Comtech Telecommunications Corp (CMTL) 2022 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Comtech Telecommunications Corp. First Quarter Fiscal 2022 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded, Thursday, December 9, 2021.

I would now like to turn the conference over to Mr. Jason DiLorenzo of Comtech Telecommunications. Please go ahead, sir.

Thank you, and good afternoon. Welcome to the Comtech Telecommunications Corp. conference call for the first quarter of fiscal year 2022. With us on the call today are Fred Kornberg, Chairman of the Board and Chief Executive Officer of Comtech; Michael D. Porcelain, 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 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 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 Chairman and Chief Executive Officer of Comtech, Fred Kornberg. Fred?

Thank you, Jason, and good afternoon, everyone, and thank you for joining us in this call. Before we turn to our results for the first quarter of fiscal 2022, I want to take a moment to acknowledge that for both Comtech and our end markets, this is a time of significant and exciting opportunity. As we head into January, the start of a new calendar year, we see the beginning of a long multiyear cycle of communications infrastructure improvement and investment. Comtech is well positioned to take advantage of this, not only because we have the right products, but also the right people and the right strategy.

We've refreshed our Board and in Mike Porcelain have appointed as CEO who has demonstrated both operational acumen and a skill for execution. Mike has been very instrumental in leading Comtech to win significant long-term contracts. Also, as you know, we recently secured a $100 million of an -- $100 million of investment capital to underwrite our long-term strategy. This was from our committed common stock shareholder who will bring not only a wealth of knowledge, experience and relationships to the company.

From where I sit, the future is very bright. Given all these transformative steps, Comtech is uniquely positioned today as a secure wireless technology leader, poised to capitalize on tremendous growth opportunities ahead. Before I hand the call over to our new incoming CEO, let me provide an update on another event that took place in the quarter. And that event was the receipt of an unsolicited nonbinding proposal from Acacia Research Corp., as was first reported in the financial and industry media several weeks ago. Shareholders should know that Comtech's Board has been considering and continues to evaluate the proposal in consultation with our independent advisers. The Board will recommend and pursue the course of action and believe to be in the best interest of Comtech stockholders, and the best interest that will maximize shareholder value. Unfortunately, that's all the detail we can provide at this time, but we'll continue to keep you all updated on the process.

We want to deliver as much value as possible to all of our shareholders. We strongly believe we have the strategy, the management team and the Board in place to do it.

With that, let me turn the call over to Mike Porcelain, our incoming CEO. Mike?

Thanks, Fred, and good afternoon, everyone. Fred talked about this being an exciting and transformative time for Comtech and our investors, and he's right. I've said this before, but I continue to believe we are uniquely positioned to capitalize on growing demand worldwide for solid ground station infrastructure and next-generation 911 systems. We believe the total addressable market for SATCOM communications equipment based on the study by Northern Sky Research is expected to grow from $5 billion to $9 billion by 2029. We also believe that the NG-911 market, based on a study by Frost & Sullivan, is expected to grow from $689 million to $1.7 billion by 2026. And as we work through COVID and global supply chain issues, we believe we will capture our fair share of this growth.

Although we have ways to go, fiscal 2022 is starting to shape up to be in line with our expectations. We delivered a solid start to the year with net sales of $116.8 million and adjusted EBITDA of $5.5 million. Our team continues to do an excellent job navigating the impacts of COVID and supply chain disruption across our end markets. And as a result of these efforts, our financial performance appears to be running slightly ahead of schedule.

Although reliable forecasting remains challenging in this environment, we continue to target fiscal 2022 net sales to be in the range of $580 million to $600 million and adjusted EBITDA between $70 million and $76 million. These targets reflect the strength of our backlog and strong sales pipeline, offset by the impacts of COVID-19 and timing considerations associated with global supply chain constraints and start-up costs associated with the opening of 2 new high-volume technology manufacturing centers. There are several large deals that we still expect to close in the second half of fiscal '22, and we have seen progress towards capturing them. I'll provide some more color on these and other key developments in our sales pipeline and end markets and product innovation.

But first, let me turn the call over to Mike Bondi, our CFO, who will comment on our financials. Mike?

Thank you, Mike, and good afternoon, everyone. As Mike mentioned, Q1 results were slightly ahead of plan. Net sales were $116.8 million. Of these sales, 78.6% were U.S.-based customers and 21.4% were to international-based customers. Bookings for the first quarter were $86.4 million, resulting in a book-to-bill ratio of 0.74 for the quarter.

While period-to-period fluctuations in bookings are normal in our business, we see evidence that COVID-19 and supply chain constraints are continuing to impact the timing of new orders, deliveries and installations. Nonetheless, based on anticipated new orders, we expect to achieve a fiscal 2022 book-to-bill ratio in excess of 1. Our gross profit percentage in Q1 of fiscal 2022 was 35.7%. SG&A for Q1 of fiscal 2022 was $28.2 million or 24.1% of consolidated net sales.

