Ladies and gentlemen, thank you for standing by. Welcome to the Comtech Telecommunications Corp. Fourth Quarter Fiscal 2018 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, Thursday, September 27, 2018. I would now like to turn the conference over to Mr. Jason DiLorenzo of Comtech Telecommunications. You may begin, sir.

Thank you, and good morning. Welcome to the Comtech Telecommunications Corp. Conference Call for the Fourth 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 will 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 assumption 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, Jason. Good morning, everyone, and thank you for joining us in this call. As announced yesterday afternoon, we reported our fourth quarter results of $167.4 million in revenues and operating profit of $16 million and adjusted EBITDA of $30.7 million and bookings of $214.4 million. We finished the quarter with a record-high backlog of $630.7 million. I could not be more pleased with our fourth quarter and fiscal 2018 performance. We enter our fiscal 2019 with a strong business momentum in each of our 2 operating segments, and I believe, we are well positioned for fiscal 2019 to be another successful year. As such, we are setting our fiscal 2019 revenue goal to be in a range of approximately $600 million to $625 million, our GAAP diluted EPS goal to be in the range of $0.89 to $1.10 and our adjusted EBITDA goal to be in a range of $80 million to $86 million. Our backlog and pipeline of opportunities are large. Our overall business activity remains strong. And if we achieve all of the business goals that we have set for ourselves, our actual fiscal 2019 results could even be better. I'll talk more about our recent accomplishments and business strategies later in this call, but first, let me turn it over to Mike Porcelain, our CFO, who will provide a discussion of our fourth quarter financial results and summary of the fiscal 2018 results as well as our fiscal 2019 guidance. Then I'll come back before opening up to questions and answers. Mike?

Thanks, Fred, and good morning, everyone. In almost every respect, Q4 was terrific and a perfect finish to a very successful fiscal 2018. Consolidated net sales for Q4 were $167.4 million, of which approximately 39.3% were generated from U.S. government end customers, 27.3% from international end customers and 33.4% from domestic commercial end customers. We did expect slightly higher revenues in Q4, but we did see a few things slip into our fiscal 2019. Otherwise, our revenues, we would have reported in Q4, would've been even higher. As you can see with our level of bookings, demand for our solutions remains very strong. During Q4, we achieved bookings of $214.4 million with strong order flow across almost all of our product lines. Our bookings exceeded our own expectations. We achieved a consolidated book-to-bill ratio of 1.28, with both of our segments achieving a book-to-bill ratio in excess of 1. As Fred mentioned, our consolidated backlog of $630.7 million, which was higher than what we finished Q3 at, is at a record high for the company. As I mentioned during our last few conference calls, when you think about the strength of our reported backlog, you should be mindful that the total contracts that we have in-house are actually higher than the $630.7 million amount. If you download our Q4 investor presentation from our website, we have, once again, included a table that shows a summary of certain contracts that we have been awarded and which indicates that we have additional visibility to approximately $500 million of potential orders from existing contracts. Alternatively stated, between backlog and contracts in place, we have approximately $1 billion of visibility into future revenue. Because we are the sole provider for many of these contracts, funding and orders are generally assured and likely to occur.…

Thank you, Mike. Now for some color on what is happening in each of our segments. First, I will 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. In the satellite modem area, we continue to be the undisputed leader in single channel per carrier or SCPC systems, driven primarily by our proven ability to deliver the most bandwidth-efficient modems. We do not take our market-leading position lightly, and we continue to invest in R&D to not only support existing customers, but to expand our addressable markets. We are also focusing on expanding our total addressable satellite ground station market by continuing to invest in our HEIGHTS product line. HEIGHTS is intended to not only meet the demands of traditional stationary GEO satellite systems, but also provide distinct advantages for those systems' users considering migrating to HTS and MEO and LEO orbiting satellite systems. To date, our customer reaction has been, and continues to be, very positive. In fiscal 2018, HEIGHTS sales experienced double-digit growth, and our pipeline of HEIGHTS opportunities is growing as we continue to seed this market. The U.S. -- we -- the U.S. government also continues to be a key customer of ours for our satellite ground station products. During the fourth quarter, we received a $2.8 million delivery order against a recently awarded 10-year, $19.1 million follow-on IDIQ contract. This contract provides long-term support for the Advanced Time Division Multiple Access Interface Processor, or ATIP, production terminals. This is…

[Operator Instructions] And we will take our first question from Asiya Merchant with Citigroup.

