Q4 2020 Comtech Telecommunications Corp Earnings Call

We finished the year with a healthy business and a solid backlog.

Prudent financial management in these turbulent times has enabled us to generate fifty two point eight million dollars of operating cash flows wage flexibility to continue to invest in our business. I firmly believe that we remain on the course of delivering long-term growth and driving shareholder value home. Now, the things have somewhat stabilized all those things are still fluid. We are reinstating guidance in our initial thinking is that we can do better in June 2021, and we did in 2020.

That said we're targeting to achieve fiscal 2021 revenues of approximately 610 million to $630 off an adjusted ebitda in the range of 74 million to 78 million dollars.

I believe that as the year progresses and new orders come in. I remain optimistic that actual 2021 results will exceed our targets before further discussing all Financial results and business and more detail. I would like to say a few words about the status of the Glad acquisition as a reminder in January 2020. We announced the highly strategic acquisition of gilad a worldwide leader in Satellite networking Technology Solutions and services. Unfortunately, after we announced eagle-eyed acquisition and covid-19 pandemic resulted in a sudden and steep decline in the travel and Aviation markets, we argue lots of operation is in a significant slowdown in galatz business.

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Publicly reported can lot has suffered lower. Over. Sales and a negative adjusted ebitda for the first six months of the calendar the 2020.

Give it everything in July 2020. We commenced litigation in the Delaware Court of Chancery seeking certain declaratory judgments, including a declaratory judgment that gehlot has suffered a material adverse effect. And that is a result of the material adverse effect wage. We are not obligated to complete the acquisition.

Currently a trial scheduled for October 5th 2020 and the Delaware Court has indicated that intends to render a judgment prior to October 2020 the date that we argue lot May terminate the emergence of agreement because this matter is getting ready for trial. I must tell you and I'm sure you will understand that we will not make any further comments on the acquisition or take any questions related to July or the related litigation.

Now, let me turn it over to Michael Bondi will provide additional commentary about our financials. And then the Michael porcelain will provide an update on our business and our pending Acquisitions might thank you Fred and good afternoon everyone our net sales for the fourth quarter of fiscal twenty twenty four hundred forty-nine point five million, and we finished the year with net sales of 616.7 million or revenues for Q4 represent a 10.8% quarter-over-quarter increase as compared to our Q3 2020 results, which were significantly impacted by the covid-19 pandemic.

In fiscal 2020 that sells to US based customers with 76.5% of total net sales with 23.5% to International customer. It was a strong quarter for bookings. We received a hundred and fifty nine point seven million dollars of orders which resulted in full-year bookings of 584.4 million dollars a month despite the impact of the pandemic we achieved a book-to-bill ratio of 95 times and finished the year with a healthy backlog of 620.5 million.

Although visibility into the economy remains a bit cloudy. We do have pretty good visibility into fiscal 2021 given are healthy backlog.

In fact, when you add our backlog plus the total unfunded value of multi-year contracts awarded to us, but not in backlog and for which we expect orders against wage. We have clear visibility to approximately 1.1 billion dollars in total future Revenue a substantial portion of which we estimate will be recognized as Revenue during the next 24 months.

Now, let me give you some Financial metrics and commentary with respect to the rest of the income statement.

Our gross profit percentage in Q4 was 33.2% And for the year, it was 36.8% gross profit in fiscal 2026 minor increases in costs due to a lower level of factory utilization and higher Logistics and operational costs resulting from covid-19.

As we look into fiscal 2021 and expect we expect a slightly higher level of sales growth in both our government Solutions segment and our commercial Solutions segment, and we expect on going higher production Logistics and safety related costs resulting from covid-19.

It would be reasonable to set an initial gross margin percentage Target of 35% for fiscal 2021. However, if product mix shifts favorably even a bit we could actually be back to 37% if not higher.

Sg&a for Q4 was 23.6 million or 15.8% of Consolidated net sales for the year selling General administrative expenses were a hundred thousand million hundred Seventeen Point 1 million or 19% of Consolidated net sales.

