Q3 2021 Comtech Telecommunications Corp Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to Comtech Telecommunications Corp, third quarter fiscal 'twenty 'twenty 1 earnings conference call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session at that time. If you have a question you will need to press the star and.
And your push button and phone.
A reminder, this conference is being recorded Tuesday June 'twenty 'twenty, 1 I would now like to turn the conference over to Mr. Jason Dilorenzo.
Comtech Telecommunications. Please go ahead Sir.
Thank you and good afternoon, welcome to the context Telecommute.
Communications Corp Conference call for the third quarter of fiscal year 2021 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.
The Companys 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 perfect.
Do you have and 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 and.
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.
Perform 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 on this call.
And today, we will be discussing the results for our third quarter of fiscal 2021 and <unk>.
Outlook for the full fiscal year.
Now to and just start this call by saying what I hope will be less words about COVID-19.
As you would expect from the news headlines around the World COVID-19, well clearly receding and the United States is still a challenge for certain international countries.
Normal operations have.
Not really yet resumed and international business travel is still almost impossible net.
Nonetheless, as you see from our announcement this afternoon, our operating performance of the third quarter of fiscal 2021 with very solid.
Third quarter net sales were 100.
And $39.4 million.
Adjusted EBITDA of $17.7 million.
And we look to a strong fiscal 2021, and we now estimate that fiscal 2021 consolidated net sales will be within a range of $580 million to 590 million.
Yes.
Our efforts to streamline our operations are really paying off and we continue to target adjusted EBITDA and the range of $74 million to $76 million.
Based on our strong pipeline and year to year date.
And this momentum.
We anticipated it.
<unk> book to Bill ratio for fiscal 2021 and excess of 1.0.
With positive signs of a post pandemic recovery continued overall demand remained strong and we have recently secured important contract awards and we're excited.
About our future.
And in all we continue to weather the Covid storm and we continue to see these clouds lifting.
Now, let me turn the call over to Michael Bondi, Our CFO, who will provide additional commentary about the third quarter of financial performance and our business outlook after that.
Michael porcelain, our president and CEO will provide an update on our total business then I will come back before opening it.
And the line of questions and answers.
Mike.
Thank you Fred and good afternoon, everyone as Fred mentioned, our net sales were 1.
$139.4 million in Q3, which is higher than what we achieved in last year's Q3.
Of the $139.4 million of net sales 79, 8%, which and the U S based customers with 22% to international customers.
Bookings for.
For the third quarter were $115.9 million and our consolidated book to Bill ratio was <unk> 83.
We finished the quarter with backlog of $636.5 million and when you factor in the total unfunded value of certain multi year contracts that have been awarded to.
Us, but which are not yet and our backlog we have visibility into approximately $1.1 billion of.
Future revenue.
Our gross profit percentage in Q3 of fiscal 2021 was 38% as compared to the 39, 2% achieved and the third quarter of 2020.
And the period over period change and our gross profit percentage reflects changes in overall product mix and significant increases in costs due to production delays minor supply chain disruptions lower levels of factory utilization and higher logistics and operational costs, resulting from the COVID-19 pandemic.
Q3 of fiscal 2021 also reflects a $2 million benefit from the recovery of historical excise tax paid.
Based on our expected level and mix of net sales for the remainder of fiscal 2021, we anticipate a consolidated gross margin percentage approximating 36%.
Were sent SG.
SG&A for Q3 of fiscal 2021.
It was $27 million or 19, 4% of consolidated net sales as compared to $32.3 million or 23, 9% and Q3 of fiscal 2020.
And Q3 fiscal.
<unk> 2021, we incurred $600000 of restructuring costs related to the shifting of production of many of our key satellite Earth station products from our existing Tempe, Arizona locations to a new 146000 square foot facility in Chandler, Arizona.
We expect.
Expect about another $1 million of such cost and Q4.
Turning to R&D, we spent $13.1 million and the third quarter or 9.4% of net sales.
Total stock based compensation for the third quarter was $1.2 million and amortization of intangibles was $5.3 million.
We continue to expect stock based compensation to approximate 11 million to $12 million for FY 2021.
Our consolidated GAAP operating income was $2.4 million and reflects $5.3 million of acquisition plan expenses, primarily due to.
