Comtech Telecommunications Corp. (CMTL) Q4 2018 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Comtech Telecommunications Corp. Fourth Quarter Fiscal 2018 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, Thursday, September 27, 2018. I would now like to turn the conference over to Mr. Jason DiLorenzo of Comtech Telecommunications. You may begin, sir.

Thank you, and good morning. Welcome to the Comtech Telecommunications Corp. Conference Call for the Fourth 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 will 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 assumption 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 Chief Executive Officer and President of Comtech, Fred Kornberg. Fred?

Thank you, Jason. Good morning, everyone, and thank you for joining us in this call. As announced yesterday afternoon, we reported our fourth quarter results of $167.4 million in revenues and operating profit of $16 million and adjusted EBITDA of $30.7 million and bookings of $214.4 million. We finished the quarter with a record-high backlog of $630.7 million. I could not be more pleased with our fourth quarter and fiscal 2018 performance. We enter our fiscal 2019 with a strong business momentum in each of our 2 operating segments, and I believe, we are well positioned for fiscal 2019 to be another successful year. As such, we are setting our fiscal 2019 revenue goal to be in a range of approximately $600 million to $625 million, our GAAP diluted EPS goal to be in the range of $0.89 to $1.10 and our adjusted EBITDA goal to be in a range of $80 million to $86 million. Our backlog and pipeline of opportunities are large. Our overall business activity remains strong. And if we achieve all of the business goals that we have set for ourselves, our actual fiscal 2019 results could even be better. I'll talk more about our recent accomplishments and business strategies later in this call, but first, let me turn it over to Mike Porcelain, our CFO, who will provide a discussion of our fourth quarter financial results and summary of the fiscal 2018 results as well as our fiscal 2019 guidance. Then I'll come back before opening up to questions and answers. Mike?

