Comtech Telecommunications Corp (CMTL) 2019 Q1 法說會逐字稿

Good day, and welcome to Comtech Telecommunications Corp.'s First Quarter Fiscal 2019 Earnings Conference Call.

(Operator Instructions) Please be advised, today's program may be recorded.

It is now my pleasure to turn the program over to Mr. Jason DiLorenzo.

You may begin, sir.

Thank you, and good morning.

Welcome to the Comtech Telecommunications Corp.

Conference Call for the first quarter of fiscal year 2019.

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 Operating Officer; and Michael Bondi, 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 will 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, Jason.

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

This morning, we will be discussing our results for our first quarter of fiscal 2019.

As you can see from yesterday's press release, we're off to a great start, and we believe our first quarter results provide a solid foundation for what we anticipate will be a year of revenue and adjusted EBITDA growth.

As you are aware, because of the recent stock market activity and political headlines in the news, business conditions have become more volatile.

Although, we are mindful of this volatility, we believe that the overall demand for our products remains strong, and we currently do not see any change to our strong current business environment.

As such, we are updating our fiscal 2019 targets as follows.

We are increasing our revenue goal to a range of approximately $625 million to $640 million.

We're increasing our GAAP diluted EPS goal to a range of $0.95 to $1.08, and increasing our adjusted EBITDA goal to a range of $84 million to $88 million.

I'll talk more later in this call, but first, let me turn it over to Mike Bondi, our CFO, who'll provide a discussion of our first quarter financial results.

And after that, Mike Porcelain, our COO, will discuss our 2 business segments.

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

Mike?

Thanks Fred, and good morning, everyone.

As announced yesterday afternoon, we reported our first quarter results of $160.8 million in revenues, an operating profit of $7.3 million, adjusted EBITDA of $18 million and bookings of $157.4 million.

We finished the quarter with a consolidated backlog of $627.3 million.

Our first quarter results benefited from a shift in sales of approximately $10 million in our Government Solutions segment, which primarily occurred due to accelerated customer fielding schedules.

Excluding this impact, our first quarter of fiscal 2019 results were still significantly above our expectations and reflect higher net sales in many of our key product lines.

As Mike Porcelain will discuss next, we experienced sales growth in both our Commercial and Government Solutions segments.

From a geographic perspective, sales to U.S.-based customers were 75.6% of total sales with 24.4% to international customers.

On the bookings front, we achieved $157.4 million, and despite our strong sales, our consolidated book-to-bill ratio was 0.98x.

We finished the quarter with a near record high consolidated backlog of $627.3 million.

Our gross profit percentage in our first quarter of fiscal 2019 was 35.9%, which does, as anticipated, reflect a decline from the 39.3% we achieved in the first quarter of fiscal 2018.

As a reminder, our gross margins are influenced by product mix changes, and our Government Solutions segment generates lower margins than our Commercial Solutions segment.

So when Government Solutions sales pickup, it will likely impact our consolidated gross margin percentage.

This quarter, our Government Solutions segment represented 51.5% of consolidated net sales as compared to 37.4% last year.

This increase in the percentage of Government Solutions sales contributed to a lower consolidated gross profit percentage this quarter.

For the full fiscal 2019 year, given expected sales growth and product mix changes, we expect that our consolidated gross profit percentage will be lower than last year.

On the operating expense side, SG&A expenses were $31.8 million in Q1 of fiscal 2019, or 19.8% of consolidated net sales, which is better than the 23.4% reported last year.

Our SG&A expenses this quarter reflect $1.4 million or $0.04 of diluted EPS of costs related to the consolidation of manufacturing facilities.

Research and development expenses were $13.2 million in Q1 of fiscal 2019 or 8.2% of consolidated net sales and were comprised of $11.4 million of spending in the Commercial Solutions segment, $1.7 million of spending related to the Government Solutions segment with the rest constituting amortization of stock-based compensation, which is recorded in our unallocated segment.

For the year, we expect both SG&A and R&D expenses to be higher in dollars, but similar to the respective percentages we achieved in fiscal 2018.

Total stock-based compensation expense was $1 million in Q1 of fiscal 2019 as compared to $0.7 million in Q1 of fiscal 2018.

On an annual basis, amortization of stock-based compensation is still expected to be in a range of $10 million to $12 million, as we expected to pay fiscal 2019 annual incentive awards in the form of fully vested share units in Q4 of fiscal 2019.

