Comtech Telecommunications Corp. (CMTL) Q2 2013 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to Comtech Telecommunications Corp. Second Quarter Fiscal 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, Friday, March 8, 2013. I would now like to turn the conference over to Ms. Maria Salerno of Comtech Telecommunications. Please go ahead, ma'am.

Thank you, and good morning. Welcome to the Comtech Telecommunications Corp. conference call for the second quarter of fiscal year 2013. With us on the call this morning are Fred Kornberg, President and Chief Executive Officer of Comtech; and Michael Porcelain, Senior Vice President and Chief Financial Officer. Before we proceed, I need to remind you of the company's 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; 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 certain significant risks and uncertainties. Actual results could differ materially from such forward-looking information. Any forward-looking statements are qualified in their entirety by cautionary statements contained in the company's Securities and Exchange Commission filings. I am pleased now to introduce the President and Chief Executive Officer of Comtech, Fred Kornberg. Fred?

Thanks, Maria. Good morning, everyone, and thank you for joining us on this call. Our second quarter results were impacted by a very weak global economic environment and the continuing funding paralysis of sequestration. As announced yesterday afternoon, we reported second quarter results of $74.6 million in revenues and a GAAP diluted EPS of $0.14. Our adjusted EBITDA for the second quarter was $10.1 million. On our last conference call, we indicated that we expected that the U.S. government would make significant progress on its budget issues and that business conditions would improve. Clearly, this did not happen. And in recent months, in fact, we believe that business conditions have actually deteriorated. We believe that failure to resolve the sequestration and related U.S. government budget issues, first by December 31, 2012, and once again by March 1, 2013, has also resulted in increased uncertainty among our global customer base. At this point, because we're navigating through a very weak difficult global economy, we cannot predict the effect of sequestration on our markets, and we're continuing to experience weak order flow, we now believe that the revenues in fiscal 2013 will be in the range of $320 million to $330 million, and GAAP diluted EPS will be in the range of $0.80 to $0.92. Our adjusted EBITDA is expected to be in the range of $48 million to $52 million. Despite lower revenue and EBITDA guidance for fiscal 2013, our long-term growth plans have not changed. We still believe that our products and services remain well positioned due to a number of factors, including the continuance -- the continued reliance by our customers on our advanced communications products and systems, the continued shift toward information-based, network-centric warfare and the need for developing countries to upgrade their communications infrastructure. In light of our long-term growth expectations, our Board of Directors approved a dividend for our third quarter of fiscal 2013 of $0.275 per common share. This dividend is expected to be paid on May 21, 2013, to stockholders of record on April 19, 2013. To date and over the past 10 consecutive quarters, we have paid out approximately $57.1 million of dividends and continue to believe that our dividend program is an excellent way to return capital to our stockholders. In addition, during the second quarter of fiscal 2013, we repurchased approximately 400,000 shares of our common stock at an aggregate cost of $10.5 million. And in early February, we completed our $250 million stock repurchase program. As we announced in December 2012, our board also authorized a new $50 million stock repurchase program, and we have repurchased approximately $5 million under this new program to date. Now let me turn it over to Mike Porcelain to provide a brief overview of our second quarter financial results, and then I will talk more specifically about each of our 3 business segments. Mike?