To the April 2021 settlement of and acquisition related litigation and our completed acquisition of Uhm.
Our adjusted EBITDA was $17.7 million or 12, 7% of consolidated net sales for the third quarter of fiscal 2021.
Adjusted.
EBITDA in our commercial solutions segment was $15.9 million or 17, 4% of related sales.
And in our government solutions segment, it was $3 million or 6.3% of related net sales.
For fiscal 2021, using the midpoint of our consolidated net sales and adjusted.
Adjusted EBITDA targets, our adjusted EBITDA margin approximate 13%.
Now, let me talk about interest taxes, EPS cash flows and our balance sheet.
Interest expense was $1.5 million and the third quarter and we expect to finish the year with total interest expense of approximately $7 million.
Our annual estimated effective tax rate, excluding discrete tax items is expected to approximate 11, 5%.
On the bottom line, our GAAP net income in the third quarter of fiscal 2020, 1 was $800000 or <unk> <unk> per diluted share excluding.
Excluding.
Acquisition plan expenses restructuring costs, COVID-19 related costs strategic emerging technology costs, and a net discrete tax expense non-GAAP net income was $6.8 million or 26 per diluted share.
Cash generated by operating activities was $6.8 million.
For the third quarter, and we expect even stronger operating cash inflows for our fourth quarter of fiscal 2021.
Our balance sheet as of April 32021 includes $39.2 million of cash and cash equivalents and our total debt outstanding was $215 million.
Our current secured leverage ratio as defined in our credit facility was $2.7 8 times now I will hand, it over to Michael porcelain Mike.
Thank you and good afternoon, everyone.
We are pleased with our Q3 performance, especially given that during the third quarter, we continue to operate our business and what remains.
Remains a difficult operating environment.
The good news is that our employees have begun limited travel mostly in the United States that have started to return to the office in person demonstrations of our solutions are picking up and being scheduled for those such activity and the international market remains limited.
And slowly.
Picks up across our industry, we are seeing higher logistics and operational costs supply chain issues are becoming more prevalent as lead times for certain parts has significantly increased but that all said and these are good problems to have compared to the health issues of Covid now let me, let me talk more about our business results.
Commercial solutions segment net sales were $91.4 million. This quarter, we received orders aggregating $75.1 million, resulting in a book to Bill ratio of <unk> 82 for this segment.
We continue to see positive momentum and our public safety and location technology product lines.
Net sales during the quarter for this.
This product line were higher than last year's comparable quarter and reflect the benefit of incremental sales of our next generation 911 and location based solutions offset in part by the absence of 911 wireless call routing sales to AT&T.
As noted on our last conference call, we were awarded the statewide.
And on track valued up to $175.1 million to design deploy and operate next generation 911 services for the Commonwealth of Pennsylvania.
This contract was initially funded at $137.4 million, a $111 million of which was booked during our second quarter work on this contract has just.
1 and is expected to ramp up next year.
In addition, as discussed on our last conference call. This contract was awarded to US shortly after we announced the receipt of a $54 million contract to design deploy and operate next generation 911 services for the state of South Carolina, We are really pleased.
And with what we're seeing to date and South Carolina. In addition to this current contract.
Starting performance, we are seeing signs from the customer that additional work maybe on the way. We believe they have strong interest and our solar come call handling solution and we hope to make some announcements here pretty soon.
Obviously.
Began and Pennsylvania, and South Carolina contracts are important but don't let them overshadow other important contract awards, we received in Q3, including a $9.8 million dollar contract with a major tier 1 mobile network operator for a broad suite of new capabilities and services centered around virtualized applications.
Lee and 5 G products.
We received orders exceeding $3.8 million with a tier 1 mobile network operator for additional capabilities related to our virtual mobility location Center platform.
And $1.6 million next generation 911 services contract to provide solar comes.
Guardian call management solution to the Toronto Paramedic services, the largest municipal paramedics service and Canada.
We also received a $1.3 million contract renewal with a tier 1 mobile network operator to support messaging services and we received our first international <unk>.
Services contract with a leading tier 1 mobile network operator in Australia.
We continue to build out various situational awareness data products 491 customers and we are working on a number of exciting initiatives and a public safety cyber security area also I can say.
Is continue to stay tuned.