Amortization of intangibles was $4.3 million in Q1 of fiscal 2019.

Looking forward, fiscal 2019 amortization of intangibles is expected to approximate $17.2 million.

During the first quarter of fiscal 2019, we initiated a targeted acquisition plan related to a small, but growing technology solutions company and incurred $1.1 million of acquisition plan expenses or $0.04 per diluted share, all of which is recorded in our unallocated segment.

Our acquisition plan efforts are ongoing and although this number can change, we expect to incur an additional $1 million or so of expenses in the second quarter of fiscal 2019 related to these ongoing efforts.

In aggregate, and inclusive of all Q1 charges, our consolidated GAAP operating income was $7.3 million or 4.5% of net sales in Q1 of fiscal '19.

Our adjusted EBITDA was $18 million in Q1 of fiscal '19 or 11.2% of consolidated net sales.

Adjusted EBITDA in our Commercial Solutions segment was $12.7 million or 16.3% of related net sales and in our Government Solutions segment was $9.2 million or 11.1% of related net sales.

Looking forward and despite mix changes, we are targeting adjusted EBITDA as a percentage of consolidated fiscal 2019 net sales to be similar to the 13.7% we achieved in fiscal 2018.

Now let me talk about our interest expense, taxes and our balance sheet.

Interest expense was $2.7 million in the first quarter of fiscal 2019.

As publicly announced on November 5, 2018, we entered into a new credit facility consisting of a $300 million secured revolving loan facility with an accordion feature allowing us to borrow up to an additional $250 million, plus additional amounts subject to pro forma covenant compliance.

Our prior facility was refinanced in full, and in connection with entering into this new facility, we wrote off $3.2 million of deferred financing costs or $0.10 per diluted share in Q1.

As of October 31, 2018, we had total debt, including capital leases, of $195.6 million, and our leverage ratio was 2.5x trailing 12 months adjusted EBITDA as compared to a maximum allowable of 3.75x trailing 12 months adjusted EBITDA.

On the tax side, we recorded a $2.4 million or $0.10 per diluted share net discrete tax benefit primarily related to the successful resolution of an IRS tax audit of our fiscal 2016 tax return.

Excluding discrete items, our effective tax rate was 22.75%.

On the bottom line, GAAP net income was $3.5 million or $0.14 per diluted share in Q1.

Excluding our facility exit cost of $1.4 million, our net discrete tax benefit of $2.4 million, our write-off of deferred financing cost of $3.2 million and our acquisition plan expenses of $1.1 million, our Q1 diluted EPS would have been $0.22.

No matter how you slice it, you could see that our first quarter was really outstanding.

On the balance sheet side, at October 31, 2018, we had $42.9 million of cash and cash equivalents.

As many of you know, our first quarter is traditionally a low or sometimes negative period of cash flow.

This quarter, we had $14.1 million of cash outflows from operations.

A large reason for this dip in cash is that we did not collect an $8.3 million receivable that was originally expected to be collected shortly before quarter-end.

This amount has since been collected.

Timing of collections between quarters does not concern us, and we believe that cash flows for fiscal 2019 will be positive and quite strong.

In fact, given expected growth, it is reasonable to think we can generate somewhere around $50 million of cash flows from operating activities in fiscal 2019.

Before turning it over to Mike Porcelain, our COO, I want to provide a few additional comments on the guidance we announced yesterday.

First, given the various changes in customer fielding schedules, the $10 million shift in Government Solutions sales mentioned earlier and an overall updated assessment of our business, we are adjusting our expectations of timing of our financial performance.

In this regard, although GAAP operating income and adjusted EBITDA in the second half of fiscal 2019 are expected to be higher than the first half, we do not expect -- we do expect a more balanced year compared to prior guidance.

We currently expect our second quarter to be nearly the same as our first quarter with our third quarter results for fiscal 2019 expected to be better than our expected results for the second quarter of fiscal 2019.

Our fourth quarter of fiscal 2019 is still expected to be the peak quarter for consolidated net sales, operating income and adjusted EBITDA.

Keep in mind, our acquisition plan efforts are ongoing, and we currently expect to incur $1 million or so of acquisition plan expenses in Q2.

Also, we do have a number of items the timing of which can still shift and impact our expected quarterly financial performance.

However, we currently do not believe that any changes in such timing would negatively impact our ability to achieve our updated guidance.