Congratulations on the promotions. Overall, an impressive fiscal year, but I do note that the fourth quarter did come in a little lighter than what was expected and towards -- and overall for the year, it was towards the lower end of your guidance. What were some of the surprises here? And then, as a second part, I mean, it seems like the guidance implies a significant ramp in the fourth quarter of next year. It seems like there's tremendous amount of visibility there. Is there something else to consider? I mean, I know, fourth quarter is generally always your highest quarter, but it seems like there is even more confidence that the second half will be stronger and in particular, the fourth quarter. So can you just help me understand what's driving that?

Sure. So on the first part of your question related to the lower side of our guidance with the revenue, I think as you guys have been reading in the press, there's lots of international trade discussions that are ongoing in the world. There's also a tremendous part shortage debt that's existing. So when you add those 2 things up, a little bit of uncertainty. Some of the customers wait because they want to figure out exactly what's going to happen. We did see some of that, and we do hear that through our customer base. And then it's just been difficult to get parts in some cases. So when you add it all up, there wasn't one specific item that caused, I'd say, a miss from our -- high side of our guidance. But we kind of factored in the best that we could at the time and those are the results. In terms of thinking about next year, same thing. We do think that some of these discussions into Q1 and Q2, you might see some -- a lower revenue in terms of what we might have thought 3, 4 months ago because of these things. But when we take a step back, based on the strength of our backlog, based on the strength of the opportunities that we see, we actually see every single quarter of next year being, what I call, a bit better than what we did last year and then certainly in Q4, which is supported by our backlog and timing of orders in-house, we do expect it to ramp. I mean, it's possible, as the year goes on, we pull in some items to get them out the door little faster. And we would be very happy to get orders in quicker than what we have built into our expectations. But I'd like to say, we're taking a conservative, but it's really a prudent view of what the revenue we think, and we feel pretty confident about the numbers we're providing.

And do you expect that component shortage to be rectified in the second quarter of fiscal or third quarter? Like, just so that I have an idea of your cadence of revenue growth and where you could be more conservative or where you expect some pull-in to happen?

The answer is no. I don't think I could do that. I mean, I -- it's tough to figure out what suppliers are going to do. And again, I don't want to imply that this is a major problem to us in any respect. It's just, $1 million here, $2 million there, that could make a difference for us given our size. But I just -- I would tell you to think about, if you look at last year's revenue for fiscal 2018, we do think we'll be a bit better across the board when you do a comparison.

And we will take our next question from Ben Klieve with NOBLE Capital.

A few questions for me. First, kind of a follow-up to prior questions regarding the supply chain. I mean, that's certainly something we've heard kind of across the board here, the challenges within the supply chain. And I'm curious if those challenges would be potentially felt in the BFT-2 follow-on orders. How does your supply chain look specific to that product?

I think I can answer that question the same way that Mike just answered before. This -- the BFT-2 transceivers that we are shipping at this moment, for instance, we're shipping approximately 500 transceivers per week. Just to give you a feeling of what that means in terms of revenue, that's better than $2 million every week. So a slippage of a component coming in could affect you severely enough for a couple of million dollars. But yes, we are being affected by it in terms of long-lead items that we need to buy. And we have to be aware of that, and we buy these long-lead items in sufficient time to make our deliveries.

Okay. Perfect, Fred. And I guess, as a follow-up to that then, as you're potentially looking at a large follow-on order for the BFT-2, how are you -- how can we look at working capital here over the next few quarters? I mean, do you think you're going to have to make kind of an investment in working capital in advance of these orders because of the supply chain issues? Or do you think working capital would be relatively flat throughout the year?

