Comtech Telecommunications Corp. (CMTL) Q3 2013 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to Comtech Telecommunications Corp. Third Quarter Fiscal 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded Friday, June 7, 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 third 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. As announced yesterday afternoon, we reported third quarter results of $69.9 million in revenues and a GAAP diluted EPS of $0.17. Our adjusted EBITDA for the second quarter was $9.6 million. Although I can't say things have meaningfully improved from the last quarter, I can say that we achieved our highest bookings quarter of the year, including a number of strategic orders, which bode well for our future. At this point, we're still navigating through a very difficult global economy and continuing U.S. government funding pressures. With this in mind, we have updated our guidance for fiscal 2013. We now believe that the revenues in fiscal 2013 will be in the range of $310 million to $320 million. And GAAP diluted EPS will be in the range of $0.86 to $0.92. Our adjusted EBITDA is now expected to be in the range of $49 million to $51 million. Also in light of our long-term expectations, our Board of Directors approved a dividend for the fourth quarter of fiscal 2013 of $0.275 per common share. This dividend is expected to be paid on August 20, 2013 to stockholders of record on July 19, 2013. To date, and over the past 11 consecutive quarters, we have paid out approximately $61.6 million of dividends and continue to believe our dividend program is an excellent way to return capital to our shareholders. In addition, during the third quarter, we also repurchased approximately 542,000 shares of our common stock at an aggregate course of $13.8 million pursuant to our Board's authorized $50 million stock repurchase program. To date, we have repurchased approximately $15.4 million under this program. Now, let me turn it over to Mike Porcelain to provide a brief overview of our third quarter financial results and then I will return to talk more specifically about each of our 3 business segments. Mike?