Thanks, Fred, and good morning, everyone. In almost every respect, Q4 was terrific and a perfect finish to a very successful fiscal 2018. Consolidated net sales for Q4 were $167.4 million, of which approximately 39.3% were generated from U.S. government end customers, 27.3% from international end customers and 33.4% from domestic commercial end customers. We did expect slightly higher revenues in Q4, but we did see a few things slip into our fiscal 2019. Otherwise, our revenues, we would have reported in Q4, would've been even higher. As you can see with our level of bookings, demand for our solutions remains very strong. During Q4, we achieved bookings of $214.4 million with strong order flow across almost all of our product lines. Our bookings exceeded our own expectations. We achieved a consolidated book-to-bill ratio of 1.28, with both of our segments achieving a book-to-bill ratio in excess of 1. As Fred mentioned, our consolidated backlog of $630.7 million, which was higher than what we finished Q3 at, is at a record high for the company. As I mentioned during our last few conference calls, when you think about the strength of our reported backlog, you should be mindful that the total contracts that we have in-house are actually higher than the $630.7 million amount. If you download our Q4 investor presentation from our website, we have, once again, included a table that shows a summary of certain contracts that we have been awarded and which indicates that we have additional visibility to approximately $500 million of potential orders from existing contracts. Alternatively stated, between backlog and contracts in place, we have approximately $1 billion of visibility into future revenue. Because we are the sole provider for many of these contracts, funding and orders are generally assured and likely to occur. As you know, although timing of receipt for 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 2019 and beyond. Let me now turn back to sales and give you a sense by segment of what is happening. Net sales in our Commercial Solutions segment for Q4 were $93.2 million, in line, when compared to Q4 of last year. Sales in this segment represented approximately 55.7% of consolidated net sales. This was a solid quarter for bookings for our Commercial Solutions segment, which achieved a book-to-bill ratio of 1.15. Net sales of our satellite earth station products, which include our HEIGHTS product line, our SCPC satellite modems and solid-state power amplifiers, were higher this quarter as compared to Q4 of last year and Q3 of fiscal 2018. This was the third quarter in a row of sequential growth for our satellite earth station product line after several years of difficult end marketing conditions and challenges, and although international market conditions have become more volatile of late, we do believe that fiscal 2019 will be another year of growth. As Fred will discuss in a bit, our HEIGHTS product line continues to pick up traction, and our business outlook for fiscal 2019 assumes that related sales of our HEIGHTS solutions will grow significantly in fiscal 2019 as compared to the level we achieved in fiscal 2018. Given market dynamics, we are optimistic that we are experiencing a period of multiyear revenue growth for this product line. Turning to our Enterprise Technologies solutions and Safety & Security Technologies solutions. Net sales in Q4 2018 were similar to Q4 of 2017. We have healthy backlog in each of these product groups, and end market conditions remain healthy. We are responding to a number of active proposals, but as we have seen, sales cycles, especially for Next-Gen 911 solutions alone. In Q4, we did make a decision to wind down our VirtuMedix product line and go into a mode where we intend to focus on maintaining customer support, but not chase new sales. Ultimately, we gave it a try, but we feel our future efforts are best spent growing our location-based and Safety & Security products lines here. Now let me turn to our Government Solutions segment where you can demonstratively see the benefit of our strategy we implemented a year or so ago. Here, net sales were $74.2 million as compared to $54.6 million in Q4 of fiscal 2017. This represents an increase of approximately 36%. Sales in this segment represented approximately 44.3% of total net sales. Bookings for this segment were at the highest level in 2 years and reflect continued strength in almost all of our Government Solutions product lines. During Q4, we achieved a book-to-bill ratio of 1.44, the sixth quarter in a row that our book-to-bill ratio in our Government Solutions segment exceeded 1. Backlog for our Government Solutions segment is the highest it has been since our acquisition of TCS back on February 23, 2016. This remains quite an accomplishment, and we are optimistic about the future. Now let me give you some color on our operating metrics. Our gross profit in Q4 of fiscal 2018 as a percentage of consolidated net sales was 37.6%, as compared to 40.9% in Q4 of fiscal 2017. During Q4, as described in our 10-K, we did record a favorable adjustment of approximately $1 million to cost of sales. Excluding this adjustment, our Q4 gross margin was actually 37%. As a reminder, our gross margins are influenced by products -- product mix changes. For example, our Government Solutions segment has lower margins than our Commercial Solutions segment, so when sales in this segment pick up, it does impact our consolidated gross margin percentage. On the operating expense side, SG&A expenses were $27.8 million in Q4 of fiscal 2018 