Turning to research and development expenses. We spent eleven point three million dollars in the fourth quarter of fiscal twenty twenty or 7.5% of Consolidated net sales rep for the year. R&D expenses were fifty two point two million dollars or 8.5% of Consolidated net sales.

Total amortization of stock-based compensation expense during Q4 of fiscal 2020 with 6.2 million dollars and for the year it was nine point three million dollars next year. We expected to approximate 11 million to $13.

Total amortization of intangibles was five point six million dollars in the fourth quarter of fiscal 2024 the year. It was 21.6 Million.

Looking to fiscal 2021 and excluding the impact of our pending Acquisitions the estimate total annual amortization of intangible assets of 21.3 million.

Our Consolidated gaap operating income for the fourth quarter of 2020 was two point eight million dollars or 1.9% of net sales.

As Mike will discuss in a bit. We continue to incur acquisition plan expenses including litigation costs, excluding 6.4 million of such costs operating income in Q4 or 20 20 would have been nine point two million dollars or 6.1% of Consolidated net sales for the year. Gap operating income was 15.2 million or two and half percent of net sales.

In fiscal 2020 we incurred twenty one point two million dollars of acquisition plan expenses and other similar expenses, excluding such expenses gaap. Operating income would have been 5.9% of net stuff are just as evil was 23.5 million or 15.7% of Consolidated net sales for the fourth quarter of 2024 the year off the seventy seven point eight million dollars of adjusted ebitda translates into a ratio of 12.6% of Consolidated net sales.

On a segment basis and Q4 commercial Solutions delivered 14.6 million of adjusted ebitda or 17.2% of related net sales for the month just edema in this segment was 61.7 million or 17.4% of related net sales.

Turning to the Government Solutions segment. We delivered five point four million dollars of adjusted ebitda in Q4 or 8.3% of related net sales.

For the year our government Solutions segment delivered adjusted ebitda of 25.7 million dollars or 9.8% of relatedness sales.

Looking to fiscal 2021 and despite all of them exchanges. We expect adjusted ebitda to approximate 12.3% when using the $620 off point of our 20 21 targeted range for that sells now, let me talk further about interest taxes EPS cash flows and our balance sheet interest expense was one point $1,000 in the fourth quarter of fiscal 2020 fiscal 2024 fiscal 2020. It was six point 1 million, excluding the impact of our pending Acquisitions interest expense is expected to be around five point nine million in fiscal 2021.

On the tax side excluding discrete tax items are fiscal 2020 effective tax rate was 37% when thinking about our tax rate for a 20 21, it is important to note that we will incur a significant acquisition plan expenses. So for modeling purposes, if you assume acquisition plan expenses of zero effective tax rate is expected to approximate 21% For now, we would tell you to use that rate but note that as we incur acquisition plan expenses the actual effective tax rate for fiscal 2021, maybe lower.

On the bottom line gaap. Net income and Q4 of 2020 was 1.1 million or 4 cents per diluted share excluding acquisition plan expenses and discrete systems are non-gaap. Net income for Q4 2020 was 5.2 million or 21 cents per diluted share.

For fiscal 2020 gaap net income was $7 or $0.28 per diluted share excluding adjustments indicated in our press release issued earlier today. Our own non-gaap. Net income for fiscal 2020 was Nineteen point two million dollars or $0.77 per diluted share. We achieved operating cash flows of Thirteen point eight million dollars for a quarter of fiscal 2020 and is Fred mentioned fifty two point eight million dollars for fiscal 2020. This is quite impressive our balance sheet as of July 31st, 2020 Volvo S40, 1.9 million dollars of cash and cash equivalents and our total debt outstanding was 149.6 dollars before turning it over to Mike for a business update. Let me page color on the Cadence of our expected fiscal 2021 performance. Although the Outlook is somewhat cloudy. We do have some visibility into the timing of how things are expected to ship wage.

Currently we are.

Our q1 Revenue to come in at around $125 with adjusted ebitda of about eight million dollars.

