Ladies and gentlemen, thank you for standing by. Welcome to Comtech Telecommunications Corp. Second Quarter Fiscal 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, Friday, March 9, 2012. I would now like to turn the conference over to Ms. Maria Salerno of Comtech Telecommunications. Please go ahead, ma'am.

Thank you, and good morning. Welcome to the Comtech Telecommunications Corp. conference call for the second quarter of fiscal year 2012. With us on the call this morning are Fred Kornberg, President and Chief Executive Officer of Comtech; and Michael Porcelain, Senior Vice President and 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; the plans, objectives and business outlook of the company's management; and the company's assumptions regarding such performance, business outlook and plans are forward looking in nature and involve certain 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 President and Chief Executive Officer of Comtech, Fred Kornberg. Fred?

Thanks, Maria. Good morning, everyone, and thank you for joining us on this call. During the second quarter, we continued to successfully execute our business strategies. Financial results we reported yesterday clearly demonstrate that despite challenging global economic conditions, our business remains strong and our long-term plans grow on and remain on track. Based on our current backlog and expected new orders, we believe the second half of fiscal 2012 is firming up nicely. As indicated in our announcement yesterday, we are raising the low end of our fiscal 2012 revenue guidance to $420 million, up from $400 million, increasing our adjusted EBITDA guidance by $2 million to a range of $72 million to $77 million, and increasing our diluted EPS guidance to a range of $1.34 to $1.44. During the second quarter, we also repurchased 2.3 million shares of our common stock for an aggregate cost of approximately $75 million. And so far, during the third quarter, we have repurchased an additional 308,000 shares for an aggregate cost of approximately $10 million. In total, since the establishment of our original stock buyback program in September 2010 and through March 7 of this week, we have repurchased a total of 9.7 million shares for approximately $287 million. Pursuant to our existing stock repurchase authorization of $250 million, we still have approximately $63 million left to go. And we continue to believe that our stock remains at compelling value and anticipate being buyers of our stock during the second half of fiscal 2012. Yesterday afternoon, we have given our business outlook and our expectations of generating solid operating cash flows in fiscal 2012 and beyond. Our Board of Directors also approved our third quarter dividend of $0.275, which is expected to be paid on May 22, 2012, to stockholders of record on April 20, 2012. To date, we have paid out almost $40 million of dividends over the past 6 consecutive quarters and believe our dividend program is an excellent way to return capital to our stockholders. At this point, let me turn it over to Mike to provide an overview of our second quarter. After which, I will share an overview of our business outlook. Mike?

Thanks, Fred, and good morning, everyone. As Fred mentioned, I'll walk you through Q2. And as I do, I will provide some additional commentary on our expectations for the second half of fiscal 2012. Our Q2 revenues were $99.1 million. Of the $99.1 million of sales, 46.5% were for U.S. government end users, 41.4% were for international end users and the remaining 12.1% were for domestic commercial end users. Let me provide some color on sales by segment. Net sales in our telecom transmission segment were $51.3 million in Q2 of fiscal 2012 as compared to $62.3 million in Q2 of last year, representing a decrease of $11 million or 17.7%. As expected, net sales in the segment reflect significantly lower sales of both our Satellite Earth Station equipment and over-the-horizon microwave system product lines. We do expect sales of our Satellite Earth Station products to slightly increase in the second half as compared to the first half. But as Fred will discuss in a bit, sales of our Satellite Earth Station products continue to be impacted by lower sales to the U.S. Government as a result of ongoing budget pressures. Net sales in our RF microwave amplifier segment were $22.4 million as compared to $23.9 million in Q2 of fiscal 2011. This decline of $1.5 million or 6.3% is primarily due to lower sales to both our U.S. and international government customers. Turning to our mobile data communication segment. As expected, sales in Q2 of fiscal 2012 substantially declined and were $25.4 million as compared to $76.6 million in Q2 of last year. This decline was primarily attributable to substantially lower sales for the U.S. Army, as well as lower sales related to the design and manufacture of microsatellites. Our gross profit in Q2 of fiscal 2012 as a…

