Ladies and gentlemen, thank you for standing by. Welcome to Comtech Telecommunications Corp.'s First Quarter Fiscal 2015 Earnings Conference Call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded, Thursday, December 11, 2014. 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 first quarter of fiscal year 2015. With us on the call this morning are Fred Kornberg, President and Chief Executive Officer of Comtech; Michael Porcelain, Senior Vice President and Chief Financial Officer; and Rob Rouse, Senior Vice President, Strategy and M&A. 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 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?

Thank you, Maria, and good morning, everyone, and thank you for joining us on this call. As announced yesterday afternoon, we reported our first quarter results of $76.4 million in revenues, a GAAP diluted EPS of $0.32 and an adjusted EBITDA of $13.3 million. We are pleased with our solid first quarter financial results and experience the highest level of quarterly bookings in over a year, with strong order book across all of our three operating segments. Despite this strength, in light of overall business conditions, we've become more cautious and now believe that the revenues in fiscal 2015 will be in the range of $355 million to $365 million in revenue. Despite incurring approximately $600,000 of expenses associated with our strategic alternatives analysis, we are maintaining our GAAP diluted EPS guidance, which is expected to be in the range of a $1.70 to a $1.86. We are also maintaining our adjusted EBITDA guidance, which is expected to be in the range of $63 million to $67 million. On December 10, 2014, our Board of Directors approved a dividend for the second quarter of fiscal 2015 of $0.30 per common share. This dividend is expected to be paid on February 18, 2015 to stockholders of record on January 16, 2015. To-date and over the past 17 quarters, we have paid out over $90 million of dividends and we continue to believe that our dividend program is an excellent way to return capital to our shareholders. Let me now provide some brief comments about our announcement yesterday relating to our strategic alternatives analysis that was initiated by our Board of Directors in the August of this year. As you would expect, the company regularly considered the broad range of strategic alternatives with the goal of maximizing shareholder value, including a possible merger or sale of the company. After conducting a thorough and rigorous process, our Board concluded that the company is best position to maximize shareholder value by continuing to execute on it strategies of enhancing its leadership positions in the markets we serve, participating and emerging technologies and enhance or expand our product portfolio, carefully pursuing acquisitions of business and technologies, and returning cash to our shareholders, and finally, that the interest of our company and our shareholders will be best served by our company remaining independent. Given the confidential aspect of our strategic analysis, we do not intend to provide any further information on that topic and respectfully request that you refrain from asking questions about it in the Q&A portion of our call. Now, let me turn it over to Mike Porcelain to provide an overview of our financial results and then I will return and talk more specifically about each of our three business segments. Mike?

Thanks, Fred, and good morning, everyone. I'll walk you through the Q1 results and then provide some comments on our updated 2015 business outlook. During Q1, we generated revenues of $76.4 million, of which 24.9% were for U.S. government end users, 61.2% were for international end users, but the remainder being for domestic, commercial and customers. Net sales in our Telecom Transmission segment were $51.4 million in Q1 of fiscal 2015, as compared to $54.4 million we achieved in Q1 of last year, representing a decrease of 5.5%. This decrease is attributable to lower net sales on our satellite earth station product line, partially offset by higher net sales on our over-the-higher -- over-the-horizon microwave systems product line. Our satellite earth station product line sales in Q1 of fiscal 2015 reflect lower sales to international customers as compared to Q1 of last year. Given overall global market and business conditions, we do believe it is prudent to be cautious as it relates to this market and we are now expecting sales on this product line in fiscal 2015 to be comparable to fiscal 2014. Based on the timing of expected orders and related shipments, including ATIP production units, which are in our backlog, we expect sales to be heavily weighted towards the second half of fiscal 2015 with Q4 being the peak quarter by far for the year. Sales of our over-the-horizon microwave systems in Q1 of fiscal 2015 were higher than Q1 of last year, primarily due to our performance and a contract with a major international oil company, and ongoing performance in our large North African multiyear contracts. Although, new orders and contracts are difficult to predict, we continue to expect significant U.S. government orders and sales in the latter part of the second half of fiscal 2015…

