Welcome to Comtech's Fourth Quarter Fiscal 2022 Earnings Conference Call. As a reminder, this conference is being recorded, Thursday, September 29, 2022. I would now like to turn the conference over to Mr. Robert Samuels of Comtech. Please go ahead, sir.

Thank you, operator, and good afternoon, everyone, and thanks for taking the time to dial in today. I'm Rob Samuels, Comtech's Head of Investor Relations. Welcome to Comtech's conference call for the fourth quarter and full year of fiscal year 2022. Today, I'm pleased to introduce Comtech's new Chairman, President and Chief Executive Officer, Ken Peterman. As many of you know, Ken joined our Board as an Independent Director in May of this year. Given his decades of experience in satellite communications, mobile networking, cybersecurity and aerospace and defense technologies, as well as his demonstrated ability to transform businesses and drive market-leading growth, he was the right guy at the right time to become our CEO. Ken's been on the job for 50 days now, and is working hard to fully familiarize and integrate himself with complex organization, people, challenges and many opportunities. Before I turn things over to Ken, let me 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. Now, I am pleased to introduce the President and Chief Executive Officer of Comtech, Ken Peterman. Ken?

Thanks, Rob, and thanks again, everyone, for taking the time to dial in today. I genuinely appreciate your interest in and support for the transformational efforts already underway, as we open an entirely new chapter at Comtech. In a moment, I'll take some time to not only introduce myself, but to discuss the strategic approach I'm taking to unleash the energy, the creativity and the innovation that exists among our people at Comtech. There's a clear opportunity to deliver technology-enabled communications capabilities that will truly change the game for our customers, and at the same time, help enable us to realize the full potential that exists in our expanding and evolving global communications markets. This strategic approach is one that I developed, refined and applied previously in my career, and I'm excited to apply it here at Comtech for two key reasons. Number one, it is directly applicable to our current organization, our culture and our emerging market environment. And, number two, quite simply, it works. But first, let me quickly turn it over to our CFO, Mike Bondi, to review our financial results for the quarter. Mike?

Thanks, Ken. As is evident from our reporting this quarter, and as we have been discussing on our last few earnings calls, we have formally resegmented our business in Q4 to better align it with our products, services and end markets. Our two new segments, Satellite and Space Communications and Terrestrial and Wireless Networks better represent who we are as a company and where our future is headed, based on evolving industry trends and how Ken intends to manage the business at this time. Our Satellite and Space Communications segment designs, builds and supports a variety of sophisticated communications equipment that meets or exceeds the highest standards for performance and quality by businesses and governments worldwide. It has four product areas: satellite modem and amplifier technologies, Troposcatter and SATCOM Solutions, space components and antennas, and high-power amplifiers and switches. Our Terrestrial and Wireless Networks segment is a leading provider of the hardware, software and solutions critical to any modern 911 public safety and modern mobile network operator infrastructure, as well as for application services requiring the specific location of a mobile user's geospatial positioning. Is organized into four product areas: next-generation 911 and call delivery, Solacom call handling solutions, trusted location and messaging solutions, and cybersecurity training and services. We hope this resegmentation will help you better understand Comtech and its long-term prospects. For Q4 fiscal 2022, we recorded $127 million of consolidated net sales, of which $76.8 million were reported in our Satellite and Space Communications segment, and $50.2 million were reported in our Terrestrial and Wireless Networks segment. The consolidated fourth quarter sales represented a 4% increase over last quarter and our third consecutive quarterly increase. Compared to the year ago quarter, our consolidated Q4 fiscal 2022 net sales declined $18.8 million or 12.9%, the large majority of…

Thanks, Mike. The entire team did a tremendous amount of work to resegment our business and to better align it with our emerging market opportunities, our strategic direction and our enterprise-wide improvement initiatives that we believe will increase operational performance and enhance shareholder value. This is important in terms of aligning how we report our performance with our products, services and end markets, representing who we are as a company, and allowing us to see with clarity our long-term future growth opportunities. I encourage everyone to review our shareholder letter in both our Form 10-K and 8-K filings made earlier today, which explain and describe this resegmentation in more detail. Finally, unlike the past, where we have given annual guidance, we're only going to provide guidance for Q1. We know that we need to rebuild investor confidence. And in order to do so, we will set realistic targets that we believe in, and then hopefully exceed. We're not going to get drawn into longer-term outlooks where our visibility is inherently lower and even more so today given the current challenging operating environment. So, taking current and expected business conditions into consideration, we are targeting the following for Q1 fiscal 2023. Our consolidated net sales are expected to grow between 1% and 3% sequentially. And our consolidated adjusted EBITDA margin is expected to approximate 8%. Again, I want to thank the entire Comtech team for all their hard work and efforts these past few quarters, executing our business plans in a challenging environment. Today, Comtech has entered the first quarter of our fiscal 2023 year with a significantly strengthened senior leadership team, which certainly includes me, committed to making rapid, aggressive and significant changes on three key fronts. First, to our enterprise-wide processes, platforms and tools and the way we operate…