Turning to R&D. We invested $12.5 million in the first quarter or 10.7% of net sales. Total amortization of stock-based compensation during Q1 was $0.9 million. Total amortization of intangibles was $5.3 million in the first quarter of fiscal 2022. Our GAAP operating loss for the first quarter was $6.5 million and reflects $2.2 million of proxy solicitation costs, $700,000 of restructuring costs and $700,000 of COVID-19-related costs. Excluding such costs, our non-GAAP operating loss was $3 million for the quarter. Our adjusted EBITDA was $5.5 million or 4.7% of Q1 consolidated net sales.

On a segment basis, in Q1, our Commercial Solutions segment contributed $9.1 million of adjusted EBITDA or 11.5% of related net sales. And our Government Solutions segment contributed $600,000 of adjusted EBITDA or 1.6% of related net sales. Interest expense was $1.6 million in Q1, and our income tax benefit was $2.1 million.

On the bottom line, GAAP net loss in Q1 was $6 million or $0.43 per diluted common share. Non-GAAP loss in Q1 was $4 million or $0.15 per diluted common share. Details of our non-GAAP reconciling items can be found in the tables at the bottom of today's earnings release.

Cash generated by operating activities was $4.8 million for the first quarter. Our balance sheet as of quarter end includes $30.9 million of cash and cash equivalents, and our total debt outstanding was $108 million. Our current secured leverage ratio as defined in our credit facility was 1.57x and reflects a substantial reduction from 2.53x as of July 31, 2021. This ratio and our Q1 debt levels reflect the benefit of the $100 million strategic growth investment that we announced in October. That investment significantly enhances our financial flexibility and strengthens our ability to capitalize on large recent contract awards and to meet the growing demand for our satellite technologies and next-generation 911 public safety solutions.

Now before turning it over to Mike, let me provide commentary on our fiscal 2022 financial targets that we are reconfirming today. We are still targeting fiscal 2022 consolidated net sales within a range of $580 million to $600 million and adjusted EBITDA between $70 million and $76 million. We continue to estimate total fiscal 2022 amortization of intangible assets to be around $22 million and stock-based compensation to range from $12 million to $14 million. Interest expense is now expected to be around $5 million in fiscal 2022, and our effective tax rate, excluding discrete items, is now estimated to be about 21%.

There is little change in the cadence of our expected fiscal 2022 financial performance that we discussed in October. The first half of 2022 is expected to be significantly lower than the comparative period of fiscal 2021 with our second half of fiscal 2022 expected to be significantly higher than the comparative period of fiscal 2021.

We continue to expect our quarterly results to build sequentially throughout the fiscal year, with the fourth quarter being the peak quarter by far. Specifically, we are expecting Q2 revenues of approximately $125 million with adjusted EBITDA of around $8 million, both metrics representing sequential improvements from Q1 of fiscal 2022 and both reflect our current assessment of various supply chain issues. We may do better, but we think we are being prudent with these targeted amounts.

As global supply chain constraints have extended lead times for certain parts, we are closely monitoring our inventory levels and supplier base and cautiously anticipate that supply chain constraints will ease during the second half of fiscal 2022. With a strong sales pipeline and backlog of $628.5 million at quarter end, which is $23 million higher than our backlog a year ago, we feel pretty good about the full year.

We need to book some large orders to achieve our second half targets and timing remains difficult to predict. That said, these opportunities are well defined, and they include new orders for the Comtech COMET and other Troposcatter solutions.

Now I'll hand the call back over to Mike Porcelain.

Thanks. As I said earlier, I want to take some time to talk about the developments we see today that we believe are strong indicators that Comtech has the right strategy to deliver long-term growth. I'm confident that we do have the right strategy.

One key indicator is our strong backlog and long-term visibility, a clear indication that our customers recognize Comtech has the right products and services to meet critical communication needs for satellite ground station infrastructure and next-generation 911 systems. We certainly have a market leadership position in the next-generation 911 space as evidenced by our fiscal 2021 multiyear contract awards totaling over $200 million. As evidence of our industry expertise, some have even called our next-generation 911 product line a crown jewel, and we don't disagree.

Our industry expertise has also enabled us to develop the strong leadership position in our satellite earth station product line, where we have been recognized as a leader in the growing satellite cellular backhaul market. Perhaps the best independent validation of our industry experience and our strength was the fiscal 2021 award of a multiyear contract to customize Comtech's next-generation broadband satellite technology. No doubt, our team has built a complete product portfolio that should serve us well for many years ahead.

Based on our current pipeline of opportunities, we believe we have over $1.2 billion of visibility into future potential revenue. I'd like to first highlight our team's successes in terms of business performances and new contract wins and then also touch more on the direction of our markets.

