Ladies and gentlemen thank you for standing by and welcome to the Comtech Telecommunication Corp's First Quarter Fiscal 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions]. As a reminder, this conference is being recorded Thursday, December 8, 2016. I would now like to turn the conference over to Ms. Maria Ceriello 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 2017. With us on the call this morning are Fred Kornberg, Chief Executive Officer and President of Comtech; Michael D. Porcelain, Senior Vice President and Chief Financial Officer; and Michael Galletti, our Chief Operating 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, including among others the risks that Comtech's and TCS's businesses will not be integrated successfully. 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 Chief Executive Officer and President of Comtech, Fred Kornberg. Fred?

Thank you, Maria. Good morning everyone and thank you for joining us on this call. As announced yesterday afternoon we reported our first quarter results of $135.8 million in revenues, and operating loss of $700,000, and an adjusted EBITDA of $10 million. Additionally we reconfirmed our fiscal 2017 revenue target of $600 million with an adjusted EBITDA for the year of approximately $70 million. Although international business conditions remain challenging our first quarter results actually exceeded our initial internal projections. Given this it was my first quarter back as CEO I am hoping that this will over time become a positive trend. Let me now turn it over to Mike Porcelain, our CFO to discuss our financial results in more detail, then I will come back and give you some additional comments before opening it up for questions. Mike.

Thanks, Fred and good morning everyone. Consolidated net sales for Q1 were $135.8 million. These sales included approximately $78 million of sales as a result of the TCS acquisition. Of the 135.8 million, approximately 35.3% were generated from U.S. government end customers, 27.9% from international end customers, and 36.8% from domestic commercial end customers. Now let me provide some color on Q1 sales information by segment. Net sales in our commercial solutions segment were 76.2 million or 56.1% of total net sales. During Q1 this segment benefited from sales of location and messaging based solutions and safety security technology solutions that we now offer as a result of the TCS acquisition. Sales of TCS products in this segment during Q1 were approximately $39.9 million. The remainder of this segment sales in Q1 consist of Comtech legacy products which we now refer to as communications technology solutions which will also include our satellite earth station products and travelling wave tube amplifiers. Although international market conditions for our satellite earth station products continue to be challenging we believe that market conditions have become relatively stable. Turning to our government solutions segment, net sales were $59.6 million or 43.9% of total net sales. During Q1 our government solutions segment benefited from a variety of new advanced communications solutions that we now offer as a result of the TCS acquisition. These solutions include field support, space components, and cyber training. Sales of TCS products in this segment during Q1 were approximately $38.1 million with the remainder of the sales in this segment being derived from Comtech's legacy products which includes sales of our over the horizon microwave products, solid-state amplifiers, and BFT-1 sustainment support services. Our Q1 results include 2.5 million of revenue related to our annual BFT-1 intellectual property license fee. As a…

Thanks Mike. As I mentioned in our last earnings call in October, I believe our business is at a turning point and I am excited about the growth opportunities that I see are ahead of us. With a combination of experience, careful planning, and successful execution I believe we will be able to drive significant shareholder value by focusing and delivering on advanced communication solutions for both commercial and government applications. Let me give you some color on what is happening in each of our segments. First let me discuss our commercial solutions segment. We continue to be a leading provider of satellite communications products such as satellite earth station modems, solid-state RF and travelling wave tube power amplifiers. We are also a leading provider of public safety systems such as the next generation technologies and enterprise application technologies such as messaging and trusted location based technologies. Our satellite based communication products participated in the satellite backhaul and network services market. In the satellite modem area we remain the undisputed leader in single channel per carrier or SCPC driven primarily by our proven ability to deliver the most bandwidth efficient modems. As most of you know, our satellite earth station single channel per carrier product line has experienced recent year-over-year declines due to challenging international markets, a strong dollar, and low oil prices. To offset this decline, we have focused a lot on marketing and research and development on our new Heights Network Solution product line. Our Heights platform is designed to support the traffic load of demanding premium enterprise users on traditional satellite networks as well as a new HTS or high throughput satellites. As such it is an entirely new market for us but one which is much larger than our traditional SCPC market. We have been developing…

[Operator Instructions]. We will go first to the line of Tim Long from BMO Capital Markets. Please go ahead.

