Comtech Telecommunications Corp. (CMTL) Q4 2015 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to Comtech Telecommunication Corp.'s fourth 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 today, Tuesday, September 29, 2015. I would now like to turn the conference over to Ms. Nancy Stallone, out of Comtech Telecommunications. Please go ahead, ma'am.

Thank you and good morning. Welcome to the Comtech Telecommunications Corp. conference call for the fourth 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. Stan?

Thanks, Nancy. Good morning, everyone. Thank you for joining us on the call. As announced yesterday afternoon, we reported our fourth quarter results of $77.5 million in revenue, GAAP diluted earnings per share of $0.34. For the year, our revenues totaled $307.3 million, and our GAAP diluted EPS was $1.42. Our adjusted EBITDA was $12 million for the fourth quarter and $51.8 million for the full fiscal year. Fiscal 2015 was a difficult year for Comtech. We started the year with expectations that we would achieve both top line and bottom line growth, but adverse global economic conditions have impeded that. As we discussed on prior conference calls, the drop in global oil prices significantly impacted the ability of our customers in the oil and gas producing regions of the world such as Russia and Brazil to invest in telecommunications products and infrastructure. At the same time, the U.S. dollar strengthened against many foreign currencies resulting in lower purchasing power from many of our international end-customers, because virtually all of our sales are denominated in U.S. dollars. During our fourth quarter China, which has historically been a relatively large region for our satellite earth station product line, announced a devaluation of its currency and many economists reduced their expectations for China's growth. As we look to fiscal 2016, we do not anticipate improving market conditions. As such, as announced in our press release yesterday, we believe that our consolidated net sales and operating income in fiscal 2016 will be similar to fiscal 2015. Specifically, we expect fiscal 2016 revenue will be in the range of $300 million to $310 million. Our GAAP diluted earnings per share is expected to be in the range of $1.34 to $1.50 and our adjusted EBITDA is expected to be in the range of $50 million to $54 million. Given market conditions, I am continuing to perform an assessment of our operations to determine if changes in our business approach or operations would help us serve our customers better and potentially reduce operating expenses. At the same time, we have embarked on a focused acquisition plan to expand our global footprint and further diversify our business. I will talk more about my assessment later in this conference call, but first let me turn it over to Mike Porcelain to provide an overview of our financial results and our 2016 business outlook. Mike?

