Welcome to Comtech Telecommunications Corp.’s Third Quarter Fiscal 2018 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, June 7, 2018. I'd like now to turn the conference over to Ms. Maria Ceriello of Comtech Communications. 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 2018. With us on the call this morning are Fred Kornberg, Chief Executive Officer and President of Comtech; and Michael D. 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'm 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 third quarter results of $147.9 million in revenues and operating profit of $14 million; adjusted EBITDA of $23.5 million and bookings of $164.3 million. We finished the quarter with a near record backlog of $583.7 million, which is close to the company's record high. Our results for the third quarter exceeded our expectations and based on our pipeline of opportunities, our strong year-to-date performance, and our positive business momentum, we believe that fiscal 2018 will be a very successful year. As such, we're maintaining our fiscal 2018 revenue target of $570 million to $585 million, increasing our GAAP diluted EPS target to a new range of $1.17 to a $1.23, and increasing our adjusted EBITDA target to a new range of $73.5 million to $76.5 million. Obviously, I am very pleased with our performance and numerous accomplishments this quarter. I will talk more about that later in this call. But first let me turn it over to Mike Porcelain, our CFO, who will provide a discussion of our third quarter financial results and our updated fiscal 2018 guidance in more detail. Then I will comeback before opening it up to questions and answers. Mike?

Thanks, Fred, and good morning, everyone. Consolidated net sales for Q3 were $147.9 million, of which approximately 37.4% were generated from U.S government end customers, 24.6% from international end customers, and 38% from domestic commercial end customers. During Q3, we achieved bookings of approximately $164.3 million with strong order flow across many of our product lines. We achieved a consolidated book-to-bill ratio of 1.11. As a reminder, this quarter does not include the type of contracts we received in Q2, such as the large ones from AT&T and Verizon. So the 1.11 was strong and a good data point for the type of market demand we're seeing across our product lines. As Fred mentioned, our third quarter finished with a consolidated backlog of $583.7 million, which was higher than what we finished Q2 at and close to a company record high. As I mentioned during our last conference call, when you think about the strength of our backlog, you should be mindful that the total contracts that we have in-house are actually higher. As promised, if you download our Q3 investor presentation from our Web site, we have included a new table that shows a summary of certain contracts that we have been awarded and which indicates that we have visibility to over 500 million of potential orders from existing contracts. Alternatively stated, between backlog and contracts in place, we have over $1 billion of visibility because we were the sole provider for many of these contracts, funding is generally assured and likely to occur. As you know, although timing of receipt of new orders and funding is always difficult to predict, I believe that our overall visibility has never been higher and clearly shows we are positioned for growth in fiscal [technical difficulty] and beyond. Let me turn back…

Thank you, Mike. Let me give you some color on what is happening in each of our segments. First, let me discuss our Commercial Solutions segment, which is focused on several large growing markets. Here, we are a leading provider of satellite communications networks and products, such as satellite modems, up-and-down frequency converters, and solid-state and traveling wave tube power amplifiers. We are also a leading provider of public safety systems, such as next generation 911 networks and enterprise applications such as messaging and trusted location-based technologies. In the satellite modem area, we continue to be the undisputed leader in single channel per carrier or SCPC systems, driven primarily by our proven ability to deliver the most bandwidth efficient modems. We do not take our market-leading position lightly, and we continue to invest in R&D to not only support existing customers, but to expand our addressable markets. One such example is that just this week we announced a collaboration with Kepler Communications to advance rapidly deployable, low-cost, low-latency communications via low Earth Orbit or LEO satellites. We've developed a flexible on-board satellite waveform processing technology to operate software defined satellite payloads for this application. We believe that LEO constellations will bring forth new opportunities and new technology demands to the satellite community. This collaboration is just one example of how we're targeting this market. We are also focusing on expanding our total addressable satellite ground station market and are continuing our development and marketing of our new HEIGHTS network solution as well as investing in other R&D new product developments. The Height solution is intended to not only meet the demands of traditional fixed Geo satellite systems, but also to provide distinct advantages for those system uses considering migrating to high throughput Geo satellite systems and MEO and LEO orbiting…

Thank you. [Operator Instructions] And we will go first to the line of Ben Klieve from NOBLE Capital. Please go ahead.

All right. Thank you. Couple of questions. So, Mike, you talked about the government backlog being at a high since the TCS acquisition. I’m curious to what the benefit of HEIGHTS? Can you talk about how that backlog has shifted towards higher-margin work? And are you able to quantify kind of what the mix was two years ago versus today of higher-margin work versus more commoditized work?

