Ladies and gentlemen, thank you for standing by. Welcome to Comtech Telecommunications Corp.’s Fourth Quarter Fiscal 2017 Earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. At that time, if you have a question, you will need to press the star and one on your touchtone phone. As a reminder, this conference is being recorded today, Thursday, September 28, 2017. I would now like to turn the conference over to Ms. Maria Ceriello of Comtech Telecommunications. Please go ahead, ma’am.

Thank you and good morning. Welcome to the Comtech Telecommunications Corp. conference call for the fourth quarter of fiscal year 2017. With us on the call this morning are Fred Kornberg, Chief Executive Officer and President of Comtech, and Michael D. 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, 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 Chief Executive Officer and President of Comtech, Fred Kornberg. Fred?

Thank you, Maria. Good morning everyone and thank you for joining us on this call. As we announced yesterday afternoon, we reported our fourth quarter results of $147.8 million in revenues and operating profit of $14.8 million, and an adjusted EBITDA of $29.1 million. I’m very pleased with our fourth quarter performance on many fronts. We solidified a strong finish to a very busy and ultimately successful year for Comtech. We enter fiscal 2018 with a solid backlog and large pipeline of opportunities, and I am seeing positive signs across all aspects of our business. The integration of our TCS acquisition and focus on gross margin is largely complete. We have now shifted our focus from integration to growing our business and focusing on increased shareholder value. I believe we are on the right path and I remain pleased with the progress that we are making. I will tell you why I’m so optimistic about our future in a bit, but first let me turn it over to Mike Porcelain, our CFO, who will provide a discussion of our fourth quarter financial results, a summary of fiscal 2017 financial results, and our fiscal 2018 guidance in more detail, then I’ll come back before opening up to questions and answers. Mike?

Thanks Fred, and good morning everyone. Our Q4 fiscal 2017 results in almost every respect were terrific. Consolidated net sales for Q4 were $147.8 million, of which approximately 31.5% were generated from U.S. government end customers, 27% from international end customers, and 41.5% from domestic commercial end customers. Net sales in our commercial solutions segment were $93.2 million as compared to Q4 of last year, which was $83.3 million. This represents an increase of approximately 11.9% versus last year. Sales in the segment represented approximately 63.1% of total net sales. During Q4, international market conditions for our satellite earth station customers continued to improve and sales to those customers were relatively strong. Turning to our government solutions segment, net sales were $54.6 million as compared to $69.1 million in Q4 of fiscal 2016, a decrease of approximately 21%. Sales in this segment represented approximately 36.9% of total net sales. I want to remind you that Q4 consolidated and government solution segment results, both sales and adjusted EBITDA, does not reflect any quarterly benefit associated with the $10 million of annual Blue Force Tracking intellectual property licensing fee which we previously earned. Going forward, future quarters will not have this fee. Now let me give you some color on our operating metrics. At July 31, 2017, our backlog was $446.2 million. During Q4, we achieved bookings of approximately $132.7 million and our consolidated book-to-bill ratio was 0.9, led by strong bookings in our government solutions segment which achieved a book-to-bill ratio of 1.26 for the quarter. Our book-to-bill ratio in our commercial solutions segment in Q4 was 0.69, which for this quarter does not accurately portray the actual level of business activity that is occurring. We are working on a number of large commercial opportunities, many of which we have been…

Thanks Mike. Let me give you some color on what is happening in each of our segments. First, let me discuss our commercial solutions segment, which is focused on several large growing markets. Here, we are a leading provider of satellite communications networks and products such as satellite modems, up and down frequency converters, and solid state and traveling wave tube power amplifiers. We’re also a leading provider of public safety systems such as the next generation 911 networks, and enterprise applications such as messaging and trusted location-based technologies. Our satellite base communication products participate in the satellite backhaul and network services market. In the satellite modem area, we continue to be the undisputed leader in single channel per carrier, or SCPC, driven primarily by our proven ability to deliver the most bandwidth efficient modems. Our strategy in the past few years has been focused on developing and marketing our new and what we call Heights network system for use with the new high throughput satellites. During our fourth quarter of fiscal 2017, we announced the general availability of our Heights Dynamic Network Access, or HDNA technology. The Heights solution is intended to not only meet the demands of traditional fixed satellite systems but also provide distinct advantages for those system users considering migrating to high throughput satellite systems. This is an entirely new market for us and one which is much larger than our traditional SCPC market. Recently, we announced that three different customers are now using Heights to support their business needs. To date, customer reaction has been and continues to be positive, and we have a growing sales funnel of Heights opportunities. We believe that fiscal 2018 will be a breakout year for orders and sales of our Heights network products. Our commercial satellite products are also…

[Operator instructions] We’ll take our first question from Mark Jordan with Noble Financial. Please go ahead.