No, we do some -- expect some, I mean, just big picture, given the expected revenue growth that we are occurring -- seeing, it's sort of why, I think, when you add up everything, I'll tell you that cash flow from operations will be roughly $50 million or so. So I would say, there would be a slight buildup in working capital. If we have an opportunity to procure some parts that we know are in shortage, we'd certainly do that because if we know we have parts that we'll need for the next -- whether it's 6 months, a year or even 2 years that we know we're going to use, we may take advantage of that given the overall marketplace. But I don't -- I wouldn't describe it as a material change in our working capital ratios.

Okay. That's good to hear. And one other quick thing regarding our cash flow here. Maybe I missed it. Can you describe about what you think CapEx is going to look like here? This year, is it going to be kind of in the $8 million, $9 million range or it will be different one way or another, do you think?

Yes. We did, I think, a little under $9 million in 2018. I think looking forward to 2019, I think that's a base number. So whether we spend $9 million or $10 million or $11 million, within that, that's kind of the way I would think about it. We -- our business does not require significant capital expenditures, which I think, is kudos the way the operations are run. At the same time, especially on the 911 side, we do have investments that we will make for our customers because we do provide some of these services, almost like a cloud-based service. So if we win a big project, let's just say, we win something in Q4 of next year, and we know we're doing it, we'll put in a capital investment that may be above that number. But I would say, $9 million, $10 million, $11 million, that's probably the right way to think about cap expense next year.

Okay. That's perfect. And Mike, congratulations on the new role.

Thank you.

And we can take our next question from Mike Latimore with Northland Capital.

Congratulations on the strong bookings in the year there. I guess, it sounds like you have a number of large opportunities in fiscal '19. So can you just sort of highlight what would be the 2 most important ones or largest opportunities? Is it the another BFT order and then this and a multiyear RFP for tropo? Or what would be the 2 that maybe jump out as the biggest opportunities this year?

I think you're right. I mean, the 2 largest opportunities that we are looking at are the troposcatter replacement of the AN/TRC-170 and also the BFT-2 transceiver program. First, on the troposcatter situation, I think, we're not expecting any revenue or any impact from that program in 2019. We believe that the program will probably be decided or contracted for some time between the first quarter of the government fiscal year and probably the third quarter of fiscal year. I think, the government is telling everybody that they will try to do it in the first quarter, but we tend to not believe that, that will happen that quickly. But we're kind of programming it for the third quarter of the government fiscal year. So that impact will not really be on our 2019. But as I mentioned, it will certainly impact our future business. The BFT-2 situation is, we got the first order for the 5,000 transceivers, which we're shipping at this time, which we started in the fourth quarter. We expect other orders similar to the same as the first one. When exactly they will occur? Tough to see. The -- certainly, the long-lead items and the material problems do affect its delivery. So we are kind of hoping that the government will come across earlier than we anticipate. But we -- as far as shipments and revenue for '19, we're really only expecting 1 or maybe 2 additional orders at best.

Got it. And then, Mike, you gave some color on expected relative growth, commercial versus government this year. What does that mean in terms of EBITDA contribution by segment? How might that change this year?

Yes. I would say, first, the -- right now, given that it's so early in the fiscal year, I would say, I have more comfort to tell you to think about it, consolidated EBITDA margin being in the 13.7% range. That I would say is probably the best way at the moment to look at it. But taking a step back, we do have pretty good pipeline and backlog into our government segment. And so when you look at the 7.7% we achieved in fiscal 2018 in terms of EBITDA as a percentage of sales, I do expect that number to increase. So 7.7%, I think, we're going to do better. I'd love to hit 10% in 2019. That was the goal that we set for ourselves. Can I get there? I'm not sure. So if we hit 9%, 10%, 10%, 11%, whatever we do, the rest will fall into the commercial side in the unallocated column. Speaking directly on the commercial side, we did achieve 19.7% adjusted EBITDA margins for the year, which was better than what we thought. It was an improvement than what we did year-over-year. If you go back to 2017, we did, I think, around 18%. So we did improvement. We are expecting 2019 to be another year of investment in, what I call, the HEIGHTS products. We're seeding the market. We're seeing growth. We want to build this total addressable market as fast as we can. We believe, we have the best product on the marketplace and so we're going to do anything we can to get the market share and do what we need to do to build this market for the long term. So we made a comment in our call, our HEIGHTS products do have, today, lower gross margins than our traditional products. So we will see some gross margin pressure, if you will, to use that phrase, in our Commercial segment. And that will impact the margins. Can we beat the 19.7%? We did in '18, I'd say, it's going to be tough at the moment to do that. But we need to see how the year plays out and the actual contracts that we get in.

