Ladies and gentlemen, thank you for standing by. Welcome to Comtech Telecommunications Corp. Second Quarter Fiscal 2019 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, Thursday, March 7, 2019. I would now like to turn the conference over to Mr. Jason DiLorenzo of Comtech Telecommunications. Please go ahead, sir.

Thank you, and good morning. Welcome to the Comtech Telecommunications Corp. conference call for the second quarter of fiscal year 2019. 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 Operating Officer; and Michael Bondi, 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 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 on this call. This morning, we will be discussing our results for our second quarter of fiscal 2019. As you can see from yesterday's press release, our second quarter results exceeded our expectations on almost every front. We generated strong operating results, our business momentum remained strong and our pipeline of opportunities is growing. I'm confident that we are well on our way to another successful year. In fact, given the successful execution of our business strategies to date, we are updating our fiscal 2019 target guidance and increasing our revenue goal to a range of approximately $645 million to $660 million, and increasing our adjusted EBITDA goal to a range of approximately $85 million to $89 million. We're also updating our GAAP diluted EPS goal to a range of $0.86 to $0.98. We also believe, if order flow remains strong, as we think it will, it is possible that the consolidated net sales and adjusted EBITDA could be high end in our targeted amounts. I'll talk more later in this call, but first, let me turn it over to Mr. Mike Bondi, our CFO, who will provide a discussion of our second quarter financial results and some details about our fiscal 2019 guidance. Then Mike Porcelain, our COO, will provide a discussion of our 2 business segments, and then I'll come back before opening up to questions and answers. Mike?

Thank you, Fred, and good morning, everyone. As announced yesterday afternoon, we reported our second quarter results, $164.1 million in revenues; GAAP operating income of $12.4 million; and adjusted EBITDA, a non-GAAP measure, of $23.2 million. From a geographic perspective, net sales to U.S.-based customers were 77.2% of total net sales, with 22.8% to international customers. Bookings for the second quarter were $123.3 million, and we finished the quarter with a consolidated backlog of $586.4 million. As stated on our last quarter's earnings call, we expected to burn off some of our current backlog until we secure a few large bookings we are chasing. We have many opportunities in the pipeline, and we currently expect bookings during the second half of fiscal 2019 to increase from current levels. Our gross profit percentage in our second quarter of fiscal 2019 was 37.3%, which, as anticipated, reflected a decline from the 38% we achieved in the second quarter of fiscal 2018. The decrease was almost entirely driven by the increase in total sales coming from our Government Solutions segment, which represented 47.2% of consolidated net sales as compared to 35.8% in Q2 of fiscal 2018. As a reminder, our consolidated gross margins are influenced by product mix changes, and our Government Solutions segment historically achieves lower gross margins than our Commercial Solutions segment. So when Government Solutions' net sales pick up, it will likely impact our consolidated gross margin percentage. On a sequential quarter-over-quarter basis, the 37.3% achieved this quarter was an increase from the 35.9% we reported last quarter. Such increase is largely due to a higher proportion of our consolidated net sales occurring in our Commercial Solutions segment. Given expected net sales growth and product mix changes, we expect that our consolidated gross profit percentage for fiscal 2019 will be…

Thank you, Michael. We were really pleased with our business performance this quarter, and things are looking better not only for fiscal 2019 but for fiscal 2020. We believe our business strategies are clearly paying off. Let me give you some perspectives by segment. First, in our Commercial Solutions segment, net sales were $86.7 million as compared to Q2 of last year, which were $85.8 million. This was a good quarter on many fronts for our satellite earth station product line, which include our HEIGHTS, modems, our SCPC satellite modems and our solid-state power amplifiers. Net sales of these products were higher this quarter as compared to Q2 of last year. Looking -- HEIGHTS revenue does appear to be coming in at an inflection point. Looking forward, I can tell you that we are very close on a number of large HEIGHTS opportunities that are not yet reflected on our bookings number. We have been verbally told that we will be receiving several strategic and financially meaningful HEIGHTS contract awards in the second half and early 2020. As many of you know, the sales cycle for these products are long, so it is really nice to feel that we are getting close to the finish line on just a few of the many HEIGHTS opportunities we have been working on. Market perception for HEIGHTS, especially in the middle to high end of the market, is very favorable, and we see several operators looking to standardize around HEIGHTS for their managed network operations and managed service offerings. We believe our HEIGHTS products are perfectly positioned and will expand our total addressable market. As an example, as most of you know, we do not sell satellite modems to U.S. mobile operators because of the widespread availability of fiber in the United States.…