In our Commercial Solutions segment, net sales were $78.9 million in Q1 of fiscal 2022. We received orders totaling $60.8 million in Q1, resulting in a book-to-bill ratio for this segment of 0.77x. Looking forward, we expect fiscal 2022 sales in this segment to accelerate over the course of the year and ultimately be higher than fiscal 2021. We continue to see positive momentum in our public safety and location technology product lines. Net sales during the quarter were higher than last year's comparable quarter, reflecting increased sales of our next-generation 911 services and location-based technology solutions.

Now let me highlight some recent wins that demonstrate our competitive position and set us up for long-term growth. We previously announced a $100 million-plus statewide contract to design, deploy and operate next-generation 911 services for the commonwealth of Pennsylvania. Work under this contract is expected to increase in fiscal 2022 as compared to 2021.

In fiscal '21, we also received additional orders from our $54 million contract to design, deploy and operate next-generation 911 services for the state of South Carolina. We also have won a multiyear statewide contract award valued at $35.8 million to design, deploy and operate next-generation 911 services for the state of Arizona. The total contract value includes a multiyear contract extension option. The contract also includes implementing our next-generation 911 solutions to provide citizens with advanced communication capabilities when calling for emergency services, including police, fire and emergency medical services.

Through the use of our next-generation system, Arizona will be able to offer a seamless coordinated and efficient NG-911 system to all of the state's local 911 centers. At the same time, the award includes an ability for Arizona to purchase Comtech Solacom call handling solutions for PSAPs, as well as offer our new cybersecurity software training program that will be available for first responders on a statewide basis. This was the first cyber contract win that included our security software training and solutions, and we hope to have more to come.

We have also previously announced the contract award to provide next-generation 911 services for the State of Ohio -- Iowa. This multiyear statewide contract includes extension options and is valued up to $48.5 million. Initial funding for the contracts was $23 million. Additionally, and as mentioned on prior calls, Comtech was selected as the winner of a multiyear next-generation 911 contract for the State of Ohio, and we do anticipate that this contract will be initially funded in our fiscal 2022. For clarity, the State of Ohio is not included in our backlog.

Other notable contract awards in our public safety and location technology product line during Q1 include a $5.6 million contract with a U.S. Tier 1 mobile network operator to continue providing messaging application support, a $1.7 million contract with a U.S. Tier mobile network operator for trusted location services and another $1.3 million contract with a U.S. tier for also precise location services.

We are clearly ideally positioned to continue building out various situational awareness data products for 911 customers and are working on several exciting initiatives in the public safety area.

In addition to incorporating our first cybersecurity software training program like we did in the Arizona contract, we have now begun marketing a new solution called Smart Response. This is an innovative cloud-based solution that offers a common operational platform to first responders for an effective data-driven response for security agencies and others. This solution can provide live feeds from traffic cameras, caller information, criminal history and other critical information, all at the tap of a button. The Smart Response solution empowers PSAP employees to ensure the appropriate resources are on the scene to better service the public in emergency situations.

While sales of this product are expected to be nominal in fiscal 2022, we are investing R&D in 2022 because it is clear to us that our solution meets a critical and growing need of 911 responders. All in all, from everything we see, both our current and future customers, we're seeing increased funding for next-generation 911 solutions given the broad recognition of the critical importance of upgrading the country's 911 systems. I simply cannot overstate the vital role that 911 service plays as part of the U.S. government's nationwide emergency response and disaster preparedness system. We think it is clear to governments at all levels that aging 911 infrastructure needs to be addressed and that Comtech is a leader in the deployment of next-generation 911 solutions.

On this topic and of particular value to Comtech, given our expertise in satellite ground station infrastructure, I want to point out that satellite services are playing a more important role in the Nation 911 network, not only in rural areas, but as backups for PSAPs and individual callers as well. As I discussed on the last conference call in August of 2021, it was reported that Apple was working on incorporating satellite capabilities for its iPhone models and that -- models, and this will allow users to call and/or text in emergency systems using satellite.

Even Starlink is rumored to be developing a plan to offer phone services over satellites. These services will need trusted location, information, and ultimately, I believe that satellite systems, including our SCPC and TDMA networking platforms will be incorporated into 911 systems given the importance of these systems.

Given our complementary expertise in public safety and satellite ground station equipment, I believe we are uniquely positioned to be a leader in this growing market and to leverage our solutions across segments to drive new business opportunities.

At this point, let me provide some updates on our satellite ground station business. Here, things remain challenging. Net sales for the quarter were lower than last year's comparable period, as this product line continues to be impacted by the COVID-19 pandemic on customer demand, particularly in international markets, which historically represents a large majority of end users for this product line. I should say that we believe demand has simply been delayed as companies and governments alike grapple with responding to the pandemic, and that over time, this business will not only resume its growth trajectory, but that trajectory will actually accelerate.

As you know, we completed our acquisition of UHP Networks in March and believe this revolutionary technology has the potential to transform the growing very small aperture terminal, or VSAT market, as well as our participation within it. With end markets for high-speed satellite-based networks significantly growing, we are really excited to have extended our product line to include TDMA modems.