or 16.6% of consolidated net sales, which is lower than the 17.9% last year. For the year, SG&A expenses as a percentage of revenue were 20%, lower than the 21.1% we achieved in fiscal 2017. Research and development expenses were $13.9 million in Q4 of fiscal 2018 or 8.3% of consolidated net sales. We continue to believe that R&D spending is paying off, and our spending is contributing to the recent contract awards we have announced. And of course, we continue to invest significantly in new technologies across our entire product line. Total stock-based compensation expense was $5.6 million for Q4 of fiscal 2018 as compared to $5.5 million for Q4 of fiscal 2017. As we did last year, we paid fiscal 2018 bonus awards to most of our employees and all of our senior executive management in the form of fully vested, but restricted share units. These share units must be held for a 1-year period before they are allowed to be sold. And in simple terms, they reflect the confidence that we have in our future. Amortization of intangibles was $5.3 million in Q4 of fiscal 2018 and we expect the run rate to be lower for fiscal 2019, as certain assets related to the 2008 Radyne acquisition became fully amortized towards the end of fiscal 2018. On a GAAP basis, our consolidated operating income was $16 million or 9.6% of net sales in Q4 of fiscal 2018. For the year, we achieved operating income as a percentage of consolidated net sales of 6.2%. Excluding favorable adjustments described in our 10-K, our operating income would've been 5.9% of consolidated net sales. This 5.9% compares favorably to the 3.3% of consolidated net sales we achieved in fiscal 2017, excluding the $18.7 million of adjustments described in our 10-K. As a reminder, operating income includes all of the amortization associated with the TCS acquisition. As such, we believe, adjusted EBITDA is an important metric. And in this regard, our adjusted EBITDA was $30.7 million in Q4 of fiscal 2018 or 18.3% of consolidated net sales. Adjusted EBITDA on our Commercial Solutions segment was $20.5 million or 22% of related net sales and in our Government Solutions segment, was $8 million or 10.8% of related net sales. Let me now talk about our interest expense, taxes and balance sheet. Here, interest expense was $2.6 million in the fourth quarter and primarily reflects interest on our secured credit facility. Our effective tax rate was 27% for fiscal 2018. And on the bottom line, GAAP net income was $7.5 million or $0.31 per diluted share in Q4. We did take a $2.3 million or $0.09 per diluted EPS charge for discrete tax items, primarily associated with updated estimates of the impact of tax reform. GAAP net income excluding this charge would've been $9.7 million or $0.40 per diluted share. On the balance sheet side, at July 31, 2018, we had $43.5 million of cash and cash equivalents. This was another strong quarter for cash flow generation. We continue to achieve operating and working capital efficiencies and in Q4 of fiscal 2018, we generated cash flows from operating activities of $19.7 million and reduced our total indebtedness by approximately $15 million. As of July 31, 2018, we had total debt, excluding unamortized deferred financing cost of $171.3 million. Our leverage ratio was 2.19x adjusted EBITDA as compared to a maximum allowable of 3x adjusted EBITDA under our current facility. So today, we have pretty good balance sheet flexibility and given our future outlook, we anticipate being in compliance with our credit facility covenants for the foreseeable future. As I mentioned during our last conference call, given our improved balance sheet and the strength of our operating results and our expectations on the future, we are looking at ways to reduce our current facility cost and obtain additional flexibility or even look at other debt structures. In short, we think we can reduce cost and obtain better terms than we have today. If we are successful in achieving such results or make changes, we will report it back to you. At the end of the day, it was a really good quarter for Comtech and a solid finish to what was a very successful year for Comtech. Let me give you a quick recap on the year, and I'll interweave some comments on our fiscal 2019 guidance. First, fiscal 2018 was our third consecutive year of revenue growth. We finished the year with $570.6 million of revenue or 3.7% higher than fiscal 2017. Our Commercial Solutions segment represented 60.5% of fiscal 2018 net sales and our Government Solutions segment represented 39.5%. Looking forward, as Fred stated, we are setting our fiscal 2018 revenue target to a range of $600 million to $625 million. This revenue growth target reflects an annual growth rate of approximately 5% to 9.5%. We think that is impressive, it may also be conservative. We have a large number of programs that we are pursuing. And if some of them come in earlier than we currently expect, our actual revenues could even be higher than our targets. Although both segments are expected to achieve revenue growth in fiscal 2019 as compared to the amounts achieved in fiscal 2018, we do expect our Government Solutions segment to significantly increase and to account for a higher percentage of our consolidated net sales in 2019 as compared to 2018. We will likely burn off some of our backlog for the next few quarters until some of these large opportunities are secured. For the full year fiscal 2018, we achieved bookings of approximately $755.1 million, which translates into a full year book-to-bill ratio of 1.32. Our book-to-bill ratio was really