Welcome to Comtech's Fiscal Q2 2023 Earnings Conference Call. As a reminder, this conference is being recorded, Thursday, March 9, 2023. I would now like to turn the conference over to Mr. Robert Samuels of Comtech. Please go ahead, sir.

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 Telecommunications Corp.'s conference call for the second quarter of fiscal year 2023. Today, I'm here with Comtech Chairman, President and Chief Executive Officer, Ken Peterman. We're also joined by Mike Bondi, our CFO. Before we get started today, I'll also say that both myself and Ken are always available to answer questions our investors may have, so please get in touch if you want to organize a meeting to talk about the Company, our results, or our strategy. We also have a detailed discussion of the quarter in our shareholder letter available on our website and we have also been working to communicate directly about our business and our market between quarters in our blog, Comtech Signals. Finally, 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?

Hello everyone and thanks for joining us today. You may recall that in my first letter to you as Comtech CEO, I spoke to the enormous potential I saw at the Company, our talented people, our innovative spirit, our history of technology leadership, and the opportunity to bring Comtech and our customers into a new era of communications convergence, bridging the digital divide, connecting the unconnected and democratizing access to information in ways that leaves no one behind. More recently, I shared my sense of urgency in driving transformational changes to assimilate our individual businesses together into two segments, improve our operational performance, and deliver the value created by this transformation to you, our shareholders. Today, I can report that over the course of these past six months, the team has fully committed to rapidly implementing these transformational changes into our new strategy and culture what we call One Comtech. I'm going to talk a little more about what that means for our company and our investors today, but I don't want to bury the headline, which is simply this. It's working. This operational and cultural transformation has taken root and is delivering results. And our financial performance is a direct result of these changes. Now Mike is going to speak to our performance in detail, but I am pleased to report that during our second quarter, we recorded revenue of $133.7 million marking our fifth sequential quarter of net sales growth. Our EBITDA, adjusted EBITDA was $11.3 million or 8.5% of sales, representing strong year-over-year growth as well as a sequential increase over Q1 of fiscal 2023. Our bookings of $167.5 million represented a book to bill ratio of 1.25 times and our funded backlog of $702 million is now at a level that we have not seen since…

Thanks, Ken. For Q2 fiscal 20 23, we recorded $133.7 million of consolidated net sales, of which $80.4 million were recorded in our Satellite and Space Communication segment and $53.3 million were recorded in our Terrestrial and Wireless Networks segment. Our second quarter net sales represented a 2% sequential increase over last quarter, and as Ken mentioned, our fifth consecutive quarterly increase compared to the year ago quarter, our Q2 fiscal 2023 net sales increased $13.3 million or 11%, reflecting higher net sales in both of our segments. Our consolidated gross profit percentage for Q2 fiscal 2023 was 34.3% as compared to 35.7% and 38.1% for Q1 fiscal 2023, and Q2 fiscal 2022, respectively. Our gross profit for Q2 fiscal 2023 primarily reflects an increase in net sales and overall product mix changes. For example, in Q2 fiscal 2023 as compared to the prior year quarter, more of our consolidated net sales we recorded in our Satellite and Space communication segment, which historically achieved a lower gross profit percentage than the solution sold by our terrestrial and wireless network segment, which generally includes more software based and recurring revenues. Also, our Q1 fiscal 2023 gross profit percentage benefited from increased sales of our next generation Troposcatter solutions during that period in support of the Ukrainian government. As explained in more detail and reconciled in our Form 10-Q filed earlier today, we utilize a non-GAAP measure that we referred to as adjusted EBITDA. Q2 fiscal 2023 adjusted EBITDA was 11.3 million or 8.5% of consolidated net sales as compared to 9.8 million or 8.1% in Q2 fiscal 2022. The increase both in dollars and as a percentage of sales is primarily attributable to the increase in Q2 fiscal 2023 net sales was offset in part by a lower gross profit percentage. Q2 fiscal 2023 adjusted EBITDA exceeded our expectations for the quarter and represented a sequential increase from Q1 fiscal 2023, all while simultaneously investing in our One Comtech transformation. As Ken previously mentioned, bookings during the quarter total 167.5 million representing a 62.7% year-over-year increase, and a quarterly book-to-bill ratio of 1.25 times. Our current revenue visibility is approximately $1.1 billion and is equal to the sum of our $702 million of funded backlog plus the total unfunded value of certain multiyear contracts that we have received and from which we expect future orders. Overall, our consolidated Q2 net sales and adjusted EBITDA were in line with or better than more guidance provided last quarter, and we are pleased to have increased our funded backlog from October 2022, particularly in light of an economic environment that continues to be challenging. Ken?