At the end of the day, it was a really good quarter for Comtech and a solid start to what we expect to be a very successful year for Comtech.

Now I will hand it over to Mike Porcelain to provide some recent developments and additional color for each of our 2 business segments.

Mike?

Thanks.

As you can see by our results, we are experiencing positive business momentum in each of our 2 operating segments.

We believe we are well positioned for fiscal 2019 to be another successful year.

Our overall business activity remained strong, and let me give you a sense by segment.

In our Commercial Solutions segment, which is focused on several large growing markets, here sales were $78 million as compared to Q1 of last year, which were $76.1 million.

This quarter was a good quarter on many fronts for our satellite earth station product line, which includes our HEIGHTS products, our SCPC satellite modems and solid-state power amplifiers.

Sales of these products were higher this quarter as compared to Q1 of last year, and we continue to see the market with our HEIGHTS products.

Additionally, based on our current opportunities, our business outlook for fiscal 2019 still assumes that sales of our HEIGHTS solutions will grow significantly from current levels.

Just a few years ago, this product line had absolutely no revenues, and we now are sitting here looking at double-digit sales growth this year.

Also, our U.S. government customer continues to be important for this commercial satellite earth station product line.

In fact just yesterday, we announced a delivery order for $9.8 million related to our $59 million contract award from the U.S. Navy's Space and Naval Warfare Systems Command for our SLM-5650B satellite modem along with related services.

This contract still has a $40 million of available ceiling, and we expect additional orders in future periods as this contract becomes fully funded.

Given overall market dynamics, we are optimistic that we are experiencing a period of multiyear revenue growth for our satellite earth station product line.

Turning to our Enterprise Technologies solutions and Safety & Security Technologies solution group.

Net sales in Q1 2019 were slightly lower as compared to Q1 of fiscal 2018.

Sales of these products include location and text messaging platforms and Safety & Security Technologies solutions such as our wireless and Next-Generation 911 platforms.

Q1 of fiscal 2019 was a solid quarter of bookings for these products.

For instance, we won a $6.8 million contract renewal to provide a GPS-enabled application to a key Fortune 100 customer.

We won a $5.5 million contract to provide virtualized mobile service device location platforms supporting various location-based services.

We also won a separate contract for $1.9 million from a top U.S. telecom service provider for hosted data assistance services that will enable the delivery of value-added location-based services.

We also won a multiyear contract extension totaling $1.2 million to provide FCC mandated enhanced 911 and emergency call routing services to a U.S. wireless carrier.

We have strong backlog for our Enterprise and Safety & Security Technologies solutions and end-market conditions, although competitive, remain pretty healthy.

We have responded and are responding to several proposals with large wireless carriers, some of them sole-source opportunities, and we remain optimistic that we will win one or more large opportunities in fiscal 2019.

Timing of any announcement of these potential awards is difficult to predict.

And as we have seen in the past, sales cycle, especially for Next-Gen 911 solutions are long.

Our business outlook assumes that total sales in fiscal 2019 of these products are expected to be similar to what we achieved in fiscal 2018.

When we sit back from the top and look out, we believe that fiscal 2019 will be a strong year for our Commercial Solutions segment with total sales in this segment expected to increase on a year-over-year basis with the fourth quarter of fiscal 2019 being the peak quarter of segment sales.

Now let me turn to our Government Solutions segment.

Here net sales were $82.9 million as compared to $45.5 million in Q1 of fiscal 2018.

This represents a substantial increase of approximately 82.2%.

Bookings for this segment were strong, and our book-to-bill ratio here was 0.99 or just under 1. During this quarter, we were awarded a number of important orders and contracts.

For instance, we received over $28.4 million of orders to supply Manpack Satellite Terminals, networking equipment and other advanced VSAT products to the U.S. Army, all of which were booked pursuant for a Global Tactical Advanced Communication System, or GTACS contract with the U.S. Army.

We also received a $7.1 million order to deliver advanced communications solutions to various agencies of the City of Baltimore.

We also receive $5.4 million of orders to provide ongoing sustainment services to the U.S. Army for SNAP terminals.

Also in September, we received a $9.1 million contract to supply a foreign military customer with our over-the-horizon troposcatter microwave system product.

Work on this contract is well underway, and we believe this over-the-horizon contract is demonstrable evidence our -- of our ability to expand the addressable market size of this product line.