fantastic. And at first glance, it may be difficult to repeat a 1.32 ratio in fiscal 2019. But then again, we have a number of large opportunities out there. So it might be possible to repeat. And at the moment, we are shooting for a book-to-bill over 1x in fiscal 2019, and we will update you as we report our numbers. Our gross profit for fiscal 2018 as a percentage of consolidated net sales was 39.2%. In fiscal 2019, we will be working through a number of large programs that we have in-house, including our new over-the-horizon troposcatter system contracts, which are in the early stages, and we continue to successfully migrate our large wireless customer to our 911 network. In addition, we anticipate more HEIGHTS sales, which, today, have lower gross margins than our SCPC products. Adding it all up though, we believe that our gross margin percentage in fiscal 2019 will be comparable to the 39.2% we achieved in 2018. Our R&D as a percentage of consolidated fiscal 2018 net sales was 9.4%, and we expect to continue such investment levels in 2019. As such, we expect the amount of our spending in dollars to be higher, but as a percentage to be comparable. Our SG&A as a percentage of consolidated fiscal 2018 net sales was 20%. We continue to make investments in this area and based on current spending plans, we do expect SG&A as a -- as -- in dollars to be higher, but as a percentage in fiscal 2019, to be comparable to fiscal 2018. Amortization in fiscal 2018 was $21.1 million and we do expect it to decline to approximately $17.2 million with all of the decline occurring in the Commercial Solutions segment. Our operating income as a percentage of consolidated net sales, excluding the favorable adjustments, were 5.9% in fiscal 2018, as I mentioned earlier. We believe, we -- that we can improve this margin in fiscal 2019. And given our current expected product mix and other spending changes, it will likely come in under 7%. Our total interest expense, which excludes -- which includes amortization of deferred financing cost is expected to range from 6% to 6.4% in fiscal 2019. Our actual cash borrowing rate currently approximates 4.5%. If you look at adjusted EBITDA [Audio Gap] segment, we achieved 19.7% in the Commercial Solutions segment and 7.7% in the Government Solutions segment in fiscal 2018. On a consolidated basis, it was 13.7%. Given all of the puts and takes I described earlier, as product mixes, changes and other spending changes, we are still focusing our adjusted EBITDA as a percentage of revenue in fiscal 2019 to be about the same that we achieved in fiscal 2018. In fiscal 2019, before any discrete items, we expect our effective tax rate to approximate 23.25%, which reflects a full year of tax reform compared to the 27% in fiscal 2018. On the bottom line, GAAP net income was $29.8 million or $1.25 -- $1.24 per diluted share. Excluding the benefit of tax reform for the year, net income would have been $18 million or $0.75 per diluted share. As such, on a GAAP basis, given the growth we are expecting, we are setting our GAAP diluted EPS target to a range of $0.89 to $1.10. As everyone knows, Comtech's financial quarters have some unevenness or lumpiness to them. In this regard, similar to Comtech's business cycles for the last several years, financial performance in the second half of fiscal 2019 is expected to be higher than the first half. In addition, given the straight-line amortization expense associated with intangible lives, we expect to report GAAP operating income slightly above breakeven in the first quarter of fiscal 2019 with each of the remaining fiscal 2019 quarters achieving higher GAAP operating income. We expect our GAAP operating income and our adjusted EBITDA in the first quarter of fiscal 2019 to be a bit better than the amount we achieved in the first quarter of fiscal 2018. Considering the impact and level of interest and taxes like we had in Q1 of fiscal 2018, we do expect to report a slight GAAP net loss in the first quarter of fiscal 2019 with significant improvement thereafter. In addition, based on the anticipated timing of shipments and performance related to orders currently in our record backlog and the timing of expected new orders, net sales and adjusted EBITDA for each of our first 3 quarters of fiscal 2019 are expected to be a bit better when compared to the respective quarters of fiscal 2018. Our fourth quarter of fiscal 2019, like last year, is expected to be the peak quarter, by far, for both net sales, operating income and adjusted EBITDA. In addition, we believe that in fiscal 2019, we will continue to generate a significant amount of cash flows from operations on a GAAP basis. In the past 2 years, we have generated over $100 million of cash flows, which truly is a testament to the strength of our business. Given our growth, it is reasonable to think we can generate somewhere around $50 million of cash flows from operating activities in fiscal 2019. In summary, fiscal 2019 is expected to be another terrific year for Comtech. And as we sit here today, our business outlook looks bright. Finally, before turning it over to Fred, I just want to mention that our Board of Directors declared a dividend for the fourth quarter of fiscal 2018 of $0.10 per common share payable on November 16, 2018, to shareholders of record at the close of business on October 17, 2018. Future dividends remain subject to board approval as well as compliance with financial covenants under our secured credit facility. Now let me turn it back to Fred, who will discuss our business in further detail. Fred?

