Ladies and gentlemen, thank you for standing by. Welcome to the Comtech Telecommunication Corp's Second 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, March 9, 2017. 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 second 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, and good morning, everyone and thank you for joining us on this call. As announced yesterday afternoon, we reported our second quarter results of $139 million in revenues, and operating profit of $12.8 million and an adjusted EBITDA of $13.5 million. Consolidated backlog as of January 31, 2017 was $453.3 million and during the second quarter, we achieved bookings of approximately $130.4 million, with particular strength in our commercial solutions segment. When I resume the CEO role in September of 2016, the first task or first priority that I gave to our management team was to increase shareholder value. To do that, we must be more profitable, we must be more competitive and we must grow. Today, I can state to them, 'Please, that the progress that we are making on all three fronts.' First, I have updated our fiscal 2017 revenue target to a range of $570 million to $580 million. This new range reflects an updated reflection and assessment of our decision to focus less on bidding on large U.S. government contracts with low margin conditions and focus more on pursuing U.S. government contracts for our niche products with higher margins. Second, we have been hard to work initiating and achieving cost reductions across the company. As such, we believe we will be able to mitigate the bottom line impact of this strategy change and are maintaining out adjusted EBITDA goal for the year of approximately 12% of revenues or $70 million. Although there are still work to do, I believe we're in the right path forward. I will talk more about our implemented changes in our government solution segment in our overall business in a few minutes. But first, let me turn it over to Mike Porcelain, our CFO to discuss our financial results in more detail. Then I'll come back and provide some additional comments. Mike?

Thanks, Fred and good morning, everyone. Consolidated net sales for Q2 were $139 million. These sales include approximately $75.9 million of sales as a result of the TCS acquisition. Of the $139 million, approximately 32.1% were generated from U.S. government and customers, 32.1% from international end customers and 35.8% from domestic commercial end customers. Net sales in our commercial solutions segment were $82.1 million or 59.1% of total net sales. During Q2, this segment benefited from sales of our location and messaging based platforms and safety and security technology solutions that we now offer as a result of the TCS acquisition. Sales for TCS products in this segment during Q2 were approximately $37.4 million. The remainder of the segment sales in Q2 consist of Comtech legacy products, which we now refer to as communication technology solutions such as our satellite earth station products from traveling wave to amplifiers. Our book-to-bill in this segment during the quarter was 1.22. Bookings for our safety and security technologies and our enterprise technology solutions were practically strong. This quarter included incremental orders for existing next generation 911 contracts and renewables of a long-time customers for some of our mapping applications. In addition, we received significant bookings during the quarter for our amplifiers that are used in the growing in-flight connectivity market. Shipments of these amplifiers and related revenue recognition are expected to occur in the second half of fiscal 2017. We are also expecting additional orders for the in-flight connectivity market in our Q4. Backlog in this segment is the highest it has been at any quarter end since our acquisition of TCS. Based on potential orders in our pipeline and the anticipated release of our next version of our Heights Networking platform which is expected to result in an increase in future satellite…

Thanks Mike. As I mentioned on our last earnings call in December 2016, we believe our business is at a turning point and I'm really excited about the growth opportunities that are ahead of us. Let me give you some color on what is happening in each of our segments. In our commercial solutions segment, we are leading provider of satellite communications networks and products such as satellite earth station modems, up and down frequency converters and solid-state and traveling wave tube amplifiers. We're also a leading provider of public safety systems such as the next-generation 911 technologies and enterprise application technologies such as messaging and trusted location-based technologies. The commercial solution segment on a long term basis should approximate by 50% of our revenues and is aligned with several large-growing end markets. Our satellite-based communications projects participate in the satellite back haul and network services market. In the satellite modem area, we remain the undisputed leader in single-channel per carrier driven primarily by our proven ability to deliver the most bandwidth efficient modems. In the last few years, we have also focused on marketing, and research, and development of our new Heights Network Solution for use with the new high throughput satellites. Just this week, we announced our next version of our Heights Dynamic Network Access technology or HDNA at the Satellite 2017 Exhibition in Washington DC. At the show, we introduced our new HDNA technology, which we believe offers an uncompromised step change and performance and exceptional end user quality of experience. Heights or HDNA is intended to meet the demands of today's traditional Fixed Satellite Services or FSS while providing distinct advantages for those already using or considering migrating to high throughput satellite systems. This HTS is an entirely new market for us, but one which is…

[Operator Instructions] I'll take our first question from Tim Long of BMO Capital Markets. Please go ahead.