Also, we hope to receive some future orders related to our Naval Air Systems Command, which awarded our partner, Northrop Grumman, a $35 million or 20-month contract on October 25 to demonstrate existing jammer capability for the U.S. Navy's next-generation low-band program.

Northrop Grumman is the airborne electronic attack integrator for the Navy's current EA-18G Growler electronic warfare system and has partnered with both Comtech and Harris Corporation for the demonstration of existing technologies for the NJ GLB program.

We are excited to be a participant, which we believe will bode well for our RF microwave amplifier product line for at least the next decade.

As discussed in our last conference call, we are still waiting for feedback from the U.S. government in response to a large multiyear RFP for the supply of new tropospheric scatter communications equipment to replace hundreds of the DoDs TRC-170 terminals.

Although an award of this program is not expected to generate any significant revenue or operating income in fiscal 2019, if we are successful in winning, we would expect it to make significant contributions to revenue and operating income for perhaps 15 to 20 years.

In addition, we continue to work very closely with the U.S. Army as it relates to the Blue Force Tracking program.

In October, at their request, we demonstrated to the U.S. Army that our BFT-2 high-capacity solution can provide for diversity or alternative communication pass.

This capability is important to the U.S. Army as they look to improve the existing BFT-2 system with various capabilities such as this for security reasons.

The demonstration was a success, and we demonstrated that the exchange of the BFT data could work with the Joint Battle Command-Platform and the joint capabilities release as well as Comtech's BFT-HC Transceiver operating over a geo satellite and a dismount application over an iridium satellite.

In addition, this demonstration is further evidence that Comtech is and has the capabilities to deliver cutting-edge solutions to address emergency threats -- emerging threats and military needs.

We believe our BFT-HC Transceivers can fill a vital need for the U.S. Army, and we continue to work with them to deploy several thousand of our MT-25 satellite transceivers pursuant to an initial $11.7 million order we received last year.

We initiated shipments in fiscal 2018 and continued such shipments in our first quarter of fiscal 2019.

Remaining shipments are expected to be substantially complete by the end of our second quarter of fiscal 2019.

We expect the U.S. government to continue to test such units and thereafter, place additional orders for our MT-2025 transceivers sometime in fiscal 2019.

However, because the amount and timing of any new MT-2025 transceivers orders are difficult to predict, we have not included any revenue or earnings contributions in our updated business outlook for fiscal 2019.

Ultimately, we believe our Government Solutions segment is going to have a very successful fiscal 2019, showing significant year-over-year revenue and adjusted EBITDA growth, an improvement in adjusted EBITDA margins.

We will likely burn off some of our current backlog until some of our larger opportunities are secured, but things look really bright.

Now let me turn it to -- back to Fred, who'll provide some closing remarks.

Fred?

Thank you, Mike.

As I mentioned before, I'm pleased to -- I'm pleased how our business is navigating through what has recently become a more volatile business environment.

As I see it today, fiscal 2019 is expected to be a terrific year for Comtech.

I see positive signs across all of our businesses.

With that in mind, our new revenue guidance reflects an increased range of $625 million to $640 million.

At the midpoint, our new revenue targets reflect an annual growth rate of slightly less than 11% that I believe is impressive.

Also, our new adjusted EBITDA guidance reflects an increased range of $84 million to $88 million.

At the midpoint here, our new adjusted EBITDA target reflects an annual growth rate of almost 10%, again, I also think that is a very impressive.

Additionally, I do want to say that the CFO and COO transition that we implemented on October 1, 2018, went without a hitch.

And I'm very pleased with our talented company-wide management team.

Finally, given our strong business outlook, our Board of Directors declared a dividend for the second quarter of fiscal 2019 of $0.10 per common share, which will be payable on February 15, 2019 to shareholders of record at the close of business on January 16, 2019.

Now, I'd like to proceed to the question and answer part of our conference.

Operator?

(Operator Instructions) And we will take our first question from Tim Long with BMO Capital Markets.

Congrats, Michaels on the transition there.

Two questions, if I could.

Just on the E911 business, sounds like a lot of deals have been won there.

If you talk a little bit about the timing of how you think you'll fulfill those?

And also just give us a sense as to how long -- how -- where we are in the game here?

How many more opportunities there are further than that?

And then secondly, just on the gross margin.

Obviously, you talked about mix being the big impact this year to government.

But within government, are there measures that can be taken to help maybe grow that gross margin?

