Welcome to the Comtech Telecommunications Corp.’s Second Quarter Fiscal 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded Thursday, March 8, 2017. I'd like now to turn the conference over to Ms. Maria Ceriello of Comtech Communications. 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 2018. 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 and good morning, everyone, and thank you for joining us on this call. As we announced yesterday afternoon, we reported our second quarter results of $133.7 million in revenues and operating profit of $4.9 million. Adjusted EBITDA of $14.5 million and bookings of $210.6 million. We finished the quarter with a backlog of $567.3 million, which is close to the company's record. Our results for the quarter, obviously, exceeded our expectations and our business momentum remains strong and shows no signs of slowing down. So as such, we’ve increased our fiscal 2018 revenue target to a range of $570 million to $585 million. Increased our GAAP diluted EPS target to a new range of $1.08 to $1.23, and increased our adjusted EBITDA guideline -- guidance to a range of $72 million to $76 million. As you can imagine, I'm pleased with our business and our accomplishments thus far. I will talk more about our accomplishments later in this call, but first let me turn it over to Mike Porcelain, our CFO, who will provide a discussion of our financial results and update our fiscal 2018 guidance in more detail. Mike?

Thanks, Fred, and good morning, everyone. Consolidated net sales for Q2 were $133.7 million, of which approximately 31.5% were from the U.S government, 26.5% from international end customers, and 42% from domestic commercial end customers. During Q2, we achieved a consolidated book-to-bill ratio of 1.57 with both segments achieving a book-to-bill ratio in excess of one-time sales. As many of you know, Comtech's reported backlog of $567.3 million only consist of funded and/or firm orders. As such, some of the contracts that we have been awarded during fiscal 2018 and fiscal 2017 and even before have not yet been fully funded, hence they’re not reported as backlog. So when you think about the strength of our backlog, you should be mindful that the total contracts that we have in place are actually higher than our backlog by a material amount. For example, our AT&T contract for $96.2 million have a multiyear ordering period and not all of it is in backlog. Our SNAP contract for $123.6 million covers a 3-year period and has minimal funding to date. Because we’re the sole provider for many of our contracts, funding is generally assured and likely to occur. But when we report backlog, we believe to take -- we believe what we do is a conservative view. Going forward, we are going to try to put some metrics out there for you to follow the contracts, but I figure I would mention it, because I do think it is relevant when understanding our current position of strength. Now let me turn it back to sales and give a sense by segment on what is happening. Net sales in our Commercial Solutions segment for Q2 were $85.8 million, an increase of 4.5% when compared to last year. Sales in the segment represented approximately 64.2%…

Thank you, Mike. I guess, 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 are 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. In the satellite modem area, we continue to be the undisputed leader in the single channel per carrier or SCPC systems, driven primarily by our proven ability to deliver the most bandwidth efficient modems. We continue to focus on expanding our total addressable satellite ground station market and have been developing and marketing our new HEIGHTS network solution. The HEIGHT solution is intended not only to meet the demands of traditional fixed geostationary satellite systems, but also provide distinct advantages for those system uses considering migrating to high throughput satellite systems, as well as MEO and LEO orbiting satellite systems. This is an entirely new market for us, but one which is much larger than our traditional SCPC market. And to date, customer reaction has been and continues to be very, very positive. Just this week we announced that we expand that our HEIGHTS portfolio to include three new and innovative remote gateways: The indoor H-Plus Remote Gateway; the H-Plus outdoor Remote Gateway, and the H-Pro outdoor Remote Gateway. Our H-Plus Remote Gateway products give our customers the flexibility to choose between hub and spoke VSAT connectivity, plus the option to run in true SCPC efficient mode. Our products also allow service providers and end users to move the entire VSAT system outdoors mounted onto an antenna and out of the remote environmentally controlled shelters.…

Thank you. [Operator Instructions] And we will go first to the line of Tim Long from BMO. Please go ahead.

Good morning. This is Alex Spektor for Tim Long. A question on your international business. It's been fairly stable as a percent of revenue, but generally declining in absolute dollar terms. Fred, you just talked about some of that enterprise solutions gaining traction in the Middle East and two international customers for troposcatter. As we think about the $570 million of backlog, is the international contribution showing a good trajectory there? Thank you.

Yes, I think we can say that the international business will start to accelerate much more. As I mentioned and as Mike mentioned, a part of the problem is always been the tropospheric scatter business is a lumpy business, and that's international business for the most part. That has been in a kind of a downward trend for the last, let me say, 18 months or thereabouts. But I think as I mentioned, I think we see the trend now going up, again, we’ve received a couple of programs. These programs really have a long, long marketing cycle, and -- but there's lots in the pipeline. And besides that, besides the international, obviously, we're now pursuing the government, the TRC-170 replacement.

