Comtech Telecommunications Corp. (CMTL) Q1 2015 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to Comtech Telecommunications Corp.'s First Quarter Fiscal 2015 Earnings Conference Call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded, Thursday, December 11, 2014. 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 first quarter of fiscal year 2015. With us on the call this morning are Fred Kornberg, President and Chief Executive Officer of Comtech; Michael Porcelain, Senior Vice President and Chief Financial Officer; and Rob Rouse, Senior Vice President, Strategy and M&A. 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, and the plans, objectives and business outlook of the company's management. The company's assumptions regarding such performance, business outlook and plans are forward-looking in nature and involve 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?

Thank you, Maria, and good morning, everyone, and thank you for joining us on this call. As announced yesterday afternoon, we reported our first quarter results of $76.4 million in revenues, a GAAP diluted EPS of $0.32 and an adjusted EBITDA of $13.3 million. We are pleased with our solid first quarter financial results and experience the highest level of quarterly bookings in over a year, with strong order book across all of our three operating segments. Despite this strength, in light of overall business conditions, we've become more cautious and now believe that the revenues in fiscal 2015 will be in the range of $355 million to $365 million in revenue. Despite incurring approximately $600,000 of expenses associated with our strategic alternatives analysis, we are maintaining our GAAP diluted EPS guidance, which is expected to be in the range of a $1.70 to a $1.86. We are also maintaining our adjusted EBITDA guidance, which is expected to be in the range of $63 million to $67 million. On December 10, 2014, our Board of Directors approved a dividend for the second quarter of fiscal 2015 of $0.30 per common share. This dividend is expected to be paid on February 18, 2015 to stockholders of record on January 16, 2015. To-date and over the past 17 quarters, we have paid out over $90 million of dividends and we continue to believe that our dividend program is an excellent way to return capital to our shareholders. Let me now provide some brief comments about our announcement yesterday relating to our strategic alternatives analysis that was initiated by our Board of Directors in the August of this year. As you would expect, the company regularly considered the broad range of strategic alternatives with the goal of maximizing shareholder value, including a possible merger or sale of the company. After conducting a thorough and rigorous process, our Board concluded that the company is best position to maximize shareholder value by continuing to execute on it strategies of enhancing its leadership positions in the markets we serve, participating and emerging technologies and enhance or expand our product portfolio, carefully pursuing acquisitions of business and technologies, and returning cash to our shareholders, and finally, that the interest of our company and our shareholders will be best served by our company remaining independent. Given the confidential aspect of our strategic analysis, we do not intend to provide any further information on that topic and respectfully request that you refrain from asking questions about it in the Q&A portion of our call. Now, let me turn it over to Mike Porcelain to provide an overview of our financial results and then I will return and talk more specifically about each of our three business segments. Mike?