Okay. Got it. Makes sense. And last one, you guys have, obviously, fully integrated TCS and getting a lot of synergies out of that. What's the general thought on acquisitions going forward? Is that part of the plan or not part of the plan?

I think, just to simply answer that, it is certainly part of the plan.

And we will take our next question from -- excuse me, Chris Quilty with Quilty Analytics.

Mike, just a clarification on the BFT-2 given the amount that you shipped, is '19 supposed to be an up year or down year in terms of revenue for that product line?

It's supposed to be an up year.

Okay. Just because of the timing of when the original shipment started in '18?

Correct.

Yes.

Okay. Kind of an off-center question here, but looking at the hurricane effect that happened with Florence and I guess, more broadly with some of the natural disasters, does that impact either your Safety & Security business or -- on sort of the government first responder side in any way? Or what's your exposure there?

It's -- in -- the bad news is sometimes good news, I guess. When an event like that happens, it certainly puts more visibility on the need to upgrade systems and so forth like that. But during a natural event disaster, there's a lot of rerouting stuff and a lot of stuff that needs to occur to get the lines back up if things are down. So we do generate some incremental revenue when those things happen from time to time and some of those are negotiations after the fact with the customer. But I would say, I think, given a number of events that have occurred, whether it's the shootings or natural disasters, it's showing the state and local governments that there's a tremendous need to upgrade their systems. And from that perspective, it's helpful -- from a -- to our business.

I guess, another thing to say is that in this recent Florence situation, our systems passed with flying colors. We had absolutely no problems.

Great. That's good to hear. Shifting gears over on to the government side, lot of discussion about possible establishment of a space force. Any exposure there, positive or negative, to the business model?

Not that we can see at this moment. I think it's way too early, certainly for us, to see where we could fit into that equation, whether that -- whether it's space or whether it's ground. We certainly aren't in the space business, but we could be in the ground support business.

Got you. And on the troposcatter business, I thought reading in the 10-K that it sounded like there was a little bit of a deemphasis on some of the international programs and a larger focus on U.S. government. Is that a correct characterization? Or how do you look at the balance in business on a go-forward basis?

Yes -- no, I would say, Chris, that would be an incorrect read or view. I think what we've done is, we actually won some contracts. We've been talking about the international with the Verizon business for quite a while. We had a $31 million program that we won in Q4. We had a $9 million program that we won in Q1 of 2019. So those are 2 programs that we have been working on for a number of years. And the phrase that I continue to say is, we never have more sales and marketing people on the ground focusing on this product line. I will say, this is a long sales cycle. So as we think about the product line in 2019, there's nothing imminent, I would say, that we're expecting based on where we are in terms of conversation. But there's tremendous activity on that product line overseas as well as, as Fred mentioned, with the U.S. government on the TRC-170 side.

Okay. And the oil and gas business there has kind of been up and down over the years, I would imagine, with oil prices and activity. Is that heating up for you at all?

I think that's always been a minor portion of our troposcatter business. But yes, you're absolutely right. It has its ups and downs. At the moment, it's kind of in a down phase. But we could be surprised with a couple of new requests since oil has been -- the price of oil has been rising. So...

Got you. And final question. The Navy satellite modem program, the $59 million order you have last year, I think you indicated most of that was shipped and that there was a large pool of aging modems that still need to get replaced. Can you characterize how big, relative to what you've done already, that opportunity represents?