Thank you.

Thank you. We will go next to the line of Mark Jordan from Noble. Please go ahead.

Good morning, gentlemen. First question is on the new BFT terminals that you are going to be producing. Noticed that the first award came through ADS, which is a logistics company servicing the Army. Was that down to expedite and not have to go through a formal RFP type of -- an award process. And do you expect that vehicle to be used for successive purchases?

The answer to the first part, Mark, yes, it was done for expedited purposes to get us on order. The second part of it, I think the Army does not intend to go that route in the future, if they can avoid it and go directly to us.

Okay. In terms of sizing this, you’ve mentioned that there's 100,000 terminals out there that could be upgraded. And is it correct, if my memory serves, that those were -- your prior transceivers were about $2,500 a piece, is that a reasonable estimate in terms of value and over what timeframe do you think they might upgrade those 100,000 units out in the field?

To the best of our information right now and discussions with the Army, they're looking to immediately field as fast as they can about 100,000 transceivers. The $2,500 price that you mentioned is roughly in the ballpark, I think, what we're talking about here. And I think as far as the delivery cycle and the ordering cycle, it obviously depends upon the funding that they have and so forth. But we believe that they really are behind schedule on the fielding of the BFT-2 system. So we anticipate that to occur pretty rapidly. As you can imagine, the first order that we've gotten, the Army is exactly being very careful again just to make sure that they get a good product. We believe this is a product we've had -- seven years ago, we had the product to have that solution, but seven years later we're finally getting there.

Okay. The SNAP re-compete, what was the pricing on this current contract versus the prior one from a margin standpoint? And how linear should the revenues be on this award? And given the fact that, would you expect all the feelings to be consumed over the 3-year timeframe?

I think we would rather not talk about the pricing obviously. But I think it is a 3-year program depending upon -- its really a support contract with sustainment services. So it really depends upon how many of these terminals are sent back by the Army to us for refurbishment and upgrading. Not knowing exactly their schedule it's difficult, but it is three years and we're assuming a linear revenue stream.

Okay. Final question for me, with the large 911 contract of $100 million plus won, where you’ve displaced West. Given the fact that you’re picking up incremental volume, what impact does that have for your margins in that segment, given I think it's a hosted service. So would this enhance the overall margins of that business in addition to just the revenue growth?

I think the short answer is, yes. For that specific program there would be some margin pickup there.

Okay. Thank you.

Thank you. We will go next to the line of Stanley Kovler from Citi. Please go ahead.

Hi. Good morning. Thanks for taking the question. So, you talked about your government book-to-bill has been above 1 for the past four quarters. And when we look at the revenue, it's been flattish recently. Can you help us understand the duration of the backlog that you’re building there to better assess how that will trend not just over the next two quarters, but perhaps some visibility over '19? I appreciate all the discussion about the orders and trends. Just wanted to get a little bit more color on those two items.

Sure. I think a very simple way to think about our backlog, it's kind of aligns with our percentage of sales. So, we’re seeing the Commercial segment being about 60 some odd percent of our sales, you could think about backlog being of that nature. And certainly on the government side, the backlog number is less representative of the total contract value that we have in place and as I mentioned in the call, the $125 million SNAP program, there's virtually none in backlog and that’s really a 3-year program. So when we think about visibility, I guess, to use that phrase, I think we’re gaining visibility in terms of let's say 9 to 12 to even maybe 18 months that we have pretty good visibility in terms of a base set of business. There is that -- there's certainly the book to ship type business in our government business that does occur, but we’re starting to get pretty good visibility, I would say beyond 12 months in terms of a base set of business that we have.

Thanks. And when we look at the operating cash flow outlook for fiscal '18, how close will that be to where you wind up with your adjusted EBITDA outlook? And then, as you think about the cash you will generate in the second half of this year, and going into '19, in the past you adjusted your dividend now with a lower tax rate and better visibility. How should we think about your dividend policy and use of cash there? Thanks.

In terms of the cash cycle and the total amount of cash, I would point you to 2017. I think our operating cash flow on a free cash flow basis that we’re going to do in 2018 is going to be similar, maybe even slightly lower than 2017, that really is just a function of the waiting of the quarter in Q4, but it's going to be real close to 2017 is the way we’re thinking about total cash -- free cash flow and obviously that will come in 2019 in Q1 for whatever doesn't come in Q4. So that’s how we’re thinking about it. I think from a strategic perspective, I think the dividend still is an important component of our capital deployment. At the same time, we want additional balance sheet flexibility and right now with our current facility, I think you'll see us reduce the revolver with no other changes in our capital structure. And I don’t -- Fred, if you wanted to add any more comments to that?

