Welcome to Comtech's Fiscal Third Quarter 2024 Earnings Conference Call. As a reminder, this conference is being recorded today, Tuesday, June 18, 2024. I would now like to turn the conference over to Mrs. Maria Ceriello of Comtech. Please go ahead, Maria.

Thank you, operator, and thanks to our investors for taking the time to dial in today. Welcome to Comtech Telecommunications Corp.'s conference call for the third quarter of fiscal year 2024. Today, I'm here with Comtech's Chief Executive Officer, John Ratigan. We're also joined today by Mike Bondi, Comtech's CFO. Before we get started today, please note we have a detailed discussion of the quarter in our shareholder letter available on our website. 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 always 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 SEC filings. Now I'm pleased to introduce Comtech's CEO, John Ratigan. John?

Thank you, Maria. And as you know, I'm relatively new to the role of CEO of Comtech, but I'm feeling that I'm already making a positive difference. Last quarter, during our earnings call, I said that it was clear to me that the foremost concern of all of our stakeholders, and certainly, our shareholders, was refinancing our balance sheet. I also said that executing a refinancing would be my highest priority. As I'm certain you all saw, we announced the completion of a $222 million refinancing that replaces our bank facility with a new credit facility consisting of a $60 million asset-based lending facility and $162 million term loan that matures in 2028. The completion of the refinancing is important for Comtech in many ways. First, our balance sheet is stronger and can support the improved performance and growth of our business as we look ahead. We can now conduct our business without the distraction associated with the looming debt maturity, which all of our stakeholders will benefit from. Our customers, our vendors and our people are all excited to move forward unencumbered by reservations about liquidity. It also means that my top operational priority is now the acceleration of our cash conversion cycle and managing our unbilled receivables downward by executing against some of our large multiyear contracts. This quarter, we made progress in delivering against our next-generation troposcatter awards with the U.S. Marine Corps and the U.S. Army. With the refinancing completed, the Comtech team is now totally and wholly focused on accelerating execution against these contracts to deliver value to both our shareholders and our customers. This leads me to my second key point. Comtech hasn't been waiting to move forward. We have been winning business this entire time, demonstrating the strength of our technologies and mission-critical…

Thanks, John. Before discussing our recent results for Q3, let me first cover the status of our refinancing efforts. Last night, we were very pleased to announce that we entered into a new $222 million credit facility with a new syndicate of lenders, which replaces our prior credit facility and which is expected to be funded today, June 18. With July 31, 2028 as its maturity date, we have significantly pushed out our repayment obligations by about four years. And by adding an asset-based revolver component to the facility, have immediately enhanced our liquidity. As a result of entering this new credit facility, we are able to once again reclass a major portion of our outstanding debt back to its long-term status. The new credit facility itself consists of a committed $162 million term loan facility and a $60 million revolver loan facility, backed by our eligible receivables and inventory. Outstanding borrowings at close approximate $187 million, reflecting $25 million drawn on the revolver. At close, our available sources of liquidity approximate $63 million, consisting of qualified cash and cash equivalents and excess availability under the revolver, both as defined under the credit agreement of approximately $28 million and $35 million, respectively. Interest on the term loan facility currently approximates SOFR plus 9.5%, whereas interest on the asset-based revolver currently approximates SOFR plus 5%. Blended, the rate currently approximates 14%. Interest on the term loan is dependent on a pricing grid based on our net leverage ratio, and interest on the revolver is dependent on a pricing grid based on our average revolver usage, both as defined in the agreement. Our first covenant testing period is July 31, 2024. At such date, our maximum net leverage ratio is set at 3.25 times trailing 12 months EBITDA. As for the minimum…

Thanks, Mike, and thanks again to those of you who dialed in today. To recap, our balance sheet is strong. We have made excellent additions to our leadership team. Our people, technology and equipment are best-in-class, evidenced by our continuing success in winning new business. As I said, my top near-term priority is ensuring that we manage our unbilled receivables downward, improving our cash conversion cycle. There's a lot ahead of us to look forward to, and we're exiting the quarter with significant positive momentum. Some of what's to come is challenging, but I remain confident, and we'll get to where we need to be. I'm excited to lead Comtech forward at this moment in time, and I expect it won't be long before the markets come to appreciate and properly value our business. In closing, I would like to thank our dedicated employees, customers and suppliers for their continued commitment to Comtech. Thank you very much.