Now I will discuss our satellite ground station product line, where things do remain challenging but are looking better net sales and this product line during Q3 were higher than the comparable 3 months of fiscal 2020.
We benefited this quarter from a number of awards, including.
A contract valued at more than $3 million for Veeva, and traveling wave tube amplifiers or tw Tas to support and new high speed satellite network.
And order valued at more than $2 million or state of the art 500 Watt <unk> band high power amplifiers supporting a leading high throughput satellite.
Customer we received another $2 million order for rugged Ku band high powered Tw T H for U S military communications system and and.
And order exceeding $1 million for our Falcon and 50, K, a solid state power amplifiers for and.
In flight connectivity application.
And in order of.
Exceeding $1 million for X band solid state power amplifiers and block up converters for transportable military satellite communication system.
In addition demand for our Heights Technology solutions is strong and we recently received a multimillion dollar contract award from an international customer.
Let me also talk about our acquisition of <unk> networks, which closed during this quarter and which is receiving alkaloids across our industry.
As we have said before we believe you hps developed a revolutionary technology and it is transforming the growing very small aperture terminal market or VSAT market.
With.
Market for high speed satellite based network significantly growing we are excited to extend our product offerings to include their TDMA satellite modems.
The integration of <unk> into our satellite ground station product line and our commercial solutions segment is well underway.
And now that you HP has full access.
To our direct and indirect distribution methods, we believe that uhm sales will significantly increase from current levels over the next few years.
We are meeting with our customers discussing with them the benefits of our height solution and are you HP solutions and how our Roadmaps will play out.
Based on the feedback.
We have received to date, we have no doubt, we are headed and the right direction.
Overall, despite navigating 12 months of Covid and fiscal 2021, we remain optimistic and net sales and our commercial solutions segment will be slightly higher than the amount we achieved in fiscal 2020.
Now, let me turn to our government.
Government solutions segment, where sales were $48 million as compared to $56.8 million and Q3 of last year.
Bookings and our commercial and our government solutions segment came in at $47 million with a book to Bill ratio of <unk> 85 and <unk>.
As everyone knows period to period fluctuations and bookings are normal for this segment.
The most recent quarter, primarily reflects lower sales of global field support services and other programs with the U S Army offset in part by higher sales of our solid state high power amplifiers, and also our Tripoli or high reliability, electrical and electronic and electromechanical space components.
<unk>.
Last quarter, we announced that we received initial orders related to a new multiyear contract valued up to 235 points.
$235.7 million to provide ongoing system refurbishment sustainment services and baseband equipment to the U S Army and support of its secret Internet protocol router.
And then unsecured and and their protocol router access point or snap family of gradual ground satellite terminals.
And the third quarter, we received an additional $9.2 million of orders under this contract.
Other notable awards given to us during the third quarter include the following a $6.
And non dollars of funding from the U S government for a joint cyber analysis cost training solutions.
$6.2 million of funding to support the U S. Army's project Management Mission Command Blue Force tracking 1 program.
A 3 million dollar order from and overseas agency for the maintenance of.
5 and range tracking stations, we received a $2 million order to provide the U S. Marine Corp, with rugged baseband command and control modules for program manager light armored vehicles and.
And we received a $1.6 million dollar contract for RF microwave and solid state amplifiers from a major domestic prime contractor.
Down since we last spoke to you we are seeing changes with respect to short term prospects for our government solutions segment, specifically and April 'twenty, 1 and the U S government announced that it intends to fully withdrawal of troops from Afghanistan and by September 2021. This accelerated plan will result in lower revenues than previously anticipated for certain program.
So we participate and in addition, the U S. Presidential administration released its fiscal 'twenty..2 budget request. This request includes less money for certain legacy programs, but additional funding for modernization and new programs that we will participate on.
Overall, we believe these budget changes will benefit us.
Over the longer term, but it will result, and our government solutions segment revenues and a significantly lower amount and we achieved in fiscal 2020.
We are definitively seeing strong interest across the board for our recently introduced contact Comtech terminals and other new technology solutions that we are actively discussing.
Graham customers currently.
And the third quarter, we can that we conducted successful infield demonstrations, including our industry, leading troper scatter solution that we are currently providing to the U S Marines Ala.
Other military commands.
<unk> and the U S Army are pleased with what they see and have shown.
And with our shown strong interest.
