Good day. And welcome to Comtech Telecommunications Corp.’s First Quarter Fiscal 2019 Earnings Conference Call. Currently, all phone lines are in listen-only mode. Later, there will be an opportunity to ask questions during the question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to turn the program over to Mr. Jason DiLorenzo. You may begin, sir.

Thank you, and good morning. Welcome to the Comtech Telecommunications Corp. conference call for the first quarter of fiscal year 2019. With us on the call this morning are Fred Kornberg, Chief Executive Officer and President of Comtech; Michael D. Porcelain, Senior Vice President and Chief Operating Officer; and Michael Bondi, 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 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’m 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 on this call. This morning, we will be discussing our results for our first quarter of fiscal 2019. As you can see from yesterday's press release, we're off to a great start and we believe our first quarter results provide a solid foundation for what we anticipate will be a year of revenue and adjusted EBITDA growth. As you are aware because of the recent stock market activity and political headlines in the news, business conditions have become more volatile. Although we are mindful of this volatility we believe that the overall demand for our products remains strong and we currently do not see any change to our strong current business environment. As such, we're updating our fiscal 2019 targets as follows. We're increasing our revenue goal to a range of approximately $625 million to $640 million. We're increasing our GAAP diluted EPS goal to a range of $0.95 to $1.08 and increasing our adjusted EBITDA goal to a range of $84 million to $88 million. I'll talk more later in this call. But first let me turn it over to Mike Bondi our CFO, who will provide a discussion of our first quarter financial results and after that Mike Porcelain, our CEO will discuss our two business segments. Then I'll come back before opening up to questions and answers. Mike?

Thanks, Fred and good morning, everyone. As announced yesterday afternoon we reported our first quarter results $160.8 million in revenues and operating profit of $7.3 million, adjusted EBITDA of $18 million and bookings of $157.4 million. We finished the quarter with a consolidated backlog of $627.3 million. Our first quarter results benefited from a shift in sales of approximately $10 million in our Government Solutions segment, which primarily occurred due to accelerated customer building schedules. Excluding this impact, our first quarter of fiscal 2019 results were still significantly above our expectations and reflect higher net sales in many of our key product lines. As Mike Porcelain will discuss next, we experienced sales growth in both our Commercial and Government Solutions segments. From a geographic perspective, sales to U.S. based customers were 75.6% of total sales, with 24.4% to international customers. On the bookings front, we achieved $157.4 million and despite our strong sales our consolidated book-to-bill ratio was 0.98 times. We finished the quarter with a near record high consolidated backlog of $627.3 million. Our gross profit percentage in our first quarter of fiscal 2019 was 35.9%, which does as anticipated reflect the decline from the 39.3% we achieved in the first quarter of fiscal 2018. As a reminder, our gross margins are influenced by product mix changes and our Government Solutions segment generates lower margins than our Commercial Solutions segment. So when Government Solutions sales pick up, it will likely impact our consolidated gross margin percentage. This quarter, our Government Solutions segment represented 51.5% of consolidated net sales as compared to 37.4% last year. This increase in the percentage of Government Solution sales contributed to a lower consolidated gross profit percentage this quarter. For the full fiscal 2019 year, given expected sales growth and product mix changes, we expect…

Thanks. As you can see by our results, we are experiencing positive business momentum in each of our two operating segments. We believe we are well positioned for fiscal 2019 to be another successful year. Our overall business activity remains strong and let me give you a sense by segment. In our Commercial Solutions segment, which is focused on several large growing markets, here sales were $78 million as compared to Q1 of last year, which were $76.1 million. This quarter was a good quarter on many fronts for our satellite earth station product line, which includes our Heights products or SCPC satellite modems and solid state power amplifiers. Sales of these products were higher this quarter, as compared to Q1 of last year, and we continue to see the market with our Heights products. Additionally, based on our current opportunities or business outlook for fiscal 2019, still assumes that sales of our Heights solutions will grow significantly from current levels. Just a few years ago, this product line had absolutely no revenues and we now are sitting here looking at double-digit sales growth this year. Also our U.S. government customer continues to be important for this commercial satellite earth station product line. In fact, just yesterday, we announced a delivery order for $9.8 million related to our $59 million contract award from the U.S. Navy space and Naval Warfare Systems Command for our SLM5650B satellite modem, along with related services. This contract still has a $40 million of available ceiling and we expect additional orders in future periods as this contract becomes fully funded. Given overall market dynamics, we are optimistic that we are experiencing a period of multi-year revenue growth for our satellite earth station product line. Turning to our Enterprise Technology Solutions and Safety and Security Technology…