[Operator Instructions] We'll take our first question from Joe Gomes with Noble Capital. Please go ahead.

Good morning, John and Mike, congrats on the refi. A couple of quick questions on the refi, just during the call scanning the 8-K. And I was wondering, you said with a new group. Did White Hat, Magnetar, did they contribute any additional funds over and above what they had done previously? Also saw there's about 1.4 million warrants that were attached to the deal. I was wondering who those warrants went to. And you gave us kind of a blended 14% rate, if you could just remind us how that compares to what it was under the old facility.

Sure. Lots to unpack there. But if I missed one or two, please remind me. So in terms of the -- let's cover the warrants first. The warrants did not go to Magnetar or White Hat. That was going to the lenders as part of the deal. Magnetar and White Hat did not put any new cash into their investment. They were very supportive during the process and helped us along the way. And in terms of the economics to the rate compared to what we have today, we're sitting at about 10% currently under the old agreement. So there was a step-up, but it's reflective of the deal that we're striking here.

Okay. Thanks for that clarification. And two, one of the things that you'd mentioned was the challenges with the supply chain and getting products done, and that has pushed some of the, we'll call it, some of the revenues to the right. And I'm just trying to get an idea of how long do you think this is -- resolving the supply chain and getting the finished products, how long is that process going to take to get back to, let's call it, a normalized rate?

Yes. So as you might imagine, going through the period we went through where our liquidity was low, we weren't able to get everything to the suppliers that we needed. They weren't able to supply equipment and certainly pushed things to the right. We are hopeful that, within a three-month time frame, we can reset the supply chain and return to a kind of a rate of normal production of all of our facilities. Does that answer the question?

Yes. Thank you for that. One of the big contracts, the global field services, I know it's been under protest and I think there have been some issuances that maybe they had -- the protests have been denied. But maybe you can just give us some update on where that contract stands today.

Yes. So as of last Thursday, we got a note from Army Contract Command that the stop work order had been lifted. And so we are anticipating taking over that contract.

Okay. And when do you think you might start seeing revenues out of that then?

Our view at this point, Joe, is with the stop work order lifted, we would get going pretty quickly. We do have a ramping up, but the Army has already expressed the desire to get going. So we will get ramped up. It's probably going to start contributing meaningfully in 2025.

I think that timing is about right. By the time we transition all the employees, I would expect August 1.

Okay. And then one last one for me and I'll jump back in queue. So John, a lot of great news here with the refi finally done and continue to move forward on adding new people, some major contract wins like Massachusetts. Any time frame as to when they're going to remove the temporary tag?

Well, unfortunately, I would give you one answer, but it's the Board of Directors who, of course, have the fiduciary responsibility to do a search, and that is ongoing. You'd have to talk to our Chairman, Mark Quinlan, about that. But as I told the Board, I'm going to make it very difficult for them to take me out of this job. And if they can find somebody better, then more power to them. But I'm loving performing under the job and with the team that we've got in place and others to be added, I couldn't think of a better place to be.

Great. Well, congrats again on the -- getting the refi done. Look forward to getting back to business as normal. And I will allow someone else to ask some questions. Thank you.

And we will move next with Mike Crawford with B. Riley Securities. Please go ahead.

Thank you. With the win in Massachusetts, does that whole $140 million go into bookings already in this July fourth quarter?

That would be a fourth quarter booking, yes. We would not put the option year in at this point. The option year would not be in backlog.

And then regarding the unbilled receivables and how those will be declining in the next year, can we just walk through some of the mechanisms regarding that? Maybe starting with troposcatters, for example, time line from order to delivery to acceptance on the tropo product? And maybe what relative contribution that kind of section of unbilled receivables is on the balance sheet? And maybe kind of a similar walk-through on the other major items there.