Thanks, Fred, and good morning, everyone. I'll walk you through the Q3 results and provide some commentary on our updated 2013 business outlook. During Q3, we generated revenues of $69.9 million of which 36.9% were for U.S. government end users, 47.1% were for international end users, with the remainder being for domestic, commercial end customers. Net sales in our Telecom Transmission segment were $45.4 million in Q3 of fiscal 2013 as compared to the $48 million we achieved in Q3 of last year, representing a slight decrease of 5.4%. This decline is attributable to lower sales of our Satellite Earth Station products, which were partially offset by higher sales in our over-the-horizon microwave system product line. During Q3 of fiscal 2013, sales of our Satellite Earth Station products were lower, primarily due to lower sales to our international customers. Although sales in bookings continued to be suppressed due to challenging global business conditions, as Fred will discuss in more detail, we were awarded an important contract from the U.S. Space and Naval Warfare Systems Command with a potential value of approximately $29 million and in Q3, we received our first order of $4.5 million to begin work. This contract is moving along and during Q4, we already received an additional $4 million of funding. For the year and as discussed on prior conference calls, we expect that Satellite Earth Station sales will be lower in fiscal 2013 as compared to fiscal 2012. Sales of our over-the-horizon microwave systems in Q3 include sales related to our performance on an ongoing 3-year $55 million contract to design and furnish a telecommunication system for use in a North African government's communications network and the delivery of TRC-170 modem upgrade kits to the U.S. Marine Corps. Shipments of these upgrade kits were previously expected to ship in the fourth quarter, and positively impacted our third quarter. We do not have any mobile transportable troposcatter systems, or MTTS, sales during our most recent quarter and given U.S. budget constraints, we do not expect to receive additional MTTS bookings until fiscal 2014. Nevertheless, based on our expected fourth quarter performance on our existing North African and other contracts currently in our backlog, we expect net sales for this product line to be higher than the level we achieved in fiscal 2012. Net sales in our RF Microwave Amplifier segment were $16.2 million in Q3 of fiscal 2013 as compared to $28.1 million in Q3 of fiscal 2012, a decrease of 42.3%. Overall market conditions continue to be challenging in this segment and we believe many of our customers have reduced or delayed their spending for our products and services. Although bookings in our RF Microwave Amplifier segment for Q3 of fiscal 2013 were significantly lower than the level we achieved for Q3 of fiscal 2012, they were actually slightly higher than Q2 of this year. Based on our current backlog and the anticipated timing of orders we expect to receive, we do expect that sales in Q4 of fiscal 2013 to be at or near the peak of quarterly revenue for fiscal 2013; however, we still expect net sales in the segment for the year to be lower than fiscal 2012 sales. Turning to our Mobile Data Communications segment, sales in Q3 of fiscal 2013 were $8.3 million as compared to $23.6 million in Q3 of fiscal 2012, a substantial decrease of 64.8% from Q3 of last year. This much anticipated decrease is attributable to a substantial decline in MTS and BFT-1 sales to the U.S. Army and our fiscal 2012 decision to wind down our microsatellite product line. As previously discussed on conference calls, we expect no additional microsatellite product revenue to be generated for the fourth quarter. Microsatellite product revenues were $2.8 million in Q3 of fiscal 2012. Mobile data communications sales for this quarter include $2.5 million of revenue related to our $10 million annual intellectual property license fee compared to $800,000 in the third quarter of last year. On a positive note, during Q3 of fiscal 2013 at the government's request, because of near-term funding limitations, we agreed to modify the terms of our existing 3-year, $80.7 million, BFT-1 sustainment contract that we received in Q3 of last year. It is now a 2-year, $43.6 million contract. In connection with this modification, we received full funding for year 2 of $20.8 million. Of this amount, $5 million was recorded as a booking in Q3 with the remainder to be booked in Q4. The $20.8 million includes $10 million for the annual IP licensing fee through March 31, 2014. Now, let me walk you through our gross margin and operating expense line items. Our gross profit in Q3 of fiscal 2013, as a percentage of net sales, was 44.9% as compared to 41.8% in Q3 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 changes in overall product and services mix within our Mobile Data Communications segment, partially offset by a lower gross profit percentage in our RF Microwave Amplifier segment. Our gross profit percentage this quarter reflects the full benefit of the $2.5 million of IP licensing fee revenue. 