Ladies and gentlemen, thank you for standing by. Welcome to the Comtech Telecommunications Corp. Second Quarter Fiscal 2020 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded on Wednesday, March 4, 2020. I would now like to turn the conference over to Mr. Jason DiLorenzo of Comtech Telecommunications. Please go ahead, sir.

Thank you. Welcome to the Comtech Telecommunications Corp. conference call for the second quarter of fiscal year 2020. With us on the call today are Fred Kornberg, Chief Executive Officer and Chairman of the Board of Comtech; Michael D. Porcelain, 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 Chairman of the Board of Comtech, Fred Kornberg. Fred?

Thank you, Jason, and good afternoon, everyone, and thank you for joining us on this call. Today, we will be discussing results for our second quarter of fiscal 2020. As you can see from our earnings announcement, our operating results were solid, with strong performance on the bottom line. I have to say that despite the sudden and unexpected deterioration in business conditions caused by the coronavirus that occurred during our second quarter of fiscal 2020, our company's businesses have performed very, very well. Our second quarter was another busy quarter for Comtech. We announced several large and important contract awards as well as our strategic acquisition of Gilat. Looking forward, although the second half of fiscal 2020 will be more challenging than we originally expected, we will remain focused on our business execution, our acquisition integration efforts and positioning our company for a strong fiscal 2021. To that end, we have updated our 2020 financial targets to reflect our current assessment of business conditions and the rebound we expect. Our targets do not include the impact of our impending acquisitions of Gilat and UHP. At this time, we currently estimate consolidated net sales to approximate $712 million and adjusted EBITDA to approximate $99 million or approximately 14% of consolidated net sales. We also now anticipate GAAP diluted EPS of approximately $1.08. So overall, despite the negative impact of the coronavirus, we still anticipate fiscal 2020 being a year of both revenue and adjusted EBITDA growth. Now let me turn the call over to Mike Bondi, our CFO, who will provide a brief discussion of our second quarter financial results. After that, Mike Porcelain will provide a discussion of our business. And then I'll come back before opening it up to questions and answers. Now let me hand it over to Mike. Please?

Thank you, Fred, and good afternoon, everyone. Our net sales for the second quarter of fiscal 2020 were $161.7 million. From a geographic perspective, net sales in the second quarter of fiscal 2020 to U.S.-based customers were 78.1% of total net sales, with 21.9% to international customers. Bookings for the second quarter were $151.6 million, and our consolidated book-to-bill ratio was 0.94. We finished Q2 with backlog of $638.3 million. And when you factor in the total unfunded value of certain multiyear contracts that we have received and for which we expect future orders, we have visibility into approximately $1 billion of total potential future revenue. Our gross profit percentage in Q2 was 37.5%, which reflects a slight increase from the 37.3% achieved in the second quarter of fiscal 2019, due primarily to product mix changes as a result of the period-over-period increase in net sales in our Commercial Solutions segment, which historically achieves higher gross margins than our Government Solutions segment. Based on expected bookings, the timing of our performance on orders and the mix of net sales between our Commercial Solutions and Government Solutions segments, we currently expect our consolidated gross profit as a percentage of consolidated net sales for fiscal 2020 to be the same or slightly higher than the percentage we achieved in fiscal 2019. The ultimate percentage will be driven by final fiscal 2020 product mix and revenues we achieve. GAAP selling, general and administrative expenses in Q2 of fiscal 2020 were $29.4 million or 18.2% of consolidated net sales. We continue to invest in selling and marketing activities. And based on our current spending plans, expect total fiscal 2020, selling, general and administrative expenses in dollars to be higher and as a percentage of consolidated net sales to be similar to the 19.1% recorded…

Thanks. Given all the news headlines about the coronavirus, I'm quite proud of our Q2 performance. But given the large attention in the press, we wanted to provide some color on the impact to Comtech and how we are looking at the situation. First, we do believe such business conditions are temporary, and they will significantly improve from the current state during the second half of our fiscal 2020. Second, to date, the largest business impact we have felt is in our satellite ground station technology product line. Here, we've been impacted by travel restrictions imposed by certain countries as well as by our customers. From what we see, a large majority of companies are restricting foreign travel, site visits to facilities and some of our customers are not even attending trade shows. Thus, although we do not believe we permanently lost any orders, no one is around to sign them or even take deliveries. To date, parts availability in our supply chain has not been materially impacted. We source our products from many global suppliers, and we generally keep stock inventory on hand. Thus, our belief is that when order flow resumes, we will be able to quickly turn back on factory production and deliver products that are in our backlog. Although there remains significant uncertainty on when business conditions will return to normal, we are expecting such to occur in the second half of fiscal 2020. Now let me give you some color by segment of our Q2 performance. In our Commercial Solutions segment, it was a solid quarter. Net sales were $96.1 million compared to $86.7 million last year, an increase of 10.8%. Bookings in this segment were $98.9 million for the quarter, resulting in a book-to-bill ratio of 1.03. Our Heights Solutions continued to gain traction.…

