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Comtech Telecommunications Corp. (NASDAQ:CMTL)

F1Q10 Earnings Call

December 9, 2008 8:30 am ET

Executives

Maria Salerno – Investor Relations

Fred Kornberg – Chairman of the Board, President & Chief Executive Officer

Michael D. Porcelain – Chief Financial Officer & Senior Vice President

Jerome Kapelus – Senior Vice President Strategy & Business Development

Frank W. Otto – Senior Vice President Operations

Tyler Hojo – Sidoti & Company, LLC.

Analysts

Mark Jordan – Noble Financial Capital Markets

Timothy Quillin – Stephens, Inc.

Joseph Nadol – J. P. Morgan

Peter Arment – Broadpoint Amtech

Richard Valera – Needham & Company

Michael Ciarmoli – Boenning & Scattergood, Inc.

Operator

Welcome to Comtech Telecommunications Corp.’s first quarter fiscal 2010 earnings conference call. At this time all participants are in a listen only mode. Later we will conduct a question and answer session. (Operator Instructions) As a reminder, this conference is being recorded Wednesday December 9, 2009. I would now like to turn the conference over to Ms. Maria Salerno of Comtech Telecommunications.

Maria Salerno

Welcome to the Comtech Telecommunications Corp. conference call for the first quarter of fiscal year 2010. With us on the call this morning are Fred Kornberg, President and Chief Executive Officer; Michael Porcelain, Senior Vice President and Chief Financial Officer; Jerome Kapelus, Senior Vice President Strategy and Business Development; and Frank Otto, Senior Vice President Operations.

A news release on the company’s results was issued yesterday afternoon and is posted to our website. 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, the plans objectives and business outlook of the company’s management and the company’s assumptions regarding such performance, business outlook and plans are forward-looking in nature and involve certain significant risks and uncertainties.

Actual results could differ materially from such forward-looking information. Any forward-looking statements are qualified in their entirety by cautionary statements contained in the company’s Securities & Exchange Commission filings. I am pleased now to introduce the President and Chief Executive Officer of Comtech, Fred Kornberg.

Fred Kornberg

Yesterday afternoon we reported our first quarter fiscal 2010 results. Before our CFO, Michael Porcelain presents a financial overview, I’ll provide some brief comments on our overall results and market conditions. After Mike completes the financial overview I will discuss each of our three operating segments followed by an update to our fiscal 2010 guidance.

The first quarter results we reported yesterday clearly show that we are off to a strong start to our fiscal year 2010. Although difficult market conditions still cause me to be cautious, as a result of our solid performance in the first quarter I am becoming increasingly optimistic because during the first quarter we started to see pockets of strength in some of our commercial product lines and importantly we now have increased visibility to the year.

As I look to the remainder of fiscal 2010, I believe we are at a turning point where our revenues and net income are picking up speed such that fiscal 2010 is on track to be a record year of revenues and a year of significant earnings growth. Now, let me turn the presentation over to Mike who will provide some financial highlights.

Michael D. Porcelain

Overall context first quarter results were solid. The cost reduction actions that we took over the past several months have resulted in tangible benefits and as Fred will discuss later, we believe Q1 sets the stage for revenue and earnings growth for the remainder of fiscal 2010. Let me start with some details on the first quarter. As usual, I will start with the top of the income statement and work my way down.

Q1 fiscal 2010 sales were $133.8 million which represents a decline of 30.3% as compared to Q1 of last year. Although sales in Q1 of fiscal 2010 were lower in all three of our segments, we began recording significant revenue in our mobile data communications segment related to shipments for MTS orders previously received from the US Army for new MTS ruggedized computers. As we will discuss in detail later in this call, because of the overall increased visibility that we now have, we expect that during the remainder of fiscal 2010 that the pace of shipments for MTS orders currently in our backlog will increase from current levels.

Of our first quarter 2010 consolidated sales our telecom transmission segment generated net sales of $46.7 million, a decrease of 37.4% as compared to Q1 of fiscal 2009. Like last year, the majority of sales in this segment during Q1 of fiscal 2010 consisted of satellite earth station products which were significantly lower as compared to Q1 of fiscal 2009. Importantly, we did see some positive signs during the quarter. Our quarterly satellite earth station product line bookings were not only better than our expectations just three months ago, they were significantly above the bookings we achieved in Q4 of fiscal 2009.

I should highlight that when considering the strength of our Q1 2010 bookings, be mindful that our Q1 2010 bookings do not include any bookings for video encoder and decoder products or commercial fiberglass antennas, which as we announced in August 2009 we are no longer offering to our customers.

Turning to our over-the-horizon microwave system product line, net sales for Q1 of fiscal 2010 were not only nominal but they were lower than Q1 of fiscal 2009. In total our telecommunications transmission segment represented 34.9% of consolidated Q1 2010 net sales as compared to 38.9% for the first quarter of fiscal 2009.

Now, let me turn to our mobile data communications segment which generated net sales of $54.1 million for Q1 of fiscal 2010. This represents a decrease of 33.9% versus the first quarter of fiscal 2009. As a reminder, quarterly sales fluctuations in our mobile data communications segment are normal and this quarter was no different. In Q1 of fiscal 2010 we began recording significant revenue related to the upgrade of MTS ruggedized computers for the US Army. In addition, we shipped virtually no mobile satellite transceivers during the quarter. This compares to last year when we shipped significant quantities of mobile satellite transceivers and related systems.

