Q3 2022 Comtech Telecommunications Corp Earnings Call

June 9, 2022

Ladies and gentlemen, thank you for standing by welcome to Comtech Telecommunications Corp, third quarter fiscal 2022 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 the prestige star and one on your push button. So.

As a reminder, this conference is being recorded Thursday June nine 2022.

I would now like to turn the conference over to Mr. Robert Cambiata of Comtech Telecommunications. Please go ahead Sir.

Yeah.

Thank you and good afternoon, everyone welcome to the Comtech Telecommunications Corp Conference call for the third quarter of fiscal year 2022.

With us on the call today are Michael D porcelain, President and Chief Executive Officer of Comtech, and Michael Bondi, Chief Financial Officer.

Rob Samuels complex head of Investor Relations.

When we proceed let me remind you of the Companys Safe Harbor language.

The information presented in this call will include but not be limited to information relating to the future performance and financial condition of the company.

The company's plans objectives and business outlook, and the plans objectives and business outlook of the company's management.

The company's assumptions regarding such performance business outlook and plans are forward looking in nature and involve significant risks and uncertainties actual results could differ materially from such forward looking information any forward looking statements are qualified in their entirety by cautionary statements contained in the company's Securities and Exchange Commission filings.

Now I'm pleased to introduce the President and Chief Executive Officer of Comtech, Michael porcelain, Mike.

Thanks, Rob and I should also say welcome aboard.

I hope that everyone on the call has had an opportunity to review this quarters investors.

When I talk about our business in detail and offer a candid assessment of the road ahead for Comtech before starting the substantive part of our earnings conference call I want to remind everyone that in Q2, we changed the format and framework of our quarterly earnings announcement from our press release to a shareholder letter in the past we have traditionally issued a quarterly earnings press release that some.

<unk> comparative financial results highlighted a few contract wins and included a quote of two for management.

The shareholder letter format was a better way to communicate with our shareholder base and analyst and provide perspective shareholders a better way to learn more about us I also thought it provided a good forum to share insights into my thinking and the way I intend to lead Comtech. Since then I've appreciated the feedback we received from investors and analysts almost all of them.

Overwhelmingly liked the new format. Some of the feedback we received was that since the shareholder letter was substantive we should allow a bit more time between its release in our earnings call. So we've taken that into consideration, which is why today's close at five P. M. Eastern time, rather than 430 P M as usual time.

Also it was suggested to us that this significantly shorten our prepared remarks and get to the question and answer portion of the call quicker we agree with that suggestion. So our prepared remarks on this call will be a lot shorter than normal.

As we start let me Echo the point I made towards the end of our new Q3 Investor letter.

Hard not to be affected by the emergencies disasters and conflicts that confront us everyday unexpected events demand our attention and response and part of responding to them effectively means giving the right people the best information as quickly as possible at a very basic level. It highlights just how important failsafe communications and connections.

For our part we want to Comtech is continuing to do what we've been doing for decades, ensuring that all of our products and services work for our customers every time all the time no matter. The conditions context is the company that connects people when it matters, most and right now I'd argue that failsafe communications are as important as they are.

Ever been now, let's talk about our initiatives and updated guidance. This continues to be a transformative time at comtech, we like businesses everywhere are confronting one of the most difficult operating environments in memory as the global economy struggles to find its footing amidst the pandemic geopolitical conflict surging inflationary pressures and some.

Fly chain disruptions.

Disruptions.

Five months as CEO I've been dealing with these issues, but I can relay that we are making demonstrable progress in several initiatives vital to the company's future successes. These.

These strategic initiatives include expanding our talent pool to bring fresh ideas, leveraging our market leading positions to capitalize on new multi year investment cycles, increasing companywide collaboration to exploit emerging opportunities and refreshing our corporate branding.

We are also assessing what product lines, and reviewing M&A and strategic opportunities to establish priorities and determined appropriate capital allocation.

Our team is energized by the exciting trends and opportunities visible on our core markets and we believe context technologies and customer relationship position us to capitalize on them.

Long term prospects for our business are strong the near term economic environment promises to be challenging right now the business challenges, we face appear to be a combination of near term supply constraints and timing issues importantly, none of them appear to be a function of softening demand in fact, and as I'll talk about shortly given our growing funnel.

I believe the stage is set for sustainable multi year growth.

Given that the economic backdrop is more uncertain than it was earlier in the year ive become more cautious with regards to our outlook and are adjusting our financial targets for fiscal 'twenty. Two as follows Q4 fiscal 2022 net sales are expected to approximate $123 million, resulting in expected fiscal 'twenty two net sales to approximate.

$482 million Q.

Q4, adjusted EBITDA is expected to approximate $11 5 million, resulting in 2022 EBITDA of approximately $38 million.

This updated guidance reflects incremental research and development expenses and the removal of several identified and viable opportunities in both our commercial solutions and government solutions segments that we no longer expect to occur in Q4.

Inflation remains a big concern and in some cases, we are seeing component price increases from 10 to 20 times, what we would consider normal we've been successful in some cases to work with our customers to pass along some of these increased costs, but we've had customers pushed back given their own challenges.

The conflict in Ukraine continues to have significant repercussions for our business. We continue with our dialogue with the U S government NATO allies and the Ukrainian government with respect to a formalized purchase of neutral, but scattered technology systems for Ukraine.

Given their priority for weapons system spending as opposed to communication spending right. Now we continue to expect no meaningful bookings or sales for the rest of fiscal 2022.

With regard to Russia, we are assuming no new sales for the foreseeable future and like all of our companies. We are continuing to shift certain commercial software development and related support activities conducted in a Russian office co locations outside of the country. Our updated guidance reflects additional expenses of roughly $1 5 million for the quarter or six.

On an annual basis associated with shifting these development resources.

What were you doing a comtech in the face of these challenges is remaining focused on execution, whether that's making the key investments in our products people and facilities that reflect and amplify our long term strategy or ensuring that on a day to day basis. We are doing everything we can to accelerate sales win business ship products and protect our margins while we.

Continue to work to drive improvements on a day to day basis, My greatest optimism for our business is grounded in what we see as a long term secular investment cycle in our end markets.

As part of my assessment of the business I've been personally speaking with our customers and industry experts in both our satellite and 901 public safety space.

Those conversations has convinced me context investments will pay off over a period that will last years in the roughly five months since I took on the role of CEO I've been making the changes necessary to drive day to day performance, while simultaneously ensuring comtech is in the best possible position to capitalize on the long term opportunities of our markets present.

As we execute on these strategic initiatives I believe we are on a three to five year journey, where we will see meaningful progress along the way and creation of shareholder value. So far I am incredibly proud of the work the entire Comtech team has done these past five months, we've delivered sequential quarters of growing revenue gross margin and adjusted EBITDA.

We've done this despite fast changing markets.

That is itself transforming starting with our people.

Key contact strategic initiative is to build out leadership and expertise in every area of our business and that's exactly what we've been doing.

I want to call out a few of the folks we brought on board first during the quarter, we welcomed Maria hidden as our new Chief operating officer.

<unk> is a true operator, and deeply experienced and overseeing multiple manufacturing and engineering organizations across the globe.

Another key addition for us, particularly in the context of my commitment to improve shareholder engagement and communications as Rob Samuels, who joins us as vice President of IR and corporate Communications, Rob is on the call today and will become more prominent and visible as time goes on.

We also just announced that Tim Jenkins was appointed President of our safety and security technology product group effective June one.

Tim has extensive experience in the 911 business and I look forward to his leadership and contributions to our business.

Further we strengthened the leadership team of our U S. Based satellite focused business line with the appointment of John <unk> as our new divisional Chief operating officer, and Bob Pescatore and general manager of digital products. Finally, we recently welcomed Ken Peterman as a new independent director to our board Ken's career spans over four.

30 years in the defense sector and he is unparalleled credentials across a wide array of markets in both commercial and government satellite systems.

These additions are part of a larger process that I announced at the beginning of the year to ensure we have the right team in place that context.

My goal is to ensure that our strategy the organization product portfolio, our board and talent deployment all come together I believe with the right people and strategy. We're looking ahead to a bright future underpinned by investments in our company and strong partnerships with our best customers. For example, just a few weeks ago.

At the request of the U S. Army, we conducted infield demonstrations of our troops kind of equipment in Florida for both U S NATO and Allied government customers. The demonstration consisted of end to end data communication links showcasing our small medium and large group of scatter terminals.

From what I saw firsthand no one in the world can do what we do in the worlds of our potential customers. These demonstrations vastly exceeded expectations and I believe there are long term opportunities for our <unk> solutions here.

