Comtech Telecommunications Corp (CMTL) 2020 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to Comtech Telecommunications Corp.

Third Quarter Fiscal 2020 Earnings Conference Call.

(Operator Instructions) As a reminder, this conference is being recorded, Wednesday, June 3, 2020.

I would now like to turn the conference over to Mr. Jason DiLorenzo of Comtech Telecommunications.

Please go ahead, sir.

Thank you.

Welcome to the Comtech Telecommunications Corp.

Conference Call for the Third Quarter of Fiscal Year 2020.

With us on the call today are Fred Kornberg, Chief Executive Officer and Chairman of the Board 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 on 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 Chief Executive Officer and Chairman of the Board of Comtech, Fred Kornberg.

Fred?

Thank you, Jason, and good afternoon, everyone, and thank you for joining us on this call.

Let me start this call by saying a few words about the COVID-19 pandemic.

As you would expect, our top priority in dealing with the pandemic has been to protect the health and safety of our employees, suppliers, customers and partners.

Also, I hope that everyone that is listening to this call is healthy and staying safe.

No doubt, the current quarter was challenging, and you could say it was a surprise to us on how difficult the quarter turned out to be.

The last time we spoke was on March 4, 2020.

We discussed the modest effect on our Q2 performance due to the coronavirus situation.

But we felt we had a strong pipeline and that the situation from what we thought we saw was temporary.

Well, we were wrong.

One week later, on March 11, the coronavirus situation was characterized by the World Health Organization as a pandemic.

Thereafter, there was a sudden and unexpected deterioration in business conditions caused by COVID-19 throughout the world.

On March 31st, just 20 days later, we withdrew our fiscal 2020 guidance.

Although, I could never have imagined what has occurred over the past few months, it had, and we saw how our Comtech employees would rise quickly to the challenge.

I have never been prouder of our employees for their dedication and commitment to our customers and to our company.

I'm also exceedingly grateful for the trust our customers continue to place in Comtech's leading industry technology and expertise.

And as you will hear about this call, I remain enthusiastic about our business.

Despite our Q3 performance occurring through the worst part of the pandemic crisis, we stayed focused.

We generated a positive adjusted EBITDA and positive cash flow.

Our business remains healthy.

Our pipeline remains full.

Although, Mike Porcelain and Mike Bondi will provide more details, let me give you a brief overview of what happened during the third quarter.

The COVID-19 pandemic really impacted our Commercial segment, satellite earth station product line, the most, especially, internationally.

Almost all travel was suspended, and historically international customers like to close deals with satellite earth station orders face-to-face.

As such, this negatively impacted our sales and our order pipeline.

The COVID-19 pandemic did not really impact our public safety or location technology product lines in our Commercial segment.

If anything, the pandemic demonstrated the importance of reliable quality advanced communications equipment and infrastructure that is needed in the 911 space.

Our customers continue to place great trust in us.

We didn't experience any outages in providing our services, and we supported state and local public agencies with flawless continuity of their 911 operations.

We believe that the market for 911 public safety and location solutions remains strong, and we hope to announce some big wins very shortly.

Turning to the Government segment markets, although we did see some fielding delays and order slippage, the pipeline for government customers, particularly the U.S. DoD remains very strong.

We won two important contract awards and received initial funding for prototypes and engineering services, that I believe, will result in multimillion dollars of revenues for the next several years.

We also demonstrated and received orders for our new, what we call, COMET product line, the world's smallest over-the-horizon tropo microwave terminal.

The COMET, which has been years in the making, is a testament to our engineering prowess, and we believe the COMET will quickly become a much needed, rapidly employable, low intercept communications tool for the DoD for warfighter.

As you can see, although we were negatively impacted by the virus, we feel with our diverse product lines we can weather this economic storms.

We believe the long-term fundamentals of our business remain strong, as we continue with our strategic planning for the acquisitions of Gilat and UHP.