Thanks Mike. Now let me discuss some of the recent developments in each of our three business segments. As always, let's start with our largest business segment, Telecommunications Transmission. This segment is comprised of two product lines, satellite earth station products and over-the-horizon microwave systems. We remain the undisputed leader in the satellite earth station, SCPC modem area, driven primarily by our proven ability to deliver the most bandwidth-efficient modems to our end customers. We are increasingly more excited about our new line of products called Advanced VSATs. These products combine a variety of technologies within our IP portfolio to provide an integrated solution. By listening closely to our end customers, we have been able to offer our Advanced VSAT solutions into markets that have traditionally been served by TDMA solutions. And recently, we have seen certain TDMA users move away from that technology since many of their ultimate customers are demanding more efficient, more dedicated reliable bandwidth and are unwilling to tolerate the latency issues associated with TDMA. It’s important to note that certain of our new products, such as Advanced VSAT, have longer lead times than our more traditional products, since these products represent the more integrated solution for our customers. We have recently also started to offer professional services to our customers and expect this new part of our business to be a meaningful growth contributor over the next few years. In addition to the introduction of new product lines, we have recently refreshed our core low, middle and high-end modem lines and as a result, our modem portfolio today offers greater bandwidth efficiencies that ever performed. On the U.S. government side of our satellite earth station product lines, we are beginning to see some return to normalcy. In fact, we're seeing a lot of proposal activity…

[Operator Instructions] And we will take our first question from the line of Joe Nadol with J.P. Morgan. Your line is now open.

Hi. Good morning, guys. This is actually Chris on for Joe. Mike, on the balance sheet, you have a large net cash balance and I am curious, if you think this is the capital structure for the business going forward or if you might move toward something more traditional with all the net leverage?

No. I think right now, we are happy where we are. We, obviously, have an existing stock repurchase program that you will continue to look at and our dividend target that was established by the Board. But right now the balance sheet does give us flexibility to do the things that our business plan calls for.

And I know you’ve been interested in M&A. Is there -- are you seeing anything on that front right now?

I think there are things that we are considering but that’s all we’ll comment.

Okay. And then on the share repurchase, I mean, I know you just had your board meeting on the authorization wasn’t increase, which seems like, it won’t be anything significant on that front. Do you guys ever get consideration, anything like a special dividend?

I think again from a strategic process and where we are, we think the things we are a doing are the right things at the moment.

Okay. And then one last one, could you just provide some color on the timing of the RFPs for BFT-2.5 and BFT-3 and maybe size with the revenue opportunity for each one looks like?

I think the -- it's difficult to define the timing for the actual RFPs. Right now, all that has happened is two RFIs which are request for information. And the government is looking to replace the BFT-2 transceiver with the BFT-2.5. So I suspect that one will probably be funded certainly earlier than the BFT-3 transceiver RFI. However, for us to really know that actually when the funding will occur, it’s very, very difficult with the government funding environment right now.

Okay. And do you have a size of what the revenue opportunity might be for 2.5 just based on the number of units you are looking for?

All we can say is no. We have approximately over 200,000, transceivers out in the field for BFT-1. If the government chooses to replace every single one of them and I should qualify that because the requirement this time is for the BFT-2.5 transceiver to be backward-compatible with the BFT-1 transceiver. So the government will have the option to buy not only the full 220 to replace the BFT-1 but also some mix of the two. But going the full gamut of 220,000 transceiver, approximate cost -- one can use approximate cost of transceiver of somewhere between $5000 to $10,000.

Okay. Thanks guys. Appreciate it.

We’ll take our next question from the line of Mark Jordan with Noble Financial. Your line is now open.

Good morning gentlemen. I think earlier you talked about over-the-horizon opportunity for the government potentially being very significant in the second half of the year which is complete to be NIE. Could you give a little more color as to, one, is that small form factor modems for portable earth stations or terminals or is this upgrading some of the larger tropo system? And secondly, what specifically gives you the visibility to expect in meaningful volumes in the second half?

