Comtech Telecommunications Corp /De/ Q1 FY2023 Earnings Call

Good afternoon, everyone, and thanks for taking the time to dial in today. I'm Rob Samuels, Comtech's Head of Investor Relations. Welcome to Comtech Telecommunications Corp.'s conference call for the first quarter of fiscal year 2023. Today, I'm here with Comtech Chairman, President and CEO, Ken Peterman. We're also joined by Mike Bondi, our CFO and we'll also be hearing from Maria Hedden, our Chief Operating Officer. Before we get started today, I'll also say that both myself and Ken are always available to answer questions our investors may have, so please get in touch if you want to organize a meeting to talk about the company, our results, or our strategy. We also have a detailed discussion of the quarter in our shareholder letter available on our website and we have also been working to communicate directly about our business and our market between quarters in our blog, Comtech Signals. Finally, let me remind you of the company's Safe Harbor language. Certain information presented in this call will include, but not be limited to, information relating to the future performance and financial condition of the company, the company's plans, objectives, and business outlook, and the plans, objectives and business outlook of the company's management. The company's assumptions regarding such performance, business outlook, and plans are forward-looking in nature and involve significant risks and uncertainties. Actual results could differ materially from such forward-looking information. Any forward-looking statements are qualified in their entirety by cautionary statements contained in the company's Securities and Exchange Commission filings. Now, I am pleased to introduce the President and Chief Executive Officer of Comtech, Ken Peterman. Ken?

Hello everyone and thanks again for taking the time to dial in today. As you all know, this is still early days in my tenure as CEO and early in the journey for everyone at Comtech as we move to fundamentally transform our business. That said, as we head into a new calendar year and close the books on our first quarter of fiscal 2023, I could not be more pleased with the progress we're making and the opportunities ahead. One thing that I was consistent and clear about from day one in my conversations with everyone from my leadership team, our employees and our investors, was that Comtech needed to move faster than ever before. Our end markets are changing in real-time, our customers' needs are constantly evolving, and new technologies mean that we can offer creative solutions to solve their problems if we, as an organization, commit to working together as One Comtech. This means sharing our collective expertise, our insights, and abilities to improve everything from our operations, to our products, and our culture. It's early in the process, but the One Comtech journey is underway and working. I see it every day in our people and it's also being reflected in our financial performance. In addition to a quarter-over-quarter increase in consolidated net sales, representing the fourth straight quarter of top-line sequential growth for Comtech, our bookings of $181 million foreshadow the increasing customer value we are creating as One Comtech. I should also point out that this performance was delivered even as we reorganized our business, continue to restructure our senior leadership team across multiple functions with key appointments, and continue to make changes to improve the functional machinery of our organization. I want to talk a little more about what we've accomplished and what you can expect from us going forward. And I want you to hear directly from our COO, Maria Hedden, as she's in the trenches, streamlining and improving our processes so that everything we do at Comtech we do better, faster, and more efficiently. Before that, I do want to turn the call over to Mike Bondi, our CFO, so he can walk you through our financial performance for the quarter. Mike?

Thanks Ken. For Q1 fiscal 2023, we recorded $131.1 million of consolidated net sales, of which $80.9 million were recorded in our Satellite and Space Communications segment, and $50.3 million were recorded in our Terrestrial and Wireless Networks segment. Our consolidated first quarter net sales represented a 3.3% increase over last quarter and, as Ken mentioned, our fourth consecutive quarterly increase. Compared to the year-ago quarter, our consolidated Q1 fiscal 2023 net sales increased $14.3 million or 12.2%, driven by higher revenue in our Satellite and Space Communication segment. Consolidated gross margins were 35.7%, in line with our gross margins achieved in Q1 and Q4 fiscal 2022. Our gross profit percentage in Q1 fiscal 2023 reflects an increase in net sales and overall product mix changes. It also reflects startup costs associated with the opening of our new high-volume technology manufacturing centers, as well as increased costs resulting from the ongoing impacts of COVID-19 and inflationary pressures. As explained in more detail and reconciled in our Form 10-Q filed earlier today, we utilize a non-GAAP measure that we referred to as adjusted EBITDA. Q1 fiscal 2023 adjusted EBITDA was $10.7 million or 8.2% of consolidated net sales as compared to $5.5 million or 4.7% in Q1 fiscal 2022. The increase both in dollars and as a percentage of sales is primarily attributable to the increase in Q1 fiscal 2023 net sales. Sequentially, in line with our prior guidance, adjusted EBITDA in Q1 fiscal 2023 was lower, both in dollars and as a percentage of sales, reflecting overall changes in mix, the general rise in costs due to an inefficient supply chain and inflation, and the settlement last quarter of fiscal 2022 annual incentive compensation with fully vested share units in lieu of cash. As Ken previously mentioned, bookings during the quarter totaled $181.2 million, representing a 26.9% sequential quarterly increase and a quarterly book-to-bill ratio of 1.38x. Our current revenue visibility is approximately $1.1 billion and is equal to the sum of our $668.2 million of funded backlog plus the total unfunded value of certain multi-year contracts that we have received and from which we expect future orders. Overall, our consolidated Q1 net sales and adjusted EBITDA were ahead of our guidance provided last quarter and we're pleased to have exceeded our targets, and to have increased our funded backlog from July, particularly in light of an economic environment that continues to be challenging. Now, let me return the call back over to Ken.

