Ladies and gentlemen, thank you for standing by. Welcome to Comtech Telecommunications Corp. Fourth 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, Monday, October 4, 2021. 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 fourth quarter and full 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. 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 Chairman and 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 is an exciting day. As I hope you all saw, in addition to announcing our fourth quarter results, our full year results and our initial fiscal 2022 financial targets, we also announced a leadership change. Mike Porcelain, our President and COO, will become our Chief Executive Officer by the end of calendar year 2021. Mike will also continue as President of Comtech and join our Board of Directors. In making this change, the Board has asked that I take on a senior adviser role on technology matters and continue as a Director and a Non-Executive Chairman of the Board. As you know, I have worked with Mike for many years, and I have tremendous confidence in him. I want to congratulate him on his well deserved appointment. Mike brings to his new role a track record of professional dedication and achievement and a deep knowledge of Comtech. Our Board also recently has taken other important actions. In July, Judy Chambers was appointed to the Board, bringing fresh perspectives and enhancing diversity. Not only is Judy the second female member of our Board, Judy is also the first African American to join the Board. She is already making invaluable contributions to Comtech and we're confident that she will continue to do so for many years ahead. At the same time that Judy joined our Board, we also announced that our longest serving outside directors will be retiring as of the upcoming annual meeting. These directors have been wise stewards of our business, and I want to personally thank them for their tireless efforts on behalf of our shareholders. And in August 2021, we announced that our refreshed Board intends to submit a plan to…

Thank you, Fred. And good afternoon, everyone. We are incredibly proud of our performance during fiscal 2021 and ended the year slightly above our full year guidance. This was a tremendous feat as we continue to navigate the lingering effects of COVID-19 and related issues that have impacted our business since early in calendar year 2020. Net sales were $145.8 million in Q4. Of these sales, 72% were to US-based customers, with 28% to international customers. But for the year, net sales were $581.7 million. And of these sales 76.1% were to US-based customers, with 23.9% to international customers. Bookings for the fourth quarter were strong. We received $168.2 million in orders resulting in a book-to-bill ratio of 1.15 times for the quarter. For the year, we achieved bookings of $623.1 million, resulting in a book-to-bill ratio of 1.07 times for the year, higher than what we achieved in fiscal 2020 which was 0.95 times. The full year's performance was strong given the headwinds we faced from COVID-19, which impacted almost all of our global customers. Our gross profit percentage in Q4 of fiscal 2021 was 37.8%, and for the year, it was 36.8%. SG&A for Q4 for fiscal 2021 was $27.8 million or 19.1% of consolidated net sales. For the year, SG&A was $111 million - $111.8 million or 19.2% of consolidated net sales. Turning to R&D. We invested $11.8 million in the fourth quarter or 8.1% of net sales. For the year, we invested $49.1 million or 8.4% of consolidated net sales. Total amortization of stock based compensation during Q4 of fiscal 2021 was $6.8 million and for the year was $10 million. Total amortization of intangibles was $5.3 million in the fourth quarter of fiscal 2021 and for the year it was $21 million. Our GAAP operating…

Thanks. And good afternoon, everyone. First, let me start out by thanking Fred on behalf of myself, the management team, our employees, the board and our stockholders for his years of dedication, leadership and service to Comtech and to its customers. At the same time, I'm also honored that the Board has appointed me CEO. I look forward to continuing to work with them, the entire Comtech team to implement a range of important initiatives already underway and to carry our strong momentum forward. I do believe we are uniquely positioned to capitalize on the growing demand for satellite ground station infrastructure and next generation 911 systems. Although we continue to operate our business in an environment where reliable forecasting remains challenging, I am confident that we have the right long-term strategy. In this regard, as you can see from our fourth quarter and fiscal year results, that strategy is clearly paying off. Key bookings received in Q4 include multi-year contracts valued at $23.5 million and $23 million to deploy and operate next-generation 911 services for the states of Arizona and Iowa, respectively. We certainly have a market leadership position in the next generation 911 space. During fiscal 2021, we were awarded multi-year contracts totaling over $200 million. Also, Frost & Sullivan, a leading industry research firm, recognized Comtech for achieving the most significant year-over-year market share increase in this space. We also have a strong leadership position in our satellite earth station product line. Here, Northern Sky Research, a leading consulting firm, recognized Comtech as a leader in the growing satellite cellular backhaul market. Perhaps the best independent validation of our strength was the fourth quarter award of a multiyear contract from a large new customer to customize Comtech's next generation broadband satellite technology. This was a huge win,…