The new MTS ruggedized computers now being shipped to our end customer are manufactured by a third party supplier. To date, we are pleased that our supplier has been able to meet our estimated shipping time tables. As further disclosed in our Form 10Q filed yesterday afternoon, although our third party supplier has had and continues to experience minor production and technical issues as they prepare for full scale production, we believe they are taking appropriate steps to meet our expected deliver time table for the remainder of the year.

Although quarterly shipments and related sales remain difficult to predict, significant shipments to the US Army during Q1 of fiscal 2010 was an important sign to us that we are right on track for the year. As such, we continue to expect that a substantial portion of the backlog associated with these computers will be recognized as revenue during the second half of fiscal 2010 with the fourth quarter of fiscal 2010 expected to be the peak quarter of shipments.

Through October 31, 2009, we received $582.7 million in total orders under our $605.1 million MTS IDIQ contract which expires in July 2010 and we received $213.9 million in total orders under our $216 BFT IDIQ contract which currently expires in December of 2011. In aggregate, our mobile data communications segment represented 40.4% of consolidated net sales for Q1 of fiscal 2010 as compared to 42.7% for Q1 of fiscal 2009.

Turning to our RF microwave amplifier segment, net sales were $33 million, a decrease of $2.4 million or 6.8%. Although US government sales were significantly higher during Q1 of fiscal 2010, this increase was more than offset by lower sales as expected of our amplifiers to commercial customers. Given ongoing challenging end markets and as a result of anticipated timing of orders currently in our backlog, we expect that quarterly sales in our RF microwave amplifier segment will decline from current levels for the remainder of fiscal 2010.

For the year, we expect sales to be lower than fiscal 2009 sales which significantly benefited from strong orders and related sales of amplifiers used on the CREW 2.1 program. In aggregate, our RF microwave amplifier segment represented 24.7% of consolidated net sales for Q1 of fiscal 2010 as compared to 18.4% in Q1 of fiscal 2009.

Let me provide some color on consolidated sales by customer type. Of our consolidated first quarter sales, 65.7% were to the US government, 26.9% were to international end users and the remaining 7.4% were to domestic commercial customers.

Now, on to gross profit. Our consolidated gross profit as a percentage of net sales was 37.2% for the first quarter of fiscal 2010 as compared to 45.3% for the first quarter of fiscal 2009. This decrease was primarily attributable to both a decrease in consolidated net sales as well as an anticipated significant change in product mix. As expected both our telecom transmission and mobile data communication segments experienced a lower gross profit percentage in Q1 of fiscal 2010 as compared to Q1 of fiscal 2009. Declines in both segments were primarily due to changes in product mix.

As I mentioned earlier, during the first quarter of 2010 a significant portion of our mobile data communications segment sales were for lower gross margin new MTS ruggedized computers rather than sales of higher gross margin mobile satellite transceivers. During Q1 of last year, we sold large quantities of transceivers. This product mix change impacted both segments. As a reminder, our telecom transmission segment manufacturers mobile satellite transceivers for our mobile data communications segment which in turn sells them to its customers, primarily the US Army.

In addition to lower relative gross margins, the new MTS ruggedized computers and certain accessories are manufactured by a third party supplier and has significantly lower gross margins than prior MTS computers in our historical mix of products. Finally, let me discuss our RF microwave amplifier segment which achieved a higher gross profit percentage as compared to the first quarter of fiscal 2009. This increase was primarily due to sales of our solid state high power broadband amplifiers and switches related to our participation in the CREW 2.1 program.

As sales in this segment are expected to decline during the remainder of fiscal 2010 our overall gross margins in this segment are also expected to slightly decline from current levels. Looking at our expectations of consolidated gross margins going forward and as we explained during our last conference call, because of the significant quantities of lower gross margin MTS ruggedized computers we expect to ship in future quarters, consolidated gross margins for the remainder of fiscal 2010 are expected to significantly decline from current levels and prior periods. Gross margins in any particular future period will be highly influenced by the ultimate quantity of new MTS ruggedized computers shipped in those periods.

Now, let me go further down the P&L and discuss operating expenses and the rest of the income statement. On the expense side, as a percentage of consolidated net sales SG&A expenses were 16.2% in Q1 of fiscal 2010 as compared to 15.1% in Q1 of fiscal 2009. The increase in SG&A expenses as a percentage of net sales is primarily due to the overall lower consolidated net sales that we achieved in the quarter. Importantly our reported SG&A expenses reflect significant cost reductions including lower SG&A expenses associated with the sales of our video encoder and decoder product lines that we announced in August of 2009.

Because we expect overall consolidated net sales to increase for the remainder of fiscal 2010 we anticipate that SG&A as a percentage of consolidated net sales will decline from current levels. Turning to R&D expenses as a percentage of consolidated net sales they were 8.4% and 7.3% for the first quarter of fiscal 2010 and 2009 respectively. In addition to our internal efforts during the first quarter of fiscal 2010 we continued our efforts associated with building, testing and delivering our next generation BFT HC transceivers pursuant to an $8 million order we received in fiscal 2009 from the US Army.

As a reminder, last year during the first quarter in addition to R&D expenses incurred in the normal course of business we also recorded a charge of $6.2 million related to the immediate amortization of acquired in process R&D related to our acquisition of Radyne. There was no such charge during Q1 of fiscal 2010.