In addition, as we enter into our fourth quarter and support of the U S. Army's network modernization efforts, we've been working to respond to a new proposal request related to the development of the mounted and mission command transport or MCT terminal, which is the successor.
Shown for the U S Army's Blue force tracking 2 program.
We estimate that there are over 120000 legacy DFT terminals across the army and joined services and and ultimate production contract to us could be worth hundreds of millions of dollars.
Over the years, we have been.
Suddenly <unk>, 1 sustainment services to the U S Army, along with other development and engineering type services and we believe that we are well positioned to meaningfully participate on this upcoming program.
In addition to the good prospects with respect to this new MMC T program, we are excited about opportunities.
With our new strategic partner.
As announced earlier today, we entered into a strategic technology partnership with <unk> to broaden its network of antenna terminals through interoperability with our SLM 50, 650 day program.
And the 56 B as a U S Army forces strategic command.
Wideband Global Satcom modem that is used for critical commercial backhaul as well as government and military applications. It's fully compliant with key military standards and complies with and supports Phipps, 1 and 42 certified encryption.
This <unk> partnership expands our solution set and capabilities.
<unk> offered to our government and military user base and will benefit both our government and commercial solutions segment.
Now I'm turning it over to Fred I do want to share with you. Some good news with respect to emerging satellite opportunities that so many of you have asked us about.
As disclosed in.
Men tend to during this third quarter, we incurred $300000 of strategic emerging technology costs for.
And for next generation satellite technology, which was used to advance our solution offerings to be used on new broadband satellite constellations.
As many of you know there was widespread industry.
History discussion of next generation satellite technologies that is likely to be used and the thousands of new Leo MEO and even geo satellites expected to be launched over the next few years.
These new satellite constellations at their core are being developed and deployed to provide high quality high speed.
Broadband Internet access to over 3 billion people across the world and are intended to meet demand for unprecedented data transmission from smart devices.
As stated in a variety of industry publications and the investment cycle is well underway and we believe attention is now turning to.
And to equipment that we provide including ground station equipment, XY antennas modems and amplify.
In order to meet this unique and emerging need certain technical capabilities need to be expanded and efforts must be encouraged to decrease size weight and complexity.
This market is new for us.
And so during the quarter, we made an initial small investment to jettison our business plan.
Although this internal R&D investment costs was small we do continue to evaluate this new market and in relation to our long term business strategies and we may incur additional cost over the next 12 months with that all said I am very excited to reported.
<unk> at the start of our fourth quarter, we entered into a multiyear agreement, enabling our customer to potentially order and hundreds of millions of dollars of our next generation satellite Earth station technology.
Shortly after signing this agreement we received our first order valued at more than $13 million to.
And customization on behalf of this customer work on these efforts has commenced immediately I.
I do hope that you understand that due to competitive reasons and non disclosure agreements, we can't say much more about it.
This is a very strategic win for us and I want to extend my thanks for all the hard work of our team members.
And make sure to make that made this happen.
We expect to fully perform and this initial development work and are very optimistic that future orders will come our way.
Now I will turn it back to Fred who will provide some closing remarks.
Thank you Mike.
And as I mentioned.
Obviously I am very pleased with how our business is performing during this epidemic.
As we enter our fourth quarter I believe we are on track for a strong finish to fiscal 2021.
And I'm also very excited about our prospects going into fiscal 2022 include.
Members are strengthening positions on the large developing near term opportunities that Mike just mentioned.
Even our business outlook because of our business outlook. Our board of directors has declared a dividend of 10% 10 cents per common share payable.
<unk>, 20th 2021 to shareholders of record at the close of business on July of 'twenty, 1 'twenty 'twenty 1.
We continue to believe that our dividend program.
It's still a great way to return some capital to our shareholders as we look to grow our business now.
Now I would like to proceed.
To the question and answer part of our conference operator.
At this time, if you would like to ask a question.
The star and 1 on Opex.
You may remove yourself from the queue.
And by pressing the pound key.
Again that is star and 1 to ask a question.
We will pause for a moment to allow questions to queue.
And it looks like we have a question from Joe Gomes from Noble capital. Your line is open. Please go ahead.
Thank you good afternoon.
Hey, Joe.
So I know you.
And you can talk a whole lot about the new multi year agreement.
