Ladies and gentlemen, thank you for standing by. Welcome to Comtech Telecommunications Corp., First Quarter Fiscal 2021 Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question-and-answer session. As a reminder, this conference is being recorded Wednesday, December 09, 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. conference call for the first quarter of fiscal year 2021. With us on the call today 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.

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 first quarter of fiscal 2021 and our outlook for the full fiscal year. As you see from our announcement this afternoon, fiscal 2021 is off to a great start. Our net sales and adjusted EBITDA for the first quarter exceeded our expectations. Our first quarter net sales were $135.2 million with an adjusted EBITDA of $14.3 million. As everyone knows, COVID-19 is still in the forefront of news. And although by no means is it over, we believe that the pandemic’s worst impact on our business is largely behind us. As announced earlier today, with our diversified customer base, product leadership positions and mounting prospects, we are targeting fiscal 2021 net sales to be in the range of approximately $610 million to $630 million and our targeted adjusted EBITDA to now be in the range of $74 million to $76 million. As you can see, our strategic initiatives are paying off, and we are clearly holding our own despite the second wave of the COVID-19 pandemic. Our pipeline of large order deals remains strong. And if momentum continues, we should achieve a book-to-bill ratio in excess of 1.0 for fiscal 2021. Now, let me turn over the call to Michael Bondi, our CFO, who will provide additional commentary about our financials. After that, Michael Porcelain, our President and COO, will provide an update on our business and pending acquisition. Then, I will come back and before opening the line to questions and answers. Thank you. Mike?

Thank you, Fred, and good afternoon, everyone. As mentioned, net sales for the first quarter of fiscal 2021 were $135.2 million. This is a decrease from the $170.3 million reported in Q1 of fiscal 2020. Net sales in the first quarter to U.S.-based customers were 74.4% of total net sales, with 25.6% to international customers. Bookings for the first quarter were $123.2 million, and our consolidated book-to-bill ratio was 0.91.

Thanks Mike. As Fred mentioned earlier, COVID-19 is still impacting our business. We continue to conduct most of our nonproduction related operations using remote working arrangements have constrained most business travel and have established social distancing safeguards. These precautions and business practices are expected to remain in effect, so long as government advisories recommend. Despite this, it was a great quarter. And let me talk about the team's success in terms of business performance, contract wins and the direction of where we think these efforts will lead us. I will first discuss our Commercial Solutions segment. Here, net sales were $81.8 million this quarter as compared to $94.3 million in Q1 of last year, a decrease of about 13%, which is not bad considering the impact of COVID-19 on our international sales. Bookings in this segment were $66.3 million for the quarter, resulting in a book-to-bill ratio of 0.81. Bookings were mainly affected by COVID-19, which caused many international bookings to shift to the right. Period-to-period fluctuation in bookings is normal for this segment. And although we have seen a recent spike in COVID-19 cases in many of the geographic markets where we sell our satellite ground station technologies, it was a relatively good quarter, and we believe there is light at the end of the tunnel. Bookings this past quarter were higher than the bookings achieved in each of our prior two quarters. In fact, we were awarded a number of important orders, including a $1.7 million order from a large government entity in Asia, who selected our equipment to support a significant network upgrade. A $1.5 million order for single channel per carrier, or SCPC satellite modems from a Tier 1 defense contractor to upgrade and expand an existing network with our CDM 625A advanced satellite modems. We received $1 million in delivery orders from the U.S. Naval Information Warfare Systems command for our latest generation SLM-5650B satellite modems as well as firmware upgrades. And we also received $1 million order for satellite ground station equipment from the largest telecommunication company in Africa, who specified our heights networking platform to enhance and improve its mobile backhaul capabilities. Now, onto our public safety and location technology product lines, first quarter of fiscal 2021 net sales were lower as compared to last year. This decline was expected and mostly timing related. As previously disclosed, we anticipated that AT&T would cease purchasing certain of our 911 wireless call routing solutions as a result of our receipt of a large contract a few years ago from another large U.S. mobile network operator.

Thank you, Mike. As I mentioned before and as you heard from both Mikes here, we're all very pleased with our business and performing particularly results performing in the first quarter. With our diversified customer base, product leadership positions and mining prospects, we are clearly holding our own despite the second wave of the COVID-19 pandemic. Given our business outlook, our Board of Directors continue to declare a dividend for the first quarter of fiscal 2021 of $0.10 per common share payable on February '19, 2021, to shareholders of record at the close of business on January 20, 2021. We continue to believe that our dividend program is a great way to return capital to our shareholders as we look to grow our business. Now I'd like to proceed to the question-and-answer part of our conference call. Operator?

We are going to take our first question from Joe Gomes from Noble Capital. Your line is open.

Good evening. Congratulations on the quarter.

Thank you.