Amortization of intangible assets with finite lives was $1.8 million in both Q1 of this year and last year. Operating income for Q1 of fiscal 2010 was $15 million compared to $35.9 million in Q1 of fiscal 2009. As a percentage of sales, operating income was 11.2% in Q1 of fiscal 2010 versus 18.7% in Q1 of fiscal 2009. The significant decrease in operating income is primarily attributable to declines in both our telecom transmission and mobile data communications segment that were partially offset by our RF microwave amplifier segment.

In addition, primarily as a result of lower cash base incentive compensation and our overall cost reduction efforts we also experienced lower unallocated operating expenses in Q1 of fiscal 2010 which declined from $7.7 million in Q1 of fiscal 2009 to $4.7 million. Interest expense for the quarter was $2 million. Last year’s interest expense of $1.8 million which has been retroactively adjusted and restated reflects the imputed borrowing rate of 7.5% for our 2% convertible senior notes which are no longer outstanding.

Interest income and other decreased from $1.3 million in the first quarter of fiscal 2009 to $200,000 in the first quarter of fiscal 2010. This decrease is primarily attributable to a significant decline in period-over-period interest rates. Turning to income taxes, our effective tax rate for the first quarter of fiscal 2010 was 31.8% as compared to 38.8% for the same period last year. Our provision for income taxes in Q1 of fiscal 2010 reflects a discrete tax benefit of approximately $600,000 or $0.02 of EPS primarily related to the reversal of tax contingencies no longer acquired due to the exploration of applicable statues of limitations. Excluding the impact of further discrete tax items, our current fiscal 2010 estimated tax rate is currently expected to approximate 36%.

Finally, on the bottom line, our diluted EPS for the first quarter of fiscal 2010 was $0.30 compared to $0.80 last year. Earnings before interest, taxes, depreciation and amortization or EBITDA was $21.4 million for the first quarter of fiscal 2010. Cash provided by operating activities for the first quarter of fiscal 2010 was $13 million.

Our balance sheet remains strong. As of October 31, 2009 we had approximately $500 million of cash and cash equivalents. Although we expect to generate significant cash for the remainder of fiscal 2010, the exact year end amount is difficult to predict and will be significantly impacted by the timing of deliveries, collections and vendor payments related to our overall performance on our MTS contract with the US Army.

Finally, let me turn to consolidated backlog. As of October 31, 2009 reported backlog was $535.6 million compared to $549.8 million of July 31, 2009 and $219.1 million as of Q1 last year. We expected a substantial portion of our current backlog will be recognized as sales during fiscal 2010. In summary, our Q1 results were solid and I believe they position us well for the remainder of fiscal 2010.

Now, let me turn it back to Fred who will provide additional color and insight in to our three operating segments as well as provide some comments and detailed financial guidance for fiscal 2010.

Fred Kornberg

I will begin with our telecommunications transmission segment which includes our satellite earth station and our over-the-horizon microwave product line. In satellite earth station products, by far the largest product line within the segment, first quarter showed a solid rebound from a bookings perspective with demand coming from both the US government and from our international customers.

In particular our US government business benefited from the growth and expansion of existing military satellite programs while cellular back haul infrastructure demand in regions including the Middle East, Africa, China and Russia resulted in stronger international bookings. Furthermore, we also saw positive signs coming from the oil producing regions and saw increased demands from direct to home satellite television providers in Latin America, the Middle East and Asia.

All the fundamental long term growth drivers in the satellite earth station markets that we described previously remain firmly intact. The combination of satellite bandwidth shortage, long term global demand from both commercial and government markets and the compelling cost savings capabilities of our modems provide an exciting and lucrative long term opportunity for Comtech.

On our over-the-horizon microwave or Troposcatter product line front, things have been overall positive both on a domestic and international front. On the domestic side we continue to work with the US DOD relating to several opportunities and we expect finally to receive an order shortly. This order could be in the range of $20 to $25 million. On the international side where we have been a strategic supplier for over-the-horizon Troposcatter systems in Algeria for almost a decade, we continue to work with two US primes on the next phases of multiphase communications network build outs.

These sales cycles continue to remain lengthy however, we continue to believe that these contracts are not a matter of if but just a matter of when. During the quarter we entered in to what we believe are final negotiations with one of the Algeria prime contractors. We remain optimistic that this particular opportunity will result in an order in fiscal 2010.

Based on this increased visibility that we now have on both of these contracts, we believe that most of the revenues from both contract opportunities will probably be recorded in fiscal 2011 and fiscal 2012. In summary, given the strength of our first quarter satellite earth station bookings and our increased visibility in to our over-the-horizon microwave opportunities, the outlook in our telecommunications transmission segment is looking a lot brighter than it was just a few months ago.

In our mobile data communications segment, we entered the year with an unprecedented backlog of over $435 million and during the first quarter we added to that and we received additional MTS and BFT contract orders, a portion of which were incremental to our expectations. As Mike mentioned earlier, our MTS ruggedized computer vendor has finally begun making significant shipments. As such, we are increasingly comfortable that our revenue assumptions for fiscal 2010 in this segment remain on track.

Now, let me provide a status update on our MTS and BFT programs. We currently anticipated that an MTS RFP will be provided to industry in the first quarter of calendar 2010. While an award for next generation MTS contract could be made in advance of the current contract expiration in July 2010 we believe that the constricted timeline makes this very unlikely. In fact, based on last week’s presidential announcement to deploy more troops and related equipment to Afghanistan we would not be surprised if our present contract ceiling is increased and extended.