Now let me turn the call over to Mike Bondi, our CFO, who will provide a discussion of our third quarter financial results.

Mike?

Thank you, Fred.

Our net sales for the third quarter of fiscal 2020 were $135.1 million.

From a geographic perspective, net sales in the third quarter to U.S.-based customers were 75.7% of total net sales, with 24.3% to international customers.

Bookings for the third quarter were $137.5 million and our consolidated book-to-bill ratio was 1.02.

We finished Q3 with backlog of $640.7 million, and when you factor in the total unfunded value of certain multiyear contracts that we have received and for which we expect future funding, we have visibility into approximately $1 billion worth of total potential future revenue.

Our gross profit percentage in Q3 was 39.2%.

GAAP SG&A expense in Q3 was $32.3 million or 23.9% of consolidated net sales.

Turning to research and development expense, we spent $12.3 million in the third quarter or 9.1% of consolidated net sales.

Of this amount, $10.8 million was spent in our Commercial Solutions segment and $1.4 million was spent in our Government Solutions segment, with the remainder representing amortization of stock-based compensation.

Total stock-based compensation expense was $1 million for the quarter.

Q3 amortization of intangibles of $5.5 million reflects a full quarter of amortization related to our January 2020 acquisition of CGC.

For fiscal 2020, we are expecting amortization to approximate $22 million.

Such amount does not include the impact of the pending UHP or Gilat acquisitions.

Our consolidated GAAP operating loss for the third quarter of fiscal 2020 was $3.1 million.

Our GAAP operating costs include $6 million of acquisition expenses -- acquisition plan expenses and $0.5 million of estimated contract settlement costs.

Excluding these costs, our consolidated operating income would have been $3.3 million or 2.5% of consolidated net sales.

Our adjusted EBITDA was $12.5 million or 9.2% of consolidated net sales for the third quarter.

On a segment level, adjusted EBITDA in our Commercial Solutions segment was $11.5 million or 14.7% of related net sales, and in our Government Solutions segment was $5.8 million or 10.3% of related net sales.

Now let me talk about interest, taxes, EPS, cash flows and our balance sheet.

Interest expense was $1.5 million in the third quarter.

Our current cash borrowing rate which excludes the amortization of deferred financing costs approximates 2.25% to 2.5%.

Excluding a $700,000 net discrete tax expense, our effective tax rate was 31%, which is what we now expect for fiscal 2020.

GAAP net loss in Q3 was $4 million or a net loss per share of $0.16.

Excluding acquisition plan expenses, estimated contract settlement costs and net discrete tax items in the quarter, non-GAAP net income for Q3 was $1.2 million or $0.05 per diluted share.

Our balance sheet remains strong.

At April 30, we had $50.6 million of cash, debt of $159.4 million, and our net leverage ratio was 1.93x.

During the quarter, we generated positive operating cash inflows of $7.7 million.

Given COVID-19, we ceased providing specific financial targets.

Although it remains difficult to predict the timing of customer awards and related shipments, we do expect that our Q4 sales, net income and adjusted EBITDA to be somewhat better than Q3.

Now I will hand it over to Mike Porcelain.

Mike?

Thanks.

As Fred stated, COVID-19 was present right from the start of our third quarter.

And as a result, we experienced significant order delays, lower sales and implemented a variety of cost-saving measures.

Let me give you some detailed color by segment and product line of what is happening.

Our Commercial Solutions segment achieved a book-to-bill ratio of 0.73 or bookings of $57.4 million.

Net sales in this segment were $78.3 million this quarter compared to $89.6 million last year, a decrease of 12.6%.

Here, you can see that our satellite ground station technology product line which has historically required significant in-person meetings to generate new business and finalize sales orders has been most impacted by restrictions on business travel.

With our recent deployment of new video sales channel methods and the partial resumption of business activities in some places around the world, we believe this product line has started to slowly recover as we enter Q4.