Thanks, Fred, and good morning, everyone. I'll walk you through the Q1 results and then provide some comments on our updated 2015 business outlook. During Q1, we generated revenues of $76.4 million, of which 24.9% were for U.S. government end users, 61.2% were for international end users, but the remainder being for domestic, commercial and customers. Net sales in our Telecom Transmission segment were $51.4 million in Q1 of fiscal 2015, as compared to $54.4 million we achieved in Q1 of last year, representing a decrease of 5.5%. This decrease is attributable to lower net sales on our satellite earth station product line, partially offset by higher net sales on our over-the-higher -- over-the-horizon microwave systems product line. Our satellite earth station product line sales in Q1 of fiscal 2015 reflect lower sales to international customers as compared to Q1 of last year. Given overall global market and business conditions, we do believe it is prudent to be cautious as it relates to this market and we are now expecting sales on this product line in fiscal 2015 to be comparable to fiscal 2014. Based on the timing of expected orders and related shipments, including ATIP production units, which are in our backlog, we expect sales to be heavily weighted towards the second half of fiscal 2015 with Q4 being the peak quarter by far for the year. Sales of our over-the-horizon microwave systems in Q1 of fiscal 2015 were higher than Q1 of last year, primarily due to our performance and a contract with a major international oil company, and ongoing performance in our large North African multiyear contracts. Although, new orders and contracts are difficult to predict, we continue to expect significant U.S. government orders and sales in the latter part of the second half of fiscal 2015 and expect annual net sales in this product line in fiscal 2015 to be higher than the level we achieved in fiscal 2014. Net sales in RF Microwave Amplifier segment were $18.7 million in Q1 of fiscal 2015 as compared to $20.2 million in Q1 of fiscal 2014, a decrease of 7.4%. Bookings for our RF Microwave Amplifier products during Q1 of fiscal 2015 were at the highest quarterly level in over four year and are expected to remain strong for each of the remaining quarters of fiscal 2015 although not at the same level we achieved during our most recent quarter. Based on orders currently in our backlog and the timing of certain orders we expect to receive and shift, we expect net sales in this segment in fiscal 2015 to be significantly higher than the level we achieved in fiscal 2014, with growth expected to occur primarily in the latter part of fiscal 2015. Turning to our mobile data communication segment, sales in Q1 of fiscal 2015 were $6.3 million as compared to $8.8 million in Q1 of fiscal 2014, a decrease of 28.4%. This decline in sales is largely attributable to the absence of sales in our most recent quarter of certain SENS technologies and products. Sales in both periods include $2.5 million of revenue related to our annual $10 million BFT-1 intellectual property license fee. During Q1 of fiscal 2015, we received additional funding from the U.S. Army for our BFT-1 Sustainment contract, which fully funded the base year of our three-year contract. During the second half of the year, we expect that the U.S. Army will exercise its option for the performance period beginning April 1, 2015 through March 31, 2016 and that we will receive incremental funding. For the year, given the discontinuation of sales in certain of our SENS products, net sales in our mobile data communications segment are expected to be lower in fiscal 2015 as compared to fiscal 2014. Now let me walk you through our gross margin and other data to give you some additional perspective on our results. Our gross profit in Q1 of fiscal 2015 as a percentage of consolidated net sales was 46.2% versus the 43.6% we achieved in Q1 of last year. This increase is largely due to the period-over-period higher percentage of overall consolidated net sales occurring in our telecom transmission segment, which generally has higher gross margins in our RF microwave amplifier segment and the cost-plus fixed fee BFT-1 Sustainment Services that our mobile data communication segment performs for the U.S. Army. Looking forward and despite all the various mix changes that are more thoroughly described in our form 10-Q filed with the SEC yesterday afternoon, we believe that our consolidated gross profit in fiscal 2015 as a percentage of consolidated net sales will be slightly lower than the level we achieved in fiscal 2014. On the expense side, SG&A expenses were $15.5 million or 20.3% of Q1 of fiscal 2015 net sales as compared to the $16.2 million or 19.4% we achieved in Q1 of last year. Excluding $600,000 of expenses related to our strategic alternative analysis during Q1 of fiscal 2015, SG&A expenses would have been $14.9 million or 19.5%. Excluding the $200,000 benefit relating to a change in the fair value of a contingent earn-out liability in Q1 of last year, SG&A expenses would have been $16.4 million or 19.7% of consolidated