Sure, Ben. I don’t think I can put it in terms of the percentage of backlog, but I do think it's fair to say that when we purchased TCS back in February of '16, that they were really chasing a lot of large commodity type service contracts and at some point we put the number out there that maybe it was $80 million to $100 million of business that we either decided not to go after or just short of wound down. And so, I don’t know, I think it's certainly better than where it was. There's still some work to do. We need to win the higher-margin stuff and that’s where our concentration is. So, we’ve got I think the product line pretty stabled. We are focusing in the Government Solution segment now on the BFT-2 program, which we think would be higher-margin than the commodity service. We are focusing on the over-the-horizon troposcatter program, which we think would be higher. So, now it's up for us to get the orders and bring them in and then we will see that improvement in the margin.

Okay, very good. Thank you. And kind of along the line to the BFT-2, I’m curious with the transceivers that you’re shipping now, do you know how quickly -- how quickly that will be kind of deployed after you ship? I'm curious how long maybe before the customer is able to judge the performance of these initial shipments of transceivers, once you’ve actually deliver them?

We’ve actually delivered a very small order a while back to the Army of about a 100 transceivers for exactly that some initial testing on their part to make sure that this transceiver does the job for them. So I don't anticipate any problems in terms of getting future orders. I think it's just a matter of when they decide to fund. As far as your questions of fielding, I think the Army is interested in fielding it almost immediately after we deliver.

Got it. I didn’t realize that the 100 had shipped for analysis, that’s great. Okay, perfect. And one more question for me here, with regards to the lower sales of the cyber training solutions that you talked about, can you kind of talk about the dynamics that are coming into play here? And the -- kind of lower than expected revenue in the third quarter, do you think that this a matter of orders just getting pushed to the right or are seeing -- are these awards that are kind of lost in the near-term?

It's a brand new product line. Most of the traditional cyber training business that we’ve done was really, I will call it human based. And this is a software-based product that we’ve been developing for the last couple of years. So what we're doing now is we're going out to customers and I think we mentioned some of them, Booz Hamilton, JPMorgan and even the military in the past. And we are going to them, there's number of opportunities that we are actively talking with them. We are taking feedback based on what they're telling us to that we need to do to the software to meet their needs and we're doing it. So I don't think any of these things from a big picture perspective are lost, but it has certainly taken us longer to get the product out the door than what we'd like. And so during our last business outlook assessment we made the decision to sort of just pull them out of our sales pipeline and when they close, they close and we will report them to you and we will be pretty happy because as you know with software it is a more profitable sale, because you’re expensing the R&D as you do the development.

Perfect. Very good. Thank you both Mike and Fred. Congrats on a good quarter and I will get back in queue here.

Thank you. And we will go next to the line of Mike Latimore from Northland Capital. Please go ahead.

Great. Thanks a lot. Excellent quarter there. On the government EBITDA margins, nice to see that improve some here. Is this kind of a good range to think about going forward or do you see kind of further improvement in government EBITDA margins?

We would love to hit 12.9% from an EBITDA margin every quarter in that segment. I don't think that is reasonable. You can see -- we mentioned some of the troposcatter stuff that we shipped to the Korean Peninsula and that really helps to the bottom-line. I think for the year, as I said on prior calls, we’re probably shooting for 7% to 8% for the year and on a very normalized basis that’s where I would expect government business to be until we start to get some of the BFT-2 hardware transceivers and volume going and even some of the troposcatter stuff. So we were on the path of increasing margins. It's just a question of how fast we can get there.

Got it. And you obviously, you mentioned that your -- I think you said your visibility is never been higher, and you expect growth and there is a good chance of growth in fiscal '19. Maybe as you look to fiscal '19, what would be sort of may be the top couple revenue driver at this point? So you have a lot in the mix, but which ones would be the most impactful [indiscernible]?

Mike, it really is across almost all of our product lines at the moment. Our satellite earth station business is doing good and showing signs as you know that’s a book-to-ship business. And we’ve been fooled in the past on when that rebound will come, but we’ve now seen a couple of quarters of sustainable growth is what we're using the term, and given the HEIGHTS business we are seeing that as Fred mentioned, sales this year have exceeded what we did in fiscal 2017. And so that -- I mean that's just a really good sign. The government side of the business, it's a question of timing of funding on a lot of things. So that’s very difficult to predict. But again, we're seeing growth there. So, in short, it really is everywhere and we're still thinking about in aggregate sort of around 5% or so next year until we get more orders. And I think it would be imprudent to think otherwise, but we think that's about the number when you look up everything in aggregate.