Importantly, we have been awarded multiple satellite ground station technology solution contracts to support several U.S. Department of Defense end customers, and we have received initial funding for these critical projects that we expect will generate revenues for 2021 and for several years beyond.

Although our U.S. government business was always important, given the increased uncertainty of the international business and commercial markets right now, it is even more so.

Here, we are well positioned and recently announced two contracts.

First, we announced a $1.7 million order for engineering services to support the Data Link Modernization or DLM contract by providing new advanced SATCOM systems for the U.S. Army's Gray Eagle Unmanned Aircraft System.

Under the development and prototype phase, we will provide advanced engineering services, including porting of waveforms to the prime's airborne and ground-based satellite modems and supporting the stringent Army Cyber Security requirements.

We believe this program will generate double-digit millions across a number of years, once hardware and the customer are ready for installation, which could begin to happen in fiscal 2021.

Second, we were awarded a $4.7 million contract for engineering services from a large prime contractor to support a critical Air Force and Army Anti-jam Modem or A3M program under the U.S. Space Force's Space and Missile Systems Center.

Our equipment when delivered will provide the Air Force and Army with a secure wideband anti-jam satellite communication terminal modem for tactical satellite communication operations.

In addition, it will support the U.S. Space Force's Space and Missile Systems Center Protected Tactical Waveform technology, an anti-jam capability operating on military satellite communication terminals through the Wideband Global SATCOM constellation.

The prime contractor, who is our customer, was awarded a 5-year, $500 million ceiling, indefinite delivery, indefinite quantity contract.

The prime received an initial delivery order in excess of $30 million for the development and prototype phase.

Comtech will be a key subcontractor to this prime, providing both engineering and hardware services.

Like the A3M contract I discussed, once development is completed, we expect to also receive significant multimillion hardware production orders in the future.

In addition to good visibility from our U.S. government satellite ground station business, we believe things are pretty good with our Commercial Solutions segment's portfolio of 911 and location-based technologies.

Although we have experienced some order and contract finalization delays for new 911 and location projects, we do believe that the pandemic has only heightened the importance of our solutions.

In fact, during the peak of the pandemic crisis, our secure highly reliable communication solutions saw unprecedented demand.

During the months of March and April and continuing into May, our network supported over 400 million text messages per hour, which is over 2x normal usage.

Comtech has aligned itself with the FCC's Keep Americans Connected pledge and has agreed to provide our mobile network operator partners with ongoing and additional access to SMS text messaging at no cost, ensuring that Americans did not lose their mobile connectivity as a result of these exceptional circumstances.

This decision did cost us a few million dollars of profit in 2020, but we felt it was the right thing to do, and in the long run, fostered better relationships with our partners and helped highlight the need for our critical technologies and reliability of our solutions.

As it relates to our Next Generation 911 technologies, we believe that demand for our solution remains strong, and we are in the process of finalizing a number of large multiyear projects and remain optimistic that we will announce them soon.

We continue to expand our 911 product leadership.

And during the quarter, we announced and closed on an acquisition of NG-911, Inc, a pioneer in providing Next Generation 911 solutions to public safety agencies in the Midwest.

NG-911 was a small distributor based in Illinois, Iowa and Missouri, and maintained key customer relationships and local know-how.

We knew NG-911 a long time, as they previously partnered with Solacom.

Given certain customers' desire to have more support and the need to buy more product, we purchased them for less than a few million dollars.

Right after we purchased NG-911, we were able to secure several multiyear contracts valued at more than $15 million to deploy new call handling solutions in the Midwest.

We absolutely think NG-911 was a smart investment.

During the quarter, we also announced that we were awarded a 5-year contract valued at $9.1 million from a U.S. tier one mobile network operator for 5G virtual mobile location-based technology solutions, including public safety applications.

This $9.1 million contract win is highly strategic, as it further positions Comtech as a leading supplier of location-based platforms, which is a key enabler for 5G.

You may recall that for more than one year, we have been repositioning this product line to focus on what we do best, and we believe this contract win provides tangible evidence of the success of our strategy.