net sales. The decrease in SG&A expenses both in dollars and percentage is primarily related to our ongoing efforts to contain operating cost and lower spending associated with lower consolidated net sales. Total stock-based compensation expense, which is recorded in our unallocated segment, was $1.3 million in Q1 of fiscal 2015 as compared to $900,000 in Q1 of fiscal 2014. Based on the amount and timing of outstanding equity awards, stock-based compensation in fiscal 2015 is expected to be higher than fiscal 2014. In light of consolidated net sales growth expected in fiscal 2015, SG&A expenses in dollars are expected to be slightly higher in fiscal 2015 as compared to fiscal 2014. As a percentage of consolidated net sales, we expect it to be lower in -- slightly lower in 2015 as compared to fiscal 2014. Research and development expenses were $10 million or 13.1% of consolidated net sales in Q1 of fiscal 2015 versus $8.5 million or 10.2% in Q1 of fiscal 2014. As a reminder, both periods do not reflect customer-funded R&D projects, which approximated $2.3 million in Q1 of this year as compared to $3.1 million in Q1 of 2014. We expect company-funded research and development expenses for fiscal 2015 in dollars to be comparable to the amount we invested during fiscal 2014. Amortization of intangibles with finite lives was $1.6 million for the first quarter of both fiscal 2015 and fiscal 2014. Consolidated operating income in Q1 of fiscal 2015 was $8.2 million, or 10.7% of consolidated net sales, as compared to $10.1 million or 12.1% in the first quarter of last year. Excluding both the expenses related to the strategic alternatives analysis and the $200,000 of benefit related to the change in the fair value of the contingent earn-out liability, operating income for the first quarter of fiscal 2015 and 2014 would have been $8.8 million and $9.9 million respectively, and as a percentage of consolidated net sales would have been 11.5% and 11.9% respectively. This decrease in operating income, both in dollars and as a percentage of consolidated net sales is primarily due to lower consolidated net sales during the first quarter of fiscal 2015. Excluding the impact of $600,000 of expenses associated with our strategic alternatives analysis, we are targeting operating income as a percentage of consolidated net sales in fiscal 2015 to be approximately 13%. Interest expense was $300,000 in the first quarter of fiscal 2015, which represents a significant decrease compared to last year, when we had $2 million of expenses that was driven by our 3% convertible notes. As announced in May, none of our 3% notes were outstanding any longer and we expect interest expense for fiscal 2015 to be significantly lower in fiscal 2014. Interest income and other was $84,000 in the first quarter of fiscal 2015, compared to $273,000 in the first quarter of fiscal 2014. Turning to income taxes, our GAAP effective tax rate for the first quarter of fiscal 2015 was 35%. We expect our GAAP tax rate in fiscal 2015, excluding the impact of any discrete tax items, will approximate 35% as well. Adding it all up on the bottom line as Fred mentioned, we delivered GAAP diluted EPS of $0.32 in Q1 of fiscal 2015. Now let me provide some additional financial metrics to help add color. Adjusted EBITDA as defined at the end of our press release that we issued yesterday, was $13.3 million in Q1 of fiscal 2015. At October 31, 2014, our backlog was $149.3 million compared to $133.4 million at July 31, 2014. Our balance sheet remains strong. We had a $144.5 million of cash and cash equivalents and no long-term debt as of October 31, 2014. This cash balance does not reflect our Q1 dividend that was paid in November 2014, which approximated $4.9 million. During the first three months of fiscal 2015, we had an operating cash outflow of $4.7 million, which is primarily related to overall changes in net working capital requirements, most notably the timing of the loans and payments related to our large over-the-horizon microwave system contracts. Although, we inspected to generate positive cash flows in fiscal 2015, the amount is currently expected to be lower than fiscal 2014, almost entirely due to timing and expected performance on our two large over-the-horizon microwave system contracts. Before turning it back to Fred, I just want to provide some comments on our fiscal 2015 guidance. Our revenue, EBITDA and EPS guidance will be significantly weighted towards the latter half of fiscal 2015 for the reasons I addressed in my comments. To give you a sense of this weight, we are expecting that our financial results for the second quarter of fiscal 2015 to be similar to our first quarter of fiscal 2015. And our first quarter of fiscal 2015 is expected to be our highest, both in terms of revenue and operating income by far. Finally, one last comment, our fiscal 2015 guidance provided yesterday does not include any additional stock repurchases that we may make or any other one-time expense items. Now let me turn it back to Fred, who will discuss our business and outlook in further detail. Fred?