We clearly believe that the MTS system is vital to the US Army. From our perspective the 12% increase in MTS line item funding for the government’s fiscal 2010 budget, I believe is a strong signal of the vital importance of MTS to our soldiers in theater. We believe that the MTS program office will do everything in its power to ensure an uninterrupted supply of hardware and services to our soldiers and we believe that our depth of experience providing a vital backwards compatibility communications solution puts us in a strong position to win the recompete.

Also, as of October 31, 2009 our BFT IDIQ contract has only $2.1 million of contract ceiling available. As such, we cannot be awarded significant orders at this time without an increase or extension of the contract. With two years to go on the contract we expect a raise to the ceiling sometime during the first quarter of calendar 2010. While the US Army released an original market survey in November of 2008 proposing a two year $617 million extension to the current BFT contract, it is our current speculation that any contract increase will be significant but not near the magnitude of the initial survey.

As you know, in April 2009 the Army also issued an RFI to fund the purchase of approximately 100,000 next generation high capacity BFT transceivers over a five year period starting in 2010. Although this RFI indicated that the Army was considering issue multiple IDIQ awards of approximately $477 million each, we believe then and we still believe that it is more likely that the government will ultimately place orders with only one vendor. As we thought in October 2009 the US Army issued another solicitation notice which now suggests that it anticipates awarding only one vendor a six year firm fixed price and cost plus fixed fee IDIQ contract for the next generation BFT system.

Although a formal RFP has not been released to us yet, we’ve had multiple conversations with the US Army and have responded to multiple draft RFP iterations. We now believe that a final RFP will be released to industry during the first quarter of calendar 2010. Here we are extremely confident that our next generation BFT high capacity transceiver and our new BFT high capacity network offer significantly enhanced functions and features many of which far exceed the requirements being put forth by the BFT draft releases to date.

Also, our current ongoing BFT high capacity prototype testing funded by an $8 million contract from the BFT program office has gone exceptionally well and further confirms our confidence in our platform’s capability. As a point of reference, in November 2009 Northrop Grumman announced that it delivered its next generation BFT software to the US Army and we were the first company to participate in those test trials using the joint capabilities release or JCR software and we’re pleased to say that we passed the test flawlessly.

Here to we believe that our current BFT products and services are critical to the US Army and given their recent announcement by the President to increase troop levels in Afghanistan, we see continued future growth opportunities and believe that our incumbency, our capabilities and our experience positions us strongly to remain the go to vendor for BFT too.

Now, let me switch gears a bit and briefly discuss our micro satellite product line, an area because of its relatively small size we don’t talk much about. This quarter we saw some tangible signs that the role that our micro satellite products can play. During the first quarter we were awarded a high strategic and important $200 million five year IDIQ contract from the Air Force Research Laboratory for the development of advanced plug and play technologies for space missions. The award includes an initial task order with the value of $500,000 with future additional orders not expected to be received until fiscal 2011.

In summary, we believe we’re making excellent headway in our micro satellite product line and hope to be in a position to discus other meaningful business opportunities in micro satellites in the coming months. If we are successful in this small initial order, 2011 and 2012 revenue from this product line could significantly increase.

Finally, let me discuss our RF microwave amplifier segment where we design, develop and manufacture traveling wave tube amplifiers for the government and commercial satellite communications market and solid state amplifiers for the electronic warfare, jamming, medical and aviation markets. In our traveling wave tube product line we differentiate ourselves in the market by virtue of our strong depth of knowledge in selecting traveling wave tubes and incorporating them in to innovative amplifier designs.

While Q1 sales were on track as a result of orders received in fiscal 2009 and while the mid and long term opportunities are tangible and identifiable, the remainder of fiscal 2010 still looks to be difficult given the current economic environment. Nevertheless, new proposal activity continues and the size and scope of the opportunities bode well for 2011 and beyond. In our solid state amplifier product line, first quarter we relatively strong as we shipped a portion of our CREW 2.1 orders that we received during fiscal 2009 as well as multiple orders for our electronic war far products.

Our deep and proven experience and capabilities in designing and building IED system jamming amplifiers and solid state switches we believe will remain an important competitive advantage as we look to explore future opportunities in this market. Currently we do not expect any large revenue contributions from CREW related programs for the remainder of this fiscal year. On the other hand, if conditions in Afghanistan and Iraq warrant, we could be surprised by unexpected higher order flows for the current 2.1 systems or an acceleration of the CREW 3.2 and 3.3 systems.

As a conclusion to this segment, while our RF microwave amplifier segment revenues in fiscal 2010 look like they will be significantly lower than fiscal 2009 largely due to the softer sales in both our TWT and solid product lines, I will say that I am very pleased with the depth of our products, programs and customers in each of our product lines. I’ve seen evidence that the addressable markets for each product line are highly compelling. We continue to believe we are the largest independent provider in each of these two product lines and we like our overall long term position.

I will now turn to guidance. As I have stated many times in the past, our guidance concerning future revenues and EPS is subject to a number of factors many of which are beyond our control. Those factors include but are not limited to: one, the timing of bookings and related revenues on large contracts; two, the uncertainty particularly in today’s economic environment of potential US and foreign government budget constraints; and three, economic conditions in general particularly in the current uncertain commercial economic environment in which we are operating.

