Comtech Telecommunications Corp. (CMTL) Q4 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to Comtech Telecommunications Corp. Fourth Quarter Fiscal 2020 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded Tuesday, September 29, 2020. I would now like to turn the conference over to Mr. Jason DiLorenzo of Comtech Telecommunications. Please go ahead, sir.

Thank you, and good afternoon. Welcome to the Comtech Telecommunications Corp. Q4 and year end conference call for fiscal year 2020. With us on the call are Fred Kornberg, Chairman of the Board and Chief Executive Officer 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 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 the results for our fourth quarter of fiscal 2020 and our outlook for fiscal 2021. We hope, our employees, suppliers, customers, partners and investors remain healthy and safe, as we continue to navigate in this COVID-19 environment. As you can see from our announcement this afternoon, our fourth quarter performance reflected a strong finish to what was a challenging year, resulting from the COVID-19 pandemic. Our fourth quarter sales were $149.7 million with an adjusted EBITDA of $23.5 million. In the fourth quarter, we generated a book-to-bill ratio of 1.07. And our pipeline remains strong with a number of large opportunities that we are optimistic about. For the year, we achieved net sales of 616.7 million and an adjusted EBITDA of 77.8 million. We finished the year with a healthy business and a solid backlog. Our prudent financial management in these turbulent times has enabled us to generate $52.8 million of operating cash flows and the flexibility to continue to invest in our business. I firmly believe that we remain on the course of delivering long term growth and driving shareholder value. Now that things have somewhat stabilized or things are still fluid, we are reinstating guidance and our initial thinking is that we can do better in fiscal 2021 than we did in 2020. That said, we are targeting to achieve fiscal 2021 revenues of approximately $610 million to $630 million with an adjusted EBITDA in the range of $74 million to $78 million. I believe that as the year progresses, and new orders come in, I remain optimistic that actual 2021 results will exceed our targets. Before further discussing our financial results and business in more detail, I would like to say a few words about the status of the Gilat acquisition. As a reminder in January 2020, we announced a highly strategic acquisition of Gilat, a worldwide leader in satellite networking technology solutions and services. Unfortunately, after we announced the Gilat acquisition, the COVID-19 pandemic resulted in a sudden and steep decline in the travel and aviation markets, where Gilat's operation is and a significant slowdown in Gilat's business. As publicly reported Gilat has suffered lower period-over-period sales and a negative adjusted EBITDA for the first six months of the calendar year 2020. Given everything in July 2020, we commenced litigation in the Delaware Court of Chancery seeking certain declaratory judgments, including a declaratory judgment that Gilat has suffered a material adverse effect. And that as a result of the material adverse effect, we are not obligated to complete the acquisition. Currently, a trial is scheduled for October 5th, 2020, and the Delaware Court has indicated that intends to render a judgment prior to October 2020, the date that we or Gilat may terminate the merger agreement. Because this matter is getting ready for trial, I must tell you, and I'm sure you will understand that we will not make any further comments on the Gilat acquisition or take any questions related to Gilat or the related litigation. Now, let me turn it over to Michael Bondi, who will provide additional commentary about our financials; and then Michael Porcelain, who will provide an update on our business and our pending acquisitions. Mike?