We are working with at least one other major U.S. carrier and hope to announce another award soon.

We believe there are more opportunities for us, not only in the United States but worldwide.

Since our 5G location platform is fully virtualized, cloud-native and compliant with almost all major industry standards, it is ready for adoption, not only in test environments, but the real world.

As such, we are well positioned with mobile network operators on a global basis to help them build and operate their 5G networks.

In fact, we believe there are at least 35 other mobile network operators that can benefit directly from our technology and are focusing business activities in this area.

Our repositioned location-based product line also enables public safety to support new applications and use cases that 5G is creating today, and we ultimately expect to significantly benefit as 5G is adopted.

All in all, we believe our public safety and location technology products will benefit from strong customer relationships, a good base of backlog and growing opportunities.

End market conditions, while competitive and subject to state government funding for NG-911, we believe, remains healthy.

Now let me turn to our Government Solutions segment.

Here, net sales were $56.8 million in Q3 and were lower as compared to last year, largely due to the timing of and performance on orders related to our $98.6 million U.S. Army global field support contract and satellite tracking antennas and high reliability satellite-based space components.

Although this segment did experience Q3 order and shipment delays as a result of the corona pandemic, demand for almost all of our government solution remains strong.

In fact, our Government Solutions segment achieved a book-to-bill ratio of 1.41 or bookings of $80.1 million.

In particular, we saw strength in VSAT equipment that we sold to the U.S. government, and we also saw orders for ongoing sustainment services for several critical programs, including the SNAP and BFT-1 programs.

In addition, we continue to support the U.S. government cybersecurity posture, and during Q3, received large orders for its Joint Cyber Analysis Course or JCAC training solutions.

We are continuing to make significant efforts to win multi-year awards for several large opportunities with the DoD, that we believe, bode well for the future.

As many of you know, there is increased attention on space, and NASA is focused on going to the moon by 2024.

In this regard, we are proud that we can support this effort.

In fact, just yesterday, we announced that during our third quarter, we were awarded a $12.6 million contract from a major U.S. subcontractor for the supply of EEE space components to be utilized on NASA's Artemis rocket launch program.

This program is intended to help NASA carry the first woman and next man to the moon by 2024.

We are excited to be part of this important program and expect more follow-on orders in the future.

In addition, as Fred mentioned, we announced a Comtech COMET, the world's smallest over-the-horizon microwave terminal and received an initial order from the U.S. Special Operations Command.

The Comtech COMET is the first rapid deployable, low power, airline checkable, over-the-horizon communication terminal which uniquely addresses the SOCOM's community concern of low probability of intercept and low probability of detection, while providing high reliable, mission essential communication.

Given our success with the U.S. Marine's troposcatter program, we are very excited about this new product, and we look forward to receiving additional orders in 2021 from both of these customers.

Finally, during Q3, we mostly completed the integration of CGC Technology Limited.

CGC, which is based in the United Kingdom, is a leading provider of high-precision, full-motion fixed and mobile X/Y satellite tracking antennas.

Although very small in revenues today, this acquisition adds another growth dynamic to Comtech and we are working with several top-tier European aerospace companies and other government entities, in particular, in the LEO and MEO's satellite space.

All in all, although sales in this segment can be lumpy and difficult to project, we do believe our Government Solutions segment is well positioned for 2021.

Now let me give you an acquisition update.

First, let me start with UHP, which we first announced in November 2019.

UHP Networks is a leading provider of innovative and disruptive satellite ground station technology solutions.

The UHP business, although impacted by the coronavirus, remains a healthy business.

In fact, UHP announced this afternoon that it completed its fiscal year ended April 2020 with record revenue and record profits.

Nevertheless, given overall changes in business conditions and the economy, we were able to amend our agreement with UHP.

Specifically, UHP agreed to reduce the purchase price from $50 million to $38 million, which reflects a 24% price reduction.