Thank you. Two questions if I could, first could you talk a little bit about obviously expecting a pretty big revenue ramp in the second half of the year and it is coming off of a down backlog into this quarter, could you just talk a little bit about the confidence in that, what gives you the visibility into the second half of the year, and kind of what needs to happen to hit that? And then secondly you highlighted some other opportunities in the next gen 911 space, it sounds like there is several states that are opportunities, could you talk about timing for potential wins there and whether or not any of those would be included in the potential 600 million revenues for this year? Thank you.

Sure, hey good morning Tim. So, yeah a couple of things, we don’t have any new -- in our 600 million we are not anticipating any deliveries of new next generation 911 systems other than what we have in our backlog. So anything that we get from a new order, from the way we are thinking and that would be shippable in 2017 would certainly be upside to the way we are thinking about it but we are viewing it as an 2018 type of revenue. Our backlog is pretty strong. We finished the year and quarter with over $400 million of backlog most of all over the horizon stuff which is really long lead stuff is in our backlog at the moment. We have the State of Washington contract that we booked over 40 somewhat million dollars worth that we are working on. That revenue is not going to really be recognized until Q3 and then a lot more in Q4. So from a trend perspective of what we see in our backlog, the trends in the analytical support the way we are thinking about the business. Additionally our satellite earth station business, I guess we used the phrase we do see stability and in our mind stability is a good thing in that market right now. There's plenty of opportunities that we are looking at, we are chasing and it is just a question of booking and bringing them in and that is all our expectation.

Okay, great. Thank you.

Thank you and we will go next to the line of Mark Jordan with Noble Financial.

Thank you. I would like to look again or talk about the next gen potential opportunities you have. You mentioned California, Tennessee, and Florida, is that market evolving and would potential contracts be similar to the State of Washington which as I understand you built the system and then operated for five years, have relatively stable revenues over that extended service period. Is that the way this market is evolving or could those other contracts have different structures of just being an infrastructure sale?

I think Mark, we really have two structures, one which is direct as we did with the State of Washington where we bid directly to the State and one that contracted. We are also discussing with carriers such as AT&T and other let's say prime contractors which would include Motorola or General Dynamics and so forth to support their entries into the similar systems that they have in various states in the U.S. So it is really a two pronged attack both direct and as a sub.

Okay, could you give a little more clarity on when you expect the DOD to start purchasing small form factor tropo systems?

I guess we have been kind of attacking this for the last few years and funding continues to be the main obstacle. It has finally I think gotten to the point where it is a program of record and we believe now although it will continue to be a delay for at least another 6 to 9 months the program of record will produce finally some tropo requests and contracts probably in the middle of next year.

Okay, final question for me, I was wondering Mike if you could go through the pipeline, you talk about a robust pipeline could you sort of highlight where you see the greatest strength in that pipeline that could potentially impact the second half of the year?

I would say at the moment Mark it’s pretty much across the board. Our satellite earth station business is in international orientated market but the opportunities are there. We have tremendous demand that we see in the pipeline for the new Heights product and while we are hoping to convert some of that in Q3 and Q4, we’re working on a new release that’s scheduled for earlier in the calendar year of next year. And we think once that we’re completed with that development work and roll out that new system that the orders will come in and again you know historically we can turn that stuff within 30 to 60 days after we get to the order. So that’s on the international side. On the domestic side, the TCS business is over 90% based in the United States and certainly that market is pretty good. So from a geographical perspective we have the visibility to the orders and we see them coming in.

Okay, thank you.

Thank you and we’ll take our next question from Mike Latimore with Northland Capital. Please go ahead.

Hey, thanks. Just on the in-flight connectivity opportunity, can you just sort of quantify I mean how big of a revenue stream can that be over time?

It’s a revenue stream that I think is just really beginning to accelerate. Companies such as Gogo for instance you can see their releases in terms of the market share and the number of planes that they are supplying with. We are a supplier to Gogo and as such we just followed their growth pattern.

Okay, got it. And then in terms of your CapEx outlook for the year, any change there or still 10 million to 15 million?

I think that’s the right number. We do anticipate it increasing from the $2 million or so that we spent in Q1. And some of these things again go back to Mark Jordan’s questions about the hosting platforms that we are rolling out. We do have some investments on the PP&E side and we only do that when we see the revenues opportunities that are there as well. So we have the ability to moderate that spending if necessary.