Good morning gentlemen. First question would be on the Heights program. Would you talk--when you’re making a sale into the Heights arena, to what extent is this potentially cannibalization of your existing customer base where Heights would more closely fulfill their needs, or how much of the sales you have in this area are actually new sales that would not have been potential customers for your existing product line?

Mark, I think our position on that is obviously there could be some cannibalization of the SCPC market. The SCPC market, as we have explained in many, many past conferences, is the top of the line, very broadband throughput system that is used on a single channel per carrier basis from point A to point B. We have been in that market and have dominated that market for a long, long time. That is the smallest market of the markets for satellite communication ground stations in this area. The market that we’re addressing with Heights is really the market that is the lower end today, kind of the market is dominated by iDirect and Gilat. We feel that the Heights platform will take that market share away from those two and we should capture that. That is by far a bigger market than the SCPC market.

Okay. Mike, do you have an estimate of capital expenditures for fiscal ’18?

Yes, I think it’s going to be maybe one or two million dollars higher than what we did for fiscal 2017, and the ultimate number will be based on how many large programs that we get by the end of the year and the timing of those things. But at the moment, it’s pretty close to 2017, maybe a couple of million dollars higher.

Okay. Final question for me, in the international tropo area, there’s been thoughts of follow-ons from some of your larger customers that seem to have been delayed for years. Is there any visibility of when you may see a next phase or two out of some of your existing large international customers?

As I mentioned, we have a large pipeline in that area, but unfortunately as we’ve said many times in the past, things do move to the right, especially in the international arena. However, having said that, I think we are in a position today that we can probably say that one or two of those contracts will probably drop out in early 2018, and we should be able to book it.

All right, and are those contracts in your sales assumptions for the year?

Yes.

Okay, thank you.

We’ll take our next question from Tim Long with BMO Capital Markets. Please go ahead.

Thank you. Two questions, if I could. Just elaborate a little bit on some of those contracts in the commercial business that you think were going to hit, that are verbal. Any color on which areas and how big those could be? Then secondly on the government business, a lot of talk from companies about slow downs, given all the drama in Washington. I understand we got a correction for the one contract, but maybe Fred, if you could just talk a little bit higher level about how you think the government spending will be and linearity through the next 12 months, that’d be helpful. Thank you.

Okay, I think as I mentioned, certainly 2017 and even 2016 prior to that were pretty soft years for our government business. I think, however, we see a turnaround in that. We see, whether it’s the environment today, something is moving the government areas now, at least to start buying some programs, so we’re kind of bullish that things will turn around and we’ll see some good bookings coming on.

Okay, thanks, and then just on the contracts that were verbal, any more color there on what areas they’re in?

Which contract?

You said the book-to-bill was a little low because some contracts weren’t signed, but you got verbal agreements. Just curious what areas they were in and maybe just a rough idea on the scale of them.

Well, they were really across the board. It’s probably okay at least for us to talk, we are on the 911 wireless area discussing with a major supplier there and major partner of ours for an add-on of two to three years to our present contract that we have in that area. That’s probably in the order of--let me just use a range of $30 million to $50 million in total bookings. We’ve been kind of talking about that one and negotiating it probably for at least three months. On the government side, there’s been the SNAP terminals which we expect to win. This has been delayed and delayed and delayed. We expect it momentarily; but however, we have been expecting it momentarily for a couple of months. We got notice of the modem job that I mentioned in this presentation. It’s a very, very large job. It’s a great opportunity. We’ve been selected literally for the next five years as a supplier for that program; however, the funding has got to wait until the government funding starting with October 1, so we expect that to drop pretty quickly as well. So these are the type, among others, that we have that should drop. One in particular that I’d like to mention, which I didn’t really mention in the presentation, is the BFT program, for instance. We have been working on the BFT program for 15, 20 years, starting with the BFT1 program and then continuing even in support of the BFT program office when they selected another supplier for the BFT2 program. As I think everybody knows today, that program has not been successful, and BFT1 continues to be the workhorse of the BFT systems. So we have been talking to the customer, we have been supporting the customer. I think we are back in a position that when BFT3 is the program of record that will come in, and that’s not going to happen until probably late ’18 or ’19, so it’s not an immediate near-term situation, but I think one of the things that I can mention is we expect the program--in fact, we have been told that we have been awarded this, but somehow the bureaucracy hasn’t gotten to us, it’s a small $6 million to $8 million program, but to give you just an idea, we will be actually porting our waveform on our competitor’s transceivers, so we will be porting our waveform on the BFT2 system that is presently in use but not working to its full capacity. I think that’s exciting news and I think that really tells you where we’re heading as a company with the BFT program office.