Thank you, Mike. As I mentioned earlier, I'm very pleased with how our business is performing to date. Fiscal 2019 is expected to be a terrific year for Comtech, and I see positive signs across all of our businesses. And as I mentioned previously, and if all goes well, we could achieve a higher net revenue and adjusted EBITDA than the guidance we have provided today. This April, we will begin our annual sales and marketing plan for our fiscal 2020. Looking out to fiscal 2020, I'm increasingly excited about our future prospects and the positive trajectory of our business. Although we are not ready to put out any specific financial metrics or targets for fiscal 2020, I believe that our growth prospects, both on the top and bottom lines, are better today than our previous expectations. Given our strong business outlook, our Board of Directors has declared a dividend for the third quarter of fiscal 2019 of $0.10 per common share payable on May 17, 2019, to shareholders of record at the close of business on April 17, 2019. Now I'd like to proceed to the question-and-answer part of our conference. Operator?

[Operator Instructions] And we will take our first question from Tim Long with BMO Capital Markets.

Two questions, if I could, maybe, Fred, for you. Just talk a little bit -- it sounds like a lot of deals in the pipeline, but definitely some pushouts here and there, and it sounds like the backlog was a little bit impacted by that as well. So could you just talk a little bit at a high level about what risks you see for the timing of a lot of these deals as we look into the second half and the guidance there? And maybe for Mike, you talked about HEIGHTS obviously getting to that inflection point. What do you think that means? How quick is that ramp? And do you think getting in with one of these large U.S. carriers, does that open up yet another bigger potential end market for that solution?

Okay. On the first part of the question, as far as our guidance for 2019 and what we are looking at for 2020, we really have no numbers in there for any of the very large programs, and that being the 2 programs that are -- that we've mentioned previously, the troposcatter over-the-horizon work and also the BFT program. I think what we're trying to tell you is that we're anticipating those to be, I guess, won by us hopefully sometime in the future. But we're not depending on it in terms of '19 or '20 numbers. I think as Mike mentioned, our proposal by our team member was considered in the evaluation not being successful. And as such, the team member has filed a protest. What that will do is essentially, in my opinion, essentially delay the program substantially, could be months, could be a year or more. I think at this point, it's very, very cloudy. So we're really not counting on it. The good news part of it, however, is that in the beginning, the Army program was supposed to include the Marine Corps as well. However, as Mike mentioned, the Marine Corps has, I guess, gotten tired of waiting and has really come out with their own specifications and their own RFQ. We actually expect, at least we've been told, that the Marine Corps RFQ should come out sometime this month in March. We're not betting on it because we've seen the government delay programs of this magnitude many, many times. However, the good news is that at least, it's not part of the formal protest on the other program. And this one, hopefully, will go through and be successful for us. On the BFT front, as Mike mentioned, things are getting a little cloudy in…

Okay. And then, Mike, on HEIGHTS?

Yes. So HEIGHTS is -- we've been talking about it for a couple of years, and we've been verbally told we're getting some new orders. But you might remember, this is a product line that generated literally 0 in revenue a couple of years, and we were certainly expecting, as I call it, 2 hands worth of revenue. And it's possible we make it to a third hand this year. So the orders are coming in. And from an inflection point, yes, I mean, we were really excited that we were able to get a U.S. mobile operator to begin testing our product. And actually, it is doing live testing. So using that as an example, yes, perhaps even the HEIGHTS market in -- the total addressable market is bigger than what we might have thought even a year ago. But we do like -- we want this stuff to happen, and so we're looking at tangible orders as the key sign, and we hope to announce several of them soon.

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

I guess, just trying to sum up the bookings opportunities for the rest of the fiscal year, would you say some of the larger ones are more on the commercial side versus government?

Yes, no doubt. I mean, we're expecting bookings in our satellite earth station product group to grow from the current level. We're expecting some safety and security awards later in the year. So yes, most of that bookings growth is going to come there.