Despite the impact of COVID and global supply chain issues on this product line, we remain confident that our satellite earth station product line is set for growth. We continue to see strong sales pipeline growth for satellite-based cellular backhaul services due to increased planned penetration of 4G and 5G in developing parts of the world. There remains a growing need to use satellite network technologies in remote areas, where terrestrial network infrastructure is simply lacking.

Finally, we are looking to enhance our focus on addressing U.S. government needs, as is in this product line. As is evident in the news, our military is very concerned about supply chain risk and cyber warfare issues. Specifically, they are concerned about counterintelligence efforts by outside actors from certain countries and whether they can penetrate the supply chain in a manner similar to the worldwide Solar incident that occurred in 2020.

In response and in discussion with our customers, we are looking to set up a focused satellite earth station group based in the United States that will cater to this need. We've shared our plans with certain government customers and so far, feedback is good, and we are taking specific guidance from them to protect their critical supply chain.

At the same time, now that we continue to get more experience with our UHP products, we are looking at ways to further accelerate sales of these products and expect to form a new group within our satellite earth station product line that is focused on satellite networking platforms. This will include new branded efforts, along with focused marketing and specialized R&D efforts. As the year progresses, I hope to share more news on these developments with you.

Now let me turn to our Government Solutions segment, where here, sales were $37.8 million, a decline from last year. As we previously disclosed and as anticipated, net sales in this segment reflect the impact of the U.S. government's decision to fully withdraw troops from Afghanistan in addition to other U.S. government program changes. Although still difficult to predict with precision, we expect that net sales in this segment for the second and third quarters of fiscal '22 will approximate the amount achieved in Q1. Thereafter, this segment is expected to benefit from increased higher-margin programs, including the receipt of new orders for the Comtech COMET and other troposcatter solutions. Bookings in this segment for Q1 were $25.6 million.

Sales and adjusted EBITDA contributions in this segment during the second half of the year are expected to come from sales of Joint Cyber Analysis Course's training solutions; anticipated awards for high reliability or EEE Space Parts and Engineering Services, including those used to support NASA missions; anticipated orders for our high-power amplifiers, many of which are used in funded electronic warfare programs; large awards for troposcatter systems in the European part of the world; and also deliveries of existing backlog for VSATs, satellite equipment and X/Y satellite antennas.

With respect to our Joint Cyber Analysis Course training solutions, we previously announced that we were awarded a 5-year IDIQ contract from the U.S. government valued at almost $125 million. This award was a renewal that acknowledges our excellence in developing and delivering complex cybersecurity operations training at the scale and demanding operational tempo required by our federal government customers, and we certainly have the industry expertise to do so. Given that this is one of our nation's top priorities, we expect to receive additional funding on this contract over the course of fiscal '22 and beyond.

In our first quarter of fiscal '22, we received approximately $4.9 million in funding, and we are honored to continue performing this work. Given the expected low level of total net sales in the segment as well as the start-up costs relating to the opening of our U.K. manufacturing center, as Mike had mentioned, adjusted EBITDA in this segment will continue to be unusually low for the first 3 quarters of fiscal 2022. But as we look to the second half, particularly Q4, we expect that the orders for our COMET, troposcatter terminals, both in the European part of the world and other parts of the world, and new VSAT solutions that we are actively discussing with our customers will benefit our Q4 quarter.

Trials and demos are well underway, and in many instances, we've been told that we've been selected as a sole source for their needs. Timing is always difficult to predict, and 2022 is no different. That said, as we said on the last call, it's not a matter of if but of when. And that is exactly why we are making the necessary investments in this category. By the numbers, and given the timing of investments versus our anticipated returns, we continue to have modest expectations for adjusted EBITDA margins in this segment for the year, but we are confident that we are on the right track to deliver meaningful future growth in several years ahead.

Now before I turn it back to Fred, I'd like to comment on one more topic. On our last earnings call, we announced that I would be taking over as CEO and President of Comtech and joining the Board at the start of the new calendar year. I am very excited about this great opportunity to lead Comtech and I am very eager to hit the ground running in my new role.

I have discussed plans with the Board and our management team that I think will result in more shareholder value down the line. Some of these initiatives have been underway for quite some time. First and of utmost priority, because fiscal 2022 is a difficult year, the entire management team is focused on successful execution. It is critically important that we successfully execute on our $1.2 billion-plus of revenue visibility as well as our new contract for customized next-generation satellite technology.

In order to take advantage of these opportunities, we are committing more than $30 million of capital investments, including the build-out of 2 new state-of-the-art production facilities. Make no mistake, this is no easy task and getting a new high technology center built out there in COVID with higher labor costs and high construction costs and a focus on safety has been difficult, yet our team is doing an admirable job.

Second, I intend to increase company-wide collaboration to exploit emerging long-term opportunities. For example, state and local 911 agencies clearly have a need for cyber training and preventing outages. Here, I believe we have untapped capabilities and requirements that are viable. As I mentioned earlier in the call, I'm working with our satellite team to establish a focused U.S. defense group as well as a focused satellite network group. Here, as the year progresses, I will talk more about our plans going forward.