Thank you. Two questions if I could -- first the change in strategy on the government side focus on a little bit more on profitability. I get you for the 12% adjusted EBITDA margin this year, but when should we start to see growth margin benefit and could it be more margin leverage as that strategy plays out into the next few years? That's number one. And then secondly, Fred, I think you mentioned commercials should ultimately be about 50% of revenues. It's running higher than that now and the government seems like there will be some more focus on profitability. So how does that 50-50 split work? Is that incumbent on some of these really large troposcatter deals you're talking about? Or what else is going to help offset the strategy changing government to bring that up to closer to half the business? Thank you.

As far as the strategy, as I mentioned in our last call and prior to that, we're really focusing now on government programs more so for our niche products which carry a very good margin. We're obviously not participating in some programs that the TCS Company would have participated in the low margin service contracts. I think what you are seeing is our down draft in the government business revenues will really occur during 2017 as the same time that we're down drafting in that area and not participating, we are looking and participating in programs that will start or be placed in 2018. I think as far as growth margin improvement and revenue improvement, I think will start to see the government improvement in that side starting in 2008. As far as the revenue being 50:50 I think our strategy is to maintain that revenue at 50:50 obviously. Today we have had much more success than the commercial satellite solution segment than we have had with the government solution segment. But I think we see that, although we see that segment growing in 2018 as well, we see the government business catching up specifically in the area, one area that you mentioned obviously is the Troposcatter business. We have been participating with the army and marines in Tropos area for years. And it's never been fully funded. Well there is now a program of un-wreck it and the funding associated with it. We will get into $200 million to $300 million for us over five years. Will the immediate impact be that great? Probably not. I think more likely we will see 2018 maybe to the tune of $30 million to $35 million and then the rest of the years to follow.

Thank you.

And we will take our next question from Mark Jordan at Noble Financial. Please go ahead

Good morning gentleman. Quick question on Tropo. You are talking about the RFP thing out near term here. Do you know if they are going to specify or acquire backward compatibility of Track170?

It's a good question Mark. I think, we certainly hoping they do because we have supplied our modems into the Track170. I believe the government because it's a lodge program, we will try to not make specific backwind solutions available similar to what we had with the BFT2 situations. So it's something that we are looking at. I think as far as the RFP coming out I can add some more color for you. We expected momentarily but then we also know that the things do slip. We do think that in May, RFP should be up. What will happen is as the RFP comes out the army has decided to request all bidders to supply through Tropo terminals through actual field testing to make sure the Tropo terminals will work. I think that probably puts us at a very good advantage because we have already fielded Tropo systems with the marines and with the army that we have supplied before and some of us our systems are actually nomenclature so we feel pretty good about that. But after the field testing trial of about 8 weeks the army will then I suspect and this is just my speculation, they will come back with a best or final and go on from there with a project contract probably in 2018.

Okay. Michael you have talked about working with the banks to gain greater flexibility which could allow you to do other [indiscernible] and etcetera. On last quarter's call you also said that you thought that getting out of an agreement was fairly imminent. What seems to have then slipped, is this an issue that is not quite as pressing now or is there some specific sticking point?

Not exactly, it's a good question mark. It's the latter given the strong performance that we had during the quarter, there's not an urgent need for us to go out and rush and do amendments so we want to get the right agreement for us, not just the short term but 2018 and beyond so out conversations have been on a week to week basis with the banks as we try to come up with an agreement that makes sense for them and makes sense for us. We think that we are pretty close to doing that, you know the banks have their own approval requirements that they got to go through so our hope is that we would announce some soon that will give us better flexibility than what we were thinking three months ago.

Okay. Final question from me. Obviously, good news on the free litigation cases that seem to be settled with sort of nominal cash impact, are those major cases that were outstanding. What other litigation do you have out there that could be meaningful?

We did resolve three cases this quarter including the Mississippi case where there was a family that got involved with a 911 situation so we have one outstanding case that we are continuing to work towards an aggressive settlement position. When I say aggressive, we want to do it quick. We obviously need the other party to do so but I think ultimately we don't think that a settlement would have a material impact on our financial statements. We kind of think we haven't bounded but we haven't been able to come to an exact settlement with the third party yet. But our hope is soon but we need that third party to agree.

Okay. Thank you very much.

And we will take our next question from Stanley Kovler of Citi Research. Please go ahead.

Hi, good morning and thanks for taking my question. I just wanted to ask you if we should be thinking about any potential impacts on your business from the new Persnip program that is being rolled out particularly on the 911 piece. Is there going to be any pull through on that build up on the wireless side? And then I have a follow up thank you.

Yes so in terms of the First Net's program, I think we used kind of ancillary or tangent to our business. We should get pulled through in. It's not going to change our existing business and obviously as the system becomes more important overall, all of the systems need to connect and so we do think that there we will pull through. The First Net program in totality is something that's been talked about for years and years and is extremely complicated and extremely long cell cycle but there are other companies talking about it having some immediate impact to their numbers. We still see our best case for growth is on the next gen 911 side whereas companies want to go a text messaging, video over 911 and overall next gen 911 system. That's where we see the immediate growth but First Net overall should benefit us.

