Q4 2024 Comtech Telecommunications Corp Earnings Call
Dan.
[music].
Speaker Change: Welcome to Comtech fiscal year, Q4, 2024 earnings conference call.
A minder. This conference is being recorded today Thursday October 31st 2024.
I would now like to turn the conference over to Mrs. Maria sorry, yellow with Comtech. Please go ahead Maria.
Thank you operator, and thanks to our investors for taking the time to dial in today.
Welcome to Comtech Telecommunications Corp conference call for the fourth quarter of fiscal year 2024.
Today, I'm here with context, President and Chief Executive Officer, John Right again, we're also joined today by Mike Bondi context CFO.
Before we get started today. Please note we have a detailed discussion of the quarter in our shareholder letter available on our website.
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.
Speaker Change: The company's assumptions regarding such performance business outlook and plans are forward looking in nature and always involve significant risks and uncertainties.
Speaker Change: 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 SEC filings.
Now I'm pleased to introduce context, president and CEO, John ride again John.
Thanks, Maria and thanks, everyone for taking the time to join US today I began last quarter's call acknowledging that I was relatively new to the role of Comtech CEO.
Speaker Change: And as I'm sure everyone on this call saw from our filings yesterday, it looks like I'll be able to use this line again.
Speaker Change: Could not be more excited about our board of directors appointed me as President and CEO let.
Let me start by saying, we're going to be taking a different approach to our earnings calls going forward.
Speaker Change: We released our shareholder letter earlier today and filed our 10-K yesterday after the close all of the key financial metrics and discussions surrounding our financial and operating performance are included in those materials.
I know Theres a lot of talk I'll have to talk about so instead of repeating already available information we plan to spend more time on Q&A rather than prepared remarks.
That being said there are some important themes I want to address today before we open the call up for your questions.
I would knowledge that Comtech has been through an extraordinary series of changes over the course of the past year.
However from my vantage point, the Comtech I see today rests on a strong foundation.
Speaker Change: We have best in class technology, great people, and a tremendous opportunity to drive profitable growth in our large and growing end markets.
Speaker Change: What we need is focus.
Operational discipline and execution and I am excited to help lead the company on that journey.
For the last few months Comtech Board and leadership team have been developing and executing against the transformation strategy that we believe will deliver the best outcome for our customers.
Our people and our shareholders as you know our process is underway to identify strategic alternatives for our terrestrial and wireless networks business. We believe this is the best way to unlock the value of this business, while simplifying our capital structure.
We are simultaneously, taking a hard look at each of our businesses and product lines to ensure we have the best portfolio to meet our customers' needs and protect and grow our top and bottom lines.
Looking ahead, the Comtech I see.
Which is the Comtech I believe our customers our people and our shareholders want is a pure play satellite and space Communications company ready to serve end markets that are themselves at the beginning of their own technology driven.
Transfer nation cycles.
Speaker Change: This is the area that I focused on throughout my career in the opportunity. These markets represent right now is the reason I joined the company.
It's why I've been clear in dozens of conversations with our shareholders and our board that is as difficult as the current operating environment has been and as tough as the challenges ahead, maybe I am.
Speaker Change: Committed to Comtech.
Speaker Change: I made a commitment to be direct and my communications with our shareholders too so I'll be blunt, our financial performance for the fourth quarter was below expectations.
Importantly, our results were not a function of missed or lost market opportunities comtech.
Comtex technologies products and solutions continue to be in demand from our customers validated by our record record funded backlog of almost $800 million.
This to me is a critical and direct reflection from our customers that comtech as a defensible highly competitive position in the market.
However, in our fiscal fourth quarter, a number of individual factors combined to put pressure on our margins you will see from our filings that while both of our businesses performed roughly in line with revenue expectations satellite and space in particular experienced a decline in adjusted EBITDA margins.
Speaker Change: Several quarters of balance sheet related headwinds impacting manufacturing and deliveries combined with cost growth on cutting edge nonrecurring engineering related programs that are nearing completion, our profitability was negatively impacted.
We also experienced a delay in the timing of the receipt of a large troper scatter related foreign military sales order.
The timing and amount of such orders are often difficult to predict due to various factors, including political influences in defense spending budgets taken together the impact on segment profitability was significant.
As I mentioned for more detail on this I'd encourage you to review our shareholder letter and SEC filings.
Stepping back and as I wrote in our shareholder letter the close of our fiscal 'twenty 'twenty four fourth quarter provides an opportunity to reflect on both the progress. The company has made over the past year as well as a reminder of how much remains to be done to build the comtech our customers our people and our shareholders want.