Thank you, Mike. Now for some color on what is happening in each of our segments. First, I will 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're also a leading provider of public safety systems, such as the 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. We are also focusing on expanding our total addressable satellite ground station market by continuing to invest in our HEIGHTS product line. HEIGHTS is intended to not only meet the demands of traditional stationary GEO satellite systems, but also provide distinct advantages for those systems' users considering migrating to HTS and MEO and LEO orbiting satellite systems. To date, our customer reaction has been, and continues to be, very positive. In fiscal 2018, HEIGHTS sales experienced double-digit growth, and our pipeline of HEIGHTS opportunities is growing as we continue to seed this market. The U.S. -- we -- the U.S. government also continues to be a key customer of ours for our satellite ground station products. During the fourth quarter, we received a $2.8 million delivery order against a recently awarded 10-year, $19.1 million follow-on IDIQ contract. This contract provides long-term support for the Advanced Time Division Multiple Access Interface Processor, or ATIP, production terminals. This is in support of the Space and Naval Warfare Systems Command. This system will allow the Navy to operate at very low code rates to maintain communications in impaired environments. We also continued to perform on our 59.0 point million dollar contract award from the U.S. Navy's Space and Naval Warfare Systems Command for our SLM-5650B satellite modems and related services. And during the fourth quarter, we received another delivery order for $3 million, and we expect, in fiscal 2019, to receive and ship additional orders for this critical equipment. In our satellite earth station amplifier product line, we're also focusing efforts on our new breakthrough 250-watt V-Band, TWT amplifier for use with High-Throughput Satellite Gateway terminals. This product is targeted towards the V-Band ecosystem, which is expected to grow significantly in the future and provide large satellite bandwidth at this higher frequency spectrum. During the fourth quarter, we received a large strategic multiyear contract award of over $20 million from a systems integrator for this new V-Band high-frequency TWT amplifier. And we're very excited about this win, as this is the first large-scale deployment of this new technology. Now let me turn to our Safety & Security technology product line where our solutions include: 911 call routing for wireless, 911 routing for voice over Internet networks and Next-Generation 911 solutions for state and local public safety operations. For more than 15 years, we have continuously provided Safety & Security solutions, including 911 call routing technologies that enable the successful handling of over 4 million 911 calls and texts each month. During the fourth quarter, we were awarded a contract amendment worth approximately $3.3 million with 2 option periods worth approximately $5.8 million for our next-generation IP-enabled 911 ESInet for a statewide system implementation. This system will support both wireless and wireless -- wireline emergency service traffic. We also recently announced that we were awarded a 2-year multimillion-dollar contract to provide next-generation text to 911 emergency services for the state of Maryland. Through this contract award, 911 call centers located across the state of Maryland will be outfitted to receive and respond to text messages sent to 911. We believe that these orders are further tangible evidence that our Next-Generation 911 services deliver reliable benefits in a real-world environment. In fiscal 2019, we will continue to migrate one of the largest wireless carriers to our enhanced 911 network. As a reminder, in fiscal 2018, we were awarded a large strategic multiyear contract valued at approximately $134 million to provide this carrier with enhanced E911 services, supporting both current 911 infrastructure and the next-generation, or NG911 networks, which enable text messaging, image and data and video processing. As a result of this contract, we will become the leading provider to this wireless carrier for enhanced 911 or E911 services for its nationwide 3G, 4G and 5G networks. Turning to our enterprise and Trusted Location solution product line. Here, our solutions include GPS-enabled software where we support products such as Verizon's navigator services and text messaging solutions. This product line has showed positive momentum with our location and mapping services being increasingly integrated into our new virtual platform offerings. We have -- and microservices into our seamless indoor and outdoor location and messaging solutions. We recently announced the award of multiyear contract renewals worth $19.5 million, of which $14.2 million was received in the fourth quarter for various services and applications related to our virtual short and text messaging solutions. As you know, mobile messaging continues to be one of the most frequently used features among today's consumer. All in all, we believe the market conditions for our Safety & Security and Enterprise Technologies solutions remain favorable and we are expecting revenues for these solutions to increase in fiscal 2019. At this point, let me talk about our Government Solutions segment where we serve large government end-users that require mission-critical technologies and systems. Our Government Solutions are sold to the U.S. Department of Defense agencies and international government agencies and primarily consist of C4ISR applications, what we call, Command & Control Technologies. Our Government Solutions segment is certainly showing positive momentum. During the fourth quarter, we received a number of strategic contracts orders, including a $44.8 million order to supply the U.S. Army with advanced microset VSAT equipment. We continue to be a supplier of over-the-horizon troposcatter systems to the U.S. government agencies and to international customers. We have a large worldwide troposcatter installed base and our systems can transmit video, broadband voice and data at throughputs of over 50 megabits per second. We continue to expand this market base to different countries. And in this regard, I'm pleased that during the fourth quarter, we received a strategic $31 million first-time order to supply our MTTS troposcatter terminals to a foreign subsidiary of a U.S.-based top-tier prime contractor to be used by the Australian military. Earlier this week, we also announced the receipt of a $9.1 million sole-sourced, a foreign military sales contract, or FMS contract, to supply troposcatter systems and services in support of an existing surveillance and reconnaissance maritime surveillance systems owned by the Iraqi Navy. This was also a sole-sourced win and a first-time win. We continue to await feedback from the U.S. government in response to a large multiyear RFP, as you know, for the supply of tropospheric scatter equipment, which will replace hundreds of the AN/TRC-170 troposcatter terminals in the DoD inventory. This multiyear opportunity, we believe, is literally going to be valued in the hundreds of millions of dollars over many years. Although an award of this program is not expected to generate significant revenues of -- or operating income for us in fiscal 2019. We would expect it to make significant contributions to revenue and operating income in subsequent years. During the fourth quarter, we also received $16.6 million of orders to provide ongoing sustainment services for the U.S. Army's SNAP mobile satellite communications program. SNAP terminals provide quick and mobile satellite communications capability to personnel in the field. And we expect to deliver these products and services over the next several years. We also continue to make progress with our work related to the BFT-2 system. The BFT-2 system provides global, real-time situational awareness and networking capabilities for U.S. war fighters and is also the successor to the BFT-1 system. I'm pleased to report that we began shipments of our BFT-2 transceivers during the fourth quarter of fiscal 2018, and we expect additional shipments during fiscal 2019. As you are aware, we have previously shipped over 100,000 BFT-1 mobile satellite transceivers and believe that this current BFT-2 opportunity is likely to be at least that large or more. Adding it all up, our pipeline of government system opportunities is clearly growing. When I take a step back and look at our overall business, I could not be more pleased. I see very positive signs across all of our business segments. As I said earlier, we enter fiscal 2019 with a strong business momentum and a record-high backlog, and I believe that fiscal 2019 is well positioned to be another successful year. Finally, before turning it over to questions, I want to make a brief remark about the important organizational changes we announced yesterday. Although I think the press release speaks for itself, we announced that we promoted Mike Porcelain, our current CFO, into the COO position. He will be succeeded in his role by promotion of our current controller, Michael Bondi, to the CFO position. These promotions, which are effective October 1, 2018, I believe, are well deserved and demonstrate the depth and the quality of our management team. Now I'd like to proceed to the question-and-answer part of our conference call. Operator?