For the remaining quarters in fiscal 2021. We expect sequential growth with Q4 like usual targeted to be the peak now. I'll hand you over to Mike porcelain Mike. Thanks Mike as most everyone knows since the onset of the covid-19 pandemic the health and safety of our employees customers and suppliers has really been our top priority in addition to safety. We've been focused on ensuring business continuity for the many critical Advanced Technology Solutions. We provide to our customers. For instance. Can you imagine 491 Public Safety Technologies? Suddenly, we're not available Healthcare responders police fire and ambulatory Personnel would be unable to timely respond. If at all wage also military and government Personnel will not have the ability to securely communicate and their lives and the safety of our citizens around the world would be imperiled for many years. I've been saying, yep.

Keeping people around the world connected using our critical Technologies is the reason contact employees came to work each day. But in 2020 that changed instead of being able to go back to work many of our employees have to stay home to do their jobs. Now than the less we had to keep both our networks and the networks of our customers operating and troubleshoot and adapt to whatever our customers needed. It was simply amazing to see and it all unfolded almost perfectly and our employees adapted to it. All since March we have conducted most of our non production related operations using remote working Arrangements also work entailed most business travel and we have established social distancing safeguards. No doubt our employees did their jobs and save lives.

Our employees are critical to the success of the company and I must take a few moments to thank them for their incredible efforts and their commitment and dedication to serving our customers with that said let me now talk about our team success in terms of business performance contract wins, and the direction of where these efforts will lead us. I will talk first about commercial Solutions segment here. It sells for $85 million in Q4 and 353.7 million for fiscal 2020, which is a decrease of only 1% versus last year that small decrease is pretty incredible everything that has gone on this year additionally bookings in the commercial Solutions segment was strong at ninety million for the quarter and 321.3 million for the year resulting in a solid point nine 1 a.m. To bill ratio and the covid-19 environment looking forward. We expect fiscal 2021 sales in the segment to be slightly higher than the level we achieved in fiscal 2020.

All the business impact of covid-19 resulted in significantly lower net sales of our satellite ground station Technologies during fiscal 2020 as compared to fiscal 2019 Volvo this begin to Rebound in the fourth quarter of our fiscal 2020. We were awarded a number of important satellite ground station technology orders during Q4 including contracts valued more than 2.2 million for ka-band high-powered traveling wave tube amplifiers what t w t a s 4 trailer based on satellite communication terminals. We were also awarded a contract valued at more than one and half million for five hundred watt Ka been twth for a tracking Telemetry and command application to be deployed globally by a major satellite service provider.

We also received.

The one point three million in orders for events satellite modems went optimization and redundancy switches to support cellular LTE back wall for a service provider in the Middle East. We also received a 1-month or 1 million order the satellite ground station equipment from the South East Asia Ministry of defense for an upgrade, which could expand to more than two thousand units.

Importantly, we still continued strength in our US Government satellite ground station business receiving additional orders to support a critical US Air Force and US Army modem program known as a 3 a.m.

The program is intended to provide the US Air Force and US Army with a secure wideband anti-jam Satellite Communication terminal modem for tactical satellite Communications operations off our Heights products continue to draw interest and we continue to educate our customers. Although there are signs of pent-up demand the satellite ground station has some ways to go before it fully rebounds. So many of our customer locations remain closed or eliminating installations to only truly must have equipment. Now, let me turn to our Public Safety and location Technology Solutions who's nut shells were higher in 2020 than in 2019 the date the business impact of covid-19 on our Public Safety and location Technology Solutions has been relatively muted demand for our products appear strong. For example, we secured several multi-year contracts valued at more than 15 million to deploy new call handling Solutions in the Midwest region of the United States wage.

