Greg Burns - Sidoti & Company :

Welcome to Comtech Telecom Corp's Conference Call for the Second Quarter of Fiscal 2025. As a reminder, this conference is being recorded. I would now like to turn the conference over to Maria Ceriello, Senior Director of Financial Operations of Comtech. Please go ahead, Maria.

Thank you, Operator, and thanks, everyone, for joining us today. I'm here with Ken Traub, Comtech's Chairman, President, and CEO, Mike Bondi, CFO, Daniel Gizinski, President of the Satellite and Space Communications Business, and Jeff Robertson, President of the Terrestrial and Wireless Networks Business. Before we get started, please note we have a detailed discussion of the quarter in the press release we issued this afternoon, which is available on our website. 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 planned 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 always involve significant risks and uncertainties. Actual results could differ materially from forward-looking information. Any forward-looking statements are qualified in their entirety by questionnaire statements contained in the company's SEC filings. With that, I will turn it over to Ken. Ken?

Thank you, Maria, and good afternoon, everyone. I appreciate your taking the time to join us today. Comtech's last conference call was on January 13th, 2025, which was also my first day in the role as President and CEO of the company. I had joined the company shortly before that as an Independent Director on October 31st and then assumed the role of Executive Chairman on November 26th, so I had a little bit of experience with the company when I shared my perspectives that day. A point I emphasized on that conference call, as I have done consistently since then with all of Comtech's stakeholders, is that I believe earning trust is the most essential ingredient for success in business. I stated specifically that, frankly, the Comtech organization has work to do to earn trust in light of its historically poor track record of financial performance and missed expectations. Our goal is to earn the trust of all of our stakeholders, and we intend to do that by being transparent, holding ourselves accountable, and delivering on our promises. On January 13th, we were clear and direct. Comtech's recent financial performance was unacceptable. Further, we disclosed our expectation at that time that the company anticipates breaching financial covenants at the end of the quarter on January 31st, and this could have significant consequences for the company. In light of the company's challenges, I announced a comprehensive transformation plan. The key pillars of that transformation plan are, number one, improving operational discipline and reducing the cost structure. Number two, supporting the growth and development of successful high-margin business initiatives. Third, conducting a broad review of strategic alternatives. Fourth, strengthening the company's capital structure. And fifth, promoting a corporate culture centered on taking pride in our transformation, resulting in enhanced employee morale…

Thank you, Ken. Before getting into the detailed results, I would like to first summarize this past quarter for you. Overall, our GAAP results were significantly better sequentially than our first quarter of fiscal 2025. While this reflects some meaningful operational improvements, it is primarily due to the fact that the first quarter included several large non-cash charges and write-downs, which did not repeat in this more recent quarter. The T&W segment continues to perform well and our satellite and space communication segment reported significantly improved results on both its top and bottom lines. While we are encouraged by the results, we believe the transformation plan that Ken described will be key to achieving further improvements. Now, let's turn to the key metrics for this past quarter. Consolidated net sales were $126.6 million compared to $134.2 million a year ago and $115.8 million in Q1 of fiscal 2025. Net sales in both segments were lower this past quarter relative to the prior year period. Compared to last year, net sales in our satellite and space segment during Q2 reflected lower net sales of our troposcatter solutions, while set in part by higher net sales of our SATCOM solutions and satellite ground infrastructure solutions. As discussed in our prior earnings call, in fiscal 2024, within our troposcatter product line, our next generation troposcatter contracts with the U.S. Marine Corps and Army were in full swing with respect to procurement and manufacturing. Today, these contracts have significantly progressed, allowing us to begin invoicing and collecting on the unbilled receivables that we have built up in fiscal 2024. Collectively, these two programs accounted for approximately $11 million of the quarter-over-quarter reduction in net sales. During Q2 of last year, we also had a large sale of TropoGear to an international customer, which did…

Thanks, Mike. First, I want to underscore Ken's comments about organizational improvement. Simplifying the segment structure is a top priority. Our employees have embraced the clear lines of accountability that the new structure enabled. There is a direct connection between the S&S segment's progress on margins and our operational improvements, 10-plus percent reduction of segment staff, and product rationalization. Alongside these organizational changes, we've addressed policies and processes to ensure that purchasing and inventory management are well-coordinated and subject to appropriate reviews. Our plan is having a positive effect. Regarding product rationalization, we are migrating customers to modern products and discontinuing products with negative or no gross margin. Those discontinued products represented less than 10% of S&S revenue over the trailing 12 months. The wind-down of our steerable antenna business is also being finalized. A separate initiative underway in the S&S segment has been to adjust our go-to-market process. As a result, we have seen early success in negotiating more favorable contract terms, leading to better management of working capital in the future as we cycle out older contracts from backlog. We continue to monitor the ongoing stop work related to our next-generation troposcatter contract in support of the U.S. Marine Corps. And while we do not have any material updates relative to our previous disclosures and SEC filings, we anticipate learning more in the near future. In closing, our S&S segment delivered meaningful top and bottom line improvements in Q2. These improvements resulted directly from a shift in corporate culture and accountability that has reinvigorated the organization. I've seen tremendous efforts by our employees to take ownership of their projects and be accountable for performance at a local level. These operational improvements benefit not only our financial performance, but our customer satisfaction and confidence. We recognize there is more to do and will continue to drive good decision-making, cost reduction, and rationalization throughout the organization. I'll now turn it over to Jeff to discuss our terrestrial and wireless segment. Jeff?