We've also been working closely with a number of our current and potential customers and making strategic R&D investments to Corey or enhanced designs for new applications of comtech year or to meet emerging requirements. Our customers know that comtech has 100% committed.

To devoting the resources necessary to forge durable long lasting partnerships.

A good example of such partnership is evident in the continued expansion of our role as a key vendor for our satellite network project undertaken by the Indonesia Ministry of communications, providing critical communication coverage for Unserved and underserved communities across Indonesia. It may be one of the worlds largest satellite networks in the world almost all of the connect.

Securely with contact equipment.

We take this ongoing partnership to be a validation of our technology and strategic commitment to gain market share in the global VSAT systems and solutions market, while <unk> infrastructure receives a lot of attention. The fact is there is a huge unmet need around the world to provide cellular cellular backhaul for legacy <unk> LTE networks.

I like the one in Indonesia.

I believe we have the right people and products in place to be winners in this market.

In our Nextgen 911 public safety business, we were awarded a small service contract during the quarter to provide our Silicon Guardian call management solution to the London, Ontario Police services. The London Police service is our latest customer in the southern Ontario region, joining the Toronto Paramedic and Toronto Police service.

Both of which also recently awarded contracts to Comtech and as everyone knows we are performing significant statewide work in Washington, Pennsylvania, Massachusetts, Arizona and South Carolina.

Hopefully it is clear that the contact here. Despite the challenges we face is performing well and demand for our solutions remain healthy and growing.

Let me now turn the call over to Mike Bondi to discuss our financial performance in more detail and I'll come back and offer some closing remarks.

Thanks, Mike for Q3 fiscal 2022, we recorded a $122 $1 million of consolidated net sales of which $88 1 million were reported in our commercial solutions segment and $34 million were reported in our government solutions segment.

Of the $122 1 million of consolidated net sales, 72%, which is a U S based customers, including 23% to the U S government with the remaining 28% to international customers.

Compared to the year ago quarter, our consolidated Q3 fiscal 2022 net sales declined $17 3 million.

Or 12, 4%, a large majority of which related to lower revenue in our government solutions segment, given the impact of the withdrawal of U S troops in.

In Afghanistan last summer and the impact of the more recent Russia, Ukraine military conflicts, creating geopolitical uncertainty in Europe on previously anticipated orders.

Gross margins were 38, 2%, reflecting slight but sequential improvement from the 38, 1% we achieved in the second quarter of fiscal 2022 and 38%.

Percent, we achieved in the third quarter of fiscal 2021.

This improvement primarily related to a more favorable product mix during the most recent quarter as well as a lower provision for warranty obligations, partially offset by cost increases in raw materials electronic components and labor.

Inflationary pressures are real and do not seem to be going away anytime soon while difficult as it may be we have initiated conversations with customers about price increases to reflect this and to protect our margins.

Our selling general and administrative expenses of $27 6 million or 22, 6% of sales reflect tight labor markets and our decision to continue to invest in both existing and new talent SG.

SG&A cost during the most recent fiscal quarter also include $1 6 million of restructuring costs to move and streamline our operations.

SG&A expenses in Q3 of fiscal 2021 with $27 million or 19, 4% of sales.

While we have been prudent we have been investing.

While we have been prudent we have been investing in our future and we will continue to do so this includes making significant capital expenditures for two new high volume technology facilities and building out cloud based computer networks to support our previously announced <unk> 91 contract wins for the states of Pennsylvania, South Carolina and <unk>.

Arizona.

Capital investments for these and other 2022 initiatives are expected to approximate $30 million with related cash outflows now expected to be approximately $25 million in.

In fiscal 2022.

Of which $14 $4 million has been expended to date.

On the R&D side, we continue to make long term investments R&D expense in Q3 fiscal 2022 was $14 3 million or 11, 7% of sales and as discussed above included.

$900000 of strategic emerging technology costs R&D in Q3 fiscal 2021 was $13 1 million or nine 4% of sales.

Operating loss in Q3 fiscal 2022 was $600000.

Flex $1 6 million of restructuring costs.

$900000 of strategic emerging technology costs, and $100000 of incremental operating costs due to the lingering impact of COVID-19.

As a result of these and other costs, our GAAP net loss attributable to common stockholders was $1 7 million and.

GAAP EPS was a loss of <unk>.

<unk> excluding.

Dividends to preferred stockholders are GAAP results would have been breakeven.

Our GAAP results also reflect $5 3 million of amortization of intangibles.

$2 5 million of depreciation expense.

$1 1 million of amortization of stock based compensation and other costs, such as interest and taxes.

Excluding former CEO transition payments and costs associated with our settled proxy contest net cash provided by operating activities for the nine months of fiscal 2022 would have been $21 9 million.

During Q3 fiscal 2022, adjusted EBITDA was $11 2 million or.

A 14, 3% sequential increase from Q2 of fiscal 2022.

As a percentage of net sales adjusted EBITDA was nine 2% an improvement from the eight 1% we achieved in Q2 of fiscal 2022.

Our Q3 fiscal 2022, adjusted EBITDA does reflect a decrease from the $17 7 million or.

Or 12, 7% of net sales we achieved in Q3 of 2021.

This decrease from the year ago period, primarily reflects the impact of lower sales in our government solutions segment that were largely driven by significantly lower sales of global field support services and advanced VSAT products as a result of the U S. Government's April 2021 decision to withdraw our troops from Afghanistan and other program changes with.

That I will hand, it back to Mike to wrap up the call.

Okay.

Thanks.

Last quarter I spoke about how things were changing our content and I hope that you our shareholders can see that we're making important strides in building the company for the long term, even as we hold our own in a challenging environment.

If there's one thing to take away from this call since that investor should not conflate timing uncertainty with underlying demand dynamics knowledgeable and long term investors will know from experience that our business, particularly as it relates to government and government agency contracts. It is difficult to time with precision.

Policy procurement and approval processes, all combined to influence execution and delivery dates.

Headwinds identified in our conference call here today and in our letter our plainly evident in daily newspaper headlines and have created timing issues with regard to booking certain orders along with a familiar supply chain headaches, which hopefully will be going away soon.

But our headline is this the demand side of the equation is healthy in both of our next generation 911 and satellite ground station businesses. Our pipeline remains strong and we are excited about the opportunities before us are government backlog is up from last quarter and overall demand for our satellite Earth station products at <unk>.

Solid and our backlog for these products is beginning to grow we have visibility into roughly $1 $2 billion in revenue.

Our investments in products facilities and people are paying off and will continue to drive our performance as we move forward.

To be clear.

Let me just at the beginning despite these deeply uncertain times, we're confident in the importance and the value of the markets, we serve and the way we are servicing them.

Thank you for your time and attention and now let's take some questions operator.

Okay.

At this time.

Your question Please press.

Star one.

One on your Touchtone phone.

You may withdraw your question at any time by pressing the pound.

Once again.

Okay pushback.

And that's first to George Notter with Jefferies.

Please go ahead.

Yeah.

Hi, guys. Thanks, very much I guess, maybe I wanted to start out asking about the full year expectation I think you took about $40 million on a full year expectation and I know theres a lot of moving parts here, but could you just walk through kind of your view on.

What pieces of revenue you thought were going to fall in Q4, and how they shifted.

It gives us an attribution of that delta on on expectations.

Sure Hi, George This is Mike Bondi.

When it came to the fourth quarter.

Let's start on the commercial solutions segment, and we did have some 901 opportunities that we have been tracking for some time now we've been talking about Ohio is one example, where we were thinking the funding was going to get approved and just based on where we think the vote is at this point in time as we said, we think that thats going to fall out in the.

The fall of 2022.

And.

That was going to be sizable bookings that we were expecting.

Another smaller order was for another 911 application for a new customer in the southwest and there that was another multimillion dollar type opportunity that again, we've been tracking for some time, but just given the delay in their vote to get the project approved we just thought it was prudent to push that into late.

In the quarter and because of the timing we're still expecting the award. We just don't think we will be able to generate any revenues in this fourth quarter.

So those are like two main themes in the 91 space.

Also as we disclosed.

Had some.

Price increases from vendors, which we've tried to pass onto our customers. We had one customer in the Asia region.

And the country was the Philippines.

And there we told them about the vendor price increases.

And ultimately the vendor.

He was unable to move forward at this point in time. So now we have to work on that opportunity to find a workable solution for that customer again, we still think it's a viable opportunities, but given the changing dynamics on the component pricing.

And this is in our government segment will have to be.

Pushing that out into Q1 as well just based on timing.

So hopefully that gives you some additional color.

Got it so in aggregate.

$40 million or so comes I guess evenly across commercial solutions versus the government side. Then is that is that fair or.

Yes, I would say more so george on the government side.

Got it.