Also, we were awarded and began work on close to Thirty million dollars a multi-year contracts from to tier one mobile network operators for 5G virtual mobile location-based thousand dollars you Solutions including Public Safety applications, although covid-19 has resulted in the cancellation of several key Public Safety trade shows and some states and municipalities have announced wage constraints other existing and potential customers are increasing their funding for next-generation 911 Solutions recognizing the critical importance of upgrading their nine-one-one system. For example during Q4. We were awarded the contract valued it up to $54 million to design deploy and operate Next Generation 911 services for the state of South Carolina. Additionally. We are working with two other states for multimillion-dollar contracts to upgrade certain components of their nine-one-one Networks.

As you can see, we believe we are well-positioned for long-term growth in this market and as mentioned on prior calls, we have several large opportunities for which we hope to announce contract award soon wage. Now, let me turn to a Government Solutions segment here net sales were sixty four point seven million in Q4 or fiscal 2020 as compared to seventy three point four million in queue for a fish bowl 2019 for the full fiscal year net sales were $263 million which represents a decrease of 16.4% from the prior-year bookings in our government Solutions segment of fiscal 2020 with 263.2 million representing a book-to-bill ratio of one.

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20 includes a nominal amount of sales related to a new XY satellite tracking antenna product line, which we acquired through our acquisition of cgc We Believe sales and fiscal 2018. This product line will start to take off.

Margins in this product line are a bit less than our normal product set but it's volumes increase we do expect margins to go up all at all. We believe fiscal twenty twenty one that sells for the government solution will be slightly higher than the amount we achieved in fiscal 2020.

In addition to revenue contributions from the cgc acquisition fiscal 2021 is expected to benefit from existing and future orders to supply manpack satellite terminals networking equipment and other baby products to the US Army and existing and future orders to provide ongoing sustainment services to the US Army Force Navi sets. In addition. We expect to continue working with a US government and delivering our joint cyber and Analysis course as well as performing sustainment work related to the US Army's Blue Force tracking vft one program as mentioned on prior, We are extremely pleased that in fiscal 21, we will be managing certain aspects of the space component supply chain for NASA's Artemis missions. We are excited to be part of this employer space program and expect more follow on orders in the future.

Also, we expect to receive new orders for our recently-introduced common terminals the world's smallest Deployable troposcatter system. Additionally. We are making progress with respect to initial to the US Marine Corp for a next-generation troposcatter system. Finally. We have several other large opportunities in this segment and are optimistic. That is the fiscal year 2021 progresses wage will be able to report them as bookings. Next. I would like to make some quick statements regarding 21 expenses and speak about the status of uh, p r other pending acquisition firms acquisition plan expenses in fiscal 2021 will include significant litigation expenses associated with our pending acquisition and litigation related to as well as ongoing expenses related to Thursday Russian regulatory approval.

Today acquisition plan expenses in q1 most of which will lead to litigation approximately 14.2 million as the trial continues litigation expense will obviously a.m. And if we are required to close the transaction, we would expect to incur an additional $38 million or so including litigation cost given the ongoing trial as friend mentioned. We won't make additional comments about the status of the litigation or take questions on this matter.

Check it as it relates to uhp the leading provider of innovative and disruptive satellite ground station Technology Solutions. Here. We are focused on the regulatory process and Russia where we still need certain improved since our last conference call and announcement. We have made progress and we were requested to provide certain information to the Russian government and have provided such we hope that we will be able to receive a package from the Russian government and close this acquisition by December 31st, 2020 for those that want more detailed information about the acquisition and Galata acquisition-related wage fertigation matters on the status of regulatory approvals. I do refer you to our form 10-K that we just filed with the Securities and Exchange Commission earlier this afternoon. Now, let me turn to Fred who will provide some closing remarks. Thank you Mike as I mentioned before. I'm very pleased with how our business is performing particularly if you're resolved.

for the fourth quarter

Fiscal 2020 was obviously a challenging gear for contact and illustrates the earnings power of our business and our product leadership positions. I'm looking at the fiscal 2021. We have a strong Diversified customer base selling to both government customers and Commercial customers. We have a good business mix wage versified product line that has protected contact in the past and we believe it is a significant source of strength today. We remain determined to extend our leading positions and are firmly Focus to achieve growth in school. Twenty Twenty-One as market conditions continue to improve

As I said before, we believed that in an environment of increasing market demand for global voice video and data usage customers will increasingly turn to compacts to fulfill their needs to secure Wireless Communications. Given our business Outlook our board of directors declared a dividend for the fourth quarter of fiscal 2028 of $0.10 per common share payable on October 27th, 2020 to shareholders of record at the close of business on October 14th, 2020. We continue to believe our dividend program is a great way to return Capital to our shareholders.