Third, I do believe we can modernize our corporate branding. We built up very recognized product brands, but I've always believed that it is confusing to both customers and investors alike. In my new role, I intend to make very visible changes here. As such, we are working to enhance our marketing, including a new Comtech website, to leverage scale and establish a prominent social media presence. We've been beta testing, improving our site and functionality with many customers, and the feedback we are receiving has been terrific.

Fourth, I do expect to expand the talent pool across the company. As part of my taking a new role, we are actively seeking to fill a new Chief Operating Officer role and a strategic Investor Relations professional. Both searches are well underway with outside agencies. And just last week, we announced the hiring of a new company-wide HR professional to energize corporate culture and help further align our employees.

Fifth, I'm continuing to conduct an evaluation and an assessment of all product lines and revisiting and reviewing all acquisition opportunities to establish strategic priorities to optimize and deploy our recent $100 million strategic growth investment.

Finally, in both my old and new role, I've been evaluating and discussing with our Board on potentially changing our segment reporting and revisiting our non-GAAP EPS calculations.

Our current segment reporting was put in place years ago. And while the segment reporting has served us well, given the different growth dynamics of some of our product lines, I've always believed it makes sense to revisit this and make a change. And we've been spending time because we want to make -- we want to do it right. I've been working with both Mike Bondi and our Board to develop some metrics that will better highlight the value of certain businesses, and I think everyone will be pleased when we do so. And we hope to announce news on this down the road at some point during the year.

With that, let me finish and take one more opportunity to thank Fred on behalf of myself, the management team, our employees, customers, shareholders and Board of Directors for his years of tireless dedication, leadership and service to Comtech. With his 40-plus years of history here, Fred, no doubt bleeds Comtech blue and he's achieved many great accomplishments and positioned the company extremely well for continued success. Very much from me to you, Fred, thanks.

And with that, let me turn it over to him who will provide some closing remarks. Fred?

Thank you, Mike, for the warm sentiment. As I look back over the years, I am very proud to have served as CEO and President of this great company. It truly has been a privilege and an honor. I have been fortunate enough serving my roles all these years.

I have never been more confident that our company has the right Board and management team, the right strategy and the right focus to create long-term value for our shareholders for many years ahead. Reflecting this confidence in our business outlook, our Board of Directors again declared a dividend of $0.10 per common share payable on February 18, 2022, to shareholders of record at the close of business on January 19, 2022.

Now I would like to proceed to the question-and-answer part of our call. Operator?

(Operator Instructions) And we'll move first to Joe Gomes with NOBLE Capital.

Good evening and congrats, Fred and Mike on the new roles. So I just wanted to talk a little bit about the next-generation 911 business. I've got a couple of multipart type of question here. You did a great job in giving us all the contracts that have been won. So kind of the first question on Ohio, what's kind of the holdup there in the funding for that? Also I was wondering maybe you could talk, has there been potential projects that you've lost? And if so, maybe give us a little insight as to why you have.

And then a couple of years ago, you got an award over in Australia. And we really haven't heard much or anything about that business. I was wondering maybe you can give us an update on that.

Sure. Yes, in terms of Ohio, it is strictly a question of funding. And I will say the good news is from our understanding, it's a pretty bipartisan funding effort that's going on. The governor is in full support of the contract, as we understand, and both the Democrats and Republican leaderships on the legislative side are working together to pull together the funding.

We're not going into the intricacies of how the state tax system works in Ohio and the funding mechanisms. There is a requirement for the legislative to actually pass something and the governor to sign it. So there's just a question of the mechanics that they're working to. And it took some time for them to come up to agreement, but it is possible that, that award actually gets done in December, if not by April.

And so there's just -- they have to work through the mechanics. But we're -- I think everybody that is connected to the contract as well as the State of Ohio is anxious to get the program going on. So that's the Ohio issue.

In terms of contracts we lost, I mean, look, I have to go back probably to California from maybe a year ago or so. We did -- California was a unique state. They broke up the state into multiple regions. Certain counties within California had, call it incumbents, if you will, and Comtech wasn't one of those incumbents. So we were coming at it from a newbie perspective. And then ultimately, I'll say in a very odd way, the State of California chose a company that was based outside of the United States. And from our understanding is the state hasn't made much progress with that vendor or with their new system. And you could assume that we're reminding the state of California of that every day, and we're standing ready to help them get their contract going on.

And I think we -- the successes we've brung and the wins we've won is because we've had successes both in terms of the rollouts and lack of outages and issues and just getting the projects up. These are very complicated systems, and so states are very careful of how to roll them out. But that would just be an example of one contract that we lost that's of note.

And other than that, as I said before, every time we announce a Solacom contract, which is a good way to Australia, every time we announce a Solacom contract, we're generally picking market share because most states and local municipalities have some type of call-handling software. So every time we announce a new customer, that's really a win. And I don't recall any losses of note, if not even of significance, in the Solacom call-handling part of the business.

