Ladies and gentlemen, thank you for standing by. Welcome the Comtech Telecommunications Corp. Second Quarter fiscal 2022 Earnings Conference Call. As a reminder, this conference is being recorded, Thursday, March 10, 2022. I would now like to turn the conference over to Mr. Jason DiLorenzo of Comtech Telecommunications. Please go ahead, sir.

Thank you, and good afternoon. Welcome to the Comtech Telecommunications Corp. conference call for the second quarter of fiscal year 2022. With us on the call today are Michael D. Porcelain, President and Chief Executive Officer of Comtech; 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 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 significant risks and uncertainties. Actual results could differ materially from such forward-looking information. Any forward-looking statements are qualified in their entirety by cautionary statements contained in the company's Securities and Exchange Commission filings. I am pleased now to introduce the President and new Chief Executive Officer of Michael Porcelain. Mike?

Thank you, Jason. And good afternoon, everyone. Thanks for joining us today. We've got a lot to talk about. But first, let's have a look at the headline numbers. Comtech consolidated net sales for the second quarter were $120.4 million, up 3.1% sequentially from the first quarter. Adjusted EBITDA and non-GAAP financial measure was $9.8 million, 76.7% sequential increase from the first quarter. New bookings also referred to as orders were $102.9 million, a 19.2% sequential increase from the first quarter resulting in a book-to-bill ratio of 0.86. Our Q2 ending backlog was $611 million, compared to $628.5 million as of the end of Q1. Our revenue visibility is approximately $1.2 billion. We measure this revenue visibility as the sum of our $600 million backlog plus the total unfunded value of certain multi-year contracts that we have received and from which we expect future orders. And we did generate $4.8 million of cash flows from operating activities. This despite making almost $3 million of cash payments for our settled proxy contest. Our second quarter fiscal 2022 results showed sequential improvements and consolidated net sales bookings and adjusted EBITDA versus Q1 fiscal 2022. Finally, and although I wish we didn't have to do it, we lowered our fiscal 2022 financial targets and are now shooting for $520 million of revenue and adjusted EBITDA of approximately $50 million. Mike Bondi will discuss these changes in a bit, but first, let me add a few more comments on the quarter and business environment. The second quarter of fiscal year 2022 was clearly transformative for Comtech, I took on a new role as CEO, we welcome new independent members to our board of directors, and we further plans to deploy the proceeds of $100 million strategic growth investment. And finally, we continued to solidify…

Thanks Mike. And thanks again, everyone for taking the time to join us today. In our December 9 2021 earnings call, Mike discuss the reasons why we believe fiscal 2022 was starting to shape up in line with our expectations for our second quarter and fiscal 2022. Immediately following the Omicron COVID-19 strain surged, closing further delays in an already strained supply chain. Certain suppliers were forced to shut down production and cease deliveries of expected parts. All the parts, which did arrive fell below our quality standards, and we declined to use them. As a result, we were unable to get several millions of dollars of shipments out the door. But nevertheless in line with our thinking at the time, our second quarter results showed improvements in sales, bookings and adjusted EBITDA vs Q1 of fiscal 2022. For Q2 fiscal 2022, we recorded $120.4 million of consolidated net sales, of which $81.3 million were reported in our commercial solution segment, and $39.1 million were reported in our government solution segment. Both segments reported slightly higher sales than achieved in Q1 fiscal 2022. But lower sales thank than Q2 of fiscal 2021. Of the $120.4 million in consolidated net sales roughly 75% were to US based customers and the balance were two international customers. Compared to the year ago quarter, our consolidated Q2 revenues declined $40.9 million or 25.4%. The large majority of which related to lower revenue from field support activities associated with the withdrawal of US troops in Afghanistan and other program changes. Our gross profit margins in Q2 was 38.1% reflecting improvement from the 35.7% we achieved in the first quarter of fiscal 2022. This improvement related to a more favorable product mix, as well as lower than expected warranty costs in our next generation 911 product…