Additionally, of the original $50 million deal, at least $35 million was payable in cash.

In order to provide more balance sheet flexibility to Comtech, our amended agreement now allows us to pay only $5 million in cash with the remainder in cash or stock, or a combination at our option, when we close.

The UHP transaction remains subject to customary closing conditions, including necessary regulatory approval in Russia.

I can tell you that we were very pleased that we were able to reach an amended agreement with UHP.

I cannot wait for them to be on board, and we look forward to attacking the market together.

Now let me turn to Gilat.

As most of you know, Gilat provides satellite networking technology solutions and services, with a presence in the satellite ground station and in-flight connectivity markets and expertise in operating large network infrastructures.

Let me provide you with some comments relating to Gilat's business and the acquisition status.

As Gilat remains a public company, I will simply repeat information that Gilat itself has publicly reported about its financial results, including in a press release, that was issued today.

The coronavirus in Gilat's own words has significantly impacted the travel and aviation markets that it is in and has resulted in a slowdown in their business.

They have experienced postponed orders and suspended decision-making by customers.

Gilat experienced a reduction in Q1 2020 sales as compared to Q1 of fiscal 2019, and they incurred an operating and adjusted EBITDA loss for Q1 of fiscal 2020, which runs from January to March 2020.

One of the conditions to close the Gilat transaction is regulatory approval in Russia.

Here, we can provide an update.

In May 2020, Comtech received notification from the Federal Antimonopoly Service, or FAS, of the Russian Federation that it was extending the review period for Comtech's application to purchase Gilat.

This extension is intended to allow the Russian government sufficient time to determine under the Russian Federal Investment Law, whether approval of the Gilat transaction is required from the Chairman of the Russian Government Commission for Supervising Foreign Investments.

The Russian Government Commission is an interagency group with the authority to review certain foreign investments.

Here, let me give you some more color.

If the Chairman decides a review by the Commission is not warranted, our application will continue to be processed by the Russian Federal Antimonopoly Service, or FAS.

If the Chairman decides to send it to the Commission, we will need to fill out a second application, and this process could take a number of months.

I want to point out that given this regulatory process is ongoing and Gilat remains a public company, we will not be making additional comments relating to this regulatory process or regarding other conditions to closing of the Gilat transaction.

We will, however, update investors as appropriate.

Now let me turn it back to Fred, who will provide some closing remarks.

Thanks, Mike.

As I mentioned previously, in these unprecedented times, we are very pleased with how we are performing.

We have an extremely dedicated and talented workforce, and I'm confident that our current approach will support sustained growth for years to come.

We have a strong, diversified customer base, selling to government customers and commercial customers, and having a good business mix and a diversified product line has protected Comtech in the past, and we believe it is a significant source of strength today.

We remain determined to extend our market-leading positions and are firmly focused to achieve growth in fiscal 2021, as market conditions approve.

Given our business outlook, our Board of Directors declared a dividend once more for the third quarter of fiscal 2020 of $0.10 per common share, payable on August 14, 2020 to shareholders of record at the close of business on July 15, 2020.

We still continue to believe our dividend program is a great way to return capital to our shareholders as we grow our business over the long term.

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

Operator?

(Operator Instructions)

We will take a question from Joe Gomes from NOBLE Capital.

Quick question on the Next Generation 911.

Last quarter you mentioned and also this one that you're in negotiations for some large multiyear orders.

And I know as part of the NG-911, Inc acquisition, you received a $15 million order from Northern Illinois.

Is that one of the contracts that you're talking about?

Are you talking about additional ones to that one also so that there's even a bigger target market out there that we're looking to get some awards from?

Yes.

So that's a good question, Joe.

That's not the contracts that we're referring to.

There's a number of contracts that are very near to finalization.

A couple of them are certainly multimillion -- double-digit millions and the high double multimillion-dollar number range.

I can even tell you that during the quarter, with the coronavirus, we had folks running around one state in the car, getting signatures, and that's how close it is to being finalized.