Okay, thank you. That’s very helpful.

We’ll take our next question from Stanley Kovler with Citi Research. Please go ahead.

Hi, good morning. Thanks very much for taking the question. I just wanted to get some more color on the Heights process. Fred, you gave a lot of detail on the competitive landscape on Heights. What do you think is the gating factor to adoption on this program here, and when you think about the competitors that you mentioned for the program, like Gilat and others, where would you see as the differentiator for you, and if we can just get a little bit more color on that, both the timing and the competitive landscape, and then I have a follow-up. Thank you.

Okay. You know, we have been in the SCPC area for quite a long time, as I mentioned, and pretty dominant in that, and that’s the smaller part of the market. That is a single channel per carrier, which communicates from point A to point B. Gilat and iDirect have been supplying what we call TDMA systems. TDMA systems are systems that are able to interleave many, many different remote areas into a communications network. As such, we were doing the very, very high throughput point A to point B, they were doing the multiple terminal networks that TDMA allows you to do that. TDMA has some, let’s say, deficiencies. A particular one is the delay of the network itself. That alone, as the throughput rises, it becomes a very, very significant deficiency, so we have been in development for a number of years on what is now resulting in the Heights network. That is really not a box anymore, it’s not a modem, it’s a network, and that network will essentially compete with the TDMA network. However, we’re not using TDMA, we are using what we call HDNA, which is an offshoot of the single channel per carrier but for multiple remotes. So I think we have an answer to a problem that now can attack that part of the market, as well as the SCPC market.

Appreciate the detail there. Then when you think about your solution as being kind of more of a network, how should we think about the product cycles and the qualification cycle with customers, how long you’ve been working with various customers and what that typically would take to qualify and deploy this new system?

Well, that’s an interesting question because that is a big differentiator. The SCPC market was really a book and ship market - you booked the modem and you shipped it the next day. This is more of a network market and more traditional, almost comparable to programs which will probably take anywhere in the order of four to six months from order to delivery, so that’s quite a difference for us. So there is that lag, but we’re experiencing that lag right now. We booked in ’17 twice as much as we did in ’16, and I think we are programming for ’18 another twice as much for ’18, so that lag will be slowly overcome and we’ll be okay.

Thank you. I just wanted to follow up on a different area with respect to some management changes that I think you addressed in your filings, along with your earnings press release. Can you help us understand what’s going on with some management changes at the company that were announced in those filings recently?

Yes, I think we’ve had some changes, obviously going back to my replacement of the prior CEO and at the same time, the hiring of what was a COO. I think what we’ve come now is we’ve pretty well successfully integrated and are pretty well finished with the integration of TCS, so at this point we feel that there is no need for that. Our operating style is that our business units have their own presidents and have their own essentially companies, and they do most of the control of that particular business market that they’re in, so we really don’t need a COO, but we’re using the gentleman that we did hire kind of as a consultant going forward.

Thanks for that clarity. Good luck.

Thanks.

We’ll take our next question from George Notter with Jefferies. Please go ahead.

Hi guys, thanks very much. I guess I’m trying to better understand gross margins and profitability into 2018. I guess, Mike, I’m just curious about how you see the different puts and takes on gross margins. I guess Blue Force Tracker licensing is a piece of this year-on-year that goes away. Also, you guys have shed a fair amount of lower margin business. I guess I’m just trying to think about how you see margins in 2018 and how do they progress over the course of the year. Thanks.