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 22% of Q3 of fiscal 2013 net sales as compared to the $20 million or 20% we achieved in Q3 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 Q3 of fiscal 2013 as compared to Q3 of fiscal 2012. SG&A expenses during Q3 of last year reflects a benefit of $800,000 related to a change in the fair value of a contingent earn out liability associated with our acquisition of Stampede Technologies. The large decrease in SG&A expenses reflects the impact of our overall cost reduction actions. Based on the increased level of sales activity expected during Q4 of fiscal 2013 as compared to Q3 of fiscal 2013 and the timing of certain planned expenditures, SG&A expenses in dollars are expected to increase in Q4 as compared to the amount we spent in Q3. Nevertheless, total SG&A expenses in dollars are expected to significantly decrease for the full fiscal year as compared to fiscal 2012. And despite the year-over-year expected decline in consolidated net sales, given the cost-reduction actions in all 3 of our reportable operating segments and the stampede adjustments that we took in earlier quarters, SG&A expenses as a percentage of consolidated net sales, is expected to be comparable to the fiscal 2012's amount. Research and development expenses were $9.1 million or 13% of consolidated net sales in Q3 of fiscal 2013 versus $9.5 million or 9.5% in Q3 of fiscal 2012. 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 third quarter of fiscal 2013, was $700,000 as compared to $800,000 in the third quarter of fiscal 2012. Amortization of intangibles with finite lives was $1.6 million for the third quarter of both fiscal 2013 and fiscal 2012. Consolidated operating income in Q3 of fiscal 2013 was $5.4 million or 7.7% of consolidated net sales, as compared to $10.6 million or 10.6% in the third quarter of last year. Based on year-to-date performance, 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%. Interest expense was $2 million in the third quarter of fiscal 2013 as compared to $2.2 million in the third quarter of fiscal 2012. Interest income and other was $287,000 in the third quarter of fiscal 2013 compared to $370,000 in the third quarter of fiscal 2012. Interest income and other for both periods is primarily generated from interest earned on our cash and cash equivalents. Turning to income taxes, our GAAP effective tax rate for the third quarter of fiscal 2013 was 22.3%. This rate reflects discrete tax benefits of approximately $0.5 million, primarily related to the finalization of certain tax deductions in connection with the filing of our fiscal 2012 federal income tax return. Excluding the impact of any discrete tax items, our estimated effective tax rate for fiscal 2013 is expected to be 35.5%. Adding it all up on the bottom line, as Fred mentioned, our GAAP diluted EPS was $0.17. Now, let me provide some additional financial metrics. Adjusted EBITDA, as defined at the end of our press release we issued yesterday, was $9.6 million in Q3. At April 30, 2013, our backlog was $130.1 million compared to $153.9 million at year end 2012 and $137.4 million at April 30, 2012. This backlog includes $3.3 million of orders related to our BFT-1 sustainment activities and does not include the additional BFT-1 sustainment order of $15.8 million related to the finalization of the year 2 contract that took place in Q4. Now let me turn to our balance sheet, which remained strong. As of April 30, 2013, we had $342 million of cash and cash equivalents. This cash balance does not reflect the use of approximately $2.5 million for cash or stock repurchases that we have made so far in Q4. We generated $15.7 million of positive cash flows from operations during the first 9 months of fiscal 2013. We also expect to generate positive net cash from operating activities for the fourth quarter of fiscal 2013, although the exact amount will be impacted by the timing of working capital requirements associated with our overall sales efforts. Finally, before turning it back to Fred, I just want to remind you that our fiscal 2013 guidance provided yesterday does not reflect any additional stock repurchases that we may make pursuant to our share repurchase plan or any unusual items. Now, let me turn it back to Fred, who will discuss our business and the outlook in further detail. Fred?