Okay and the press release, I think you mentioned $10 million associated with this customer in the Philippines. So it seems like Theres other pieces on the government side also.

Yes, I think it's a bunch of various orders I would say tied to more changes in defense spending and ongoing budgetary priorities changing on the fly again, we still see some opportunities over the long term, but just given the timing of where things are we felt it was appropriate to move that out of the year.

Got it and then as you look to next year, obviously, a quarter left in this fiscal year, but as you look at fiscal 'twenty three.

Any sense for what the top line could look like obviously, you've got a bunch of projects that have been pushed into next year.

Yeah, obviously, it's a pretty dynamic environment, but any early read on what you think next year could look like.

Yes, I think at this point in time, Georgia, we haven't given any guidance, yet, but I would say we're looking at Q4 shaping up similar to Q3, and if you just take Q4 as expectations and multiply that by four.

I think thats sort of a starting point for how we're thinking about FY 'twenty three.

Got it okay, Okay I'll pass it on thanks, a lot guys.

Thank you.

Thanks, Tim.

Joe Gomes with noble capital markets. Please go ahead.

Good afternoon, thanks for taking the questions, Mike and Mike.

Sure Joe.

Pardon me so.

First kind of wanted to talk a little bit odd.

Bob.

The satellite contract that's been hanging out there for a while you guys really haven't set a whole lot about it.

Kind of beat around the Bush I mean can you give us any clear clearer insider update as to where we stand on that.

Yes, I mean I.

I think we're extremely excited about our participation in the legal market in EMEA market and a very broad sense as.

As we've mentioned to you before we obviously have non disclosure agreements with several of our key customers in this market. So we're not going to speak specific to any particular customer I think.

Our view as.

You can look at what the public documents are in I would point you to our shareholder letter, where we've kind of made a few comments that we feel are relative.

<unk> to US first as you think about the satellites the public documents that have been filed with various <unk>.

The FCC's and industry reports that are available. The majority of these satellites are not going to occur for more than a year plus so when we take a look at it and map out the lining of.

Our participation in those markets as a whole we don't really have any revenue in fiscal year 2022 related to those things and I would say, we will probably going to have modest revenues in fiscal year 'twenty 'twenty three but clearly our belief is as satellites are broad.

Hardly get launched and again not trying to be specific to any customer, but as satellites go launched you need those ground station equipment and I think thats when we that's when you'll start to see.

Tangible orders come in from our view is when we'll start to see that at the bottom line. So I do think it's a 24 perspective is where you start to see sort of that bump in our participation, but we're not looking for much more participation in 'twenty three.

And then in 2022.

Wed love for it to come in earlier than that and we'll see how things play out but.

We're making progress and we're hard at work working with our customers.

Okay. Thanks for that.

And in your prepared remarks, you talked about Youre assessing product lines and reviewing M&A opportunities.

I was wondering if you might give us a little more color or detail there as to what exactly you are looking for an existing product lines or.

Were kind of broadly what you'd be looking at M&A opportunities.

Yes, I would say right now.

The biggest the biggest area, we see at the moment and you know things can change from quarter to quarter over a period to period is really in public safety and cyber security.

We have a smart response software application that.

We're piloting with some some real nice big customers out there feedback is real good it requires us to have a lot of API information.

<unk> connections and.

Information flows to go in there so as we look at the types of functions and features that are public safety customers want that as an area where we see.

Okay.

Technologies, I would call them and some maybe some smaller companies that could fit right into our.

Our product line.

And would be synergistic to the efforts that we're doing at the same time I think cyber security.

Is there is it is an area that we're looking at we do have very large contract $125 million with.

U S government that we are performing cyber work for for the next four or five years.

We have a couple of million dollars worth of work with the various public service agencies today.

<unk> 911 segment and.

As we look at the landscape you see that every day with the war in Ukraine Foreign nationals wherever they may be are attacking.

Both U S government secured contractors, the 911 public safety system as part of our national infrastructure, and we see a need out there by state and local municipalities that do not have the scale or the cyber skills necessary to defend those attacks.

Not monitor those attacks and if not be in a position to.

If they are attacked to get those systems up and running again, so again as we work with our customers.

Commonwealth of Massachusetts State of Arizona for instance.

We see opportunities there and I think I would point to when we won the contract with Arizona. It was the first contracted.

One of our existing customers signed for some of our cyber security solutions. So again, we have a good captive if you will or loyal customer base and so just within our own customer base. We are optimistic that we could grow.

The revenue that we're getting from that line, but those things take time, and obviously you need funding.

I think if we were able to make some smaller acquisitions in that area it might accelerate our participation in those markets.

Okay, great if I can sneak in one more here.

So.

Hello.

Nine months or roughly a year or so ago.

You had a firm offer 30 Bucks a share for the for Comtech closed today at $12 32 in last I looked after markets. It was trading below 11, you have a stock buyback out there.

Can you just maybe give us your thoughts on does it make sense at this point to maybe start.

Picking up some of the shares at these type of depressed levels given the fact that you're so excited about the growth opportunities for the company.

Well, what I would say first the market as a whole has compressed pretty pretty significantly I mean, there are various stocks down 50, 60, if not more percent and so I think the market dynamics right now are pretty volatile and technology stocks, which of course, we participate in are 10.

Rarely suppressed and Thats, what I would say I don't necessarily look at the day to day stock prices to what the intrinsic value is of the company at the end of the day and I think we as a company we would share that view. So in terms of the stock price today is a cheap sure I think I think it is at the same time.

We have a number of initiatives that we're funding our capital expenditures that we're funding.

We have various commitments to our customers and so look we've always used the phrase we'll going to be opportunistic as we look at a potential buyback we haven't done anything today, but I would just tell you that we continue to be of the view that we have a program and we will be opportunistic about when we decided to execute on.

On that.

Okay, great. Thanks for those insights I'll pass it along.

Sure Mark.

With Citi. Please go ahead.

Thanks for the opportunity.

You guys provided some initial color on fiscal 'twenty, three and how we should think about that maybe if you can also talk to me about it.

How we should think about.

EBITDA margin from here.

Some of those price discussions that youre, having with your customers.

Again, reflecting perhaps.

Better margins here.

And anything else you are doing to kind of.

Improved the EBITDA margin profile and how we should think about the EBITDA margin profile in 'twenty three.

Just a couple more on the 'twenty two how should we think about cash flow expectation.

For this year and then just on the emerging technology is something that you guys exclude from adjusted EBIT that you guys can provide some color like what is that.

Why is that excluded.

Adjusted EBITDA. Thank you.

Hi, This is Mike Bondi.

I'll take the first question in terms of the EBITDA margin profile and also even our gross profit margin profile I think we did show some sequential improvements over the last two quarters, but at the same time, we really are battling with increasing prices for our labor and parts and and just a sluggish supply chain. So I think overall when we look at 2023.

I would say just.

In the 10% range is probably for EBITDA margins, where we would end up at this point in time.

And there's too much uncertainty as of next year to to say, we can do better than that right now, but certainly would be working towards that.

In terms of the cash flows expectations for this year.

We did reevaluate where we are in the year, we spent $14 4 million to date on our Capex plans of $30 million of just based on where we are in the year and timing we're expecting.

The capex to be about $25 million and then when we looked at operating cash flows for the year.

While we're at breakeven as our GAAP number that does have the proxy solicitation costs included in that and also we have our former CEO transition costs included in that and when you back those items out we'd be roughly around $25 million to $30 million of positive operating cash flows.

And in terms of the third question.

Yes.

Origin Technology, I think you mentioned <unk> that's on your account.

Curious what that is and why is that excluded.

Sure Okay.

As we announced about a year ago. We also had a similar charge of about 300000, this particular quarter.

As Mike was talking about our partnerships with our lead customers in attacking the EMEA market as well.

We're working with our customers we identified some highly technical risky type endeavors that we chose to do ourselves to show our partnership with the customers and to progress in our relationships and so in this particular quarter, we incurred about $900000 of those types of costs.

And.

And representing.

Yes, I mean, I think it's I'd say the way I think much description of it was perfect I think from our perspective look their R&D cost no doubt about it and what we would emphasizes today, we don't have any revenues associated with these projects. These are things that we are doing.

You could call it very much on a speculative type type basis for us.

<unk> market in EMEA market as new business.

Our business historically has been in the Geo market in the high high speed.

Type satellite. So this is an era area, where I don't want to kind of say it is you're trying to make us learn how our fly flies.

We're trying to develop really cutting edge technology, where we don't have any markets without really any identified.

End customer for the stuff that we are trying to develop we have certain contracts, we know what our customer wants. So a lot of this is some trial and balloon and we feel it's appropriate to call. It out because it's something we wouldn't do if we didn't believe in the long term aspect of the market and as of today, we don't have any revenues from it. So we think it's proper way to look at the <unk>.