Which is a good segue to Australia. It's known as 000. It's an emergency system. We have a partner with Telstra, who's, call it, the prime, if you will. I could just tell you, you haven't heard anything because it's going very good. We're rolling out and installing the stuff. We're working with customers and enhancing certain functions and features and functionality, looking and talking with them about New Zealand and other types of things. So hopefully, you'll hear more about that.

We are working with some -- in connection with Smart Response and some of the video and technology and imaging requirements that Australia as well as U.S. states are looking for. We're working on a whole bunch of enhancements and obviously, if you look at the R&D spend that we're doing this year, you can see that we continue to invest in this product line for growth. So hopefully, that answers your questions.

Yes, they did, thanks, Michael. One other one, if I may. You talked about the comment in the troposcatter potential contracts here and new orders in the second half of the year. Maybe you could give us a little more insight, if possible, as to why you're confident in receiving those. And has the continuing resolution have any impact, I guess, not just on that, but in some of your other government type of contracts?

Well, I don't want to disclose the specific country that we're focusing on because that would provide some information to potential competitors out there. But this particular country does have a need for communication services for a variety of both defensive reasons and communication reasons.

And I could tell you that the award is really split into 2 pieces. It's one with the government directly and one that is effectively being funded through the U.S. government. So again, both the foreign government and the U.S. government are working very closely together. And again, without specifically calling out the country, I think we just feel pretty good that they need the equipment, and there's an intense focus to make it happen. That being said, we call it out because, as you know, some of these things are just difficult to predict because of timing and lumpiness.

Ok great. Thanks, I'll let someone else ask some questions and get back into queue.

And we'll move Next to Mike Latimore with Northland Capital.

Great. Thank you. Interested to learn a little bit more about the satellite backup services for PSAPs. Can you just provide a little more color there? What's -- are there RFPs out already? What could be the revenue per PSAP? What's the catalyst to get these kind of services deployed?

Yes. Mike, look, there's roughly 4,000 PSAPs, if I'm not mistaken, in terms -- or 6,000. I forgot the exact number, it's in our slides. So bear with me on the difference. But look, a large majority of those PSAPs are in rural areas, where telephone lines or connectivity is not great to begin with. But it comes back -- it really just comes up to backup. And I could tell you that state and local governments, for the most part, they don't have backup, which is why when you see on the news sometimes, the 911 systems go down for a variety of reasons and the 911 system just doesn't work and you have to call a local number directly to that PSAP.

So the market is pretty big. It's going to be a question of funding and getting the states and local agencies really on a onesie-twosie-type basis to fund these things. We think programs and funding such as the infrastructure bill as well as some of these 911 bills that are floating around in the Senate and the House will be helpful to making that initiatives take off, if you will.

I could tell you that there are states like, for example, in the state of New York, there are states up -- counties up in the rural parts of New York that do use satellite backup systems, and in some cases, use satellite as the primary method of transmitting calls over the 911 system. So there's definitively a market. It's a question of funding.

But the thing that's going to drive it is not only funding by the federal government and the state, but the fact that you're putting 911 systems now with video and text messaging and imaging, just like any regular enterprise, backup, reliability and redundancy becomes important. And again, the states are learning that as they go through this process. And so yes, some states are looking at it -- putting that in the RFP. But I would also tell you, it's in the infancy stage from that perspective because the state first needs to get the next-generation 911 system up.

So again, some of the stuff I'm talking about is not going to be revenue that's going to hit in 2022 and maybe not even '23, although I'd like to be a little bit more optimistic. But these things will take some time. And look, you could do your own math. I'll use -- I'll stick to the low end, 4,000 PSAPs times $100,000 worth of equipment, that's your market size. And you could double that if you want, if it's $200,000 and maybe there's a recurring revenue. It's a new business model that we're working on to roll out. And again, we'll report back to you when -- as and when we get success in that market. But we are working on it.

Great. And then on the current 911 deployments, are they basically proceeding to plan? Or have some of the labor shortages slowed deployments?

Hi Mike, in terms of the deployments, they're moving along as planned, according to the milestone set with the customers. So fortunate for us right now, we don't see any issues with that, certainly, as like in Pennsylvania being mindful of the winter. And this is work that's being done outdoors, laying fiber and stuff like that might slow things down. But I'd say overall, things are looking pretty good there.

Got it. And then just last one. I guess what is your interest level in making more acquisitions? And maybe what technology areas would be of type of interest?

Yes. I mean, look, certainly, acquisitions do and are part of our thinking, both on a tactical basis and within each of the product lines. It's one of the benefits of having $100 million strategic growth investment and the benefit of having folks like White Hat Capital and Magnetar associated with the company, because both, given the industry expertise that we now have access to as well as the relationships and partner network, if you will, it's really going to be helpful to bring in better deal flow, if you will, and also the capability and expertise to do some of these things.