No, that’s fine.

Okay. Thanks. And if I can just squeeze in a follow-up on government side. I just wanted to understand sort of the margin profile of the BFT-2 business that you have, you were getting a license fee for number of years and so now this is going to transition to more of a product business. I’m curious what impact that will have on your gross margin as we head into late this year, next year? Thanks a lot and good luck.

Sure. We’ve said it before this way, we were obviously optimistic, we were going to get some of the BFT-2 transceivers, which we're so pleased to have received. Last year when you look at the adjusted EBITDA margin on the Government segment, it was about 8% in total which included the BFT-2 -- a BFT-1, which do not include the BFT-1 IP fee in Q4. So if you look at Q4 of last year, we did 8.7% without that. So if I could this way, I think that’s where we’re going to wind up being for the year in 2017, that’s sort of a good proxy of where we’re going to be and we want to get higher and total. So, but we don’t want to give out specific margin statistics on the BFT-1, on the BFT-2 transceiver, but our hope is to get the segment to 9% to 10% adjusted EBITDA margin, relatively quickly and we will see where it goes from there. But we are taking it in steps and right now we think 8.5% -- 8.7% or something like that is going to be the margin this year. Just like that was on Q4 last year, but we want to get higher.

Thanks a lot, and good luck guys.

Thank you. And we will go next to the line of Mike Latimore with Northland.

Yes, thanks. Congratulations, boy. Great to see the organic business and TCS assets come to fruition here. I guess on -- just on the PFT opportunity, you talked obviously about sort of upgrading a 100,000 units to BFT-2 is the opportunity. But then he also said, long range, you’re planning on BFT-3. So it's a fact that they’ve upgraded sort of 100,000 to BFT-2 and then there's another 100,000 opportunity to go up the BFT-3, is that the way to think about the long-term?

Yes, I think definitely I mean what we’re seeing now is finally after many, many years as I mentioned, our BFT-1 system is 15 years old. And so, still being used by the Army as the main system, because the BFT -- excuse me, the BFT-2 was never really, let me say, worked out. So BFT-2 will replace BFT-1, and BFT-3 will replace BFT-2. Timing wise, I think we should be thinking in terms of BFT-3 being in the call that the 20 timeframe or 2021.

Got it. Okay, great. Thanks. Then on the -- you talked about this tropo opportunity with U.S government. I think you described it as hundreds of millions of dollars, is that -- would that be the opportunity for a single vendor in terms of if you were to win that, that would be your opportunity or would that be an opportunity of which you get a segment of the business?

Well, that's -- the numbers that I quoted was really our opportunity. And as far as the competition there are two parties bidding on this program and the outcome will be winner takes all.

Got it. Okay. Yes, great. And then just last on the big sort of the new 911 deal that you announced this quarter, how long till that sort of fully implemented? And also can you just try little more clarity on sort of the reason to be -- sort of exclusive vendor here? It's kind of unusual to see sort of an exclusive vendor in this category, at least historically?

I think, again, we can't speak for our customers. And as you know prior to this most of the carriers wanted two suppliers. We managed to convince this particular carrier that our product was superior and superior enough and the price was attractive enough that we can handle it to make them -- get more comfortable with a single supplier.

And Mike, we think that the transition is going to take at least 9 to 12 months, before that occur. So there will be some incremental revenue down the road. But it's going to take about 9 to 12 months for the migration to occur.

Okay, great. And then just last question. The tax rate, I know you’ve given sort of tax rate guidance here. Is that the rate we should also use in the third and fourth quarter or what specific ratio would you use in the third and fourth quarter?

Yes, it would be -- again, without any of these one-time type things that could occur, its 27.75% for Q3 and Q4, that’s right.

Okay, great. Thank you.

Thanks.

Thank you. And we will take our next question from the line of Kyle McNealy from Jefferies.

Hi. Good morning. Thanks for the question. A few items on backlog. Is there an aged backlog number that you can give us for expectation over the 12 months that convert to revenue?