Sure, George. You know, I’d say you could almost look at Q4 of 2017 sort of as the high point, if you will. Clearly that business represents the peak of our quarterly cycle flow, so if you take a step back, our commercial group did 24% adjusted EBITDA margins, and our government group at the peak of their revenue did 8.7%. Now, to me what’s pretty exciting about the government segment doing 8.7% is that doesn’t include any of the BFT1 IP fee, so at the revenue number that we achieved, $54.6 million, we did a really good shift in going away from low margin opportunities to better margin profile contracts and we achieved 8.7%. The commercial side, a dynamite quarter. We did $93 million of revenue at the peak and we achieved 24% adjusted EBITDA margin, so clearly you get a sense that as the revenue increases in our businesses, we get pretty good contribution margins going down the bottom line. Now, I’ll take 19.7% every quarter, but obviously that’s not going to occur. When you look at FY17, we achieved 12.8% on the bottom line in terms of adjusted EBITDA margin. That does include 6.7% of IP fee. We have to make that up next year in 2018, so when we sit back and we look at all of the pluses and minuses and puts and takes, well, our goal is to get over 12% adjusted EBITDA margins in total. We think it would be terrific if we could achieve 8% in the government side of the business in 2018, kind of making up the loss of the IP fee. It’d be great if we could do above that, but we think for the moment that’s a good starting point. Again, we did 18.4% in the commercial segment, and as the revenue sort of ramps up in that segment, we think that we could do better than the 18.4% that we achieved in 2017, so that’s kind of a summary. It’s going to look a lot like 2017 just because we’re making up the absence of the IP fee.

Got it. Is there still a lot more revenue that comes out of the model as you guys move away from lower margin business, or do you think that’s mainly behind us now?

I would say it’s largely, if not significantly largely behind us. There are some lingering contracts that we’re dealing with and some if it we like and some of it we’re still evaluating. But I think that’s why our revenue guidance sort of reflects what we believe will ultimately be where we are. If some of these larger contracts come in that we’re talking about, our revenue guidance might be low; but right now, our annual revenue guidance that we provided does reflect what we’ll wind up with, and hopefully some of these programs that we’re working on will be incremental to the number and we’ll announce that when we achieve it.

Thank you.

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

Great, thanks. Very nice quarter there. I guess Mike, just on the gross margin, how are you thinking about gross margin this year relative to fiscal ’17?

Yes, pretty much the same thing as on the adjusted EBITDA margin. I think for the year, we’re going to be very close to what we did for fiscal 2017, and in order to do that, we’re making up the IP licensing fee through improved margins throughout the company. We’re definitely seeing margin improvement on the government side of the business. Our commercial business is sort of steady state, if you will. As we get the incremental margins from the Heights products and some of the additional work that we expect, that margin will increase as well, and you add it all up, you’re going to wind up coming pretty close to what we did for 2017. Our goal obviously would be to do a little bit better than what we did, but we have to make it up through mix changes and improvement to absorb that IP fee.

Got it, okay. Then it looks like you had strong commercial--sequential commercial revenue growth in the fourth quarter. What was behind some of the sequential strength there?

You know, we started to see the Heights products come in. As Fred mentioned, we’ve had two times the number of orders that come in. We’ve been talking about it all year long, and if you remember back in our Q2, Q3 when we started to see the bookings flow, and if you take the six months cycle that Fred mentioned, Heights is starting to come in. Earlier in the year, Q1, Q2, it reflected low international sales. The market back in Q1, Q2 was not where it was at the end of the year. Sales to our international customers for our satellite earth station products were pretty good, and it was the first year in fact where we finished with the year-over-year increase in sales to those customers. So again, that’s what gave the lift in Q4. I don’t want to call it seasonality - I’d rather call it timing of orders, but our Q4 for the last two years, if not three years, has been our peak quarter, and then our Q1 has been our weakest quarter. So just in the timing of the bookings and the timing of the cycle, our Q1 is going to drop off before rapidly increasing in Q2 and thereafter in 2018.

Thanks. Then just last on the BFT opportunities, it sounds like you’re getting good traction there for whatever might be the next gen opportunity. It does look like there’s been some funding of BFT2 technology. Can you just elaborate on that - you know, why would they be funding BFT2? Is that just sort of maintenance stuff until they get to BFT3?