The way I kind of look at our markets, and this sort of does -- I'll tease a little bit the way we're thinking about the segment information. But look, we've got 911 and location products, which we know very uniquely tie together. Although you do have cross-pollination with the satellite business and redundancy in some of the cyber training stuff, we have a product line that is really satellite and space components.

And when you sit back and you look at the 911 business, you can have certain market dynamics that are growing there. And we feel there are some software companies that are out there, some additional features and functionality from a technology perspective that we could add to our systems. And that -- you can then sort of take that out, there's things such as evidence tracking and dispatch systems and other things that you could add to the 911 system if you start extending and talking to your customer.

But I would say to you, look, Smart Response is the reason why we developed that type of a system, because I don't want to say it's like a plug and play, but similar to you have an API with software that you could take certain functions and feed it into the Smart Response system, like we are doing with cameras for a particular customer. That's how we're going to sell. And we think -- I think we're going to go to the states that we currently do business with first, and that's the best way to do it, right? We've got states like Washington, commonwealth of Massachusetts and Pennsylvania and South Carolina.

So we have what I would call very good relationships with these customers and they're getting good and growing every day. And as we're talking to them about their unique needs, we're able to find out what they need. And if we don't have that technology in-house or we can't develop it in-house, we'll certainly go acquire it if we think the ROI is there. And that's an example where the $100 million is good for us to go to do that.

At the same time, satellite and space communication market, look, there are thousands of LEO satellites that are being launched. We're getting into the TDMA market. We've been very pleased with the market reaction to our TDMA products. At the same time, we're very focused on building out what we call a focused U.S. defense group to respond to supply chain risk that the U.S. government is seeing and concerned about. And so as we build out both the U.S. government piece of it related to our satellite earth station business, we may add some additional products and feature sets. Whether it's additional security and software or certain things that the U.S. government customers may want, we may tap in there.

And at the same time, on the commercial side with our TDMA and our Heights platform, we are working on a new product set and bringing the best of the TDMA and SCPC technologies that we have. And you'll hopefully hear about that later on this year. But as we continue to talk to our customers, we're getting feedback from them, and we'll probably do some tactical acquisitions in that space. And we are revisiting them. And as I said, it's one of the things that we're doing. And as we look to how to deploy the strategic growth investment in the most optimal manner, that's going to be one of the areas that we use the proceeds.

Ok, got it. Thanks very much and congratulations Fred and Mike.

Thanks Mike.

And we'll move next to Kyle McNealy with Jefferies.

Hi, thanks a lot. I'm on for George Notter. I also want to say congrats on the transition, Fred and Mike. And thanks for the additional clarity on your initial priorities after the change.

I wanted to see if you could give us any clarity on the incremental R&D and sales and marketing investments, OpEx overall, that you're making on the new opportunities that you have that aren't necessarily generating revenue yet. Could you give us some clarity on a dollars basis or a percentage of revenue basis? We're trying to understand the split out of what the base business is doing in relation to revenue versus new opportunities that you're investing in, like LEO and MEO. And any new Next-Gen 911 wins that flow in?

Sure, Kyle. In terms of the investment, I would say, that's not generating revenue at this point would be around $3 million. If you're thinking about it for where we're spending that money, it's focused on, as you mentioned, the LEO and MEO space and upgrading, like Mike was talking about, Smart Response areas of the business like that. That's where we're focusing.

And just to be clear, that's incremental spending versus last year. I mean we're spending more than that in those areas, but it's incremental versus last year.

Okay. Is that a quarterly basis? Is that the annual figure, that $3 million...

That's an annual number. It's an annual number.

Okay. Great. Do you have any additional anything additional in terms of the timing on when bigger step-ups in that LEO and MEO revenue opportunity can ramp up? Or any larger NG-911 deals that might be on the horizon that can meaningfully inflect sales in that business as well?

Well, let me specifically tell you on my large contract for next-generation contract is I'm not going to discuss anything with that. My customer is extremely sensitive towards what we can say and talk about that. So I just would like to punt on that issue. And obviously, when we get the order we'll be able to talk about it.

In terms of the 911 stuff, again, we're thinking about the second half of the year, and that's what we're thinking.

Okay. Great. One last one for me, I'll jump back in the queue, but you're guiding for a pretty big step-up in the back half for this fiscal year. I know that that's typically what a year does in terms of shape, but this seems to be even bigger ramp than most years. I'm curious how much of the kind of post-pandemic normalization is required to achieve that back half? Like would you say is it still conservative? Or is it dependent on face-to-face meetings opening up -- back up in a bigger way and some kind of bigger inflection in satellite ground station business that's been relatively slow for the last few quarters or a year?

I would say the number one thing for us for the Q4 really is in the COMET and the troposcatter, those opportunities that I was referring to. We have conducted in-country trials already. So that's been taken care of. So we've actually been in country and now we're out of the country. And we're trying to work with the customer to get those fundings. So again, sitting here in December, it takes a couple of months to hopefully work out those contracts, if not sooner.