Thank you, Mike. As I mentioned previously, despite the difficulties due to the coronavirus, with -- I'm very pleased with how our business is performing and I expect fiscal 2020 to be another solid year of growth for Comtech. I'm also confident that we are looking at sustained growth for years to come. I believe that in an environment of increasing market demand for global voice, video and data usage, customers will increasingly turn to Comtech to fulfill their needs for secure wireless communications. Given our business outlook, our Board of Directors declared a dividend for the second quarter of fiscal 2020 of $0.10 per share common share payable on May 15, 2020, to shareholders of record at the close of business on April 15, 2020. We continue to believe that our dividend program is a great way to return capital to our shareholders as we continue to grow our business. Now I'd like to proceed to the question-and-answer part of our conference call. Operator?

[Operator Instructions] We'll take our first question from Joe Gomes with NOBLE Capital.

First question on the coronavirus. It would seem, at least given the headlines, that the impact would even be greater in the third quarter than the second. Is that accurate from what you guys are seeing? Is there any way you can quantify financially what that impact was in the quarter?

Yes. Well, I would say this, from a shift perspective, we probably saw a good $4 million, $5 million, just that we were expecting in the quarter. We were expecting close to about $168-or-so million and that difference is largely attributable to just revenue that just did not come in as things slowed down at the end of Q2. So from our perspective, right now, from where we sat a couple of months ago, we're looking at Q3 revenue in the $150 million to $155 million range for Q3. And that does reflect our best shot at where things are, we're seeing bookings still be relatively low. But at the same time, we don't think we've lost anything. So we're expecting those orders to come in at some point either during Q3 or early Q4, and we'll have a big rebound in Q4.

Okay. Thanks for the additional information on that. And I noticed, on the positive side, the awards since the beginning of the year, the ones at least that you guys put out a value on in your press releases, increased to over $50 million from about $35 million in the same period last year. And I was wondering what's behind that up tempo? Are you winning more of that than you normally have? Is the winning percentage going up? Are there just more contracts out there? I just wonder if you could give a little more color on that.

I would say it's a little bit of both. We certainly see, as Fred mentioned, long-term demand for our satellite products and our amplifier products, we think, is certainly on a multiyear uptick and we think it's just not limited, outside of what I call this temporary lull right now in -- because of the business conditions. We think we're in a multiyear period of growth. And yes, I'd like to think that we're winning more than our fair share, given our product leadership positions that we have. And I think that's the best way I would describe it. I'd like to think that we're growing a little bit faster than the overall market based on what we see. But obviously, it's a multiyear trend and we hope to participate at our fair share.

Okay. And the acquisition expenses, in the first quarter, you guys said, we're expecting about $2.4 million for the quarter and it came in at $6 million. Just wondering what happened there that they were significantly higher than what you had originally forecast?

Yes. It was called Gilat. I mean, at the end of the day, we didn't -- at the time, we kind of gave an estimate for where we thought we were. And obviously, with a certain level of expenses we expected, and as we got closer to getting to a deal, we turned up our due diligence. And given the size of the acquisition, that number is not anything out of the ordinary.

Right, right. Okay. And do you expect any contribution from the CGC acquisition in the second half of 2020? Or can you size that?

The business is certainly lower than $10 million a year on a run rate perspective. Obviously, we just closed on the acquisition. There's some timing involved. So I mean, it's a few million dollars in our 2020 numbers. But most of that number is sort of a 2021 number as things go underway. We're spending the first quarter integrating that business into our operations and our infrastructure. So we're not really expecting a whole heck of a lot of revenue both in our Q3 and then maybe a little bit in Q4.

We'll take our next question from Mike Latimore with Northland Capital.

I'm [ Pavan Kumar ] on for Mike Latimore. I have two questions. Like, I have two questions. The European Union has a mandate requiring population alerting by 2022, do you benefit from that?

We do sell some emergency awareness location services over in the European community. I would say it's not a material part of our business today. But we are seeing much more bid opportunity and proposal activity in that area. And obviously, if we have some good news to report down the road, we'll report it. But we do see that activity, and we're bidding on some projects, but they're not a big portion of our business today.

Got it. And the second question is, how important is Telefónica to Heights growth? Is it the largest customer for Heights?