So we feel pretty good that things are going to get finalized, but we need to get all the paperwork done and announce the contract soon.

Okay, great.

That sounds fantastic.

And on the COMET, again, you got the Marines, the one, and now you're talking about the special ops have ordered -- placed an order.

But last year, we had lost the Army contract.

Does this potentially give you the opportunity to go back there and maybe get some other Army business also?

I guess, I'll answer that one.

The COMET is really a, what

you could call a thin line tropo terminal.

It's extremely small.

It's extremely low power, but very, very employable in special ops operations.

So it's a special -- it's really a special product line.

That -- notwithstanding that, it is almost equivalent to the large tropo systems that we have supplied in the past.

So to answer your question, yes, I certainly believe that the COMET will effectively be used by the Army, as they see the performance that we will show -- we actually demonstrated it to them and then we will show in actual field operations.

That's good news.

And one last one for me, and I'll jump back in the line.

Again, last quarter, you guys had talked about, especially in the satellite stations that you couldn't get into offices and no one was there to receive product, et cetera, but it still sounds like there's some of that going on.

But you've been releasing a fair number of awards lately in your press releases.

I mean, how close to normal would you think we are to business at this point in time?

I think it's just starting, I guess, is the reopening is the way I would characterize it.

Earlier in the quarter, we started to see some increased activity with China, and China opened up, first, around the world.

But there are many places around the world that are not placing orders right now.

There are customers that are still closed, but at the same time, we are seeing a pickup in activity.

And that's what we're seeing.

And I guess, I would say it's a slow, and I'd like to think we're in the early stages of that.

I can't tell you right now, is it going to be V recovery for us or a U or an L, it's difficult for us to say that at this point.

But the one comment that I think we feel pretty strongly about is, given the markets that we have strength in, the 5G, the cellular backhaul market and the types of end applications that we sell, we do think that there's a tremendous need for them and, let's say, other markets, they should come back relatively quickly.

We will take a question from Chris Quilty from Quilty Analytics.

Just wanted to follow-up on that COMET product line.

Was that a cost development -- internal development product line?

Or do you have any customer funding from it?

No.

It's been totally developed by Comtech funds.

Taken us a couple of years, but we actually demonstrated it to the Army and to the Marines just in the past few months.

And is there a separate contract vehicle that might be available for that product line?

Or since it's something entirely new, do we prospectively have to go through some kind of a long contracting and specification period?

Or can it just be tagged on?

I think we're dealing at the moment with the special forces, obviously.

But I think both the Marines and the Army have expressed interest in actually getting a, I guess, an ordering number to be a large program for the Army.

And Chris, importantly and not to deemphasize this point.

Right now, there is a, we think, a very big market with the special operations command.

And I think you know that they have ways to do business.

Our initial orders that we're getting is through rapid acquisition modes, through other companies that have contracts, that allow for quick turned communication equipment to be purchased.

So we're not seeing an obstacle, I guess is the main point here.

There's not an obstacle of not having a contract vehicle out there.

There's ways that the government can procure this and they're doing so and we're talking to them about more orders.

Great.

And one other tropo related question.

Are you seeing any kind of a slowdown with your international customers, given the fact that, I believe, some or many of those customers are dependent upon energy markets for funding a lot of their defense expenditures?

Certainly, the international market is very, very similar to the satellite international market.

We are seeing delays.

We -- as Mike mentioned and as I mentioned, these are usually contracts that get placed with personal face-to-face meetings and negotiations.

So I think it's very, very similar to the satellite area.

Yes.

And it would Chris to be -- it would be a mistake to use oil, as the reason, the lower oil prices here to be the cause of these delays.

But we think that these delays are strictly related to the coronavirus and the markets that we're serving.

Most of our end customers are not in the oil-producing side of the business.

There's other companies out there that sell a lot of their equipment into it.

We don't.

Our key customers are in the mobile network operations space.