I think -- I'm not sure that we shipped most of it. We shipped a great deal of that in '18, but there's lots of more revenue to be had from that program in '19. I think we also look at the futures of that particular model modem that we have. It's not only being procured by the Navy, but also some strong interest from the U.S. Army and also the Air Force.

Yes. And Chris, just to clarify, right? This is a $59 million contract. It's an IDIQ contract. We did get an initial order off of that contract, which -- I don't know offhand, what that number was, but it was like $11 million or so. That's the order that I think you're referring to that when we say we shipped it. Yes, that -- we pretty much shipped most of that initial order. So just from a math perspective, if you take $59 million and you minus $12 million, that's the rest of the contract that we don't even have that in backlog at the moment, for the most part, and we would be expecting additional orders throughout fiscal 2019 to deliver that. And I know it's a multiyear program. So that's really the representative of the remaining demand that's left for us to go to that program.

But that's on that program. But I think you also indicated that, that program represents perhaps a small piece of the overall broader market.

Yes. I mean, there's other military commands that we are speaking to and that can go on. And yes, then it becomes a much larger number, could be hundreds of millions of dollars. But that's just something that -- it would be in the early stages. But yes, you are correct if you're -- if that's the way you're asking the question. There's a very broad opportunity for us out there.

And we will take our next question from Glenn Mattson with Ladenburg Thalmann.

Mike, I might have missed what you said. But when you're -- I think when you were describing the satellite earth station business, you kind of talked about some opportunities, but also some challenges. Can you kind of just elaborate on what you meant, what kind of challenges you're referring to there and just, generally, your overview of the demand backdrop in that business as you see it?

Yes. The only challenge we're seeing and first of all, our satellite earth station business is expected to grow in 2019 versus 2018. The only commentary that we're saying is, international market conditions have become a little bit more volatile. You see that in the press, obviously, and most of that is directly related to the trade discussions and headlines that go back and forth between the U.S. and other countries. So there is some, call it, uncertainty as to what's going to happen in there. So -- is that a challenge? Yes, that's a challenge. But other than that, our business is quite healthy. We are expecting year-over-year revenue growth. It's been 3 quarters in a row of revenue increases and very, very strong order demand. And our HEIGHTS products is doing very, very well. And we grew double digits in 2018, and we expect that growth to continue in 2019.

Is South America a significant end market for that business? And is it that you've seen challenges with some of the countries there that are having some economic turmoil?

Yes. I mean, it's a worldwide product. So South America, Africa, Europe, China, those markets are there for the HEIGHTS product line.

Last question on the in-flight. Can you talk about that at all? Maybe I missed it, but can you talk about the outlook for in-flight connectivity in 2019?

Yes. I mean, it's steady Eddie. I guess, we're at a point where we have sort of a steady order flow of revenue. So we're not expecting a big pop in revenue next year. But it will be part of our revenue assumptions. We continue to work on expanding our products with other customers. But obviously, that takes time to get qualified and so forth. So we're not expecting anything in 2019 that would be, call it, unexpected.

[Operator Instructions] We'll go next to George Notter with Jefferies.

I guess, I wanted to ask about the gross margin outlook in the government business. Just going through the 10-K, it looks like that margin was down year-on-year in 2018. And I get that given the loss of the BFT license. But it sounds like the outlook there is for flat gross margins in 2019. I guess, I'm just trying to better understand the puts and takes there. Why couldn't margins be better as you get growth in the business going forward?

Sure. I do think it's possible and probably likely, over time, the gross margins will improve from the level we're thinking about for 2019. George, we did get a bunch of what we call the international over-the-horizon contracts in Q4 as well as in Q1. And some of these programs were so large, the way -- we take a very prudent approach to our gross margin assumptions, as we recognize the revenue. As the program starts to move along and we start to make good progress and assuming there's no mistakes or hiccups or anything like that, we'll be able to report effectively higher gross margins. But we take a very prudent view on those early margins. So that's built into our assumptions. If you look at our past, you've seen -- you go back a couple of years, as we get these programs, we will see an improvement in that margin and that's really what's impacting our margin, growth from not being higher.

And at this time, there are no additional questions in queue.

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

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