Thanks Mike. I'm going to finish up shortly and get to everyone's questions. But before I do, I want to talk a little bit more about where we are right now and what you can expect from us all in the context of guidance for next quarter. As I said earlier, we are intensely focused on improving our operational performance and managing our costs, so that we can accelerate our growth. And it's working. Thanks to the success of our work so far, we believe that we will realize operational efficiencies that improve our margin profile, while simultaneously funding investments in innovation and accelerating growth. Practically speaking, while we anticipate some variability from time to time as we move through this important transformational change, for Q3 fiscal 2023, we expect to achieve sequential consolidated revenue growth in the range of 1% to 3% with consolidated adjusted EBITDA margins in the range of 8.5% to 10%. A clear example of the investments made possible by our One Comtech initiatives is the recent launch of EVOKE, or innovation foundry. EVOKE extends the One Comtech philosophy to our customers, our partners and suppliers, right bringing them together in a structure designed to foster collaboration and accelerate innovation in global connectivity infrastructures. Not only will EVOKE enhance our existing technology and service offerings, we believe it will also allow us to pioneer entirely new ideas and opportunities, with the benefit of combining multiple perspectives, different industry backgrounds, and diverse areas of expertise. Our first publicly announced partnership speaks directly to the spirit of innovation. We're working on what we call Smart Operations with Seattle based tech pioneer Sirqul. Using Comtech expertise and connectivity and real time location tracking, Smart Operations, applications are anticipated to allow enterprises the ability to leverage the real time data…

[Operator Instructions] And we'll go first to Joe Gomes with NOBLE Capital. Your line is open.

I wanted to start out on the gross margin. I mean, you could give us a little more color. You talked about it's down because of the increase of revenues as a whole from the satellite business. How big is the delta between the Satellite and Terrestrial businesses? So if we do see, satellite continued to outpace growth, that's where I feel we can kind of figure out where those gross margins may be going?

Yes, I'll take that Joe. In terms of the gross margins that we don't disclose each of the segments, but I would always offer this when looking at terrestrial and wireless that is software based. There is recurring revenues in that revenue mix and the software that we have is developed on the 911 side of the house in terms of location based services. It's also cutting edge technologies that we're creating. So, we're getting a premium for the work that we do. So there's more of a solution there that we are selling. In terms of the gross margin on the Satellite and Space side, that's more akin to modems and amplifiers and other things that we are selling from a product perspective. But as we are looking forward, trying to move up the tier in terms of what we are providing and not just think of it as a box or a particular product, but more as a service that we could offer to the customer. I think we will start to see a convergence of the gross margins in those two segments and then probably exceed what we are doing today in terms of historical run rates for the margin in Satellite and Space. So I think the story here is, it's one of the change in mix within Terrestrial and Wireless last year, we did have more LBS software sales in there. That has transited to now more NG 911 sales in the current period as returning on PSAPs within our 911 deployment. So there is a mix change going on there. At the same time, we also had seen some increase in the first half for Satellite and Space with the comments that we had sold off to the Ukrainian government in support of their efforts there. So we did have a good dose of product go out in Q1 and some of it in Q2, but the bulk of it was in Q1. So when you are looking at Satellite and Space in terms of their EBITDA profile, you could see the impact from quarter-to-quarter sequentially.