So again, the over-the-horizon business that we previously sold to Algeria, we're in between phases of a contract.

So it's not -- oil is not driving any of the delays for us at the moment.

Got you.

And question on the Heights product line.

I mean, given everything going on, I don't know that we should expect any developments around that product line, but any commentary on customer acceptance, either on the historic product, or I forget the name of the new lower-cost version?

Yes, Chris, you are referring to the Heights Pico line, but I think it's kind of lumped into the slowdown that we're seeing.

I think one of the things that we are hearing from our sales team is that it's allowing customers to test the product a lot more.

So that is what's happening is this -- a lot of the folks that instead of actively rolling out networks, they're spending much more time testing it, which ultimately will bode good if those tests go good.

So again, I don't think there's anything -- we have nothing big to announce right now on the Heights stuff, but the opportunities are still there, and they're just waiting for things to improve.

Got you.

Switching gears over to the NG-911 area.

Lots of government money being thrown around.

Are there any specific government grants or outlays or whatnot that you can identify that might benefit your customers' ability to either expand or accelerate their purchasing decisions?

I guess, I would say there's a yes and no.

Many of the projects that we're talking with our end customers, there's this 911 charge that already appears on everybody's phone bill.

So there is some 911 money.

On the other hand, we do recognize that some of the states that are out there are now have budget constraints.

They spent a lot of money on coronavirus, they're having some reductions of state income tax revenue, so we're cognizant of that.

I think when we sit back and the feedback we're hearing from our customers is there's going to be most likely a federal infrastructure budget that will be passed, and they'll have access to spend on equipment and upgrades and things that will boost the local economy.

So if anything -- if an infrastructure bill is passed, it will help solidify some things that are out there and also potentially get things moving faster.

Upgrading 911 equipment definitely increases employment, definitely provides a tangible benefit to the citizens.

I think most everyone has -- continues to go through this pandemic and realize how important a 911 system is, and if anything, we think big picture, it's going to drive more money to the market.

Understand.

And final question, you mentioned some cost-cutting initiatives.

Can you help quantify perhaps where they fall, either by government or commercial or just from a P&L perspective, were these folks out of sales and marketing?

Or was it more heavily on production side or evenly split across the board?

I would say it's more broad-based.

I mean, obviously, as Fred and I both discussed, our satellite earth station product line bore the brunt of the coronavirus.

So you could assume that a higher percentage was in that group, but we don't want to get into specifics.

Doing cost reductions during this time is not easy and it wasn't a fun activity to do, but it was pretty broad-based.

We will take a question from Mike Latimore from Northland Capital.

On the 911 or NG-911, Inc acquisition, can you just talk a little bit about the assets you're acquiring there?

Is it -- what technology, what sort of services are you getting there?

Yes.

I mean, the NG-911, as we mentioned in the prepared remarks is really was a small distributor with local know-how.

And local know-how means who do you know and how do you get stuff done in the town.

And it also means where do you do the installations and what kind of the local system.

So a lot of it was intangibles rather than hard technology or hard equipment.

And that's why it was, I would say, a very nominal investment for us to make, which really resulted in those $15 million contract awards that we subsequently received.

Got it.

And then, I think during the quarter, you closed some of your -- like your Santa Clara facility for a few weeks.

I guess, is everything back up and running?

And then what kind of, I don't know, revenue effect does that have on the quarter?

Yes.

I mean, it definitely did.

We -- from both a production side and an order side.

But we were -- when the Santa Clara announcement, I think, came out, that was one of the first counties in the United States to issue any sort of shutdown mode.

And eventually, shortly thereafter, I think, about a week later, the U.S. Department of Defense issued this essential definition company and that sort of overrode some of these local ordinances.

So, I would say we lost a couple of weeks of production, really.

Almost all of our facilities are impacted by the coronavirus in some way, shape or form.

We were implementing self-quarantine, not self-quarantine, we're separating people, doing social distancing, as we best can implement them at the facility.