Thanks, Mike. At this point, I would like to provide a brief update on each of our core product lines, update you on where things stand on the MTS and BFT programs and then say a few words about our fiscal 2012 guidance. I'll start with the -- with our telecommunications transmission segment, which is the backbone of our current business and where we remain the undisputed leader in both Satellite Earth Station products and over-the-horizon microwave troposcatter systems. As we anticipated during our last investor call, our Satellite Earth Station product bookings were lower in the second quarter than they were in the first quarter. As you know our Satellite Earth Station business is a book-and-ship business. And as such, bookings in the second quarter were in the short term, primarily, impacted by lower U.S. government activity. The general paralysis in the government's decisions and procurement processes have presented stiff headwinds on the government side of this product line. On the other hand, our commercial and international Satellite Earth Station product bookings remained strong. In fact, bookings both in the second quarter and year-to-date have increased in every single international market that we serve. In aggregate, our international bookings are up double digits, and we believe this trend will continue. And we continue to believe that the growing need for cellular backhaul and the growing demand for satellite capacity will provide important growth opportunities for us in the years to come for this product line. The strength in our international bookings, combined with a bit more clarity on the government side now that the fiscal 2013 U.S. budget has been published, makes us more confident that bookings in the second half of fiscal 2012 will be higher than the first half. At the same time that we are navigating…

[Operator Instructions] And we'll take our first question from Rich Valera with Needham & Company.

Last quarter, you said you didn't expect to achieve growth in your core business. At least you said it would be tough to achieve growth, I guess. Given, it sounds like, some puts and takes in the core business, can you update that? Do you think you can achieve growth in that core business this year?

Yes, I think the answer is it's still going to be tough for us to do for the year. I would say we're really not expecting it to occur in the way we're thinking about the year. It still could happen based on how the bookings come out. But I think what we've seen in the first half is really going to continue into the second half of the year.

Okay, that's helpful. And then with respect to the -- you gave a little more color on the payment you're expecting, you're hoping to receive for IP. So it sounds like you would be looking for an annual sort of fixed IP payment from the government and then you'd -- that would be sort of ongoing and sort of perpetuity. Is that a fair way to look at that?

I think what we've told the government and, obviously, we're still in the process of negotiating this feature but we intend to charge an IP license on an annual basis for the sustainment contracts that the Army will place with us.

I mean, can you -- obviously, you've had a lot of negotiations there, but does that seem like something that they were agreeable to at this point?

I think our position is pretty clear. I think we need to be paid to go forward, and I think the Army understands that.

I mean, Rich, we've proposed numerous structures to the government. They've known about this for several months, and we are in negotiations with them on initial contract, as well as they've told us that they intend to do a multi-year contract, as Fred mentioned, 3 to 5 years. So we think all the facts are on the table, and certainly our guidance assumes that the way the structure is ultimately going to be is on some type of annual recurring basis.

Okay, that's helpful. And can you give us how much MTS, BFT revenue is baked in to your annual guidance?

Well, we've mentioned on the last conference call we do think our mobile data com business in the second half is going to continue to wind down as compared to the first half. But at this point, our contract still expires on March 31, 2012, for the satellite stuff. It's very, very difficult for me to say, but I think directionally in the second half, it'll be a little bit down from what we did in the first half. But it's just tough to put an exact number on it right now.

But it sounds like you expect more revenue today than you did 3 months ago for MTS, BFT. Is that correct?

That's definitely fair. In January, we got a bunch of orders including roughly $12 million of new mobile satellite transceivers. And as we talked about in our 10-Q that we filed yesterday afternoon, some of that $12 million, we actually expect to actually ship in fiscal 2013. But yes, the bottom line is as compared to the last time we were sitting here, we do think our MTS and BFT business will generate more revenue in 2012 than we did the last time.

Great. I know it's tough to look this far ahead, but can you give us any sense of where MTS and BFT could be next year? It sounds like you've had, too, may be some unusually strong stuff this year. I know you had I think an adjustment that was probably not recurring. But can you give us any sense of year-over-year how we might be able to think about this business in fiscal 2013?

I think it's really too much of a fluid situation as you can anticipate. We've really got 3 weeks to finish our negotiations. And as I mentioned, things have really been going back and forth and changing to a large degree. I think we could get one contract as I kind of alluded to. We could actually get 2 contracts. The surprise recently for us was that certainly the contract or the contracts will have now an additional bandwidth requirements, which we didn't expect 3 months ago. So things are just changing too much for us to really be -- to able to predict.

We'll take our next question from Tim Quillin from Stephens Inc.

Could you just go through the backlog by segment?

Sure. Our backlog for the quarter ended at $126.3 million, of which, $55.4 million came from our RF amplifier segment, $36.5 million is in our telecom transmission segment and $34.4 million is in our mobile data communication segment.

And would you be able to tell us what the split on the Satellite Earth Station equipment business, what the split is between government and commercial right now?

We don't really put out those percentages. I mean, most of our backlog, I could tell you, in our telecom segment is mostly with the Satellite Earth Station side of the camp. But I think, directionally, the way to think about it, as Fred mentioned, in our international markets, we're seeing double-digit growth in almost every single one of our international markets. So what we're seeing increased international sales and you could assume the same going down on the U.S. government side. But we don't want to put a number on that.