So, I just wanted to talk a little bit here first on the Next Generation 911, you guys could be having some fantastic success there. Just trying to get a bigger picture of what do you guys really see is driving these wins? I think in the last call, you said that you were working on two large state ones. I would assume one is Pennsylvania. Is the other one still available? What's the competitive environment? Are you pretty -- I guess, kind of like what's the win rate here for you guys in the business at this point in time?

Sure. Well, yes, we're really pleased with the contract win that we got from the Commonwealth of Pennsylvania. And the way I would categorize it is, it's extremely competitive in the marketplace. And we think we're winning more than our fair share. In fact, we're mining most, if not all of the large contracts. And we've done so in the past with Commonwealth of Massachusetts, the state of Washington on the West Coast, South Carolina and now Pennsylvania. So we're taking it state by state. And yes, there is a really large opportunity that's out there. And we'll probably see some activity on that in calendar year next year, not our fiscal year, but the calendar year 2021, and we'll see how that develops. But we're extremely optimistic that we will be awarded a very significant contract there. And although it is competitive, we like to think it's our prior experience and technology that is winning the states, and we're demonstrating excellence in how we do our products, and we're winning. So technology and our experience and – it's competitive, but we're doing great.

Okay. Thanks for that insight. And on the UHP acquisition, I don't know if you can talk a little bit. I mean, what just seems to be the holdup in getting this thing to the finish line? What are the Russian authorities, I guess, focused on that the deal has not come to fruition yet?

Well, the best way I could describe it is typically the Russian government normally has four to five meetings a year, where they kind of make these decisions related to the acquisitions. And because of COVID, we only know that they've had one meeting since February. So these are sort of behind the door meetings that the Russian government has, but we certainly think COVID-19 has impacted the speed of which the Russian government has had to work through the process. We're not really aware of anything specific that the Russian government has that they would be opposing it. They haven't told us any specific reason or posing it. We think we're somewhat caught up in the impact of COVID and the lengthy delays of just general bureaucracy, not in the negative way, but that's just what we're dealing with. And both parties understand that. But we're not aware of any specific reason that the Russian government would oppose this transaction that I can tell you without any question.

Okay. Thank you. One last one for me, I'll jump back in queue. So, SG&A expenses seem to have been a little elevated here sequentially. And then also if I look quarter-over-quarter, our year-over-year as a percent of sales, anything going on in there? Is that the $27.5 million for the quarter, your run rate going forward? Or do you think those will be reined in some?

Hi, Joe, this is Mike. In terms of the comparative that you were doing to Q4 to Q1, just keep in mind that in the fourth quarter, we had issued our non-equity bonuses and share units. So, you get a little bit of a bump there.

Okay. And year-over-year as a percent of sales, they were up, I think, about 200 basis points?

Yes. The run rate for Q1, I would expect, in terms of our historical percentages, we had done some cost-saving measures back in Q3 of last year. And be mindful of the level of business, we'd expect to try to hold our historical relationship there.

Okay, thanks. I’ll get back in queue.

Our next question comes from Chris Quilty from Quilty Analytics. Your line is open.

Thanks. Guys, just wanted to follow-up, I think, in the guidance you provided. It's -- you expect the Earth Station business to be flat in 2021, is that correct? And can you talk about what trends you're seeing there, either by end market demand or trends in your specific product line where you're seeing either uptake or slowdown by product or technology?

Look, the international market, we're seeing, you could call it sluggishness, if you will. I mean, we've certainly seen an experienced order delays on what I would categorize as the small orders. In terms of the vertical markets that we've participated, I mean, the cruise line market for us is – get in the water to use that phrase. We're not -- we don't see any activity there. But on the other hand, and despite our categorization of flat, I could tell you that there are a number of large multimillion-dollar opportunities that we are working in the satellite ground station business that I don't want to use the word transformational, but they're multimillion-dollar contracts that we believe that we have a good shot at winning either the whole contract or a portion of those contracts. And we don't want to talk too much about that from a competitive perspective on which ones there are. But there are multiple contracts, multiple opportunities that exist in the marketplace. And so, we're seeing extensive activity there and a lot of interest in our products.

And are some of these LEO broadband related projects?

Yes.

And are there anything outside of that where you're seeing major customer upgrades due to technology refresh or other issues on the supply side in terms of satellite capacity with new very high throughput satellites coming online?

Yes. The short answer is, yes. Although the sales cycle -- we've always talked about it being long and it's probably longer now because of COVID. The Q1 quarter, which I think I mentioned at least $1 million order we called out, we're seeing good activity on our heights products still. So it's pretty broad-based. But on the smaller side, we are seeing a slowdown in smaller orders that we see. But on the other hand, the bigger customers are pretty active, and we'll see how the year plays out. But it's sluggishness and it’s got its fits and stops, if you will, starts and stops. And we haven't really seen consistency yet in order flow to see that it's going to jump up and start to increase in sales like it was about a year ago. It was probably a little bit more time needs to work its way through.