[Operator Instructions] And we will take our first question from Asiya Merchant with Citigroup.

Congratulations on the promotions. Overall, an impressive fiscal year, but I do note that the fourth quarter did come in a little lighter than what was expected and towards -- and overall for the year, it was towards the lower end of your guidance. What were some of the surprises here? And then, as a second part, I mean, it seems like the guidance implies a significant ramp in the fourth quarter of next year. It seems like there's tremendous amount of visibility there. Is there something else to consider? I mean, I know, fourth quarter is generally always your highest quarter, but it seems like there is even more confidence that the second half will be stronger and in particular, the fourth quarter. So can you just help me understand what's driving that?

Sure. So on the first part of your question related to the lower side of our guidance with the revenue, I think as you guys have been reading in the press, there's lots of international trade discussions that are ongoing in the world. There's also a tremendous part shortage debt that's existing. So when you add those 2 things up, a little bit of uncertainty. Some of the customers wait because they want to figure out exactly what's going to happen. We did see some of that, and we do hear that through our customer base. And then it's just been difficult to get parts in some cases. So when you add it all up, there wasn't one specific item that caused, I'd say, a miss from our -- high side of our guidance. But we kind of factored in the best that we could at the time and those are the results. In terms of thinking about next year, same thing. We do think that some of these discussions into Q1 and Q2, you might see some -- a lower revenue in terms of what we might have thought 3, 4 months ago because of these things. But when we take a step back, based on the strength of our backlog, based on the strength of the opportunities that we see, we actually see every single quarter of next year being, what I call, a bit better than what we did last year and then certainly in Q4, which is supported by our backlog and timing of orders in-house, we do expect it to ramp. I mean, it's possible, as the year goes on, we pull in some items to get them out the door little faster. And we would be very happy to get orders in quicker than what we have built into our expectations. But I'd like to say, we're taking a conservative, but it's really a prudent view of what the revenue we think, and we feel pretty confident about the numbers we're providing.

And do you expect that component shortage to be rectified in the second quarter of fiscal or third quarter? Like, just so that I have an idea of your cadence of revenue growth and where you could be more conservative or where you expect some pull-in to happen?

The answer is no. I don't think I could do that. I mean, I -- it's tough to figure out what suppliers are going to do. And again, I don't want to imply that this is a major problem to us in any respect. It's just, $1 million here, $2 million there, that could make a difference for us given our size. But I just -- I would tell you to think about, if you look at last year's revenue for fiscal 2018, we do think we'll be a bit better across the board when you do a comparison.

And we will take our next question from Ben Klieve with NOBLE Capital.

A few questions for me. First, kind of a follow-up to prior questions regarding the supply chain. I mean, that's certainly something we've heard kind of across the board here, the challenges within the supply chain. And I'm curious if those challenges would be potentially felt in the BFT-2 follow-on orders. How does your supply chain look specific to that product?

I think I can answer that question the same way that Mike just answered before. This -- the BFT-2 transceivers that we are shipping at this moment, for instance, we're shipping approximately 500 transceivers per week. Just to give you a feeling of what that means in terms of revenue, that's better than $2 million every week. So a slippage of a component coming in could affect you severely enough for a couple of million dollars. But yes, we are being affected by it in terms of long-lead items that we need to buy. And we have to be aware of that, and we buy these long-lead items in sufficient time to make our deliveries.

Okay. Perfect, Fred. And I guess, as a follow-up to that then, as you're potentially looking at a large follow-on order for the BFT-2, how are you -- how can we look at working capital here over the next few quarters? I mean, do you think you're going to have to make kind of an investment in working capital in advance of these orders because of the supply chain issues? Or do you think working capital would be relatively flat throughout the year?

No, we do some -- expect some, I mean, just big picture, given the expected revenue growth that we are occurring -- seeing, it's sort of why, I think, when you add up everything, I'll tell you that cash flow from operations will be roughly $50 million or so. So I would say, there would be a slight buildup in working capital. If we have an opportunity to procure some parts that we know are in shortage, we'd certainly do that because if we know we have parts that we'll need for the next -- whether it's 6 months, a year or even 2 years that we know we're going to use, we may take advantage of that given the overall marketplace. But I don't -- I wouldn't describe it as a material change in our working capital ratios.

Okay. That's good to hear. And one other quick thing regarding our cash flow here. Maybe I missed it. Can you describe about what you think CapEx is going to look like here? This year, is it going to be kind of in the $8 million, $9 million range or it will be different one way or another, do you think?

Yes. We did, I think, a little under $9 million in 2018. I think looking forward to 2019, I think that's a base number. So whether we spend $9 million or $10 million or $11 million, within that, that's kind of the way I would think about it. We -- our business does not require significant capital expenditures, which I think, is kudos the way the operations are run. At the same time, especially on the 911 side, we do have investments that we will make for our customers because we do provide some of these services, almost like a cloud-based service. So if we win a big project, let's just say, we win something in Q4 of next year, and we know we're doing it, we'll put in a capital investment that may be above that number. But I would say, $9 million, $10 million, $11 million, that's probably the right way to think about cap expense next year.

Okay. That's perfect. And Mike, congratulations on the new role.

Thank you.

And we can take our next question from Mike Latimore with Northland Capital.

Congratulations on the strong bookings in the year there. I guess, it sounds like you have a number of large opportunities in fiscal '19. So can you just sort of highlight what would be the 2 most important ones or largest opportunities? Is it the another BFT order and then this and a multiyear RFP for tropo? Or what would be the 2 that maybe jump out as the biggest opportunities this year?

I think you're right. I mean, the 2 largest opportunities that we are looking at are the troposcatter replacement of the AN/TRC-170 and also the BFT-2 transceiver program. First, on the troposcatter situation, I think, we're not expecting any revenue or any impact from that program in 2019. We believe that the program will probably be decided or contracted for some time between the first quarter of the government fiscal year and probably the third quarter of fiscal year. I think, the government is telling everybody that they will try to do it in the first quarter, but we tend to not believe that, that will happen that quickly. But we're kind of programming it for the third quarter of the government fiscal year. So that impact will not really be on our 2019. But as I mentioned, it will certainly impact our future business. The BFT-2 situation is, we got the first order for the 5,000 transceivers, which we're shipping at this time, which we started in the fourth quarter. We expect other orders similar to the same as the first one. When exactly they will occur? Tough to see. The -- certainly, the long-lead items and the material problems do affect its delivery. So we are kind of hoping that the government will come across earlier than we anticipate. But we -- as far as shipments and revenue for '19, we're really only expecting 1 or maybe 2 additional orders at best.