But you did mention you've got our first order of 13 million and I was wondering you might be able to give us a little.
Color on.
How long does that last you know, what's the timing for that 13 million and what's the kind of.
And it would be the next steps and the process.
Once that contract the $13 million is completed.
Sure well you know as we discussed in our 10-Q.
We're making customization to our technologies. So I mean, obviously, it's a development contract.
And that we first got and you know as.
As we say and you're right I can't say much more but we think that there is a potentially hundreds of millions of dollars that.
Once that customization is done.
And that's what we expect.
Okay. Thanks on that.
And you kind of went over the Pennsylvania, and South Carolina, and 911 opportunities I believe there was another 1 out there that that you were chasing maybe you could kind of give us a little more color on what else is out there right now that youre looking for that might be.
In the South Carolina, and or Pennsylvania type of size.
Yes, I mean theres really.
Say at this point, there's probably 2 contracts and we will probably named named them since the information out there is is pretty public at this point so.
Waiting for Ohio.
To fund.
Probably a triple million dollar contracts of north of 100, and some odd million dollars is out there and we would just sort of waiting on the funding for that particular contract and when we're really waiting on and award announcement, which is more competitive in the state of Arizona and those are very.
Near term opportunities and that's pretty much out there for public consumption.
Okay. Thanks, and then 1 last 1 from me and I'll get back in queue.
Bookings and in both of the business segments, where we're at a 0.8.
8.5.
<unk>, you mentioned and the government solutions that it's normal to see some fluctuations there and.
The commercial side anything.
Out of the ordinary there or is that just again some more of just your normal fluctuations.
And in and business for the quarter there.
Yeah, I mean, obviously in Q2.
It's lower than Q2, because we had that large.
Pennsylvania booking, but our Q3 bookings was actually higher than what we achieved in Q1 for the commercial segment. So you know I would just say, it's normal fluctuations up and down and obviously the international market.
It is is difficult right now and so those will eventually come at some point.
Great, Thanks, and ill get back in queue.
Okay.
Our next question comes from Chris Quilty from Quilty analytics. Your line is open. Please go ahead.
Thanks, Mike I wanted to just follow up on that constellation and order I don't know whether you can provide the detail but are you providing.
A point solution I E amplifiers or baseband or are you, providing a comprehensive solution for this customer that would range from the gateway to the end user terminal.
Well the best answer I'll give you is that we're going to ride the wave of what's happening and in the industry and and I can only referred to it as next generation satellite technology, but I'm not going to get into the specific products.
That where we're putting forth, okay, and you're not building satellites at least.
[laughter].
Alright, and you could get I.
And I agree with you on that 1.
I got something from you.
Shifting over real quick to the the Heights product line, you said Youre seeing positive momentum just general business trends that you're seeing there in terms of.
And markets, where domestic and international are coming.
Coming back I know, you've got some you know like oil and gas that that tend to be pretty cyclical.
Video has moved and cycles.
Any color you can give us.
1 other thing thats different than the last time I.
And we've always we're a big believer that data transmission.
And then with needs are going to increase and that and certainly you saw an acceleration of that during the COVID-19 pandemic.
The award of height Spud this international customer again multimillion dollars I mean, it was it's a very prominent awards.
Award and that part of the World and.
And we actually think that that will lead to additional height sales.
And there and you know at the same time, you know our UHT network solutions and best in breed buy by far and obviously you know that we've had some in depth and experience with satellite companies over the last day.
2 years and you.
Uhm.
Well position and given the growth that's happening with <unk> and <unk> around the world with mobile network operators and we thank you HP and our high solutions is very very uniquely positioned and back.
And.
Great and.
Shifting over to the government.
And segment of the business, if I read the language correctly. It sounded like there was a significant Afghanistan component.
To the the guide down you know and the guidance for the government segment can you can you size that for US is that stuff that just goes away because troops.
Or does it get reallocated somewhere else and show up later.
It's more what you said in the earlier part of your comment look most of that most if not all of the change was related to the withdrawal of troops with Afghanistan and.
I think we've always said publicly if you have a few troops and.
They're not stand or and a particular area and easy communication system here. The plan is to fully withdraw troops. So I mean, you're talking about additional dismantling of and infrastructure that was out there. So we.
We don't think that that's coming back in.