Great. And shifting to the Government outlook. Presumably, your forecast assumes that we get something beyond a short-term budget that gets put in place in the next couple of months, and we're not stuck in another sequester for some period of time or other budget morass? That's the question.

Yes. I mean, look, we've got pretty healthy backlog in our government segment to kind of hold us through what -- we obviously will see a change in administration. But I think the budget will be the budget, we'll get our fair share, and we'll see how it plays out. But we're not really nervous about it, but I think they just passed something yesterday or the day before in terms of some budget compromise or whatever. And I can't speak specifically because it just happened. I haven't had a chance to digest it, but we're not we're not concerned internally about what happens with the actions of the budget. We have, like I said, good backlog. We know the opportunities that we're working on for the rest of the year, and we feel pretty good about the programs that we're participating on.

Got you. And I think you did mention you've experienced some delays in fielding equipment. And I've heard sporadic reports from other companies around that same issue. Is it your sense that it's getting better or worse? Have you worked through the COVID type procedures in order to be more effective at deploying with government customers or is the biggest issue, government policy in terms of what they allow to happen in terms of deployments?

It's a little bit of both. I would characterize it as not getting better, but it's not getting worse. So I think it's something that we've been dealing with for the last few months. And I guess our hope is with the vaccines coming to marketplace, will continue to see a rebound in that stuff and the orders that were delayed or not placed will come through the channel.

Got you. And final question on the 911 business, congrats on the big win. I think you had implied that there may be more than one of those that you think are a possibility this year?

Well, we had two large opportunities that we talked about. And we definitively have one very large opportunity. But yes, you are right. There are other 911 opportunities we haven't really alluded or hinted to them, but they are out there. And I can't say whether or not the second opportunity would come in this fiscal year. But there are other opportunities, although the ones that we're talking about, and as things progress through the sales channel or opportunity, obviously, we're going to be mindful of the competition. And we're not going to talk too much about them. But when we say we feel pretty comfortable we're going to win, we feel pretty comfortable we're going to win. And that one other opportunity we feel pretty good about.

Great. And the funding environment, the CARES Act, I'm sure provided some money, but have you had a chance to see, I can't imagine. What's in the next package that's coming through and whether that would be supportive of some of these government spending programs because, obviously, a lot of the states and municipalities are way down on tax revenue?

Well, I think as it relates to the U.S. market, no impact to us. On the other hand, Chris, we have seen, in particular, the Canadian government recently launched some funding out there, specifically on the satellite to one of our favorite customers that's based in Canada. So we feel we're going to get some orders from there. And we think other international governments are going to start funding the infrastructure. And since they use satellite as a form of communication infrastructure, we think will benefit from them. But those things need to happen. But we've only seen one instance of a very specific impact to us that we haven't received the orders yet, but we're pretty optimistic based on the funding that we'll get.

Our next question comes from Asiya Merchant from Citigroup. Your line is open.

Thank you, gentlemen and congratulations on a good quarter. Just as you guys sound pretty optimistic, there is obviously the macro to consider, but maybe Mike referred to gross margins could be closer to 37%. And adjusted EBITDA margin paying here around 12% at the midpoint, which is lower than -- slightly lower, I should say, relative to where you guys were last year. Can you walk us through some of the puts and takes to that? And then I also have a follow-up question on cash flow. How should we think about cash flow for the year, knowing that the first quarter was obviously a large payment to Gilat?

Asiya, this is Mike. So in terms of your first question, in terms of the guide for the midpoint for the year, yes, we're trying to be mindful of what's in the news, and as Mike referred to some delays, and I was referring to some disruptions here and there. We just wanted to be mindful of that when thinking about the full year for EBITDA. But in terms of gross margins themselves, we have some very large lumpy government orders that we had known were timed for the fiscal 2021 period. So as those clear out, that will obviously affect the gross profit margins in the quarter. But we had thought for Q1, we were going to be around 35%. We ended up doing like 37%. So as we work through these deliveries, it's going to be in that range. In terms of cash flows from operations for the year, for the remainder of the year, we do expect to see significant positive cash flows. And in terms of free cash flow itself, as Mike mentioned, we had won the Commonwealth of Pennsylvania contract. And we also recently, as a reminder, one, the state of South Carolina contracts, and there, when you think about free cash flows, we'll probably see an uptick from our historical levels of CapEx to support the deployments of those very large programs.

We now have a question from Kyle McNealy from Jefferies. Your line is open.

I wanted to ask if you could tell us the revenue in the quarter for satellite ground station products and what the year-over-year growth was for that product vertical?

Yes, Kyle. We, generally -- as you know, we don't break out our product line for our segments, but we have made comments in the past that, that business line as a whole is probably about 50% or so, plus or minus. So that's the way I would tell you to think about it. But obviously, for competitive reasons, we just don't want to put a number on there.