Thank you, Mike. As I mentioned before, I am very pleased with how our business is performing in spite of continuing COVID headwinds, particularly some great wins in the fourth quarter. Our 2021 results demonstrate our success in executing our plan, the strong market leadership positions we have and the resilience of our business. We navigated challenging market conditions, delivered strong financial performance with significant year-over-year bookings and backlog growth, giving us significant comfort with our outlook and visibility into the future. Despite continuing COVID headwinds, I continue to be excited of our prospects going into fiscal 2022 and beyond, including our strengthening positions on the large developing near term opportunities that Mike just mentioned. I believe our achievements and prospects confirm that we have the right strategy, the right team and the right focus to create long-term value for our shareholders for many years ahead. Reflecting this confidence in our business outlook, our Board of Directors once again declared a dividend of $0.10 per common share, payable on November 12, 2021, to shareholders of record at the close of business on October 13, 2021. Now I would like to proceed to the question-and-answer part of our call. Operator?

And we'll take our first question from Joe Gomes with NOBLE Capital Markets. Please go ahead.

Good afternoon, Fred and Mike, congratulations on today's announcements.

Thank you, Joe.

So you talked a lot about some of these supply chain constraints. And I was wondering, you might give us a little more detail there, as much as you can as to what exactly are you referring to here, where it's impacting the most on the company and how quickly you might be able to get past these here.

Sure. If you go back a few months ago when we announced our Q3 call, we disclosed in our 10-Q that we saw some sort of extended lead times. And as the quarter continued, things sort of got a little worse. I would say to you that we've seen lead times for parts that are normally 20 to 30 weeks being extended to 40, 50, and in some cases, 60 weeks. And we sort of saw that in the Q4. We probably have about 5 or 6 key vendors that have chips to everybody in the industry, so it's not something unique to us. The good thing is, is that we have pretty good relationships in the sense that we are one of the larger manufacturers of satellite equipment, especially on the West Coast. So we feel we have pretty good visibility as to when supply chain will be coming in, and it's really reflected in the guidance that we put out. So we do think, for us, it's going to ease up really towards the tail end of our Q1. And then as the quarters come in, we think we've got a good visibility to the parts coming in and our ability to ship in the latter part of the year.

Okay. Thank you for that insight. And you mentioned some significant CapEx expenditures for the year. I was wondering if you could kind of quantify for us what was CapEx in fiscal 2021 and how much higher do you think it should be in fiscal 2022?

Hi, Joe, I'll take that. In terms of the CapEx requirements and investments we plan to make next year, in our releases today, we did highlight that we expect it could get up to about $30 million. The timing of that is spread out over the course of 2022 and possibly even into 2023. But those investments are specific to a few things that we have going concurrently. We have the NG-911 programs that we won and we had booked over $200 million in contract value this year. So these investments are to support those great wins that Comtech had this year. And then also, we have the two new facilities that we're getting online this year to support our high-volume manufacturing for the next-generation satellite ground station equipment that we expect to sell. So the timing of that, it's a little tricky to pinpoint the exact dollar amount by quarter, but we do see that probably in Q2 and Q3 being at its peak and then tailing off in Q4.

Okay. Thanks for that. And one more for me and I'll get back in the queue. So obviously, the last quarter, you announced the big satellite earth station win. Going through the release, it looks like you're not including much of anything outside of the initial $13 million order in fiscal 2022 results. Was wondering if you could talk a little bit more about that, how that project is unfolding so far. And also, are there other opportunities there which the company is pursuing?

