Comtech Telecommunications Corp. (CMTL) on Q3 2021 Results - Earnings Call Transcript
Operator: Ladies and gentlemen, thank you for standing by. Welcome to Comtech Telecommunications Corp Third Quarter Fiscal 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. As a reminder, this conference is being recorded Thursday, March 11, 2021. I would now like to turn the conference over to Mr. Jason DiLorenzo of Comtech Telecommunications. Please go ahead, sir.
Jason DiLorenzo: Thank you, and good afternoon. Welcome to the Comtech Telecommunications Corp. conference call for the third quarter fiscal year 2021. With us on the call today are from Fred Kornberg, Chairman of the Board and Chief Executive Officer of Comtech; Michael D. Porcelain, President and Chief Operating Officer; and Michael Bondi, Chief Financial Officer.
Fred Kornberg: Thank you, Jason, and good afternoon, everyone, and thank you for joining us on this call. Today, we will be discussing the results for our third quarter of fiscal 2021 and our outlook for the full fiscal year. Let me just start this call by saying what I hope will be last word about COVID-19. As you would expect from the news headlines around the world, COVID-19 clearly receding in the United States is still a challenge for certain international countries. Normal operations have not really yet resumed, and international business travel is still almost impossible. Nevertheless, as you see from our announcement, this afternoon, our operating performance of the third quarter of fiscal 2021 was very solid. Our third quarter net sales were $139.4 million with adjusted EBITDA of $17.7 million. We look to a strong fiscal 2021. And we now estimate that fiscal 2021 consolidated net sales will be within a range of $580 million to $590 million. Our efforts to streamline our operations are really paying off. And we continue to target adjusted EBITDA in the range of $74 million to $76 million. Based on our strong pipeline and year-to-date business momentum we anticipated achieving a book-to-bill ratio for fiscal 2021 in excess of 1. With positive signs of a post pandemic recovery, continued, overall demand remains strong. And we have recently secured important contract awards and we're excited about our future. All in all, we continue to weather the COVID storm, and we continue to see these clouds lifting. Now let me turn the call over to Michael Bondi, our CFO who will provide additional commentary about the third quarter financial performance and our business outlook. After that, Michael Porcelain, our President and CEO will provide an update on our total business. Then I will come back before opening up the line of questions and answers. Mike.
Michael Bondi : Thank you, Fred. And good afternoon, everyone. As Fred mentioned, our net sales were $139.4 million in Q3, which is higher than what we achieved in last year's Q3. Of the $139.4 million of net sales, 79.8% were to the U.S. based customers with 20.2% to international customers. Bookings for the third quarter were $115.9 million. And our consolidated book-to-bill ratio was 0.83. We finished the quarter with backlog of $636.5 million. And when you factor in the total unfunded value have certain multiyear contracts that have been awarded to us, but which are not yet in our backlog, we have visibility into approximately $1.1 billion of potential future revenue. Our gross profit percentage in Q3 of fiscal 2021 was 38% as compared to the 39.2%, achieved in the third quarter of 2020. The period-over-period change in our gross profit percentage reflects changes in overall product mix and significant increases in costs due to production delays, minor supply chain disruptions, lower levels of factory utilization, and higher logistics and operational costs resulting from the COVID-19 pandemic. Q3 of fiscal 2021 also reflects a $2 million benefit from the recovery of historical excise tax paid. Based on our expected level and mix of net sales for the remainder of fiscal 2021, we anticipate a consolidated gross margin percentage approximating 36%. SG&A for Q3 of fiscal 2021 was $27 million or 19.4% of consolidated net sales, as compared to $32.3 million, or 23.9% in Q3 of fiscal 2020. In Q3 fiscal 2021, we incurred $600,000 of restructuring costs related to the shifting of production of many of our key satellite earth station products from our existing Tempe, Arizona locations to a new 146,000 square foot facility in Chandler, Arizona. We expect about another $1 million of such costs in Q4. Turning to R&D, we spent $13.1 million in the third quarter, or 9.4% of net sales. Total stock-based compensation for the third quarter was $1.2 million. And amortization of intangibles was $5.3 million. We continue to expect stock-based compensation to approximate $11 million to $12 million for FY 2021. Our consolidated GAAP operating income was $2.4 million, and reflects $5.3 million of acquisition plan expenses, primarily due to the April 2021 settlement of an acquisition related litigation and our completed acquisition of UHP. Our adjusted EBITDA was $17.7 million, or 12.7% of consolidated net sales for the third quarter of fiscal 2021. Adjusted EBITDA in our commercial solution segment was $15.9 million, or 17.4% of related sales. And in our government solution segment, it was $3 million, or 6.3% of related net sales. For fiscal 2021 using the midpoint of our consolidated net sales and adjusted EBITDA targets, our adjusted EBITDA margin approximates 13%.