Thanks and could you just provide a little bit more detail on the second half gross margins. Obviously, we previously expected gross margins to come back in the second half of your fiscal year, more so related to the government business but what should we think about as far as gross margins on the commercial side and with the new programs you have in place for 2018 potentially with Troposcatter programs, could we start to see gross margins get back to over 40% at some point? Thank you.

Sure, Stanley so I would tell you to think about our gross margins more in aggregate than by segment because we do have some inter-company manufacturing that goes on between the segments. Just a couple of comments, on the government solution segment side we are actually likely to see a down drift in gross margins because of the wind down of the BFT intellectual property thing which by Q4 will no longer be in our financial results so that's a $2.5 million drop if you will. That's the negative. On the good end we think we are able to absorb it in the numbers given the growth in the other areas and the bookings and margin profiles that we are seeing in our backlog. We would love to get to 40% gross margins in total. That's certainly a near term target for us and we obviously need the bookings and executions to come in but we did do 38% in change this quarter so it's not a stretch for us to get to 40%. In our commercial segment Stanley, we have pretty good contribution margins so when we get incremental revenue it's even possible that we can pick up almost 45% to 50% contribution margins, most of that does appear in the gross margin line. So the way to think about our business is incremental revenue drops to the bottom line real quickly and if you think about the way we are giving you our projections you kind of see that in Q4 that this incremental revenue, we expect our Q4 revenue to be the peak quarter of revenue in this year and resulting adjusted EBITDA margin for the most part is coming from that incremental revenue.

Thank you. And I guess if I could just follow up on, could you give us an update on your other verticals like the manufacturing or the energy verticals and what you are seeing in those areas? Thank you very much.

Yes, when you say the energy side Stanley I am assuming what we are seeing on the international market side on our satellite earth station business. We do see some continued challenging conditions in the international markets. Although oil prices have rebounded the dollar continues to be strong overseas. You know from that perspective our international market is still struggling. On the other hand there has been this huge pent up demand that's been built as a result of the high products so we hoped that this Washington D.C. satellite show which is really, it's one of the premier show in our specific space was ultimately result in the orders and based on the feedback we are hearing, we seem to be on track for that to occur. In terms of the manufacturing vertical, I am assuming you referring to the somewhat of the connected car market that we are involved with on the enterprise base and again it's a longer term play. The manufacturing vertical using that is not a material portion of our business but it is a growth area that we are focusing in and you know that will take some time to play out.

Thank you.

And we will take our next question from Mike Latimore from Northland Capital. Please go ahead.

Hey thanks. Very nice quarter there guys. Just looking at the commercial segment for the second; the 911 services within that, is that revenue area growing? And then second did you say you had a kind of big renewal contract in the quarter?

Sure, yes. The revenue in the 911 portion of the business that we call safety and security is growing and it's growing very nicely. During the quarter in addition to some contract renewals that occurred during the quarter we actually did get some additional work related to the state of Washington and as that contract scope continues to increase which is one of the nice things about these large contracts that as you get more deeply involved with the customer, things become bigger and more important and you can get to pick up some additional work. So yes, the revenue is growing and the opportunity is growing, we see some good things ahead of us.

And the Washington deal do you expect, how is the deployment going there? Do you expect an uptick in deployment in the fourth quarter?

The answer is yes and it is reflected in our guidance and in our thinking. You will see that in our Q4 which one of the reasons is that the Q4 revenue and adjusted EBITDA is expected to be higher. That stuff is in our backlog and based on the timing and deployment and the way revenue recognition works, we should see that benefitting Q4.

And then Mike did you say you expect EBITDA to grow sequentially through the last quarter?

Yes, we are expecting. I mean we did $13.5 million of EBITDA in Q2 and we are expecting just a few million dollar increase in Q3 with significant EBITDA in our Q4 as the revenue comes in.

And last, there was a litigation settlement, do you see a notable drop in the legal costs next quarter?

Yes absolutely true which is why our EBITDA in the second half is going to be better. We still have that one case that's out there where spending still continues but yes exactly as a result of the settlements of these lawsuits we are expecting our legal spends to drop absolutely.

Thank you.

And we will take our next question from Glen Mattson of Ladenburg. Please go ahead.

Hi, thanks for taking the question. You used to quantify that in the past, the litigation expense, what it would be for the rest of the year? Do you do that still?

Well we have thrown that number somewhere between $5 million and $10 million and we have not been specific about it because we obviously we didn't want the other party to get a sense of how we were looking at the cases, so we are down to sort of one case. It's obviously, will be on the lower side of that number is the way to think about it. But there is definitely a drop in spending to the first half to the second half.