Thanks Mike. Now let me discuss some of the recent developments in each of our three business segments. As always, let's start with our largest business segment, Telecommunications Transmission. This segment is comprised of two product lines, satellite earth station products and over-the-horizon microwave systems. We remain the undisputed leader in the satellite earth station, SCPC modem area, driven primarily by our proven ability to deliver the most bandwidth-efficient modems to our end customers. We are increasingly more excited about our new line of products called Advanced VSATs. These products combine a variety of technologies within our IP portfolio to provide an integrated solution. By listening closely to our end customers, we have been able to offer our Advanced VSAT solutions into markets that have traditionally been served by TDMA solutions. And recently, we have seen certain TDMA users move away from that technology since many of their ultimate customers are demanding more efficient, more dedicated reliable bandwidth and are unwilling to tolerate the latency issues associated with TDMA. It’s important to note that certain of our new products, such as Advanced VSAT, have longer lead times than our more traditional products, since these products represent the more integrated solution for our customers. We have recently also started to offer professional services to our customers and expect this new part of our business to be a meaningful growth contributor over the next few years. In addition to the introduction of new product lines, we have recently refreshed our core low, middle and high-end modem lines and as a result, our modem portfolio today offers greater bandwidth efficiencies that ever performed. On the U.S. government side of our satellite earth station product lines, we are beginning to see some return to normalcy. In fact, we're seeing a lot of proposal activity by government terminal applications and upgrades and are awaiting some significant U.S. government-related orders. Here again, orders for NRE and production generally have longer lead times than our more traditional commercial book and ship product lines. For example, as you know over the past year and a half, we have developed and will be manufacturing the Advanced Time Division Multiple Access Interface Processor or ATIP for the Space and Naval Warfare Systems Command. In the first quarter, we announced the receipt of our first production order and related engineering services for $5.5 million. We’re expecting additional orders in fiscal 2015 and the production phase will provide a solid revenue stream for the next few years. The ATIP contract is also strategically important, as that enters us into the protected MILSATCOM market, where there are several sizable opportunities both, in the navy and other branches of the military, as well as foreign MODs. During the first month of our second quarter, we did see a slowdown in bookings, which we attribute to the recent volatility in global business conditions, such as the sudden plunge in oil price. Although, bookings in quarter one were very strong, we’re taking a more conscious view for the rest of the year and believe that year-over-year sales of our satellite earth station products will be comparable. We continue to conservative, but we believe that we are nicely positioned to capitalize on market opportunities as the economic conditions further stabilize and improve. Turning to the other components of our Telecommunications Transmission segment, fiscal 2015 is expected to be another strong year for our tropo business. Anchored by backlog from programs with our North African end customer, we entered the year with a strong base. And just last week, we announced additional orders relating to this end customer aggregating $5.5 million. In the long-term, there were also additional large opportunities with this end customer, which we expect will materialize in the years ahead. Beyond our traditional customer base, we’re addressing and in some cases have already bid on large opportunities in the Middle East, Australia, Asia, South America and Africa. We are increasingly confident that some of these opportunities will result in substantial contract awards in fiscal 2015 and beyond. In fact, earlier this week, we announced additional orders aggregating $7.4 million relating to an ongoing project in Brazil. Ultimately, our goal is to find a few large long-term customers that can serve as significant and steady revenue contributors similar to our North African end customer. On the U.S. government side of the tropo area, bookings have been very soft for the past year and half or so. However, our tropo system has recently completed additional network integration evaluation or NIE testing. This is expected to significantly increase the potential number of deployable tropo units by standardizing the DoD on our product portfolio. As a result, we expect significant orders and shipments for our U.S. government end customer in the latter part of the second half of our fiscal 2015. Also on the commercial front, we continue to receive orders from industry-leading oil companies for tropo systems that are used on drilling and exploration platforms. Our optimism about our tropo business is based on the significant amount of backlog we have, the significant additional international opportunities that we have in the pipeline, and successful completion of the U.S. Army NIE testing. All in all, we remain confident that our Telecom Transmission segment will continue to grow in fiscal 2015. Turning to our RF Microwave Amplifiers segment, although fiscal 2014 was not a standout revenue year, we received important large awards and so far in fiscal 2015 this continues, which provide a strong base of fiscal 2015. In our traveling wave tube amplifier or TWTA product line, we have recently received orders relating to the FAB-T and WIN-T programs, which when combined with additional of our FOT and SWAN orders in backlog, will provide a strong base of U.S. government-related revenues for next several years. On the commercial side of the TWTA product line, we see the broadband high-throughput satellite Ka-band market and the direct-to-home TV market a very exciting growth opportunities for us. We have already sold our products into most of the large North American and European Ka-band platforms, and are bidding on next-generation platforms with the same customers, as well as new opportunities with new customers in new geographies. In particular, we believe the direct-to-home or DTH market is poised for dramatic growth in the next few years, as broadcasters are looking to replace aged bandwidth-efficient klystron amplifiers with high-power, more efficient broadband TWTAs to support high-definition and ultra high-definition program offerings in their existing networks. In addition, these broadcasters, as well as other new entrants to the DTH market are looking to emerging markets as significant growth drivers as these same services are rolled out to a brand new group of potential end-users. We believe that our product offerings will be uniquely positioned to serve these dynamic market opportunities. On the solid-state power amplifiers side, our SSPA product line, our business has been dramatically impacted by weak U.S. government spending, as well as the receipt of certain international orders, as a result of the end customers being in areas in the world that are experiencing unrest. However, activity is heating up again. During the first quarter of fiscal 2015, we booked $6.7 million in SSPA orders from international customers. Also in the first quarter of fiscal 2015, we signed a master purchasing agreement with a major domestic OEM for identification friend or foe or IFF solid-state power amplifiers. The master purchasing agreement valued at $6 million and so far, we have received funded orders totaling $3.7 million. Although, smaller part of the SSPA business, our commercial product lines serving the aviation and medical communities have continued to do well. During the past year, we have made significant inroads into the in-flight entertainment and communications space, which is expected to grow exponentially over the next decade and we are very excited about this development. As of today, significant amount of our projected RF microwave amplifier sales for fiscal 2015 is already in backlog and we see this segment growing significantly in fiscal 2015. In our segment Mobile Data Communications, the largest revenue contributor remains our BFT-1 sustainment work, which we are performing for the U.S. Army. During fiscal 2014, we received two new three-year BFT-1 sustainment contracts aggregating $68.2 million. The first contract, which has and not to exceed the value of $38.2 million relates to our ongoing engineering and satellite network operation services. The base period for this service contract is from April 1, 2014 to March 31, 2015, and the government has two 12-month period options that can -- that they can exercise. The total value of the base service contract is $13.6 million, which has been fully funded. The second contract is a continuation of our IP licensing agreement. This agreement requires the army to pay us a $10 million annual license fee for the period from April 1, 2014, March 31, 2015, again with two 12-month option periods exercisable by the army. In addition to our sustainment activities on BFT-1, there are other well-defined opportunities that we are pursuing, both in the U.S. military and certain international military markets, and we expect to receive orders relating to some of these new opportunities during the second half of fiscal 2015. Our primary goal in the Mobile Data Communications segment continues to be provides the U.S. Army with outstanding support. Doing so, should position us well to participate in the next-generation BFT platform. In fact, we have recently responded to two government RFIs that effectively are requesting alternatives to the BFT-2 transceiver. One RFI is for a BFT 2.5 L-Band transceiver to replace the current BFT-2 transceiver. The second RFI is for a dual-frequency BFT-3 transceiver operating at both L-Band and X-Band. We have responded to both RSI -- RFIs and we believe we are uniquely qualified to offer the best, most cost-effective solutions in responding to the government's request. We look forward to continue to support the army for many years. Finally, given the holiday season and upcoming New Year, I would like to wrap this up of the portion of the call by saying thank you to all of our employees for their tireless efforts, as well as thanks to our suppliers and customers for their support. Happy holidays everyone. With that, I would like to proceed to the question-and-answer part of our conference call. Operator?