Thanks Mike. And we'll get to some questions soon. But I wanted to talk more about how we're positioning Comtech to bridge the distance between our vision of the future and the opportunity that Failsafe Communications represent for us now. I like to think I'm a realistic person. We know we're in the right markets. But while having a view of the future is one thing, making sure a company that has the right products and services and selling them in the right channels to the right customers is another. We need to make sure the company itself is invested in the right resources making improvements to both our physical and human capital to execute against our long-term plan. Change doesn't come easy, and it takes some time to achieve success. When it comes to our products, we're ready. You may have seen that we recently announced the launch of our new VSAT platform, ELEVATE, a scalable, reliable software defined satellite communication system that will enable our customers to create private VSAT networks of any size and topology with infinite scalability. We're incredibly excited about ELEVATE, as it will offer any user the opportunity to build data and communication networks with full functionality on land, at sea or in the air using next generation satellite constellations that are completely private, fast and reliable. The use cases for ELEVATE technology spanned multiple industries because it works everywhere, aerospace, agricultural, land, mobile, maritime, energy, and any other application or geography where a community, government or an enterprise needs reliable secure Failsafe Communications. In a future defined by the increasing proliferation of so called edge devices comprising the Internet of Things we believe that ELEVATE will give Comtech and our customers a competitive edge. And in our next generation 911 public safety product…

And we'll move first to Joe Gomes with NOBLE Capital Markets.

Good afternoon. So obviously a tough operating environment, a lot of things way out of your guys’ control. But you mentioned a couple of times, Mike about your experience suggests that following these types of issues that are occurring in Europe right now that it is a positive for you guys, wondering if you could give us maybe a little more color or detail or examples where you've seen that in the past?

Sure. Well, I guess I'd rather not talk about the past, but the present. I mean, if you look at the Ukraine situation itself we're really talking about the ability of timing right now. We took approximately $35 million of revenue out of our forecast for 2022. The opportunities are still there. There's ongoing conversations with various parties to obtain funding and logistical to get equipment over there is extremely difficult given the situation there. But that's an opportunity that is probably actually growing. No matter, it depending on how the outcome occurs or what's going to be there, the communication infrastructure of the Ukraine country has now been destroyed. So our troposcatter equipment is perfectly aligned to deal with a situation like that. And again, as you think about satellite communication systems and the need for upgraded terrestrial systems, our satellite communication will be, be able to be deployed there at some point. And that's an example of something that I would say is the future what's sort of happening now. I think another example is you saw some news in the headline in the last two weeks that a major satellite system of one of our competitors was jammed. And we do a lot with the US government and some of our allied countries that really provide sophisticated components and software and techniques and technologies that will prevent those things from occurring. So again, I think is satellite communication becomes really important. You saw that with Elon Musk shipping terminals over to the Ukraine to expand communications, I think as you look out, you're going to see that continued demand for what I guess I'll use our new buzzword Failsafe Communications, but I really believe in it.

Okay, thank you for that. And the talk about the satellite ground station, you've talked in the past a lot about that contract in that space where you can't name the other side of the contract, but can you just give us any update there? And what can you give us in terms of that award?

I can't give you any update, I guess the best way of saying it, given our agreement with our customer, I think I will just point out to you, again, I'll use the Elon Musk as the example you could see the need for these types of satellite systems that are out there. We're a big believer that the legal markets going to grow. We believe we have the right next generation broadband satellite technology. We're building out our facilities to provide that future demand, but I can't talk anything specific other than we're heads down. We're working. We're working on it.

Okay. And the past couple of quarter’s book-to-bill been below one. I mean, as you're looking out here, especially in this type of environment, do you see that bid pipeline that you think you'd get that book-to-bill back over one year in the short term? Or do you think that it's a longer term opportunity?

Well, we, I guess the short answer is we actually still believe that our book-to-bill will exceed 1.0 for the year, based on the opportunities in our pipeline, it'd be difficult to say what comes in Q3, and Q4 from a bookings perspective. But we do think our backlog is going to grow pretty nicely in Q3 and Q4. Where we have some large orders that we still expect to close. I think, again, the issue for us, like every other company is going to be can we get it out the door? Some of these things we, I mean, cooling fans and power supplies, things that were available two months ago, have suddenly just dried up. So, yes, the short answer is we feel pretty good book-to-bill, we think we'll still exceed 1.0, if everything goes the way we're thinking about it. We’re trying to be thoughtful in our approach. But that's still our target to exceed 1.0.

And move next to Asiya Merchant with Citigroup.

Great, thank you very much for the opportunity. If I can just ask the gross margins were a positive surprise in the quarter. Can you just elaborate on that? And as you look out, based on the revenue guidance for the second half of this year, if you can talk about the outlook for margins there. And that's just on the SG&A side of things, it was a little bit more elevated than what I had in the model. And is it expected to remain at this elevated level, you said you guys are investing. And then lastly, just kind of what your cash flow expectations are for fiscal ‘22. Thank you.