Thank you, Fred, and good afternoon, everyone. Our net sales for the fourth quarter of fiscal 2020 were 149.7 million, and we finished the year with net sales of 616.7 million. Our revenues for Q4 represent a 10.8% quarter-over-quarter increase, as compared to our Q3, 2020 results, which were significantly impacted by the COVID-19 pandemic. In fiscal 2020, net sales to U.S.-based customers were 76.5% of total net sales with 23.5% to international customers. It was a strong quarter for bookings. We received a $159.7 million of orders, which resulted in full year bookings of $584.4 million. Despite the impact of the pandemic, we achieved a book-to-bill ratio of 0.95 times and finished the year with a healthy backlog of 620.9 million. Although visibility into the economy remains a bit cloudy, we do have pretty good visibility into fiscal 2021 given our healthy backlog. In fact, when you add our backlog plus the total unfunded value of multi-year contracts awarded to us, but not in backlog and for which we expect orders against, we have clear visibility to approximately $1.1 billion in total future revenue, a substantial portion of which we estimate will be recognized, as revenue during the next 24 months. Now, let me give you some financial metrics and commentary with respect to the rest of the income statement. Our gross profit percentage in Q4 was 33.2% and for the year, it was 36.8%. Our gross profit in fiscal 2020 reflects minor increases in costs due to a lower level of factory utilization and higher logistics and operational costs resulting from COVID-19. As we look into fiscal 2021, and expect - we expect a slightly higher level of sales growth in both our Government Solutions segment and our Commercial Solutions segment, and we expect ongoing higher production, logistics and safety-related costs resulting from COVID-19. It would be reasonable to set an initial gross margin percentage target of 35% for fiscal 2021. However, if product mix shifts favorably even a bit, we could easily be back to 37% if not higher. SG&A for Q4 was 23.6 million or 15.8% of consolidated net sales. For the year, selling, general and administrative expenses were 117.1 million or 19% of consolidated net sales. Turning to research and development expenses, we spent $11.3 million in the fourth quarter of fiscal 2020 or 7.5% of consolidated net sales. For the year, R&D expenses were $52.2 million or 8.5% of consolidated net sales. Total amortization of stock-based compensation expense during Q4 of fiscal 2020 was $6.2 million, and for the year, it was $9.3 million. Next year, we expected to approximate $11 million to $13 million. Total amortization of intangibles was $5.6 million in the fourth quarter of fiscal 2020, for the year, it was 21.6 million. Looking to fiscal 2021 and excluding the impact of our pending acquisitions, we estimate total annual amortization of intangible assets of 21.3 million. Our consolidated GAAP operating income for the fourth quarter of 2020 was $2.8 million or 1.9% of net sales. As Mike will discuss in a bit, we continue to incur acquisition plan expenses including litigation costs. Excluding 6.4 million of such costs, operating income in Q4, 2020 would have been $9.2 million or 6.1% of consolidated net sales. For the year, GAAP operating income was 15.2 million or 2.5% of net sales. In fiscal 2020, we incurred $21.2 million of acquisition plan expenses and other similar expenses. Excluding such expenses, GAAP operating income would have been 5.9% of net sales. Our adjusted EBITDA was $23.5 million or 15.7% of consolidated net sales for the fourth quarter of 2020. For the year, the $77.8 million of adjusted EBITDA translate into a ratio of 12.6% of consolidated net sales. On a segment basis in Q4, our Commercial Solutions delivered $14.6 million of adjusted EBITDA or 17.2% of related net sales. For the year, adjusted EBITDA in this segment was $61.7 million or 17.4% of related net sales. Turning to the Government Solutions segment, we delivered $5.4 million of adjusted EBITDA in Q4 or 8.3% of related net sales. For the year, our Government Solutions segment delivered adjusted EBITDA of $25.7 million or 9.8% of related net sales. Looking to fiscal 2021 and despite all of the mix changes, we expect adjusted EBITDA to approximate 12.3% when using the $620 million midpoint of our 2021 targeted range for net sales. Now, let me talk further about interest, taxes, EPS, cash flows, and our balance sheet. Interest expense was $1.1 million in the fourth quarter of fiscal 2020. Fiscal 2020 - for fiscal 2020, it was 6.1 million. Excluding the impact of our pending acquisitions, interest expense is expected to be around $5.9 million in fiscal 2021. On the tax side, excluding discrete tax items, our fiscal 2020 effective tax rate was 37%. When thinking about our tax rate for fiscal 2021, it is important to note that we will incur significant acquisition plan expenses. So for modeling purposes, if you assume acquisition plan expenses of 0, our effective tax rate is expected to approximate 21%. For now, we would tell you to use that rate, but note that as we incur acquisition plan expenses, the actual effective tax rate for fiscal 2021 maybe lower. On the bottom line, GAAP net income in Q4 of 2020 was $1.1 million or $0.04 per diluted share. Excluding acquisition plan expenses and discrete tax items, our non-GAAP net income for Q4, 2020 was $5.2 million or $0.21 per diluted share. For fiscal 2020, GAAP net income was $7 million or $0.28 per diluted share. Excluding adjustments indicated in our press release issued earlier today, our non-GAAP net income for fiscal 2020 was $19.2 million or $0.77 per diluted share. We achieved operating cash flows of $13.8 million for the fourth quarter of fiscal 2020, and as Fred mentioned, $52.8 million for fiscal 2020. This is quite impressive. Our balance sheet as of July 31st, 2020 includes $47.9 million of cash and cash equivalents, and our total debt outstanding was $149.6 million. Before turning it over to Mike for a business update, let me provide color on the cadence of our expected fiscal 2021 performance. Although, the outlook is somewhat cloudy, we do have some visibility into the timing of how things are expected to ship. Currently, we are expecting our Q1 revenues to come in at around $125 million with adjusted EBITDA of about $8 million. For the remaining quarters in fiscal 2021, we expect sequential growth with Q4 like usual targeted to be the peak. Now, I will hand it over to Mike Porcelain. Mike?