With our transformation strategy defined in place and well underway I believe we'll get there we have a lot of work to do but from my perspective, we're engaging in that work from a position of strength.
And again customers turn to contact to solve their most challenging communications problems.
Now, let me turn the opt to the operator to address your questions.
Speaker Change: Okay.
Absolutely at this time, if he would like to ask a question. Please press star and one on your telephone keypad.
Keep in mind Humira remove yourself from the question queue at any time by pressing star and two.
We will take our first question from Greg Burns with Sidoti <unk> Company. Please go ahead. Your line is open.
Greg Burns: Good afternoon.
The strategic review process for the terrestrial business could you maybe give us a little bit more color on the timing of when you expect that to be completed what kind of processes and me as being Ron is it open or are you dealing directly with.
Specific interested parties.
Greg Burns: And then.
Assuming some transaction as is completed what do you foresee the capital structure of the Standalone satellite business.
Greg Burns: Looking like.
Do you expect to buy.
Buy back all of that and called the preferreds and you'd be left with a clean balance sheet. Thank you.
Okay, Great and Greg, Yeah, Hey, Greg Thanks.
Speaker Change: Thanks for the question. So the the process has been ongoing for quite some time it'll be a it'll be dictated in the public it'll be public documents surrounding the whole thing it's been a methodical process that we've we've been running actually for for quite a while now we're making sure that we proceed through this.
Greg Burns: With great diligence on both sides of these equations, we continue to entertain.
Various factions that want to come forth and take a look at this.
And then second part of your question I believe dealt with what do we anticipate the cost structure to look like.
Greg Burns: After the divestiture and certainly I think we can all take a look at as well as the the the loans.
Certainly as we divest of that part of the business.
The cost structure will have to be reduced in order to accommodate the smaller business that we will be at the time of that divestiture.
The other question had to do with.
Speaker Change: What was the third part of that yes, the capital the capital structure do you expect to be able to get the capital throughout your is your goal to pay down all the debt.
Speaker Change: Called the preferreds.
Yeah, It would be anticipated certainly that we would.
Pay off the loans and and and do the same thing with the preferred if possible.
Greg Burns: Okay.
Greg Burns:
Hey, Greg on that point too I would just add to what John is saying [noise].
Certainly, we're not going to speculate about valuation and things of those are related to those matters, but certainly our view is with the liquidation of our own builds in a transaction like that we would look to simplify our balance sheet.
Greg Burns: Okay.
Greg Burns:
Greg Burns: Okay.
Greg Burns: And the.
Speaker Change: Could you just talk a little bit more about the.
The margin headwinds are the impacts this quarter, what was driving that from an operational perspective, and you know what you're doing going forward to avoid these types of situations, where you run into these cost overruns and issues like this in the future.
Let me take your first part of the call and just yeah. Okay, we're going to split up the answer probably yeah Greg.
You know in terms of the Q4 performance and some of the adjustments that John was referring to in his opening remarks.
Speaker Change: You know, we're going through especially in our satellite in space segment.
A few and I'll read development jobs that will lead to production.
You know those jobs as John said are progressing and along the way. These are cutting edge technologies and in the fourth quarter as we did at a hard scrub of those we made sure that the Acs properly reflected the cost estimates I.
I would say, we believe that the noise is behind us on that front, but these are development jobs, yeah, we want to get it right that our production up for the future. So you know in terms of the fourth quarter performance, we took our lumps and certainly each quarter and we'll be looking at those but you know I'd say Q4, we did a hard scrub.
I would also add Greg that.
We are probably we have a high percentage of what I would call it development jobs, especially in Chandler right now in our amplifiers and modems part of the business.
Where we've got a substantial amount of revenue coming from our development projects and as intrinsically those projects are not the highest gross margin where the margin comes back into play is when they move into production and we're certainly hopeful that that is going to occur over the well at various times. We've got you know eat.
Speaker Change: With the army that'll be longer, but we've got other things like the E. Three M with the Army Air Force anti Jam modem that should move into production sooner. So as we cycle those off of the.
The development stage of those projects, we will the margins, we will see the margins improve.
Speaker Change: Okay.
Speaker Change: Okay.
And then I guess looking forward I guess, you had to take a break.
Bridge some bridge financing to get you through this this quarter you had some movement on the <unk>.
Billed receivables like what's your line of sight on kind of converting those unbilled receivables.
Speaker Change:
Speaker Change: And I guess your ability to going into the first quarter or two.
Maybe maybe it's going to depend on a transaction with.
The terrestrial business, but if nothing is done.