Got it. And then, Mike, you gave some color on expected relative growth, commercial versus government this year. What does that mean in terms of EBITDA contribution by segment? How might that change this year?

Yes. I would say, first, the -- right now, given that it's so early in the fiscal year, I would say, I have more comfort to tell you to think about it, consolidated EBITDA margin being in the 13.7% range. That I would say is probably the best way at the moment to look at it. But taking a step back, we do have pretty good pipeline and backlog into our government segment. And so when you look at the 7.7% we achieved in fiscal 2018 in terms of EBITDA as a percentage of sales, I do expect that number to increase. So 7.7%, I think, we're going to do better. I'd love to hit 10% in 2019. That was the goal that we set for ourselves. Can I get there? I'm not sure. So if we hit 9%, 10%, 10%, 11%, whatever we do, the rest will fall into the commercial side in the unallocated column. Speaking directly on the commercial side, we did achieve 19.7% adjusted EBITDA margins for the year, which was better than what we thought. It was an improvement than what we did year-over-year. If you go back to 2017, we did, I think, around 18%. So we did improvement. We are expecting 2019 to be another year of investment in, what I call, the HEIGHTS products. We're seeding the market. We're seeing growth. We want to build this total addressable market as fast as we can. We believe, we have the best product on the marketplace and so we're going to do anything we can to get the market share and do what we need to do to build this market for the long term. So we made a comment in our call, our HEIGHTS products do have, today, lower gross margins than our traditional products. So we will see some gross margin pressure, if you will, to use that phrase, in our Commercial segment. And that will impact the margins. Can we beat the 19.7%? We did in '18, I'd say, it's going to be tough at the moment to do that. But we need to see how the year plays out and the actual contracts that we get in.

Okay. Got it. Makes sense. And last one, you guys have, obviously, fully integrated TCS and getting a lot of synergies out of that. What's the general thought on acquisitions going forward? Is that part of the plan or not part of the plan?

I think, just to simply answer that, it is certainly part of the plan.

And we will take our next question from -- excuse me, Chris Quilty with Quilty Analytics.

Mike, just a clarification on the BFT-2 given the amount that you shipped, is '19 supposed to be an up year or down year in terms of revenue for that product line?

It's supposed to be an up year.

Okay. Just because of the timing of when the original shipment started in '18?

Correct.

Yes.

Okay. Kind of an off-center question here, but looking at the hurricane effect that happened with Florence and I guess, more broadly with some of the natural disasters, does that impact either your Safety & Security business or -- on sort of the government first responder side in any way? Or what's your exposure there?

It's -- in -- the bad news is sometimes good news, I guess. When an event like that happens, it certainly puts more visibility on the need to upgrade systems and so forth like that. But during a natural event disaster, there's a lot of rerouting stuff and a lot of stuff that needs to occur to get the lines back up if things are down. So we do generate some incremental revenue when those things happen from time to time and some of those are negotiations after the fact with the customer. But I would say, I think, given a number of events that have occurred, whether it's the shootings or natural disasters, it's showing the state and local governments that there's a tremendous need to upgrade their systems. And from that perspective, it's helpful -- from a -- to our business.

I guess, another thing to say is that in this recent Florence situation, our systems passed with flying colors. We had absolutely no problems.

Great. That's good to hear. Shifting gears over on to the government side, lot of discussion about possible establishment of a space force. Any exposure there, positive or negative, to the business model?

Not that we can see at this moment. I think it's way too early, certainly for us, to see where we could fit into that equation, whether that -- whether it's space or whether it's ground. We certainly aren't in the space business, but we could be in the ground support business.

Got you. And on the troposcatter business, I thought reading in the 10-K that it sounded like there was a little bit of a deemphasis on some of the international programs and a larger focus on U.S. government. Is that a correct characterization? Or how do you look at the balance in business on a go-forward basis?

Yes -- no, I would say, Chris, that would be an incorrect read or view. I think what we've done is, we actually won some contracts. We've been talking about the international with the Verizon business for quite a while. We had a $31 million program that we won in Q4. We had a $9 million program that we won in Q1 of 2019. So those are 2 programs that we have been working on for a number of years. And the phrase that I continue to say is, we never have more sales and marketing people on the ground focusing on this product line. I will say, this is a long sales cycle. So as we think about the product line in 2019, there's nothing imminent, I would say, that we're expecting based on where we are in terms of conversation. But there's tremendous activity on that product line overseas as well as, as Fred mentioned, with the U.S. government on the TRC-170 side.