Thanks, Ken, and thanks to everyone for dialing in today. As Ken said, there are additional details about our strategy and performance available in our shareholder letter and other SEC filings today, and we'll provide ongoing insights in Signals. And as a reminder, we intend to be as responsive as we can with investors going forward. So for anyone with questions, please reach out to me directly, and let's connect. Operator, we can now open up our call for questions?

[Operator Instructions] We'll move first to Joe Gomes with NOBLE Capital. Please go ahead.

Good afternoon, and welcome aboard, Ken.

Thanks, Joe.

So I glanced at the letter here when it's come out. Just one of the things that you put in it are many challenges facing the company. And I was wondering maybe you can kind of give us what you see as the biggest near-term challenges and how you're going about to handle those?

Sure. I'll tell you. I think, Joe, largely, this builds on the experience that I've had previously, okay? I've got a track record of taking businesses that are operating in silos and bringing those teams together to create sustainable and profitable growth by leveraging technology to meet the continually evolving needs of global markets. I have - we've moved from silos - businesses that are in silos to one enterprise, so that we can step up and punch our weight, so that we can realize the synergies, eliminate the overlap, better manage our risks collectively, and improve our operational performance. We've got a track record of that. Secondly, a track record of now that we could operate as a collective enterprise and not operate as individual silos. We can expand our addressable markets and move up the food chain, because we're operating on a stronger operational foundation, but also because we're able to address customers' problems more comprehensively. And in my experience, that improves operations of our core business. It also grows revenue fast and frankly, grows EBITDA faster.

Okay. Thank you for that. Maybe last quarter, we had talked to some on the 911 market opportunities, and some of them had been kind of moved out of the fourth quarter, and we're hopeful that they would be reengaged here in early fiscal '23. I'm just wondering what the status of those opportunities were in the 911 market?

Well, Joe, I'm going to speak to the key wins that we had here in the fourth quarter. And I think that it comes in three key areas for us. First of all, in an incumbent position, we had a next-gen 911 customer expand our scope in a state-wide employment - deployment. And that's important that your existing customers see you favorably and flow additional work scope to you. The second one, we won a new multiyear contract for Canadian province, and it's a province-wide hosted, managed multi-PSAP 911 system. So we've also won new customers and new geography. That's item 2. Item 3, we've moved technology forward by establishing licensing agreement with a Tier 1 MNO to provide cloud native messaging platform. And that moves the needle, okay? So for us, that takes our capabilities to the cloud and puts us on a path to keep pace with 5G and other network infrastructure opportunities. Mike?

Ken, I'll add to that, too, is, Joe, you probably referred to two opportunities specifically that we did shift out in our thought process to 2023. We are still tracking those items. But in terms of our outlook for Q1, I would say, nothing new to report right now, and it's not factored into our guidance that we just explained for Q1.

Okay. Great. Thanks for that update. And one more, if I may, on the satellite business. We had, again, previously talked about the contract with a LEO, MEO, and I know here in the shareholder letter you talk about some key wins here in there, with a new LEO and a MEO satellite network. Maybe you could give us just a little more color or detail on those, and when you might start to think you see some revenue generation from those types of contracts?

Well, we did have two key wins in the satellite and space segment, okay? And frankly, we're developing and providing modems for leading LEO and MEO providers, and that's the usual stack of equipment for us. It's not just modems, it's gateways, amps, antennas and those kinds of things. Mike, you may want to add some color to that?

Sure. And the opportunity set here - we really can't specify exactly what our contract entails. We're bound by confidentiality, and it's something that's competitive. But we're very excited about winning the strategic opportunity. It's growing a relationship that we definitely want to see grow over time. And we'll have more to report on that in FY '23 downstream.

Great. Thanks. I'll let someone else ask the question. Again Ken, welcome aboard. Look forward to seeing how it plays out here in the future.