Company, So people know what we're spending.

Okay.

Okay. That's fair and then just this is mark.

Well, thank you guys.

Is there like a timeframe associated with it.

We expect to fulfill that backlog, which ruble.

We have supply chain issues right now do you expect to fulfill this backlog in the next six months 12 months whats kind of the timeframe associated with the backlog.

I think we've always said our backlog is probably more of an 18 month type type type of a situation maybe even closer to two years I think one trend I would point out to you.

Our backlog here was slightly down from Q2 about $602 million in the quarter.

Right now we're doing a lot of work in the 901 stuff and we really haven't announced any substantive contract work, but so on one hand, or 911 backlog is sort of going down but on the other hand, we are bookings for our satellite Earth station business.

Some of the older stuff like in our government segment is actually pretty strong so youre starting to see some of those trends that we're talking about enter into our backlog and as our 911 customers start to come up for renewal that will add to the backlog, but if you just look at the 600 <unk>, it's probably somewhere between an 18 month.

<unk> 24 months sort of on average depending on which bucket it falls in.

Okay. Thank you.

Okay.

Thanks to Mike Latimore with Northland Capital. Please go ahead.

Yeah.

Okay. Thanks.

On the communications business grew pretty well sequentially is that just sort of deploying some of these 901 deals or what caused that growth.

Hi, Mike This is Mike Bondi, Yes, this quarter.

We did see an uptick in the commercial sales we did see some of our satellite ground station product lines do well and I think also keep in mind last quarter in Q2, we did have some.

Costs that were hung up and so you did see some of that pop in Q3 and some of that will also be in Q4. So.

But yes, youre right Youre observing.

An uptick in the commercial.

Okay.

And then the.

Just kind of one time R&D investments you said 900000 this quarter.

Is that something that is going to be sporadic or should we think of that as a cost every quarter going forward.

Sporadic as the perfect work.

It's something that.

Before speaking to our customer are assessing the market. We may we may have a.

Pop euro there.

Mike mentioned, the last time, we decided to make an initiative investment was almost a year ago for a couple of hundred thousand dollars. So I think it's sporadic as the wife right way to look at it.

Sure.

Alright got it.

And you talk about discussing with your customers price adjustments given inflation are these discussions.

<unk>.

Contract renewals and new prospect discussions or are you doing that kind of mid contract.

Yes.

No.

Obviously, we'd love to go back and adjust current contracts that provide for that but obviously, if we have a firm fixed price contract with our customers are folks expect us to.

Honor it but if they have a change order or something that they want us to do differently, we're certainly going to be pricing it.

It's really there's not much of negotiation, we're certainly going to be pricing.

<unk> the current labor market and the cost parts that we're seeing and I would say to you I mean.

I think this is one of the issues that we and other companies are facing with inflation I think right. Now people are trying to understand is inflation really at 8%, 9%, 10% until they are pausing right.

People are waiting to see what theyre going to do in some cases, you might have some companies I just want to order because they think inflation is going to be continued at this number so you might as well get the stuff now before it gets more costly on the other hand, I think there are some companies that have to redirect some of their spending to fuel or labor as opposed to let's say.

So I think inflation is hurting us that but come back to your core question.

We're negotiating prices, where we can add anything thats, new we're going to be.

Reflective of where market conditions are today.

Yes.

Okay, and then with renovate U S government vertical I mean, they pass their budget a few months ago.

How is your visibility into just kind of U S government projects for you guys.

Okay.

It's tough right now I think.

For US there is the war in Ukraine, and I think as you read in the headlines the government is funding having supplemental budgets to do deals.

Shifting a lot of their current inventory.

Two to Ukraine, and obviously, that's resulting in the army's budget and the Dod's budget to replace weapons that they may have redeployed to Ukraine. So as opposed to communications equipment. So I think from our perspective visibility is tough.

On the other hand.

We have some large opportunities in the <unk> got to work on.

Our views on the long term, that's going to happen, but right now it's difficult to see when we're going to get orders.

Got it.

901.

How many opportunities.

Do you see in the pipeline for fiscal 'twenty three.

New state deal.

Well I would say there is certainly the two opportunities that Mike had talked about that we were expecting in Q4, I think that those we hope and we will continue to expect that they will become 2023.

Opportunities I think we have seen a pause in some of the larger procurements that are out there in the 911 space.

And I think again between.

Inflation cost that the states are.

Being experienced in the need to raise taxes. If you will on their side to pay for other types of things I think we are seeing a little bit of a lull in new next generation 911 procurements. So.

I don't want to call out competitive stuff. There is a few things out there that we are bidding on so we can start to say that there is none but theres certainly nothing on the scale of let's say, a california was or not.

Arizona was.

Yes.

Okay. Thanks.

Okay.

Yes.

Okay.

Chris Quilty Quilty analytics.

Go ahead.

Yeah.

Hi, guys. Thanks, and again I do appreciate both the shareholder letter and the extra half hour to read it in a slow reader.

Mostly some housekeeping questions here for.

Mike, Yes, there Mike.

But.

You had a large capex here in the quarter and I think he just gave US an update on the full year, but it didn't seem like the PP&E went up all that much sequentially was there something specific that dropped out.

Nothing stands out.

Okay.

And also you had mentioned.

Dialogue with CEO transition cost, but as I look at the.

Table for the adjusted EBITDA calculation, there is nothing that shows in this quarter.

On the adjusted EBITDA that was last quarter or am I missing something there.

All of the CEO transition costs were expensed in full in the second quarter.

So I think the total was about $13 6 million. Chris you May you may be conflating being expense, which is a Q2 versus the payment of it which is in really in the Q3 quarter.

For the cash flow side of it okay got it.

Yes, correct.

Alright, and also inventory levels understandably have been ticking up a bit here should we expect them to remain at a little bit of an elevated level on a go forward basis.

Yes, Chris.

Or.

As the current quarter sort of a good run rate or might we see them tick up a little bit.

No look if if we're able to sort of the Q4 inventory level is probably a good number going forward at the numbers Mike was talking about.

I would agree with that I think we're still short of inventory to ship products. So.

The hope is that we can continue to start to get parts, we're starting to see that breakthrough a little bit like as Mike mentioned as one of the reasons why Q2.

It was a little bit better in the commercial segment go into Q3, So we're starting to see parts come in a little bit better, but I think we're going to want to secure parts to make sure that we can deliver our stuff to our customers, but all in all we ended up I would say that Q4 number is probably the right number to think about.

And <unk>.

Commend you on the donation of the.

<unk> systems to Ukraine, but a question here are there opportunities for you.

F N type.

Funding for that equipment shipment in the Ukraine are there any ongoing discussions.

And I guess just more broadly I think you mentioned in your letter that you are seeing broader interests can you maybe.

Add a little bit.

Substance or sort of sizing on how that opportunity is looking today versus perhaps where you were a year ago in terms of the pipeline.

I think the funnel for us Chris.

<unk> has grown significantly.

We mentioned in the past obviously, we have.

No.

$400 million plus contracts are so for our <unk> program with the Marines, but we do think that that's going to continue to come.

We do know that there is a.

<unk>.

Another company out there, it's much larger than us that has a $600 million contract for trophy scatter stuff.

Army.

And as I put a nice big picture in the letter for Enterprise I took out my iPhone.

The army.

Attended a demonstration of our equipment at their request.

So when I look at the opportunity I would say, we're growing with the Dod.

As they see what's happening in the world and the need to have redundant communications and have an ability to make sure that they can communicate in other modes other than satellite.

And Thats just with the Doj.

Youre also seeing NATO governments.

Pointing out a specific country, but it's more than one country that attended our demo down there.

In.

We're seeing that.

Comment is being worked hard wired into some procurement of.

Both communications and certain overseas procurement as certain equipment compatible with it. So again these systems take a long time.

You used the phrase in the past and the companies used to.

Craig it's lumpy very difficult to predict right now we don't really have much in our backlog, we don't have much in our order flow the way, we're thinking about and I think our view and our philosophy right now is look.

We could tell you the funnel is growing but it's very difficult to tell you when we're going to get an order and we would rather be in a position to.

I'll tell you when we got the order rather than put it into our guidance for something like that and just and just miss it because of the timing. So that's going to really be our philosophy on this but all in all.

The opportunities are definitively growing.

And again it also applies to Ukraine, and we continue to have conversations with them.

Topic in Ukraine, I think you've quantified in your letter.

The revenue exposure to Russia.

Can you just clarify I mean is that primarily in the Earth station business or is that spread across other segments.