Thanks, Daniel. Overall, our terrestrial and wireless performance has met our expectations for Q2. Given that public safety and carrier technologies entail long sales cycles, large backlogs, and multiyear contracts, comparisons of our T&W bookings can fluctuate from quarter to quarter. As a reminder, T&W has three divisions. First, CLT. This division focuses on wireless carrier’s network solutions related to location, emergency notification, and messaging. CLT's 5G cloud-based location services are really gaining traction with global wireless carriers. Second, SST. This is our largest in terms of revenue. This serves as the core of next generation 911 networks. We currently support 11 states and multiple regions in the United States with plans to expand to additional states and regions soon. Third, CLT or Solacom, the fastest growing division, serves local dispatch centers with hosted and local applications for managing emergency responses. In our SST division, we were recently notified of a NextGen 911 related award. And in contract negotiations with a state in the southeastern part of the United States and estimated to be worth north of $25 million over five years. With such a broad network of mission-critical customers, we're developing a plan to leverage our nationwide scale to reduce significant network expenses by interconnecting various jurisdictions and offering new customers enhanced redundancy options through adjacent regions and data centers. Along with our development efforts, this focuses on bringing more core NextGen 911 technologies in-house, reducing our reliance on third parties and improving our gross margins across existing and new customers. In our CLT division, we booked one of a series of anticipated purchase orders with Vodafone. Beginning in the United Kingdom, we are currently negotiating the statement of work, which will likely expand beyond this initial region, potentially adding 30 plus more with this global wireless carrier over…

Thank you, Jeff. I want to close with a brief summary. The performance in the second quarter of 2025 reflects the initial impact of our transformation plan. To recap, the elements of our transformation plan are, number one, earning the trust of all key stakeholders with transparency, accountability, and delivering on our promises. Number two, improving operational discipline and reducing the cost structure. Third, supporting the growth and development of successful high-margin business initiatives. Fourth, conducting a broad review of strategic alternatives. Fifth, strengthening the capital structure. And finally, sixth, promoting a corporate culture that is centered on taking pride in our transformation, resulting in enhanced employee morale and productivity. We're delighted that we have already succeeded in strengthening the capital structure with the recently announced capital infusion, coupled with the amendments to the credit agreement. And we do believe this is a validation of the trust and confidence our lenders and creditors have in the merits and early results of our transformation plan. Operator, please open the call to questions.

[Operator Instructions] We will go first to Greg Burns with Sidoti and Company.

Good afternoon. Can you just talk about maybe the progress you're making in terms of cost optimization in the satellite business? How far along are you in that process? Is it all reflected in this quarter's results, or is there more to be gained in coming quarters?

I'm going to start, Greg, and then I'll turn it over to Daniel for some more specifics. So, it's a continuous process. So, we announced the transformation plan on January 13th. Now, there was some work that was taking place before that to start reducing the cost structure, but this is an ongoing process. It's not just about reducing cost, it's about being more efficient in how we operate and being more targeted in the business that we choose to take on and what we choose not to take on. Historically, this company has taken on very low margin and, frankly, in some cases, negative gross margin business. We need to be better at assessing what our cost is going into a job, pricing it appropriately, and taking it on. So, it's not just about reducing cost. It's an element of it, but it's about running the business more efficiently and targeting business opportunities where we can justify appropriate gross margins. Daniel, do you want to add anything to that?

Absolutely. So, I think a couple of points worth mentioning here. First, as Ken mentioned, this process is ongoing and something that we'll continue to thoughtfully evaluate. I would say, certainly, many of the cost reduction efforts that have already been deployed were accomplished during our second quarter, and so there is a partial benefit that's reflected there for some of those. But the product rationalization process and the efforts to move into some higher margin areas are kind of a continuing, ongoing effort. We are in the process today still of working through some of the committed backlogs on existing products and existing contracts that we have some additional time to perform under as well.

Okay, thanks. Then, maybe in terms of looking forward and targeting maybe some higher margin business, you announced the $26 million order with L3 for A3M modems. Can you just maybe talk about some of these higher margin programs that you've been doing development work for over the last maybe year or two that are now potentially going into production this year? What should we think of looking forward in terms of opportunities for growth in some of these areas where you've been doing development work?