Thanks, Mike. I'd like to provide a brief update and then we'll go into the question-and-answer period. As I mentioned before, for the first time in fiscal 2013, we finally achieved a quarterly book-to-bill ratio of greater than 1.0. And perhaps, more importantly, we received strategically important contracts, which I'll touch on later in my commentary. We now also expect to exceed a book-to-bill ratio of greater than 1.0 in the fourth quarter. And based on the anticipated receipt of certain orders in the quarter, we expect to achieve a book-to-bill ratio above 1.0 for the full fiscal 2013 year. Starting with our Telecommunications Transmission segment, or more specifically, in our Satellite Earth Station product line, third quarter revenues were comparable to this year's second quarter revenues. Bookings, however, were slightly lower in the third quarter compared to the second quarter as some improvement in the U.S. government market was offset by continued weakness in international bookings. Our Satellite Earth Station modems continue to be the technology of choice in providing maximum bandwidth efficiencies for critical applications such as broadcast, cellular backhaul and disaster recovery operations. Despite our clear leadership position in this area, on the commercial side of this business, order flow continues to be depressed by challenging global business conditions and increasingly volatile political conditions. We believe that many large telecom carriers, some of which are among our largest customers, continue to be faced with shrinking capital budgets and therefore, choose to invest their limited available CapEx dollars into enhancing their 3G, 4G and LTE networks in more populated areas where fiber and terrestrial infrastructure are the more efficient choices. We believe, however, the economic need to provide coverage to outlying rural areas, which is where satellite dominates, still exists and in certain cases is mandated by statute or regulatory licenses. So despite the headwinds in this market today, we are confident that spending by our commercial customers for our products will come back as economic conditions stabilize and gradually improve. Although there's much more -- there is not much more clarity in terms of where or when the defense dollars will be spent, we did have a good bookings quarter of the government side of the Satellite Earth Station product line. As Mike discussed earlier, during this third quarter, we were awarded a new contract with a potential value of $29 million to develop the advanced time division multiple access interface processor known as ATIP for the U.S. Government Space and Naval Warfare Systems command. The ATIP is essentially an advanced packet processing unit leveraged from technology developed from our advanced VSAT commercial product line. To date, we have received funded orders totaling of $8.5 million against this contract for development and engineering services. This contract is extremely important to us and strategically important to us as it enters us into the projected -- protected MILSATCOM market and they provide, not only for additional future sales with the Navy, but also non-Navy customers, as well as position us to bid on other related protected MILSATCOM development work. Although business conditions seem to be stabilizing, sustained growth will depend on economic conditions improving and government spending freezing up. In the meantime, we have made appropriate cost reductions to rightsize our business, while maintaining our R&D spending to ensure that we protect our product leadership position in the future. Turning to the other component of our Telecom Transmission segment, we remain very bullish 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 a nice revenue stream in this fiscal year. Just as importantly, this end customer has awarded the same prime contractor another contract for the next phase, the same project. We expect to receive our contract from this prime contractor during our fourth quarter, which should be in the vicinity of approximately $50 million. There are also other substantial opportunities relating to separate projects, which we are engaged with the same end customer directly and through prime contractors. As such, this end customer market, which we have worked on for a number of years, is expected to continue to provide significant additional revenue opportunities for us in the foreseeable future. We also continue to make significant headway with various new potential customers in South America, the Middle East, Northern Europe, Africa and Asia. We're cautiously optimistic about these opportunities, some of which are quite large. These potential customers have real requirements for tropo and are already negotiating with us or waiting for government approval and funding for their project. As you may recall, earlier this year, we received a modest contract from the Swedish military for our mobile modular transit case terminals, and as well as our trailer communications mounted troposcatter systems. We expect such a system, if successful, will require significant follow-on work by this customer. In addition to the Swedish order, we also received another modestly-sized contract in the third quarter to provide modems to a significant potential customer in Asia. Here too, this could lead to potential large follow-on orders. On the U.S. government front, we have supplied our products to a prime contractor that is using its antennas in our Modular Transportable Troposcatter System to offer the U.S. Military a fly-away 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 should be forthcoming as there are hundreds of potential units to be deployed, this program has continued to move to the right as a result of the continuing U.S. government budget issues. Over the past several years, as you know, our over-the-horizon microwave systems, including upgraded TRC-170s have been fielded by the U.S. Military throughout the world and have proven to be an important link in critical communications channels. We see this trend continuing once the U.S. government resolves its procurement priorities, which it's currently experiencing. Overall, we believe that our telecommunications transmission product line, satellites and tropo, are poised for growth as economic conditions improve and government funding frees up. Moving to our RF Microwave Amplifier segment, our traveling wave tube amplifiers, or TWTAs, and solid-state power amplifiers, or SSPAs, 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 important commercial TWTA wins over the past few years have been 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 broadband satellite systems. Here too, commercial bookings in recent quarters have been impacted by weak global economic conditions. On the defense side, our TWTA products are used extensively to support capacity U.S. Military satellite communications systems, such as Wideband Global Satellite, or WGS Constellation, and the MilStar systems. We also have qualified products for both the FAB-T and the WIN-T programs. Here too, we have seen programs shifted out to the right, even high profile ones, like WIN-T. Ultimately, such program represents significant opportunities to drive growth in this product line for us. In addition to commercial applications, such as aviation, medical, satellite, our SSPAs 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 SSPA sales have come from our participation in counter-IED programs. We have now completed work on developing contracts in support of the DoD's next-generation counter-IED programs, most notably CREW 3.3. However, in light of technical issues experienced on this program, which are unrelated to us, and the uncertain government funding environment, where this program is heading and when the government and the prime contractor would be ready to order our products is not clear at this point. And as I said on previous calls, this large opportunity that is present with the CREW 3.3, we view this program as being on hold. Despite some of these headwinds, we are expecting some sizable orders in the next few months and project the fourth quarter to be at or near our strongest bookings quarters of our RF Amplifier segments in more than 2 years. In our Mobile Data Communications segment, as anticipated, revenues in fiscal 2013 relating to the BFT-1 and MTS have been significantly lower than those reported in the past few years. We are currently providing both MTS and BFT-1 sustainment services pursuant to a 2-year, $43.6 million IDIQ contract. We're in the second year of this contract which has a performance period that began in April 1, 2013 and ends on March 31, 2014, and is funded for approximately $20.8 million. Pursuant to this contract and a related IP licensing agreement that we signed last fiscal year, we received a $10 million annual IP licensing fee, which the government has the option to renew each year for a total of 5 years. At the end of the 5 years, the government will have a nonexclusive royalty of right to use our IP. The U.S. Army has informed us that it intends to award us further contracts to provide BFT sustainment services beyond March 31, 2014, and could go as far as the 2020 area. As of today, we have substantially completed the repositioning of our mobile data communications segment and are now solely focused on providing BFT-related services to our legacy U.S. Army customers, as well as seeking other government opportunities that our technology can be readily adapted to. With that, I'd like to proceed to the question-and-answer period of our conference. Operator?