Right. I mean, is it fair to say that the significant -- the majority of revenue is in commercial markets though?

Yes.

Yes.

And I wasn't -- so you are pretty clear in terms of 3Q versus 2Q, that 3Q margins would be lower. Do you expect 3Q revenue to be lower as well or continue...

Tough to say. I think we are looking at Q4 revenue to be higher. I mean, I think we should be able to do over $90 million of revenue in the quarter for Q3, but that's directionally is the way to think about it, $90 million plus. And where that comes in, we'll see.

And so explain the different factors maybe that would drive this stronger fourth quarter. It sounds like maybe the amplifier business would have us in a especially strong fourth quarter. Maybe you expect that Satellite Earth Station equipment business to be a little bit higher in the fourth quarter, but it's a pretty significant step-up is the delta -- is the bigger part of the difference coming in the mobile data side in 4Q versus 3Q?

No. Almost all of it's in our telecom segment and in our RF segment. I mean, if you look at the backlog in our telecom segment, it's a book-to-ship business. If you recall the last time we spoke to you in Q2, we saw the slowdown in the U.S. government side of the business. It happened. We're still working through that. We do think it's going to take some time for U.S. government spending to return to our Satellite Earth Station business. So we're looking at Q3 to be kind of close to what we did in Q2 in that part of the business. And then on the other part of that business, in our over-the-horizon business, we're expecting the contract by Q4. So some of it is timing. Some of it's related to the mobile data communication business in terms of the other segments, but it's -- there's a lot of pluses and minuses right now between what we see. But directionally, that's kind of the way we're thinking about it right now.

On the over-the-horizon contract, though, that you anticipate, you expect that to come at the end of fourth quarter. So I'm presuming there's really not anything in your guidance related to that?

I would say nominal. We do have, and Fred mentioned, we got an order for long lead parts for 40 terminals for the mobile troposcatter systems that we're producing. So we are expecting to get a nice order from that, and we do have that in our Q4.

And I know this is a little bit hard to parse out, but how much of the anticipated 4Q jump-up in revenue versus 3Q is related to the belief that the government business on the Satellite Earth Station equipment business will come back?

Well, I'll just say a good portion. Again, we do have strong backlog in our RF amplifier segment, Tim. So you're going to see that growth coming, and we are anticipating additional orders in that segment to be very strong in the second half. And we do feel confident that we're going to see that pop. It's just some timing. If you remember, back at the beginning of Q2, in a continuing resolution, the budget wasn't released. All of those things have now happened. And so again, it takes the government, call it, 60 to 90 days to kind of rejigger what they're going to rejigger. We're starting to see some of that now, not at the pace that we would like, but eventually we do think that the string purses will open up.

Yes, that's fair enough. And then just one last question. I didn't fully understand the IP fee. It sounds like you're going to start taking or -- I guess, recognize a certain amount ratably over the course of the year whether negotiations are finalized or not. Is that true?

Yes.

Okay. Does that indicate some kind of confidence, it will be done or just some by hook or by crook, it's going to be done?

I think both of the above.

We'll take our next question from Tyler Hojo with Sidoti & Company.

Just first, you mentioned kind of your favorable prospects to the JCREW 3.3 program. I was wondering if you could talk a little bit about that. Maybe you could give us a little bit of color just in regards to content. And if you're not willing to give kind of actual numbers, maybe you could just talk relative to kind of some of the legacy systems where your content is.

Well, let me say on CREW 2.1 and CREW 3.1, we were 1 of 2 suppliers for the IED amplifier systems. On CREW 3.3, which I can say that at the moment with the budget being approved for '13, the plan on CREW 3.3 is for approximately 275 or approximately 300 units to be fielded in '13, and approximately 1,000 units for '14, '15 and '16. To us, as the sole source supplier of this particular unit at this point in time, it represents roughly $20 million to $25 million a year.

Okay, great. And just to go back, not to beat the dead horse, but your guidance now assumes some sort of contribution from a licensing fee for the IP that goes into the BFT contract. Is that correct?

That's correct.

And, Tyler, if I could, I mean, on our last conference call, too, we told folks, and just to be very clear, our guidance the last time did include some level of the intellectual property fee in terms of whether it's going to be satellite service revenue or whether it's going to be IP. There's some element in the guidance as well last time. I think what our point to you this time is we're making it clear we feel -- we do feel confident that if we are successful in negotiating the BFT-1 -- one or more sustainment contracts that the IP will be part of that contract. So that's really the message here today. There's not anything different than what we said last time. But from a mix perspective, we do feel confident that the IP will be part of it. Now at the same time, as we'll put the caution on there, things are changing every day with the U.S. Army. And we are in some negotiations and their requirements seemed to change, but we've exchanged it. It's been on the table for a long time. We seem to be down a good path with them. And ultimately, what the mix may be, that's still being determined.