Thanks Mike. As I said, at the top of the call, a big part of our financial performance reflects a lot of hard work that we're doing to improve the core machinery of our business. In my opinion, we have the best people and the best solutions, and we serve the most demanding customers in the world and we're growing. To support everything, we're doing and everything we want to do, we have to make sure that Comtech's organization, operations, and systems can keep pace with where our business is going. A lot of that work is being spearheaded by Maria Hedden, our Chief Operating Officer. Maria joined us in March, bringing over 20 years of executive P&L management experience and a history of improving business performance. At the core of Maria's work is a commitment to a One Comtech strategy, ensuring that everyone at the company shares a common set of tools and processes to improve and optimize everything they do every day. I want you to be able to hear directly from Maria, as she plays such an important role in accelerating the growth and profitability of our business. Maria?

Thanks Ken and good to be able to have the opportunity to speak with all of you today. Today is actually the first time I've participated in an earnings call, but I think it highlights two things that I expect are important for investors. The first is that at Comtech, we are making serious strategic commitment to operational integration and excellence, what you've heard Ken call One Comtech. The second is that we are focused on translating that strategic commitment into tangible actions on the ground that improve the way we work and the way we work with each other every day. Our belief is that cumulatively, those actions will make us a stronger company, will directly translate into growth and profitability, and in so doing deliver value to our shareholders. All of this is to say our One Comtech strategy isn't about ideas as much as it is about actions. Shortly after I arrived, it became clear to me that we already had the single most important resource a company can have in place, a talented passionate workforce. As I saw it, my job was to ensure that all these talented people had the right organizational machinery around them to support what they were already doing in ways that were more effective, efficient, and scalable. We needed to collectively harmonize our business with best practices through each business unit. That meant everything from optimizing the company's supply chain, our engineering operations, our manufacturing to our sales processes, including pricing and contract reviews. And it also meant we had to make sure all our teams were appropriately staffed to not only meet today's needs but for the growth we anticipate. And it meant a reorganization of our leadership structure to make sure we had the right executives in place, but also to create structures to ensure all our leaders had a clear sense of the totality of our business and access to the insights and innovations from across the business. In a very short period of time, we have not only committed ourselves to the idea of One Comtech, but we are implementing it. We have made key appointments and strong hires into leadership positions. We are in the process of a firm-wide business and operations improvement project to control costs, where we can to defend and grow margins, while at the same time make deliberate investments to promote our growth and ability to operate at scale. And while this may sound straightforward, we make sure we are talking to each other all of the time. I have instituted a monthly business review process, which convenes the entire leadership team for a full day to ensure we celebrate our wins, learn from our losses, and make sure our plans and targets are on track and appropriately resourced. Related, I also hosted a strategic goals deployment session so that I, as COO, can make sure that the organization has a clear understanding of how to properly support our growth initiatives. There's a lot of change happening at Comtech right now. And in many organizations, change can bring uncertainties down, but at Comtech, I see every day what our financial performance this quarter confirms that we're making the right changes that are unleashing and empowering our people to do what they were already doing, innovating and delivering the best solutions to our customers around the world. We all know that there is a lot of work to do ahead of us, but I have the confidence that the changes we are and will be implementing at Comtech will create permanent competitive advantages for our company and our customers as well as value for our shareholders. Thank you for your time. And now let me turn to Ken for his closing remarks.