Thanks for that. And In terms of -- you mentioned PSAPs and where are we in terms of the numbers of those that are going live year over the first two quarters of the year?

Yes. In terms of specific numbers, I think I would focus in on a large customer like Pennsylvania and South Carolina and Arizona. I think they are making good progress, getting out of the deployment phase of those contracts and turning on certain regions within each of the states. In terms of a specific number of PSAPs, I'm not going to be able to quantify that for you today. But it is growing each period that we are reporting. They are making good progress on those deployments, and get on schedule and moving into more of that recurring revenue phase that we like, because the more recurring revenue that you bring on, you have those fixed costs that were put in place on day one. And so we will see a better leverage model on the margin side.

Okay. And Ken, you talked about a lot of the initiatives and a lot of the potential there. But as we are looking forward, what are some of the near-term milestones that you are looking at to judge the success of the One Comtech program?

Sure, Joe. Of course, in the short-term, as we assimilate our individual businesses into two segments, we are identifying redundancy, streamlining operations, we are able to perform more agilely as a business and actually we have better clarity, wherein we can make more informed decisions collectively and collaboratively on how to operate the business. We are able to speak to the supply chain in an amplified voice. So we are able to increase efficiency. That's why you are seeing us increase the adjusted EBITDA guidance as we move into Q3. Okay. Now with respect to EVOKE and our innovation foundry, it has two purposes that have immediate value. The first thing is that, we are bringing our various technologies together from across the enterprise. And you can think of those as a toolbox or as building blocks. So we are able to then collectively bring those building blocks together, compound their individual value in terms of technology leadership and then create value for customers. That is more comprehensive. So we can move up into subsystems systems and even services. And by putting those building blocks together, we're able to demonstrate or quantified, calculate what our value proposition is in a comprehensive level to a customer. So for example, instead of talking instead of talking about a technology advantage of a modem or an amplifier, in DBs or in technical jargon, we're able to quantify that value proposition to a customer in terms of, for example, additional subscribers that might be supported on a satellite channel, in order to raise the revenue that given satellite channel can produce for that operator. Because we compound of technology advantage of our modem, with our amplifier, with our antenna with the other equipments that we have. That dialogue is ongoing. And we're very encouraged…

And we'll move next to Greg Burns with Sidoti. Your line is open.

In terms of dividend usually, you see a company cut the dividend as a defensive measure, but it seems like your businesses recovering some from about a year ago. And so, can you just talk about the thought process behind eliminating the dividend and where you're going to reallocate that capital? Is it going to go towards paying down the debt?

I'll respond to that from a from a philosophy level. Our responsibility, of course is to deploy capital will get the highest return and create the greatest value. In fact, that's what a responsible board and CEO does. And when we see a better use of capital, then as responsible stewards of that capital, we should invest it accordingly. Our vision and our strategy, given our expanding opportunity set, which I described in response to Joe Gomes question a few minutes ago. We have the ability to really compound capital if we invest it appropriately. So, we're now informed and excited to some extent about the progress we've made in the future we see. So, we're choosing to be responsible stewards and implement the strategies that we believe is most appropriate.

Okay. And then in terms of the EBITDA margin guidance, the improvements that you're projecting there. How much of that is needed versus the benefits you're seeing from One Comtech and that range that we're looking at range up to 10%, what are the puts and takes that might take you to the top end of that range?

Hi, Greg, in terms of the margin profile for the next two quarters, as we're thinking about Q3, we certainly are being mindful of still, an economic environment that's challenging. But at the same time, as Ken mentioned, we're very excited about the progress we're making with EVOKE and other initiatives. We just announced today, some other actions that we're taking. And I think when we look at the puts and takes, I think we definitely move forward in executing on the initiatives today, trying to secure that higher end, but I think we still have some work to do, we still have investments that we're making. The things that we announced today in terms of our workforce, that's just one element, we still have systems that we're implementing and processes that we're streamlining, that's going to take some time. So as we think about puts and takes, certainly we have a nice book of business, if you will, with over $700 million of funded backlog. Now, which is a nice accomplishment for the Company going back several years, we haven't been at that level. So it's a function of us executing on that backlog, pursuing these new endeavors with the EVOKE, very excited to see these emerging growth opportunities. As we're thinking of ourselves now, it's more of a growth story, I think we're trying to invest appropriately to capture that growth and move the Company forward into the next chapter.