And 2 you know to our thinking camp for you unless there's another.
Ground action or something unexpected.
And may happen. So those those program changes were announced by the U S Presidential administration during the quarter. So we don't see that revenue coming back at the same time, we were working through the budget and the Best example that I can point to is look it was certainly legacy programs.
And that this administration is going to not fun, but at the same time. They are funding next generation systems, such as the Blue Force tracking successor program. So I mean, you can see that I mean, the white paper was out there. We're responding we're responding to this finally after so many years.
I've told people.
And the phone don't even ask me about Blue force tracking 3.
And I have something to say then you'll know what I'm talking about it because it's real and we are responding we have some pretty good teaming agreements within the work.
I'd like to think that the government will get the band back together and BMT 1 was an extreme.
People saw successful program he sold $1.5 billion worth of equipment.
Under the <unk> program.
Take half of that you know in this next generation cycle. So we're very optimistic that the successor program to the <unk> 2 program 2 and a half program.
Streaming you could call it will happen and we're going to put forth our best foot forward to the government and we'll see what happens, but that's an example of where and the outside of the short term noise. The long term prospects look dynamite.
So technically I'm not asking a question about it because you brought it up.
But.
And my Gosh.
Is there a determination at this point in terms of frequency band.
System might go so much of the satcom capacity that that's being brought online both Geo and Leo is K a ban.
Or are we.
Migrating towards military only X.
And or staying and K U.
I think the way I would describe it as look they certainly want backward compatibility, which is something that comtech is uniquely positioned to provide as it relates to some of the aviation type of equipment Thats still using our equipment today, So and obviously, we'll have L band we've previously.
And so a couple of years ago, a partnership with Iridium and I think that you'd be looking to see the iridium out there and yeah. You may see some X band out there. So I think the governments idea is they don't want to be stuck with 1 particular satellite ban or 1 particular satellite system.
They want the ability that if 1 part of the system gets jammed.
Jammed it to seamlessly move over to another and within the same what isn't.
And the same product so.
We have that capability to have multiple waveforms and multiple modem technologies and the same transceiver.
Alright, and I will do a final question on.
Now next Gen 911, a lot of money being thrown around by the government. Nowadays obviously the infrastructure Bill hasn't made its way through but.
Any indications that you are seeing that there might be additional money set aside for those types of systems.
Everyone's talking about and crush so.
I guess, we agree with the philosophy, we hope it happens and it's a question of where that funding winds up some states I think it's fair to say are waiting to see bread and state those are kind of announced that their own funding. If they can get the funding from the federal government. So that's and I think there's a little bit of pause by some states, but at the same time.
And there are other states that do not want to wait their local constituents want to move forward, Arizona as an example of it Ohio as an example of it we saw it with Pennsylvania, we start with South Carolina. So I would say, it's all good news either way if theres more funding it and what we should benefit from it.
Great. Thanks, guys.
Our next question comes from Us.
Martin <unk> from Citigroup. Your line is open. Please go ahead.
Great. Thank you.
And just a question I mean, given all these initiatives that you're talking about.
And I hope and think about the growth drivers and so net even.
And growth.
Good day numbers for 'twenty, 2 as it relates to the government and commercial solutions.
Should we expect given the significant drop in government and of course, hopefully growth within fiscal 'twenty, 2 but what kind of levels or are we talking about can be come back at.
And point to where they.
Relative to 'twenty, given all the various initiatives and help to meet the <unk> opportunity materializes and as well.
Look I think the DFT opportunity is probably you know again and thats outside of the initial work that we'll be doing you know assuming we win this initialize.
Initial opportunity.
Net revenue is really going to be 'twenty, 3 'twenty 4 type type revenue.
And that it's going to take some time might it be a booking in 2022 in the hundreds of millions well, yes, that's a possibility I mean, the government is giving all signs right now that they're moving.
And sitting here in the month of I think it's June.
And it's it's just way too early for us to give you some some clarity here.
We normally don't give our guidance to September I think look the 1 thing I can say about the government yeah. It's not I don't think it's going to grow next year.
And as what I would say based on what we see but and again, it's too early to tell as the programs come in and we if they come in on the earlier side, Yeah, we might be able to do that but I think given the Afghanistan, Afghanistan withdrawals and what we're seeing on the budget side I think the government business.