Thanks, Stan and good morning, everyone. During Q4, we generated revenues of $77.5 million, of which 33.1% were for U.S. government end users, 51.5% were for international end users, with the remainder being for domestic commercial customers. For the full year fiscal 2015, we finished at $307.3 million of revenue with 30.6% being generated from U.S. government customers, 56.2% from international end users, with the remainder generated from domestic commercial customers. Net sales in our telecom transmission segment were $39.1 million in Q4 of fiscal 2015 as compared to the $59.3 million we achieved in Q4 of last year, representing a decrease of 34.1%. This decrease is attributable to lower net sales in both our satellite earth station and our over-the-horizon microwave system product lines. For the full year of fiscal 2015, net sales in our telecom transmission segment were $190 million, down $41.5 million or 17.9% from the $231.5 million we achieved in fiscal 2014. Sales in fiscal 2015 were impacted by reductions and delays in spending by many of our international customers. In our satellite earth station product line, although we did see some nominal improvement in bookings during Q4 2015 as compared to Q3 2015, our international customers continued to be impacted. Looking to fiscal 2016, we do not expect market conditions to mainly improve for these end customers. However, we are expecting overall annual satellite earth station product line sales to nominally increase in fiscal 2016 as compared to 2015. This will be driven by new product introductions which Stan will discuss. Sales for this product line are expected to be heavily weighted towards the fourth quarter of fiscal 2016. In our over-the-horizon microwave system product line, sales in Q4 of fiscal 2015 were significantly lower as compared to the level we achieved in Q4 of last year. This decrease is largely attributable to the timing of performance of our two large multiyear contracts to design and supply over-the-horizon microwave systems for use in a North African government's communication network. As both of these contracts are nearing completion, we expect them to contribute significantly lower level of sales in fiscal 2016. And as such, we expect overall sales for this product line in 2016 to be lower. Sales in this product line will also be heavily weighted towards the second half of this year. We are expecting fiscal 2016 bookings to increase and anticipate receiving large orders from one or more potential new international customers who expressed strong interest in purchasing from us. We are also expecting to receive additional orders from both the U.S. military for MTTS terminals and from our North African government end customer for additional products for their communication network. Net sales in our RF microwave amplifier segment were $32.1 million in Q4 of fiscal 2015 as compared to $23.3 million in Q4 of fiscal 2014, an increase of 37.8%. For the full year of fiscal 2015, net sales in our RF microwave amplifier segment were $92.1 million, up $4.1 million or 4.7% from the amount we achieved in fiscal 2014. During fiscal 2005, we introduced and received our first order for our new SuperPower TWTAs and expanded our presence in the in-flight connectivity market. We are expecting these new initiatives to drive significant additional orders and sales during fiscal 2016. To date, the adverse global business conditions have not significantly impacted our RF microwave amplifier segment, and we believe that fiscal 2016 will be another year of revenue and bookings growth for this product line. Turning to our mobile data communication segment. Sales in Q4 of fiscal 2015 were $6.3 million as compared to $6.8 million in Q4 of fiscal 2014, a decrease of 7.4%. Sales in both periods include $2.5 million of revenue related to our annual $10 million BFT-1 intellectual property license fee . For the full year 2015, net sales were down $25.2 million in this segment or 9% from the $27.7 million we achieved in fiscal 2014. This was largely due to the absence of sales in fiscal 2015 associated with our SENS technology and products which we sold in fiscal 2014 to an end customer. Sales in both fiscal 2015 and 2014 include $10 million of revenue related to our annual BFT-1 intellectual property license fee. We expect that sales in fiscal 2016 in the mobile data communication segment will approximate the same levels we achieved in fiscal 2015, as we continue to focus most of our efforts on providing BFT-1 sustainment support to the U.S. Army. As discussed in more detail in our 10-K, we are currently providing BFT-1 sustainment services to the U.S. Army pursuant to two contracts, which have a combined not to exceed value aggregating $71.2 million. In addition, we intend to continue to focus our efforts on expanding sales of our mobile data communication products and services into foreign military markets. We currently have multiple opportunities of this type in development and we are expecting a nominal amount of sales into this marketplace in fiscal 2016. Now let me walk you through our gross margin and operating expense line items and provide some operating metrics. Our gross profit in Q4 of fiscal 2015 as a percentage of consolidated net sales was 43.1% versus the 44% we achieved in Q4 of last year. For the year, gross profit was 45.2% as compared to 43.6% in fiscal 2014. Looking forward and despite various mix changes that are more thoroughly described in our Form 10-K, we believe that our consolidated gross profit in fiscal 2016 as a percentage of consolidated net sales will be comparable to the level we achieved in fiscal 2015. On the expense side, SG&A expenses were $16.1 million or 20.8% of Q4 fiscal 2015 net sales as compared to the $17.3 million or 19.4% we achieved in Q4 of last year. The decrease in SG&A expenses in dollars is primarily related to the decrease in overall sales activity and reflects the benefit of a number of cost reductions that we took during fiscal 2015. For the full year fiscal 2015, SG&A expenses were $62.7 million or 20.4% of net sales as compared to $67.1 million or 19.3% in fiscal 2014. SG&A expenses in fiscal 2015 includes six months of additional senior leadership cost as compared to fiscal 2014. Although global business conditions remain challenging, during fiscal 2016 we expect to increase our spending on companywide marketing and business development activities and other companywide initiatives to position the company for future growth. At the same time, as Stan will discuss, we are embarking on a focused acquisition plan. As such, excluding any potential one-time changes associated with these efforts, we believe that fiscal 2016 SG&A in dollars will be slightly higher than the amount we reported in fiscal 2015. Research and development expenses were $7.6 million or 9.8% of consolidated net sales in Q4 of fiscal 2015 versus $8.4 million or 9.4% in Q4 of fiscal 2014. We have completed several of our research and development projects that we initiated in prior years and have adjusted our staffing levels accordingly. As such we expect company funded research and development expenses for fiscal 2016 in dollars to be lower than the amount we invested during fiscal 2015. Total stock-based compensation expense, which is recorded in our unallocated segment, was $700,000 for the fourth quarter of fiscal 2015 as compared to $1.2 million for the fourth quarter of fiscal 2014. Amortization of intangibles with finite lives was $1.5 million for the fourth quarter of fiscal 2015 and $1.6 million for Q4 of fiscal 2014. Consolidated operating income in Q4 of fiscal 2015 was $8.1 million or 10.5% of consolidated net sales as compared to $12.1 million or 13.5% in the fourth quarter of last year. For the year, operating income as a percentage of net sales was 11.1%. Currently and excluding potential one-time charges, we are targeting operating income in fiscal 2016 to be around 11%. Interest expense was $73,000 in the fourth quarter of fiscal 2015 and $295,000 in the fourth quarter of fiscal 2014. Interest income and other was $124,000 in the fourth quarter of fiscal 2015, compared to $156,000 in the fourth quarter of fiscal 2014. Turning to income taxes. Our GAAP effective tax rate for the fourth quarter of fiscal 2015 was 32.6%. We expect that our GAAP tax rate in fiscal 2016 excluding the impact of any potential discrete tax items, will approximate 34.75%. Adding it all up, on the bottom line as Stan mentioned, we delivered GAAP diluted EPS of $0.34 in Q4 of fiscal 2015 and $1.42 for the year. Now let me provide some other financial metrics to help add color to our results. Adjusted EBITDA as defined at the end of our press release that we issued yesterday, was $12 million in Q4 and $51.8 million for fiscal 2015. At July 31, 2015, our backlog was $117.7 million compared to $133.4 million at July 31, 2014. Our balance sheet remains strong. We had $151 million of cash and cash equivalents as of July 31, 2015. This cash balance does not reflect our Q4 dividend that was paid in August 2015, which approximated $4.8 million. Yesterday, our Board of Directors approved a dividend for the first quarter of fiscal 2016 of $0.30 per common share. This dividend is expected to be paid on November 20, 2015 to stockholders of record on October 19, 2015. To date and over the past 20 consecutive quarters, we have paid out over $104.5 million of dividends. We generated $21.7 million of positive cash flows from operations during fiscal 2015. Looking to next year, we expect reductions on our working capital requirements primarily due to the fact that both of our large over-the-horizon microwave contracts are nearing completion. As such, although fiscal 2016 revenue and operating income are expected to be similar to the levels we achieved in fiscal 2015, we expect cash flows from operations in fiscal 2016 to be higher than the level we achieved this past year. In fiscal 2015, we repurchased 175,735 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. Finally, before turning it back to Stan, I just want to remind you that our fiscal 2016 EPS and EBITDA guidance provided yesterday does not include any additional expenses associated with our President and CEO's assessment of our operations or any potential one-time charges including costs associated with any acquisitions that we may make during the year. Additionally given our expectations of shipments of orders currently in our backlog and the expected receipt and timing of shipments of new orders, we believe that will sales and operating income in fiscal 2016 will be significantly weighted towards the second half. Our first quarter is expected to be the lowest quarter of fiscal 2016. In fact, lower than the first quarter of fiscal 2015. Our fourth quarter of fiscal 2016 is expected to be the peak. Now let me turn it back to Stan, who will discuss our business and outlook in further detail. Stan?