Okay, got it. And then on the BFT-2 and 3 and then over-the-horizon opportunities, I mean, if those get delayed, I mean, could you still grow your government revenue in fiscal '20? Or do you need some orders from those to come through to grow government in fiscal '20?

We have -- we certainly have other government work in both of those areas that we will probably receive. I didn't mean to -- cannot disqualify us from many of the further work. I just -- what I'm talking about is the 2 major programs, which were roughly for us $200 million of the tropospheric stuff over 5 to 7 years. And BFT, certainly, based on our prior experience, could be $200 million to $400 million over 5 to 7 years. So those are 2 major programs that -- they're binary. You either get them or you don't. And as it happened to us before, someone did kind of take the BFT-2 program away from us. But as we know now, it's not working. So the BFT-3 is really the real component. But what we're trying to do with the Army is actually get the BFT-2 working with our transceivers instead of our competitors.

Yes. And Mike, just to kind of continue with your thought process, I mean, obviously, in Q2, we had a 61% year-over-year revenue growth in the Government Solutions segment. We're not going to achieve that growth next year no matter what we do. But when we -- and obviously, 2019 is a very strong year for our Government Solutions segment. But yes, I think we would say, in aggregate, there are a bunch of over-the-horizon opportunities even on the international side that go in there. You might remember, we -- in the last quarter, we talked about the Northrop Grumman program for the broad-based, solid-state amplifiers that are used in that new radar program that we are participating in. Yes, so when you add up the things we have, the SNAP program, the VSAT stuff, there are a lot of what we call protected communication opportunities, and these would be small VSAT-type opportunities that the government is looking to and is in the process of procuring. I do think, even from '19 to '20, without any big awards, it's -- we should be able to grow that business, I would say, in the low single digits for the moment. And then, obviously, if we get these opportunities, that will help that number go higher. And the government order is always difficult to predict because of the lumpiness of the things, but we do have pretty solid backlog in that segment today. We finished the -- Mike had mentioned that we had $586 million of backlog. Almost $200 million of that is in our government segment. So there's plenty of base to start with for next year. And obviously, we expect to get orders in future quarters. So nothing to be concerned about. It's a lumpiness factor, and that's how that business is always going to be.

Okay, yes, makes sense. Very good. I guess, just last one. This mobile operator testing HEIGHTS, that sounds very interesting. Like what would be the specific use case there?

It's actually for the backhaul of cellular traffic in the United States. So U.S., you have the ability to run fiber. The satellite technology in aggregate, we believe, is starting to be less expensive and perhaps less expensive than fiber. So it's an interesting dynamic that's occurring. It has to be proven. It has to be -- we have to work out the technologies. U.S. telecom operators, as you know, have really high specification rates for quality. Nobody wants their phone calls dropping. So the fact that they have decided to go forward with live testing on the system is really exciting news for us, and it demonstrates the quality of our product and the ability to meet the needs of the marketplace.

[Operator Instructions] We'll go next to Kyle McNealy with Jefferies.

I guess, first, on Commercial Solutions, are there any wind-downs from significant projects like 911 in the state of Washington that might act as kind of a headwind in -- throughout this year? And then I guess based on your guidance for this segment, it appears that there's offset, is there anything like that? And are there any other additional NG911 in the pipeline that could be significant and come in and impact 2019's revenue?

As it relates to our Safety & Security solutions group, no. We don't see headwinds in that marketplace, certainly not in the short, medium or long term. We're in early inning stages of next-generation opportunities. There are several opportunities that are out there publicly. State of California, for one, has been an example. So there are things out there. We actually -- we're working with New York City, in fact, as an example of providing the solution. We actually passed on providing certain solutions for them. It's a very difficult and complex system, but they actually made outreach to us about 1 month ago and asked us to provide services to them, and we're in the process of bidding them. And as you know, state of Washington, we're doing the statewide implementation. So I think what's happening is many of the states are starting to see that we have the full capabilities, a full solution set and that we really have demonstrated that we're able to deliver it. This is an industry that you read the headlines, there are outages and there are shortages from time to time, and these systems are very old and antiquated and you're always going to have some hiccups and some issues. But as these systems mature and as everything starts to sync up together, I think we're starting to gain some leadership and some brand recognition back from what it was just a few years ago. The Solacom acquisition, we think, is certainly a demonstration of our commitment to this space. And as I mentioned, we're really excited. In terms of other headwinds, we did begin a repositioning of our enterprise technology product line group, and we did actually take out a bunch of revenue in our 2019. So although we're increasing our revenue in aggregate, we are actually lowering our revenue expectations in that group. And there are -- yes, I only call them headwinds, but we are in the midst of repositioning that business to focus on higher-margin solutions. So that will kind of pull down our overall assumptions as we think about the entire business in total, but that is reflected in our '19 numbers.