Yeah, Joe, it's a great question. So I would love to share as much detail as possible as I could about the contract because the excitement that we have internally is just tremendous. It's a large new customer, and certainly, thousands of satellites are expected to be launched and you could refer to public documents about that. And look, when we sit back, the best we could tell you is that this is hundreds and hundreds of millions of dollars of opportunities. And we're the only ones that we're aware of that has announced an award of such a size. I could tell you that work is well underway with this customer. We're working hand-in-hand with them. I can tell you that relationships with this customer are growing every day and are fantastic. We meet with them regularly, including we just had a SATCOM show where we had very good conversations about their needs and some of the things that we can provide to them. As you know, we are an expert not only on the satellite ground station side, but experts on manufacturing. And certainly, our decision to build out a new manufacturing center in Chandler should speak for itself. At the same time, we're also, I would say, best-in-class related to the US military and DoD when it comes to satellites. So I think if you just take all of the data points that we have to offer and what I could share with you, you can kind of connect your own dots. But I am very subject to a strong nondisclosure with this customer. And that's about the best I could say. But there's nothing but excitement, nothing but good things happening, and let me leave it at that.

All right. Sounds good. Thanks, Mike.

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

Thank you. Mike and Fred, congratulations on your new roles there. Sounds great.

Thank you.

So I guess, Mike, you talked about the pipeline in commercial being strong. Can you just elaborate on that a little more? Is it on next gen 911 like winning more states or would it be enhancing services that you're providing the current state wins? And then on the satellite earth station side, does that strong pipeline reflect this large customer specifically or are there others kind of in the mix there?

So, yeah. I guess one way to answer it is the latter part of what you just said, Mike. Our satellite earth station pipeline is strong. Our 911 pipeline is strong, and that excludes those opportunities with our large new customers. So the basic business of selling satellite modems, amplifiers, our networks is strong on the commercial side and on the defense side. So we do see a growing pipeline. We also have the benefit of the UHP acquisition, and we're offering the UHP satellite network technology to customers, training our sales force, educating them about our capabilities of how we're going to integrate our UHP technology, if you will, with our Heights platform. And so that process is well underway. On our 911 business, I could say, and again, I'm not going to point out to you the specific states that we're chasing, although as I always say, if you look hard enough, you'll find it. But there are several states out there that have big opportunities out there. And we do think that these big opportunities could translate into orders during fiscal 2022. And I would categorize our pipeline as pretty strong. Adding that on top is this large new opportunity with our large new customer.

Yes. Okay. Great. And then in terms of the Afghan withdrawal, you quantified that a little bit last quarter. I guess any more detail on how we should think about the revenue impact from that withdrawal in 2022 versus 2021?

Sure, Mike. I'll take that. In terms of the impact of that troop withdrawal that's now complete and other program changes that we saw as we were going into Q4, we're expecting that to continue into the third quarter of fiscal 2022. And when we're looking at what we see out there for right now, it's going to roughly be what we did similar to Q4, probably a little bit below that level for at least the next quarter or two before it starts to pick up as we start moving into higher margin programs later in the year.

Mike, if I can also just give you another data point just to look at with public numbers. If you look at what our government segment did last year in Q1 and Q2 and just sort of averaged it out you can see, on the average for Q1 and Q2 of last year, we did about $64 million, $65 million of revenue. And if you look, if you look at Q3, Q4, it came quite sudden the impact, but you could see we did less than $50 million or $48 million in Q3, $46 million in Q3. And as we said in our prepared remarks, we do think we're going to bounce around the $40 million level for Q1, Q2, Q3. That difference on the quarterly run rate is about the difference we're seeing due to the withdrawal and the other changes in the government programs. And the one thing, again, timing is always difficult for us to predict, but we're assuming we're going to be able to get these COMET orders in the second half and ship them in Q4. They could come in earlier where maybe Q3 is a lot better than what we're thinking, but we'd like to think we're taking a cautious view at the moment in terms of timing, but we use the word lumpy because the programs are difficult to predict.