Thank you, Joe.

And we move next to Greg Burns with Sidoti & Company. Please go ahead.

Good afternoon. Just a quick follow-up on the last question. So the two wins mentioned in the letter, the LEO and the MEO operators, those are new to this quarter? Because I know you had previously talked about a LEO opportunity you're aligned with. So I just wanted to make sure that I'm understanding that correctly.

Hi Greg, this is Mike, I'll take this one. Yes, in the prior disclosures, we've been talking about one particular contract that we won. And so, we're well on our way with that contract. The item that we're referring to in the shareholder letter is a new opportunity that we secured a position on, and we're doing work here. And this is an added aspect to the overall relationship.

And then, on the terrestrial side of the business, why were the margins down this quarter? And what do you see the sustainable EBITDA margins of that business being?

Yes, in terms of the chart, you're probably looking at the shareholder letter, and you do see a drop off in Q3 and Q4. I'd also point you to the bottom of that page, you probably see the bookings rising up nicely in Q4. Here, I think it's a story of where, as a reminder, we won some very large contracts a few years ago, to develop the first 5G location-based platforms for Tier 1 mobile network operators, those contracts sort of in the first and second quarters of '22. We're nearing their completed phase, not 100% done, but they are moving through their life cycle and we're starting to now shift gears towards what's in our backlog as of July 31st. So I think we'll see a return and improvement in the margins over time. But right now, we're just sort of shifting gears. And I also want to point out, we are spending money on R&D to secure these types of wins. So, we are making investments along the way here as well.

Okay, great. And then in terms of the guidance, I guess, a sequential decline in the consolidated EBITDA margin. What are the factors driving that, even though revenue is going to be up?

Yes. I think, Greg, it's still a challenging environment. We have a new CEO at the helm who's doing an evaluation. We're facing rising costs and inflationary pressures. So I think we're just trying to not get too far ahead of ourselves. We also had, in the fourth quarter, as we always do in the fourth quarter when we do the share units in lieu of cash incentives. You have a little bit of a pop there. But I think, overall, we're just trying to be cautious about the environment that we're in as we move into FY '23.

And then just lastly, you announced an agreement or a contract to deliver equipment to Ukraine. Is that - I know earlier this year, you had talked about some orders from Ukraine being delayed, and that was - I think at the time, you lowered your revenue guidance by about $35 million for that. Is this that opportunity? Has that been realized? And now you're going to - I guess is that the same opportunity? And what is the kind of the revenue potential of that contract?

Sure. I'll take that one. You are correct. This was - we had multiple opportunities actually in this area. And as we said before, we did not think we lost those opportunities. We thought it was a challenging environment for defense spending, as people were retooling their budgets. We stayed close with our customer. We've actually donated a few comets in the fourth quarter. We thought that was the right thing to do, and it translated to a good relationship that we're building with our customer. And so, the press release you saw probably a few days ago is an aspect of that relationship. And, as we said, we think there's strong demand for this product.

And we move next to George Notter with Jefferies. Please go ahead.

Hi, thanks a lot guys. And welcome to the company, Ken. Congratulations on the new role. I guess I wanted to ask about the shareholder letter. You mentioned the strategic committee that's being formed within the Board of Directors. I guess I'm just curious in your words, what the thought process is behind the strategic committee? Are you looking at making changes in the product segments or makeup of the company in terms of product lines? Anything you can share there would be great.

Yes, sure. We're driving that - we're really opening a new chapter, okay, at Comtech, and that chapter involves moving beyond operating as individual businesses in silos and unlocking the shareholder value that comes with those businesses operating collectively together. That gives us the opportunity to punch with the full way to the enterprise. I talked to you about our COO, Maria Hedden taking the lead on centralizing operations, supply chain, strategic sourcing so that we can deal more effectively with our supply chain because we can - it amplifies our voice, right? We're also operating on common processes so that we can collaborate more effectively together. That opens the door for us to move up the food chain and offer our customers a more comprehensive solution. The strategic committee is valuable to me as our markets evolve, and as we launch these new strategies, and develop the business thesis that will enable us to operate the business that we've always had more effectively, but potentially take advantage of the market convergence that we spoke about, with the terrestrial wireless market blending together with the satellite market, and how we might prosecute those opportunities that are rightly suited and rightly timed for us, so that we can unlock that shareholder value in a more comprehensive way at a higher level in the food chain.