Our outlook remains cautious but increasingly optimistic and I am pleased to raise both revenue and GAAP EPS guidance from the guidance I provided this past September. With that said, our new revenue guidance the range is $840 to $860 million which represents an increase of $20 million from our previous guidance. For diluted GAAP EPS our new guidance range is $2.20 to $2.30 a $0.10 increase from the guidance provided this past September. In addition, although we have nothing to report now on the acquisition side, we continue to simultaneously pursue a number of attractive opportunities which we believe could significantly enhance our existing market leadership positions and provide new opportunities for additional growth.

I would like now to turn to the question and answer period part of our conference call.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Mark Jordan – Noble Financial Capital Markets.

Mark Jordan – Noble Financial Capital Markets

First I’d like to talk about BFT please, as you mentioned Northrop Grumman in November delivered the joint capabilities release software. It implied in that release that there was additional system wide testing going on. Do you know is JCR ready for fielding or what would be the timing that that system would be available to field and is that the last hurdle point for potential deployment of next generation hardware?

Fred Kornberg

I think the answer to that is what we believe is the Northrop Grumman release really is a Phase I release of the JCR software. As you know, they provided the original software for the present BFT system and they are now in contract to provide the second generation which is the JCR. We believe this is the Phase I. Although this has been a successfully deliver of Phase I, I can’t really say that at this point the Army is ready to adopt JCR for the next generation BFT.

Mark Jordan – Noble Financial Capital Markets

A question, there’s been speculation, there’s been orders placed for 6,000 plus MRAPs from Oshkosh, specialized vehicles for deployment to Iraq prior to the surge, there’s speculation that there may be up to 10,000 new vehicles going there to support the higher troop levels. Do you have a sense that, or do you have any idea if there is any inventory around or is that an unidentified opportunity for you and is this in any of your models?

Fred Kornberg

Actually, if you recall our recent order from BFT we actually had to decommission some satellite backlog or contracts to put more ceiling on a contract so they could buy transceivers. Having said that, we’re kind of in a dark period right now with the program office on both contracts because both contracts are in the throes of going for a recompete so it’s really difficult for us to really know exactly what they’re planning at this point. We can tell you that a most likely scenario could be the cross over from the present vehicles used in Iraq in to the new MATV vehicles that would be used in Afghanistan. Whether that is really likely or efficient we just can’t tell at this point.

Mark Jordan – Noble Financial Capital Markets

Given the fact that your next generation transceiver capabilities are dramatically higher and they’re backward compatible when do you think the Army might be comfortable in buying the next generation hardware even for the existing network given the fact that they’d be concerned about obsolesce if they were buying your older transceivers? In other words, when do you feel that you could go GA on the next generation transceiver?

Fred Kornberg

Well, as I mentioned in our presentation we believe Mark that the RFP for the next generation transceivers should be out some time as early as January and maybe as late as March. So, given the two years remaining on our contract, the Army has plenty of time to place that second generation order and at the same time place additional orders for our BFT-1 equipments as well.

Now, having said that as you know the Army initially wanted to extend the contract for two years and raise it by $617 million. Obviously they’ve run in to some funding problems. We now believe that there will be a significant raise in the ceiling but it won’t be $617 million, maybe it will be one third of that. But, that’s still a substantial piece of business for us to be had hopefully in 2010 and 2011. Now, whether that extension or raise in the ceiling could also include not only our BFT-1 transceiver but also the BFT high capacity transceiver. That’s a possibility and we could then start actually shipping both units because they are backward compatible.

Mark Jordan – Noble Financial Capital Markets

Final question relative to over-the-horizon, is there any updates now that you’re in to negotiations with prime, a sense to really the size here? Historically you’ve said just $40 million plus, do you have a better sense as to what the opportunity might be updating that previous guidance?

Fred Kornberg

Yes, I think we’ve always kind of rounded out the number to $40 million based on past experience. I think generally it will probably be in that area, depending upon what options are picked up. So, we’ve just started the negotiation. As you know, dealing with primes they like to keep most of their work to themselves so it’s a difficult negotiation but I think we’ll probably wind up somewhere near that $40 million line.

Operator

Your next question comes from Tyler Hojo – Sidoti & Company, LLC.

Tyler Hojo – Sidoti & Company, LLC.

First question, I guess if you could just provide the backlog by segment?

Michael D. Porcelain

For the quarter we added aggregate backlog of $535.6 million. Roughly $54.2 million came from telecom transmission, $429 million came from mobile data com with the remaining from RF amplifiers.

Tyler Hojo – Sidoti & Company, LLC.

Just in the prepared remarks there was some mention of a $20 to $25 million order mention from the US government in over-the-horizon, is this Track 170 we’re talking about or something else?

Fred Kornberg

It’s related to the Track 170 but one could characterize it as something else.

Tyler Hojo – Sidoti & Company, LLC.

Any detail you could perhaps give us on that?

Fred Kornberg

I think at this point we’d rather not. We’ve been kind of in negotiation on this for a number of months and it’s kind of important for us not to have our competitors know what it is.

Tyler Hojo – Sidoti & Company, LLC.

I guess maybe looking at this order as it relates to the guidance increase that you guys put out just a short while ago, is some of this implied in kind of the more optimistic outlook that you provided?

Fred Kornberg

Yes, I believe that particular is included in our guidance.

Tyler Hojo – Sidoti & Company, LLC.

Then just lastly for me, if perhaps you guys could update your free cash flow expectations for the year?