Thanks, Fred, and good morning, everyone. I'll walk you through the Q2 results and provide some commentary on our updated 2013 business outlook. During Q2, we generated revenues of $74.6 million, of which 32.8% were for U.S. government end users, 54.3% were for international end users, with the remainder being for domestic, commercial end customers. Let me provide some color on sales by segment. Net sales on our Telecom Transmission segment were $45.8 million in Q2 of fiscal 2013 as compared to the $51.3 million we achieved in Q2 of last year, representing a decrease of 10.7%. This decline is attributable to significantly lower sales of our Satellite Earth Station products, which were partially offset by higher sales of our over-the-horizon microwave system product line. During Q2 of fiscal 2013, sales of our Satellite Earth Station product line were negatively impacted by reduced spending by both U.S. government and our international customers. Q2 fiscal 2013 bookings and related ending backlog for our Satellite Earth Station products were higher as compared to Q2 of fiscal 2012 and Q1 of fiscal 2013. Our bookings during the quarter included a $5 million order that we announced in February from a U.S. government system integrator to support reliable high-bandwidth war fighter communications. Despite this order, we believe that the order level we achieved on our most recent quarter was suppressed due to uncertainty that exists amongst our global customer base. We believe this uncertainty will continue to impact bookings for this product line for the remainder of fiscal 2013. In particular, our Q3 bookings are expected to be lower than Q2 before picking up in Q4. Based on expected order flow, we believe that the Satellite Earth Station sales will be lower in fiscal 2013 as compared to fiscal 2012. Sales of our over-the-horizon microwave systems in Q2 primarily reflect an increased level of performance on our ongoing 3-year, $55 million contract to design and furnish a telecommunications system for use in a North African government communications network. These large contracts are sometimes lumpy, and we are currently in between project stages and deliveries within this contract. We also have a number of other over-the-horizon microwave system contracts in our backlog, such as our $2.7 million order for TRC-170 modem upgrade kits that are expected to ship in Q4 as opposed to Q3. As such, based on the timing of expected contract performance on our North African government contracts and the timing of shipments for our other contracts, which are in backlog, sales of over-the-horizon microwave systems are expected to significantly decrease during Q3 of fiscal 2013 before increasing in Q4 fiscal 2013. This lumpiness will cause our operating margins in our Telecom segment in Q3 to dip below the 12% we just increased -- we just achieved before significantly increasing in Q4. In addition, we did not have any sales or received new orders for our Mobile -- Modular Track Transportable Troposcatter Systems or MTTS systems during Q2 2013, and we do not expect any shipments for the rest of the year. Based on our current backlog and the anticipated receipt of other orders, we still expect net sales for this product line in fiscal 2013 to be higher than the level we achieved in fiscal 2012. Although there's always performance risk, much of our expected fiscal 2013 over-the-horizon microwave revenue is in our backlog. Net sales in our RF Microwave Amplifier segment were $20.4 million in Q2 of fiscal 2013 as compared to $22.4 million in Q2 of fiscal 2012, a decrease of 8.9%. Bookings in this segment for Q2 of fiscal 2013 were significantly lower than the level we achieved for Q2 of fiscal 2012. Based on our current backlog and the anticipated timing of orders we expect to receive, we now expect net sales in the RF Microwave Amplifier segment in fiscal 2013 to be lower than the level we achieved in fiscal 2012. Based on the timing of expected order flow, sales in Q3 of fiscal 2013 are expected to decline from the level we just achieved in Q2. Although we are not anticipating any meaningful improvement in the overall economy, based on expected order flow including known opportunities, sales in Q4 of fiscal 2013 for this segment are anticipated to be near or at the peak for this segment for fiscal 2013. Turning to our Mobile Data Communications segment. Sales in Q2 of fiscal 2013 were $8.4 million, a substantial decrease of 66.9% from Q2 of last year. This anticipated decrease is attributable to a substantial decline in MTS and BFT-1 sales for the U.S. Army and our fiscal 2012 decision to wind down our microsatellite product line. As we mentioned earlier, we expect no additional microsatellite product revenue to be generated for the remainder of fiscal 2013. Microsatellite product revenues were $4.4 million in Q2 of fiscal 2012. Although Mobile Data Communications sales for the second quarter of fiscal 2013 include $2.5 million of revenue related to our $10 million annual intellectual property license fee, we continue to expect that sales in our Mobile Data Communications segment will be materially lower in fiscal 2013 as compared to fiscal 2012. As a reminder, since June 30, 2012, we no longer procure or provide satellite transponder capacity to the U.S. Army. We currently have $4.5 million of BFT-1 orders in our backlog, and as Fred will discuss in a bit, we're expecting that the BFT-1 sustainment contracts optional performance period will be exercised by the U.S. Army later this month. Let me walk you through our gross margin and SG&A line items on the balance sheet -- on the income statement. Our gross profit in Q2 of fiscal 2013 as a percentage of net sales was 43.2% as compared to 41.8% of Q2 of last year. Our gross profit percentage this quarter benefited from a significantly higher percentage of consolidated net sales occurring in our Telecom Transmission segment and an overall better mix of products and services in both our RF Microwave Amplifiers and Mobile Data Communications segments. Our gross profit also reflects