Sure. Hey Mike. This quarter, looking at our footnote, you probably will notice that, while the total headline number stayed about the same, we did have a shift in our unbilled receivables with the U.S. Government towards billed receivables. So I take that as a sign that we are starting to get the components in, starting to make the deliveries that we need to in order to clear the unbilled. So we always felt around this time of the year we would start to see this liquidation. I think now with the refi behind us and supporting our balance sheet, we can lean in on the supply chain to get components in faster and out the door sooner. I think that's probably the number one thing to do, is just get the supply chain, get the manufacturing and getting those deliveries out as planned on both the Army tropo order as well as the Marine tropo order. So I think we're in the thick of it right now, and we do expect to see a nice liquidation in those two particular contracts over the next couple of months.

Yes. I would also add that we started deliveries -- significant deliveries, I should say, at the end of May. We'll be delivering throughout the month of June, July and August. And I believe the last delivery is -- we're trying to move it into August, but the last deliveries, I think, are the beginning of September.

Okay. That's great for the tropo. And what about sort of things like software delivered to telecom customers where you've been waiting for acceptance after it's been delivered?

Yes. I think we're doing what we need to do for our deliveries. Some of these milestones were out in fiscal '25, so we haven't yet approached those milestones. I think you're probably going to see probably a more dramatic drop in the Satellite and Space unbilleds. The T&W unbilleds, I think, will be a little bit of a longer tail. But I think we're moving along doing what we need to working with our customers, and we expect to recover that as planned.

Yes. Some of those contracts in that space which are indicative of that market have long times between milestones. And so as we catch up to those, and I believe in fiscal year '25, we'll start to roll those off. And in the future, we will try to make sure that we put in place contracts with a little bit better milestones.

Yes, that would be good. And then just to be clear, this $11.9 million adjusted EBITDA number for 3Q with a similar expectation for 4Q, are those the numbers that will be used for the leverage covenant in your new bank facility?

Yes. In terms of the specifics how we derive that, this is our view at the moment based on getting the refinancing done. And certainly, we have some risks and opportunities that we track, and we felt at this juncture it's so close to year-end. This was probably the appropriate guidance. Certainly, we'll do our best now having secured the refinancing to expedite and move things to the left. But we just want to be cautious. We're only into it one day. And we want to start executing now servicing the supply chain. In terms of how we develop the covenants themselves, we modeled in sensitivities and we feel comfortable that how we set up the covenants going out of the gate, we'll be -- we expect to be in compliance, is the best way to say it.

Great. Well, thank you very much.

[Operator Instructions] We will move next with Greg Burns with Sidoti. Please go ahead.

Good morning. Just a follow-up on that last comment. When you look at staying in compliance with those covenants, obviously, this run rate would imply like either a step down in the level of debt or EBITDA growing from these levels, what is your view on that? And how you're going to, I guess, stay in compliance? Are you expecting to liquidate those receivables and reduce the level of lending? Do you have a view on EBITDA maybe stepping up with the -- some of these contracts kicking in, in 2025? How should we think about that?

I think you nailed it on the last point, certainly, the unbilled receivables and liquidating the unbilled is a key driver to this. We are expecting those, as I said earlier, to unwind over the summer and generate cash flows for us. And certainly, we have grown our backlog and we're on pace to have record backlog if we keep this up. So I think things are trending in the right direction. And now that we have the refinancing secured, we feel comfortable about making those investments to move forward on bringing whatever we can to the left and maximizing our EBITDA. But I think the #1 item is definitely the unbilled that's going to drive our compliance.

Okay. And when you look at the disruptions in your business that you saw last quarter and this quarter, and I guess probably into the next quarter a little bit, how much of that is just timing with the supply chain and getting the products out the door versus maybe lost business?