[Operator Instructions] And we will take our first question from the line of Joe Nadol with J.P. Morgan. Your line is now open.

Hi. Good morning, guys. This is actually Chris on for Joe. Mike, on the balance sheet, you have a large net cash balance and I am curious, if you think this is the capital structure for the business going forward or if you might move toward something more traditional with all the net leverage?

No. I think right now, we are happy where we are. We, obviously, have an existing stock repurchase program that you will continue to look at and our dividend target that was established by the Board. But right now the balance sheet does give us flexibility to do the things that our business plan calls for.

And I know you’ve been interested in M&A. Is there -- are you seeing anything on that front right now?

I think there are things that we are considering but that’s all we’ll comment.

Okay. And then on the share repurchase, I mean, I know you just had your board meeting on the authorization wasn’t increase, which seems like, it won’t be anything significant on that front. Do you guys ever get consideration, anything like a special dividend?

I think again from a strategic process and where we are, we think the things we are a doing are the right things at the moment.

Okay. And then one last one, could you just provide some color on the timing of the RFPs for BFT-2.5 and BFT-3 and maybe size with the revenue opportunity for each one looks like?

I think the -- it's difficult to define the timing for the actual RFPs. Right now, all that has happened is two RFIs which are request for information. And the government is looking to replace the BFT-2 transceiver with the BFT-2.5. So I suspect that one will probably be funded certainly earlier than the BFT-3 transceiver RFI. However, for us to really know that actually when the funding will occur, it’s very, very difficult with the government funding environment right now.

Okay. And do you have a size of what the revenue opportunity might be for 2.5 just based on the number of units you are looking for?

