Comtech Telecommunications Corp. (CMTL) Q3 2015 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. And welcome to the Comtech Telecommunications Corp's Third 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, Friday, June 05, 2015. 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 2015. With us on the call this morning are Dr. Stanton D. Sloane, 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, 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, Dr. Stanton Sloane. Dr. Sloane?

Thank you, Maria. Good morning, everyone, and thank you for joining us on the call. As announced yesterday afternoon we reported our third quarter results of $71.6 million in revenue. GAAP diluted earnings per share of $0.30 and adjusted EBITDA of $11.6 million. The third quarter results reflect the fact that many of our customers continue to face economic headwinds such as the impact of lower oil prices and the strong U.S. dollar. We do not anticipate meaningful improvements during our fourth quarter. Based on the Company’s year-to-date results and anticipated fourth quarter performance we now believe that revenues in fiscal 2015 will be in the range of $310 million to $314 million. GAAP diluted earnings per share are expected to range from a $1.38 to $1.54 and adjusted EBITDA is expected to be in the range of $52 million to $56 million. I continue to view certain current market conditions and short-term impediments on the road to long-term growth. We have already begun the process of positioning our company to better deal with the current business environments as well as to be able to take advantage of any improvement in market conditions when it occurs. Let me turn the call over to Mike now, who will provide an overview of our financial results and some additional comments on our business outlook. Afterwards, I will return and talk more specifically about each of our three business segments as well as provide you an update on my review of strategy and operations that I mentioned during my first conference call with you back in March. Mike?