The short answer is no. I think we have pretty good visibility out 9 to 12 months in both the commercial and the government segment is the way to think about it. There is some backlog that goes out to 2020, no doubt. But it is the total contract value number that we will tell you to think about, because there's things again like the AT&T $96 million contract, not all of that is in our backlog number. The 125 SNAP is not in our backlog number. So, from a visibility perspective, again I would say its 9 to 12 months, if not pushing beyond that is what we have in place, and then obviously we expect to record pretty solid bookings in Q3 and Q4, that will add to our visibility length, but I think the overall good news is the level and strength of our bookings here and our backlog is, we’re getting more visibility into the business perhaps than we've ever had before and that that's really a good thing to have.

Right. Great. And is there a number you can give us for the backlog including unfunded?

Yes, I think as I mentioned Alex (sic) [Kyle], we’re going to try to do that. Right now we just don’t have a good number to give you. I mean, you could go o back and pull the press releases results and kind of do that, but we’re going to try to put some out there for folks and we thought it was a good number, but we’re just not ready to do that today.

Okay, great. Should we expect to see that -- I know TCS had disclosed the unfunded backlog in some of their Ks and Qs. Do you intend to do that?

We’re going to look at it. So, short answer is yes, we are looking at doing that.

Okay, great. And circling back to the BFT transceivers, I know there has been a lot of talk about it on the call, but just one last point. Do you expect that, there's going to be a share on split for those new BFT-2 transceivers or do you expect to get a majority of those new orders?

I think as far as the army is concerned, if our units perform, we will get the total share.

Okay, great. And one last question on gross margin. Can you talk a little bit about margin [ph] trajectory for the remainder of the year? I know that you mentioned I think the government solutions business transition towards -- away from lower margin revenue is, it's largely -- you’re largely past that transition. Do you expect [technical difficulty] start to pickup in the back half of the year and I know it's still in a downward trajectory, but once we start to see the benefit from that transition in Government Solutions?

We think it's going to happen in Q3. In total, our gross margin in Q2 was 38%, which was a decline in from the Q1 number of 39%. The way I would tell you think about is we'd like to get back to the Q1 number for the year in total on -- in average, so if we can hit the 39% in total, that would be great. What is going to -- what is -- it’s not a challenge, it's sort of a good news, right. As the government segment business grows which is now recurring, those margins are lower than the commercial segment. So the good news is the total values may -- will increase, but it becomes a little bit more challenged to increase the percentage of revenue. So I think our immediate goal is can we get the 40% in total, that would be a great thing for us to do. We are not one percentage point change from where we are today in our minds to where we need to be. So that, I think we'd like to take it in steps, let's get to 41st, but we think we're headed up.

Okay, great. Thanks. That’s it for me. Congrats on the quarter, guys.

Thank you. And we will take our last question from Glenn Mattson with Ladenburg Thalmann. Please go ahead.

Yes. Hi, guys. Most of my questions have been asked. I’m just curious, obviously, you’re not giving anything remotely close to 2018 guidance, but just the cadence of the last couple of years with a very large Q4 number versus the prior three quarters, is that kind of how to expect to think about the business going forward given whatever information we have now is just that -- is that the natural cadence of the quarterly -- the way the quarters fall?

Yes, I think -- I will answer the question in a little bit more broader sense. I think when you look at our year-over-year guidance, the growth rate that we’re seeing on revenue is a little under 5%. The way we see adjusted EBITDA is a little under 5%. So when we are thinking about next year, with all of the puts and takes, I would say that's probably the right way to think about the years in total. Again, these large contracts that we have are difficult to predict. So even the BFT-2 opportunities that we see -- we are not expecting that in 2019 to come into that big lumpy kind of a thing. It's just not the way we do our business planning. We'll take it if it comes, but we’re not thinking about it. So I think close to that 5% on the top and close to 5% on the bottom, again, could we get to 600 next year? I don’t know, that’s -- it's kind of tough to see given the difficulty of predicting these large contracts. That all being said, if we can get close to 600 and close to that 5% growth rate, then I think, yes, it will be sequentially back end loaded in Q4 because that's just what we’ve seen in the last three or four years both in the Comtech legacy business and in the TCS business. So, we’re thinking about it in the same way. And if we are able to level it out a little bit, that would be great. But from a pure modeling perspective and the way we do or plan our business, yes, we would expect Q1 and Q2 to be the lower quarters with a pop in Q3 and the big ramp up in 4%, just like we’ve done for the last several years.

Okay. Thanks. That’s helpful. And then just being that the TCS acquisition is pretty well digested at this point and everything is working pretty well on the balance sheet as you know repaired, is the company -- how aggressively are you looking at other acquisitions or anything like that?

I think the best way to answer that one is, we’re looking.

Okay. All right. Great. Thanks, guys and good luck.

Okay. Thanks.

At this time, I’d like to turn it back over to the company for any closing remarks.

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