But I think also at the same time, since order flow is suppressed at the moment, we've been able to accommodate that lower order flow, and we're not operating at full capacity.

That is certainly the case.

And then you talked a little bit about, I think, some pushouts in orders from the U.S. government, I believe, but the demand is there, the pipeline is there.

I mean, are you expecting a little bit more of a fiscal year-end spike in kind of federal spending this year, at least on the projects you're looking at?

Yes.

In the short term, yes, some of the government bases that we do work on have actually made public announcements that they're not letting folks on the grounds until at least July 1. So again, there's an inability to do certain field support and services that we normally would do.

So we definitely saw delays there.

But it's going to get shifted to the right.

And so some of that stuff is in backlog already.

We can't do.

Some of the stuff is -- government has money, it's not a question of money.

And at the end of the day, the government doesn't like to lose funded money.

So what they're trying to figure out is the logistics behind how to do the work and every state and every county has its own rules and regulations, and we're working through that with the customer.

But in short, yes, we do expect to receive some nice orders in Q4 of this year, and we're expecting to do some deliveries in Q4 as well as continuing that in 2021.

Got it.

And then I guess just last one.

It seems like there's been a lot more just text messaging activity, given people staying at home, communicating more.

Has that had any influence on some of your kind of messaging business?

Yes, no doubt.

We -- like I said, we had -- the messaging that we've been processing on our system is twice than what is normal.

And right then and there, there's some revenue opportunities for us, that I would categorize in the millions and very high-margin type work.

But in connection with the FCC's Keep America Connected pledge, we decided that we didn't want to pass on cost to our cell phone mobile network operators who were not passing cost on to the end user, trying to make sure that people had this very critical capability.

Now I think what's happening is you start to see these reopenings and some people work at home, some people come back to the office, that number will probably drop at some point.

But I think most importantly, there's going to be increased messaging, and there's going to be an opportunity for us to get incremental revenue from these customers.

And most importantly, I think -- and it's something that I've always felt that text messaging is not a dead technology.

It's a critical piece of the network infrastructure.

It's going to be needed around, and it certainly proved its worth during this crisis.

And I guess, I don't think it's going anywhere, for a long time.

We will take a question from Chris Sakai from Singular Research.

Just had a question.

I know you mentioned that the states are running into some budgetary issues.

Has that affected you guys at all?

I mean, how have you dealt with that?

I joke, we drove around the county in a particular state to try to get some signatures.

So funding, obviously, the states need to provide funding to do 911 services, so it's a part of getting an order.

We have seen some delays.

We don't have those orders at the moment.

That's why we haven't announced them.

And hopefully, those states will deal with their funding issues and allocate their budgets and move forward with the projects in the short term.

These projects, Chris, are safety orientated.

So I think as you're seeing states sort of wind down the mobilization of hospitals, the purchasing of these masks for health care responders and so forth, I think you'll see a shifting of money back to the 911 space to try to get the networks and computers ready for the next wave.

Okay, great.

And then, I don't know if you can shed some light on this.

But -- so for the Commercial Solutions segment, your -- the book-to-bill ratio was 0.73.

Just was wondering, in the current quarter, can you guys give an idea, or in the ballpark, where this book-to-bill ratio might land?

For Q4, we think it's going to be higher.

Our satellite earth station business, we'd like to get it back to 1.0 on a trailing 12 months.

We think it's a growth business market for us, given the cellular backhaul requirements that mobile network operators have.

So this is a business that the book-to-bill, we would like to believe is 1.03, 1.05 on a short-term basis.

So that's kind of where we like to go.

But obviously, given the coronavirus, just things just didn't happen in Q3.

So the best I can say is, we think it's going to be higher than it currently was in Q3.

And we do not have any further questions at this time.

I will turn it back over to the speakers.

Well, thank you again for joining us today.

And we certainly look forward to speaking with you again in the fall to discuss our full-year fiscal 2020 results.

Thank you very much.

This concludes today's program.

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