Or are there certain mix shifts that could help that as that business evolves over the next few years?

Sure.

Most of the programs in the 911 side of the camp that we won in Q1 were also relatively small or add-ons to existing programs.

So from a trajectory perspective, it'll be pretty even out through fiscal 2019.

The number of opportunities on the other hand continue to increase.

And I -- we always use the phrase, we're in inning #2, but it's been a pretty long inning #2.

Sales cycles in this market are pretty long, and we're bidding and working on a number of opportunities and we just need those things to come in, and we'll win our fair share.

In terms of the gross margin side in our government business, I will tell you to look at what we did since last year.

And I -- we report EBITDA, we did 11.2% EBITDA margins in our government segment, which was -- beat what we did in Q4 of last year, which was 10.8% and was also a significant improvement from the 1.8% we did a year ago.

Our facility closures that we did in Q1 is an example of some of the things that we're working on to improve some of our margins.

There's some cost that we've been working to take out.

But we're doing it rather slowly, and at the same time, we're also increasing cost on the marketing side and other areas.

So when we sit back, we think we're going to get to double digits for the year in the government segment, which should be a meaningful improvement from the 7.7% we did last year.

(Operator Instructions) We will go next to Chris Quilty with Quilty Analytics.

Mike, just a clarification there.

Is that double digit by fourth quarter or double digit for the full year?

No, for the full year.

I mean, we did 11.2% in Q1, and you might have some balances up and down a little bit throughout the year.

But no, we do expect to be over 10% for fiscal 2019.

Okay.

On the acquisition that you're working on, can you tell us whether that's on the commercial or government side?

And part two, do you have a preference or is it just more opportunistic in terms of which side of the business you're looking to deploy capital?

Chris, it's Fred Kornberg.

I think we'd rather talk about that acquisition when it occurs and not on this phone call.

Okay.

Let me shift that a little bit.

It sounds like the Trump Administration is going to start calling back a little bit on defense spending after a couple years of increases.

Does that change your thought on the balance of the business or the potential growth rate, given the programs that you're exposed on?

No, I don't think so.

As I think I mentioned that I think our momentum is there and I think it will continue.

We're really instituting a marketing push on programs that will last, by last I mean programs that are on the record and will last 5 to 20 years.

Great.

And on the HEIGHTS platform, can you give us a sense of where you're seeing the most success with that platform either by vertical market or application?

I think the success on the HEIGHTS, I think, is really widespread.

We've previously announced, for instance, that we won the Carnival Cruise Line project.

We haven't received that order as yet, but we have been told that we won that.

So that's one area, which is the cruise line area, obviously.

The other areas are the basic communications satellite systems and networks.

We believe that, especially with the influx of hopefully the LEO and MEO satellites, that HEIGHTS really be a star performer in that area.

Got you.

And I know in the 10-Q there was a statement that you haven't seen any impact from international sales, given some of the volatility we've seen.

Are there any areas where you're seeing any level of concern about demand coming from international markets?

Not really, Chris.

I mean, in fact with tariffs and everything like that, it's probably caused people to put some orders on the books rather than wait for potential changes in that.

So that's probably one area where maybe there's actually been some acceleration of it.

But I would certainly characterize that as being not significant and not material enough for us to talk about.

So no, we haven't seen it.

As it relates to our guidance when -- if you remember, when we gave our guidance back in September, we kind of gave some thought to this, and we've kind of considered those thoughts in our guidance back in September and they're reflective in our current thinking as well.

And presumably that also covers components on the supply chain for your products?

Yes, I mean, we do -- we are still seeing component shortages, and it's impacting some of the stuff on the military side as well as the commercial side.

But again, yes, we've kind of given in our thoughts and that does get into the comment that Mike Bondi made earlier where timing could just between the different quarters.

Some of that is part of availability and stuff like that and fielding schedules.

So there's a lot of changes that we're seeing that are little bit more volatile in terms of rollouts.

But again, we've kind of considered all of that in our thoughts.

And we can take our next question from Glenn Mattson with Ladenburg.

So I guess Fred mentioned, he didn't want to talk about the end markets that the acquisition -- potential acquisition would be geared towards.

But can we talk a little bit about what kind of parameters we're talking about just -- so we can get an idea and frame it.

Is it -- I guess, you increased your borrowing capacity, so I imagine that was an anticipation of this, would you imagine using all of that increased capacity?