Thanks Mike. As most everyone knows since the onset of the COVID-19 pandemic, the health and safety of our employees, customers and suppliers has really been our top priority. In addition to safety, we've been focused on ensuring business continuity for the many critical advanced technology solutions we provide to our customers. For instance, can you imagine for 911 public safety technologies suddenly were not available, healthcare responders, police, fire and ambulatory personnel would be unable to timely respond if at all. Also military and government personnel will not have the ability to securely communicate, and their lives, and the safety of our citizens around the world would be imperiled. For many years, I've been saying that keeping people around the world connected using our critical technologies is the reason Comtech employees came to work each day, but in 2020 that changed. Instead of being able to go to work, many of our employees had to stay home to do their jobs. Nonetheless, we had to keep both our networks and the networks of our customers operating and troubleshoot and adapt to whatever our customers needed. It was simply amazing to see and it all unfolded almost perfectly that our employees adopted to it all. Since March, we have conducted most of our non-production related operations using remote working arrangement, also we've curtailed most business travel, and we have established social distancing safeguards. No doubt our employees did their jobs and saved lives. Our employees are critical for the success of the company, and I must take a few moments to thank them for their incredible efforts and their commitment and dedication to serving our customers. With that said, let me now talk about our team success in terms of business performance, contract wins and the direction of where these efforts will lead us. I will talk first about our Commercial Solutions segment. Here net sales were 85 million in Q4 and 353.7 million for fiscal 2020, which is a decrease of only 1% versus last year. That small decrease is pretty incredible given everything that has gone on this year. Additionally, bookings in the Commercial Solutions segment were strong at 90 million for the quarter and 321.3 million for the year, resulting in a solid 0.91 book-to-bill ratio in the COVID-19 environment. Looking forward, we expect fiscal 202 sales in this segment to be slightly higher than the level we achieved in fiscal 2020. Although, the business impact of COVID-19 resulted in significantly lower net sales of our satellite ground station technologies during fiscal 2020, as compared to fiscal 2019, bookings did begin to rebound in the fourth quarter of our fiscal 2020. We were awarded a number of important satellite ground station technology orders during Q4, including contracts valued at more than 2.2 million for Ka-band high-power traveling wave tube amplifiers or TWTAs for trailer-based satellite communication terminals. We were also awarded a contract valued at more than 1.5 million for 500 watt Ka-band TWTAs for a tracking telemetry and command application to be deployed globally by a major satellite service provider. We also received 1.3 million in orders for advanced satellite modems, WAN optimization and redundancy switches to support cellular LTE backhaul for a service provider in the Middle East. We also received a 1.1 million order for satellite ground station equipment from the Southeast Asia Ministry of Defense for network upgrade, which could expand to more than 2,000 units. Importantly, we saw continued strength in our U.S. government satellite ground station business receiving additional orders to support a critical U.S. Air Force and U.S. Army Anti-jam modem program, known as A3M. The A3M program is intended to provide the U.S. Air Force and U.S. Army with a secure wideband Anti-jam satellite communication terminal modem for tactical satellite communications operations. Our Heights products continue to draw our interest, and we continue to educate our customers. Although, there were signs of pent-up demand, the satellite ground station has some ways to go before it fully rebound, as many of our customer locations remain closed or are eliminating installation to only truly must have equipment. Now, let me turn to our public safety and location technology solutions, whose net sales were higher in 2020 than in 2019. To-date, the business impact of COVID-19 on our public safety and location technology solutions has been relatively muted and demand for our products appear strong. For example, we secured several multi-year contracts valued at more than 15 million to deploy new call handling solutions in the Midwest region of the United States. Also we were awarded and began work on close to $30 million of multi-year contracts from two U.S. Tier 1 mobile network operators for 