracy hasn't gotten to us.

It's a small $6.0 million to $8.0 million program but to give you just an idea, we will be actually porting our waveform on our competitors' transceivers.

So we will be porting our waveform on the BFT-2 system that is presently in use but not working to its full capacity.

I think that's an exciting news bit, and I think that really tells you where we're heading as a company with the BFT program office.

And we'll take our next question from Stanley Kovler with Citi Research.

I just wanted to get some more color on the HEIGHTS process.

Fred, you gave a lot of detail on the competitive landscape on HEIGHTS.

What do you think is the gating factor to adoption on this program here?

And when you think about the competitors that you mentioned for the program like Gilat and others, where would you see as kind of the differentiator for you?

And if I can just get a little bit more color on that, both the timing and competitive landscape.

And then I have a follow up.

Okay.

We have been in the SCPC area for quite a long time, as I mentioned, and pretty dominant in that.

And that's the smaller part of the market.

That is a single channel per carrier, which communicates from point A to point B. Gilat and iDirect have been supplying what we call TDMA systems.

TDMA systems are systems that are able to interleave many, many different remote areas into a communications network.

As such, we were doing the very, very high throughput point A to point B. They were doing the multiple terminal networks that -- TDMA allows you to do that.

TDMA has some, let's say, deficiencies.

One in particular, one is the delay of the network itself.

That alone, as the throughput rises, it becomes a very, very significant deficiency.

So we have been in development for a number of years on what is now resulting in the HEIGHTS network.

That is really not a box anymore.

It's not a modem.

It's a network, and that network will essentially compete with the TDMA network.

However, we're not using TDMA.

We are using what we call H-DNA, which is an offshoot off the single channel per carrier, but for multiple remotes.

So I think we have an answer to a problem that now can attack that part of the market as well as the SCPC market.

Yes.

I appreciate the detail there.

And then, when you think about your solution as being kind of more of a network, how should we think about the product cycles and the qualification cycle with customers?

How long have you been working with various customers and what that typically would take to qualify, and deploy this new system?

Well, that's an interesting question because that is a big difference -- differentiator.

The SCPC market was really a book-and-ship market.

You book the modem and you ship it the next day.

This is more of a network market and more traditional and almost comparable to programs which will probably take it anywhere in the order of 4 to 6 months from order to delivery.

So that's quite a difference for us.

So there is that lag, but we're experiencing that lag right now.

We have some -- we have booked -- we booked in '17 twice as much as we did in '16, and I think we are programming for '18 another twice as much for '18.

So that lag will be slowly overcome and we'll be okay.

And I just wanted to follow up on a different area with respect to some management changes that I think you addressed in your filings along with your earnings press release.

Can you help us understand what's going on with some management changes at the company that were announced in those filings recently?

Yes.

I think -- we've had some changes, obviously, going back to my replacement of the prior CEO.

And at the same time, the hiring of what was a COO.

And I think what we've come now is we've pretty well successfully integrated and have pretty well finished with the integration of TCS.

So at this point, we feel that there's no need for that.

Our operating style is that our business units have their own presidents and have their own, essentially, companies.

And they do most of the control of that particular business market that they're in.

So we really don't need a COO, but we're using the gentleman that we did hire kind of as a consultant going forward.

And we'll take our next question from George Notter with Jefferies.

I guess I'm trying to better understand sort of gross margin and profitability into 2018.

I guess, Mike, I'm just curious about how you see the different puts and takes in gross margins.

I guess Blue Force Tracker licensing is a piece of this year that goes away.

Also, you guys have shed a fair amount of lower margin business.

I guess I'm just trying to think about how you see margins in 2018 and how do they progress over the course of the year.

Sure, George.

I'd say if you almost look at Q4 of '17 sort of as the high point, if you will.

Clearly, that business represents the peak of our quarterly cycle flow.

So if you take a step back, our commercial group did 24.0% adjusted EBITDA margins, and our government group at the peak of their revenue did 8.7%.

Now to me, what's pretty exciting about the Government segment doing 8.7% is that it doesn't include any of the BFT-1 IP fee.