the benefit of the $2.5 million IP fee. Looking forward, we believe gross profit, as a percentage of consolidated net sales in fiscal 2013, will be slightly higher than the percentage we achieved in fiscal 2012. On the expense side, SG&A expenses were $15.4 million or 20.6% of Q2 2013 net sales, as compared to the $19.6 million or 19.8% we reported in Q2 of last year. The decrease in our SG&A expenses in dollars was primarily due to overall lower spending associated with the significantly lower level of consolidated net sales during Q2 of fiscal 2013 as compared to the prior period last year. In addition, our SG&A expenses this quarter include a benefit of $900,000 related to a change in the fair value of a contingent earn-out liability associated with our acquisition of Stampede Technologies and a benefit of $200,000 related to the reversal of previously accrued costs associated with the wind down of our microsatellite product line that were lower than expected. Excluding these amounts in Q2 of fiscal 2013, SG&A expenses would have been 22.1% of Q2 fiscal 2013 net sales. Given the absence of fair market value adjustments and cost reversals, as well as the impact of the timing of certain planned operating expenses, we do expect that consolidated SG&A expenses in Q3 and in Q4 of fiscal 2013 in dollars to be higher than the reported amount in the second quarter of fiscal 2013. However, total SG&A expenses in dollars are still expected to significantly decrease in fiscal 2013, as compared to fiscal 2012, and as a percentage of consolidated net sales, are expected to be comparable to the reported amount for fiscal 2012. Research and development expenses were $9.3 million or 12.5% of consolidated net sales in our most recent quarter, versus $9.4 million last year. Looking forward, despite challenging business conditions and notwithstanding our cost reduction efforts, we expect to continue to invest in R&D. As such, we expect that R&D expenses in dollars for fiscal 2013 will be comparable to the amount we invested during fiscal 2012. Total stock-based compensation expense, which is recorded in our unallocated segment for the second quarter of fiscal 2013 was $800,000 compared to $1 million in the second quarter of fiscal 2012. Amortization of intangibles with finite lives in the second quarter of fiscal 2013 was $1.6 million compared to $1.7 million in the second quarter of fiscal 2012. Consolidated operating income in Q2 of fiscal 2013 was $5.9 million or 7.9% of consolidated net sales, as compared to $10.7 million or 10.8% in the second quarter of last year. Based on the orders currently in our backlog and orders we expect to receive, our GAAP consolidated operating income in fiscal 2013 as a percentage of consolidated net sales is expected to approximate 10%. As further discussed in our Form 10-Q filed yesterday afternoon, given the timing of shipments related to expected RF microwave amplifier orders and the timing of our performance on our over-the-horizon microwave system contracts, most of which are currently in our backlog, we expect that our consolidated operating income, both in dollars and as a percentage, will decrease in Q3 before increasing in Q4. Interest expense was $2 million in the second quarter of fiscal 2013 compared to $2.2 million for the second quarter of fiscal 2012. Interest income and other was $315,000 in the second quarter of fiscal 2013 compared to $434,000 in the second quarter of fiscal 2012. Turning to income taxes. Our GAAP effective tax rate for the second quarter of fiscal 2013 was 44.1%. This rate reflects a net discrete tax expense of approximately $400,000, of which $700,000 relates to the establishment of a valuation allowance on certain deferred tax assets of one of our some foreign subsidiaries offset in part by a $300,000 discrete tax benefit related to the retroactive extension of the federal research and experimentation credit. Excluding these discrete tax items, our effective tax rate for Q2 of fiscal 2013 would have been 35.5%, which is the amount that we expect for the fiscal 2013 year period excluding any additional discrete tax items. For the second quarter of fiscal 2013, we delivered GAAP diluted EPS of $0.14. Now let me provide some other financial metrics. Adjusted EBITDA, as defined at the end of our press release that we issued yesterday, was $10.1 million in Q2. As of January 31, 2013, our backlog was $126.4 million compared to $153.9 million at year end and $126.3 million at January 31, 2012. Our current backlog includes $4.5 million of orders related to our BFT-1 sustainment activities. Now let me turn to our balance sheet, which remains very strong. As of January 31, 2013, we had $352.9 million of cash. This cash balance does not reflect the use of approximately $5.7 million of cash for stock repurchases that we made so far in Q3 of fiscal 2013. We generated $11.4 million of positive cash flow from operations during the first 6 months of fiscal 2013, and we expect to generate positive net cash from operating activities for the remainder of fiscal 2013. Finally, I want to highlight a few comments related to our expected fiscal 2013 performance. In light of current market conditions and the timing of expected orders, we do believe it is prudent to provide some comments on Q3. We expect that our sales in Q3 of fiscal 2013 will approximate $70 million, and that our fourth quarter revenue will be near or at the peak for what we achieved in fiscal 2013. As a result of our outlook, we expect that our 3% convertible notes in Q3 will not be dilutive. As such, for income statement modeling purposes, you should consider excluding the shares from your diluted EPS ratio calculation and not adding back the interest expense to the net income. From an EPS perspective, Q3 GAAP diluted EPS is expected to be between $0.03 and $0.05. Of course, this does not reflect any stock repurchases that we may make pursuant to our share repurchase plan or any one-time items. Now let me turn it back to Fred, who will discuss our business strategies and outlook in further detail. Fred?