5G virtual mobile location-based technology solutions including public safety applications. Although COVID-19 has resulted in the cancellation of several key public safety trade shows, and some states and municipalities have announced budget constraints, other existing and potential customers are increasing their funding for Next Generation 911 solutions recognizing the critical importance of upgrading their 911 systems. For example, during Q4, 2020, we were awarded a contract valued at up to 54 million to design, deploy and operate Next Generation 911 services for the state of South Carolina. Additionally, we are working with two other states for multi-million dollar contracts to upgrade certain components of their 911 networks. As you can see, we believe we are well positioned for long term growth in this market and as mentioned on prior calls, we have several large opportunities for which we hope to announce contract award soon. Now, let me turn to our Government Solutions segment. Here net sales were 64.7 million in Q4 of fiscal 2020, as compared to 73.4 million in Q4 of fiscal 2019. For the full fiscal year, net sales were 263 million, which represents a decrease of 16.4% from the prior year. Bookings in our Government Solutions segment for fiscal 2020 were 263.2 million representing a book-to-bill ratio of 1. Fiscal 2020 includes a nominal amount of sales related to our new X/Y satellite trucking antenna product line, which we acquired through our acquisition of CGC. We believe sales in fiscal 2020 for this product line will start to take off. Margins in this product line are a bit less than our normal product set, but as volumes increase, we do expect margins to go up. All-in-all, we believe fiscal 2021 net sales for the Government Solutions segment will be slightly higher than the amount we achieved in fiscal 2020. In addition to revenue contributions from the CGC acquisition, fiscal 2021 is expected to benefit from existing and future orders to supply Manpack Satellite Terminals, networking equipment and other advanced VSAT products to the U.S. Army, and existing and future orders to provide ongoing sustainment services to the U.S. Army for SNAP VSAT. In addition, we expect to continue working with the U.S. government and delivering our Joint Cyber Analysis Course, as well as performing sustainment work related to the U.S. Army's Blue Force Tracking BFT-1 program. As mentioned on prior calls, we were extremely pleased that in fiscal 2021, we will be managing certain aspects of the space component supply chain for NASA's Artemis missions. We are excited to be part of this important space program and expect more follow-on orders in the future. Also we expect to receive new orders for our recently introduced COMET terminals, the world's smallest deployable troposcatter system. Additionally, we are making progress with respect to initial deliveries to the U.S. Marine Corp for our next generation troposcatter system. Finally, we have several other large opportunities in this segment and are optimistic that as the fiscal year 2021 progresses, we will be able to report them as bookings. Next, I would like to make some quick statements regarding '21 expenses and speak about the status of UHP, our other pending acquisition. First, acquisition plan expenses in fiscal 2021 will include significant litigation expenses associated with our pending acquisition and litigation related to Gilat, as well as ongoing expenses related to seeking Russian regulatory approval. To-date acquisition plan expenses in Q1, most of which relate to Gilat litigation approximate 14.2 million. As the trial continues, litigation expense will obviously go higher. And if we are required to close the transaction, we would expect to incur an additional 38 million or so, including litigation cost. Given the ongoing trial, as Fred mentioned, we won't make additional comments about the status of the litigation or take questions on this matter. Second, as it relates to UHP, the leading provider of innovative and disruptive satellite ground station technology solutions, here we are focused on the regulatory process in Russia, where we still need certain approval. Since our last conference call and announcement, we have made progress, and we were requested to provide certain information to the Russian government and have provided such. We hope that we will be able to receive approval from the Russian government and close this acquisition by December 31st, 2020. For those that want more detailed information about the UHP acquisition and Gilat acquisition related litigation matters and the status of regulatory approvals, I do refer you to our Form 10-K that we just filed with the Securities and Exchange Commission earlier this afternoon. Now, let me turn it back to Fred, who will provide some closing remarks. Fred?