And you touched on sort of the tactical changes that are I guess still ongoing and just little additional clarity on kind of what’s under consideration there?

I didn’t understand the question can you repeat that?

Yes, I mean you just touched on -- you said that you are undergoing -- you’re considering tactical changes, you mentioned that a couple of times. And just as a follow on to the changes from last quarter do you have any updates on kind of where you see some of the priorities changing perhaps?

I think in general to just answer that question as I mentioned in my speech there, I think overall we’re really in the integration of TCS and to Comtech. We’re really looking at a change in strategy of going from large let’s say services contracts that have very low margins to maybe more strategic programs with more of the legacy Comtech as well as TCS products that will give us higher margins. So really it is concentrating more on the bottom-line than on the top line.

And in fact with regards to the second quarter guidance did that imply sort of operating cash flow positive as well?

We were actually expecting it to be a little bit negative in Q2. We were pleasantly surprised by a lot of the effort that went into the balance sheet by our folks across the company to generate positive cash flow. So some of that is timing from Q2 to Q1 but we are expecting very similar operations so P&L performance both on the operating income line and on the adjusted EBITDA line as compared to Q1, geez if we could pull in a breakeven cash flow or slightly positive cash flow for Q2 that would be great. At the moment we’re probably looking at a little negative in terms of the operating cash flow just from a timing perspective.

Okay, thank you.

Thank you and we’ll go next to the side of Glenn Mattson from Ladenburg Thalmann. Please go ahead.

Hi, good morning just quick curious on the working capital for the year, would you expect that to be just directionally an increase or decrease in working capital this year?

Well by the end of the year we are expecting our book-to-bill to be over 1 and given some of the timing of shipments both in Q3 and Q4 and the buildup we will probably be looking at an overall increase by the time Q4 comes around. Now offsetting that we have a number of initiatives to reduce the balance sheet, the investments, and accounts receivable in the balance sheet investments and inventory. So we had those two things to offset each other but all of those being equal just because of the revenue growth we’re expecting you probably see a build up by Q4 with that stuff coming back into the P&L -- cash flow, excuse me, and balance sheet in Q1 of 2018.

And that assumes a decrease in inventory days and DSOs?

No, if we are able to achieve that would offset that. So I think it’s difficult for us to tell you how much achievement we could do. Saying it again, if things stay where they are we’ll have a buildup in working capital, if we’re successful in reducing our investments that would offset some of that investment.

Okay, and then can you talk a little more about the negotiations with the debt and the debt to EBITDA ratios and just kind of what’s keeping you from completing. I imagine you would have preferred to have an agreement done by the time you had this call or just some progress on the thoughts there?

I think if you do the simple math of 70 million divided by $262 million current debt level those are the types of ratios that we’re looking to see. From a starting and a reset point I think banks understand that. So, this is a really good banking group that we’ve had since November of 2015 and prior to that so they really have a good sense of the operations and the needs. So from a simplistic perspective everybody knows what we need to do and the feedback that we’re getting is there is path forward and obviously we need to go through the process and there is a number of banks that have a process. Our hope is to your point we will love to have had that all resolved by the time we had this call today. We’re probably looking at Q3 if not before we announce Q3.

You mean agreement by then.

Excuse me, Q2 result pardon me. We’re looking to resolve that prior to the end of Q2 or with our Q2 earnings.

Okay, thanks. That’s it for me.

Thank you and we’ll go next to the line of George Notter from Jeffries. Please go ahead.

Hi, this is Kyle in for George, thanks for taking my question. Wanted to dig in a little bit more on your comments about international. I believe last quarter you said that you have a large pipeline of international deals for tropo terminals, I wonder how that fits with your comments from this call and whether you are seeing any impact from the moves in a dollar post the election season and kind of what you’re seeing in terms of your international business?

I think the international business as I mentioned in numerous phone calls has always been lumpy. And yes, we do have a large pipeline of opportunities but dealing with the international community especially with the dollar being strong, the oil prices being low, and the impact on the funding that our customers have these delays or movements that right have really continued for us for a long while now. I believe these pipeline opportunities will most likely be let’s say become contracts sometime late in 2017 and probably FY18 for us.

Okay, thanks and what percentage of your backlog is international currently, it is that something you disclosed in the past?

I don’t have that number and we haven’t disclosed it but I think generally if you just look at the mix of our sales mix that gives you a sense for what it is. It is probably somewhere between 30% and 40% of our total backlog at any given point of time.