Thanks, Mike. Let me discuss recent developments in each of our three business segments. I will start with the 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. I am enthusiastic about our new Heights solutions. It's a scalable network platform designed with a 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. The 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 eliminate double hop latency. Heights is a successor to our advanced VSAT product line and will take a little time to establish itself in the market. However, we continue to invest in enhancements, so that the platform can be used in markets that we have not historically participated in. To date, customer reaction to our Heights platform has been very positive. We are expecting Heights to contribute to sales in the second half of 2016. 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 and anticipate sales in fiscal 2016 from additional shipments of ATIP production units to the U.S. Navy. In addition, we anticipate new development and production contracts to further improve the Navy's communications system performance. We are also pursuing similar programs with other U.S. military customers. On the over-the-horizon front, interest in our over-the-horizon microwave systems, both with our U.S. government customers and with new potential international customers, continues to be strong. However, as you know, predicting the timing of potential contract awards for these opportunities is difficult. During Q4 of fiscal 2015, we received orders for our modular tactical transmissions system or MTTS, a high capacity over-the-horizon microwave system designed for easy and rapid deployment with related revenue to be recognized in fiscal 2016. As discussed on prior conference calls, 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. We expect to receive and ship additional MTTS orders in fiscal 2016. Also we are bidding international opportunities in the Middle East, Australia, Asia, South America and Africa. While I was hopeful that I would be able to announce one or more of these potential contract awards before the end of fiscal 2015, I now believe that the awards for some of these opportunities will move into fiscal year 2016 along with the related revenue and operating income. Turning to our RF microwave amplifier segment. I expect that fiscal 2016 will be another year of revenue and operating income growth. We have seen extremely positive customer reaction to our new SuperPower traveling wave tube amplifiers which were introduced in March 2015. Our SuperPower amplifiers will not only allow our customers such as broadcasters to build out new infrastructure, it will enable the replacement of 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 have also made significant inroads into the high growth in-flight connectivity market. Our solid-state power amplifiers help enable commercial airlines to provide in-flight connectivity services to their passengers. We expect additional orders and 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 regarding our traveling wave tube amplifiers that support both the FAB-T and WIN-T programs. Those 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 power amplifier side, business remains steady and we continue to develop new products that will ensure we remain at the forefront of this technology. In our third segment, mobile data communications, the largest revenue contributor remains our BFT-1 sustainment work for the U.S. Army. This work is tangible evidence of the important role our technology plays with the Army. As discussed in detail in our Form 10-K, we are currently providing BFT-1 sustainment services to the U.S. Army pursuant to two contracts that have a combined not to exceed value of $71.2 million. During fiscal 2015, the U.S. Army exercised its first 12-month option for both contracts, which have a performance period from April 1, 2015 through March 31, 2016. Total funding received to date for both contracts approximates $49.3 million. Given the importance of the work we are performing, we believe U.S. Army will exercise the remaining 12-month option period on the BFT contracts. 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 the next generation systems. Finally before going to the Q&A portion the call, I want to make a couple of additional comments about fiscal 2015 and 2016. While fiscal year 2016 is shaping up to be pretty similar to fiscal year 2015, I can tell you that with certainty that I believe and our leadership employees believe that the growth potential for the future is significant and we are very excited about it. On the management front, we have made some changes in the executive staff and I will continue to add talent which I think will bring new ideas and new ways of doing things to the business. For much of last year, our team worked longer hard on lengthy strategic sales process, which culminated in the Board's decision that Comtech shareholders would be best served by remaining independent. With that future now solidified, we are refocusing our energy on customer satisfaction and growth. In this regard, I have expanded and 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 little time to produce results, but I do believe the additional investment will provide demonstrable returns down the road. Finally, I believe our customers love our products and our technological prowess. At the same time, they want us to do more to meet their needs. As a result, we are embarking on a focused acquisition plan that we expect to expand our global footprint and further diversify our business. We see several exciting opportunities, some small, some large that we are currently evaluating. And while we have nothing specific to report to you here, we will continue to seek acquisitions that we feel will enhance shareholder value. With that, I would like to proceed to the Q&A part of the conference call. Operator?