Again, I'll start, and then Daniel can add if he likes. So, we're not going to comment on gross margins of any particular job. I assume you can appreciate that. But -- the company's aggregate gross margins have been weighted down by the incorporation of, frankly, inappropriate jobs, and we are going to be more selective. So, when you see our gross margin going forward, we are hoping that it will improve partly as a result of improved product mix. We are deliberately not going to accept jobs going forward as the company has done in the past that are very low, thin, or even negative gross margins. So, that in and of itself is going to improve the mix. The other thing I'll add to that is we are going to do a better job of leveraging our differentiated and proprietary technologies and providing improved service to our customers that enable us to solve our customer problems better and where we can deserve better gross margins than what the company has charged for similar programs in the past. But as we provide a better, more differentiated solution, we do deserve improved gross margins. Daniel, do you want to add to that?

I think I agree with those points. On A3M specifically, certainly, we're very pleased to see a program that we've worked through the development phase over the past several years, beginning to transition into production contract awards. I think it reflects a continued level of confidence from both our end users within the U.S. DoD and other partners as well as with our direct customer in L3Harris. We're continuing to focus on delivering differentiated capabilities that offer meaningful, understandable customer value that allows us to capture meaningful margins.

Okay, and then just lastly, on the cash flow and working through some of your own billed receivables, what do you think -- or what is your outlook for the cash flow in the second half of the year? Do you expect to be cash flow positive?

We're not taking projections, but Mike maybe you can give them some color on that.

Yes, I was just going to say, we probably aren't going to give any specific guidance on that, Greg, but in terms of our trajectory on the unbilled, we are working through, as you can see, each quarter, chipping away at the growth we had experienced last year. I think that, coupled with our cost reduction initiatives, a focus on being mindful of our CapEx requirements, we are certainly having a view that we're trying to improve our cash position with profitable business going forward, so our expectation is we'll continue to be better, but we still have some more work to do.

All right, thank you.

[Operator Instructions] We will go next to Griffin Boss with B Riley Securities.

Hi, good afternoon. Thanks for taking my questions. I'd like to drill down into some of the questions Greg just asked there, maybe a little bit more pointed question. I'm curious, just with the deliberate decision to not accept low-margin bookings or business, which I appreciate, is there any color you can provide in terms of what you believe could be a sustainable margin profile for space and satellite and T&W in general, not digging into specific programs on a go-forward basis, assuming S&S gets back to normal operations, post-restructuring, that historically was maybe a 10% EBITDA business, T&W maybe 20%, just generalizing, perhaps any more color on a go-forward basis with these new bookings profile that you're targeting?

We're not giving guidance. We do aim to improve the gross margins through better cost discipline, better product mix, and improved product positioning that enable us to justify better gross margins by delivering better value to our customers. We're not in a position to give you specific numbers on what that gross margin is at this time.

Okay, understood. So, just shifting gear, related to the unfavorable ruling after what I believe was the fifth protest by the incumbent on GFSR, I appreciate this news occurred today, but is there, just curious, is there anything Comtech can do to re-protest this yourselves? And even if so, if there is something you could do related to GFSR, is that something that you even want to spend time on at this time, given the low margin profile of that contract?

Good question, and we are considering it. As you noted, we were alerted today of the GEO's decision. We are going to consider our options in light of their decision on the protest. There is room for us to respond, but as you also observed, the margin is very low there as well. So, we are considering our options. Daniel, do you want to provide any further color on that?

Ken, I think I agree with the summary. It is relatively fresh news at this point. There are a number of options available to us that we are in the process of evaluating and assessing at this point.

Okay, fair enough. Thanks for that. And then maybe one more, if I could, just more broadly on T&W, maybe for Ken or for Jeff. Just curious if you had any commentary around the FCC release their meeting agenda for their meeting later in March, and it really highlighted their commitment to ensure NG911 resilience and accessibility. Just curious if there was anything on that front that maybe you wanted to comment on or anything in that that surprised you or improves your confidence in that part of the business going forward?

Jeff, do you want to take that question?

Sure. Griffin, thank you for the question. We were anticipating the FCC's agenda coming out. There are really two key things there that are exciting for us. One, there is a focus on location accuracy. Since we are the key supplier to wireless carriers for location accuracy, it really helps our business and gives us some opportunity there within the carriers themselves. They specifically call it Z-Access, which is the floor someone is on when they dial an emergency. So, that is also something we do and offer to wireless carriers. But the second part to your point is they also talked about NextGen 911 resiliency in the agenda. And it is kind of what I talked about in my prepared comments is as we interconnect the networks, adding additional resiliency to the network is something we are looking at doing. And the FCC is just kind of enhancing that mandate and looking for vendors to comment on. So, we will be preparing some replies and comments for them and some recommendations along that. But we are already kind of doing that and anticipated their move there. So, both we thought were very favorable for our business at T&W.

Great. Thanks for that call, Jeff. And thanks, everyone, for taking my questions. Appreciate it.

It appears that we have no further questions at this time. I will turn the program back over to Mr. Ken Traub for any additional or closing remarks.

Thank you, operator. To those of you who are attending the SATSHOW in DC this week, we hope you find a chance to stop by our booth and meet some of the contact team members. We really look forward to speaking with you all on our next earnings call for fiscal Q3. Thank you all very much and have a good evening.

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