Thank you, Mike. As I mentioned before, I'm very pleased with how our business is performing, particularly the results for the fourth quarter. Fiscal 2020 was obviously a challenging year for Comtech and illustrates the earnings power of our business and our product leadership positions. Looking out to fiscal 2021, we have a strong, diversified customer base selling to both government customers and commercial customers. We have a good business mix and a diversified product line that has protected Comtech in the past, and we believe it is a significant source of strength today. We remain determined to extend our market leading position, and are firmly focused to achieve growth in fiscal 2021, as market conditions continue to improve. As I've said before, we 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 fourth quarter of fiscal 2020 of $0.10 per common share payable on October 27th, 2020 to shareholders of record at the close of business on October 14th, 2020. We continue to believe our dividend program is a great way to return capital to our shareholders, as we grow the business. Finally, today we announced our Board of Directors approved a new $100 million stock repurchase program. Clearly, we believe this authorization demonstrates our confidence in the underlying value of our stock and in our future. Now, I would like to proceed to the question-and-answer part of our conference. Operator?

[Operator Instructions] We can go ahead and take our first question from Asiya Merchant with Citigroup. Your line is open.

Couple of quick questions, maybe for Mike, Fred, Mike, it doesn't matter. First quarter guide is down 16%, I believe sequentially. If you can give us some color on what's going on there? And then, obviously, you expect the quarterly progression to be there. Seems like the guide staying slightly better than what you guys achieved given that you guys have a good backlog, good visibility, why just slightly given economic conditions has resumed, if you can give us some color on that? Thank you?

Sure. So the customers out there, the way we're seeing in the marketplace, the order activity interest is pretty high, but there are still issues in terms of installations that are ongoing. I mean, I referred to that in my prepared remarks, customers still have their doors locked so to speak, and it's very difficult to get into do installations. And you know, this is a global company with global installations, and it does take some time to find the right talent in the field that is willing to do it. So with that being said, we're expecting a quarterly ramp up. Q1 was the number, Mike gave to you and then each quarter thereafter is the way we're thinking about it if things shift earlier because vaccine gets developed or something like that and installations get ramped up then that, that will change. But right now, that's the way we're thinking about the delivery of the revenue. Order flow, we actually feel pretty strong about. We've got some large opportunities out there in the 911 space. And yesterday's news in the marketplace is very favorable for the things we need. It's just another sign to the politicians that the 911 systems need to be upgraded. So things like that kind of go in our favor we think.

Fair enough. And then on cash, cash flow, the a pretty strong cash flow that you guys generated this year, can you guys share some commentary on should we expect cash flow again then to be higher given revenues will be higher next year or was there something one time that we should kind of keep in mind that will not occur in '21?

Well, Mike did talked about strong cash flows that we do expect. I think obviously we're going to call out again, the acquisition plan expenses. So I mean, candidly, I think we spent $20 million or so in fiscal 2020. So anything above that number for 2021 will make the - that year-over-year comparison probably be lower, is the way I would tell you to think about it because acquisition plan expenses just need to get paid, and obviously, we're in litigation. So if you look at it two ways, if you pull out the acquisition plan expenses, you can see the very strong cash flow dynamics of the company, and I think that's really the right way to look at the company on a long term basis.

[Operator Instructions] We can go to Mike Latimore with Northland Capital. Your line is open.

Yes, just looking at the SG&A line there, it came down fairly significantly sequentially. I guess, is that a good baseline to think about, was there any one-time items in there. What was the main factor behind that decline?