Right, right. Okay. Got it. And then just last on international. How is the sort of pipeline activity internationally? Are some of these, I don't know, COMET troposcatter opportunities there as well? Just a little more color on international would be great.

Yeah. On the tropo side and the COMET, there are international opportunities as well as regular troposcatter opportunities. Despite COVID restrictions, we were able to, as I call, sneak in a couple of travel visits overseas. And I don't mean sneak in where we did something improper. But we were able to get them in before the restrictions came back into place. So we were able to get some demos overseas done and we've been told in some cases, we're sole source and those opportunities are moving. So yes, on the tropo side, it's both. On the international side, we're definitely getting impacted on the satellite ground station part of the business. The SATCOM show that took place in September had virtually no one from Europe there. So that was a little disappointment that we do think will impact our 2022 thought process, but that's reflected in the guidance we're giving.

All right. Okay. Great. Thanks a lot. Good luck.

Thank you.

We'll move next to Caleb Henry with Quilty Analytics. Please go ahead.

Hi. Two questions from me. First, I don't know if it's too early or not, but we're kind of seeing some momentum with the Space Development Agency on their own military LEO constellation. They've talked about that one going up to, I think, 1000 max. So separate from your commercial project. But I was just curious if you see any opportunity with the SDA or if the U.S. military's interest in LEO constellations is having any impact on the ground equipment that you're providing or even doing R&D on?

I don't want to tell you what we're doing from a competitive perspective. I'll refer to my remarks about our strength in the defense side, and I think we could be the thought leader in the LEO space, but let me just keep it at that.

Okay. And then my other question was just on cybersecurity of the $125 million IDIQ. Can you talk about some of the demand drivers for cyber training? And I guess, where you're seeing that come from? If it's just within, if it's just for military applications or if you're also seeing this from like state and local government or even satellite operators?

Yeah. It's really two pieces. The $125 million contract is somewhat of a renewal, but increased funding versus what we've had in prior years. So we're expecting to get funding throughout the year off that $125 million. And again, continue the work that we've done with truly the Department of Homeland Security and special operations over the course of the year. That's where that contract really focuses in on. And the contract award that we actually got did exceed our original thinking by multiples of millions and that is the evidence to us of the demand for cyber courses related to the government. At the same time, we've taken our competencies that we've learned on that contract and have applied it to the public safety market. It's an initiative that we've been working over the last 12 months,. And we were successful in getting the State of Arizona to include the cyber training offering to PSAPs in the State of Arizona. It was our first contract win, and we're in the process of talking to other states, including those states that we do business with. And we're optimistic that we could really build a new product line in the public safety market given our expertise as it relates to cyber training. I mean, clearly, as I mentioned, the 911 service is a vital part of the government's emergency response and disaster preparedness system. It's going to be hacked. It will be hacked time and time again. And to make sure that it's not hacked or that employees are trained on how to handle it, we think we could help our 911 customers deal with it both on a reactive basis and a proactive basis as well.

Thank you.

And we'll take our next question from Kyle McNealy with Jefferies. Please go ahead.

Hi, great. Congrats from us as well on the management announcement, best of luck in the new roles all around. I guess I wanted to ask a little bit about TDMA and SCPC and wanted to see if you'd give us a sense for how your satellite ground station revenue mix of TDMA type use cases is tracking versus your internal plan for Heights and UHP. And I guess I consider that to be Heights, which could be targeted at previously TDMA use cases and UHP. Is there a way for you to quantify how much is Heights in UHP as a percentage of total ground station right now and where that might go in the future maybe in 2022?