As we grow the business finally today, we announce our board of directors approved the new hundred million our stock repurchase program Thursday. We believe this authorization demonstrates our confidence in the underlying value of our stock and in our future.

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

And again, that is star and one if you would like to register to ask a question today, we can go ahead and take our first question from Asia Merchant with Citigroup. Your line is open great. Thank you Jennifer and for all the color, quick question, uh, maybe for Mike red Mike. It doesn't matter first order guide is down 16% I believe sequential, you know, if you can give us some color on what's going on there and then obviously you expect the orderly progression to be there seems like the guide, you know, same slightly better than what you guys achieved, you know, given that you guys have a good backlog good visibility. Um, why just lightly given in economic conditions of resumed if you can give us some color on that, thank you. So, you know the customers out there the way we're seeing in the market place. The order activity interest is pretty high, but yep.

Still issues in terms of installation.

Things that are ongoing I mean, you know, I referred to that in my my prepared remarks customers still have their doors lock so to speak and it's very difficult to get into do installations and with you know, this is a a global company with global installations and it does take some time to find the right talent in the field that is willing to do it. So, you know with that being said, oh, we we are expecting a quarterly ramp-up q1, you know is the number Mike gave Tia and then each quarter thereafter is the way we're thinking about it if things shift earlier because Thursday vaccine gets developed or something like that and installations get ramped up then that that that you know, that will change but right now, you know, that's the way we're thinking about the birth the delivery of the revenue order flow, you know, we we actually feel pretty strong about we've got, you know, some large opportunities out there in the 911 space and you know yesterday's birth.

You know news in the market place is very favorable to the things we need is just another sign to the two politicians that the 911 systems need to be upgraded. So things like that, you know, that's kind of going on favor. We think.

Fair enough and then on cash cash. So that was a pretty strong cash flow that you guys generated this year. Can you guys share some commentary on what should we expect cash flow again? Been dead higher given, you know revenues will be higher next year. Was there something one time that we should kind of keep in mind that will not occur in 21.

Well, my my my did talk about strong cash flows that we we do expect. You know, I think obviously we're going to call out again the acquisition plan expenses. So, you know, I I mean candidly I think you know how long we spend twenty million dollars or so in fiscal 2020. So, uh, you know anything above that number for 20 21 will make the that that year-over-year comparison probably be lower is the way I would tell you to think about it because acquisition plan expenses just need to get paid and obviously we are in litigation. So if you if you look at it two ways, if you pull out the acquisition plan expense just you can see the very strong cash flow dynamics of the company and you know, I think that's really the right way to look at the company that a long-term basis.

Okay. Thank you.

And again, that is star and one for your questions today. We can go to Mike Lattimore with Northland Capital your line is open.

Great. Thank you. Yeah, just looking at the sg&a line there. It came down fairly significantly. Sequentially, I guess. Is that a good Baseline to think about was there any one time in their you know, what was the name Factor behind that decline?

Mike that was probably function of our cost savings initiatives that we put in place in Q3 and you seen the benefit of that in Q4.

Okay, and that's a good kind of Base Line number to think about to start here.

Yeah, as we entered 2020-21 certainly will be looking to be mindful of the cost expenditures on the sg&a line. You know our view is that we're still seeing the benefits and for the foreseeable future. We're going to have those programs in place until you know conditions meaningfully improve. Okay, great. And then in terms of the US federal government, you know, we're kind of having it right into their fiscal year end here and I guess how is that, you know customer behaving I guess into a joke around sort of a normal pattern there.