Michael D. Porcelain

Tyler, it’s real difficult I mean we finished the quarter at $500 million and if you kind of back in to expectations of earnings, the way I would tell you to think about it is certainly our EBITDA should be well north of $100 to maybe $120 million for the year. The real issue is going to be the timing of year end deliveries to the government, timing of collections, etc. It’s fair to say that cash could really be anywhere between $550 with maybe a top kind of goal of $600 million but it’s really just such a wide fluctuation at this point we wouldn’t want to put a specific number on it.

Operator

Your next question comes from Timothy Quillin – Stephens, Inc.

Timothy Quillin – Stephens, Inc.

In terms of the timing of the MTS computer shipments I understand it’s fairly backend loaded but do you expect a ramp up each quarter? Do you expect Q2 revenues from the computers to be higher than 1Q?

Michael D. Porcelain

Yes, I think we do. Sitting here today, and again we’ll put the caveat quarter-to-quarter predictions are real tough, we do expect some ramp in Q2 but the majority is still going to be Q3 and Q4. Just to give you a proxy, there are some numbers that you guys have had aggregate out there for Q2 and that’s probably a good way to look at it because really nothing has really changed from our expectations from yearend when we previously provided the ramp up. So, it’s still going to be back end loaded but we certainly have better visibility that we’re on track.

Timothy Quillin – Stephens, Inc.

Can you say how much revenue you got from the computer shipments in the first quarter? I think 4Q ’09 was roughly all service so $24 to $54 is that essentially all driven by computer shipments?

Michael D. Porcelain

I think that’s exactly the right way to look at it, yes.

Timothy Quillin – Stephens, Inc.

In terms of the amplifier business I understand it’s going to drop off from 1Q levels, the bookings have been over the past couple of quarters in that segment kind of around the $20 to $22 million level. Is that kind of a quarterly run rate we should look for in that business?

Michael D. Porcelain

Certainly I think our backlog that we finished Q1 is right around the $50 to $52 million number and with kind of Q2 is going to be pretty down. If you look at the implied bookings that we did in Q1 it’s around the $20 million number so yes Q2 is going to drop but we do expect by the end of the year some pickup related to the economy. As we said on the last conference call we are expecting bookings to come back in so Q4 we are expecting to see some pop to the number so yes, RF is going to decrease in Q2 significantly and kind of then start the upward elevator by the end of the year.

Timothy Quillin – Stephens, Inc.

Then just kind of conceptually and I know it’s really too early to say but in terms of the mobile data business in fiscal ’11 should we look at the numbers in fiscal ’10 and strip out the computer revenue contribution and look at a significantly $280 million year-to-year drop in fiscal ’11 in that segment?

Fred Kornberg

No, I don’t think you can fully look at it that way. It depends on a number of things happening here. Obviously, if we receive extensions the way we feel we will for both contracts those extensions will most likely include the computers. On the other hand, we’re very confident that we will win the recompete as well. A third point is if you look at the funding that is available for both MTS and BFT I think you will see a very strong 2011 numbers.

Michael D. Porcelain

Tim, another proxy, we can’t really give you a sense of timing but you have got to look what the government is saying on BFT. They’re talking about 100,000 replacement transceivers over a number of years so I mean those are pretty significant increase to the quantities that we’re shipping in fiscal 2010. So, if our expectations come out and we win the BFT contract for the next generation, if the government says that they’re going to do ’11 really will look dynamite in terms of seeing those next generation BFT transceivers come through the P&L. Obviously, a lot needs to happen before that but that’s kind of the way we sit back and we look at ’11.

Timothy Quillin – Stephens, Inc.

With regards to BFT-2 I think you’re feeling relatively confident that you’ll be able to win that business and it looks now like they want a single winner but do you have any sense are they still going to beat you up against your primary competitor against price? I mean is price going to shake out any different than you might have hoped?

Fred Kornberg

I think that’s always the case whether it’s competition or its sole source awards, the government does a pretty good job in getting the best price.

Timothy Quillin – Stephens, Inc.

Just one last question, you’re doing a great job still on generating cash but everybody is very curious about how you are going to use that cash. Is there any further insight that you might have on the pipeline of acquisition opportunities?

Fred Kornberg

Not any more than I made in the presentation. Obviously, we’re looking at a number of targets and opportunities for us and as you know we haven’t pulled the trigger. Should we be successful I would say we probably will pull the trigger on at least one acquisition in ’10.

Operator

Your next question comes from Joseph Nadol – J. P. Morgan.

Joseph Nadol – J. P. Morgan

My first question is on margins in the MDC segment, is it fair to assume that we should have kind of a sequential ramp through the year as revenues grow and maybe get in to the higher teen driven 20 as we close the year out?

Michael D. Porcelain

I think that 20 number is going to be virtually impossible to achieve but that’s certainly a nice goal to have internally for a guy running it. We do expect margins to slightly increase as the year goes on. We do, as Fred mentioned, we do have some orders for mobile satellite transceivers that are in our backlog and those will expect to ship so that will offset some of the lower margin from the ruggedized computer. But, if you look at it on a quarterly basis as shipments go out and as these transceivers go out back end loaded, you will see the operating margin on mobile data communication segment to increase.

Joseph Nadol – J. P. Morgan

I mean if we just look sequential Q4 to Q1 at the incremental margin has a two in front of it and there might be other things going on in there but that would certainly suggest that as the revenues grow quite a bit sequentially that there’s some opportunity there. Is there anything that I should be thinking about?