Thank you, Mike. As I mentioned before, I'm pleased to how our business is navigating through what has recently become a more volatile business environment. As I see it today fiscal 2019 is expected to be a terrific year for Comtech. I see positive signs across all of our businesses. With that in mind, our new revenue guidance reflects an increased range of $625 million to $640 million. At the midpoint, our new revenue targets reflect an annual growth rate of slightly less than 11% that I believe is impressive. Also our new adjusted EBITDA guidance reflects an increased range of $84 million to $88 million. At the midpoint here, our new adjusted EBITDA target reflects an annual growth rate of almost 10%, again, I also think that is very impressive. Additionally, I do want to say that the CFO and COO transition that we implemented on October 1, 2018 went without a hitch and I'm very pleased with our talented company-wide management team. Finally, given our strong business outlook our Board of Directors has declared a dividend for the second quarter of fiscal 2019 of $0.10 per common share, which will be payable on February 15, 2019 to shareholders of record at the close of business on January 16, 2019. Now, I’d like to proceed to the question and answer part of our conference. Operator?

Certainly. [Operator Instructions] And we will take our first question from Tim Long with BMO Capital Markets. Your line is now open.

Thank you. And congrats Michaels on the transition there. Two questions if I could, just on the E911 business, sounds like a lot of deals have been won there. Could you talk a little bit about the timing of how you think you'll fulfill those, and also just give us a sense as to how long -- where we are in the game here? How many more opportunities there are further than that? And then secondly, just on the gross margin, obviously you talked about mix being the big impact this year to government. But within government, are there measures that can be taken to help maybe grow that that gross margin or are there certain mix shift that could help that as that business evolves over the next few years? Thank you.

Sure. Most of the programs in the 911 side of the camp that we won in Q1 were also relatively small or add-ons to existing programs. So from a trajectory perspective, it will be pretty even out through fiscal 2019.The number of opportunities on the other hand continue to increase. And we always use the phrase, we're in inning number two, but it's been a pretty long inning number two. Sales cycles in this market are pretty long and we're bidding and working on a number of opportunities. And we just need those things to come in when we'll win our fair share. In terms of the gross margin side in our government business, I will tell you to look at what we did since last year. And we report EBITDA, we did 11.2% EBITDA margins in our Government segment, which was -- beat what we did in Q4 of last year, which was 10.8%, and was also a significant improvement from the 1.8% we did a year ago. Our facility closures that we did in Q1 is an example of some of the things that we're working on to improve some of our margins. There are some costs that we've been working to take out, but we're doing it rather slowly. And at the same time we're also increasing costs on the marketing side and other areas. So when we sit back we think we're going to get to double-digits for the year in the Government segment, which should be a meaningful improvement from the 7.7% we did last year.

Okay, thank you very much.

[Operator Instructions] We will go next to Chris Quilty with Quilty Analytics. Your line is now open.

Mike, just a clarification there. Is that double-digit by fourth quarter or double-digit for the full year?

No, for the full year. I mean, we did 11.2% in Q1. And you might have some bounces up and down a little bit throughout the year, but no, we do expect to be over 10% for fiscal 2019.

Okay. On the acquisition that you're working on, can you tell us whether that's on the commercial or government side? And part two, do you have a preference or is it just more opportunistic in terms of which side of the business you're looking to deploy capital?

Chris, this is Fred Kornberg. I think we'd rather talk about that acquisition when it occurs and not at this -- not on this phone call.

Okay. Let me shift that a little bit. It sounds like the Trump administration is going to start calling back a little bit on defense spending after a couple years of increases. Does that change your thought on the balance of the business or the potential growth rate given the programs that you're exposed on.

No I don't think so. As I think I mentioned that I think our momentum is there and I think it will continue. We're really instituting a marketing push on programs that will last, by last, I mean, programs that are on the record and will last 5 to 20 years.

Great. And on the Heights platform, can you give us a sense of where you're seeing the most success with that platform either by vertical market or application?

I think, the success on the Heights I think is really widespread. We've previously announced for instance, that we won the Carnival Cruise Line project. We haven't received that order as yet, but we have been told that we won that. So that’s one area which is the cruise line area obviously. The other areas are the basic communications satellite systems and networks we believe that especially with the influx of hopefully the LEO and MEO satellites that Heights really be a star performer in that area.

Got you. And I know in the 10-Q there was a statement that you haven’t seen any impact from international sales given some of the volatility we’ve seen. Are there any areas where you’re seeing any level of concern about demand coming from international markets?

Not really, Chris, I mean, in fact with tariffs and everything it’s probably caused people to put some orders on the books rather than wait before potential changes in that. So that’s probably one area where maybe there’s actually been some acceleration of it, but I would certainly characterize that as being not significant and not material enough for us to talk about. So, no, we haven’t seen it as it relates to our guidance if you remember when we gave our guidance back at September we kind of gave some thought to this and we’ve kind of considered those thoughts in our guidance back in September and are reflective in our current thinking as well.