Okay. Hi, Asiya. This is Mike Bondi. I'll take that. In terms of the first question in terms of the margin improvement in Q22, we did see better product mix for sure. And we also had a warranty reversal in the quarter that gave us some uplift there. But even without that we still would have been in the 36% range so that's something as you asked about the second half of the year, I would imagine that we would continue to be in that range as we have a mix shift in our business to more of a commercial in the second half. In terms of your second question in terms of G&A being elevated, I just would want to point out in terms of our SG&A and stock-based compensation, we did have three retiring directors this quarter. So we did have about $900,000 of incremental G&A cost. So when you look at the EBITDA though that's getting added back. And in terms of restructuring costs, we also had some additional restructuring costs related to the facility moving Arizona, as we're carrying to duplicative rent as we're building out the facility. But things are progressing nicely there. So hopefully that answered that part of the question. In terms of cash flows for the year, I guess our expectations at this point in time, taking everything into consideration, is we're expecting somewhere in between $5 million and $10 million for the year. And obviously, for the quarterly numbers, it's subject to timing of cash collections and things like that. But I think when you take into account, the one-time charges we had taken in Q2, namely the proxy contest, cash payments that we'll be making, as well as the CEO transition cost, when you back that out of the number think about it as adding back another $17 million of cash. So you could really be thinking about like $22 million to $27 million. So that'll be in terms of our cash outlook for cash flows from operations for this year at this point in time.

Okay, great. And then just a little bit on the next generation 911. If you can focus a little bit more on that, is that like the competitive dynamic there? Are you noticing something that is requiring more investment there? If I read correctly through my comments if you can just elaborate a little bit on the competitive dynamics in that space? Thank you.

Sure. I think anybody in the satellite world is talking about LEOs and that's the topic of the day, along with the launching of new high throughput satellite HTS satellites. There's a whole bunch, though, of new frequencies coming on higher band frequencies, such as V band, and people are spending that to go after that bandwidth because people need that additional capacity and speed from a competitive landscape, if you will, at least my sense of it right now, is that there's a little bit of a pause out there. So some customers are trying to figure out what they want to do with their network, which system they're going to buy, are they going to be an open platform? Are they going to go with a closed platform? Our strategy has been to date and we'll continue to be is we're going to be an open independent provider, we're going to serve as everybody that we can service. So I think, from my own perspective, the launching of the Leo satellite systems and all of the conversations that's causing some people to pause, and I think there's a little bit of pressure on pricing, if you will, overall in the marketplace, as people are chasing things. And again, I think that's why when we look at it, we sit back and we go back to our acquisition of UHP. And our entry into the TDMA market that we did in 2019, we viewed this as a huge opportunity, because Comtech didn't provide TDMA technology before so we're going after enterprises around the world that had installed base of very old TDMA networks. And as they go to these new platforms, you need to change an upgrade. And that's our sort of our playing field for us from a competitive perspective. Other competitors out there have to defend their platform. And so long as we're investing in what we consider to be the best in breed TDMA technology platform, combining it with the best and breed of our SEPC technology and our modulation techniques. We think we are positioned well, to gain I would say more than our fair share, as the market grows. So again, as these Leo launches, and as systems get upgraded. I think that's when we're going to see the growth that everybody is been talking about in the industry. But right now there's a little bit of a pause. COVID has slowed things down, Omicron clearly again, everybody thought it was coming back and still delayed things. But I still think that there's this overtone of just a pause in the environment as people are making decisions or what they really want to do. I don’t know if that's helpful, but that I guess is the color. The way I'm viewing it from my seat.

And we move next to Chris Sakai with Singular Research.

Hi, good afternoon. I just had some questions. I know in your prepared remarks, you mentioned, governments were changing their budgets. And I wanted to ask how have you guys seen this already because of the Russian Ukraine war and how is it affecting you?

Sure. I mean, directly from the customer is how we're seeing it. I mean, we've been tracking a number of opportunities, not only the Ukraine, COMET but other types of equipment with our customers. And obviously, that would include the US government. And, again, not to disclose specific things. It is stuff that you're reading in the news, the Javelin missile, the Ukraine government is buying lots of UK missiles. So that's an example where stuff that was supposed to go for our stuff got temporarily shifted.

Okay. And then, I guess, have you guys done some sort of sensitivity analysis or something to I mean, to sort of, I mean, to see was this war expands will -- how much will that affect your revenue and guidance going forward?