Are you going to be able to generate enough cash or satisfy your <unk> obligations without taking on additional.
Speaker Change: Financing.
Speaker Change: Yeah, Greg on that front.
You saw in the footnote for the receivables we did have a very nice reduction in the Unbilled I know total receivables still are at an elevated level, but you can see both on our commercial and government programs.
<unk> into the to build arena. So we're clicking off the the task that we need to do to invoice our customer and received payment. We did see a reduction we expect to continue to see that reduction as we completed deliveries on the army.
Speaker Change: And Marines Nextgen triple programs are.
We're in the throes of making those deliveries as we speak so we do expect that cadence to continue and provide further liquidity to the situation.
Speaker Change: But yes.
We do expect a decrease no change in our thinking on it.
Speaker Change: Okay. Thank you.
Thanks, Greg.
We will take our next question from Joe Gomes with Noble capital. Please go ahead. Your line is open.
Good evening, Thanks for taking my questions.
So Joe.
I wanted to.
Start out Joe.
In your in your prepared remarks or in the shareholder letter I guess I shouldn't say you do talk about and Mike you talked about it briefly.
In the fourth quarter are you scrubbed that.
Some of these estimates to complete different products.
Speaker Change: Wondering.
How much what was the delta from what you originally had.
Estimated as to know Actavis complete scrub what what is the.
The change there.
Because it sounds like it was.
Speaker Change: A pretty big change.
And your estimates and I'm, just trying to get some more color on that.
Yeah No. Good question, Joe I don't think I'll put a specific number on the various programs and our investments that we're making in these programs with assai with our customer I would just say that it was more than one contract, but it was contained to the development contracts and you know in terms of our fourth quarter performance.
Speaker Change: As John did mentioned in his prepared remarks, and then the shell of the letter we will also tracking a fairly large chunk of scatter order.
Destined for an end customer overseas and it was a very difficult to predict so we had line of sight to that it shifted out came out of the quarter. So on top of the adjustments we were making that hitting also in the late in the quarter and are working through that.
They added up to a pretty sizeable.
John said significant impact in the fourth quarter, but you know what I'm going through these reviews. We're also trying to think about the estimates to complete to getting us done so.
Hopefully the team did a good job in getting that all behind us.
Speaker Change: Okay.
Thanks for that.
Speaker Change: The TF SAR contract.
Speaker Change: I was under the impression that.
You had had finally got the approval to go ahead, but reading through the K last night. It appears that that contract is still under protest so.
Speaker Change: Maybe give us a little more color on you know.
Where that stands and when do you think you're actually going to get the opportunity to start fulfilling that that contract and we can start seeing that.
Speaker Change: The impact of that.
Speaker Change: The results here.
Speaker Change: Yeah Joe.
I wish I had a great answer for you, but I don't right that is clearly extended way beyond any protests that I've ever been involved in.
Every time.
Everytime. It is re awarded a new protest is filed.
Every time you file a new protest its got to be on something that has not previously been protested.
Speaker Change: And it goes through the <unk> on that and we are we remain hopeful right.
Speaker Change: And I see almost.
Speaker Change: Biweekly Theres an update on it but it has not yet been.
Full and final determination to end the protest.
I wish I wish I had a better answer for you right. Because then I'd have a better answer for us.
We're hopeful hopeful that it soon but there are no guarantees on it.
Speaker Change: Okay. Thanks, and then.
Speaker Change: Yeah.
Speaker Change: Just.
If I'm looking at your R&D expenses.
Speaker Change: As a percent of revenues.
We're four 5% and 24, which is down from eight eight.
And 23, which was down to 10 from 10 eight in 'twenty two.
Speaker Change: Are we under investing in R&D here at this point in time or is this you know we've completed some big programs that are R&D related and were comfortable at this four 5% of revenue level.
Speaker Change: Because as you know.
Speaker Change: And it's a pretty big substantial decline over the past three years in terms of the amount of.
Speaker Change: R&D that is being spent.
Speaker Change: Yes, Joe I'll take the first part and then.
Speaker Change: Hand, it off to John I think what's important to also note is that.
The state had R&D expense on the P&L. It's just one line. We also have R&D that sits in cost of sales and I would point you to upfront in the K, we talk about the.
The trend in our R&D coming down but at the same time you have the customer funded going up substantially from 10 million to almost $19 million over the course of the last three years. So I think it's part of our initiatives to have the customer help pay for some of the development. So you don't see it as reported R&D you see part of it.
Revenues and cost of sales.
John mentioned, whose jobs inherently generally have lower margins, but we're also getting part of the bill footed by the customer.