Most of it is in the satellite Earth station business, but there was other equipment that we would provide to to Russia, but.

Not anymore.

Great and final question.

Early days, yet, but any thoughts on the elevate product line.

Bob.

I hate to use these words excitement a lot of interest, but thats why we have the <unk>.

Elevate products is designed to work with not only existing geo satellites, but the new Leo satellites and stuff like that so.

It's part of R&D.

The investments that we're making.

But we do we do hope to announce some release dates.

I'd like to say by the end of the calendar year, but our marketing guys might have better better visibility as to when it's going to be shippable product, but a lot of interest and we think it's going well.

Thank you.

Okay.

And well go next to Chris Sakai with singular research. Please go ahead.

Hi, good afternoon.

Just a question on I guess, there was some $1 6 million spent in restructuring costs for SG&A.

Just wondering.

Is this going to lower SG&A.

And then next quarter or next year, how should how should we think about that.

Hi, Chris Mike again.

In terms of the restructuring costs, there, but for the most part that's relating to our facility moves that we've had ongoing this year and as we said in our filings we do expect that to continue into the first part of 2023.

So we do expect it to continue to I think that was one part of your question.

As we get into the new facility for example in Chandler, Arizona, We would think that that would.

Abate, because we're going to have one.

In one facility as opposed to the multiple facilities that were ongoing but yes.

I think you'd also have to consider at the same time, while that might go away. We also have inflationary pressures that we don't want to understate and.

And labor costs and other things. So that's something that we're still working through to figure out for 2023, and so at that point I would say don't expect.

Just the wholesale drop off of the $1 6 million.

Okay. Thanks for that.

I wanted to ask about your updated guidance.

Is this.

How much of this is still anticipating the.

Russia War prolong into say the fourth or the <unk>.

And by the end of the year.

Yes, I think this is the view that we think it's going to be prolonged.

It certainly has been to date and we would expect it to continue into the fourth quarter and just with <unk>.

Defense spending priorities still literally being defined.

That's why we adjusted our guidance for some of the awards that we have been tracking that we still think are viable, but just as Mike said as weapons systems are getting priority over communication systems. We just felt it was prudent to push those out.

Okay. Thanks for your questions. Thanks for your answers.

You're welcome Chris.

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

Yeah.

Okay, great well, we appreciate everybody's.

Participation on this call. Thank you for your time and attention and if anyone who has any additional follow up questions feel free to reach out to Rob directly your mic and we'll be happy to answer them. Thanks, very much and we look forward to speaking to you guys sometime in mid September most likely but.

Today's program. Thank you for your participation you may disconnect at any time and have a wonderful evening.

Yeah.

[music].

Ladies and gentlemen, thank you for standing by and welcome to Comtech Telecommunications Corp, third quarter fiscal 2022 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 star and one on your push button.

As a reminder, this conference is being recorded Thursday June nine 2022.

I would now like to turn the conference over to Mr. Robert Zambia Comtech Telecommunications. Please go ahead Sir.

Yeah.

Thank you and good afternoon, everyone welcome to the Comtech Telecommunications Corp Conference call for the third quarter of fiscal year 2022.

With us on the call today are Michael D porcelain, President and Chief Executive Officer of Comtech, and Michael Bondi, Chief Financial Officer.

Rob Samuels context head of Investor Relations.

When we proceed let me remind you of 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.

Now I am pleased to introduce the President and Chief Executive Officer of Comtech, Michael porcelain, Mike.

Thanks, Rob and I should also say welcome aboard.

I hope that everyone on the call has had an opportunity to review this quarters investors letter when I talk about our business in detail and offer a candid assessment of the road ahead for Comtech before starting the substantive part of our earnings conference call I want to remind everyone that in Q2, we changed the format and framework of our quarterly earnings announcement from our press release.

A shareholder letter in the past we have traditionally issued a quarterly earnings press release that summarized comparative financial results highlight the few contract wins and included a quote of two for management.

The shareholder letter format was a better way to communicate with our shareholder base and analyst and provide perspective shareholders, a better way to learn more about us.

Also thought it provided a good forum to share insights into my thinking and the way I intend to lead contact since then I've appreciated the feedback we received from investors and analysts almost all of them overwhelmingly liked the new format. Some of the feedback we received was that since the shareholder letter was substantive we should allow a bit more time between its release.

On our earnings call. So we have taken that into consideration, which is why today's calls at five P. M. Eastern time, rather than 430 P M as usual time.

Also it was suggested to us that this significantly shortened our prepared remarks and get to the question and answer portion of the call quicker we agree with that suggestion. So our prepared remarks on this call will be a lot shorter than normal.

As we start let me Echo the point I made towards the end of our new Q3 industrial letter.

For our part we want to Comtech is continuing to do what we've been doing for decades, ensuring that all of our products and services work for our customers every time all the time no matter. The conditions contact is the company that connects people when it matters, most and right now I'd argue that failsafe communications are as important as they are.

Why change this disruptions.

Disruptions.

Five months as CEO I've been dealing with these issues, but I can relay that we are making demonstrable progress on several initiatives vital to the company's future successes. These strategic initiatives include expanding our talent pool to bring fresh ideas, leveraging our market leading positions to capitalize on new multi year investment cycles, increasing company.

<unk> collaboration to exploit emerging opportunities and refreshing our corporate branding.

We are also assessing our product lines, and reviewing M&A and strategic opportunities to establish priorities and determined appropriate capital allocation. Our team is energized by the exciting trends and opportunities visible on our core markets and we believe context technologies and customer relationship position us to capitalize on them.

While the long term prospects for our business are strong the near term economic environment promises to be challenging right now the business challenges, we face appear to be a combination of near term supply constraints and timing issues importantly, none of them appear to be a function of softening demand in fact, and as I'll talk about shortly given our growing.

Tunnel I believe the stage is set for sustainable multiyear growth.

Given that the economic backdrop is more uncertain than it was earlier in the year I become more cautious with regards to our outlook and are adjusting our financial targets for fiscal 'twenty. Two as follows Q4 fiscal 2022 net sales are expected to approximate $123 million, resulting in expected fiscal 'twenty two net sales to approximate 400.

$82 million.

Q4, adjusted EBITDA is expected to approximate $11 $5 million, resulting in 2022 EBITDA of approximately $38 million.

Inflation remains a big concern and in some cases, we are seeing component price increases from 10% to 20 times, what we would consider normal we've been successful in some cases to work with our customers to pass along some of these increased costs, but we've had customers pushback given their own challenges.

Given their priority for weapons system spending as opposed to communication spending right. Now we continue to expect no meaningful bookings or sales for the rest of fiscal 2022.

With regard to Russia, we are assuming no new sales for the foreseeable future and like all of our companies. We are continuing to shift certain commercial software development and related support activities conducted in our Russian office the locations outside of the country. Our updated guidance reflects additional expenses of roughly $1 5 million for the quarter or six.

On an annual basis associated with shifting these development resources.

We continue to work to drive improvements on a day to day basis My greatest optimism for our business is grounded in what we see as a long term secular investment cycle in our end markets.

As part of my assessment of the business I have been personally speaking with our customers and industry experts in both our satellite and 901 public safety space.

Those conversations have convinced me context investments will pay off over a period that will last years in the roughly five months since I took on the role of CEO I've been making the changes necessary to drive day to day performance, while simultaneously ensuring comtech is in the best possible position to capitalize on the long term opportunities our markets present.

As we execute on these strategic initiatives I believe we are on a three to five year journey, where we will see meaningful progress along the way and creation of shareholder value.

So far I am incredibly proud of the work the entire Comtech team has done these past five months, we've delivered sequential quarters of growing revenue gross margin and adjusted EBITDA. We've done this despite fast changing markets and a contact that is itself transforming starting with our people.

Key Comtech strategic initiative is to build out leadership and expertise in every area of our business and that's exactly what we've been doing.

I want to call out a few of the folks we brought onboard first during the quarter, we welcomed Maria hidden as our new Chief operating officer.

<unk> is a true operator, and deeply experienced and overseeing multiple manufacturing and engineering organizations across the globe.

The key addition for us, particularly in the context of my commitment to improve shareholder engagement and communications as Rob Samuels, who joins us as vice President of IR and corporate Communications, Rob is on the call today and will become more prominent and visible as time goes on.

We also just announced that Tim Jenkins was appointed President of our safety and security technology product group effective June one.

Tim has extensive experience in the 911 business and I look forward to his leadership and contributions to our business.

Further we strengthened the leadership team of our U S. Based satellite focused business line with the appointment of John <unk> as our new divisional Chief operating officer.

Bob Pescatore and general manager of digital products. Finally, we recently welcomed Ken Peterman as a new independent director to our board Ken's career spans over 40 years in the defense sector and he is unparalleled credentials across a wide array of markets in both commercial and government satellite systems. These.