Okay. And I guess you're getting a little bit maybe more visibility on some of the One Comtech initiatives. So do you have like a target or is there anything you would quantify for us in terms of what, maybe where that margin might go or do you have a target range that you're shooting for over the next couple of years?

Yes. First of all, this is Ken. It's a good question. Thanks. So in the re-segmenting of our business and assimilating our business units, we've moved the common tools, common platform so that our business is running holistically now and moving toward the same set of practice, okay. And in fact we've restructured leadership teams, centralized functional areas of responsibility, like contracts, operations, supply chain management, and that streamlined operations. It's improving performance, eliminating redundancy and enhancing collaboration. And then so internally, we have established a set of key performance indicators, metrics and milestones that we are working in managing to on a weekly and monthly basis. And so, we're hitting those and that's what's giving us the insight and competence to forecast, the improved adjusted EBITDA margin that you suggested, that you alluded to. And that's why we're seeing 8.5% to 10% adjusted EBITDA as we move into the third quarter. Now, we do believe that we're on a path to get back to our historical EBITDA levels, which pre-COVID were in the 14% range. So, we're excited about the ability to get to there. And then, as we look at EVOKE and the initiatives that we see there, many of those are going to be software systems and services solutions, where the business models are traditionally profit margins that are more favorable than the equipment sales. So, we are looking forward in the future to going north of that.

And we will take our next question from Asiya Merchant with Citigroup. Your line is open.

Great. Thank you for any opportunity. So just in your guidance, should we expect kind of both segments to do around the same? Or are you guys still expecting terrestrial there to be a little bit more tempered? And the same thing on margins as well, like should we expect any one segment margin mix shift or otherwise to do better?

Yes. I'll take that and then if Ken wants to add to it. The way we are thinking about Q3 certainly on the top-line is 1% to % and you could see what the Terrestrial and Wireless business has been doing. We did book some orders a quarter or so ago that are still yet to ramp up. And as we continue to turn on those PSAPs, I would say, you would continue to see that growth each quarter. In terms of Satellite and Space, I think in terms of the opportunities that we have just secured, we just announced and we will have some more details in the press release soon to come. But we just won a multimillion dollar contract that we are very excited about. For us, it's a greenfield, it's a new relationship with the new customer, at a size we haven't seen before or at least for a long time. And that we believe will give us some nice uplift for the second half of the year. And so, with an opportunity like that and some others, I think we will see probably good growth in the Satellite and Space business. But at the same time, we don't want to get too far ahead of ourselves and we will go only one quarter out at this juncture with the 1% to 3% in total and consolidated.

Okay. And then on the -- go ahead. Sorry.

Well, this is Ken. I was just going to say that we have identified some of our more entrepreneurially oriented growth minded leaders and those are the ones that are strategizing with us regarding EVOKE, our innovation foundry and they are beginning to conceptualize these more comprehensive up tiered value propositions and using the EVOKE venue as a technology incubator and innovation foundry for the integration of other key ingredients, such as blockchain, cloud computing, AI, machine learning, and other things that we can implement on private networks to serve customers and create customer value. You know that we announced Sirqul as our first publicly announced a technology partner. And so, those opportunities hold, we think enormous promise for us.

And then, just, somebody earlier asked the question about the dividend, before going to dividend this quarter and maybe perhaps even next quarter from what I understand from the press release, but what exactly is the cash outlay that you are -- that is involved in this relationship with EVOKE? How much cash on this -- from the cash flow are you planning to put into this that resulted in foregoing the dividend? Is it comparable to the dividend amount? Is it substantially more just trying to get some clarity on that?