Thanks, Maria. I just want to extend the point Maria was making about the incredible and incredibly positive changes that are happening every day at Comtech. As she said, we made significant changes to our leadership structure and now have executives focused on both our key end markets as well as our key customer segments. Tim Jenkins is our Terrestrial and Wireless Networks segment President and Justin Wexler is our Satellite and Space Communications segment President. We also appointed Daniel Gizinski as our Chief Strategy Officer for Defense, and Jay Whitehurst as our Chief Strategy Officer for Commercial. Finally, we appointed Doug Houston our Vice President of Global Support. Together, it means we have a leadership structure that is ready to partner with customers across business units and has expertise in the specific needs of key customer segments. I believe that with the people we have in place, heading an organization that is itself improving every day, Comtech is poised for a successful year ahead. Before I move on to take questions, let me circle back to our bookings, which totaled $181 million for the quarter, we were over 2x higher than our first quarter of last fiscal year. Our investors should view this as a clear indication that while we continue to improve the machinery of our business, we have not and will not fail to remain completely focused on solving our customers' problems and creating unprecedented customer value in unique and innovative ways. Our contract wins during the quarter validate not only our unwavering customer focus but also make it clear that Comtech solutions and services continue to set the standard in every one of our key markets. It never leaves our mind that we have the most demanding customers in the world. Our technology-enabled solutions are not just field tested, they are battle tested. We welcome new business at Comtech, but I'm always happy to win repeat business too, because it means that these tough customers have put our products through their paces and we have measured up to their very high standards. Among the contracts that were awarded during the quarter from customers we have worked with before, we saw key wins with the U.S. military as well as for the Ukrainian government, which is adding new communication systems identical to those we donated to them in March of this year. In addition, one of the largest wireless carriers in the United States renewed our 911 services contract with them, again, underscoring that across our segments and our end markets, customers have come to know, trust, and depend upon Comtech. With that, let me acknowledge that the road ahead will be challenging, given the macroeconomic environment that combines inflationary pressures, pandemic aftershocks, and unresolved geopolitical tensions. But we believe Comtech has never been better prepared to meet these challenges and take advantage of the opportunities they present. With new leadership, a new organization, a refreshed common operational infrastructure, and an energized and invigorated team, our One Comtech transformation is positioning us for success. One Comtech is working and we're moving fast. And we are winning in a market that is itself growing. Now, finally, I want to take a moment to thank Fred Kornberg for his 50 years of service to Comtech. Next week, Fred will be retiring from our Board and from all of us here at Comtech, we wish him well, and thank him for all his contributions over the years. And with that, let me take your questions.

And we'll move first to Joe Gomes with NOBLE Capital. Please go ahead.

Good evening. Thanks for taking my questions.

Hi Joe.

Good evening Joe.

So, Ken, I wanted to ask now that you have a quarter of experience, could you provide more details on your observations, evaluations, and conclusions? You mentioned some of this in your prepared remarks, so could you elaborate further? Also, are you encountering any resistance regarding the changes you are implementing in the organization?

Yes, thanks, Joe. I'm going to offer perspective on that and then if Maria or Mike want to chime in, they can with respect to their lens through which they look through. But I'll tell you that first of all, the move to One Comtech is challenging. And obviously, our biggest challenge here in the beginning is aligning our various businesses on the common operating practices and common operating systems. We're moving through that aggressively and we've baselined the current configuration, current operating processes that they operate on. We put an integrated master schedule together that transitions them, we prioritize those tasks and we put key metrics and key performance indicators in place so that we can measure our performance on that. And we're able to forecast at this juncture when and how much the return on that investment might be and on what programs. So, the good news is we're moving ahead on that and the team is very excited about it. Secondly, I'll say that we've launched a number of crucial initiatives. One of those is the launch of the Innovation Foundry, our technical incubator, if you will, that's being led by our Chief Growth Officer. I'm really excited about that Joe because we've identified already some initial partners who can bring exciting and relevant technologies into that technology incubator so that we can assess and blend them with our own capabilities to demonstrate how they improve customer value and how they improve customer outcomes. And in this kind of a controlled environment, we can't even quantify what we think that customer value might be. That's really significant. So, one of the things is I'm really excited and enthusiastic about the Innovation Foundry and how that provides a lens through which we can up tier our capabilities to the systems and services level and measure the performance that that brings our customers.

Okay, great. Thank you for that. And pardon me, maybe you could talk a little bit more on the Terrestrial business. It was down sequentially, maybe a little more color detail, how are the 911 market opportunities out there, the deployments, in Pennsylvania, Arizona, some of the other states that you've won? Are we making any move there, getting those deployments up and running? Any color there on the Terrestrial business will be great. Thank you.