So at the revenue number that we achieved, $54.6 million, we did a really good shift in going away from low-margin opportunities to better-margin profile contracts and we achieved 8.7%.

The commercial side, dynamite quarter.

We did $93.0 million of revenue at the peak and we achieved 24.0% adjusted EBITDA margins.

So clearly, you get a sense that as the revenue increases in our businesses we get pretty good contribution margins going down to the bottom line.

Now I'll take 19.7% every quarter but, obviously, that's not going to occur.

And when you look at FY '17, we achieved 12.8% on the bottom line on terms of adjusted EBITDA margin.

That does include $6.7 of IP fee.

We have to make that up next year in 2018.

So when we sit back and we look at all the pluses and minuses and puts and takes, our goal is to get over 12.0% adjusted EBITDA margins in total.

We think it would be terrific if we could achieve 8.0% in the government side of the business in 2018, kind of making up the loss of the IP fee.

It would be great if we could do above that.

But we think for the moment, that's a good starting point.

And again, we did 18.4% in the Commercial segment.

And as the revenue sort of ramps up in that segment, we think that we could do better than the 18.4% that we achieved in 2017.

So that's kind of the summary.

It's going to look a lot like 2017 just because we're making up the IP absence of the IP fee.

Got it.

And is there still a lot more revenue that comes out of the model as you guys move away from lower-margin business?

Do you think that's mainly behind us now?

I would say it's largely, if not significantly largely, behind us.

There are some lingering contracts that we're dealing with and some of it we like and some of it we're still evaluating.

But I think that's why our revenue guidance sort of reflects what we believe will ultimately be where we are.

Some of these larger contracts come in that we're talking about, our revenue guidance might be low.

But right now, our annual revenue guidance that we provided does reflect what we'll wind up with.

And hopefully, some of these programs that we're working on will be incremental to the number and we'll announce that when we achieve it.

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

Very nice quarter there.

I guess, Mike, just on the gross margin, how are you thinking about gross margin this year relative to fiscal '17?

Yes.

It's pretty much the same thing as on the adjusted EBITDA margin.

I think for the year, we are going to be very close to what we did for fiscal 2017.

And in order to do that, we're making up the IP licensing fee through improved margins throughout the company.

We're definitely seeing margin improvement on the government side of the business.

Our commercial business is sort of steady state, if you will.

As we get the incremental margins from the HEIGHTS products and some of the additional work that we expect, that margin will increase as well.

And you add it all up, you're going to wind up coming pretty close to what we did for 2017.

Our goal, obviously, would be to do a little bit better than what we did.

But we have to make it up through mix changes and improvement to absorb that IP fee.

Okay.

And then, it looks like you had strong commercial -- sequential commercial revenue growth in the fourth quarter.

I guess, what was sort of behind some of the sequential strength there?

We started to see the HEIGHTS products come in.

As Fred mentioned, we've had 2x the number of orders that come in.

We've been talking about it all year long.

And if you remember back in our Q2, Q3, we said that when we started to see the bookings flow and if you take the 6-month cycle that Fred mentioned, HEIGHTS is starting to come in.

We also -- earlier in the year, Q1, Q2, it reflected low international sales.

The market back in Q1, Q2 was not where it was at the end of the year.

Sales to our international customers for satellite earth station products were pretty good, and it was the first year, in fact, where we finished with the year-over-year increase in sales to those customers.

So again, that's what gave the lift in Q4.

I don't want to call it seasonality, I'd rather call it timing of orders but our Q4 for the last 2 years, if not 3 years, has been our peak quarter and then our Q1 has been our weakest quarter.

So just in the timing of the bookings and the timing of the cycle, our Q1 is going to drop off before rapidly increasing in Q2 and thereafter in 2018.

And then just last on the BFT opportunities.

It sounds like you're getting good traction there for whatever might be the next-gen opportunity.

It does look like there has been some funding of BFT-2 technologies.

I guess can you just elaborate on that?

Why would there be funding BFT-2?

Is that just sort of maintenance stuff until they get to BFT-3?

Yes.

I think you have to recognize that the BFT program -- this is satellite -- the satellite part of the BFT program is about 20 years old, going back to the first Iraqi war.

So it's an old system.