I guess to answer the first part of your question, Mark, just recently as a matter of fact, the U.S. Marines who patrol most of the AN/TRC-170 terminals have come out with an RFI to replace all of TRC-170 terminals with new transportable tropo systems. There are approximately 400 of TRC-170 terminals out there and used by both marines, the army and the Air Force. So that gives you a kind of a feeling of what the requirements will be. Again, it’s very difficult to see timing wise what and when that will occur. But NIE testing has actually put us in a position as the only tropo transportable and these are in suitcase -- suitcases that the tropo system is in and can be readily constructed within 30 minutes anywhere in the world. This NIE testing has concluded that we are the only one that met this fact. The other fact is that if you remember we retrofitted most of the TRC-170 tropo terminals with our modem and the RFI states unequivocally that the new system must communicate with the present TRC-170 and that’s replacing it, but they still intend to use it and be compatible with it. And I think we are the only modem that is compatible obviously because it’s our modem in the TRC-170.

Okay. Relative to your comments on buyback you obviously noted that in your press release that the amounts you have remaining, are there any broad guidelines as to how sizeable the buyback activity maybe moving forward, say in relationship to annualized free cash flow you generate or any other metric?

I think the -- as far as the buyback is concerned, the only authorized Board action right now is the remaining $13.7 million that we have of buybacks. Obviously, we will be looking at the opportunity and pulling the trigger if we see that it’s something that we want to do.

Okay. Final question for me. Do you have a CapEx expectation for fiscal ’15?

Sure. Including what we did in Q1, we are expecting a range at this point of $5 million to $7 million of capital expenses for the year.

Thank you very much.

We will take our next question from the line of Tyler Hojo with Sidoti & Company. Your line is now open.

Yeah. Hi. In the prepared remarks you mentioned, kind of bookings for satellite earth station in the past month being kind of soft and that was one of the reasons why you kind of lowered expectations for the full year. I’m just curious, is kind of your expectation that the book-to-bill for satellite earth station will be below one in your second quarter? How do we think about that?

I think -- it's very difficult for us to predict anything on a quarterly basis, if not on a monthly basis. So at this point, given what we saw in November, the way we are looking at the company as a whole, we are thinking Q2 will be very similar to what we did in Q1 and it is possible. It might be slightly lower than what we did in Q1. At this point, it’s just tough for us to say. But for the year at the moment, given what we say, we are expecting it to be comparable for the year.

You are talking about revenue, right?

Everything. Bookings and revenue and income as well.

Okay. So, I mean, how do we square the fact that you're coming off of a book-to-bill that’s kind of at a four year high. I mean, I get the uncertainty but I mean, presumably for just the book and ship nature of this business, I mean, presumably if your expectation for the year is lower, your expectation for bookings would be lower in the coming quarters, right?

I think, again, we look at it on an annual basis and won’t give some color as it leads it bookings. But certainly our bookings in Q1 were terrific, couldn’t have ask for anything better. The market conditions have changed. Oil prices have suddenly come down and we did see that impact in our most recent month. Now as Fred had mentioned in his prepared remarks, we might be conservative but we are certainly being prudently cautious at this point. Lot of things in the pipeline, certainly on the U.S. government side but our international business is not growing at the moment. And we need to see things flush out and at this point, we think it's appropriate to think about satellite earth station sales being comparable.

Got it. Okay. That’s fair. And then just on the OTH MS business, could you maybe just size how much of that revenue base today stems from the oil and gas industry?

I think we would characterize it is, as it keeps the lights on and it’s not a material portion of our over-the-horizon business. But certainly as we get orders, it is positive to the revenue and operating income.

Okay.

I’m specifically I’m assuming you're talking about the shipments of OTH products to the oil exploration companies for offshore development.