Additions are part of a larger process that I announced at the beginning of the year to ensure we have the right team in place a context.

My goal is to ensure that our strategy the organization product portfolio, our board and talent deployment all come together I believe with the right people and strategy. We are looking ahead to a bright future underpinned by investments in our company and strong partnerships with our best customers. For example, just a few weeks ago.

At the request of the U S. Army, we conducted infield demonstrations of our <unk> equipment in Florida for both U S NATO and Allied government customers. The demonstration consisted of end to end data communication links showcasing our small medium and large group of scatter terminals.

We've also been working closely with a number of our current and potential customers and making strategic R&D investments to Corey or enhanced designs for new applications of comtech gear or to meet emerging requirements. Our customers know that comtech has 100% committed.

To devoting the resources necessary to forge durable long lasting partnerships.

<unk> <unk>.

Securely with Comtech equipment.

We take this ongoing partnership to be a validation of our technology and strategic commitment to gain market share in the global VSAT systems and solution market, while <unk> infrastructure receives a lot of attention. The fact is there is a huge unmet need around the world to provide cellular cellular backhaul for legacy <unk> LTE networks like the <unk>.

One in Indonesia, I believe we have the right people and products and pleased to be winners in this market.

<unk> both of which also recently awarded contracts to Comtech and as everyone knows we are performing significant statewide work in Washington, Pennsylvania, Massachusetts, Arizona and South Carolina.

Hopefully it is clear that the contact here. Despite the challenges we face is performing well and demand for our solutions remain healthy and growing.

Let me now turn the call over to Mike Bondi to discuss our financial performance in more detail and I'll come back and offer some closing remarks.

Thanks, Mike for Q3 fiscal 2022, we recorded a $122 1 million of consolidated net sales of which $88 1 million were reported in our commercial solutions segment and $34 million were reported in our government solutions segment.

Of the $122 1 million of consolidated net sales, 72% were to U S based customers, including 23% of the U S government with the remaining 28% to international customers.

Impaired to the year ago quarter, our consolidated Q3 fiscal 2022, net sales declined $17 3 million or 12, 4%. The large majority of which related to lower revenue in our government solutions segment, given the impact of the withdrawal of U S troops in.

In Afghanistan last summer and the impact of the more recent Russia, Ukraine military conflicts, creating geopolitical uncertainty in Europe on previously anticipated orders.

Gross margins were 38, 2%, reflecting slight but sequential improvement from the 38, 1% we achieved in the second quarter of fiscal 2022, and 38% we achieved in the third quarter of fiscal 2021.

Our selling general and administrative expenses of $27 6 million or 22, 6% of sales reflect tight labor markets and our decision to continue to invest in both existing and new talent.

SG&A costs during the most recent fiscal quarter also include $1 6 million of restructuring costs to move and streamline our operations SG.

SG&A expenses in Q3 of fiscal 2021 with $27 million or 19, 4% of sales.

While we have been prudent we have been investing.

While we have been prudent we have been investing in our future and we'll continue to do so this includes making significant capital expenditures for two new high volume technology facilities and building out cloud based computer networks to support our previously announced <unk> 91 contract wins for the states of Pennsylvania, South Carolina and <unk>.

Arizona.

Capital investments for these and other 2022 initiatives are expected to approximate $30 million with related cash outflows now expected to be approximately $25 million in.

In fiscal 2022.

Of which $14 $4 million has been expended to date.

On the R&D side, we continue to make long term investments R&D expense in Q3 fiscal 2022 was $14 3 million or 11, 7% of sales and as discussed above included.

$900000 of strategic emerging technology costs R&D in Q3 fiscal 2021 was $13 1 million or nine 4% of sales.

Operating loss in Q3 fiscal 2022 was $600000.

Flex $1 $6 million of restructuring costs.

$900000 of strategic emerging technology costs, and a $100000 of incremental operating costs due to the lingering impact of COVID-19.

As a result of these and other costs, our GAAP net loss attributable to common stockholders was $1 7 million.

And GAAP EPS was a loss of <unk>.

<unk> <unk>.

Excluding dividends to preferred stockholders are GAAP results would have been breakeven.

Our GAAP results also reflect $5 3 million of amortization of intangibles $2 5 million of depreciation expense.

$1 1 million of amortization of stock based compensation and other costs, such as interest and taxes.

During Q3 fiscal 2022, adjusted EBITDA was $11 2 million or.

A 14, 3% sequential increase from Q2 of fiscal 2022.

As a percentage of net sales adjusted EBITDA was nine 2% an improvement from the eight 1% we achieved in Q2 of fiscal 2022.

Our Q3 fiscal 2022, adjusted EBITDA does reflect the decrease from the $17 7 million or.

Or 12, 7% of net sales we achieved in Q3 of 2021.

That I will hand, it back to Mike to wrap up the call.

Alright.

Thanks.

Last quarter I spoke about how things were changing our context and I hope that you our shareholders can see that we're making important strides in building the company for the long term, even as we hold our own in a challenging environment.

If there's one thing to take away from this call since that investor should not complete timing uncertainty with underlying demand dynamics knowledgeable long term investors will know from experience that our business, particularly as it relates to government and government agency contracts. It is difficult to time with precision.

Policy procurement and approval processes, all combined to influence execution and delivery dates.

The headwinds identified in our conference call here today and in our letter our plainly evident in daily newspaper headlines and have created timing issues with regard to bookings certain orders along with the set of familiar.

Your supply chain, headaches, which hopefully will be going away soon.

But our headline is this the demand side of the equation is healthy in both of our next generation 911, and satellite ground station businesses. Our pipelines remain strong and we are excited about the opportunities before us are government backlog is up from last quarter and overall demand for our satellite Earth station products is.

Solid and our backlog for these products is beginning to grow we have visibility into roughly $1 $2 billion in revenue.

Our investments in products facilities and people are paying off and will continue to drive our performance as we move forward.

To be clear.

We're only just at the beginning despite these deeply uncertain times, we're confident in the importance and the value of the markets, we serve and the way we are servicing them. Thank.

Thank you for your time and attention and now let's take some questions operator.

At this time, if you would like to ask a question. Please press the star.

One on your Touchtone phone.

You may withdraw your question at any time by pressing the pound.

Once again that is star.

Yeah.

One on your push button.

Ed.

First to George Notter with Jefferies.

Please go ahead.

What pieces of revenue you thought were going to fall in Q4, and how they shifted.

Give us an attribution of that delta on expectations.

Sure Hi, George This is Mike Bondi.

When it came to the fourth quarter.

Let's start on the commercial solutions segment, and we did have some 901 opportunities that we have been tracking for some time.

Talking about Ohio is one example, where we were thinking the funding.

Going to get approved and just based on where we think the vote is at this point in time as we said, we think that thats going to fall out in the.

The fall of 2022.

And.

That was going to be sizable bookings that we were expecting.

In the quarter and because of the timing we're still expecting the award. We just don't think we will be able to generate any revenues in this fourth quarter.

So those are like two main themes in the 901 space.

Also as we disclosed.

We had some.

Price increases from vendors, which we've tried to pass onto our customers. We had one customer in the Asia region.

In the country with the Philippines.

And there we told them about the vendor price increases.

And ultimately the vendor.

Wasn't able to move forward at this point in time. So now we have to work on that opportunity to find a workable solution for that customer again, we still think it's a viable opportunity, but given the changing dynamics on the component pricing.

And this is in our government segment will have to be.

Pushing that out into Q1 as well just based on timing.

So hopefully that gives you some additional color.

Got it so in aggregate.

$40 million or so comes I guess evenly across commercial solutions versus the government side. Then is that is that fair or.

Yes, I would say more so george on the government side.

Got it.

Okay and the press release, I think you mentioned $10 million associated with this customer.

Customer in the Philippines. So it seems like there is other pieces on the government side also.

Yes, I think it's a bunch of various orders I would say tied to more changes in defense spending and ongoing budgetary priorities changing on the fly.

Again, we still see some opportunities over the long term, but just given the timing of where things are we felt it was appropriate to move that out of the year.

Got it and then as you look to next year, obviously, a quarter left in this fiscal year, but as you look at fiscal 'twenty three.

Any sense for what the top line could look like obviously, you've got a bunch of projects that had been pushed into next year.

Yeah, obviously, it's a pretty dynamic environment, but any early read on what you think next year could look like.

Think thats sort of a starting point for how we're thinking about FY 'twenty three.

Got it okay, Okay I'll pass it on thanks, a lot guys.

Thanks.

Okay.

To let Joe Gomes with noble capital markets. Please go ahead.