All we can say is no. We have approximately over 200,000, transceivers out in the field for BFT-1. If the government chooses to replace every single one of them and I should qualify that because the requirement this time is for the BFT-2.5 transceiver to be backward-compatible with the BFT-1 transceiver. So the government will have the option to buy not only the full 220 to replace the BFT-1 but also some mix of the two. But going the full gamut of 220,000 transceiver, approximate cost -- one can use approximate cost of transceiver of somewhere between $5000 to $10,000.

Okay. Thanks guys. Appreciate it.

We’ll take our next question from the line of Mark Jordan with Noble Financial. Your line is now open.

Good morning gentlemen. I think earlier you talked about over-the-horizon opportunity for the government potentially being very significant in the second half of the year which is complete to be NIE. Could you give a little more color as to, one, is that small form factor modems for portable earth stations or terminals or is this upgrading some of the larger tropo system? And secondly, what specifically gives you the visibility to expect in meaningful volumes in the second half?

I guess to answer the first part of your question, Mark, just recently as a matter of fact, the U.S. Marines who patrol most of the AN/TRC-170 terminals have come out with an RFI to replace all of TRC-170 terminals with new transportable tropo systems. There are approximately 400 of TRC-170 terminals out there and used by both marines, the army and the Air Force. So that gives you a kind of a feeling of what the requirements will be. Again, it’s very difficult to see timing wise what and when that will occur. But NIE testing has actually put us in a position as the only tropo transportable and these are in suitcase -- suitcases that the tropo system is in and can be readily constructed within 30 minutes anywhere in the world. This NIE testing has concluded that we are the only one that met this fact. The other fact is that if you remember we retrofitted most of the TRC-170 tropo terminals with our modem and the RFI states unequivocally that the new system must communicate with the present TRC-170 and that’s replacing it, but they still intend to use it and be compatible with it. And I think we are the only modem that is compatible obviously because it’s our modem in the TRC-170.

Okay. Relative to your comments on buyback you obviously noted that in your press release that the amounts you have remaining, are there any broad guidelines as to how sizeable the buyback activity maybe moving forward, say in relationship to annualized free cash flow you generate or any other metric?

I think the -- as far as the buyback is concerned, the only authorized Board action right now is the remaining $13.7 million that we have of buybacks. Obviously, we will be looking at the opportunity and pulling the trigger if we see that it’s something that we want to do.

Okay. Final question for me. Do you have a CapEx expectation for fiscal ’15?

Sure. Including what we did in Q1, we are expecting a range at this point of $5 million to $7 million of capital expenses for the year.

Thank you very much.

We will take our next question from the line of Tyler Hojo with Sidoti & Company. Your line is now open.

Yeah. Hi. In the prepared remarks you mentioned, kind of bookings for satellite earth station in the past month being kind of soft and that was one of the reasons why you kind of lowered expectations for the full year. I’m just curious, is kind of your expectation that the book-to-bill for satellite earth station will be below one in your second quarter? How do we think about that?

I think -- it's very difficult for us to predict anything on a quarterly basis, if not on a monthly basis. So at this point, given what we saw in November, the way we are looking at the company as a whole, we are thinking Q2 will be very similar to what we did in Q1 and it is possible. It might be slightly lower than what we did in Q1. At this point, it’s just tough for us to say. But for the year at the moment, given what we say, we are expecting it to be comparable for the year.

You are talking about revenue, right?

Everything. Bookings and revenue and income as well.

Okay. So, I mean, how do we square the fact that you're coming off of a book-to-bill that’s kind of at a four year high. I mean, I get the uncertainty but I mean, presumably for just the book and ship nature of this business, I mean, presumably if your expectation for the year is lower, your expectation for bookings would be lower in the coming quarters, right?

I think, again, we look at it on an annual basis and won’t give some color as it leads it bookings. But certainly our bookings in Q1 were terrific, couldn’t have ask for anything better. The market conditions have changed. Oil prices have suddenly come down and we did see that impact in our most recent month. Now as Fred had mentioned in his prepared remarks, we might be conservative but we are certainly being prudently cautious at this point. Lot of things in the pipeline, certainly on the U.S. government side but our international business is not growing at the moment. And we need to see things flush out and at this point, we think it's appropriate to think about satellite earth station sales being comparable.

Got it. Okay. That’s fair. And then just on the OTH MS business, could you maybe just size how much of that revenue base today stems from the oil and gas industry?