Yes, I think right now we're going to watch it play out live. Again from our perspective, we think the second half of the year, as we talked earlier, we're going to be able to book more than 1.0. So we think the opportunities that we're seeing will come in, but we'll have to see how it plays out live. But again, if you look at all of the wars that we've been experienced, at least, through my lifetime here, it's always resulted in an increase in satellite communications, at some point during the process. So I think that's that, same time, though then to not under emphasize it is in the 911 portion of the business. I mean, you're reading every day, about 911 systems being attacked, and being something from a cyber-war perspective. So as we talk to our customers we're finding that they have a need for increased services and stuff like that, and how to best help them protect their networks. And given that we do some of the major states in the United States, our customers are talking to us about how we could help them and work with them to prevent the 911 system from being cyber-attacks. So I think those types of things are they're just real examples of things that I think will benefit from.

Okay, great. And then I guess the comment on these the next generation 911 systems, I mean, as we head out of, hopefully, out of the pandemic, are you seeing or can you -- do you think you'll expect more states to hop on board?

We do. Yes. I mean the short answer is do, we do our second half guidance does assume that we got a couple of, I'll say, smaller size contracts, but we are expecting to receive funding for at least one new customer in the second half of our fiscal 2022. There's another a number of opportunities that are out there, but those types of things are very lumpy and difficult to predict and not to forget about Ohio. Ohio is a contract that we've won. It's more than it is north of $100 million. It's not in our backlog where we have a contract that signed and we're working very actively with the state legislator and the government of Ohio to fund that contract. And I think I mentioned in our last conference call, and if not, it's certainly public knowledge. This is a contract that has bipartisan funding support. It's a question in Ohio, how much tax are going to increase to fund the contract, as well as other initiatives that they're working through, but they're making progress and our hope is still by the end of fiscal 2022 that contract will be awarded to us with funding.

And we'll take our next question from Chris Quilty from Quilty Analytics.

Hey, Mike. You had mentioned some of the supply chain issues that I've heard in the last month here, several of your competitors mentioned price increases. Is that something that you've done or are considering?

Chris, and I apologize, it was a little low for us to hear the first part of that question.

I was just saying that several of your competitors over the last month on their conference calls have talked about the same supply chain issues and the fact that they're raising prices. And I was wondering if that's something that you've done, or are considering doing?

I would answer the latter. We haven't done it yet. We've been holding our prices that we've committed to for the items in our backlog. There have been a few contracts that have been new that we actually have obtained price increases for and some of that will flow through the P&L and in future quarters, but we are considering it, but we haven't done anything yet. One of the benefits of our UHP product line, for instance, it's a low cost product line. So it was one of the reasons we purchased it back in 2019. Because we felt that we could enter the market in such a way that will allow smaller customers to buy the TDMA platform, and then scale up as they need to. And I think we want to keep to that dynamic. But look, the short answer is we always like to raise our prices. And when we can, we will but we haven't done anything across the board yet.

Right. And I for one, commend you on the shareholder letter. I think that's a good format. Lots of information, I could use some more time to read it before the call. And to that point, looks like the midpoint revenue came down by $70 million as I was scanning through the letter I saw $35 million mentioned twice. Can you just give a breakdown of where you're taking the guidance down on the revenue side?

Sure, Chris, this is Mike. In terms of the $70 million reduction, we're thinking about it is $35 million coming from things stemming from Russia, Ukraine, and defense budgets. The other $35 million is more in our commercial space supply tray, change driven and disruptions and just timing but overall, as we're looking at the next two quarters, we're seeing Q3 being more similar, almost exact to like Q2, at this point in time and with the uptick in Q4. So most of the reduction, you could say is in the current quarter, Q3 with the peak quarter being Q4 still.

Thank you. And I know you're looking to change your reporting. But in the past, you've kind of broken out language around the earth station business and whether it was up or down and trends, there's any details you can provide?

Yes, I'd say our satellite earth station business is down versus last year. And that's really because of the supply chain component issues that we're seeing in the marketplace. I take as Mike had mentioned, when you look at year-over-year stuff, and some of the guidance, I mean, our revenue is going to be down versus last year, most of that's going to be in our government segment, a significant portion of that, due to the Afghanistan withdrawals. And now of course with lower COMET not being in there as a replacement. But our commercial segment as a whole is going to be slightly down, I think at this point versus 2021. Whether it's down 5%, 8% or something like that, I think we'll see as the year progresses, because there's obviously some pluses and minuses. But the short answer is our satellite earth station business is down. Our next generation businesses is doing well. And I think that trend will reverse as the supply chain issues leave us and hopefully we'll be able to get those COMET in next year.