Okay. Can you give us any kind of sense for the growth rate year-over-year? It's kind of a yardstick or a range of growth rate? Just trying to get a recovery for the last quarter?

Well, I think for the year, looking at the year and being mindful of the fact that we're not going to have the AT&T 911 routing services in our in our commercial segment, you can think about it being similar, relatively flat. It's in aggregate for both the public safety business and our commercial segment. But it's a plus or minus on each of the segments. A few million dollars could change that relationship. So if you want to talk big picture, that's the way I would tell you to think about it.

Okay. And going forward, do you kind of expect now that you're past the bulk of the COVID impact in the satellite ground station business? Do you expect it to be a slow grind recovery? Or is there potential for SNAP back? I know you previously said that the biggest impact is coming from the fact that you can't do face-to-face meetings and go to trade shows and things like that. Once you can do a little bit more of that or you get the benefit of doing virtual meetings, could there be a SNAP back? Or do you think it's going to take some time?

Well, we're thinking it's going to be a slow grind for the rest of the year. But these large opportunities that I mentioned earlier in the conference call, and there's more than one. They relate to the LEO market. In the MEO market, and in fact, the GEO market as well. So, there's we do -- I don't want to use the word game changer, but these are really large contracts. And it's possible that I we get awarded them this year. They're not really in our revenue guidance or our EBITDA thinking because we're being mindful of how long binary some of these program awards could be. But those are the ones that were really jettison our business on an upward trajectory, and it would not just be for one quarter, it would be a multiyear type of situation. But the regular business that we're seeing now, yes, it's sluggish. And that's the way we see it. Let's see how people get to vaccines. Let's see how people get on planes. Let's see where money is being spent. It's we don't subscribe to the belief that things are going to turn over night, but maybe we'll be wrong and things will come back faster. But we're thinking it's going to be sluggish.

And in the longer term, do you think the underlying growth rate in that market has changed at all versus pre COVID? Or once not reminding how long the recovery takes, but once we kind of get the escape velocity, do you think it's the same growth rate versus pre COVID? Or is there any kind of long-term lasting impact from COVID that kind of weighs on the growth rate for cellular station?

There's a possibility in our thing in that it could possibly have increased the long-term demand for the product. And we say that very sincerely because there's not -- what's been happening is, right, people have been using video across the world and using up their capacity in many states and countries have banned the upgrades right now, right? You can't go out to the field. They don't want anybody doing any upgrades on the system. So people are increased capacity. So if people are going to work from a home, or from their offices remotely and do less traveling, that's going to result in an increased need to communicate video over satellite, and it's going to result in an increased need to backhaul, video and mobile communications on the cellular network. So you can make a really strong compelling argument as I am, that it's going to actually result in an increase in demand in the long-term and a faster growth rate than maybe what we would have thought nine months ago. But we're not there yet at the peak to see it. But time will tell what will happen. But it certainly didn't result in a negative change in our view. And in fact, some of these large big programs that we're talking about, what the COVID crisis has shown is the bigger the Company you are, you're a survivor. And these LEOs and GEOs are being supported by very large companies in the marketplace, and we think those programs are going to happen.

Okay. Great. That's helpful. And one last one on the troposcatter contract with the marines. Do you have any more visibility into the level of services that you might provide within that contract? I know that previously you had said that it's not certain yet, and it may -- you may deliver 30% to 50% of the total contract value, but it's really dependent on how much the prime contractor either allocates to you or asks you to do? Is there any more visibility now that we're a couple of quarters passed when the contract was awarded?

Yes, there's really been no change in our thinking on that program. We need to kind of do the initial deliveries and get them out there. There is opportunities for us to get design changes within the program with the end customer and as well as the -- our prime, but nothing really to talk about yet.

At this time, there are no further questions. I will now turn back over to our presenters for closing remarks. Oh, actually, I do have one more question. Someone just queued up. We will take our next question.

This is Aditya on behalf of Michael Latimore. So my question to you is, do you face any supply chain difficulties due to the COVID situation?

We have seen some minor supply chain issues, nothing that we would categorize as material, but we certainly have seen them, and we know we deal with them. They've caused some order delays and obviously some incremental expenses, but nothing that I would describe as material.

All right, all right. And do you foresee a lot more hirings in the next few quarters?

Well, if we win some of these big contracts, yes. Sure. But hey, we're always looking for great people to work for Comtech engineers, software developers, production people, accountants, if you're a good person, you want to come to work for Comtech, give us a ring.

Now at this time, we do not have any further questions. I will now turn the program back over to our presenters for final closing remarks.

Okay. Yes, I guess that's the end of today's call. Thank you again for joining us today, and we look forward to speaking with you again in March. Thank you very much.

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