Or would it be all of that plus something else like plus stock or like, just give a sense of how -- what size it is?

And then as you said, small but growing, sometimes growing company sell for kind of higher multiples and things.

So is your thought process that this will be dilutive or accretive shortly there -- shortly after the acquisition, just some kind of general sense financially and the parameters around what we're talking about.

Sure.

Well, I will point you to the magic word, small but growing.

We -- this will likely be something that we'll pull down from our revolver, but it's not going to be a material impact to our ratings at all.

I would even say it's not going to be a significant impact to our debt profile in any way shape or form.

So it's something that we think folks will be excited about, but right now, we're just going to stick to small and growing.

It is a technology company, and we might see some amortization in there.

So I'll leave it at that, but as Fred said, we really can't say and of course there's no certainty that ultimately we could be successful within the transaction.

So let's just let things play out and we'll report back to you.

And we think if we're able to successfully close the transaction, it'll be some really good news.

Okay.

And then, you mentioned a little bit more detail about tropo and the length of the contract that should you be able to win one.

Could you just give us little more color on thoughts -- on what kind of feedback you're getting as far as timing or competitive -- your situation versus any potential competitors?

I guess we have very little to report at this time that's any different than we've reported 3 months ago.

I think the Army is still standing with their word that they would -- let's say that they've made a decision and that they will award the contract in the first quarter of their fiscal year, which started in October 1 and will end in December 31.

So if you take them at their word, they've got a couple of weeks to go.

On the other hand, it's extremely quiet and silent.

So I think we don't expect it to happen in December.

We hope that it happens in the next quarter, which will be in the -- let's say, the January to March time frame.

And we will take our next question from Kyle McNealy with Jefferies.

I guess, I wanted to see if you had any -- a little bit more to offer on next-generation 911?

And whether you're seeing any pickup there right now?

We were at (inaudible) conference this year, it was pretty apparent that next-generation 911 still has pretty low penetration throughout the market, and at the same time, Congress has been taking a few actions to enhance the funding environment at an even higher level.

So just curious, is this something that we may have to wait for Congress's actions to kind of play out?

Or you're seeing an uptick in opportunities right now?

Anything you can add on that front would be great.

Yes.

I mean from our perspective, we would say sales cycles are long.

And certainly, they -- when you get to a larger city, they are even longer, like New York City's proposal has been going on for extremely long time and I'd say that's something that we're counting on at all.

Where our focus is, is in -- a lot of the smaller-to-mid opportunities that's where we focus, what we're -- where our efforts are on.

And we're seeing probably a growing list of opportunities.

And again, we just have to work through that.

Will the federal passage -- will the passage of federal legislation help?

Yes, I think it would certainly help.

But we are seeing the opportunities.

I think the states want to go to an IP-based system, the cities and local municipalities want to do so as well.

So all the signs are pointing towards a growth market, but it's a slow market.

Okay, great.

And then shifting onto the government section -- segment.

I know a bit was asked on this already, but it looks like you had a big sequential improvement in sales, but not such a big sequential improvement in EBITDA margin?

Just curious as to like the big uptick, was there a concentration of certain product line, the $10 million pull forward was that?

What product lines that associated with?

And is there anything you can add to kind of the discussion around operating leverage and get out of the additional sales like what you saw in Q1?

Yes.

Sure, Kyle.

First just to be clear, our government adjusted EBITDA margins are significantly higher than they were last year.

So again, if we did 11.2% in Q1 of this year versus 1.8% last year versus 7.7% in 2018.

So we've made substantial improvements in that business and we continue to do so.

From the mix perspective, we're in the early part of some of the over-the-horizon microwave product line.

So we got that almost $10 million contract, and we've got various programs that, I would say, are in the early stages, and we tend to be a little bit more prudent as we think about those margins.

So if things go well, we'll have some of the ability to take those margins up.

And I would leave it at that, but things are going pretty well in our government business.

We just shut down our facility down in Tampa and merged it with our Orlando facility.

So as that new portion or new portion of that facility ramps up, we should see some improvement there as well.

Okay, great.

And was there a concentration in the outperformance for Q1?

Like what product line that was necessarily associated with?

Yes, it was mostly in our Command & Control solutions.

That stuff where we're taking products, we're assembling them, we're integrating them and we provide them to the government for their deployment.

So that's really where it was.

I would just say it is product mix, but that does change from quarter-to-quarter.

But on an annual basis, it's about the same as it was last year.