Got it. Great. And then on the -- just on the 911 and next-gen 911 deal, you mentioned with the large wireless operator. Have you started to deploy that? How long does that take to deploy? If you’ve started, how is the process going [ph]?

Yes, we’ve started to deploy it and its approximately over a 12-month period.

Okay, great. Thanks a lot. Excellent quarter.

Thank you. And we will go next to the line of Asiya Merchant from Citigroup. Please go ahead.

Good morning, everyone and congratulations on a strong quarter. I guess my questions were more along the lines of as you look out into fiscal '19, you provided some color on the -- how to think about top line. If you could also help us understand about the margins, the EBIT -- adjusted EBITDA margin, how are you thinking about that across the two individual segment? And then I have a question more on the modem side, satellite modem side and on the HEIGHTS platform, like what kind of competitive dynamics are going on there? Is there any pricing pressures that you’re seeing? Some of the stuff that I’ve been reading about is pressure is on the end customer on the satellite services. Are you feeling any of that on the equipment side from your customers? Thank you.

Let me kind of split your -- the answers to your questions. So as we think about EBITDA in total even for next year, I think if we put a 5% growth target for the moment now, I think that’s about the right way to look at the business. We see and you can see it in our P&L today, we've -- our biggest challenge right now is where do we invest because we have tons of growth opportunities out there and we’re continuing to invest pretty significantly in R&D activities. That even includes in the government segment, the BFT-2, and the BFT-3 opportunities that we see. It includes the troposcatter opportunities that we see. So we were investing in R&D there. In our satellite -- in our commercial side, the HEIGHTS platform, I mean, we are talking about a business that we hope will double if not triple out over the next couple of years, and it's a question of how fast that business will grow. So, again, we were taking the position, now we’re going to invest significantly in that business and we have and expect to continue to do so. On the 911 side of the camp, there's just tons of opportunity out there on the next generation side with text, video, voice, call handling and so forth. And so plenty of places for us to invest and actually result in incremental returns in the outer years and same thing on the location side, it's just out there. So when -- we look at '19, yes, we’re going to be continuing our R&D investments. So, but - yes, ahead of the revenue growth and everything and given I will call not conservatism, just prudency of product mix assumptions, we think about 5% adjusted EBITDA is probably the right way. And so I think when you add that all up, if FY019 should -- could we beat the 13% we’re targeting in 2018, I would like to, but we need to kind of flush that out with product mix because there is some sensitivity between the two segments which is why we couldn't get anything more specific until we see how the new order pipeline and timing comes in because we do have fluctuations from quarter-to-quarter.

As far as answering your question in terms of the effect on the HEIGHT solution of let's say pressure on bandwidth costs, I really don't see that at all affecting our HEIGHT sales. It's really two different cross parameters. HEIGHTS is a network product as compared to our previous products which were the SCPC products, which were really modems for the most part. This is a network solution and it's really intended to replace not only our high-end SCPC product line, but also the low-end TDMA product lines that are being offered by some of our competitors. So this is -- our HEIGHTS product line is essentially a modified SCPC solution that is a network oriented product line that should replace most of the TDMA applications because of their latency problems. So we look forward to having a pretty strong market, but it is a much longer sales than just selling boxes.

Fair enough. Thank you for the opportunity.

Thank you. And we will go next to the line of Kyle McNealy from Jefferies. Please go ahead.

Hi, guys. Thanks a lot for the question. A few here, if I may. So the commentary about the Q4 being the peak for adjusted EBITDA, Q3 for operating income, just curious if you could clarify that a bit what the driver of the difference is considering that there's not much between one than other. Is that GAAP versus adjusted or what are the big drivers there?

Yes, actually -- the latter part is exactly what you hit the nail on the head for. That is the difference between the GAAP and the non-GAAP measure. GAAP net income does reflect the stock-based compensation award that we do in Q4. So if you look at last year, you'll see a very similar metric. For purposes of adjusted EBITDA we pull the stock-based compensation out of that, given that's really not a cash item. So given in Q3, we had the Navy modem shipment. That contributed to the GAAP operating income, but when we look at Q4 that's not going to be in the GAAP operating income. So we will see a decline there, but on adjusted EBITDA we’re going to see a lot more stock-based compensation in Q4.

Okay, great. Thanks. And then on international revenue, it's improving, but still down at year-over-year. Is there anything additional you can give us on -- what trends are looking like internationally? And also remind us of your us dollar impact for international sales is, how much of the stronger dollar impacting trends internationally?