Okay. So at what point do you think you'll have a little bit better visibility into, I guess, the longer-term contribution from those contracts as we look into 2013, 2014? Is it when you actually have the contracts in hand? Or I'm assuming they would be IDIQ sort of contracts, so when do you have better visibility there?

We certainly will have a better visibility on March 31 of this year, 3 weeks from now. In terms of the contracts, I have to repeat, we've gone from negotiating a sustainment contract for 3 to 5 years, which was an IDIQ contract, to a separate fixed contract for one year for just services and some hardware, to an additional contract for satellite bandwidth and then combined on a basis, combining those 2 contracts. So we're kind of in a very fluid situation. If I were a betting man, I'd say that we probably are going to have -- get one or more of fixed one-year contracts because of the time frame involved. I mean, we are 3 weeks away from the termination of our present contract obligation. So I would say that the best bet that we're thinking of is that we will get 1 or 2 one-year definitized contract and then a subsequent sustainment contract for 3 to 5 years, which would be an IDIQ contract.

Got it. And just one last follow-on to that. Just within -- there was a pre-solicitation on the fed biz op side. And I was a little bit surprised that the government is intending on awarding you guys a satellite airtime contract. Could you talk about that and maybe the duration of how long that would be in effect?

Yes, actually, I think it's all pretty well public. The government has for a long time -- and we've mentioned it in numerous of our calls. The government for a long time has wanted to go and consolidate their bandwidth purchase through these offices of government agency. And they, obviously, started to do that, and they had an RFQ and actually made an award to a company to provide that bandwidth for BFT-1 and MTS going forward. There has been a protest, and this was a one-year award. And the bandwidth will always be a one-year award situation for the government. There has been a protest, and you could say that we benefited from that protest because the protest is in process and they need that bandwidth starting April 1. So they've come back to us and asked us to renegotiate our obligations to include bandwidth for -- and we've heard it for 6 months with a 3-month option. We've heard it for a full one year. We can't tell you exactly how it's going to come out, but the need is there for at least one year.

Okay Got it. And just one more, I'm sorry. Were you the party that protested the award?

No, we weren't. We actually were a subcontract bidder to the -- to 4 out of the 5 parties that bid the satellite time. So we were hoping to be involved in it regardless.

We'll take our next question from Chris Quilty with Raymond James.

I wanted to follow up with a question on the telecom business. Specifically, I think, Mike, you mentioned that the Earth station business should be flat going towards the back half of the year. And I guess the question is, what does that imply for the over-the-horizon business?

I think, again, plus or minus, it's very difficult to say. We are expecting the Algerian contract to come in, in the second half of the year, and we are expecting what I call nominal contributions. It's too -- I would really say, Chris, your question is too precise at this point given the levels that we are.

Well, I guess, the question is you've got 2 long-term contracts that are winding down. Are they still going to provide a similar level of contribution in the back half that they did in Q2?

Well, we do -- we are expecting the order in the over-the-horizon business for the additional snap terminals. We do expect revenue in that part of the business during Q4. Q3 will be very close to what it was in Q2, which is kind of why we're thinking that the mix of revenue and the SKU of revenue is going to be towards Q4.

Okay. And when that new North African over-the-horizon contract is awarded, typically it takes some period of time, 6 months before those things get turned on, or is this a continuation program that should roll immediately?

Well, a lot of -- the way I would say it is, our accounting for those things as a percentage of completion. So almost immediately, as we start to incur cost, we'll be able to recognize revenue on that. So we've really been ramped up and we've been asked to kind of proceed and do some work already. We've kind of taken a mom-and-pop approach to it, and we're really just want to get the contract signed with our prime contractor before we really do anything. But at the same time, I could tell you within a few minutes of the contract being signed, we'll be working hard towards progress.

Okay. And you had previously said you expected telecom margins to be north of 20% given the puts and takes here on the business. Is that still likely?

I think we're still shooting for the 20% operating margins. It's a little bit difficult and a little bit more challenging than it was to achieve since our last call. Some of that is due to the -- some of the legal matters and incremental expenses that we were expecting to happen in the second half. But if you exclude them, we would have easily have achieved that number. But adding them all in and given our expectations, we still think that the 20% is our target, and we think it's still achievable.