Michael Porcelain : Thank you and good afternoon, everyone. We are pleased with our Q3 performance, especially given that during the third quarter we continue to operate our business in what remains a difficult operating environment. The good news is that our employees have begun limited travel mostly in the United States and have started to return to the office. In-person demonstrations of our solutions are picking up and being scheduled for those such activity in the international market remains limited. As demand slowly picks up across our industry, we are seeing higher logistics and operational cost. Supply chain issues are becoming more prevalent as lead times for certain parts has significantly increased. That all said these are good problems to have compared to the health issues of COVID. Now, let me talk more about our business results. In our commercial solution segment, net sales were $91.4 million this quarter, we received what is aggregating $75.1 million resulting in a book-to-bill ratio 22 for this segment. We continue to see positive momentum in our public safety and location technology product line. Net sales during the quarter for this product line were higher than last year's comparable quarter. And reflect the benefit of incremental sales of our next generation 911 and location-based solutions offset in part by the options of 911 wireless call routing sells to AT&T.
Fred Kornberg: Thank you, Mike. As I mentioned previously, am very pleased with how our business is performing during this epidemic. As we enter our fourth quarter, I believe we are on track for a strong finish to fiscal 2021. I'm also very excited about our prospects going into fiscal 2022 including our strengthening positions on the large developing near-term opportunities that Mike just mentioned. Even our business outlook -- because of our business, our board of directors has declared a dividend of 10%, $0.10 per common share payable on August 20, 2021 to shareholders of record at the close of business on July 21, 2021. We continue to believe that our dividend program is still a great way to return some capital to our shareholders, as we look to grow our business. Now, I would like to proceed to the question-and-answer part of our conference. Operator?
Operator: And it looks like we have a question from Joe Gomez from Noble Capital. Your line is open Please go ahead.
Joe Gomes : Thank you. Good afternoon. So I know you just mentioned you can talk a whole lot about the new multi-year agreement. But you did mention you got a first order of $13 million as well. You might be able to give us a little color on how long does that last? What's the timing for that $13 million? What's the kind of would be the next steps in the process once that contract, the $13 million is completed?
Michael Bondi: Sure. Well, as we discussed in our 10-Q, we are making customizations to our technology. So I mean, obviously, it's a development contract that we first got in. As we say, and you're right, I can't say much more. But we think that there's a potentially hundreds of millions of dollars that, once that customization is done that's what we expect.
Joe Gomes : Okay, thanks on that. And you kind of went over the Pennsylvania and South Carolina and the 911 opportunities. I believe there was another one out there that that you were chasing? Maybe you could kind of give us a little more color on what else is out there right now that you're looking for that might be in the South Carolina and or Pennsylvania type of size?
Michael Bondi: Yeah, I mean, there's really -- I'd say at this point, there's probably two contracts. And we'll probably name them, since the information out there was pretty public at this point. So, we're waiting for Ohio to fund with probably a triple million dollar contract. So, north of $100 million odd is out there. And we were just sort of waiting on the funding for that particular contract. And we're really waiting on an award announcement, which is more competitive in the State of Arizona. And those are very near term opportunities. And, that's pretty much out there for public consumption.