Michael D. Porcelain

My only caveat to you is on a quarterly basis there are even within the orders we have with the US Army, there are different margin mix profiles within what we are shipping so Q2 could have a different mix profile because we may ship more accessories, more keyboards in one particular quarter than necessarily computers and even within those things they have different categories but the general thesis of moving from a 14.9% operating margin in Q1 to sort of the higher teens by the end of the year, that is the way to look at it in the segment.

Joseph Nadol – J. P. Morgan

Then on just commercial bookings in general you have little over a month under your belt since the end of the quarter, is there any incremental color you can give us on either of the two segments with commercial exposure as to what you’re seeing in terms of demand?

Fred Kornberg

I think as I mentioned the demand certainly in satellite space looks very good and over-the-horizon I think it’s coming more and more confident. In our amplifier area as we mentioned it looks like there are going to be some difficult times for the next few months at least and we hope to kind of reverse it by the end of the year. Mobile data com as you know, both of our contracts are right at the top so we’re really dependent upon the Army to extend both of those ceilings and get us some backlog that way plus whenever the recompete comes about. We’re kind of being cautiously optimistic.

Joseph Nadol – J. P. Morgan

Fred on just looking at the two segments with commercial exposure, you’re more optimistic on telecom transmission, less optimistic on RF microwave I guess including the commercial exposure in to those segments, going the opposite direction, to what do you contribute that – what end market differences are there that really would explain that?

Michael D. Porcelain

Joe, if I could, on the RF microwave amplifier segment there’s just a longer sales cycle relative to the segment so telecom you can turn those things around a lot quicker so as the economy turns around, as things happen as we would like them to that order flow would increase rather quickly. RF is a little bit more complicated sale even on the commercial side, these things are incorporated in to complex systems so you might have a recovery and while you would see it in terms of order negotiations, discussions with your customers but you may not get those tangible orders to let’s say Q4 or Q1 of next year which in our mind just bodes well for 2011.

Joseph Nadol – J. P. Morgan

Then I just want to try one more on the cash balance and the acquisitions and we may not get an answer and I understand that but as we’re looking at Fred you said one deal this coming year at least is likely, are your conversations more with companies in the $20 to $50 million range or are they triple digit type opportunities or is it both?

Fred Kornberg

I think it’s both and we’re obviously concentrating on the triple digit area.

Operator

Your next question comes from Peter Arment – Broadpoint Amtech.

Peter Arment – Broadpoint Amtech

You just actually hit upon one of my questions, simply are we now expecting the telecom segment maybe to returning to growth or is it just too early to make that given your guidance increase?

Fred Kornberg

Well I think as I mentioned Peter, we’ve seen an uptick in the satellite area demand. Now, one quarter does not make a trend so we’re cautious but we see an uptick for the year.

Peter Arment – Broadpoint Amtech

So year-over-year we are expecting the telecom segment to have higher results?

Fred Kornberg

Not necessarily, I think we’d like to really talk more on consecutive quarter basis. As you know, our first quarter of last year was just a dynamite quarter for the satellite area and having said that, that’s really the number we would like to come back to hopefully by the end of the year but there’s no assurance that the growth will be forth coming that quick.

Peter Arment – Broadpoint Amtech

Then just quickly Fred you mentioned possibly on the extension on the blue force tracking and mentioned in the area of one third maybe or just putting some numbers behind it but do we expect for the extension at least the majority of these [inaudible] and they just wait to award and buy the new transceivers once that competition is completed?

Fred Kornberg

Actually there are two pieces, I mentioned that one third piece really for the extension of the contract itself as it is right now. Along that we are in negotiation right now with the Army for approximately a $40 million what they call an urgent contract action to supply the state and network facilities to continue the BFT network operating through December ’10. That additional nine months of space and network time that they’re buying will extend the space segment backlog through December of ’10. The additional escalation in the ceiling that they’re talking about which I mentioned is approximately one third of the previous one, that will be for transceivers and hardware.

Operator

Your next question comes from Richard Valera – Needham & Company.

Richard Valera – Needham & Company

I just want to try and understand your expectations for two of the segments relative to a quarter ago when you gave the initial guidance. Telecom transmission, your commentary in the K called for comparable to slightly down revenue year-over-year, your commentary in the Q was comparable to down which seems incrementally negative so I’m just wondering if in fact there is any slight decrease in your expectations for telecom transmission this year? Then on RF amplifier you didn’t really change the specific commentary but it sounds like the tone of just the commentary is that you expect lower levels in RF than you did a quarter ago. Can you clarify on those two?

Michael D. Porcelain

I think it’s actually good news all around in terms of what we’re really expecting and saying here. In our telecom transmission segment we are expecting a little slightly higher revenue related to satellite earth station products but as Fred mentioned because of the increased visibility that we have with our Algerian customer some of the revenue we were expecting in ’10 kind of shifted to ’11. We do expect to get that contract in but the amount of revenue that is going to contribute in ’10 will be slightly lower so I think you’re right, our telecom transmission net/net is probably slightly lower this time around versus last time.

Our RF amplifier segment is kind of where we expected it to be. We are and continue to expect some recovery in the second half of the year certainly on the order flow which will bode well for 2011. We’ve just taken a conservative view on how fast that ramp up will be. We haven’t seen that in terms of tangible bookings yet and when that comes that will kind of change how we feel.

Richard Valera – Needham & Company

So I guess it’s far to say that the increase to the guidance was all effectively in mobile data?

Michael D. Porcelain

I think that’s right.