[Operator Instructions] We'll go first to the line of Joe Nadol with JPMorgan. Joseph B. Nadol - JP Morgan Chase & Co, Research Division: Just starting out on the bookings in general and in the Earth Stations, but you gave some reasonable bigger details there on what you're seeing. But, I guess, overall for the company, the bookings are picking up. It really doesn't sound like, I guess, in either of the 2 really core end markets, U.S. Military and the international telecom customers -- commercial telecom customers, that bookings shift underlying core businesses really ticked up. And you're not really -- the acceleration you're looking for in Q4, I don't think you're looking for that to happen. Is that the right sense?

I guess, what we're trying to tell you is that what we're beginning to see is, I believe, a bottoming out of the downtrend that we've experienced in terms of bookings and so we finally did have a bookings quarter with a greater than 1.0 number and we expect a good fourth quarter bookings such that even, as I mentioned, our bookings ratio for the full year could exceed 1.0. So I think we do see an uptick, whether that is the beginning of a long-term trend, I couldn't tell you, but we do see some positive signs. Joseph B. Nadol - JP Morgan Chase & Co, Research Division: Yes, but what you're getting from the U.S. Military within the Earth Stations, I mean, you got a one-off, but it sounded like a nice one-off order with more follow-on opportunities coming. But you talked about, I believe it was last quarter, getting a new certification that might drive, I guess, more of the steady drumbeat of smaller orders. Have you seen those pick up?

No, we haven't. We haven't received the certifications yet. That's still in process. And we still continue to believe that once we get that certification, yes, we should get substantial orders for our Carrier-in-Carrier modems. Joseph B. Nadol - JP Morgan Chase & Co, Research Division: What's delayed the certification?

It's not a delay, it's just typical length of time that the government processes things. Joseph B. Nadol - JP Morgan Chase & Co, Research Division: Okay. And then it looks like you're looking for the big, over-the-horizon follow-on in Q -- [indiscernible] on orders in RF. I think you stated in your Q that you don't need the over-the-horizon follow on to achieve your target for the quarter. But do you need the RF orders to achieve your target for the quarter?

I think, yes. Nominally, I think, we need some of the RF orders in our comtech BFT division to make some of those numbers. We certainly don't need any revenue from the other contracts. Joseph B. Nadol - JP Morgan Chase & Co, Research Division: Okay. And then just one more, then I'll turn it over. On the share repurchase front, it looks like you've settled into, the last couple of quarters, into I think a $10 million to $15 million quarterly range. Is that a level right now, given everything that's out there, that you feel comfortable with? Or could -- would you give any indication of which way you're leaning on, on taking that volume?

I think as you've probably seen, our trend in the buyback area has been kind of drifting downwards and I think you can expect that to continue. We'll be watching our free cash flow and how much we can afford to continue.

We'll go next to the side of Tyler Hojo with Sidoti & Company. Tyler Hojo - Sidoti & Company, LLC: Just firstly for me, if you could provide the backlog by segment, that'd be helpful.

Sure, Tyler. Q3's total backlog was $130.1 million, of which $82.6 million was in our Telecom Transmission segment, $40.6 million was in our RF Amplifier segment and $6.9 million was in our Mobile Data Communications segment. Tyler Hojo - Sidoti & Company, LLC: Okay, great. And just a follow-on in regards to some of the bookings opportunities for over-the-horizon, you mentioned something like a $50 million opportunity heading in Q4 coming from North Africa. But, I guess, you were alluding to additional opportunities beyond that. I was hoping that maybe you could give us some sort of additional details in regards to size and timing for some of those.

I think we've always had a number of opportunities that we continue to work on, but the international market, and specifically, the tropo international market, is an extremely volatile and tough to schedule with international customers. As you recall, the contract that we're on right now, we were expecting for a number of years and instead of taking 1-year, it took about 3 years for us to land that one. And that was not our contract directly with the customer, it was really through a prime contractor in the U.S. So it's a very difficult area to project. I think this contract was almost a pleasant surprise for us that this one came so quickly. So we expect that one to really come in, in the fourth quarter. Other opportunities. We've developed this North African customer a number of years ago and we've been working with them a number of years, with him directly or through some U.S. prime contractors. I think we obviously feel very strongly that we will continue with this particular customer for the next number of years. But we've also taken the opportunity to develop a similar type of situation with a number of other countries around the world, in Asia, in the Mid East, in Latin America and so forth, and the one that I mentioned is, for instance, the Swedish contract. It starts off with a very modest contract and then leads on to -- if they like it, they buy more and they feel more convinced that tropo can do the job for them. Tropo is not well-known in the international market, as well as, let's say, satellite. So it's a very, very long sell and a very, very long bookings situation. We don't like to mention the countries until we're really very close. That's a long-winded answer, but that's what it is. Tyler Hojo - Sidoti & Company, LLC: Okay, great. And just one follow-on. In regards to North Africa, how far along are we in terms of rolling out the system? Maybe if you could equate it to like an inning or something like that.