Thanks, Stan, and good morning, everyone. Let me walk you through our Q3 results and as I do I will provide some comments as it relates to our updated fiscal 2015 business outlook. During Q3, we generated revenues of $71.6 million of which 37.5% were for the U.S. Government, 50.6% were for international customers with the remainder being for domestic, commercial customers. Net sales in our Telecom Transmission segment were $45.6 million in Q3 of fiscal 2015, as compared to the $61.2 million we achieved in Q3 of last year representing a decrease of 25.5%. This decrease reflects lower comparative net sales in both our satellite earth station and over-the-horizon microwave system product lines. Bookings in our satellite earth station product line during the third quarter of fiscal 2015 were nominally higher than the second quarter of fiscal 2015. At the same time sales of satellite earth station products were significantly lower during Q3 of fiscal 2015 as compared to both Q2 of fiscal 2015 and Q3 of fiscal 2014. Market conditions continue to be difficult and based on our year-to-date net sales and expected fourth quarter performance fiscal 2015 net sales for this product line are anticipated to be significantly lower than in fiscal 2014. Our second product line in our Telecom Transmission segment is our over-the-horizon microwave system product line. Here sales in Q3 of fiscal 2015 were also significantly lower than Q3 of last year. During Q3 of fiscal 2015, we continued our ongoing performance on our two large multi-year contracts that design and supply over-the-horizon microwave systems and equipment for use in a North African government’s communications network. Although both of these contracts are nearing completion we have multiple large project opportunities both with the U.S. Government and international customers for which we expect to receive orders for. The awards for these potential projects are large, the sales cycles are long and the timing of actual orders is difficult to predict, but we do believe that we would generate revenue from these anticipated orders sometime in fiscal 2016. Based on expected performance and contracts that are currently in our backlog and the timing of other contracts that we anticipate receiving, we do expect sales for this product line during the fourth quarter of fiscal 2015 to be lower than the third quarter and expect fiscal 2015 net sales to be lower than the level we achieved in fiscal 2014. Net sales in our RF Microwave Amplifier segment were $19.7 million in Q3 of fiscal 2015 as compared to $22.5 million in Q3 of fiscal 2014, a decrease of 12.4%. To date the volatile business conditions have not significantly impacted our RF Microwave Amplifier segment. Although we have seen some orders that we previously expected in fiscal 2015 shift into fiscal 2016 we have recently received important orders in our Amplifier segment that boards well for our future. Stan will talk about these orders in a moment. Given such bookings for our RF Microwave Amplifier products are expected to be higher in the fourth quarter as compared to the third quarter and net sales in fiscal 2015 are expected to be higher than the level we achieved in fiscal 2014. Turning to our Mobile Data Communication segment, sales in Q3 of fiscal 2015 were $6.3 million as compared to $5.2 million in Q3 of fiscal 2014 an increase of 21.2%. Sales in both periods include $2.5 million of revenue related to our annual $10 million BFT-1 intellectual property licensing fee. For the full year, net sales on our Mobile Data Communication segment are expected to be lower as compared to fiscal 2014. Now let me walk you through our gross margin and other data to give you some further perspective. Our gross profit percentage in Q3 of fiscal 2015 was 45.1% versus the 43.1% we achieved in Q3 of last year. Our gross profit percentage during the third quarter of fiscal 2015 benefited from better than expected performance on the two large over-the-horizon microwave system contracts we’re working on. Both of these contracts are nearing completion as I mentioned. In addition our gross profit also benefited from $0.5 million reduction in warranty obligations due to lower than anticipated warranty claims and a contract for which the warranty period expired on April 30, 2015. Looking forward based on our anticipated Q4 performance we anticipate that our consolidated gross profit percentage in fiscal 2015 will be slightly higher than the level we achieved in fiscal 2014. On the expense side, SG&A expenses were $15 million or 20.9% of Q3 of fiscal 2015 net sales as compared to the $17.3 million or 19.5% we achieved in Q3 of last year. For the year excluding any potentially charges resulting from Stan’s ongoing the assessment of operations we expect SG&A expenses in dollars in fiscal 2015 to be lower than fiscal 2014, but as a percentage of sales to be slightly higher. Research and development expenses were $8.6 million or 12% of sales versus $8.9 million or 10% in Q3 of fiscal 2014. As a reminder, both periods do not reflect customer-funded R&D projects, which approximated $2.5 million in Q3 of fiscal 2015 as compared to $3 million in Q3 of last year. We expect company-funded R&D expenses for the year both in dollars and as a percentage to be higher as compared to fiscal 2014. Amortization of intangible with finite lives was $1.6 million for the third quarter of both fiscal 2015 and fiscal 2014. Total stock-based compensation, which is recorded in our unallocated segment, was $1.2 million in Q3 of fiscal 2015 versus $1.1 million in Q3 of fiscal 2014. Based on the amount and type of outstanding equity awards, stock-based compensation expense in fiscal 2015 is expected to be higher than in fiscal 2014. Consolidated operating income in Q3 of fiscal 2015 was $7.2 million, or 10.1% of consolidated net sales, as compared to $10.6 million or 11.9% in the third quarter of last year. The 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 third quarter of fiscal 2015 as compared to third quarter of last year. Exclusive any potential one-time charges we are targeting operating income as a percentage of consolidated net sales in fiscal 2015 to be approximately 11%. Interest expense was 100,000 in the third quarter of fiscal 2015, as announced in May 2014 or 3% notes on our longer outstanding and as such we expect interest expense for fiscal 2015 to be significantly lower than fiscal 2014. Interest income and other was also 100,000 in the third quarter of fiscal 2015 as compared to 300,000 in the third quarter of fiscal 2014. Turning to income taxes, we recorded a discrete tax benefit of 300,000 or approximately $0.02 of diluted EPS in Q3 of fiscal 2015, which resulted in a GAAP effective tax rate for the third quarter of fiscal 2015 of 31.1%. This tax benefit related to the reversal of tax contingencies no longer required due to the expiration of applicable statutes of limitation. Excluding the impact of any discrete tax items our effective tax rate in fiscal 2015 is expected to approximate 34.75%. On the bottom line as Stan mentioned earlier, we delivered GAAP diluted EPS of $0.30 in Q3 of fiscal 2015. Now let me provide some additional financial metrics to add color to our results and also provide you with some data and dividend payments and stock repurchases that we made during the quarter. Adjusted EBITDA as defined at the end of our press release that we issued yesterday, was $11.6 million in Q3 of fiscal 2015. At April 30, 2015, our backlog was $130 million. Our balance sheet remains strong. We had a $142 million of cash and cash equivalents and no long-term debt as of April 30, 2015. This cash balance does not reflect our Q3 dividend payment that was paid in May of 2015, which approximated $4.8 million. Also yesterday our Board of Directors approved the divided for the fourth quarter of fiscal 2015 of $0.30 per common share. This divided is expected to be paid on August 18, 2015 to stockholders of record on July 17, 2015. To date and over the past 19 consecutive quarters we have paid out approximately $99 million of dividends and we continue to believe our dividend program is an excellent way to return capital to our stockholders. During the third quarter of fiscal 2015 we repurchased approximately 176,000 shares of our common stock at an aggregate cost of approximately $5 million pursuant to our current $100 million stock repurchase program as authorized by our Board. Pursuant to this program we are currently authorized to repurchase up to $8.7 million of additional shares of our common stock. For the nine months of fiscal 2015 we had an operating cash inflow of $7.7 million. Given our expected fourth quarter fiscal 2015 sales levels at our expectations that we will invoice and collect a significant amount of receivables related to over-the-horizon microwave systems contracts we do expect to generate significant positive net cash flow from our operating activities during the fourth quarter of fiscal 2015, although the exact amount is difficult to predict. Given our expected overall fiscal 2015 sales level we expect operating cash flow in fiscal 2015 to be lower than the cash flow is generated in fiscal 2014. And finally, one last comment our fiscal 2015 EPS and EBITDA guidance provided yesterday does not include any stock repurchases that we may make pursuant to our repurchase plan or any other one-time items. Now, let me turn it back to Stan, who will discuss our businesses in further detail. Stan?