This is Ken. I'll take that. I'll tell you that, our technology leadership across the enterprise in what were our individual businesses and are now aggregated into these two segments, our technology leadership is astounding. And it's broad and comprehensive, it touches all different points of the terrestrial and wireless and location based services domain. So frankly, when we pull that together, it just takes a little salt and pepper sprinkled on that in order to create a blended solution. That offers significant customer value. So as we launched, EVOKE, engaged with our critical strategic technology partners, we've established a advisory group that involves third parties that are experts in these domains and understand some of the military and commercial problems that need to be solved. We don't, we don't find that we need to invest very much. And we also believe are finding that it's an extremely accelerated timeline, in terms of weeks to develop a minimally viable product that we can demonstrate to a customer and then work with them to envision how they can put that aggregated capability to work for them. So from our perspective, we're bringing mature technologies forward, and we're just integrating them together in new ways. Our technology partners enable us to bring the tour companion technologies and integrate them rapidly. So we're now looking at long-term, high cost development cycles. We're much more agile and moving much more quickly than that.

I'll talk to you guys after the call. It's a little bit of a head scratcher, why the dividend exists for investment and all that significant.

I think, Asiya, in terms of the financial flexibility that we get out of that easily $30 million in cash that we can redeploy into our initiatives to accelerate the things that we're doing. We see growth ahead of us. And the sooner we get through the transformation, the sooner we can tap into that growth. And when we look back at interest rates being where they are, and getting more rhetoric about more rate hikes. When you start to think about it, you know, with interest on top of it, and where our leverage is and where our leverage is going into the next two or three quarters with the step downs on the facility. This just gives us the flexibility for us to move faster on these initiatives.

This is Ken. I don't want to leave it with the impression that we're moving the money from the dividend to fund EVOKE. EVOKE is not consuming anything like that. We're preserving that cash so that we're better able to apply it and accelerate our penetration in new markets, our ability to create customer value. After we get a customer that says yes, I want this we want to be we want to be poised and ready to go. It's to preserve that flexibility so that we can capitalize on the growth opportunities we see.

And we'll move next to George Notter with Jefferies. Your line is open.

I guess, I was just curious about the revolver. Looks like you grew the revolver about $90 million sequentially. I haven't seen the cash flow statement yet. But there's definitely some cash burn here. I guess, in that context, I certainly understand the move with the dividend. Could you tell me what the cost is on the revolver right now? I believe that's floating rate. I'm just kind of wondering where that is?

Yes, there's two metrics, I'll quote one is with the amortization of the deferred financing costs. That's roughly 8.8%. And if you strip that not, the non cash portion of it the cash borrowing rate is about 8.4% right now.

And then I mean, have you guys thought about trying to do something on the cap structure here, and then try to get some more permanent financing in? Anything that you guys are kind of needling on that is worth chatting about right now, any options that you guys see here?

Without getting too specific about our internal plan, I would say we're not sitting idle. Everything that we're doing is coordinated to our plans. We are focused on the growth and to be ready to move faster, we will need to address our facility back in November. When we sign that it was a two year extension but the reality is, you'll be negotiating pretty soon. So with that in mind, and seeing our trajectory going in the right direction, and hopefully the market starts to ease up a little bit. But we would certainly be mindful that we're not out of the woods, in that regard. We're going to try to time that appropriately so that we're ready for the next stage of growth to address some new initiatives from Ken. But we are not sitting idle, we are putting thought into that as well on top of these One Comtech transformational type initiatives.

And then if you think about just the cost structure of the Company, and then you guys mentioned earlier, there were some headcount reductions. And I know you guys are consolidating some ERP systems. I know there's a bunch of heavy lifting there. But can you talk about what that translates into, in terms of improved cost structure? Is there a target on annual savings that you guys are looking at or anything you can give us in terms of that that benefit?

Well, we've clearly set internal targets. We've clearly managing to those key performance indicators. Michael, give you a little bit insight.