As a segment it will be tough to.
Tough to grow <unk>.
As I say this year and.
In terms of our commercial business I think yeah, I think we're all signs are positive.
And the growth and international comes back you know given sort of the midpoint of your guidance and obviously that standard GAAP.
And then those who is down high single digit growth and your next year for the commercial.
Oh Oscar.
Yeah, well familiar with and Covid yeah.
Yeah.
And that's possible, we need and international markets to come back and and you know it should it should.
Good should come whether or not it's going to occur and the first 6 months of 2022, it's too early for us to tell you.
But I think I think we eventually as youre seeing and in the United States. The market is starting to turn.
Unfortunately, you look at areas of the World like India, I mean, India is close.
You know.
And just theres pockets of the world right, now where nobody's doing anything and.
It's a lot different than what's happening and the U S.
And Canada.
Surprisingly so we have we have business operations up there and it's just shut down so that'll being said you know when you look at this thing.
They're on a 12 to 18 month basis.
Theres very positive signs and our satellite Earth station business. There's this new contract that I mentioned to you.
We're talking about hundreds of millions of dollars and you know when that comes.
It will come after we think the development.
And on part of the program, but we have to kind of work through that and what's the competitive dynamic there.
I'll, let my competitors share are there aspects to it I can't I can't comment.
Okay and.
And anything if you can talk about like you know how we should.
Element about margins here across the 2 segments.
And if government kind of means and there may be no growth, but what kind of margins that we now expecting and that segment I mean, clearly is it going to take.
Take them down relative to where we were before but.
But of the 8.9%.
And you think mark and yeah.
Yeah, I think I think we.
I think our focus for this year was to get higher than 10% adjusted EBITDA margins. When we started the year I think.
Excuse me as we will as we've witnessed with this.
Shut and change by the by the government.
The withdrawal of the troops it is going to impact our goal and I don't think we're going to do 10% adjusted EBITDA margins in the segment, so maybe closer to 8 or 9% I think when they're not true. This year. So I think as again as I look forward to next year I'd like to get us back to the 10% that's the target.
Our commercial segment.
Yeah.
We have done pretty well.
Each of the first 3 quarters, we've done north of 17% adjusted EBITDA margins.
Start getting incremental volume on some of these large opportunities that we're talking about it.
It will come.
You know normally when you do development work.
Such as customization or customer funding type of R&D margins on those initial programs are relatively low you get the benefit of production and you know that's a little ways off but again, we're talking very large amounts of hardware coming.
Great. Thank you.
Our next question comes from Mike Latimore from Northland Capital. Your line is open. Please go ahead.
Hi, this is other.
And behalf of Mike Lattimore.
Could you tell me are you facing any component shortages and yogurt.
And the business environment and if so how much impact is the timing on the gross margin or revenue.
And you sure we we are experiencing.
What I would call industry wide shortages, we're not seeing anything specific to us and it's more and the lead time.
The issue right now, we're not seeing unavailable and availability of parts were.
And factory is.
And went on fire, it's just simply delays.
And getting parts. So you know some of that and results and inefficiency and our facility as we just we build the product and we have to wait until we could deliver it till we get the parts, but it.
It has negatively impacted our gross margins I'd prefer not to tell you you know a specific dollar amount, but it is impacting our margins, which we hope will go away but.
We're definitely seeing increased parts and and the mid.
Similar to what Youre reading about on the industry.
Free for just another example, and freight cost and some areas of the world have tripled.
And you know we.
We obviously just need to those things, we obviously need to see those come down when you hope.
We're not going to experience the cost and some parts of the world that we are seeing right. Now we think that's part due to the shutdown on availability of labor and certain parts of the world, but yeah.
It's real and it's out there.
Alright, alright and.
And my next question would be the Pennsylvania and 911 deal.
Can we expect it to start contributing to the revenue from <unk>.
Yeah, we will we are expecting from Q4 revenue from our Pennsylvania contract, but not a whole heck of a lot, it's really going to turn on and next year.
Alright. Thank.
Thank you.
Okay.
Okay.
Once again net of star and want to ask a question and thank our next question from Kyle Mcnealy Jefferies. Your line is open. Please go ahead.
Hi, This is Kyle on for George and Thanks for the question I wanted.