Yes, I think you have to recognize that the BFT program, the satellite program of the BFT program is about 20 years old, going back to the first Iraqi war, so it’s an old system. BFT2 now is seven years old but has some problems, and the funding for the program office has actually increased this year, and that’s why we’re kind of excited that we may be able to participate in that increased funding if we prove that we can port our waveform on the ViaSat transceivers. So if that happens successfully, and we think that we have the technology to do that, and we’ve had some demonstrations to the BFT office, I think it’s a matter of just timing in terms of getting some orders initially, not necessarily for the BFT3 as I mentioned, because I think that’s probably more in fiscal ’19 for us. But certainly for fiscal ’18, there could be some nice additional orders for us for BFT2.

Got it. Just last one, in terms of the next gen 911, how many state-wide deals are you looking at over the next--or prospects you’re looking at over the next 12 months, let’s say?

I think we have a number of bids outstanding with our partners in that area. As I mentioned, unfortunately our partners lost two bids just recently, but we’re participating with them in a number of states and we hope they win and we’ll win a couple of them.

Good, thanks.

We’ll take our next question from Glen Mattson with Ladenburg Thalmann. Please go ahead. Mr. Mattson, please check the mute function on your phone.

Hi, sorry. Nice to--thanks for taking the question. Nice to see the order from GoGo that you mentioned. Curious - I believe in the past, maybe it was last quarter, you were talking about perhaps a slightly slower market for that product in the short run as they kind of installed some of the stuff that they had taken on from you. Can you give an update on where we’re at in that market?

I guess we’d rather not give out any numbers, but on a monthly, let’s say shipment basis at this moment, yes, we’re flat as to what we’ve been doing for the last, let’s say six to nine months with GoGo. But on the other hand, GoGo keeps getting orders and those orders will eventually flow to us as well.

Okay, thanks for that. On the next gen 911 side, has there been any churn? I understand going after new business. Has there been any lost customers or anything like that in that segment at all?

None in that segment, no.

Okay, great. Thanks. That’s it for me.

We’ll take our next question from Chris Quilty with Quilty Analytics. Please go ahead.

Thanks. Just wanted to follow up real quickly on the commercial market. First, just a question - I believe the Heights program is primarily targeted as a higher end, higher performance product suite. Do you have something that addresses some of the larger volume part of the market, or is that a part of the market that you want to target?

I guess--you know, the Heights really is targeted--you know, we look at it as targeting a market which is the lower market than traditionally what the SCPC market has covered, so we look at that as a lower market. Yes, the suite, I think has the capability to go across the board on a total market basis. We are not there yet in terms of, let’s say, the very efficient or cost-effective remote terminal type of system, but we certainly are, let me call it in the middle market, so whereas we’ve been in the top market, I think we’re attacking the middle market pretty well right now.

Got you. Specific to end market exposure, I know you’ve got a fairly substantial business in the oil service. What are you seeing happen there, and can you give us any other comments on specific verticals or applications, whether it’s cellular backhaul or others, where you’re seeing strength and weakness?

I think the oil market to us is really the offshore oil platform market, which is a tropo scatter market. That’s been traditionally a market for us for a number of years, and I would say it’s probably flat at the moment with the oil price being where it is. In terms of any of the oil market effects, that’s been an effect obviously on our business for the last three years or thereabouts with the oil price dropping from $100 a barrel to $50 a barrel. That’s obviously affected our customers and their ability to buy capital goods.

Chris, I just want to clarify as well. You mentioned oil services. Although what Fred said in terms of what’s happening in the oil services portion of the business that we do, that’s a very, very small portion of our revenue. When we talk about the impact of oil prices to the company, it’s more on the satellite earth station side of the camp because some of the international countries’ governments that procure satellite modems for their communication systems in total, not just used for oil services but just the actual purchase of the satellite modem, they get impacted because their revenues and their budgets don’t reflect the benefit of higher oil prices. So we’ve seen in the second half of 2018 that issue sort of go away--’17, excuse me. We’re not being impacted right now by oil situation, prices as it relates to our international customers.

Got you. Thanks for the clarification.

We have no further questions at this time. I would like to turn the call back over to the Comtech speakers for any additional or closing remarks.

Okay, I’d like to thank everybody for joining us today, and we look forward to speaking with you all again in December. Thank you very much.

This does conclude today’s call. You may disconnect at any time and have a wonderful day.