Joe Gomes : Okay, thanks. And then, one last one for me. And I'll get back in queue. Bookings in both of the business segments were 0.8-0.85. You mentioned in the government solutions, that it's normal to see some fluctuations there. In the commercial side anything out of the ordinary there, or is that just again, some more of this your normal fluctuations in business for the quarter there?
Michael Bondi: Yeah. I mean, obviously in Q2, it's lower than Q2, because we had that large Pennsylvania booking. But our Q3 bookings was actually higher than what we achieved in Q1 for the commercial segment. So, I would just say it's normal fluctuations up and down. And obviously, the international market is difficult right now. And so, those will eventually come at some point.
Joe Gomes : Great. I’ll get back in queue.
Operator: Our next question comes from Chris Quilty from Quilty Analytics. Your line is open. Please go ahead.
Chris Quilty : Thanks. Mike, I want to just follow up on that constellation order, I don't know whether you can provide the detail. But are you providing a point solution, i.e. amplifiers or baseband? Or are you providing a comprehensive solution for this customer that would range from the gateway to the end user terminal?
Michael Porcelain : Well, the best answer I'll give you is that we're going to ride the wave of what's happening in the industry and I can only refer to it as next generation satellite technology. But I'm not going to get into the specific product that we're putting forth.
Chris Quilty : Okay, no, you're not building the satellites at least.
Michael Porcelain : All right, I agree with you on that one.
Chris Quilty : I got something for you. Shifting a real quick to the Heights product line. You said you're seeing positive momentum. Just general business trends that you're seeing there in terms of end markets or domestic and international coming back. I know you've got some like oil and gas, that tend to be pretty cyclical, video has moved in cycles. Any color you can give us?
Michael Porcelain : That's different than the last time. I mean we're a big believer that data transmission and bandwidth needs are going to increase. And you certainly saw an acceleration of that, during the COVID pandemic. The award of Heights by this international customer, again, multi-million dollars. I mean, it was -- it's a very prominent award in that part of the world. And we actually think that that will lead to additional Heights sales in there. And at the same time our UHP Network Solution's best in breed by far. And obviously, you know that we've had some in depth experience with satellite companies over the last two years. And UHP is well positioned. And given the growth that's happening with 4G and 5G around the world with mobile network operators, we think UHP and our Heights solutions are very uniquely positioned.
Chris Quilty : Great. And shifting over to the government segment of the business. If I read the language correctly, it sounded like there was a significant Afghanistan component to the guide down on the guidance for the government segment. Can you cite that for us? Is that stuff that just goes away, because troops are not deployed? Or does it get reallocated somewhere else and show up later?
Michael Porcelain : It's more what you said in the earlier part of your comment. Look, most if not all of the change was related to the withdrawal of troops with Afghanistan. And, I think we've always said publicly, if you have a few troops in Afghanistan in a particular area, in either communication system. Here, the plan is to fully withdraw troops. So I mean, you're talking about additional dismantling of an infrastructure that was out there. So we don't think that that's coming back in both to our thinking camp for -- and this is another ground action or something unexpected that that may happen. So those program changes were announced by the U.S. Presidential Administration during the quarter. So we don't see that revenue coming back. At the same time, we're working through the budget. And the best example that I can point to is, look, there was certainly legacy programs that this administration is going to not fund. But at the same time, they're funding next generation systems, such as the Blue Force Tracking successor program. So I mean, you can see that. I mean, the white paper was out there, we're responding, we're responding to this. Finally, after so many years. I told people on the phone, don't even ask me about Blue Force Tracking-3, when I have something to say, then you'll know I'm talking about it, because it's real. And we all responding. We have some pretty good teaming agreements within the work. I'd like to think that the government will get the band back together. And BFT-1 was an extremely successful program. We sold $1.5 billion worth of equipment under the BGT-1 program. I'll take half of that in this next generation cycle. So we're very optimistic that this successor program to the BFT-2 program, 2.5 program, I guess you could call, it will happen. And, we're going to put forth our best foot forward to the government, and we'll see what happens. But that's an example of where outside of the short term noise, the long-term prospects look dynamite.