So we're getting that better improvement and better efficiency in what we're doing.

Okay, great.

And one last one, with the new credit facility, do you have an expectation on -- maybe I missed it, but correct me if I have -- an expectation for like ending quarter debt and cash for the Q2?

We don't put out anything specifically on the quarter.

But right now, as Mike had mentioned, Q1 was a negative quarter for cash flow.

Right now, I think we're -- we collected almost $30-some-odd million already in Q2.

So we're well on our way to -- we believe Q2 will be a positive cash flow.

And as Mike mentioned, we believe 2019 will have about $50 million or so of free cash flow this year.

We actually -- back in September, we might have thought that number might have been a bit lower than $50 million, but things are actually strengthening from the cash flow perspective, and we're doing better.

And with the increase sales that we have this year versus last year, cash from operations is likely to be about $50 million this year.

(Operator Instructions) We will take our next question from Asiya Merchant.

Asiya is with Citigroup.

A lot of the questions have been asked.

Just if you could provide some clarity and some guidance on the cadence as you see in both the Commercial and the Government segments, given there were some pull in and some of the orders in the government.

So how should we think about how the rest of the year looks like from seasonality as well as revenue on the top line?

Sure.

As Mike had mentioned, we did have a big pull-in in Q1 in our Government segment.

So we did $82.9 million in Q1.

I think from a trajectory perspective that number's going to decline throughout the year.

Q2, Q3, Q4 will be lower than what we did in Q1.

Now if we get some of these larger-type bookings different timings that may adjust, but at the moment, we're seeing our Government segment sort of have quarter-to-quarter declines in sales before -- again, we'll see that spike again next year.

On the Commercial side, it's the opposite.

We're going to expect to see Q2, Q3, Q4 margin -- revenues sort of increase from the level we did in Q1.

And so taking it all back and adding it all up, you're going to see, again, margin improvement on the adjusted EBITDA side in consolidation, because our Commercial business has higher margins than our Government business.

So that -- you're almost going to see like I said Q2, as Mike had said, is going to be nearly the same as Q1.

I mean, we did $160.8 million, it's probably the same number that we'll do in Q2.

And then, Q3 will be a little bit dip from that number before Q4 will be a peak quarter of sales and will likely be higher than the $160.8 million we did in Q1.

That's how I would tell you think about it.

Great.

And if I may just ask, I know last quarter there were some issues with components shortages et cetera that impacted your Government revenues.

If I'm not mistaken, and so that seems -- is that -- has that component shortage -- does it no longer exist?

Is it still impacting some of your other product lines, if you can just provide some color on that?

We are seeing component shortages, but I would say they're not material component shortages.

And we've also kind of built that into our guidance thinking.

So things are pretty spread out.

We also -- we did a number of things from a procurement perspective, buying inventory parts in advance and securing them.

And given our revenue cadence, we think we have it built in right.

(Operator Instructions) And we do have a question comes from Joe Gomes with NOBLE Capital.

You had mentioned that you've done some cost reduction actions in the first quarter.

Do you see -- how much anymore for the rest of fiscal 2019?

We are looking at types of cost reduction activities.

We're not going to get -- not to get into detail, but I will say cost reduction and operating efficiency improvement is something that really is -- something that's embedded in our business mojo so to speak, so we're always doing it and we'll continue to do so.

And if we have some big enough to announce, like our facilities shut down, we'll certainly tell you guys.

But I would tell you, we're always looking at stuff.

Okay.

And there's been some discussion in some of the other companies that I cover, difficulty here in the current employment market and getting new employees.

Seeing if you guys have any difficulties?

And maybe if that's -- that is driving up some cost, or you guys seeing that you're able to get an attractive employees with no big deal right now?

Well, we always have that issue of bringing in talented people into the organization.

I think it's fair to say that you read the headlines as we do.

The unemployment rate is pretty low.

But -- so there is difficulty in attracting people, no doubt.

On the other hand, we think Comtech is a pretty good place to work in, and we have pretty low turnover.

And we'll recruit the right people to do what we need to do.

(Operator Instructions) And there are no additional questions at this time.

Okay.

Well.

Thanks, again, for the joining us today, and we look forward to speaking with you again in March.

I want to wish everybody a happy holiday and happy New Year to our employees, suppliers, customers and shareholders.

Thank you very much.

Thank you for your participation.

This does conclude today's program.

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