Sure. Joe, thanks. I'm going to let Mike jump in on that.

Sure. Joe on the Terrestrial and Wireless business background again in early part of fiscal 2021, we announced winning several large 5G location-based services contracts. Those software contracts definitely contributed to a favorable sales mix that we disclosed last year in Q2 and Q3. Also coming in fiscal 2022 and especially in Q2, just to remind everybody, we did have a $2.5 million benefit to cost of sales that were the result of reducing the warranty accrual due to lower than expected warranty claims in that 911 product area. So, certainly, we had some favorable headwinds last year. When you look at the sales and the adjusted EBITDA contribution net in Q1 of fiscal 2023, as we stated before, we're subject to mix changes and the recently awarded statewide NG911 contracts, as we disclose generally have lower upfront margins, lower than our 911 Wireless Call Routing Services. And that's generally because the legacy 911 Call Routing Services are based on advanced and mature software. Whereas you have to keep in mind the new contracts that we're winning in the 911 area, the NG911 area, those contracts were recently won, we're installing the infrastructure, and it's going to take some time, as we turn on the PSAPs to absorb that upfront cost. And in terms of improving margins over time, the more PSAPs we light up on the recurring service, our expectations are to have a better bottom line. So, to answer your question, in terms of the progress on Pennsylvania, South Carolina, Arizona, those big contracts that we won, I think we are very happy with the progress on all three of those contracts. We're getting towards the tail end of the deployment portions of those contracts, where we're spending the CapEx, and we have been lining up the PSAPs. And so we're very encouraged by that progress. And as we move into 2023, we'll likely see more of those PSAPs go live.

Great. Thanks for the insight there, guys. I'll get back in the queue. Thanks again.

Thanks Joe.

Thanks Joe.

And we'll take our next question from George Notter with Jefferies. Please go ahead.

Hi guys. Thanks very much. You mentioned the $181 million number in bookings for the quarter, I assume that included some big chunky contracts. I think during the quarter, you announced a Tropo deal with the U.S. military for $50 million. I assume that ran through that bookings number. And are there any other kind of chunkier pieces in there as well?

I'll take that, George. In our 10-Q, we provided details on some of the largest orders, which are also mentioned in the shareholder letter. As you pointed out, we have the next-generation Troposcatter terminals, and we were pleased to see that order come in larger than expected. It was a significant win. We also received the Ukrainian COMETs order in the first quarter, and we made considerable progress delivering 80 units during that quarter. Additionally, we have a large Tier-1 carrier for whom we provide call routing services, and we renewed our annual contract with them in the first quarter. Those are likely the largest highlights, along with some additional reset orders from the U.S. Army and other key wins, but those three were the most notable.

Got it.

George, this is Ken. George I will tell you that, as we bring our business together, we are seeing our addressable and serviceable markets expand as we look to harness the enterprise-wide capability of One Comtech and that enables us to move up tier into the Systems and Services segment. So, we're pretty enthusiastic about the opportunities that's revealing to us and we're seeing customers even engage with us directly to better understand how this expanded value proposition can create value for them. We're engaging directly with both Satellite and Terrestrial customers. We have strategic partnering discussions underway in the upcoming 30 days where we're hosting technology workshops and leveraging the innovation foundry to demonstrate and quantify these enhanced capabilities in a customer context. So, looking forward, our customers are aligned with us in this expanded value proposition, that's expanding our new business funnel going forward.

Got it. Okay. A quick question on the balance sheet. Also, I think you guys have about $130 million drawn on the credit line, the revolver right now. I know that expires in the fall of next year. Can you kind of talk about your plans to kind of deal with that given where the balance sheet is right now?

Sure, George. In terms of the debt, on the balance sheet, it's actually a little north of what you just said. But more importantly, I would add, about a week ago, we did announce through 8-K that we did basically amend our credit facility. So, in the presentation on our balance sheet, you see as long-term it's because we were successful in getting our lenders to move forward with an amended deal. We did change some of the deal terms to be more representative of today's business, but that was a syndication we announced last week. And we're very pleased with that and very thankful in this environment. Obviously, you're reading a lot of news reports, there's a lot of skittishness out there with the lenders, dealing with a global recession, potentially higher default rates. And so navigating through that in this environment, we're very pleased with the outcome and it gives us the flexibility to operate.

Got it, great. Thank you very much. I'll take a look at the 8-K. Appreciate it, guys. Thank you.

Thanks.