Yeah.

Good afternoon, thanks for taking the questions, Mike and Mike.

Sure Joe.

Pardon me.

First kind of wanted to talk a little bit on.

Bob.

The satellite contract that's been hanging out there for a while you guys really haven't said a whole lot about it.

Kind of beat around the Bush I mean can you give us any clear clearer insider update as to where we stand on that.

Yes, I mean I.

I think we're extremely excited about our participation in the legal market in EMEA market and a very broad sense.

As we've mentioned to you before we obviously have non disclosure agreements with several of our key customers in this market. So we're not going to speak specific to any particular customer I think.

Our view as.

You can look at what the public documents are in I would point you to our shareholder letter, where we've kind of made a few comments that we feel are relevant to us first as you think about the satellites. The public documents that have been filed with various FCC as an industry reports that are available.

The majority of these satellites are not going to occur for more than a year plus so when we take a look at it and map out the lining of.

Our participation in those markets as a whole we don't really have any revenue in fiscal year 2022 related to those things and I would say, we'll probably going to have modest revenues in fiscal year 'twenty 'twenty, three but clearly our belief is as satellites.

Hardly get launched and again not trying to be specific to any customer, but as satellites go launched you need those ground station equipment and I think thats touch when we that's when you'll start to see.

Tangible orders come in from our view is when we'll start to see that at the bottom line. So I do think I'd say 24 perspective is where you start to see sort of that bump.

Participation, but we're not looking for much more participation in 'twenty three than than in 2022.

Wed love for it to come in earlier than that and we'll see how things play out but.

We're making progress and we're hard at work working with our customers.

Okay. Thanks for that.

And in your prepared remarks, you talked about Youre assessing product lines and reviewing M&A opportunities.

I was wondering if you might give us a little more color or detail there as to what exactly you are looking for an existing product lines or.

Were kind of broadly what you'd be looking at M&A opportunities.

Yes, I would say right now.

The biggest the biggest area, we see at the moment and you know things can change from quarter to quarter or period to period is really in public safety and cyber security.

We have a smart response software application that.

We're piloting with some some real nice big customers out there feedback is real good it requires us to have a lot of API information.

<unk> connections and.

Information flows to go in there so as we look at the types of functions and features that are public safety customers want that as an area where we see.

Okay.

Technologies, I would call them and some maybe some smaller companies that could fit right into our product line.

And would be synergistic to the efforts that we're doing at the same time I think cyber security.

Isn't there isn't as an area that we're looking at we do have very large contract $125 million with the.

U S government that we are performing cyber work for for the next four or five years.

We have a couple of million dollars worth of work with the various public service agencies today.

<unk> 911 segment and.

As we look at the landscape you see that every day with the war in Ukraine Foreign nationals wherever they may be.

Our attacking.

Attacks and if not be in a position to.

If they are attacked to get those systems up and running again, so again as we work with our customers.

Commonwealth of Massachusetts.

State of Arizona for instance.

We see opportunities there and I think I would point to when we won the contract with Arizona. It was the first contracted.

The revenue that we're getting from that line, but those things take time, and obviously you need funding.

I think if we were able to make some smaller acquisitions in that area it might accelerate our participation in those markets.

Okay, great and if I can sneak in one more here.

So.

Hello.

Nine months or roughly a year or so ago.

You had a firm offer 30 Bucks a share for the for Comtech closed today at $12 32 in last I looked after markets. It was trading below 11, you have a stock buyback out there.

Can you just maybe give us your thoughts on does it make sense at this point to maybe start.

Picking up some of the shares at these type of depressed levels, given the fact that youre. So excited about the growth opportunities for the company.

Well I would say first the market as a whole has compressed pretty pretty significantly I mean, there are various stocks down 50, 60, if not more percent and so I think the market dynamics right now.

Pretty volatile and technology stocks, which of course, we participate in are temporarily.

Preston and Thats, what I would say I don't necessarily look at the day to day stock prices to what the intrinsic value is of the company at the end of the day and I think we as a company we would share that view so.

The stock price today is a cheap sure I think I think it is at the same time.

We have a number of initiatives that we're funding our capital expenditures that we're funding.

We have various commitments to our customers and so look we've always used a phrase we'll going to be opportunistic as we look at a potential buyback we haven't done anything today, but I would just still tell you that we continue to be of the view that we have a program and we'll be opportunistic about when we decided to execute.

On that.

Okay, great. Thanks for those insights I'll pass it along.

<unk> with Citi. Please go ahead.

Great. Thanks for the opportunity.

You guys provided some initial color on fiscal 'twenty, three and how we should think about that maybe if you can also talk to me about it.

How we should think about.

EBITDA margin from here.

But some of those price discussions that youre, having with your customers.

<unk> be reflected in perhaps a little bit better margins here.

And anything else, you're doing to kind of.

Improve the EBITDA margin profile and how we should think about the EBITDA margin profile in 'twenty three.

Just a couple more on the 'twenty two how should we think about cash flow expectation.

For this year and then just on the emerging technology something that you guys exclude from adjusted EBIT that you guys can provide some color like what is that and why is that excluded from adjusted EBITDA. Thank you.

Hi, This is Mike Bondi.

I would say just.

In the 10% range is probably for EBITDA margins, where we would end up at this point in time.

And there's too much uncertainty as of next year to to say, we can do better than that right now, but certainly would be working towards that.

In terms of the cash flow expectations for this year.

We did reevaluate where we are in the year, we spent $14 4 million to date on our Capex plans of $30 million of just based on where we are in the year and timing we're expecting.

The capex to be about $25 million and then when we looked at operating cash flows for the year.

We're at breakeven as our GAAP number that does have the proxy solicitation costs included in that and also we have our former CEO transition costs included in that and when you back those items out we'd be roughly around $25 million to $30 million of positive operating cash flows.

Okay.

And in terms of the third question.

Yes.

With emerging technology I think you mentioned Wix code that's on your CAGR.

Kind of curious what that is and why is that excluded.

Sure. Okay. So as we announced about a year ago. We also had a similar charge of about 300000. This particular quarter as Mike was talking about our partnerships with our lead customers in attacking the EMEA market as well.

And.

Yes.

Yes, I mean, I think as I say it the way I think much description of it was perfect I think from our perspective look their R&D cost no doubt about it and what we would emphasizes today, we don't have any revenues associated with these projects. These are things that we are doing you could call. It very much on a speculative type type basis for us.

<unk> market in EMEA market as new business.

Business historically has been in the market and the high high speed throughput type satellite. So this is an area an area, where I don't want to kind of say it as youre trying to make them learn how a fly flies.

We're trying to develop really cutting edge technology, where we don't have any markets without really any identified.

End customer for the stuff that we are trying to develop we have certain contracts, we know what our customer wants. So a lot of this is some of trial on ballooning, we feel it's appropriate to call. It out because it's something we wouldn't do if we didn't believe in the long term aspect of the market and as of today, we don't have any revenues from it. So we think it's proper way to look at the <unk>.

Company, So people know what we're spending.

Okay.

Okay. That's fair and then just this is more like the backlog that you guys have.

Is there like a timeframe associated with it.

Expect to fulfill this backlog which ruble.

We have supply chain issues right now do you expect to fulfill this backlog in the next six months 12 months like what's kind of the timeframe associated with the backlog.

I think we've always said our backlog is probably more of an 18 month type type type of a situation maybe even closer to two years I think one trend I would point out to you.

Our backlog here was slightly down from Q2 of about $602 million in the quarter.

Right now we're doing a lot of work in the 911 stuff and we really havent any announced any substantive contract work, but so on one hand, our 911 backlog is sort of going down but on the other hand, we are bookings for our satellite Earth station business and some of the older stuff like in our government segment is actually.

Pretty strong so youre starting to see some of those trends that we're talking about inter into our backlog.

<unk> 911 customers start to come up for renewal that will add to the backlog, but if you just look at the 600 <unk>, it's probably somewhere between an 18 month on.

24 months sort of on average depending on which bucket it falls.

Okay. Thank you.

Next to Mike Latimore with Northland Capital. Please go ahead.

Yes. Thanks.

On the communications business grew pretty well sequentially is that just sort of deploying some of these 91, one deals or what caused that growth.

Hi, Mike This is Mike Bondi, Yes, this quarter.

So we did see an uptick in the commercial sales we did see some of our satellite ground station product lines do well and I think also keep in mind last quarter in Q2, we did have some.

That were hung up and so you did see some of that pop in Q3 and some of that will also be in Q4. So.

And yet Youre right Youre observing.

An uptick in the commercial.

Okay.

And then.

Just kind of one time R&D investments you said 900000 this corridor.

Is that something that is going to be sporadic or should we think of that as the cost of every quarter going forward.