Richard Valera – Needham & Company

Then on the telecom transmission side, I’m just trying to get a sense of how strong the bookings where? It sounds like at having a shot of being flat for the year overall there, it seems you need to average almost $70 million a quarter for the remaining three quarters which is obviously pretty dramatic above where you were in the first quarter so I’m just trying to get a sense of maybe the sequential profile we should look for there. It sounds like based on Fred’s comments, you expect fourth quarter to be the strongest quarter but any color at all on sort of the sequential trajectory we might look for in telecom transmission would be helpful?

Michael D. Porcelain

Certainly in our telecom transmission most of the bookings we did were almost all satellite earth station related so that number is going to go up hopefully as the economy improves and it’s just a matter of how fast the economy improves and how fast those orders come in. At the same time, if the order that we’re negotiation with Algeria switches by $10 million, $15 million that could easily happen. It’s just too early in the year for us to put a precise number and a precise thought but all of the signs point to a very, very strong second half with Q4 being the peak.

Even on our mobile data com segment, our vendor is shipping these computers, things are moving well right now. Our Q4 could go to Q3 and Q3 could go to – everything is just sort of in the air and we’re going with the flow but right now the signs look like it’s going to be second half backend loaded with Q4.

Operator

Your last question comes from Michael Ciarmoli – Boenning & Scattergood, Inc.

Michael Ciarmoli – Boenning & Scattergood, Inc.

Fred, just from the commentary, what you guys have been saying this morning it sounds like your outlook for fiscal ’11 has improved dramatically. If I’m not mistaken originally I guess the expectations were take your initial guidance call it $830 million, back off the $280 onetime computer order this year and that was sort of a kind of starting point for ’11 but based on the ceiling increases which look to be very likely over-the-horizon orders with both the Algerian and the new government order it seems like that number moves up substantially, am I correct to think that?

Fred Kornberg

It certainly good. Again, it’s a bit early but I think we’re getting better visibility in some of the projects that make us feel more comfortable obviously in ’10. But also, we’re getting much better visibility in to some of those programs, although they’re slipping to the right they’re actually widening up in ’11. So, overall I would say that we look favorably on ’11 better than we did three months ago. But, a lot of things are kind of fluid.

Michael Ciarmoli – Boenning & Scattergood, Inc.

Then just two quick ones, on the BFT, the generation two transceivers if an order was placed today when can these products actually hit the field and get to the customer presumably the Army in Afghanistan?

Fred Kornberg

We could probably deliver any larger order within 90 days.

Michael Ciarmoli – Boenning & Scattergood, Inc.

I tend to be of the belief that you guys will get the contract, do you know what sort of Viasat’s timing would be, their delivery schedule?

Fred Kornberg

I have no idea.

Michael Ciarmoli – Boenning & Scattergood, Inc.

The last one, just help me understand, there seems like there is a disconnect and maybe I’m just interpreting this wrong, CREW 2.1 being down I would expect with increased MRAP vehicle production, a surge in Afghanistan there would actually be more demand for IED jammers. Is this a function of the migration to 3.2 and 3.3 or is there a lot of excess inventory built already for the troop surge?

Fred Kornberg

It’s probably all of the above and probably a lot of it to do with the administrations kind of holding back the decisions on Afghanistan. It kind of froze everybody in this area.

Michael Ciarmoli – Boenning & Scattergood, Inc.

So I can think of this as what we’ve been seeing across the industry general contracting and procurement delays presumably waiting on Afghanistan and perhaps you guys get some more clarity and visibility in the next couple of months here on that?

Fred Kornberg

You would think that all of those vehicles should be outfitted not only with an IED function but also a BFT function but we’re kind of waiting on both fronts. Now, the puzzle here is what are the Army’s plans to take systems off any vehicles coming out of Iraq and putting them on those vehicles going in to Afghanistan. That’s kind of the unknown.

Michael Ciarmoli – Boenning & Scattergood, Inc.

I would think there would be some testing involved there. You’re not just going to take a product that’s been in the field for a couple of years and ship it off to Iraq without going through some sort of testing to make sure the guys are getting a fully functional piece of equipment?

Fred Kornberg

Yes, you’re absolutely right. If you just look at the road conditions in Afghanistan and Iraq one is an on road and the other vehicles are an off road so just the vibration and the environment that the new systems have to operate in Afghanistan are quite different.

Michael Ciarmoli – Boenning & Scattergood, Inc.

Just one last quick one, regarding the acquisitions, regarding the plans for cash, has the order, the big $200 million IDIQ you guys received for the micro satellite business has that changed your target point for acquisitions? Did that all of a sudden become more of a priority and you guys are looking to maybe deploy some cash towards that business line?

Fred Kornberg

No, I think any of the IDIQ programs literally pay for themselves. The Army is a pretty good payer when they provide you the contract. I think in terms of acquisitions we are focused really on the first three segments that we operate in and we’re always focused on what we call the forth legged stole, another area that could be brand new for us but something that we understand.

Operator

At this time we have no further questions. I would like to turn the conference back over to management.

Fred Kornberg

I guess if there are no further question, let me take this opportunity to wish all of our friends, shareholders and employees a happy holiday season and a happy New Year. Thanks again for joining us today and we hope to speak to you again in three months.

Operator

This concludes today’s teleconference. You may disconnect at any time. Thank you and have a great day.

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Source: Comtech Telecommunications Corp. F1Q10 (Qtr End 10/31/09) Earnings Call Transcript
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