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

Great, yes. Thank you. Yes, definitely hit the the ground running here, looks good. Just on the gross margin, can you just kind of go through a little bit of the drivers and headwinds you're seeing on gross margin this year, I was trying to get a sense of where that might go over time here?

Sure, in terms of our guidance, I certainly would be mindful of that we're only given guidance for Q2. We're certainly in an economic environment that's challenging, as Ken mentioned, and then we disclosed, we definitely have seen inflationary pressures, supply chains are still not running optimally. And against that background, and backdrop, we're pleased with our performance in Q1, we think that over time, our margins will improve. But we do have a lot of backlog in our Terrestrial and Wireless Network segment. A lot of that backlog is multi-year in nature, and set up a year or so ago. So, it will take some time to burn off that backlog. But where we can, we are resetting that backlog with higher pricing that is market-based, taking into account inflationary pressures, but certainly for the rest of the year, it's a little too early to call. We're pleased with the fact that we're holding the line and able to keep that 35%. And as I pointed out last year, in Q1, we certainly had some favorability based on the mix at the time. But when you isolate those out, we're sitting in that mid-30% range. So, our goal and the targets for us are certainly higher. But right now, we're not going to go beyond what we're saying for Q2 is guidance on the top and bottom-line.

I want to share that we are making significant strides. I would like to give Maria the opportunity to contribute here. We are clearly on the right path with the right people in place. We have outlined some of these individuals in the shareholder letter. They are experienced professionals who have successfully unified siloed businesses in the past. Now, I'll let Maria provide some insights regarding the metrics, the KPIs, and how we are monitoring progress on the integrated mattress schedule while guiding the team towards those objectives.

Yes. Thanks, Ken. So, just a couple things on that. So, obviously, we've rolled out some of our people strategy and what we've dealt with that, but clearly some of the new processes that have been instituted over the last quarter that is focused on really understanding some of our business risks, and understanding those key performance indicators. As Ken mentioned, I hosted a full day session on developing what our stress objectives are and what we need to do. And really that's driving visibility and alignment across the organization to stay focused on really being able to grow the organization while continuing to perform day-to-day on our expectations.

Yes. Great. And then maybe just on the pipeline itself, let me guess you kind of called out the macroeconomic geopolitical effects here, but also you've obviously had strong demand. So maybe just in terms of the pipeline, how healthy is it? What areas are particularly prominent in the pipeline here?

I'll address that. Both of our segments have significant growth potential. In our Satellite and Space segment, we are now able to offer systems and services that our previously siloed businesses could not provide. This greatly expands our market opportunities and allows us to deliver more value to customers, creating a larger business funnel for us. We can enhance the value proposition for customers in the Satellite and Space sector, leading to more innovative business models that let us monetize that proposition more efficiently. We are excited about this development. In the Terrestrial and Wireless segment, we are geographically expanding and increasing the number of transactions related to 911 calls and location-based queries. As transactions rise, particularly with the movement toward machine-to-machine 911-like calls, we see another layer of growth opportunities for Comtech. Additionally, as Satellite and Terrestrial Network infrastructures converge, we identify further growth prospects. Devices are now providing multiple connectivity options, including terrestrial options like Bluetooth, Wi-Fi, and cellular, as well as satellite connectivity to low Earth orbit, with various devices and providers moving in that direction. Overall, we see considerable growth potential in each of our segments and at the enterprise level due to the convergence of satellite and terrestrial domains, where Comtech holds a unique advantage.

Yes, just last one. Troposcatter that a big part of the pipeline. Are there big deals out there?

We view Troposcatter as an exciting technology that enhances SATCOM because when SATCOM's performance decreases, like during a hurricane with heavy rain, Troposcatter actually performs better. It works by reflecting the signal off particles, so a greater number of particles improves its functionality. This makes it a natural complement to SATCOM. We see opportunities in both traditional military and defense sectors, as well as commercially, particularly in connectivity for oil and gas companies and ensuring strong connections between critical operations centers such as hospitals, firehouses, law enforcement, and emergency operation centers during hurricanes or similar situations. We believe this technology has significant potential to grow within the defense market, especially given its success in peer adversary conflicts, and we anticipate its expansion into new markets, including commercial and enterprise levels like oil and gas. Therefore, we consider this a major growth opportunity for us.

Great, sounds good. Thank you.

Thank you, Mike.

And we'll take our next question from Chris Sakai with Singular Research. Please go ahead.

Hi, everyone. This is Sean speaking for Chris. With you taking charge, Ken, and considering the temporary challenges to free cash flow, has there been any discussion about a commitment to or an increase in dividends?