Chris Quilty : Great. So technically, I'm not asking you a question about it, because you brought it up. But is there a determination at this point, in terms of frequency band, that that system might go. So much of the SATCOM capacity that that's being brought online, both GEO and LEO, is Ka-band, or are we, migrating towards military only X-band or staying in Ku?
Michael Porcelain : I think the way I would describe it is what they certainly want backward compatibility, which is something that Comtech is uniquely positioned to provide as it relates to some of the aviation type of equipment that's still using our equipment today. So obviously, we'll have L-band. We previously announced a couple years ago a partnership with Iridium. And I think that you'd be looking to see the Iridium out there, yeah, you may see some expand out there. So I think the government's idea is they don't want to be stuck with one particular satellite band, or one particular satellite system. They want the ability that if one part of the system gets jammed that to seamlessly move over to another within the same product. So, we have that capability to have multiple waveforms and multiple modem technologies in the same transceiver.
Chris Quilty : Right, and I'll do final question on next gen 911. A lot of money being thrown around by the government nowadays. Obviously, the infrastructure bill hasn't made its way through. But any indications that you're seeing that there might be additional money set aside for those types of systems?
Michael Porcelain : Everyone's talking about it, Chris. I guess we agree with the philosophy. We hope it happens. It's a question of where that funding winds up. Some states, I think it's fair to say are waiting to see right, the state doesn't want to announce that, but their own funding if they can get the funding from the federal government. So that's that I think there's a little bit of paused by some states. But at the same time, there are other states that do not want to wait. Their local constituents want to move forward. Arizona is an example of it. Ohio is an example of it. We saw it with Pennsylvania, we saw it with South Carolina. So I would say it's all good news either way. If there's more funding, it's what we should benefit from it.
Chris Quilty : Great. Thanks, guys.
Operator: Our next question comes from Asiya Merchant from Citigroup. Your line is open. Please go ahead.
Asiya Merchant : Great, thank you. Just a question. I mean, given all these initiatives that you're talking about, can you help us think about growth drivers and sort of eve some growth numbers for ‘22 as it relates to the government and commercial solutions? I mean, should we expect, given the significant drop in government of course, hopefully, it grows in fiscal ‘22. But what kind of levels are we talking about? Can we come back at some point to where they were in fiscal ’20, given all the various initiatives, and hopefully the BFT opportunity materializes as well.
Michael Porcelain : I think the bf t opportunity, is probably -- again, that's outside of the initial work that we'll be doing assuming we win this initial opportunity. That revenue is really going to be ’23-‘24 type revenue. It's going to take some time. Might it be a booking in 2022, in the hundreds of millions? Well, yeah, that's a possibility. I mean, the government is giving all signs right now that they're moving forward. Sitting here in the month of -- I think it's June. It's just way too early for us to give you some clarity here. We normally give our guidance to September. I think, look, one thing I can say about the government, yeah, it's not -- I don't think it's going to grow next year. This is what I would say, based on what we see. But again, it's too early to tell. As the program's come in, if they come in on the earlier side, yeah, we might be able to do that. But I think given the Afghanistan withdrawals and what we're seeing on the budget side, I think the government business, as a segment, it'll be tough to tough to grow versus the say this year. In terms of our commercial business, I think all signs are positive.
Asiya Merchant : The growth as international comes back, given sort of the midpoint of your guidance, and obviously the Afghanistan stuff. Is it reasonable to assume high-single digit growth into next year for the commercial -- with the within COVID?