And presumably that also covers components on the supply chain for your products?

Yes, I mean, we are still seeing component shortages and it’s impacting some of the stuff on the military side, as well as the commercial side. But again yes we’ve kind of given in our thoughts and that does get into the comment that Mike Bondi made earlier where timing could shift between the different quarters some of that is part availability and stuff like that and fielding schedule. So there’s a lot of changes that we’re seeing that are a little bit more volatile in terms of roll outs, but again we’ve kind of considered all of that in our thoughts.

Great, I will bow out and let someone else ask questions.

And we can take our next question from Glen Mattson with Ladenburg. Your line is open.

Hi, thanks for taking the questions. So, I guess, Fred mentioned he didn’t wanted to talk about the end markets that the potential acquisition would be geared towards, but can we talk a little bit about what kind of parameters we’re talking about just so we can get an idea and frame it. Is it I guess you increased your borrowing capacity, so I imagine that was in anticipation of this; would you imagine using all of that increased capacity or would it be all of that plus something else like plus stock or like just give us a sense of how -- what size it is? And then just said small but growing sometimes growing company self or kind of higher multiples and things. So is your thought process that this would be dilutive or accretive shortly after the position, just some kind of general sense financially the parameters around what we’re talking about.

Sure, well, I will point you to the magic word, small, small, but growing. This will likely be something that we’ll pull down from our revolver, but it’s not going to be a material impact to our ratings at all. I would even say it’s not going to be a significant impact to our debt profile in any way, shape or form. So it’s something that we think folks will be excited about, but right now we’re just going to stick to small and growing. It is a technology company and we might see some amortization in there. So I’ll leave it to that, but as, Fred, said we really can’t say and of course there’s no certainty that ultimately we could be successful within the transaction. So let’s just things play out and we’ll report back to you and we think if we’re able to successfully close the transaction it will be some really good news.

Okay, thanks for that extra color. And then, you mentioned a little bit more detail about tropo and the length of the contract, should you be able to win one. Could you just give us a little more color on what kind of feedback you’re getting as far as timing or competitive -- your situation versus any potential competitors?

I guess, we have very little to report at this time that’s any different than we reported three months ago. I think the army still standing with their words that they would -- let’s say that they’ve made a decision and that they will award the contract in the first quarter of their fiscal year, which started in October 1 and will end in December 31st. So, if you take them at their word they've got a couple of weeks to go. On the other hand it's extremely quiet and silent. So I think we don't expect it to happen in December, we hope that it happens in the next quarter, which will be in the let's say the January to March timeframe.

Okay, great. Thanks for the color and good luck.

And we will take our next question from Kyle McNeely with Jefferies. Your line is open.

Hi, guys thanks a lot for questions. I guess, I wanted to see if you have any -- a little bit more to offer on next generation 911. And whether you're seeing any pickup there right now? We were at ASCO Conference [ph] this year and it was pretty apparent that next generation 911 still has pretty low penetration throughout the market. And at the same time Congress has been taking a few actions to enhance the funding environment at an even higher level. So just curious, is this something that that we may have to wait for Congress actions to kind of play out. Or are you seeing an uptick in opportunities right now? Anything you can add on that front would be great.

Yes, I mean from our perspective we would say sales cycles are long. And certainly when you get to a larger city they are even longer like a New York City proposal has been going on for an extremely long time and it's -- that’s something that we're counting on at all where our focus is in a lot of the smaller to mid-opportunities that's where we focus our efforts on. And we're seeing probably a growing list of opportunities. And again we just have to work through that. Will Federal Passage -- will Passage of Federal legislation help. Yes, I think, it would certainly help. But we are seeing the opportunities I think the states want to go to an IP based system, the cities and local municipalities want to do so as well. So all the signs are pointing towards a growth market. But it's a slow market.

Okay, great. Thanks a lot. And then shifting on to the Government segment, I know, a bit was asked on this already, but it looks like you had a big sequential improvement in sales, but not such a big sequential improvement in EBITDA margin. Just curious as to like the big uptick was there a concentration in certain product line the $10 million pull forward was that what product lines that associated with. And is there anything you can add to kind of the discussion around operating leverage you can get out of additional sales like what you saw in Q1.

Yes, sure Kyle. First, just to be clear are our Government adjusted EBITDA margins are significantly higher than they were last year. So again if we do the 11.2% in Q1 of this year versus 1.8% last year versus 7.7% in 2018. So we've made substantial improvements in that business and we continue to do so. From a mix perspective, we’re in the early part of some of the over-the-horizon microwave product line. So we got that you know almost $10 million contract and we've got various programs that I would say are in the early stages and we tend to be a little bit more prudent as we think about those margins. So if things go well we'll have some of the ability to take those margins up. And I would leave it at that. But things are going pretty well in our Government business. We just shut down our facility down in Tampa and merged it with our Orlando facility. So as that new portion of that facility ramps up, we should see some improvement there as well.