Got it and sticking with the earth station, the ELEVATE product line, is that a replacement for or is it separate from the Height platform, which is only a couple years old?

Oh, it's really separate system. It's taking, Height is really I guess the way I would describe it is we've got Heights to the point where we think it's pretty fully developed for what we want it to be. It's really for very high, very powerful networks that are say on the more smaller side of the campus, not necessarily something that would scale to 10,000 - 15,000. So what we're doing is with our expertise and the type of technology that we develop in house, we're able to take that and sort of create a new product line called Fidelity. And so some of that will be backward compatible over time right. So but the customers have Heights, we're going to continue to support them. And there's many customers that have a need for a system that does exactly what Heights does. It's a very, very sophisticated system. We think that there's some government customers out there that very interested in doing it, as well as some international customer. So Heights is good product line. It's going to be there. But ELEVATE is really a brand new product for us, a brand new product, taking the best in breed for what we have out there. And that's what we're focusing on.

And final question on the earth station. Haven't heard you talk much about 5G networks and the impact of 3G PP standards. And I'm assuming both of those capabilities are designed into the new platform.

What I would say to you is, I was just in Arizona talking about it. And I don't want to say much, except to say that we're pretty visible in the 5G space. Our location business itself has a lot of dominance in the 5G space, particularly with the location side. And as we take what we have in our relationships in there, yes, we're working on some things, but I don't want to share our thought plans just yet.

Final question was at the theme song, the frozen I heard on your cell phone?

I'm not sure.

No comment. Okay.

We'll move next to Mike Latimore with Northland Capital.

Hi, this is Aditya added on behalf of Mike Latimore. Could you tell me what percentage of your 911 business is recurring revenue? And are you seeing some international opportunities for your 911 technologies?

Sure, I'll cover the first part about the recurring revenue. That's something we've been watching, we don't report anything specific. But if we think about our 911 business, a good portion of it is recurring, especially on the 911 call routing side. Those tend to be nice long-term contracts that are pretty level in their revenue, the 911 upgrade cycle, those types of contracts have sort of two phases to them. First is the implementation phase. And then once you get into the recurring piece, those contracts usually run 3, 5, 7 years. So a good portion of the NG-911 business that we've won, would fall into that recurring category. And in terms of the second question, can you just repeat the second question?

International opportunities, yes.

Yes. I think in that area, we, just to remind you, we do full handling in Australia. So we do triple zero. We do also work in New Zealand. We've also have been winning some call handling work up in Canada. So in Canada, a lot of the cities have been upgrading to hard, cyber hard in their networks and putting in more robust Solacom Guardian call handling solutions. So we've been making good inroads there. And those are nice recurring type contracts as well, a little bit of upfront implementation, and then maybe one or two year contract period that we look to get renewals on.

Alright, can you also give some color on if you have acquisitions? That's an important plan for this particular year?

Well, yes, I think the short answer is probably yes. But we're being very cautious about the market as a whole. We raised $100 million for the reasons that we started back in October of 2021. I think time has proved out the intelligence of that investment in the sense we, it's really provided us flexibility to our balance sheet, in light of everything that's going on in the world. So I think that just turned out to be just a fantastic decision. As you can see interest rates are now increasing and the availability for capital is difficult, but at the same time, you're seeing some depressed pricing in M&A. So as a result of all of these market conditions, pricing, I think, on the M&A side has come down which could prove advantageous to us as we look through it, but I would say our number one focus at the moment is execution of the things that we have in backlog, securing the opportunities that we are chasing, and really positioning the company for growth for next year by itself. And that's going to be my focus for the next six months. But certainly if something attractive comes along, when you look into 2023, more maybe the second half of ‘22 some that makes sense. Yes, we have the flexibility to do it. So that's how I'd answer your question. It does appear there are no further questions at this time. I would now like to turn it back to the presenters for any closing remarks.

Well, okay, really, that concludes today's call. I really want to thank everybody for joining us today. We look forward to speaking with you again in June. Thanks everybody.

This does conclude today’s conference call. Thank you for your participation. You may disconnect at any time and have a wonderful afternoon.