Thanks, Mike. At this point, I'd like to provide a brief update on each of our core product lines and then we'll go into a question-and-answer period. Let me start with our Telecommunications Transmission segment, which is the backbone of our current business. As Mike mentioned, total second quarter revenues in this segment decreased significantly. The decrease in Satellite Earth Station product sales, which was more than we had anticipated even a few months ago, was primarily the result of a weak global economic environment, as well as of the ongoing paralysis in U.S. government spending. Although overall bookings were up, several international regions, such as Europe and Latin America, were down, and we continue to experience shifts do the right in the international markets we serve. The U.S. government's failure to address the sequester has also not helped. We believe the failure to resolve timely the sequestration and related budget issues, first by December 31, 2012, and then again on March 1, 2013, has a caused additional uncertainty in our markets. We believe that the paralysis due to sequestration combined with a very weak worldwide economy has resulted in delays, not only to some of our U.S. government programs, but the reductions or delays in spending by many of our domestic and foreign customers. At the same time, some of our international customers are also being affected by increasingly volatile political conditions in their respective countries. In light of these ongoing and, in some case, worsening economic and government funding headwinds, we are not assuming a meaningful change in conditions for the second half of fiscal 2013. Although we do expect the fourth quarter to be stronger than the third quarter, as the mystery of sequestration becomes clearer and our customers resume their buying activities accordingly. In the long term, we remain confident that our Satellite Earth Station product line will return to its strong historical growth trend, enabling key applications such as broadcast, cellular backhaul and IP-based communications traffic. Turning to the other component of our Telecommunications Transmission segment, we remain bullish in the long term about our over-the-horizon microwave product line. As you know, in the fourth quarter of fiscal 2012, we received a $55 million contract from a U.S. prime contractor relating to the next phase of a major communications project with a North African end customer, which has begun to generate revenue in this fiscal year. Just as importantly, the end customer has awarded the prime contractor another contract for the next phase of the same project. As such, we're negotiating with the prime contractor to obtain additional business for the next phase. We expect to receive this $40 million to $50 million order for this next phase in fiscal 2013. We've also made significant headway with various new potential global customers. In fact, earlier this year, we received a $1.4 million order from the Swedish military for our mobile modulated transit case terminals and our transportable communications trailer-mounted troposcatter systems, and there's a potential of large follow-on work. We're cautiously optimistic about our other international opportunities, some of which are large, as all of these potential customers have a requirement for tropo and are preparing specific specifications, negotiating with us or waiting for government approval for their projects. On the U.S. government front, we have supplied our products to a prime contractor that is using its antennas in our troposcatter systems to offer the U.S. military a flyaway configuration, which is capable of providing seamless compatibility with legacy fielded over-the-horizon microwave systems. Although we believe that additional orders for this product may also be forthcoming as there are hundreds of potential units to be deployed, this program has also moved to the right as a result of the U.S. government budget issues. Over the past several years, our over-the-horizon microwave systems have been fielded by U.S. military throughout the world and have proven to be an important link in critical communication channels. We see this trend continuing once the U.S. government resolves the procurement paralysis. Overall, we believe that our Telecommunications Transmission product lines are poised for growth as conditions improve and government funding frees up. Moving to our RF Microwave Amplifier segment, our traveling wave tube amplifiers and solid-state power amplifiers serve critical needs in both the commercial and defense markets. Our TWTAs are used extensively in the satellite communications market, enabling vital services such as traditional broadcast, direct-to-home broadcast, satellite newsgathering and the emerging satellite broadband communications area. Among our more recent commercial TWTA wins, are contracts for our industry-leading 500-watt Ka-band amplifiers, which are key components in the vast majority of North American and European high-throughput satellite systems. Commercial bookings in recent months have been impacted by weak global economic conditions, but we are expecting some sizable orders in the next few months, some of which are expected to ship in the fourth quarter of fiscal 2013. On the defense side, our TWTA products are used to support high-capacity U.S. military satellite communication systems such as the Wideband Global Satellite Constellation and the Milstar system. We also have products qualified for both the new FAB-T and WIN-T programs. However, hereto, we have seen these programs shift out to the right, even the high-profile ones like WIN-T. In addition to commercial applications, such as aviation, medical and instrumentation testing, our solid-state PAs are used in a number of electronic warfare applications, including counter-IED systems. In fact, during the past few years, a significant portion of our solid-state sales have come from our participation in counter-IED programs. At this time, we have completed our development work on contracts in support of the DoD's next-generation counter-IED programs, most notably CREW 3.3. However, in light of technical system issues experienced on this program, unrelated to us, and the uncertain government funding environment, where this program is heading and when the government and the prime contractor will be ready to order our product, is not clear at this time. As I said on our last call, we view this program as being in a hold, and that the earliest it would be reactivated would be in our fiscal 2014. In our Mobile Data Communications segment, as anticipated, revenues in the first half of fiscal 2013, relating to BFT and MTS, were significantly lower than those reported in the past few years, and we expect that trend to continue for the second half of the fiscal year. We're currently providing both MTS and BFT-1 sustainment services pursuant to a 3-year IDIQ contract that we were awarded in late March, 2012. This contract has a not-to-exceed value of $80.7 million and a base performance period that began on April 1, 2012 and ends on March 31, 2013. The contract provides for 2 12-month option periods exercisable by the U.S. Army. And payments of annual IP license fees of $10 million beyond the base year are contingent upon the U.S. Army's exercise of the optional performance periods. On Wednesday of this week, the U.S. Army notified us of its intention, subject to available funding, to exercise its first 12-month option. In our fiscal 2013 guidance, we have assumed that the U.S. Army will exercise the first option period before the end of this month and have included intellectual property license fees, as well as certain engineering and support services for the full year in fiscal 2013. As of today, we have substantially completed the repositioning of our mobile data communications segment and are now solely focused on providing BFT-1 and MTS-related services to our legacy U.S. Army customer, and seeking other government and commercial opportunities that our technology can be readily adapted to. With that, I would like to proceed to the question-and-answer period of our conference call. Operator?