Thanks Mike. Before I discuss our third business segments, I want to provide you with an update on my review of strategy and operations which was briefly discussed in my first conference call back in March. I continue to spend a great deal of time meeting with our management team our employees, our customers and believe that our products and technologies are second to none. I do believe we are on the right path to long-term growth. At the same time, we can continue to improve our current performance. In March, I initiated the assessment of our operations to determine what changes in our business approach or operations could help us better serve our customers and potentially reduced operating expenses. As a result, I’ve made some changes and will continue to consider others. First, in light of market conditions that have impacted our satellite earth station product line we have significantly reduce staffing to a level that we believe this commensurate with current business activity. Second, we have expanded and we expect to continue to expand our corporate marketing and business development function to enhance our focus on existing and untapped market opportunities. The benefit of this expansion will take sometime to produce results. But I do believe that the additional investment in this area will result in demonstrable returns down the road. Third, I’ve made some organizational changes to leverage our strong product portfolio. For instance as many of you know we have multiple legal subsidiaries each of which have traditionally marketed their products and services separately from each other. During the third quarter we formed legal joint venture consisting solely of our domestic subsidiaries which will allow us to propose our new opportunities including several large U.S. Government solicitations with the unified approach. During the quarter we submitted our first bid to the U.S. Government using this entity and we have several other opportunities we are pursuing that we will believe that we believe will ultimately bare fruit. I am continuing to review a number of other areas, which I believe maybe candidates for improving efficiency and reducing costs. And I will keep you posted on these future changes. With that background, let me now discuss some of the recent developments in each of our three business segments. I’ll start with our largest segment, Telecommunications Transmission which is comprised of two product lines, satellite earth stations 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 and highest efficiency amplifiers to our end customers. We continue to be excited about our Advanced VSAT product line which combines a variety of technologies within our IP portfolio to provide integrated solutions to our customers. Just a few days ago we announced that our advanced VSAT solutions are now being deployed to support multiple customer installations using O3b network’s innovative satellite systems. Our Advanced VSAT product line continues to be well received and will contribute to long-term growth objectives. For the past year or so despite the market conditions, we pressed ahead with certain R&D investments and our satellite earth station product line. In March we began previewing our new HEIGHTS solutions, a scalable network platform designed with service provider in mind. HEIGHTS leverages a single user interface with a powerful traffic analytics engine that allow simplified design, implementation, monitoring, control and optimization of networks using our hubs and gateways. HEIGHTS platform is designed to support the traffic loaded demanding premium enterprise users on traditional as well as HTS or high throughput satellites. HEIGHTS also supports dynamic remote-to-remote connections which we call dynamic mesh, which eliminate double-hop latency. To date customer reaction to our HEIGHTS platform has been very positive. Like our Advanced VSAT, our new HEIGHTS platform will take a little time to establish itself in the market, but we do believe it will contribute to growth over the next few years. On the U.S. Government side of our satellite earth station product line, we continue to perform work on our Advanced Time Division Multiple Access Interface Processor or ATIP contract. During the third quarter we began shipping ATIP production units to our customer and we continue to perform development work related to Adaptive Coding which will further improve the Navy's communications system performance. The ATIP contract is our entry into the protected MILSATCOM market, strategically important market for us where there are several sizable opportunities not only with U.S. Military, but with our U.S. Allies Overseas as well. All in all despite difficult near-term market conditions and lower revenues I believe our satellite earth station product line is well positioned for long-term growth. On the over-the-horizon front, demand for our over-the-horizon microwave systems both with U.S. Government customers and with new international customers continues to be strong. However, as you all know predicting the timing of potential contract awards for these opportunities is difficult. That said we still expect to receive orders for our Modular Tactical Transmissions System or MTTS, the high capacity over-the-horizon microwave system designed for easy and rapid deployment with related revenue to be recognized in fiscal 2016. In February, we demonstrated MTTS to the U.S. Army successfully establishing and maintaining 50 megabits per second communications link between two systems separated by approximately 100 miles. Also we are bidding international opportunities in the Middle East, Australia, Asia, South America and Africa. I am hopeful we will be able to announce one or more these potential contract awards before our fiscal 2015 closes. I anticipate we will generate revenue and related operating income from some of these potential contract opportunities in fiscal 2016. Turning to RF Microwave Amplifiers segment, we believe that fiscal 2015 will be a year of revenue and operating income growth. While we have seen some orders shift to the right, we have on the other hand seen extremely positive customer reaction to our new super power traveling wave tube amplifiers which were introduced in March 2015. In fact on June 1, 2015 we announced our first $1.1 million order from a domestic integrator and believe this order will be the first of many. Our super power traveling wave tube amplifiers will not only allow our customers such as broadcasters to build out new infrastructure. It will also allow our customers to replace aged inefficient equipment in their current infrastructure with high power, high efficiency broadband amplifiers necessary for high-definition and ultra high-definition broadcasting. During the past year or so, we’ve also made significant inroads into the high growth in-flight connectivity market. Just this week, we announced an order of $4.3 million for solid-state power amplifiers that will help enable commercial airlines to provide in-flight connectivity services to their passengers. Most if not all of this order will be recognized as revenue in fiscal 2016. This is a new and growing market for us, we expect additional orders and we believe that this area should be a significant revenue contributor for Comtech over the next several years. On the U.S. military front, we remain well positioned where our traveling wave tube amplifiers support both the FAB-T and WIN-T program that plus opportunities we see in tactical communications enabled by our X-Band products will provide a strong base of U.S. Government related revenues for the next several years. On the broadband high-power solid-state amplifier side business remains steady and we continue to develop new products that will ensure we remain at the forefront of this technology. As of today, significant amount of our projected RF microwave amplifier sales for the balance of 2015 are already in backlog and we see this segment growing significantly. I am optimistic we will see future growth here as well. In our third segment, Mobile Data Communications, the largest revenue contributor remains our BFT-1 Sustainment work for the U.S. Army. These activities continue to be funded despite ongoing government spending pressures. That work is tangible evidence of the important role our technology plays with the U.S Army. We continue to support the BFT program pursuant to two multi-year contracts that have a combined contract value not to exceed $68.5 million. During the three months ended April 30, 2015 the U.S. Army exercised its first 12 month option, which will allows us to continue to provide services through March 31, 2016. In addition, we received initial funding of $19.8 million including funding of our $10 million annual license fee. Total funding received to-date for both contracts approximates $43.4 million and we are optimistic that we will receive additional orders before March 31, 2016. In addition to our Sustainment activities on BFT-1, there are other opportunities we are pursuing, both with the U.S. Military as well as international military customers. Although, we are optimistic about these opportunities and that they will develop into sizeable orders, it’s difficult to predict timing. Our primary goal in the Mobile Data Communications segment for the moment continues to be providing the U.S. Army with outstanding support. Doing so, should position us well to participate in next-generation platforms. With that, I would like to proceed to the Q&A part of the conference call. Operator?