I I guess we could say normal pattern. I think it'll you know, it all depends on how close we get October 31st off and then

you talked a little bit about the like Demand Being solid and a little bit, you know harder to get in and do installs. I guess this does the box that install Dynamic effect the sales cycle to a little bit such that maybe the sales take a little longer because of the longer insult.

Definitely no, no, no no question about it. You know, the sales cycle is definitely longer, you know, the way I would describe it, you know in in a good way though wage is back in Q3 and and you know, we we didn't see any new opportunities right anything that was being done was old opportunities. And now with everybody going to all online video sales channels. We've really seen a a pickup in new opportunities and and those are the types of things that we started to see in Q4 come in. We expect them to continue to come in fact that it's just a question of figuring out how we're going to get them installed whether it's contact doing it or third-party doing it or you know, one of our partners in the field. So we you know, that that is extending a process. You know, when I would say a good amount, it's not it's not a small change. It's a big change that's out there.

Okay, and any color on just International versus domestic demand is is one, you know clearly outperforming other here.

No, not sure what you know, I would say overall. We're not we're not seeing you know much difference between how people are reacting to the virus out there. You know, I would say a bright herbal of positive note is our number one business, you know, I mean, I think you know that that that we are seeing and we would like, you know, we would like to see them, you know, push the final pain across the paper and you know, sign the final documents show to speak. Yeah, right, right. Okay, great. Thank you.

And we'll go now to Chris with singular research your line is open.

Hi, everyone. Just had a question. First question. I got asked on on your research and development expense. I know this quarter it was down, you know about 4 or 4 and 1/2 million dollars from from a year ago. Just wanted to see you know, what you guys had to say about that going forward, Do you see a rebound in in that expense? Thanks. So hi Chris. Yeah, you saw a decline in in the fiscal 2020. So long as we came out of Q3, we tried to be very mindful of, you know, the critical projects and make sure we continue to invest their you know, as we go into twenty Twenty-One. So I would say that our normal pattern would still suck exist in terms of percentage of sales.

Okay, and then you know, I've been noticing over the last four quarters. Your inventory level has been increasing, you know about 2 to 3 million quarter. Can you guys come in on that when you know if it's just planned? What do you see for 20 21, how do you see those level?

Yeah, I think we do expect him into already go down a little bit, you know in 20 21, you know, some of the inventory build-up is, you know, we've taken the position as when we can get parts, you know from suppliers will take off, you know, given that there's you know logistical issues and Mike referred to that in in his prepared remarks portion, you know, there are some Supply Logistics that are out there and when we get a lot of components or something that we decided to take them in so we have them to deliver our customers when they they want to but there's nothing nothing special per say that that you know is occurring other than that and normal seasonality and and and normal fluctuation.

Okay. Well, all right. Okay. Thanks.

Does reminder that is star and one for your questions today? We do have a follow-up from a c a merchant with Citigroup. Your line is open. Hi. Thanks. Thanks for the opportunity to get a quick question on the stock buyback program. I'm trying to remember. When was the last time you guys were buying back stock, but you also have, you know, two Acquisitions in play here. So is this authorization something that one would expect would get executed during the fiscal 21 even partially or if you can just help us understand the rationale behind the stock buyback. Thank you.

Well, I think we've you the stock is being undervalued obviously and really it depends upon the litigation that we're in our cash position is such thoughts. The old the old buyback program was coming to an end. And so we thought we would implement it and depending upon our cash position. We will start buying stock.

All right, while the Acquisitions are in play. Will you still be myself or you'd wait till the acquisition one way or the other, you know are either or Germany? I think we will we will probably wait until the litigation is over. But we we really hope to have the litigation over by the end of October.

Okay. Thank you.

And we will pause to allow any further questions to Q again that is star and one to register to ask a question.

It does appear that we have no further questions at this time.

Okay. Thanks very much operated and thanks everyone for joining us today. We look forward to speaking with you again in December.

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

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