Michael Porcelain : Yeah, I think that that's possible. We need the international markets to come back. And, you it should come, whether or not it's going to occur in the first six months of 2022. It's too early for us to tell you. But I think we eventually -- as you're seeing in the United States, the market is starting to turn. Unfortunately, you'll get areas of the world like India, I mean, India is closed. There's just pockets of the world right now where nobody's doing anything. And it's a lot different than what's happening in the U.S. Even Canada, surprisingly so. We have business operations up there and it's just shut down. So, that being said, when you look at this thing on a 12 to 18-month basis, there's very positive signs in our solid origination business. This new contract that I mentioned to you, what we're talking about hundreds of millions of dollars. And when that comes, it'll come after we think the development part of the program. But we have to kind of work through that.
Asiya Merchant : And what's the competitive dynamics there?
Michael Porcelain : I'll let my competitors share their, their aspects to it. I can't comment.
Asiya Merchant : And anything if you can talk about, like how we should think about margins here across the two segments? If government kind of hangs in there, maybe no growth, but what kind of margins are we now expecting in that segment? I mean, clearly, we're going to take them down relative to where we were before, but off this 8%-9% margin --
Michael Porcelain : Yeah, I think our focus for this year was to get higher than 10%, adjusted EBITDA margins when we started the year. I think, as we've witnessed with this sudden change by the government with the withdrawal of the troops, it is going to impact our goal. I don't think we're going to do 10% adjust the margins in the segment. So maybe closer to 8% or 9%.I think -- and that’s for this year. So I think as again, as I look forward to next year, I'd like to get us back to the 10%. That's the target. Our commercial segment, we've done pretty well. Each of the first three quarters, we've done north of 17%, adjusted EBITDA margins. We start getting incremental volume on some of these large opportunities that we're talking about, it will come. Normally, when you do development work, such as customization or customer funding type R&D, margins on those initial programs are relatively low, you get the benefit of production. And, that's a little ways off, but again, we're talking very large amounts of hard work coming.
Asiya Merchant : Great. Thank you.
Operator: The next question comes from Mike Latimore from Northland Capital. Your line is open. Please go ahead.
Aditya Dagaonkar: Hi, this is Aditya on behalf of Mike Latimore. Could you tell me are you facing any component shortages in your current business environment? And if so, how much impact is it having on the gross margin or revenue?
Michael Bondi: Sure. We are experiencing what I would call industry wide shortages. We're not seeing anything specific to us and it's more in the lead time issue right now. We're not seeing unavailability of parts where, a factory is burnt -- when on fire, it's just simply delays in getting parts. So some of that results in inefficiency in our facility is we just, we build the product and we have to wait until we could deliver it till we get the parts. But, it has negatively impacted on gross margins. I prefer not to tell you a specific dollar amount, but it is impacting on margins, which we hope will go away. But we're definitely seeing increased parts and similar to what you're reading about on the industry. Freight for just another example, I mean, freight cost in some areas of the world have tripled. And we obviously just need to those things. We obviously need to see those come down. We hope that we're not going to experience the costs in some parts of the world that we are seeing right now. We think that's part due to the shutdown on availability of labor in certain parts of the world. But it's real, and it's out there.
Aditya Dagaonkar: All right, All right. And my next question would be the Pennsylvania 911 deal. Can be expected to start contributing to the revenue from 4Q.
Michael Bondi: Yeah. We are expecting some Q4 revenue from our Pennsylvania contract, but not a whole heck of a lot. It's really going to turn on in next year.
Aditya Dagaonkar: All right, all right. Thank you.
Operator: We’ll take our next question from Kyle McNealy from Jefferies. Your line is open. Please go ahead.
Kyle McNealy : Hi, this is Kyle on for George. Thanks for the question. Wanted to see if you could parse through the updated guidance for the full year a bit more? And what's implied for Q4? How much of that guidance is now driven by the inclusion of UHP revenue for the step down versus the previous guy for the full year? Is that all related to the U.S. government and kind of the budget updates there? Or are there other puts in takes to consider in other parts of the business?