And also we had spent some time this year.
Prioritizing our resources going through our transformation to focus on now the programs. We think that have the highest margin potential and ones that will unlock sales as opposed to trying to feed legacy programs that maybe don't have the right ROI on it.
Speaker Change: Does that help.
Speaker Change: Yeah. So.
We concur with Mike on that so as I indicated during my remarks, and certainly the way that we're operating that we got quite a few.
Development projects underway.
Speaker Change: Facilities and many of those are customer funded.
So instead of dramatically increasing our total cost of engineering expense, obviously, where we're trying to utilize the valuable resources, we have and the best way, we can especially as those projects move from the development phase into the production phase.
I don't want to be trying to replace or have to get rid of the engineering talent. So.
Speaker Change: I'm comfortable with what we're doing now and as you as you may or may not remember I don't know how closely you follow us, but we recently introduced.
So the digital common ground series satellite modems that will bring out over the course of the next year.
And that is a major R&D projects that were undergoing along that one has a similar project to the army modem that we're building, which are both fully digital modems.
Speaker Change: So we are we are spending money, we know how important that is and.
But I think I think we've got the right balance.
Speaker Change: Okay.
Speaker Change: Okay, great. Thanks, I'll get back in queue.
Speaker Change: Thank you.
Speaker Change: And as a reminder, if you'd like to ask a question. Please press the star and one keys, we will take our next question from Mike Crawford with B Riley Securities. Please go ahead.
Alright, thank you'd be right with securities so absent.
Speaker Change: Further than that.
Given that Q1 ends today.
Speaker Change: Hmm.
Speaker Change: Wood.
Speaker Change: What.
Type of revenue and gross margin should we.
We expect in terms of a range for.
Speaker Change: This quarterly period than it is today.
Yeah. So we what we expect for Q1 is the revenue to stay about the same as it was in Q4 and we expect we are expecting certainly greater EBITDA than we achieved in Q4, we're not prepared to give a range on that but.
But we're prepared to say that we're gonna have greater EBITDA that we had in Q4.
And Mike I would add to what John saying is keeping in mind you referenced the EAC is put that aside but we also just announced a.
Speaker Change: Our strategy to transform our business.
Yeah, and we also had just announced the wind down of baptizing, Stoke and while that substantially done we still have a few more things to get done and.
Speaker Change: And that's tracking very nicely. According to our plan, but you know those things create some uncertainty on the bottom line I think as John said on the topline I think we have.
Speaker Change: Decent visibility right now we still have to close the books right closely with that process, but certainly when it comes to bottom line performance.
Wanted to just kind of talk in terms of non bathing Stoke.
Because that's a little bit of an unknown as we go through a restructuring there.
Speaker Change: Mhm.
Speaker Change: And with these.
Speaker Change: 124 million or of Unbilled lifestyle that remained at July.
Speaker Change:
At what level should we look for those to decline too in this period that ends today.
Speaker Change: And what is that.
Speaker Change: No rush composition of those like versus truckload scatter versus maybe software delivered to.
What wireless carriers et cetera.
Speaker Change: Yeah I'll take that.
Speaker Change: Do we know the percentages, yes, so in terms of our liquidation plan.
Speaker Change: First point you to the footnote that breaks out the Unbilled and you can see the distribution between <unk>, which is more software development and customer acceptance versus satellite in space, which is more let's get the products out and deliver it. So we can invoice that milestone.
Speaker Change: Certainly.
Majority is falling in satellite and space typical programs, we've discussed in the past like the U S. Army next Gen Troppo project, which was about $30 million and you know we're well into the deliveries now in that one same thing with the larger U S Marine Corps order.
Which we're also making deliveries of all the systems to our prime and.
In support of the Marines program, so and at this point in time, our deliveries we are well advanced in the delivery.
And ramping up to that state, where we expect it to be and if we continue this up I think it will be.
Invoiced timely and with typical payment terms for those contracts with the army, probably paying a little bit faster than the Marines just given the nature of the contract and then within those contracts. There is some extended payment terms that they've put in there right its like 45 or 60 days.
Speaker Change: <unk> ability to pay but what we saw in Q1 was a steady roll off as well that the unbilled.
That's what the team is doing a great job getting the deliveries.
Speaker Change: Okay.
Speaker Change: And then just regarding margin I know.
Speaker Change: You have all.
These additional legal and consulting costs associated with.
Speaker Change: The decision this accident the one business that strategic review process, if I am but just when you get down to these modem.
These digital modem development programs, where youre getting.
Speaker Change: You know kind of paid to develop them by your customers but.