I think we would characterize it is, as it keeps the lights on and it’s not a material portion of our over-the-horizon business. But certainly as we get orders, it is positive to the revenue and operating income.

Okay.

I’m specifically I’m assuming you're talking about the shipments of OTH products to the oil exploration companies for offshore development.

Yeah. That’s right. Yeah, okay. All right. Good. And then just the last thing I wanted to ask was just kind of in context with Fred’s comments on professional services being a driver. I’m just again curious, how big a piece of the business is that today in satellite earth station? And what kind it differentiates your offering relative to some of the competitors in the space?

To characterize, the 2015 is going to be a small contributor to the satellite area. What we found is especially with the Advanced VSAT product line that we have come up with, that there is the tremendous need for professional services for integrated solutions and since we are now in that -- in that business area, we kind of said to ourselves, this is a good area of growth for us. And so we're going to expand that into other product areas as well.

Hey, thanks a lot.

[Operator Instructions] We’ll take our next question from the line of Chris Quilty with Raymond James. Your line is now open.

Morning, gentlemen. Wanted to touch on the North American commercial business, which looks like it was down about 27% in the quarter. And I think there's been a week trend there for a while. Can you help us understand where specifically, either in end markets or products you're seeing the weakness and what you see is the outlook here for the balance of the year?

Well, Chris, if you could, could you just repeat the first part of your question. It didn’t come clear on our end.

Sorry. The North American commercial business was down about 27%, I think in the quarter. And you’ve had a bit of a weak trend there. And I was just trying to identify what specific end markets or product lines or underlying trends are driving that softness, given the U.S. is actually doing well economically relative to other parts of the world.

Sure. I think this is a more of a timing of sales. When you look at our domestic business, and our satellite earth station business, Chris, as you know, we don’t sell all heck of a lot of products to the U.S. commercial customers anyway. So where we do see sales is in our amplifier side on the DirecTV market. And again, I think this is from timing to sales perspective. We see lots of opportunities in the direct whole market, as well as in-flight entertainment market on our amplifier side. So I would characterize it as a timing of sales than anything.

Got you. And just to clarify on the statement about concern with energy markets. Do you have any exposure beyond the oil rig business you talked about? And you’ve got obviously, over-the-horizon customers internationally that are dependent upon oil revenues. Is there any other exposure that we should be concerned about?

I think it’s a global issue. Clearly, we sell to countries such as Russia and even Algeria and revenue is based on oil prices for those countries. So there is that global risk that we have to deal with. So I think, the answer to the question is yes and it kind of goes into our cautiousness.

Okay. And final question on the Advanced VSAT, I know you had a sort of an initial announcement a while back, what I believe it was Harris Corp. and Royal Caribbean. Could you give us an update on how that's progressing? And a clarification, my understanding was the Advanced VSAT product was more of a integrated bundle but you almost seem to imply that there are service revenues attached to the product line?

Yeah. That’s true. Well, first for the Royal Caribbean, I think the system is being rolled out and so far very successfully. As far as the professional services, that’s really become part of the Advanced VSAT portfolio that we’re now offering. And as I mentioned before partly because our customers have really asked us to do this. And we’ve decided that this is something that we want to go, going forward, not only at the Advanced VSAT but other products as well.

So is there an actual service contract, long-term service contract attached to that or is there just a service component of the initial sale?

Yeah. There is a service to support contract that we do with our customers. And for us and I think, Fred appropriately characterized it, is not a meaningful part of our business in ‘015. We introduced the services in 2014. We had a pretty significant growth year-over-year, although again, I characterized it has being not material yet but it is an annual type services. So it is something that for us in our satellite earth station product line, not only will we generate the revenue in the first year but we are very optimistic that we will become a recurrent type revenue stream as we look forward. And we are structuring on these renewals with our customers.

So they are typical 10% to 15% type attachment on the service contract?

Well, we are actually showing almost a one-for-one. As we rollout the advanced VSAT products for the customers, which are doing well and so it really is a one-for-one as opposed to a 15% attach rate.

That’s good stuff. All right. Thank you gentleman.

And it appears, we have no further questions at this time. I will turn it back to the company for closing remarks.

Okay. Thanks for joining us today and we look forward to speaking with you again in March. Thank you very much.

This does conclude today's teleconference. You may now disconnect. Thank you and have a great day.