Yeah. That’s right. Yeah, okay. All right. Good. And then just the last thing I wanted to ask was just kind of in context with Fred’s comments on professional services being a driver. I’m just again curious, how big a piece of the business is that today in satellite earth station? And what kind it differentiates your offering relative to some of the competitors in the space?

To characterize, the 2015 is going to be a small contributor to the satellite area. What we found is especially with the Advanced VSAT product line that we have come up with, that there is the tremendous need for professional services for integrated solutions and since we are now in that -- in that business area, we kind of said to ourselves, this is a good area of growth for us. And so we're going to expand that into other product areas as well.

Hey, thanks a lot.

[Operator Instructions] We’ll take our next question from the line of Chris Quilty with Raymond James. Your line is now open.

Morning, gentlemen. Wanted to touch on the North American commercial business, which looks like it was down about 27% in the quarter. And I think there's been a week trend there for a while. Can you help us understand where specifically, either in end markets or products you're seeing the weakness and what you see is the outlook here for the balance of the year?

Well, Chris, if you could, could you just repeat the first part of your question. It didn’t come clear on our end.

Sorry. The North American commercial business was down about 27%, I think in the quarter. And you’ve had a bit of a weak trend there. And I was just trying to identify what specific end markets or product lines or underlying trends are driving that softness, given the U.S. is actually doing well economically relative to other parts of the world.

Sure. I think this is a more of a timing of sales. When you look at our domestic business, and our satellite earth station business, Chris, as you know, we don’t sell all heck of a lot of products to the U.S. commercial customers anyway. So where we do see sales is in our amplifier side on the DirecTV market. And again, I think this is from timing to sales perspective. We see lots of opportunities in the direct whole market, as well as in-flight entertainment market on our amplifier side. So I would characterize it as a timing of sales than anything.

Got you. And just to clarify on the statement about concern with energy markets. Do you have any exposure beyond the oil rig business you talked about? And you’ve got obviously, over-the-horizon customers internationally that are dependent upon oil revenues. Is there any other exposure that we should be concerned about?

I think it’s a global issue. Clearly, we sell to countries such as Russia and even Algeria and revenue is based on oil prices for those countries. So there is that global risk that we have to deal with. So I think, the answer to the question is yes and it kind of goes into our cautiousness.

Okay. And final question on the Advanced VSAT, I know you had a sort of an initial announcement a while back, what I believe it was Harris Corp. and Royal Caribbean. Could you give us an update on how that's progressing? And a clarification, my understanding was the Advanced VSAT product was more of a integrated bundle but you almost seem to imply that there are service revenues attached to the product line?

Yeah. That’s true. Well, first for the Royal Caribbean, I think the system is being rolled out and so far very successfully. As far as the professional services, that’s really become part of the Advanced VSAT portfolio that we’re now offering. And as I mentioned before partly because our customers have really asked us to do this. And we’ve decided that this is something that we want to go, going forward, not only at the Advanced VSAT but other products as well.

So is there an actual service contract, long-term service contract attached to that or is there just a service component of the initial sale?

Yeah. There is a service to support contract that we do with our customers. And for us and I think, Fred appropriately characterized it, is not a meaningful part of our business in ‘015. We introduced the services in 2014. We had a pretty significant growth year-over-year, although again, I characterized it has being not material yet but it is an annual type services. So it is something that for us in our satellite earth station product line, not only will we generate the revenue in the first year but we are very optimistic that we will become a recurrent type revenue stream as we look forward. And we are structuring on these renewals with our customers.

So they are typical 10% to 15% type attachment on the service contract?

Well, we are actually showing almost a one-for-one. As we rollout the advanced VSAT products for the customers, which are doing well and so it really is a one-for-one as opposed to a 15% attach rate.

That’s good stuff. All right. Thank you gentleman.

And it appears, we have no further questions at this time. I will turn it back to the company for closing remarks.

Okay. Thanks for joining us today and we look forward to speaking with you again in March. Thank you very much.

This does conclude today's teleconference. You may now disconnect. Thank you and have a great day.