Mike that was probably a function of our cost savings initiatives that we've put in place in Q3, and you're seeing the benefit of that in Q4.

Okay. And that's a good kind of baseline number to think about to start there?

Yes. As we enter 2020 - '21, certainly we'll be looking to be mindful of the cost expenditures on the SG&A line. Our view is that we're still seeing the benefits. And for the foreseeable future, we're going to have those programs in place until conditions meaningfully improve.

And then in terms of the U.S. federal government are kind of heading in - right into their fiscal year end here, and I guess, how is that customer behaving, I guess into their fiscal year end sort of a normal pattern there?

Yes. I guess, we could say normal pattern. I think it all depends on how close we get to October 31st.

And then you talked a little bit about the like demand being solid and a little bit harder to get in and do installs. I guess, does the - does that install dynamic affect the sales cycle, too, a little bit, such that maybe the sales cycle is a little longer because of the longer install?

Yes. Definitely, no question about it. Yeah, the sales cycle is definitely longer. The way I would describe it in a good way though is back in Q3, and we didn't see any new opportunities, right, anything that was being done was old opportunities. Now with everybody going to all the online video sales channels, we've really seen a pickup in new opportunities and those are the types of things that we started to see in Q4 come in. We expect them to continue to come in. And then it's just a question of figuring out how we're going to get them installed, whether it's Comtech doing it or third party doing it or one of our partners in the field. So we - that - that is extending that process, and I would say, a good amount. It's not a small change. It's a big change that's out there.

Okay. And any color on just international versus domestic demand is one clearly outperforming the other here?

Yes. No, we're not - we - I would say overall, we're not seeing much difference between how people are reacting to the virus out there. I would say a brightable positive note is our 911 business. I mean, I think that we're seeing. And we would like - we would like to see them push the final pen across the paper and sign their final document, so to speak.

And we'll go now to Chris Sakai with Singular Research. Your line is open.

Just had a question, first question, I guess, on your research and development expense. I know this quarter it was down about $4 million, $4.5 million from a year ago. Just wanted to see what you guys had to say about that going forward. Do you see a rebound in that expense? Thanks.

Yes, we saw a decline in the fiscal 2020 period certainly, as we came out of Q3, we tried to be very mindful of the critical projects and make sure we continue to invest there. As we go into 2021, I would say that our normal pattern would still exist in terms of percentage of sales.

Okay. And then I've been noticing over the last four quarters, your inventory level has been increasing about 2 million to 3 million a quarter. Can you guys comment on that - is - or is this planned or what do you see for 2021. How do you see those levels?

Yes. I think we do expect inventory to go down a little bit in 2021. Some of the inventory buildup is, we've taken the position is when we can get parts from suppliers, we'll take them. Given that there is logistical issues, and Mike referred to that in his prepared remark portion, there are some supply logistics that are out there. And when we get a lot of components or something like that, we've decided to take them in. So we have them to deliver our customers when they want to. But there's nothing special per se that is occurring other than that and normal seasonality and normal fluctuation.

[Operator Instructions] We do have a follow-up from Asiya Merchant with Citigroup. Your line is open.

Hi, thanks for the opportunity again. Quick question on the stock buyback program. I'm trying to remember when was the last time you guys were buying back stock, but you also have two acquisitions in play here. So is this authorization something that one would expect would get executed during the fiscal '21 even partially or if you can just help us understand the rationale behind the stock buyback? Thank you.

Well, I think we view the stock as being undervalued obviously and really it depends upon the litigation that we're in. Our cash position is such that the old buyback program was coming to an end. And so we thought we would re-implement it and depending upon our cash position, we'll start buying stock.

All right. While the acquisitions are in play, will you still be buying stock or you'd wait till the acquisition one way or the other are either committed or terminated, yes.

I think we'll probably wait until the litigation is over. But we really hope to have the litigation over by the end of October.

[Operator Instructions] It does appear that we have no further questions at this time.

Okay. Thanks very much, operator, and thanks, everyone for joining us today. We look forward to speaking with you again in December.

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