I would say it's -- the majority is components, getting key components in to manufacture things. It only takes one part to hold you up. And certainly, as we were in the throes of getting the refinancing done, we were expecting to have this done back in March. So we were living under this agreement for another three months that was coming that we had a reserve for in that old agreement, which changes your behaviors. So now the things have opened up a little bit with our liquidity under this new asset-based loan, and the way we structured this, we'll have more liquidity at our disposal and, again, service the supply chain. They've been very good partners over the last several months working with us. I think it's time to return the favor now and get things back prioritized in the factories and keeping Maria's team busy.

Yes. I would also add that I'm not sure that we were losing orders, but that there were orders that were being delayed with some of the customer base worried a bit about our financial stability. And this completing and the resolution of the refinancing will solve all of those problems in terms of our perception in the market, as well as giving us a boost into business for the next year.

Okay. When you think about alternative solutions, if a customer is delaying and kind of waiting to see where you're at, how easy would it be for them to replace your solutions? Or -- I'm just trying to get a sense of maybe if they found -- were able to find another supplier, or if they...

Yes. On the troposcatter side, there really aren't a lot of competitors in that market. And certainly, we're the world leader in the technology that's in that space. So sometimes it will come down to what's their trade-off, whether or not they want to go to a piece of equipment that is less capable than what we produce. On the satellite side -- on the digital side and the RF side, there are competitors there, but we're still seeing a very healthy backlog. I wouldn't say that there was a diverse set of competitors there, but certainly, there are, and they could go to other places. But we haven't seen that yet. I think what we've seen is a delay in some of the things that customers are doing, as well as our ability to produce and get equipment out the door. We're going to be excited to do that in a much better way than we have over the last three or four months.

Great. And with the 911 renewals, what was the pricing like on those? Was there a step down in pricing? Or how did those renegotiations go?

Yes. I don't think we'll get specific as to how we price the opportunity, but I would say we have good relationships with our customers. These were competitive awards that we won. So there were folks out there that we were competing with, and we outbid them, I guess, if you will. But yes, the pricing and the jobs themselves, this is a lot of work that we've been doing for years and the continuation of that work. And we were not seeing like massive discounts to win the opportunities. I think the customers are at the point in their life cycles where they're also looking to do upgrades of the technologies, particularly in the 911 space. And so that gives us opportunities to have margin expansion while we secure the base and then bring in other opportunities on top of that.

Okay, great. Thank you.

We do have a follow-up from Mike Crawford with B. Riley Securities. Please go ahead.

Thank you. Just on growth -- other growth drivers. So the global field services representative contract, is that still anticipated to grow to be as much as $100 million a year kind of revenue contribution for the company for several years?

Yes. That was a four-plus -- 4.5-year contract. It's staffing over 200-something positions globally. And once you have them in place, it's pretty stable, steady work.

Okay. Thank you. And then the other one that we've been maybe more excited about is this EDIM modem that you're developing that really is the next generation of this EBIM modem that FISAT, I think, has generated about $1 billion of revenue on over the last decade. And I believe you're building the first articles there. Or what's the time line on EDIM?

Yes. So the first articles and prototypes are due in September. We aren't expecting significant revenue to that till probably the end of what would be our -- towards the end of our 2025 fiscal year. But yes, that will be the first digital modem in the market. We're pretty excited about that. That kind of aligns with where our strategy is going forward, which is the digitalization of the satellite industry. So we're getting a bit of a jump start on it with the Army on that modem. By the way, we have other modems that we do expect -- that we've been involved in. There's been three major programs that have come out of the military, and Comtech has been involved in all 3 of them. That's the WANs [ph], the A3M, which is the Army-Air Force anti-jam modem, as well as the EDIM, and we expect the A3M to move into a production phase very shortly. And that should provide significant revenue for us in the fiscal year 2025.

Okay, great. Thank you.

And we show no further questions at this time. I will turn the call back to our presenters for any closing or additional remarks.

Thanks, everybody, for calling in and being with us today. Mike and I and his entire team of financial professionals that are very proud of the work we did to complete the refinancing, and we're happy to move forward. We're excited about the future. We think there are lots of good things ahead for Comtech. We expect to continue to bring on additional leaders in the industry and expect great things out of both our Public Safety and Satellite and Space businesses. Thank you.

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