Okay. And the oil and gas business there has kind of been up and down over the years, I would imagine, with oil prices and activity. Is that heating up for you at all?

I think that's always been a minor portion of our troposcatter business. But yes, you're absolutely right. It has its ups and downs. At the moment, it's kind of in a down phase. But we could be surprised with a couple of new requests since oil has been -- the price of oil has been rising. So...

Got you. And final question. The Navy satellite modem program, the $59 million order you have last year, I think you indicated most of that was shipped and that there was a large pool of aging modems that still need to get replaced. Can you characterize how big, relative to what you've done already, that opportunity represents?

I think -- I'm not sure that we shipped most of it. We shipped a great deal of that in '18, but there's lots of more revenue to be had from that program in '19. I think we also look at the futures of that particular model modem that we have. It's not only being procured by the Navy, but also some strong interest from the U.S. Army and also the Air Force.

Yes. And Chris, just to clarify, right? This is a $59 million contract. It's an IDIQ contract. We did get an initial order off of that contract, which -- I don't know offhand, what that number was, but it was like $11 million or so. That's the order that I think you're referring to that when we say we shipped it. Yes, that -- we pretty much shipped most of that initial order. So just from a math perspective, if you take $59 million and you minus $12 million, that's the rest of the contract that we don't even have that in backlog at the moment, for the most part, and we would be expecting additional orders throughout fiscal 2019 to deliver that. And I know it's a multiyear program. So that's really the representative of the remaining demand that's left for us to go to that program.

But that's on that program. But I think you also indicated that, that program represents perhaps a small piece of the overall broader market.

Yes. I mean, there's other military commands that we are speaking to and that can go on. And yes, then it becomes a much larger number, could be hundreds of millions of dollars. But that's just something that -- it would be in the early stages. But yes, you are correct if you're -- if that's the way you're asking the question. There's a very broad opportunity for us out there.

And we will take our next question from Glenn Mattson with Ladenburg Thalmann.

Mike, I might have missed what you said. But when you're -- I think when you were describing the satellite earth station business, you kind of talked about some opportunities, but also some challenges. Can you kind of just elaborate on what you meant, what kind of challenges you're referring to there and just, generally, your overview of the demand backdrop in that business as you see it?

Yes. The only challenge we're seeing and first of all, our satellite earth station business is expected to grow in 2019 versus 2018. The only commentary that we're saying is, international market conditions have become a little bit more volatile. You see that in the press, obviously, and most of that is directly related to the trade discussions and headlines that go back and forth between the U.S. and other countries. So there is some, call it, uncertainty as to what's going to happen in there. So -- is that a challenge? Yes, that's a challenge. But other than that, our business is quite healthy. We are expecting year-over-year revenue growth. It's been 3 quarters in a row of revenue increases and very, very strong order demand. And our HEIGHTS products is doing very, very well. And we grew double digits in 2018, and we expect that growth to continue in 2019.

Is South America a significant end market for that business? And is it that you've seen challenges with some of the countries there that are having some economic turmoil?

Yes. I mean, it's a worldwide product. So South America, Africa, Europe, China, those markets are there for the HEIGHTS product line.

Last question on the in-flight. Can you talk about that at all? Maybe I missed it, but can you talk about the outlook for in-flight connectivity in 2019?

Yes. I mean, it's steady Eddie. I guess, we're at a point where we have sort of a steady order flow of revenue. So we're not expecting a big pop in revenue next year. But it will be part of our revenue assumptions. We continue to work on expanding our products with other customers. But obviously, that takes time to get qualified and so forth. So we're not expecting anything in 2019 that would be, call it, unexpected.

[Operator Instructions] We'll go next to George Notter with Jefferies.

I guess, I wanted to ask about the gross margin outlook in the government business. Just going through the 10-K, it looks like that margin was down year-on-year in 2018. And I get that given the loss of the BFT license. But it sounds like the outlook there is for flat gross margins in 2019. I guess, I'm just trying to better understand the puts and takes there. Why couldn't margins be better as you get growth in the business going forward?

Sure. I do think it's possible and probably likely, over time, the gross margins will improve from the level we're thinking about for 2019. George, we did get a bunch of what we call the international over-the-horizon contracts in Q4 as well as in Q1. And some of these programs were so large, the way -- we take a very prudent approach to our gross margin assumptions, as we recognize the revenue. As the program starts to move along and we start to make good progress and assuming there's no mistakes or hiccups or anything like that, we'll be able to report effectively higher gross margins. But we take a very prudent view on those early margins. So that's built into our assumptions. If you look at our past, you've seen -- you go back a couple of years, as we get these programs, we will see an improvement in that margin and that's really what's impacting our margin, growth from not being higher.

And at this time, there are no additional questions in queue.

Okay. Well, thanks, again, for joining us today. And we look forward to speaking with everybody, again, in December. Thank you very much.

Thank you for your participation. This does conclude today's program. You may disconnect at any time.