Well, yes, I can tell you we look at deployment of capital on a regular basis. We try to optimize that with respect to driving our business performance and creating shareholder value. We deal with that at the Board level. So, yes, there's continuing conversations in that regard. Our capital allocation plans are continually discussed reviewed. I pointed to our disclosure in the liquidity section of our 10-Q. But I don't have anything specifically that I'm going to say on that right now beyond the fact that we continually look at.

Okay. The company's international customer base as a percentage has stayed constant last couple of years, last five years or so around one quarter and correct me if I'm wrong. So, can you comment on the dynamics of business developments internationally, and the sales and marketing efforts internationally, maybe how it is, per se, and how it is different from domestic dynamics?

We have a dedicated sales team focused on the international market, another for the defense market, and one for the domestic market. Our international presence is approximately 21.2%, which means it accounts for about a quarter of our business. This segment is expected to benefit significantly as part of our One Comtech transformation, likely to grow at least as much as our domestic and defense sectors. This expectation arises from our shift toward ground-satellite infrastructure and possibly offering it as a system or service, which presents international customers with opportunities. As the international community transitions from 2G and 3G to 4G and 5G technologies in the Terrestrial and Wireless market, we foresee substantial benefits. Additionally, we are looking to expand our location-based services in the international market. We believe that all sectors of our business can thrive internationally as we enhance our capabilities and marketing strategies, ensuring that the international market receives the same benefits as our domestic and defense operations.

This quarter saw benefits from military sales, particularly foreign military sales of our beyond line of sight communication terminals, including sales to the Ukrainian government. Can you provide insight into whether these will continue to be beneficial next quarter and for how long?

What I can tell you is something we've said in our blogs, as well as other communications. And that is the most effective marketing person in the world is a customer in a uniform, a uniformed son or daughter who is in a conflict or otherwise, in the service of the nation. And the Ukraine is a great example because they're in a conflict with what we like to say, as a pure adversary. And our equipment is present, our equipment is working. So, that becomes a test that has a greater value than any marketing brochure or podcast that I've ever seen. So yes, we do expect that to have an extended benefit that continues the viability of our equipment, and extends its value, because it works, it works in the toughest of environments proven.

Absolutely. Yes. It creates a strong narrative for the stock as well. Ultimately, this is a long-term question, so we can share our thoughts. The recent iPhone models feature Emergency SOS. In this context, do you believe this Apple product will represent a competitive threat or a substitution possibility, or do you view Apple's approach as complementary to our offerings?

The convergence of Satellite and Terrestrial Network infrastructures presents a significant opportunity for Comtech, as we hold technological leadership in both areas. Historically, these have been separate domains with distinct devices and frequency bands, but we have been strong in both. As these two sectors converge, Comtech is uniquely positioned to capitalize on this development. Additionally, sometimes future trends can be inferred from past experiences. For instance, the transition from flip phones to BlackBerrys allowed the latter to capture market share from those focused solely on voice services. However, the introduction of smartphones not only took market share from BlackBerrys but also opened up a much larger market for new applications that added significant value for users, such as boarding pass downloads, restaurant reservations, and online banking. As we look ahead, it's uncertain whether the convergence of Satellite and Terrestrial will simply draw market share from providers lacking SATCOM capabilities or if it will lead to an expansive ecosystem of new applications and capabilities. While I won't make a prediction, I believe Comtech is strategically well-positioned due to our strengths in both Satellite and Terrestrial Network technologies, as well as location-based services. This alignment is one of the key reasons we integrated our siloed businesses, allowing us to enhance our capabilities and take advantage of this market shift.

Thank you. Thank you so much. Good luck to you and the new team. Appreciate it.

Thank you.

Thank you.

We'll move next to Greg Burns with Sidoti & Company. Please go ahead.

Good afternoon. With the Terrestrial and Wireless segment, what is a good target for a steady state margin profile for that business?

Yes, historically, we observed that the EBITDA profile reflected our combined commercial savings. Moving forward, we are reaching a point where we have two types of revenue streams converging along with the growth of NG911 revenue. Currently, as we manage those initial costs, the EBITDA contribution will resemble what we see now, especially since we are between significant 5G LBS contracts. As we mentioned in Q4, we received a substantial order, but revenue from that will increase towards the end of this year. At this moment, we are seeing a mix of our NG911 revenues. As we activate more PSAPs and expand our infrastructure across a wider range of recurring services, the EBITDA profile will enhance. I won't specify an exact percentage, but it will definitely be higher than it is now as we are just at the beginning of those contracts.