[Operator Instructions] Our first question is from Mark Jordan from Noble Financial. Your line is open.

Good morning gentlemen. Question on the Tropo sector couple. Will the MTTS product as I understand that you have a partner in that program, what percent of the content of MTTS is Comtech provided versus your partners?

Mark, to be honest with you I would have to refer you to the prime contractor because there is other elements to those programs that we have no inside on, so I really can’t answer it by providing chunk of the system, but not all the services and logistics and all the other stuff to go with it.

Okay, and will the MTTS replace the track 170s or will they remain in the Army’s inventory to the longer term and remain an upgrade opportunity for you?

Well, again I’d have to refer you to the Army for what their plans are, but that is our from a technical point of view that’s what we believe make sense; the current system would replace the track 170.

Okay, you mentioned foreign military sale opportunities with MTTS if you take a parallel I guess like the Harris Corp has been very successful selling their next generation radios into friendly countries you believe that there will be with the Army adopting MTTS is a mainstream communications methodology that should have a parallel opportunity to what Harris has done internationally?

So just I guess words are important, when you say mainstream obviously this is one piece of the communications architecture that consist a whole lot of other things, obviously Tropo is one element, but they have all sorts of other radios and communications systems. There are opportunities internationally are in addition to FMS we think there is opportunity for direct sale to other governments only military, but commercial sales overseas as well. So we are pursuing all of that at the moment we [indiscernible], but as I said we are hoping that some of those things will come to fruition in the near-term.

Okay. Question for Mike relative to accounts receivable and inventory you mentioned some significant milestone I think in the tropo area. If you look at the balance sheet inventories and accounts receivables is up about $20 million versus the start of the fiscal year, is that the order of magnitude of accounts receivable and inventory that could convert to cash in the fourth quarter with certain milestone are hit?

Mark, I don’t know it would be that high, but it would certainly be in the $10 million to $15 million range and it will be depending on progress and exact timing of the buildings, but it should be north of $10 million.

Okay. Thank you very much. End of Q&A

[Operator Instructions] And it appears we have no further questions at this time. I would like to turn the call back over to the company for closing remarks.

Thanks again for joining us today. We look forward to talking with you again in September. Have a great day.