BFT-2 now is 7 years old but has some problems.

And the funding for the program office has actually increased this year, and that's why we're kind of excited that we may be able to participate in that increased funding if we prove that we can port our waveform on the ViaSat transceivers.

So if that happens successfully, and we think that we have the technology to do that and we've had some demonstrations to the BFT office, I think it's a matter of just timing in terms of getting some orders initially.

Not necessarily for the BFT-3, as I mentioned, because I think that's probably more in the fiscal '19 for us.

But certainly for fiscal '18, there could be some nice additional orders for us for BFT-2.

Got it.

And just last one.

In terms of the next-gen 911, how many sort of statewide deals are you looking at over the next -- or prospects you're looking at over the next 12 months?

I think we have a number of bids outstanding with our partners in that area.

As I mentioned, unfortunately, our partners lost 2 bids just recently but we are participating with them in a number of states.

And we hope they win and we'll win a couple of them.

And we'll take our next question from Glenn Mattson with Ladenburg Thalmann.

Nice to see the order from GoGo that you mentioned.

Curious -- I believe in the past, maybe it was last quarter, you were talking about perhaps a slightly slower market for that product in the short run as they kind of installed some of the stuff that they've taken on from you.

Can you give an update on where we're at in that market?

I guess we'd rather not give out any numbers, but on a monthly, let's say, shipment basis, at this moment, yes, we're flat as to what we've been doing for the last, let's say, 6 to 9 months with GoGo.

But on the other hand, GoGo keeps getting orders and those orders will eventually flow to us as well.

Okay.

Thanks for that.

And maybe on the 911, on the next-gen 911 side, is there -- has there been any churn?

I understand going after new business.

Has there been any lost customers or anything like that in that segment at all?

Not in that segment, no.

And we'll take our next question from Chris Quilty with Quilty Analytics.

Just wanted to follow up real quickly on the commercial market.

First, just a question.

I believe the HEIGHTS program is primarily targeted as a higher-end, higher-performance product suite.

Do you have something that addresses some of the larger volume part of the market or is that a part of the market that you want to target?

I guess the HEIGHTS really is targeted -- we look at it as being -- as targeting a market, which is a lower market than traditionally what the SCPC market has covered.

So we look at that as the lower market.

And yes, the suite, I think, has the capability to go across the board on the total market basis.

We are not there yet in terms of, let's say, the various -- very, let's say, efficient or cost-effective remote-terminal type of system but we certainly are, let me call it, in the middle market.

So whereas we've been in the top market, I think we're attacking the middle market pretty well right now.

Got you.

And specific to end-market exposure, I know you've got a fairly substantial business in the oil service.

What are you seeing happen there?

And can you give us any other comments on specific verticals or applications, whether it's cellular backhaul or others, where you're seeing strength and weakness?

I think the oil market to us is really the offshore oil platform market, which is a troposcatter market.

And that's been traditionally a market for us for a number of years.

And that, I would say, it's probably flat at the moment with the oil price being where it is.

And in terms of any of the oil market effect, that's been an effect, obviously, in our business for the last 3 years or thereabout with the oil price dropping from $100 a barrel to $50 a barrel.

That's obviously affected our customers and their ability to buy capital goods.

Chris, I just want to just clarify as well.

You mentioned oil services, we -- what Fred said in terms of what's happening in the oil services portion of the business that we do, that's a very, very small portion of our revenue.

When we talk about the impact of oil prices to the company, it's more on the satellite earth station side of the camp because some of the international countries' governments that procure satellite modems for their communication systems in total, not just used for oil services but just the actual purchase of the satellite modem, they get impacted because their revenues and their budgets don't reflect the benefit of higher oil prices.

So we've seen in the second half of 2018 that issue sort of go away -- '17, excuse me.

We don't -- we're not being impacted right now by oil situation prices as it relates to our international customers.

And we have no further questions at this time.

I would like to turn the call back over to the Comtech speakers for any additional or closing remarks.

Okay.

I'd like to thank everybody for joining us today, and we look forward to speaking with you all in December.

Thank you very much.

This does conclude today's call.

You may disconnect at any time, and have a wonderful day.