But like I said, the contracts kind of being split into 2 funding mechanisms, and that's what we're working with. So I don't think it requires a reopening per se. And I think this is a matter of just getting that particular product funded and with the customer.

The rest of the stuff, COVID and supply chain, I think we have it factored in. I mean we're -- it's not a pretty situation out there, at least from our perspective, on the international front. If you look at our revenues in Q1 in our Commercial segment, again, we kind of almost did the same in Q1 this year, as we did last year. So the big drop in Q1 year-over-year is really almost all in the government side of the business due to the Afghanistan and all the program changes on the revenue side.

So I think, again, we -- I don't want to use the word muddle along, if you will, this year. But look, it's a challenging year, no less when you look at the comparative years, comparative view that we have. But we need those troposcatter orders for the second half.

Ok, thanks very much, that's helpful.

(Operator Instructions) We'll move next to Asiya Merchant with Citi.

Oh great, thank you for the opportunity. Congratulations on the roles. I just had a quick question, a lot of them have been asked. But Q1 or October quarter was good for you guys, a little bit ahead of expectations as you guys talked about, was there any pull-in that happened from 2Q into 1Q? It seems like the guide for $125 million on the top line and $8 million on the adjusted EBITDA is a little bit shy of what I was expecting. So just wanted to see if there was any quarterly changes that happened and a pull-in from the -- and if it did, which segments were those in.

Hi, Asiya, In terms of the Q1 results, I mean, it was a lot of puts and takes, but nothing that was a pull-in from Q2. It's just timing of when we could get stuff out and based on parts that we had and what we could get out the door. So certainly, if we could get something out, we will.

Okay, thank you. And then also on adjusted EBITDA, anything there to be mindful of for the second quarter?

I would just say -- and we said it in the prepared remarks of our script, our Government segment is going to be very similar to what we did in Q1, and we'll continue to be that way even in Q3 before really bouncing up in Q4. And our hope is that we might be able to get these orders in for the troposcatter stuff early, and that may help us.

And it's one of the comments we make, if we get these things earlier in the year, it might be helpful to making Q4 not -- as high as it is. But when we set the initial guidance at the beginning of the year, we're mindful of COVID. We're mindful of the global supply chain issues. We're mindful that things could go wrong. So yes, to I think Kyle's earlier point in his earlier question, yes, Q4 is higher than it normally is, and I'd like to think that that's conservatism. But I think I said on the same -- I'll use the same word I think I used on the Q1 conference call as I certainly have said, is I think we're being pragmatic and realistic. And if we're able to get the orders in earlier, the quarters will be better, but we're just -- we're navigating still a very challenging environment on the supply chain side as well as COVID.

And again, just this recent spike with Omicron is just causing people to get all nervous in countries -- some countries are shutting down, and you got to go through test and quarantine again. So it's just -- it's not a good time to be building satellite network systems. And even in the U.S., it's just -- it's not a good time to go into a PSAP and do upgrades.

Ok, thank you.

(Operator Instructions) We'll move to a follow-up from Kyle McNealy with Jefferies.

Hey, thanks a lot for squeezing me in again, a lot of your bigger success for NG-911 has been for core services. I know the Solacom has been doing well, but the big contract wins have been core services related. What traction are you getting now for Solacom? You mentioned a few things on the call, but is there an opportunity for your core services deals to pull through, more Solacom for PSAP call handling? I'm thinking in states like Washington, Massachusetts, Pennsylvania, South Carolina, anywhere that you're deploying core services. Like what's the outlook there in terms of opportunities to kind of get some synergies between call handling and integrations with core services that might be -- might work better with everything from a single vendor or the integration as well?

Kyle, thanks for the softball question. State of Arizona is a great example. We just won that contract and -- to do the core services. And with that, I call it, we get a hunting license. We get permission to go to the PSAPs and sell the Solacom call handling software, and that initiative is well underway. And you're exactly right. Our hope is that we're going to be able to extend Solacom into the state of Arizona. There's lots of counties in Arizona that do not do that. And we think, again, every time we win a contract in the state of Arizona, it will be basically taking market share. And you're exactly right, customers like to have the same systems, connectivity, it's more seamless, one vendor to point to. And that's been part of our strategy.

South Carolina, same situation. And I can tell you that that's a state that we've been executing to that strategy. So again, some of these contracts are small because they are PSAP-by-PSAP basis, may not hit that individual press release threshold, but yes, we're executing to that.

All right, thanks very much.

And it does appear there are no further questions at this time.

Okay. That concludes today's call. I want to thank everybody for joining us today, and we look forward to speaking with you again in March. But in the meantime, as a reminder, our 2021 Annual Meeting is scheduled for December 17, and we strongly urge you to vote the blue proxy card. Thank you very much.

This does conclude today's program. Thank you for your participation. You may disconnect at any time.