[Operator Instructions]. Our first question from Mark Jordan with Noble Financial. Please go ahead.

Good morning, gentlemen. Stan, I wondered if you could expand a little bit more on your international pipeline for Tropo in terms of numbers and how you think orders may flow this year and next? A related question, on the ones that you expect to potentially get in the current fiscal year, would those be your more traditional three-year programs where you would have a building of revenue into the middle time of three-year performance period or would these be more shorter-term equipment sales?

So on the first one, when we talk about international for Tropo, let me divide it. There is government or military type systems and then there is international applications, things like offshore oil platform communications and commercial opportunities. On the international side, there also are potential U.S. government, foreign military sales to international customers, and there are direct contracts that we anticipate with foreign customers. So it's all of those things. I think the way to summarize it is that we are continuing a couple of large international, direct international sales for systems that incorporate Tropo. They are not just Tropo boxes, if you will. They are larger systems, where we are actually going to integrate the Tropo into some other additional communications capabilities. Those are international. There are couple of foreign military sales opportunities in there that we are also looking at. On the commercial side, internationally, there are the classical or traditional customers like oil and gas provider. So those are all of the Tropo things. My current thinking is those are probably going to be second half of fiscal year signatures, if you will, on the contracts. That being the case, we would get some revenue from them in fiscal year, but your earlier point, your second question, most of those types of programs are not just a book and ship. They tend to involve longer timelines, two to three years is sort of what I would think of for a typical horizon for that sort of contract.

Okay. The BFT, you mentioned that there is opportunities and you are working on developing foreign military sales, export sales. Do you see that there will be any movement on a potential BFT-2.5 contract which would offer opportunity for the company in fiscal 2016? Or is that probably more than a year out?

So it's our understanding that the government awarded a BFT-2.5 contract. That's not an opportunity for us. We are thinking BFT-3.0. I think it's a next generation system where we are expending our energies. We are working with the Army and in fact we are looking at a couple of opportunities where the U.S. government has issued RFIs for second sources and other things related to BFT. So there is several things in the mix. We are working hard on the R&D front to position for what I will refer to as BFT-3 That's not a defined U.S. government program, but we expect that the government is going to need to replace the current generation, and so we are positioning for that replacement.

Okay. Final question for me, if I may. Your M&A plans -- you have talked about that you are looking at things. Are you looking for businesses that could fit and complement one of your four existing lines? Or are you looking for the potential to adding a new business line to the four that you have? Or a combination of both?

Well, we are not going to buy a running shoe company. We are going to stick to what I would call our core competency. I would describe that as communications systems and electronics generally, so if you want to think in terms of government terminology, I would call it the C4 space. And on the commercial side, communications systems, satcom, all those would be fair game. Objective is to not get too far outside of our comfort zone on what we know how do and we will add them in.

Okay. Thank you very much.

[Operator Instructions]. And it appears we have no further questions at this time. I will return the program to the company for any additional remarks.

No additional remarks from us. We appreciate your time and thank you for joining us. And with that, we will look forward to talking with you again in December in the next call.

This does conclude today's program. Thanks for your participation. You may now disconnect. Have a great day.