And we'll move next to Asiya Merchant with Citigroup. Please go ahead.

Hi, good evening. Thank you for the opportunity, and welcome aboard, Ken. I guess my - with the sequential growth that you guys are seeing in your fiscal 1Q - typically, fiscal 1Q does tend to be the lowest quarter going back a few years, pre-pandemic. Should we expect sort of this year to kind of exhibit that where 1Q for you guys will be kind of the lowest quarter for you guys? And then just maybe if you could break it down between the two new segments that you have, the guidance that you're quoting, where should we kind of be modeling that sequential growth? Is that more in the terrestrial side of things, just given some of the design wins that you've talked about? Thank you.

Hi Asiya, I'll take that. Yes, in terms of our guidance, this is a change for us to only look out 90 days when we're giving out guidance at this point in time of the year. I would like to say, you could probably think of Q1 resembling Q4 in terms of distribution of the revenues with the concept that our terrestrial business has a nice flow of recurring revenue. And so, some of the growth you'll see - as the whole economy improves over time, you would think that we would improve as well. But I think we'll hold our comments to just the first quarter right now and kind of not get ahead of ourselves.

And then just in terms of pricing, I think you talked about a challenging environment with your adjusted EBITDA coming down sequentially. Just - are you able to - I mean, if you can give us some color on how the negotiations are going with your customers, are you able to pass on these price increases related to components? Or are you getting a lot of pushback? And if there is any color between the two segments, where do you expect the margin impact?

Yes. I think, it's - a good place to start is with our backlog. I mean, we have over $600 million in funded backlog today. And a lot of that does relate to our Terrestrial and Wireless Networks segment, which - To break that down, that's sort of our 911 business where we have long-term contracts in there. So those contracts were set a few years back in terms of the whole negotiation of those contracts. It does take some time. So while we did have escalators in there, I don't think we were figuring this level of inflation. So we will have some gross profit impacts over the course of maybe the next year or so, as we're still winding those contracts down. But certainly, as we get opportunities for new proposals, we are taking into account the current environment and trying to be smarter about how we price those contracts with levers to improve our profitability. So I think that's probably where it will be impacted most is in our terrestrial segment in our 911 business. But our satellite ground station product lines and some of the other product lines, they do have a book-to-ship element to that. And so, in this environment, we are looking to increase prices when and where possible, keeping in mind that it's a very competitive environment. And we don't want to shoot ourselves in the foot, as we had some experience last quarter with one particular customer, and we didn't get a good reaction. So I think we're going to be very mindful and strategic about how and when we do that.

And we'll move next to Mike Latimore with Northland Capital Markets. Please go ahead.

Thanks. And congrats on the new role here, Ken.

Thanks, Mike.

Ken, you mentioned this kind of hybridized world. Can you give a couple of use cases that are - maybe have the biggest addressable market where Comtech can sell something that combines satellite and terrestrial technology? Like what would be some IoT use cases that kind of maybe jump out and might have the biggest opportunity or where you have the most differentiation? And then maybe just tie that into how you see that helping you move up the food chain? Maybe elaborate a little bit more on what that means?

Okay. So, our value proposition in terrestrial wireless among the MNOs, the mobile networks operators, is in location-based services, short message service centers, wireless emergency alerts, satellite backhaul, okay? And now we're moving into cloud native platform solutions with the contract win that we just talked about a few minutes ago. Those cloud-native platform solutions are just adaptable in the satellite ecosystem that they are in the terrestrial wireless systems. So that's one area. Secondly, in the other direction, our satellite communications value proposition has typically been in equipment like modems, amplifiers, bucks and antennas. But importantly, our RF expertise in those domains, millimeter wave frequency equipment, is now becoming applicable in the terrestrial wireless space, because those frequency bands, those spectrums are being reapplied to 5G, okay? So we're seeing the opportunity for the businesses to work together to improve the value proposition on both sides. Finally, I'll say that we've traditionally thought of ourselves as a 911 public service market player, and we serve that market very effectively. But these value propositions that we bring in the 911 public safety sector are directly applicable to the much broader orders of magnitude larger market that is transforming the 5G network infrastructure globally. So, as we look to extend the relationships that we have in our traditional 911 markets, we see the opportunity to play a bigger role in the broader markets beyond public safety.

Okay. Interesting. And I guess maybe somewhat the reverse of that almost, but to the extent you have - do have two separate businesses that you're reporting, is it clear that one segment or the other would have a kind of higher growth rate over the long term, or too early to say on that?