[Operator Instructions] And we'll take our first question from Joe Nadol of JPMorgan. Joseph B. Nadol - JP Morgan Chase & Co, Research Division: I'd like to dig into the cost structure, a little bit, of the company. Because I hear you on the -- certainly, I hear you on the tough backdrop, the sales backdrop, both government and your commercial markets, but -- I mean, when you think about long-term growth in a -- if I just look at Telecom Transmission, put aside MDC, Telecom Transmission sales were below where they were 6 years ago and that includes -- you had some revenue in there from Radyne on top of that. So at what point on the R&D side and the corporate side -- your corporate costs are going down, but not in line with sales. R&D is not going down, sales are going down a lot. At what point do feel like you need to take more aggressive action?

I think to answer your question, yes, sales have been trending downward. Our R&D, however, is flat and being expensed. I think the way we look at it that this point in time is if this weak trend continues, we will obviously cut our R&D expenses as well. But as you know, R&D is planned well in advance and products have to be completed, or the R&D has to be completed, until the products are finished. So a lot of our R&D expenses are and will continue for certainly the near term until they're finished and are able to be offered as products. And then, we will look into cutting our R&D. Joseph B. Nadol - JP Morgan Chase & Co, Research Division: Okay. And then just secondly on the visibility. I understand, believe me, in the near-term that it's tough with the sequester in particular. But it sounds like you're looking for a bounce back in bookings in Satellite Earth Stations next quarter in Q4? Correct me if I'm misinterpreting what you said. What is your visibility into that? Or how much of that is hope and how much of that is based on what you're hearing from your customers, specifically?