Sporadic as the perfect word.

It's something that.

Before speaking to our customer are assessing the market. We may we may have another.

Pop euro there.

Mike mentioned, the last time, we decided to make an initiative investment was almost a year ago for a couple of hundred thousand dollars. So I think sporadic as the wife right way to look at it.

Yeah.

Alright got it.

And you talk about discussing with your customers price adjustments given inflation are these discussions.

On.

Contract renewals and new prospect discussions or are you doing this kind of mid contract as well.

No.

Obviously, we'd love to go back and adjust current contracts that provide for that but obviously, if we have a firm fixed price contract with our customers are folks expect us to.

But if they have a change order or something that they want us to do differently, we're certainly going to be pricing it.

It's really there's not much of negotiation, we're certainly going to be pricing.

<unk> the current labor market and the cost parts that we're seeing and I would say to you I mean I.

I think this is one of the issues that we and other companies are facing with inflation I think right. Now people are trying to understand is inflation really at 8%, 9%, 10% and so they are pausing right.

So I think inflation is hurting us that but come back to your core question.

We're negotiating prices, where we can add anything thats, new we're going to be.

Reflective of where market conditions are today.

Yes, okay.

And then with her.

Great.

S government vertical I mean, they perhaps their budget a few months ago.

How is your visibility into just kind of U S government projects for you guys.

It's tough right now I think.

For US there is the war in Ukraine, and I think as you read in the headlines the government is funding having supplemental budgets to Dod is shifting a lot of their current inventory.

Two to Ukraine.

And obviously, that's resulting in the army's budget and the Dod's budget to replace weapons that they may have redeployed to Ukraine. So as opposed to communications equipment. So I think from our perspective visibility is tough.

On the other hand.

We have some large opportunities in the <unk> got to work on.

Our views on the long term, that's going to happen, but right now it's difficult to see when we're going to get orders.

Okay got it and just last.

901.

How many opportunities do.

You see in the pipeline for fiscal 'twenty three in terms of like new state deal.

Opportunities I think we have seen a pause in some of the larger procurements that are out there in the nine month one space.

And I think again between the inflation cost that the states are.

Being experienced in the need to raise taxes. If you will on their side to pay for other types of things I think we are seeing a little bit of a lull in new next generation 911 procurements. So.

I don't want to call out competitive stuff. There is a few things out there that we are bidding on so we start to say that there is none but theres certainly nothing on the scale of let's say, a california was or <unk>.

Arizona was.

Yes.

Okay. Thanks.

Thanks to Chris Quilty Quilty analytics. Please go ahead.

Hi, guys. Thanks, and again I do appreciate both the shareholder letter and the extra half hour to read it on a slow reader.

Mostly some housekeeping questions here.

Sure Mike.

But.

Nothing stands out.

Okay.

And also you had mentioned in your dialogue with CEO transition costs, but as I look at the table.

Table for the adjusted EBITDA calculation, there is nothing that shows in this quarter.

On the adjusted EBITDA that was last quarter or am I missing something there.

All of the CEO transition costs were expensed in full in the second quarter.

So I think the total was about $13 6 million. Chris you May you may be conflating being expense, which is a Q2 versus the payment of it which is in really in the Q3 quarter.

For the cash flow side of it okay got it.

Yes, correct.

Alright.

Also inventory levels understandably have been picking up a bit here should we expect them to remain at a little bit of an elevated level on a go forward basis.

Yes, Chris.

Or.

As the current quarter sort of a good run rate or might we see them tick up a little bit.

No look if if we're able to sort of the Q4 inventory level is probably a good number going forward at the numbers Mike was talking about.

I would agree with that.

We're still short of inventory to ship products. So.

The hope is that we can continue to start to get parts, we're starting to see that breakthrough a little bit like it was Mike.

Mike mentioned as one of the reasons why Q2 was a little bit better in the commercial segment go into Q3. So we're starting to see parts come in a little bit better, but I think we're going to want to secure parts to make sure that we can deliver our stuff to our customers, but all in all we ended up I would say the Q4 numbers, probably the right number to think about.

And <unk>.

Commend you on the donation of the <unk>.

<unk> systems to Ukraine, but a question here are there opportunities for you.

F N S tight.

Funding for that equipment shipment in the Ukraine are there any ongoing discussions.

And I guess just more broadly I think you mentioned in your letter that you are seeing broader interests can you maybe.

Add a little bit of.

Substance or sort of sizing on how that opportunity is looking today versus perhaps where you were a year ago in terms of the pipeline.

I think the funnel for us Chris.

<unk> has grown significantly.

You know we mentioned in the past obviously, we have.

No.

$400 million plus contract or so for our <unk> program with the Marines, but we do think that that's going to continue to come.

We do know that there is a.

<unk>.

Another company out there that's much larger than us that has a $600 million contract for trop scatter stuff.

Army.

And as I put a nice big picture in the letter I took out my iPhone.

The army is.

Attended a demonstration of our equipment at their request.

So when I look at the opportunity I would say, we're growing with the Dod.

As they see what's happening in the world and the need to have redundant communications and have an ability to make sure that they can communicate in other modes other than satellite.

And Thats just with the Doj.

Youre also seeing NATO governments.

Not to point out a specific country.

It's more than one country that attended our demo down there.

We're seeing the.

Comment.

Is being worked hard wired into some procurement.

Communications and certain overseas procurement.

Certain equipment compatible with it so again these systems take a long time.

You used a phrase in the past and the companies used to.

Trace it's lumpy very difficult to predict right now we don't really have much in our backlog, we don't have much in our order flow the way, we're thinking about and I think our view and our philosophy right now is look.

We could tell you the funnel is growing but it's very difficult to tell you when we're going to get an order and we would rather be in a position to.

I'll tell you when we got the order rather than put it into our guidance for something like that and just and just missed it because of timing. So that's going to really be our philosophy on this but all in all.

The opportunities are definitively growing.

And again it also applies to Ukraine, and we continue to have conversations with them.

Topic in Ukraine, I think you've quantified in your letter.

The revenue exposure to Russia.

Can you just clarify I mean is that primarily in the Earth station business or does that spread across other segments.

Most of it is in the satellite Earth station business, but there was other equipment that we would provide to to Russia.

Not anymore.

Great and final question.

Early days, yet, but any thoughts on the elevate product line.

Bob.

I hate to use these words excitement a lot of interest, but that's why we have the <unk>.

Elevate products is designed to work with not only existing geo satellites, but the new Leo satellites and stuff like that so.

It's part of R&D.

The investments that we're making.

But we do we do hope to announce some release dates.

Like to say by the end of the calendar year, but our marketing guys might have better better visibility as to when it's going to be the shippable product, but a lot of interest and we think it's going well.

Thank you.

And well go next to Chris Sakai with singular research. Please go ahead.

Hi, good afternoon.

Just a question on I guess, there was some $1 6 million spent in restructuring costs or SG&A.

Just wondering.

Is this going to lower SG&A.

And then next quarter or next year, how should how should we think about that.

Hi, Chris Mike again.

So we do expect it to continue I think that was one part of your question.

As we get into the new facility for example, in Chandler, Arizona, where we think that that would.

Abate, because we're going to have one facility as opposed to the multiple facilities that were ongoing but yes.

I think you would also have to consider at the same time.

That might go away. We also have inflationary pressures that we don't want to understate.

And labor costs and other things. So that's something that we're still working through to figure out for 2023, and so at that point I would say don't expect.

Just the wholesale drop off of the $1 6 million.

Okay. Thanks for that.

Yes.

I wanted to ask about your updated guidance.

Is this.

How much of this is still anticipating.

Russia War prolong into say the fourth or the into the.

And by the end of the year.

Yes, I think this is the view that we think it's going to be prolonged.

Certainly has been to date and we would expect it to continue into the fourth quarter and just with.

Defense spending priority still literally being defined.

That's why we adjusted our guidance for some of the awards that we had been tracking that we still think are viable, but just as Mike said as weapons systems are getting priority over communication systems. We just felt it was prudent to push those out.

Okay. Thanks for your questions. Thanks for your answers.

Youre welcome Chris.

Okay.

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

Yeah.

Okay, great well, we appreciate everybody's.

Participation on this call. Thanks for your time and attention and if anyone has any additional follow up questions feel free to reach out to Rob directly your mic and we'll be happy to answer them. Thanks, very much and we look forward to speaking to you guys sometime in mid September most likely but.

At this time.

Today's program. Thank you for your participation you may disconnect at any time and have a wonderful evening.

Q3 2022 Comtech Telecommunications Corp Earnings Call

Request a DemoDemo

CMTL

Comtech Telecommunications

Earnings