Okay. Great and then on the next gen 911, interesting comment, that you are in the late stages of selection for it. Can you talk about some of the dynamics that are going on there? Perhaps your partnership with Motorola and GB are helping but some of the reasons why you think you are going to win or what the competitive landscape is as you look to close those deals?

Generally, I think we are partnered with as you have mentioned, Motorola and GB and typically the third bidder is usually someone like AT&T so we kind of have two-thirds of a chance of winning in these contracts. And all of these areas in the pipeline, you can assume that all three of those prime contractors are still involved.

Okay. So is it, are the service levels about the same and you are competing on price in some cases or is there competitive advantage out of it you think?

The competitive advantage is in different reach of our partners. But I think it's not a total let's say qualified bid and low price, each bid is different.

Okay. And then I guess on the, did you see some are renewal for mapping or was that with your largest customer?

Yes.

Okay. Was there a multi-year deal, year-to-year, how does that work?

The rule is optional renewals and it is on a year-to-year basis.

Okay, great. Thanks guys.

We will take our next question from Kyle Magnelia from Jefferies. Please go ahead.

Hi, Thanks this is Kyle for [indiscernible]. Just wanted to ask a little bit more about your segments and how they interact for the rest of the year for you. Specifically in light of your revised guidance. Would a majority of that revision come out of the government's solution segment, given your commentary about transitioning away from the lower margin revenue and I guess could there also be some additional growth enquiry commercials so the step down in government might be even more than the $25 million than the difference in your guidance?

Yes, Kyle so most of the revenue assessments we have made is really in the government side of the camp. We are expecting our sales in Q3 to be slightly lower than Q2 and that will be in the government segment. We are expecting our commercial segment to be the same or slightly higher in Q3 with incremental increases in Q4 most of that coming from the H products that we are expecting to deliver in Q4 along with the inflight entertainment amplifiers that we have in our backlog. So the backlog is short of supporting a trajectory if you will of commercial business sort of being slight similar to what we did in Q2, slightly higher in Q3 with significant increase in Q4. Our government side is kind of saying slightly lower n Q3 with a big pick up in Q4 and again a lot of that is supported in back log already, given that we have $453 million in our backlog at the moment, we expect obviously incremental bookings n Q3. The $20 million order that we are expecting shortly and there's all other stuff that we expect to incur in 2017 that will also result in revenue in Q4.

Okay, thanks. And then I believe you mentioned earlier that the government solution segment may actually have lower margins in the back half of the year than in the beginning because of the DIT license revenue coming up. I am just trying to reconcile the lower revenue versus the re-confirmation of your EBITDA guidance and are there any other items at play that we should be thinking about?

Sure again same comment and again think of it from an EBITDA perspective. Our EBITDA in our government segment will be impacted as that IP fees sort of rolls off. But offsetting that will be the incremental revenue from these contracts in Q4 so again from a segment perspective we are expecting a drop in EBITDA in our government segment in Q3 before it increases to Q4 for Q4 being our peak. On the commercial side we are expecting sequential growth in EBITDA. So even though we are expecting our revenue in our commercial segment to be the same or slightly higher in Q3 was increased further in Q4 and EBITDA will follow along that same trajectory. During the quarter we have also made cost reductions, and so those cost reductions are not yet reflected in our Q2 results so to speak and you will see it will come into play in Q3 and Q4. We know which is why I think earlier in the call if you think about Q3 in total we did $13.5 million of EBITDA in Q2, you can think of Q3 being higher by a couple of million on the EBITDA line in aggregate with the rest coming in Q4 supported by our backlog and in the timing of the stuff that we have been talking about.

Okay. Can you give an instance once you have gone into a normalized steady state of business once the lower margin governor of it comes out, how much of a gross margin impact there might be in the longer term, is it like 200 basis points, is it more, is it less?

Well, I think the way I will say this way is we still need some time for it shake out. We are targeting a spread mentioned 12% adjusted EBITDA margins total. If you look at it by segment, commercial segment did 15.5% EBITDA in Q2, we think with incremental revenue and incremental profit we can get that close to 20% and that's not a crazy number and if you look at Q4 of 2016, we did 19.3% adjusted EBITDA margins, we do need the revenue to come in to achieve that but that's the way we are thinking about it. IN government solutions segment there's a lots of blended mix, could we get to a 10% margin basis that's not unreasonable and so obviously on a longer term basis we would be, we would certainly say that we would like to be higher than 12%. We are not going to put out a number at this point, we need these contracts to come in and still work through our cost reductions more specifically, but in aggregate we have a longer term plan to achieve higher than 12% adjusted EBITDA margins but that's the number we are shooting at right now and that's what we would like to achieve that first.

Okay. Thanks a lot.

It appears that we have no further questions at this time. I would like to turn the call back over to the company.

Okay. I would like to thank everyone for joining us today and we look forward to speaking with you again in June. Thank you very much.