Well, I guess, let me first say that we've been expecting this bounce for quite a while. And obviously, it hasn't happened. Yes, we do expect a bounce in bookings. In fact, we've had a bookings increase in this past quarter, so we kind of expect it to continue that way. Will it happen? We don't know. Joseph B. Nadol - JP Morgan Chase & Co, Research Division: Okay. And then just finally, the change in the accrual for the earnout? Mike, was that in corporate or is that in the segment?

That is in our Telecom segment. So when you look at the 12% margin that we reported, if you wanted to get to a more normalized number for where we're currently running the business, you'd want to back that out.

And we'll take our next question from Rich Valera with Needham & Company. Richard Valera - Needham & Company, LLC, Research Division: Just trying to get a feel for how much of the delta in your guidance is due to things not improving as you had expected? Because I think in your Q, you talked about expecting significantly improved conditions versus things actually getting worse than they were a quarter ago due to sequestration or whatever other macro headwinds. Can you give us any sense of the split there between -- what's actually due to things getting worse versus just not getting significantly better as you had hoped for?

Rich, I think that's a good question. In our Telecom side on our Satellite Earth Station business, we're just not seeing the growth that we expected. Clearly, the issues that happened in December did cause what we were hoping is just a short time -- timing kind of a thing where Q3 bookings are going to be down and then will kind of bounce back bounce to where maybe the second half of fiscal 2012 -- '13 will be similar to what we did in the first half. So we would just say that business, we hope from a bookings perspective, will be flat. Where we did see the unexpected decline in bookings was on our RF Amplifier side. We did have a little bit more optimism that we would now only get the bookings but that we would be close to comparable revenue, let's say, in fiscal 2013. So that's where we saw the unexpected decline and we're going to see how that comes out. But we've kind of reevaluated where we sit on the bookings level. We've taken our bookings growth down to where we think, based on known opportunities and what we think is going to happen. Richard Valera - Needham & Company, LLC, Research Division: Great. In terms of the incremental impact from sequestration, if you had to guess, do you think it's been greatest in RF Amps at least to date?

I would say that, but I'd caution you, it's very, very difficult for us to tell you because our -- sequestration impacts some of our international customers as well. I mean, they're buying stuff and everything has just sort of been on hold, and I think a lot of people are just waiting. Richard Valera - Needham & Company, LLC, Research Division: Great. And then with respect to the fourth quarter rebound in Satellite Earth Station bookings, just, again, kind of wanted to understand what underpins your belief that will happen. Can you give us any color on maybe monthly booking trends at least the contour you've been seeing that would maybe suggest that there would be a reacceleration? Or is it stuff in your pipeline that you expect is going to hit in that fourth quarter? Just any color there would be helpful.

I think it's very difficult to predict. We're kind of in a perfect storm situation. We operate in really 2 major areas, and that is U.S. government and commercial, but commercial international markets. So we've got kind of a perfect storm. The sequestration has affected, obviously, the government portion of our business. The weak global economy, specifically internationally, has obviously affected that. And even the turmoil in some of the countries of that we have expected some growth coming from, specifically, in the Mid East. That seems to be a problem right now. So having those 3 issues at the same time has given us a little bit of a heartburn in terms of how well we can predict the bounce back. But I think we know if the programs -- we know how many have moved to the right and how long they have been moving to the right. So our best guess is what we've given you.

Yes. And Rich, certainly, we are expecting a pop from Q3 of our expectations. I mean, we do expect Q3 bookings to be quite lower than what we just achieved in Q2. Again, as you know, that business is a real book-to-ship business. So in light of the conditions that happened late in the year with the sequestration, short of being delayed and everything kicked to the can to the right, what we've seen and what we're guessing, really, is that a lot of this stuff just -- people just are waiting. And even now that sequestration has taken place in the first part of March, we do think it's going to take some time before that order come -- call it a normal ordering pattern, comes into place. We're not expecting growth in the sense if you look kind of back into, we're looking at the second half of fiscal 2013, and some really looking like we did in the first half of fiscal 2013. Richard Valera - Needham & Company, LLC, Research Division: That's helpful color. Just one more if I could. Just wanted to get your latest thoughts on the DCAA order of the BFT-MTS program. It sounds like you believe you're sort of in the clear there, but still a little ambiguity as far as the sort of the penalty that they said they were going to assess, but you're sort of protesting.