Yes, I mean, international sales are lower than been last year and we will probably finish the year with that trend. I would say two things to be mindful of. Number one, that doesn't include any international troposcatter stuff for the most part. So that’s where that lumpiness comes in. And from a dollar perspective, although the dollar has strengthened recently, there's the political issues that exist out there. We haven't been able to see anything, what I would call, material customers not purchasing our product, but we do kind of know it's out there. But the number one driver I think is just lack of international over-the-horizon opportunities more than anything.

Okay, great. Thanks. And then it looks like the third quarter was impacted pretty positively for U.S government sales by the satellite modem contract with the U.S Navy. Just wanted to see if you have any kind of color that you can provide on how lumpy that might be coming in going forward? Is there particular quarter or time throughout the year that the Navy is more inclined to make purchases against that IDIQ based on their fiscal year and trending there?

I think the answer to that really is a matter of -- it's up to the U.S. Army. However, we do understand that they are -- let's say, expecting to place orders relatively quickly. And as Mike mentioned during his presentation, we not only get the initial funding order, but we actually shipped most of the units in the third quarter. The Navy does want to have those shipped pretty quickly. So I anticipate that the orders will come pretty quickly. It's a 5-year program, if I were to bet on it. It would probably be over a 3-year period, not a 5-year period.

Okay, thanks. And one last one on the tropo contract there, that’s currently out with the U.S. Army. We understand there's another -- you’re not the only bidder on that contract. Can you give us a little bit about what competition is looking like? How you think you’re positioned with your product competitively in there?

I guess the only thing we can tell you is the bids were submitted back in May. And we did supply a couple of terminals for the Army to test to their specifications, which has now finished. We certainly know that we did very well. We did better, much better than the performance requirements of the RFP. We do not know what the competition has or has not done. So we really can't tell, but our bids are in. We expect the Army to come back to us soon hopefully, but I would say we don't look for any information for at least 30 to -- and it could be as long as 60 days.

Okay. All right, great. That’s it for me. Thanks a lot. Congrats on the quarter.

Thanks.

[Operator Instructions] We will go next to Chris Quilty from Quilty Analytics. Please go ahead.

Mike, I think you had said you expected the Q3 operating cash flows be kind of similar to Q2 and it turned out much better than expected. Is that just timing related issues or something that you’re looking at a better cash flow outlook for the year?

I would say it's mostly operational efficiencies that we're able to achieve. We are pulling stuff out -- you can call it, off the balance sheet, right? We are improving our AR turns and our inventory turns. We did have a buildup in inventory and so we tried to -- there managed the payable cycle a little bit. I would -- I don’t know, 60% of the benefit was operational, 40% could be timing. But I think as we’ve said, Chris, in our prior conference call, 2018 was expected to be a cash flow -- free cash flow perspective little bit the same or lower than 2017. It's sort of what we’re thinking and based on how things play out in Q4, that’s going to make that -- that will decide what will happen and then it's just really timing. But if you look at another to 2019, 2019 should be the same or possibly stronger than 2018.

Got you. Thank you for the guidance. And so a question just on the earth station business in general, it sounds like obviously you feel you’re taking share with the HEIGHTS platform, but where do you see the overall health in the market as you look forward next 12 to 24 months, given down trend in GEO orders, you’ve got LEO changes. How does that all mix together to impact you?

I think we see the satellite market really kind of turning around. I think it's had a rough period for the last, let's say, five years and we see even with the bandwidth pressure on cost and so forth, there's lots of satellites being programmed to be shot up there and lots of systems in the development stages. So we actually look forward to much better times in the satellite industry, specifically for us with our HEIGHTS platform which I think our HEIGHTS platform we believe really answers the questions and the requirements, technology requirements for the LEO and MEO orbiting satellites. Not only the GEO HEIGHTS throughput satellites, but also the LEO and MEO, because those are different, those are tracking systems and HEIGHTS has to address that. Having said that, our HEIGHT solution has been long time in the making and we have started to get market share and we hope to kind of increase our revenue in that area from year-to-year and I think we are just getting started.

And are there any big solicitations that you're actually looking at currently?

There are a number of big solicitations, as you say, big can be, it's a matter of definition what’s big. We normally have -- in that business it's mostly book to ship business. As such, I think there's lots of development programs out there in terms of future systems.

Very good. Thank you.

And at this time, I would like to turn it back over to the company for closing remarks.

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

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