I think we're probably in the second inning, maybe the bottom of the first or the second inning here. The programs typically of this size are in the order of about 3 years timeframe and they usually start slowly with an uptick and then by the second year, you have your majority of revenue and then by the third year, it starts to taper off.

And Tyler, as Fred mentioned, in addition to this contract that we're working on, there's substantially large contracts that we still think we can get from the North African country as well. Tyler Hojo - Sidoti & Company, LLC: Got it. Just one last question for me pertaining to the JCREW program. Obviously, certainly understand that things appear to be on hold. But I was just curious as it relates to your exposure there, are you solely tied to ITT or if that goes in a different direction, would you participate?

Yes, we were on the original CREW 3.3. That's the original. It is the CREW 3.3. And we are the sole supplier to Exelis, which is the former ITT. And there has been some technical difficulties on that program, which have kind of put it on hold. It's a very large opportunity for us. If the program gets finally going, it could probably mean for us, $25 million a year for 3, 4, 5 years.

We'll go next to the side of Mark Jordan with Noble Financial.

Relative to the Mobile Data, I think that you mentioned there was approximately, what, $2.8 million of remaining of the microsatellite revenue. So if you were to look at that after that has fallen away, we would see typically on a typical quarter, between $5-plus million worth of revenue related to the sustainment contract. Should we assume that the operating profit of about $2 million to $2.5 million will be standard for that in the sustainment mode?

Mark, I think right now, I hope I didn't misspeak, but the microsatellite number that you talked about was what we recorded in last year's Q3 of fiscal 2012. This quarter reflects no revenue of microsatellite revenue. So what you're looking at the 8.3 of Mobile Data Communications segment is substantially all BFT-1 sustainment revenue, including $2.5 million of IP licensing fee and we have some various small other initiatives and contracts as you know, but the end part of your question is, is $2.5 million of operating income the right way to look at the business. Right now, given our spend rate on some of these smaller-type things and initiatives that we're working on, and they're very small and very minor, we think $2.5 million of operating income per quarter right now is probably the right way to look at this business.

Okay. In Fred's comments, talking about this longer-term sustainment opportunity, thinking throughout the opportunity to potentially support BFT-1 through 2020. Does that imply that at least to date, you don't see a very broad -- that there's the opportunity for a very broad fielding of BFT-2?

Yes, we certainly don't see it. That doesn't mean that some is not happening. But I think basically BFT, the Blue Force Tracking program, appears to be kind of at a stand still. We lost BFT-2, as you know, Mark, and what we were really going to go after was BFT-3, which is the X-band version of it. And the government has essentially told us that right now, there's no money for the development of the X-band and that they have no intent of looking at it until probably late '14 or maybe '15.

Okay. All right. And then a final question relative to tropo for the U.S. Military. Do you see, over the next 24 months, that your primary opportunity with DoD tropo will be in the small form factor with your partner? Or do you see a larger system rebuild opportunity over the next 24 months?

I think we see both. We certainly see the near-term being the small terminals with our partner, but I think we see also the -- our larger MTTS terminals as coming online as well. I think we see the interest in the DoD or the Army specifically and the Marine Corps in tropo, we just don't see the funding as yet.

Okay. And just finally, relative to tropo, do you -- has there been any of the industry players trying to get back into this marketplace or has this been very quiet on the competitive front?

I think on what we've seen, let's say, for the last 3 years of thereabouts, I would say it's probably less than 50% of that. We seem to have someone popping in their head once in a while, but it's really not much of an area that we are interested.[ph]

[Operator Instructions] With that, we'll move next to the line of Rich Valera from Needham & Company. Richard Valera - Needham & Company, LLC, Research Division: Just a quick follow-up question on a prior question about Mobile Data run rate. So can we assume that the roughly $8 million revenue run rate this quarter is the right level going forward? Would you expect it to continue to have that sort of other, say, $2 million to $3 million of revenue on an ongoing basis beyond the sustainment level revenue?

Yes, it might be slightly lower than the $8 million, but it's certainly not materially different. So it's a good number to use until we figure out some of these things in the future. Richard Valera - Needham & Company, LLC, Research Division: Great. And then a certainly interesting contract there with the ATIP award, wondering if there's any kind of background you can give us on how competitive that was. And if that potentially opens up any other avenues for you, how much you'd leverage that contract into other businesses?