Alrighty and you could parse through the updated guidance for the full year, a bit more and what's implied for Q4.
How much of that guidance is now driven by the inclusion of U H P revenue and that for the step down versus the previous guide for the full year is that all related to the U S government and kind of the budget updates there.
And see if there are other puts and takes to consider and other parts of the business.
Hi, Kyle in terms of the first question with Uhm I would say, it's still a nominal amount in the year.
In terms of Q4.
Your second question, Yes, it was mostly and the government segment and.
There or that it was driven by the recent changes that Mike was referring to earlier.
Okay great.
And this is 1 kind of piggyback on the logistics constraints comment, but you mentioned kind of impact on gross margin, but is there any way you can frame you know what the risk may be 2 net revenue if you.
You see.
And currently with the supply chain issues like is it <unk>.
Percentage of revenue a couple percent.
Or not really that much of a headwind to revenue as you go through the next couple of quarters.
Yes.
I think the way I would best characterize.
The impact to let's say the rash.
The difference here is really not on the revenue side, but probably on the margin side, so within our guidance number.
And we're thinking it's going to be somewhere between 74, and and 76, if if the component cost.
A parched continued inquiries or they don't dissipate and when we might we might be on the lower side of that 74 million.
But depending on and that's how I would characterize the impact it's not we don't necessarily see it on the revenue side, it's really on the cost side, we're seeing it.
Alright. Thanks, that's helpful and 1 last 1 from me. This is regarding the timing and outlook of U S. GAAP sales.
With the budget changes and associated headwinds.
Wins that you talked about are they persistent.
And through 2022, which seems to be the natural conclusion and you also mentioned the various nextgen programs and you talked about the BMT 2.1 but I'm sure there's others and wonder if you can add anything in terms of the timeframe of those and when they will be positioned to come in are there any.
And that could be as early as impacting 2022 or are these all kind of 2023 and beyond.
Yeah.
It's a mixed and it's a mixed answer.
You know look we have these like would be a T..3 I guess, which I have to start learning the new acronym which is and the.
And the 10-Q, but the debate.
Sweet program.
It's it's there and it's going to be and initial development program that will take some time to work, but the government has indicated that shortly after completion of that work day intend to issue production Awards and so you know you simply do the math and you're talking about hundreds of millions.
$2 of production available so we could be in a situation where none of that occurs in 2020, 2 or we get big orders and that's a twenty-three revenue or we get the revenue and 22. That's why we always say, it's just too early especially with the B F T..3.
Program, a comet is another.
And <unk> available.
Comment.
We were expecting again earlier and this year some from orders to come in by Q4, and this is a sort of a quick ship product.
So with the funding situation still not being fully clear yet and we're not expecting any orders for the product and Q4. So we're not we're thinking to your point, it's going to carry over a little.
Other rigs in fiscal year, 2020, 2 until things get sorted away, but if comment orders start to come quickly. Then you know then that will be a big benefit.
To the bottom line I mean these are these are.
Hardware products that we make internally and to get good margins and we're seeing.
A bit into very strong interest both from the U S government and foreign customers.
Our total scattered program is another example, right now you know we've been working with the Marines with the program that we won with our partner.
People have asked us time, and time again, well do you have and opportunity.
Barry you go back to the U S Army and we said we will have something that valuable and we have something to tell you. The thing that I can tell you right. Now is we've now demonstrated the solution to the U S. Army just very recently so we believe that there is a lot of upside for us.
And our government segment, despite the decline in revenues that we.
Unity to go today.
At the same time, it's just too early for me to tell you, but when I sit back and I look at it and say you asked the question earlier, you kind of think our government segment it'll be flat, it's going to be tough to grow next year, when I think about everything.
And we'll see we'll see we'll see what happens it's going to come down to funding and.
And whatever the government does we'll get clarity over that over the next few months and we'll we'll give you an update as we as we learn.
Okay, great. Thanks, a lot.
Once again net of star and 1 to ask a question.
She.
And it appears that we have no further questions. At this time I will now turn the program back over to our speakers for any additional or closing remarks.
Okay.
And with today's call. Thank you again for joining us today, and we look forward to speaking with you again in September.
This does conclude today's program. Thank you for your participation you may disconnect at any time.
Yeah.
Amber.
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