Can you give like, a range like high teens, low 20s? Like, what should investors be expecting from this business as these 911 deals scale up?

I'll answer it this way in a more broader answer. In the past couple of years, you've seen our EBITDA contributions come down from say, the 14% that we were doing pre-COVID. As a company in all of our product areas, not just in the 911 area, we want to get back to those historical levels and if not exceed that. As we've articulated, we have a lot of initiatives going on right now and once we start to bear fruit, our expectation is that we will get there. So, I don't want to overstate we have a lot of work to do. It's certainly a challenging environment, but in the next couple of years, I would expect this to get back to that level.

Okay. On the contract with Verizon, how many years has that extended for? And was there any change in pricing?

That contract was an annual renewal. It was at this point in time annual renewals, and in terms of pricing, just due to competitive aspects of it, we have a very good relationship with a Tier 1 carrier, and it was a seamless type of renewal.

Just rolled forward.

Okay. The Tropo deliveries to the Marines, or maybe that was in bookings, can you remind us that the total size of that contract that you were awarded, and how much of that have you delivered on?

Greg, just to be clear, you're talking about the marine contract for next-gen Tropo?

Yes.

Okay. That's the contract we won about two years ago. I think the headline ceiling was $200 plus million, maybe $213 million. We initially got a $13 million order to run out the first leg of prototypes, which we delivered about a year ago. And they've been using them in the field and testing them. And this particular go around, it was a $50 plus million order that we received, which is sort of the first production run of their needs for it, it's something that they have a need and a desire for, it's going to take some time to get the deliveries out based on the fact that it's a very large order. But globally, there's still a lot of headroom left on that contract. But in terms of our outlook, we're just focusing on the current order that we have.

Okay. And then the award to the U.S. Army, I think at the time, when you were awarded the Marine contract, the U.S. Army had a larger contract that they awarded to someone else is the is what you were awarded this quarter part of that, are they coming back to market? Like, what is the opportunity there?

We were awarded this quarter completely independently of the Army situation. We are exploring and working towards opportunities with the Army because our equipment has proven itself in battle, which is a significant credential. We are aiming to leverage that and engage in discussions that could lead to ways for the Army to be more effective in combat. However, we don't have any additional comments on that at this time.

Okay. And then on the E911 side, any update on Ohio, is there any line of sight on when funding might be approved for that contract?

You want me to take that one?

Yes.

Regarding Ohio, it seems unlikely that a vote will happen before the end of the year. To remind everyone, the booking this year is not expected to contribute to revenue, as extensive design work is needed upfront. We're collaborating closely with our end customer who has a strong need and desire for the application, and we are exploring the next steps in terms of potential funding. Currently, our outlook suggests a large contract potential exceeding $100 million. We think there could be an opportunity for a booking in the short term, but any revenue or EBITDA contributions are likely to come next year, depending on the amount of upfront funding they provide. It’s probable that any funding will be in increments rather than all at once, and we need to wait for the next session to determine the outcome of the vote.

Okay. And the pipeline for E911, is there any other large state contracts that are up for bid that we should be focusing on?

Yes, there are other opportunities. So, despite getting pushed out for us, Ohio, we certainly have identified other near-term opportunities. We're not sitting idle in terms of the competitive nature of those procurements. I'm not going to name the states or the regions, but there are a handful of those that are coming to market and we'll be responding and I think with our recent wins and our capabilities, we think we have good positioning there. But we'll have more to report on that in the future.

Okay. Lastly, you're increasing capacity in Arizona, which I believe is largely to support new high volume production for the upcoming LEO and MEO satellite networks. Is there any update on when those might start ramping up and contribute to revenue?

Yes, regarding our progress with our large LEO customer, as mentioned last quarter, we have expanded our relationship. There is certainly a desire to move quickly, and the facility we are bringing online is equipped to handle the high volume demands we anticipate from this contract over time. As for our current status with the customer, things are moving forward. We have expanded the relationship and are discussing other aspects of it as well. The timing for production orders is still uncertain, but it could be later this year or early next year, with revenue contributions expected in 2024. Overall, things are heading in a positive direction.

Yes, just some other things, in addition to what Mike shared, obviously, there's a couple of development contracts that we're moving into production phase. And with the rollout of our new SMT line, it will definitely make us more efficient as we build those units, and continue to drive production costs higher for that facility. So, we definitely are planning as part of that release and opening of the facility to drive additional throughput through the facility, and workload in that area.