Okay, great. And then the NG911 projects that you may have in the pipeline, are they near term? Could they -- do any of them have the chance of coming in, in fiscal 2019? Or are they longer term, over the next year or so?

Well, in particular, there's one very large opportunity that we were actually expecting to get this quarter. That actually got delayed, and then the customer basically went from, I'll call it, 5 years down to 2 years. So using that as an example, the carriers constantly change their sort of RFPs or their request. So it's difficult for us to say whether or not we'll hit that in 2019. The last time we know that's what we've been told is that this opportunity will come in there. But again, that's more of an opportunity that we bulk. It will benefit us in 2020 and '21. So even these opportunities, they don't start right away, and we have pretty healthy backlog to continue to do the services for '19 and 2020.

Okay, great. And then on the tropo RFP, did you get any feedback from your partner or the government in terms of the determining factors for why you were removed from consideration in the running?

That's really going on right now. And as I've mentioned, it's -- we did not bid that program, our partner did. So they are the prime, and they are the ones that have been told that they have some issues. And they're in a protest. And right now, we have very little information.

Okay. So no -- like whether there was a specification issue or product issue or service issue or something? Not real -- any clarity there?

Yes, we can't provide that. I mean, Kyle, we are aware of what -- certain things that the government didn't like about the -- our teaming partners proposal to them. But we can't obviously talk about that on the call.

We're a subcontractor.

Okay. Sure. And then one last thing in regards to the slowdown in orders in Government Solutions. It seems like their 1x book-to-bill, your expectation for 2019 seems like that might indicate a healthy ramp in the back half, like you said. What areas of Government Solutions would you say would contribute to the uptick in orders for the back half? Like what are the strongest areas you think?

It's really 2. It's the protected communications area and some of these on the ultra satellites, small satellite type terminals. And we do have some nice international over-the-horizon opportunities that are there. We also have some IFF stuff with our amplifier group. So again, a lot of this is good business that we've been working on for the last 1.5 years or so that are developing, and our expectations are that those bookings will come in.

[Operator Instructions] We'll go next to Glenn Mattson with Ladenburg.

Just building off the last question on the tropo. The -- I guess, does the Army's position of kind of ruling out your partner on that project hurt your cause when it comes to the Marine Corps order? Has that weakened the case there at all? Or is that completely independent?

Number one, I think it's completely independent. And there's some history between the Army and the Marine Corps in terms of what the specification requirements were, and that's one of the reasons that the Marine Corps pulled out. So number one, it is independent. And number two, I believe, really, that may actually give us the ability to bid that program prime ourselves.

And one thing just to sort of add. I mean, our partner who obviously we're committed to working with through the protest process, at the end of the day, the government still needs to purchase these over-the-horizon troposcatter programs. So whatever happens with our prime, we're there to support that partner. But there are a number of paths that we see that we can ultimately deliver our product to the end customer. So we're not concerned. We're just disappointed in the delay. We don't necessarily view this as a loss for Comtech, but it certainly is a delay.

Can you remind me, didn't you ship some tropo systems kind of in a rush situation in Southeast Asia? Was it maybe last year? And did those -- were those assembled with the same partner? And did they perform well in the field? Can you talk about that at all?

Yes. We've shipped in the last, let's say, 3 to 5 years. We've shipped numerous systems to the Army and the Marines. And they've been working in the Asian area, in Korea or in the Philippines or also in the Mid-East area. So they've been working fine. It's certainly not a problem that we have. We just -- for some reason, the government has decided to not to go forward with our partner, and we're trying to really find that what that reason is.

[Operator Instructions] At this time, there are no additional phone questions. I'd like to turn the program back over to our presenters for any closing remarks.

Okay. Thanks, again, for joining us today. We look forward to speaking with you again in June of 2019. Thank you very much.

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