Sure. We didn't put a specific percentage or number of heads in the disclosures. We're trying to be mindful that we're still making investments in our business but to give you some context, we figured you guys would ask, you would point to 2020 when we had reduced our workforce, at that time, it was about 10%. And so the reduction that we're talking about here today is not as large as that. It was a meaningful action that we took to move a soldier seeing it in the EBITDA contribution in our guidance. That's how we think about it for right now. Certainly, when you think about Q3 versus Q4, the actions that we're talking about, we're undertaking them now. So I would say you're not going to see a full quarters benefit of them. So in Q4, you would see likely the full magnitude of that action, plus the other things that we're looking at, like you said, ERP systems, looking at our facilities, and just streamlining our processes and getting improved efficiencies. Yes, and Ken is mentioning, we also will be moved into our channels facility in the upcoming weeks. So that will also be behind us. It's nice to see a chapter closing, we can move forward, all in one building.

And we'll take our next question from Chris Sakai with IDR Research. Your line is open.

Hi, yes. It's Singular Research. Just had a question on the supply chain. How are you seeing it? How are lead times there?

Hi, Chris. This is Mike. In terms of supply chain, I think, we have determined that right now the part shortages don't seem to be the problem. Lead times certainly still seem to be long. We are mindful of that. We do have a lot of backlog. So, we are looking at that backlog and making sure we are placing those purchase orders timely, that part of the reason why you see the use of cash. As we are building backlog above the $700 million level, you also have to support that with inventory procurement and also receivables. So from a supply chain perspective, I don't think we're out of the woods yet. I think Maria would also agree with me on that. I think we still have things to keep an eye on, but I think it's getting better, but we are not fully behind that.

I'll say too. This is Ken. I think it's getting better when we look at our core business, because we are learning how to manage that. We are able to speak with an amplified voice now across all the businesses. But in addition to that, when we think of the up tiered business in systems and services, those supply chain questions are still a little bit open, as we move into some of those new markets that we are excited about. So that's why we say we are still a little cautious. We may see some variability from time-to-time because we are stretching into some things that are different than what we have traditionally done.

Okay. Thanks for that. And then can you talk about your recent VSAT orders from the U.S. government? Do you expect more and how much more?

Chris, in terms of the VSAT, this is a contract we have had with the army for quite some time. And we always say, with the army they have a very unpredictable funding schedule and sometimes they don't always know exactly what they are doing. And sometimes orders will show up where we thought it'd be a little bit later in the quarter and maybe it shows up earlier and vice versa. So I think in our disclosures today, we talk about the variability from time-to-time. The lease out equipment that we have sold here or will be selling and shipping shortly, it's a function of that, it's things that sometimes are just hard to predict, but we have the contract vehicle. The army, we have a good relationship with them over the years. And yes, we would expect to see some more to come, but nothing to put a specific dollar amount on.

Yes. And I'll just chip in, because we are aggressively working that. Our technology is state-of-the-art in things like triple scatter as well as the VSAT terminals. You saw the President's budget come out today and it's trending upward. In addition to this, we are approaching fiscal year end for the government and sometimes with our contract vehicles that are in place, they sweep up funds that didn't get spent on something else and we benefit from that. So while we are not forecasting that right we are aggressively working to take advantage of those kinds of opportunities.

Okay, great. And can you talk about how orders are coming in from the Ukrainian government? Are they continuing on the same pace as before or tapering off. Can you shed some light there?

I don't feel comfortable speaking to that directly at this time. But I'll tell you that, as we have said before, there is no better marketing testimony in the world than folks that are in the fight with a sophisticated pure adversary, and the equipment that they're buying from us works in that tough environment. And so, we anticipate that that puts us in a very strong position.

And it does appear there are no further questions at this time. I would now I'd like to turn it back to Robert Samuels for any closing remarks.

Thanks, operator. And thanks, Ken and Mike, and everyone for dialing in today. As Ken said, there are additional details about our strategy and performance available in our investor letter and SEC filings. And we'll provide ongoing insights in our signals blog. 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. This concludes our second quarter call. We thank you all for your continued support.

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