I think obviously I can tell you that or I have to tell you that it's somewhat of a classified program. So I can't really tell you too much about it. But on the other hand, I can tell you that a company like Raytheon was the incumbent on it and this contract is with the Navy and for the Navy applications of ATIP. I think there are substantial other markets with the Army, which are probably even larger than the Navy contract and I think as you, I hope, recognize this is a development program for us. So this is extremely important because it does get us also into a capability and into a, let's say -- I don't want to call it a club, but it gets us into the protected MILSATCOM market. It opens the door for us.

We'll go next to the side of Chris Quilty with Raymond James. Chris Quilty - Raymond James & Associates, Inc., Research Division: Fred, just a follow-up on the protected MILSATCOM, does that give you an angle in any of the possible FAB-T work? Or what specific programs do you think might be addressable?

I think we certainly don't want to get into which programs we're pursuing. I will tell you though, since you mentioned FAB-T, that we are on FAB-T with our RF Amplifier program. So we're fully aware of the FAB-T program and we're actually sole-sourcing that one. Chris Quilty - Raymond James & Associates, Inc., Research Division: Okay. Switching back to tropo, Mike, can you just help me recall what you have in your expectations amongst the tropo programs that you have or are expecting? I mean do you have any prospective programs in your forecast?

Really for the rest of fiscal 2013, which are now down to one quarter, of course, is really going to be driven by the performance of our over-the-horizon microwave contract with our North African customers. It's really going to be most of our revenue from that contract and then as we see some of these other bookings, we'll start to see, hopefully, additional growth in '14 from those other contracts that we have in backlog. But we talked about it the last time, big increase in Q4 in performance from our North African contract is expected. Chris Quilty - Raymond James & Associates, Inc., Research Division: Okay. And traditionally on those tropo programs, the early years, you tended to have fairly conservative percentage of completion accounting and saw a big boost towards the late latter end of the programs with good performance, where do you think you're at on that cycle and what might be the implications for telecom margins looking out into '14?

It's a good point. As Fred mentioned, we're in the early part of that contract, and yes, we would be on the conservative side of our gross margin. Things are going very, very well on the contract in terms of performance right now and hopefully, it will continue. And we'd like to see a position on where we could take higher margins on that contract, but obviously, the accounting rules and stuff needs to play out, but I agree with what you said. Chris Quilty - Raymond James & Associates, Inc., Research Division: Okay. And I guess, and more specifically, just with regard to telecom margins, they've kind of been all over the board from the sort of a low to mid-20%s down to 10% in the second quarter. Can you give us a sense of where you think they might settle out looking out into '14?

At this point there's a couple of drivers. It's the timing of the over-the-horizon contracts that are going to come into play. We did have some higher-margin over-the-horizon products such as the TRC-170 and we get into these larger contracts, the margin profile on that is obviously lower. We did get this ATIP contract, and $8.5 million of funding is, as full development work, is lower margin, but the rest of the ATIP contract is, hopefully if it works, will be hardware, and which would be at higher margins. So if you take a snapshot, you can imply what our Q4 operating margin is going to be similar to what we did in Q3. It might be like that for a while. But once the bookings come in and once some of these contracts start to gel, we hope to gravitate back towards the upper teens and if not, 20%, but we've got a ways to go. Chris Quilty - Raymond James & Associates, Inc., Research Division: Okay, great. And just a final question, sequestration. You've talked about some of the issues surrounding that. Do you feel like the impact of the '13 sequestration is fully factored in, or are you seeing continuing budget tightening on the horizon as a possibility?

I think as best as we can see it right now, I think the impact of sequestration, which was 1 quarter or 2 quarters past, that really hit us hard was really because the government just didn't know what was really happening and what they had to do. I'm talking individual program offices. And so what happened, I think to us, was that the government just stopped ordering our products. Period. The orders just stopped. I think we see that it's stabilized. I think yes, we have sequestration, there is going to be a lower budget and therefore, there will be lower funding. But I think what we see now is the beginnings of the priorities that the government needed to set, have been set and funding is being released.

And this will concludes our Q&A session. I'll turn the program back to the company for any further remarks.

Okay, thank you very much for joining us today and we look forward to speaking with you again in September. Thank you very much.

This concludes today's program. Have a great day. You may disconnect at this time.