Okay, thanks and going back to your tactical changes that you are making to the government business what percentage would you say of your government revenue is associated with those lower margin piece of the business that you’re looking to move away from?

I’d say probably 30% to 40%

30% to 40% of the government thing?

Of the government segment, yes.

Okay, alright thanks and one last question on synergies. I believe previously you mentioned you are hit on synergies, how much of those 8 million by one year, 12 million by 2 year have you already accomplished at the end of this past quarter?

We’re pretty much it by this year and including in our guidance based on some of the ups and pluses and minuses within our 70 million. I think we definitely exceeded the year two synergy number at this point so we were originally expecting 8 million and 12 million and so I think we certainly hit the 12 million. We actually had some initiatives that we’re looking to do to exceed that number. But obviously offsetting that is some of the revenue delays and some of the things that we are seeing elsewhere in the business. But I think it’s fair to say that there is more opportunity for us to reduce our cost and we continue to do that including in the government segment as well.

Okay, thanks. So I guess net-net by the end of the year should we expect OPEX to kind of progress upward or would you be able to kind of decline at all on a net basis?

Well, I think it is a good question. I think the goal that we have is certainly to kind of maintain again if our revenues increased to the way we’re seeing it we actually expect our operating expenses to be relatively flat. There will be obviously some increase from the 52 million that we recorded in Q1 and as the revenue is going to grow obviously we will pay some extra commissions and so forth to our sales guys. But we actually think we’re starting point operating expense number of 52 million is probably good number. It will increase as those revenues increase but not a whole heck of a lot and that’s what we think is going to really drive that adjusted EBITDA margin in Q3 and Q4. And that’s what we’ve done that in the past and if you look at Q4 again it was the first full quarter with TCS but we did 18 somewhat million of adjusted EBITDA during that quarter and then we had a lot of expenses in there. So those things are going away. So Q4 is a good sense with the seasonality that we’ve had in our business and you look at the Q4 we did, you add back in those incremental synergies and incremental expenses that will go away, the Q3 and Q4 to us pretty reasonably to be achieved.

Okay, great. That’s it for me. Thanks guys.

[Operator Instructions]. We’ll go to next to the side of Stan Kovler from Citi Research. Please go ahead.

Good morning and thanks for taking my questions. It's actually Josh Keyodara [ph] for Stan. The question I wanted to ask you is given the confidence in the second half of this period 2017 guidance is now more backend loaded than before what was the impetus that cut the dividend in the second half of fiscal year 2017 after reiterating it for fiscal year 2017 and the 10-K filed in early October?

I think from where we sit the Board decided to continue our dividend policy obviously but at a more appropriate level. For our company at this time we feel that increasing our cash level will provide us with the ability to continue to do some small tuck in acquisitions and provide us with new technology capability and growth, both our top and bottom lines. It’s a matter of just the strategy going forward having appropriate dividend.

The other thing I just want to comment, everyone has a role in financial models but our Q1 actually was better than what we thought. So coming into the year I mean I think if you look at the average EBITDA estimate that the analysts had out there as a group they were in the $8 million range and so we actually delivered $10 million. So from what the Street sort of had as a collective group we actually accelerated some of the poll. So from our perspective the way we are looking at it is we did have a backend loaded year and in fact some of that has been recorded in our Q1 results. But everyone has their own model but from our perspective that only has gotten better year-over-year.

Okay, thanks. And what is the outlook for Comtech in energy vertical and what percentage of revenue does it still represent following the combination with TCS?

Well the energy vertical as a whole is not really significant to us. We do sell to some oil rig companies and so forth like that. But we don’t have a whole heck of lot of revenue there. Where our revenue does come from is on a geographical basis, countries like Russia and Brazil who are oil producing countries. And that business although challenging, has been relatively stable for a number of quarters now which we think is a good thing given the insatiable demand for satellite bandwidth and demand and so at some point they just got to place orders.

That's it for me, thanks.

And at this time we have no further questions. And I would like to turn back over to the speakers for any closing remarks.

Okay, well thanks again for joining us today and I want to wish everyone a happy holiday season and an upcoming New Year and I look forward to speaking with you again in March. Thank you very much.

We would like to thank everybody for their participation on today's conference call. Please feel free to disconnect your line at any time.