Speaker Change: Is there any reason to think that when you come out the other side of that production that it's not going to be more close similar to.
Speaker Change: Cash margin experience.
No no the production.
Margins are much better than the development margins.
Speaker Change: The development margins, we go through and that's certainly what we've had the EAC.
Write down for the fourth quarter right. So once we start moving into volume is where we shine right, but that's where we've got the surface Mount machine. The factory. We just we just move it into production and it becomes a steady kind of business for us and the margins are much better.
We're not I'm, not saying that we're not worried about the margins when it moves into production.
Speaker Change: Mhm and I think you said atrium first and maybe is that something that we could expect.
Speaker Change: She will start occurring in the second fiscal quarter ended January or or when should we look for this.
Speaker Change:
<unk> transformation.
Speaker Change: Yeah.
Production to occur.
Yeah, I think where we're winding down the development part of that and I believe that in the second and third quarters of the year, we will get a little bit more in the second and I expect more in the third.
Speaker Change: But.
We'll certainly have some substantial revenue in 'twenty five and beyond.
Speaker Change: Okay.
Speaker Change: Mhm.
It should go on for quite a number of years.
Speaker Change: [laughter], yeah, well, Okay I'm I'll just end with one final question on different topic. So now that the 10-K filed.
Speaker Change: When.
Speaker Change: Would you buy statute need to hold your AGM and win.
Do you expect to set a date for that.
Speaker Change: Yes, if you're referring to the shareholder meeting and setting a date, we'll be putting out information at the appropriate time not going to make any comments on it at this time.
Speaker Change: Okay, Alright, thank you very much.
Thanks, Mike.
We will take our next question from George Notter with Jefferies. Please go ahead. Your line is open.
Hi, there I'm wondering if you can make any comments on the progress you're making in the potential sale of the terrestrial and wireless business.
If I go back from memory.
Yeah, I think there were prior management teams that also.
I think looked at selling these assets and.
I guess I'm, just trying to handicap, the likelihood of getting to a successful sale.
I'm wondering how fresh this this asset is on the marketplace.
Speaker Change: Yeah.
Speaker Change: So.
The process has been ongoing I can't comment a lot on where the process is and when we anticipate that it would come to a conclusion.
We do know with great certainty is that the.
Speaker Change: The business the <unk> business is clearly as all of you guys know.
<unk> undervalued asset in the market.
It is an extraordinary business performing incredibly well for us.
We've got a great management team in there they are well received in the market there their backlog is strong there.
They're continuing to improve their margins.
It is a very attractive business, we feel it's really the only great way to unlock the value of that business for our shareholders.
Speaker Change: We're certainly trying to drive all the great things out of the business, we can and we certainly see that as a way to do that but I can't comment further on where we are in that process where.
Or speculate on whether we'll be successful or not but we certainly hope to.
Also and then the other one I wanted to the bad things to a facility can you give us a sense for how much revenue and how much cost structure was associated with that business.
Speaker Change: Obviously, it will be coming out of the financials, but what would that look like.
Speaker Change: Yes.
Speaker Change: Yeah, again, probably won't give a specific number George but yes, certainly use of enough size and scale to.
Speaker Change: And you've got heavy focus from management to invest in that business unit.
Just at this point in time it wasn't.
Coming to fruition, but it definitely has a significant impact on our results for the year and curtailing that loss going forward.
Speaker Change: We think it will be a meaningful reduction in expenditures.
Significant improve our bottom line in that segment.
Got it.
Speaker Change: Yeah.
Speaker Change: I'm sorry.
I'm not going to put a specific number on it.
Got it can you tell us how many people are in that business line.
Under 90 under five at this point in time George.
George: Under five employees spread in that business.
George: It's it's wound down and basketball.
Got it and can you say your question was in terms of the employment in that business.
I think John gave a little color on that.
Speaker Change: To say it was about 100.
Speaker Change: Okay great.
Speaker Change: Great.
Speaker Change: Thank you very much.
George: Thanks George.
And once again, if you'd like to ask a question today. Please press the star and <unk> on your telephone keypad.
We can pause for a moment to allow any further questions to queue.
And there are no further questions on the line at this time I will turn the program to our speakers for any additional or closing remarks.
Yeah, I don't have any further comments I appreciate everybody, taking the time to listen to us This afternoon.
And I hope everyone has a happy Halloween and we will talk again in another quarter.
George: Okay.
This does conclude today's program. Thank you for your participation and you may now disconnect.
George: Mhm.
Speaker Change: [music].
Speaker Change: Hum.
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Speaker Change: Uh-huh.
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