Can you repeat the question? I didn't understand.

How important is Telefónica to Heights growth? Is it the largest customer for Heights?

No. So it's just -- I would describe -- Telefónica is a good customer of ours and certainly purchases products from us. But it's just one of several different mobile operators that will purchase Heights products from us. So it's not -- I would not describe it as a material driver to us, but it is certainly a good customer of ours and we would expect to sell our product set to them over time.

We'll take our next question from Asiya Merchant with Citigroup.

The question I had was, as you look into your second half, Michael, you mentioned a bunch of positives. I mean, of all the various initiatives that you're talking about and the significant recovery you're expecting in the back half and more in the fourth quarter, can you maybe prioritize which of these, you have a lot of confidence in, will definitely come back to help you meet your kind of guidance for the year?

Sure. I would say, certainly, we have a lot of stuff in our backlog. Our backlog ending Q2 is $638 million and so there's a good chunk of our Q3, and obviously, less of that in Q4. But certainly, our backlog is there. If customers start opening up their facilities and allowing us to ship and they're willing to accept, that will certainly be an important fact. And we're expecting that to occur. The second thing, which I would say, we're not sure, and I don't really want to use the word confidence, there's uncertainty, is we do need bookings to come back. We're experiencing an impact in our bookings and our satellite earth station product line. We haven't seen it come back. Even as of today, things are not there in our satellite earth station business. Next week, there's a big satellite showdown in Washington, D.C. We've seen some customers pull out of that show and so we're obviously rejiggering appointments and stuff like that to occur and do things remotely with our customers. So ultimately, what we are accounting for and hoping to work through is what is a challenging environment right now to close sales. And so that, I would say, is the biggest thing that we're counting on. If we're unable to do that, I think, again, I think as Fred said, and we view it as a temporary situation, we either close it and ship it in Q4 or we'll ship it in 2021. And then we'll just see what happens over the next 2 quarters. On the government side, we feel pretty good about order flow. When we're expecting stuff to come in and we need that. We feel pretty confident about that. And that's how we come to our guidance. As at the end of the day, we still think we need that rebound in bookings.

Great. And then any guidance on cash flow for the year?

Yes, so we're thinking at the moment about $50 million that reflects acquisition plan expenses as well that we're forecasting for the rest of the year. So just when you're looking at that number, it's inclusive of that. And it reflects our latest guidance.

Okay. So that's $50 million on cash flow from operations.

[Operator Instructions] We'll take our next question from Chris Sakai with Singular Research.

Just had a question, I guess, on the acquisition of Gilat. Wanted to sort of get your idea when will you start to see some revenue additions from Gilat?

Sure. Our thinking at the moment, if all goes well, is that we'll likely close the transaction sometime in late June, maybe early July of fiscal 2020. It's possible it gets into August of our 2020, which would be the start of our fiscal year '21. So that's kind of the time frame. It's very late in Q4 of this year or certainly in our Q1 of next year, assuming everything works according to plan. At that point, then you just really taking a snap, if we close at the beginning of August, it will be a full year impact next year.

Okay, great. And then to follow-up on that, are you seeing any sort of delays because of the coronavirus with the integration there?

With the integration, no. I think it's fair to assume that Gilat's no different than any other company in the world and is being impacted by the coronavirus as well. But from an integration perspective, the lull in travel has actually been very helpful towards facilitating our planning. And it's allowing people to actually be around to actually plan integration efforts, and there's lots of conversation. We've done some internal site visits of their facilities. They've done some internal visits of ours. And so I would actually say it's allowed us to accelerate our planning process over the acquisition. And as we continue to learn each company, they learn us, we learn them. The culture match between the companies is extremely similar and exciting and employees literally around the world are truly excited about it and we're all becoming friends and it's a good thing. And we think that once the acquisition closes, we've got plenty of years of growth ahead as a combined company.

Okay, great. I mean, when you say plenty of years of growth, I mean, what are you sort of referring to? How long?

It's many years. I mean, we think that the cellular backhaul growth, as Mike -- as things get rolled out on 5G and satellite becomes part of that ecosystem, that's certainly 4, 5, 10 years' worth of growth. Certainly, IFEC -- you can't -- as I said, you can't run a piece of fiber to the plane. So IFEC is going to be on every single large jet and business jet in the future. So what we're in what we would say is in the early stages of multiyear growth. Putting timing aside, our view is, it's going to happen and is one of the reasons why we did the acquisition.

And there are no further questions on the line at this time. I'll turn the program back to the company for any closing remarks.

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

This does conclude today's program. Thank you for your participation, and you may now disconnect.