Yes. I mean, at this point, I would tell everyone that wants to know more information about it is to really just read the 10-K because we provided some pretty descriptive disclosure. We did receive a draft report and the orders -- we presented some information to the auditors and they basically agreed to go back and revisit their recommendation at this point. So we have really no idea whether or not they're going to continue with their recommendation or what. But based on the facts that they did present to us in December, we just believe, as we stated in the 10-Q, that their draft audit report was erroneous and flawed. And if that was something that, that would continue, well, we will vigorously intend to dispute it and fight it.

[Operator Instructions] We'll move next to the side of Tyler Hojo with Sidoti & Co. Tyler Hojo - Sidoti & Company, LLC: So just on the RF Microwave segment. Within the Q filing, you kind of discussed the sales CAGR expectation of, I think, 1.4%, I believe that's through 2017. And I guess what I'm wondering is, if I look at kind of how the business is running, you'll probably be down something like double digits in fiscal '13. What are you looking at, from a program level base, to kind of get you confidence in kind of a snap back?

Tyler, just to be very clear that those growth assumptions that you're quoting are actually on the low side of what we actually expect. Those numbers actually relate to a -- our goodwill analysis that we did, which as I'm sure everyone knows is a very sensitized analysis. So those growth assumptions are actually on the low side. From what we're expecting over in the next few years is obviously continued participation on a bunch of electronic jamming systems and participation on a bunch of electronic warfare programs that we think is, once this U.S. government budget issue gets a little bit more clear, spending will ultimately resume. And these are the areas that we think will be poised for spending growth. Tyler Hojo - Sidoti & Company, LLC: Okay. Anything specific that you can point to? Fred talked about JCREW program with not a whole lot of potential until fiscal '14, at the earliest. On the defense side, what are you looking at?

Well, as you mentioned, we're looking at CREW 3.3. We're looking at the WIN-T program. It is a -- we believe it's a program that the government will proceed with. It has moved to the right, but everything seems to have moved to the right. We're also very strong in the FAB-T program as well. So there are a number of programs that I think we're very bullish about. Tyler Hojo - Sidoti & Company, LLC: Okay. Great. And maybe this relates to kind of the first question that was asked. But when we look at the margins in Telecom Transmission, do you think you can get back to kind of the 20% or so level that you had been running over the last several years?

I think the short answer now, based on our updated revised revenue outlook, is that it's not going to happen in 2013. We do think that it's -- something that we can achieve is, once that revenue starts to come back in, if we get that second North African contract, that will be a very, very nice pop to the run rate as we look to 2014. But at this point, 2014 is a long ways away, even though it's 6 months, in light with what we're dealing with the economy, it's something that we're not going to get into. But -- It's not going to happen in 2013, but we do expect operating margins to ultimately come back over 20% and exceed that number. And that will be mostly driven by the revenue that we're able to earn. Tyler Hojo - Sidoti & Company, LLC: Okay. And I think it was in the Q, but maybe you can just talk about the follow-on North African contract. What's the timing surrounding that?

As you know, we -- it took about, I guess, 3 years for the -- for this particular phase that we have right now to finally get contracted for and -- at least at our level. That was the bad news. The good news is that the phase -- the next phase of that particular contract actually took a couple of months. And so our customer, which is a U.S. domestic customer, actually has now signed the contract, has received the down payment for that contract, and we're in the process of negotiating the final terms. It would not surprise me if we could book this as early as April. But certainly, no later than July.

And we'll take our next question from Mark Jordan with Noble Financial.

A couple of questions relative to Mobile Data. First of all, Fred, as you expect, the second year option to be picked up, is there anything that you've seen in the market with regards to plans to deploy BFT-2 that would call into question the probable exercising of option year 3?

It's really difficult for us to kind of give you some color on that because, obviously, we are not in the, let's say, in the information flow on that particular program. All I can tell you, Mark, is that we have not seen any of the follow-on, let's say, steps that BFT-2 should have accomplished at this time. So we don't really see it fielded in other than some experimental places, and we don't see any follow-ons going on. Obviously, with the government spending situation, that's probably a program that has to be looked at pretty thoroughly. We have been told, at least on the BFT-1 sustainment situation that -- in informal discussions with the government that that's going to be around till 2018, 2020. We'd love to believe that.

When you first started -- the government started revitalizing the tropo equipment, the TRC-170s, there was -- I think GD and Raytheon were interested in potentially getting back in that business with tropo starting to become more pervasive since Sweden and other countries looking at it, obviously the U.S. government doing some small form factor purchases of tropo, do you see anyone coming -- trying to start an initiative in that, in tropo, to potentially compete with you?