Perfect. Thank you.

And we'll take our last question from Asiya Merchant with Citigroup. Please go ahead.

Great. Thanks for the opportunity. So, a lot of questions have been asked. I just wanted to ask about cash flow, with a drawdown this quarter as well on your cash flow from operations? And how should we think about the cash trajectory for the remainder of the year?

Sure, to summarize for the quarter, we incurred approximately $4 million in costs related to the CEO transition. It's important you understand that context. With our backlog increasing by about $50 million this quarter, we deemed it wise to initiate the procurement cycle for certain items to accommodate this growth. Although our capital expenditures in Q1 may appear somewhat high now, we had around $6 million in unpaid capital purchases at the end of last year, which impacted Q1. With a $30 million budget target for last year, we effectively spent about $25 million of the $26 million available. We are being cautious with our spending in terms of timing and amounts. We are optimistic about future growth and plan to continue our investments. However, we are nearing the completion of several facility projects, specifically contracts in Pennsylvania, Arizona, and South Carolina in the 911 sector. We expect our capital expenditures to return to more typical levels soon. For Q2 cash flows, while I can’t provide specific guidance, I anticipate that CapEx will remain elevated initially before decreasing later in the year. We're being careful about our leverage ratios with the new credit facility, which gives us some operational flexibility to manage large orders. Though I won’t provide a specific annual cash flow figure, we do expect it to remain positive, keeping in mind that there are still numerous opportunities in the pipeline for the rest of the year. For now, I’ll limit my comments to Q2.

Okay. Are these one-off charges that appear in the non-GAAP adjusted strategic technology costs going to be recurring? If they are, why not just include them in your regular R&D or operating expenses?

In terms of the strategic emerging technology costs, it is specific to a type of technology and customer set. As we're evaluating this market, it's not recurring in nature, say for the opportunities that are very near-term in front of us, we would not likely be spending that. But because of those opportunities, we made a decision as a company to go above and beyond to show our potential customers and existing customers that we're here to partner with them. So, it will be something that is not going to be there forever. But right now, it's a very competitive marketplace, there's a lot of opportunities to grab, and so we're going to make those investments to secure for the long-term.

Okay. I know you discussed EBITDA margins and mentioned there are some factors affecting it, particularly why it is hovering around the 8% level. While you are providing guidance, can we expect that by the end of this fiscal year, or even into early next year, we might see a return to double-digit margins instead of the current high single-digit margins?

Asiya, I would love to address that question with a definitive percentage. But right now, while we're encouraged at the start of Q1 and going into Q2, it's just a little too early for us to call in terms of this challenging environment that we're still navigating through. And so we're going to keep our comments to our top-line and bottom-line growth for Q2 at this point.

Okay. And sorry, one last one. So, a lot of telecom equipment companies are reporting better results. And some of it's just a function of better supply chains that's allowing them to convert elevated levels of backlog into revenues. Can you give some color on how much perhaps that was an effect on the revenues that were better than what was expected for the quarter?

Yes, I mean, I would say this Asiya, our trajectory, we certainly are pleased with our trajectory having four quarters of sequential growth. So, I know we're being compared to maybe others in the industry, but certainly with what we had to face in 2022, with certain specific headwinds in our business, and then the Russia-Ukraine war, it's nice to see that we've been growing our backlog and having such a strong bookings quarter. So, it's in our backlog, we now just need to execute on it. Supply chain, we're aware of what we have to work around, namely long lead items, and making sure we procure timely enough to deliver on time. But I think we are building a good foundation to continue our growth.

I'd like to add that if we take a moment, I can have Maria provide additional insights. One significant advantage of unifying our separate businesses as One Comtech is our ability to manage our supply chain with a unified and more impactful voice. Instead of ordering similar items in smaller amounts through different divisions, we can now consolidate our purchases, which should yield benefits. Additionally, we are actively engaging in strategic sourcing and have brought in experienced professionals. I'll have Maria share more on that aspect.

Yes, thanks Ken. We have brought on Don Boruch as our VP of Operations, and one of his initial responsibilities is to drive strategic sourcing. He has his team in place and has identified some immediate opportunities. This will certainly impact our ability to leverage the supply chain and drive greater efficiencies throughout the entire business, moving away from the current stovepipe approach.

When we talk about improving the machinery of our business operations, that's the kind of thing we're talking about.

Makes sense. Thank you.

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