Fred Kornberg: Hi, Kyle. In terms of the first question with UHP, I would say still nominal amount in the year in terms of Q4. Your second question, it was mostly in the government segment. And it was driven by the recent changes that Mike was referring to earlier.
Kyle McNealy : Okay, great. And this is one, kind of piggyback on that logistics constraints comment. But you mentioned kind of impact on gross margin. But is there any way you can frame what the risk may be to net revenue if do you see difficulty with the supply chain issues? Like is it a percent of revenue a couple percent, or not really that much of a headwind to revenue as you go through the next couple quarters?
Michael Bondi: Yeah. I think the way I would best characterize the impact to, let's say, the rest of this year, is really not on the revenue side, but probably on the margin side. So, within our guidance number we're thinking it's going to be somewhere between 74 and 76. If the component cost -- if parts continue to increase, or they don't dissipate. We might be on the lower side of that $74 million. But depending on -- that's how I would characterize the impact. It's not -- we don't necessarily see it on the revenue side. It's really on the cost side, we're seeing it.
Kyle McNealy : All right, thanks. That's helpful. And one last one for me. This is regarding the timing and outlook of the U.S. gov sales. With the budget changes and associated headwinds that you talked about, are they persistent through 2022, which seems to be the natural conclusion. You also mentioned the various next gen programs, and you talked about the BFT-2/1, but I'm sure there's others. I wonder if you can add anything in terms of the timeframe of those. And when they will be positioned to come in? Are there any that could be as early as impacting 2022 or are these all kind of 2023 and beyond?
Michael Bondi: Yeah, it's a mixed answer. Look, we have these -- with BFT-3, I guess, which I have to start learning the new acronym, which is in the 10-Q. But the BFT-3 program, it's there. And it's going to be an initial development program that will take some time to work. But the government has indicated that shortly after completion of that work, they intend to issue production awards. And so you simply do the math, and you're talking about hundreds of millions of dollars of production available. So we could be in a situation where none of that occurs in 2022 or we get big orders, and that's a ‘23 revenue, or we get the revenue in 22. That's why we always say it's just too early, especially with the BFT-3 program. COMET is another example. COMET, we were expecting, again, earlier in this year some orders to come in by Q4. And this is a sort of a quick ship product. So with the funding situation still not being fully clear yet. Yeah, we're not expecting any orders for the product in Q4. So we're not -- we're thinking to your point is going to carry over a little bit into fiscal year 2022 until things get sorted away. But if COMET orders start to come quickly, then that will be a big benefit to the bottom line. I mean, these are concrete hardware products that we make internally. They got good margins. And we're seeing very, very strong interest both from the U.S. government and foreign customers, Our Troposcatter program is another example. Right now, we've been working with the Marines with the program that we want with our partner. People have asked us time and time again. Well, do you have an opportunity to go back to the U.S. Army? And we said, we'll have something to tell you when we have something to tell you. The thing I can tell you right now is we've now demonstrated the solution to the U.S. Army just very recently. So we believe that there's a lot of upside for us in our government segment, despite the decline in revenues that we see today. But at the same time, it's just too early for me to tell you. But when I sit back and I look at it, as I asked the question earlier, that kind of thing on government segment it'd be flat. It's going to be tough to grow next year. When I think about everything. We'll see what happens. It's going to come down to funding. And whatever the government does, we'll get clarity over that over the next few months. And we'll give you an update as we learn.
Kyle McNealy : Okay, great. Thanks a lot.
Operator: And it appears that we have no further questions at this time. I will now turn the program back over to our speakers for any additional or closing remarks.
Fred Kornberg: Okay, that is the end of today's call. Thank you again for joining us today. And we look forward to speaking with you again in September.
Operator: This does conclude today's program. Thank you for your participation. You may disconnect at any time.