I think we've experienced the "try", as you call it, in the last few years certainly by General Dynamics and Raytheon. Those 2 being really the only ones that we've seen in trying to go after this market. I think most people don't realize, but the General Dynamics situation relies on a modem that we actually have as a Comtech modem. And it's an outdated version of it. So they're kind of behind the 8 ball as far as that's concerned. Raytheon claims that they're in development of some of that -- some of their tropo situation. We have not seen that out there. We have not lost a program to Raytheon at all. So it's difficult to tell you exactly what's happening in someone else's laboratory, but we don't see them as competitors at all.

All right. Could you give us any sense of what your plans are through the second half of the year relative to the buyback program and/or any thoughts on M&A, which has obviously been an area that's -- you've not seen anything meaningful in the last few years?

Well, again, we are always looking for additional M&A product expansion that we can use to beef up our revenue, obviously, especially in this particular situation that we're in at this moment. So yes, we are looking at various targets. I have to tell you that -- nothing that we like at the moment. As far as the buyback situation is, we will continue -- as the board did approve an additional $50 million buyback, we will continue buying back our stock during the next couple of quarters, and then we'll revisit the problem some more.

Okay. Final question if I may. If you look at the Telecom Transmission group, what percent of that is DoD-oriented and what percent of that kind of revenue stream would be tropo, which is not -- which would be foreign military sales or foreign sales and commercial or international revenue?

Mark, I guess, to try to stick with the public numbers is if you look at the 38% of U.S. government sales for what we did as a company and you kind of back out our Mobile Data Comp segment, that'll give you a good proxy for what that segment does on a stand-alone basis as a percentage of their respective sales to the U.S. government. And obviously, on the over-the-horizon portion, if I understood your question, I mean, almost all of that is international with the exception of our MTTS orders, which we announced publicly, generally, because of the size when we get them.

And we'll take our next question from Chris Quilty with Raymond James. Chris Quilty - Raymond James & Associates, Inc., Research Division: First a housekeeping, Mike. Can you give us the backlog by segment, please?

Sure, Chris. For Q2, our backlog in Telecom, we ended with $78.9 million in backlog. Our RF Amplifiers, we ended with $39.8 million. And on our Mobile Data Com was $7.7 million, and that should add up to about $126.4 million of backlog. Chris Quilty - Raymond James & Associates, Inc., Research Division: Great. Second question on the R&D effort. Can you talk about where you're concentrating that, both in the RF comps versus Telecom Segment, and whether these are developments primarily focused on enhancing the existing product line? Or are you actually branching out into some potential new opportunities that you're looking at?

I think, Chris, probably the answer is all of the above. Most of our R&D expenses are in the Telecom area. Some of our expenses in the RF and the Mobile Data Communications area are mostly customer funded, as that goes. So yes, we have new products on line. We have new bells and whistles to our existing products, so it's really a little bit of everything. Chris Quilty - Raymond James & Associates, Inc., Research Division: Okay. And your expectation in terms of the RF business? Again, I think you indicated that, in the 10-Q, that if you don't sustain your expected level of revenues that there could be a goodwill write-down. Is your expectation that any lift in that business will be driven primarily by a particular segment either on the military or commercial side or by a certain product type?

Well, the RF segment is really primarily government, but a large portion of our TWTA business is also international. Unfortunately, it's -- as I mentioned before in an answer, it's -- our business is international and government, so we're kind of being affected in both of those areas. But we do have, as I mentioned in the TWTA area, we have a number of programs that we really expect to book in the fourth quarter or the third quarter, actually. Chris Quilty - Raymond James & Associates, Inc., Research Division: And you did have one new product customer announcement recently with Harris and something on the mobility side. Can you give us an update of what's happening there and how that's progressing?

I guess it's progressing. I have a difficulty in giving you too much information in that area. But we -- the thing that I would like to kind of give you some color on is that we feel that, that new product, which is the -- our new advanced VSAT is one heck of a product that will have some good sales in the future. Chris Quilty - Raymond James & Associates, Inc., Research Division: So are you out selling that into other new potential customers?

We're certainly trying.

[Operator Instructions] It appears that we have no further questions at this time.

Okay. Thanks again for joining us today, and we look forward to speaking with you again in June.