Yeah. It's actually a good question, Kyle. I would say our early read we've only owned the UHP business since March of 2021. And I think our early read is that there's a lot of demand for TDMA solutions, and maybe there's a bigger market on the TDMA side versus maybe our Heights product line. I think we're adjusting that as we speak to customers in terms of you know, would they prefer a TDMA solution versus a Heights. So I would say to you that there's been a tilt in our thinking more towards TDMA than our Heights just in terms of that. Is that a 5% swing, 10% swing in the thought process, too early for me to say, but that's an early observation that I think we have. And we'll see how that plays out.

Is there an approximate like overall mix of the UHP plus Heights that you have in your revenue stream right now like as of Q4?

Yeah. I would prefer not to disclose that, again, for competitive reasons. It's a very small portion of our business. I mean, we talked about UHP itself being a small product line addition. And I just think, at this point, I just want to stick to the qualitative comments rather than the quantitative piece.

Okay. Yeah, fair enough. That's fine. And then what's your assumption for the COVID and supply chain issues that you mentioned continuing to weigh on 2022? Do you have a specific time frame when that will normalize as contemplated in your guidance, like when does it get better? I mean, you talked about the second half being much bigger than the first half, so perhaps it's around the middle of the year? But what should we think about kind of being past the worst of it or when you start seeing it normalize within the 2022 fiscal year?

I think it will be at the start of our Q3. I think, look, we're seeing - we definitely have visibility, we think, to our supply chain constraints that we're seeing. Again, we're kind of working with our vendors. And Mike's thinking revenue for Q1 is going to be about $115 million in terms of revenue. And we talked about nominal improvement. In Q2, you could probably take that number up by 10% in Q2 just to sort of give you a sense of the way we're thinking about it. But it's going to be a Q3, Q4 event where we do think things will start to get back to normal, if you will. And certainly, by Q4, we should be humming again.

Okay…

Maybe it comes earlier, Kyle, but we're using the words, we're taking a cautious view and maybe a realistic view at the same time.

Okay, great. Thank you.

We'll move next to Asiya Merchant with Citibank. Please go ahead.

Hi, congratulations again, Mike and Fred. Just most of my questions have been answered here. But in terms of EBITDA as it relates to clearly the supply chain disruptions and the COVID anticipated effects that you're seeing. Can you kind of talk a little bit about what would EBITDA have been without these in each of, probably in your commercial segment the most because, obviously, your government is also seeing loss of revenues from the Afghan program. But just at least if you could guide us on what was your commercial EBITDA expected to be without the supply chain disruptions that you guys are thinking about now?

So Asiya, this is Mike. I'll take that. In terms of the first quarter, we have definitely a few things going on with respect to COVID and the supply chain. We are seeing the impact of that. We also, in terms of our EBITDA guidance, we're also considering that we're migrating our production to a new facility, and that's ongoing during the first half for sure. In terms of what it could have been had these supply chain issues not sort of surfaced in recent months, I would say we'd be back to our historical EBITDA margins minus those events. But just with where we are two months into the quarter already, it's basically what we see today looking out for the next month.

Okay. And then in terms of cash flow, Mike, I know you talked about a heavier CapEx cycle in fiscal '22. How should I think about cash flow generation as a percentage of revenues for fiscal '22?

Yeah. I think it's early in the year to give a number, a precise number. But we're thinking as we normally do have strong cash flows for the full year from operations. So we do see things rebounding and leveraging our balance sheet, collecting our receivables in the first couple of quarters of the year. So I think when we boil it all together, we do expect to see traditional cash flows from operations that we normally would throw off to support our cash investments and CapEx and other endeavors.

Okay. So you wouldn't be taking on any additional debt here?

Throughout the quarters, there is a likelihood that we could borrow on our facility. We have room on our facility to support the cash investments that we're incurring to build out the facilities as well as the NG-911 projects. But I think it's going to be more in the Q2, Q3 time frame where we'll see maybe higher levels of debt, and then we'll throttle down back to existing levels that we see today towards the end of FY '22.

Okay, thank you.

It does appear there are no further questions at this time.

Okay. That concludes today's call. Thank you again for joining us today. And we look forward to speaking with you again in December. Thank you very much.

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