Okay. And could you give an update on the margin trajectory for the other 2 segments?

Yes, the RF, you saw it happen as we said it would. Our operating margin went from 1.5% to over 5% in Q2. We do see that business getting back close to an 8% to 10% over time. So that's the way we think about that business segment. And you can plug the mobile data com for the rest.

Okay. And for RF, is that based solely on the bomb jamming, which historic has had a 10, 15 percentage point positive contribution relative to the core business, or is it because the core RF business itself is seeing margin improvement?

It's really the latter. If you recall for the last few quarters and going through fiscal 2011, we shipped out a lot of those developmental amplifiers not only for the CREW program, but other programs as well. So we're coming back to what is a normal margin profile. If we can get over 10%, get to your number of 10% to 15%, that's going to be based on the volume in any given quarter. And if we're able to get a really good efficient or production run, something like that could happen in the a given quarter. And if they really need to get it out because of some military issue that occurs in the world, that would be great for us from a business perspective. But we do think 8% to 10% overall is where that business will achieve, and we think we're headed there.

And we'll take our next question from Mark Jordan with Noble Financial.

A question relative to the converge. I think the first put call period is in 2014. Do you have any sense that there'll be a put or a call on those bonds, and do you intend to maintain the $200 million liquidity through that time frame?

Well, the bonds have a conversion price that -- it's in the Q, I think it's like $34 and change, Mark. So we were kind of thinking about it as we expect to continue to pay our dividend payments by 2014. The conversion price on those shares will roughly be $32 and change. So it's more like equity than it is debt at this point. It's kind of the way we're thinking about it. And of course, those shares, the dilution from those shares are already in our share count. So that's not going to effectively change. So yes, effectively, we have access to the $200 million on the balance sheet side is the way we are looking at it.

Okay. Secondly relative to the BFT program, do you have a sense of the rollout schedule for BFT-2, and how does that impact your view of how meaningful the sustainment could be in sort of the out years of the potential 3 to 5-year sustainment contract?

Yes, Mark. The best we can tell you is that we really don't have that much information on the BFT-2 program for obvious reasons. The Army doesn't really share that with us. We can say that it is 1.5 years later and, we certainly have followed the qualification requirements for that -- for BFT-2, and they have not qualified the transceiver portion of that system. So obviously, without first article qualification, there can be no production. So we don't see any rollout certainly in the near term.

Mark, I would also add to what Fred is saying is just on the first week of January, the government did place an order for $12 million for new mobile satellite transceivers. And they've even requested a portion of those satellite transceivers, which are going to be deployed, we assume, in the field not to occur until 2013. So as we go through these negotiations that we've been with the government certainly in the last month and certainly yesterday and the day before, they're asking for new hardware. So we'll get a better visibility as to what that hardware will be, if at all, when we sign the contract, if we're able to sign that contract come March. But our expectation is that we're going to even get some hardware numbers. We just don't know the amount, but, yes, we feel that we used a phrase, where we're getting positive traction on our BFT-1 sustainment contract in our business going forward.

Okay. Final question relative to the international tropo opportunities. You alluded to customer opportunities outside of your historical customer. Could you add a little color in terms of the number of specific companies that you -- countries that you think are serious potential buyers of that technology and some sense of what you think you might be able to penetrate over, let's say, a 24-month period?

I think, overall we've always been in the oil platform business; and that's been a $1 million, $2 million type of order that we've always received. And we get 3 to 5 of those a year on a continuous basis. What we really meant and our focus on the international area is more like the -- our Algerian customer. We, as you probably know in the past 12 or 18 months, we actually broke through in Saudi Arabia and had a $10 million contract for some preliminary tropo systems. Obviously, we feel very strongly that, that will lead to a similar situation as we've had in Algeria and could lead for us to have major programs in the $40 million to $50 million area. So that's just one example. I'd rather not get into any of the other specific countries, but we have about 4 or 5 of those type of opportunities kind of in the pipeline. Now as I mentioned, with everything that's going on in that part of the world, delays are probably to be expected.

Okay. Just a follow-up relative to those 4 or 5 opportunities that are out there. Are you marketing those as the prime, or are you jointly marketing with a large defense prime?

I think for the most part, we're now marketing themselves -- by ourselves as primes. We do have opportunities with major contractors that we're also teaming with.

We have time for a final follow-up from Tim Quillin with Stephens Inc.

Yes, I'm sorry, I tried to withdraw my question, but I'm all good.

All right. There are no further questions. We'll turn it back to the company for closing remarks.

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

This concludes today's teleconference. You may now disconnect, and have a great weekend.