Okay, great thanks. And was there a concentration in the outperformance for Q1. Like what product line that was necessarily associated with?

Yes, it was mostly in our command and control solutions that stuff we're taking products we're assembling them, we’re integrating them and we provide them to the government for their deployment. So that's really where it was I would just say just product mix. But that does change from quarter-to-quarter, but on an annual basis it's about the same as it was last year. So we're getting that better improvement and better efficiency in what we're doing.

Okay, great. And one last one with the new credit facility. Do you have an expectation on -- maybe I missed it, but correct me if I have an expectation for like ending quarter debt and cash for the Q2.

We don't put on anything specifically on a quarter, but right now as Mike had mentioned Q1 was a negative quarter for cash flow. Right now I think we're -- we collected almost $30 million some odd already in Q2 so we're well on our way to -- we believe Q2 will be a positive cash flow. And as Mike mentioned, we believe 2019 will have about $50 million or so of free cash flow this year. We actually back in September, we might have thought that number might have been a bit lower than $50 million, but things are actually strengthening from a cash flow perspective and we're doing better. And with the increased sales that we have this year versus last year, cash from operations is likely to be about $50 million this year.

Okay, fair enough. Great. Thanks a lot. Thanks for the presentation.

[Operator Instructions] We will take our next question from Asiya Merchant. Your line is open. Asiya is with Citigroup.

Great. Congratulations everyone. A lot of the questions have been asked. If you could provide some clarity and some guidance on the cadence as you see in both the Commercial and the Government segment, given there were some pull in, in some of the orders in the Government. So how should we think about how the rest of the year looks like from seasonality as well as revenue on the top line? Thank you.

Sure. As Mike had mentioned, we did have a big pull in Q1 in our Government segment. So we did $82.9 million in Q1. I think from a trajectory perspective that number is going to decline throughout the year. Q2, Q3, Q4 will be lower than what we did in Q1. Now if we get some of these larger type bookings, different timings that may adjust. But at the moment we're seeing our Government segment sort of have quarter-to-quarter declines in sales before again we'll see that spike again next year. On the Commercial side it's the opposite. We're going to expect to see Q2,Q3, Q4 margin -- revenues sort of increase from the level we did in Q1. And so taking it all back and you adding it all up, you're going to see again margin improvement on the adjusted EBITDA side in consolidation, because our Commercial business has higher margins than our Government business. So that you’re almost going to see I guess a Q2 as Mike had said is going to be nearly the same as Q1. I mean, we did $160.8 million, that's probably the same number that we'll do in Q2. And then Q3 will be a little bit dip from that number before Q4 will be a peak quarter of sales. And will likely be higher than the $160.8 million we did in Q1. That's how I would tell you to think about it.

Great. And if I may just ask, I know last quarter there were some issues with component shortages, et cetera that impacted your government revenues. If I'm not mistaken and so that seem -- is that -- has that component shortage does it no longer exist, is it still impacting some of your other product lines? If you can just you know provide some color on that? Thank you.

We are seeing component shortages, but I would say they're not material component shortages. And we've also kind of built that into our guidance thinking. So things are pretty spread out. We also -- we did a number of things from a procurement perspective buying inventory parts in advance and securing them. And given our revenue cadence we think we have it built in right.

Okay, great. Thank you.

[Operator Instructions] And we do have a question, comes from Joe Gomes with Noble Capital. Your line is open.

Good morning. Congratulations on the quarter. You had mentioned that you've done some cost reduction actions in the first quarter. Do you see how much if any more for the rest of fiscal 2019?

We are looking at types of cost reduction activities. We're not going to get -- not to get into detail, but I will say the cost reduction and operating efficiency improvement is something that really is something that's embedded in our business mojo so to speak. So we're always doing it. And we'll continue to do something, if we have something big enough to announce like our facility shut down, we'll certainly tell you guys. But I would tell you we're always looking at stuff.

Okay. And there has been some discussion in some of the other companies that I cover, difficulty here in this current employment market and in getting new employees. If you guys are having any difficulties and maybe if that is driving up some costs are you guys seeing that you are able to get and attract employees within no big deal right now.

Well, we always have that issue of bringing in talented people into the organization. I think it's fair to say that you read the headlines as we do the unemployment rate is pretty low. But so there is difficulty in attracting people no doubt. On the other hand we think Comtech is a pretty good place to work and we have pretty low turnover and we'll recruit the right people to do what we need to do.

Okay, thanks.

[Operator instructions] There are no additional questions at this time.

Okay, well thanks again for joining us today and we look forward to speaking with you again in March. I want to wish everybody a happy holiday and Happy New Year to our employees, suppliers, customers and shareholders. Thank you very much.

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