Well, I'll say this, this convergence of satellite and terrestrial [ Com's ] infrastructures, and us moving to be one Comtech and punch our way at an enterprise level, to be clear, it's the early days of that. But one of the reasons I created the role of Chief Growth Officer is to have a very senior individual among my leadership team whose role is to look across those two markets, bring enterprise technologies forward, and apply them to the market in innovative ways. So, I would tell you that there's kind of three answers. I think first one, each of those segments have high growth potential as we start to look at ourselves differently, as one contact with the new segmentation. But then, when we bring the two segments together, we think we can operate in a convergence environment at the enterprise level, and we think that's going to open up additional markets for us.

Great. And I think just last one minor topic. I think your Arizona manufacturing center was supposed to be opened pretty soon. You know the status of that?

Sure. I'll tell you what, I've toured it, and I'm extremely impressed. I've been in this business a long time. I've seen a lot of manufacturing facilities, and I think this one lays the ground for us to support the growth in the future. Mike can speak to it. I don't know - Mike wants to speak to it, too. So I'll let him have the floor in a minute, but I'm very impressed about what's going on there.

Yes. And working with Maria, our COO, who's overseeing that migration, it is progressing very nicely. As Ken had mentioned, we are expecting to be fully in - operational in FY '23. I think we still have a few more things to do, but we are seeing a lot of the functions migrating over as we speak. And so, we're very encouraged that we're getting near the end of that.

Yes, people are in the facility.

[Operator Instructions] We'll move next to Chris Sakai with Singular Research. Please go ahead.

Hi, good afternoon, Ken and Mike. My question is in regards to, I guess, the Satellite and Space and Terrestrial and Wireless. It looks like adjusted EBITDA margins in Satellite and Space are getting better, but margins in Terrestrial and Wireless are declining. Can you help us understand why there's this divergence here between the two segments?

Sure. Chris. In terms of the Satellite and Space segment, Q4 was influenced by some work that we were doing in the EEE space components part of the business, as we're delivering on the first phase of a major project. We also had some comet orders go out in the fourth quarter on another opportunity, not Ukraine, which also helped provide some uplift there. And also, timing of our R&D investments in the fourth quarter contributed to a higher EBITDA margin for Space. On the flip side, Terrestrial, as I was explaining earlier on the call, we did have a mix of business that we're nearing completion on, as we're starting to now shift gears and work on the next phase for our customer who is migrating and virtualizing their 5G platform. So, I think you're seeing a little bit of a timing issue. We do have - at this point, won some sizable orders that are in our backlog as of July 31st. And as we start performing on those contracts, I think you'll see us improving there.

And then, as far as bookings are concerned for Terrestrial and Wireless, was this a timing issue again as far as this increase in Q4?

Yes. In terms of the order flow - I mean, we've always said - we are in some niche markets, and we also have some large lumpy contracts that are difficult to predict. We know - we feel confident that we will get them. It's just a matter of timing, what quarter. But yes, in Q4, there was a good push with our customer base to position ourselves on some long-term contracts here. So we are excited with the bookings flow that we saw in the fourth quarter. And it's just a function of timing on these large contracts.

And then it looks like - so terrestrial and wireless network revenue is kind of - it looks stagnant. What are you guys doing to get that to grow?

I would recharacterize it, if you could, to say steady, not stagnant. It's nice recurring revenue. And we are in the process of rolling out three major deployments with Pennsylvania, Arizona and another state. And as we're completing the implementation phase, the first phase of the projects, and turning on the PSAPs to the recurring services, I think you'll start to see the benefit of that over time. So we're making good progress on Pennsylvania. We're getting deeper into our Arizona implementation, and we've been working on South Carolina. So, I think it's just a function of where we are in the life cycles of those contracts.

And the growth opportunity is, one, taking a new geography; two, up gunning the geography that we're already servicing, and then driving beyond the current generation to the next generation that supports the Internet of things, and creating the capability to make sure that a digital device can make a 911 like call in the future and supporting that type of device density, speed, low latency that the market demands, and we're doing that.

And it does appear there are no further questions at this time.

Thanks, operator. Well, we really appreciate everyone's interest in Comtech today. If you have any other questions, please don't hesitate to reach out to me or check out our Signals blog on our Investor Relations page. Thanks very much again.

This does conclude today's program. Thank you for your participation. You may disconnect at any time, and have a wonderful evening.