Welcome to Comtech Fiscal Year Q4, 2024 Earnings Conference Call. As a reminder, this conference is being recorded today, Thursday, October 31, 2024. I would now like to turn the conference over to Mrs. Maria Ceriello with Comtech. Please go ahead, Maria.

Thank you, operator. And thanks to our investors for taking the time to dial in today. Welcome to Comtech Telecommunications Corp's conference call for the fourth quarter of fiscal year 2024. Today, I'm here with Comtech's President and Chief Executive Officer, John Ratigan. We are also joined today by Mike Bondi, Comtech's CFO. Before we get started today, please note we have a detailed discussion of the quarter in our shareholder letter available on our website. Certain information presented in this call will include, but not be limited to, information relating to the future performance and financial condition of the company, the company's plans, objectives and business outlook and the 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 always 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 SEC filings. Now, I'm pleased to introduce Comtech's President and CEO, John Ratigan. John?

Thanks, Maria. And thanks, everyone, for taking the time to join us today. I began last quarter's call acknowledging that I was relatively new to the role of Comtech's CEO, and as I'm sure everyone on this call saw from our filings yesterday, it looks like I'll be able to use this line again. I could not be more excited about our Board of Directors appointing me as President and CEO. Let me start by saying we're going to be taking a different approach to our earnings calls going forward. We released our shareholder letter earlier today and filed our 10-K yesterday after the close. All of the key financial metrics and discussions surrounding our financial and operating performance are included in those materials. I know there's a lot to talk about, so instead of repeating already available information, we plan to spend more time on Q&A rather than prepared remarks. That being said, there are some important themes I want to address today before we open the call up for your questions. I'll acknowledge that Comtech has been through an extraordinary series of changes over the course of the past year. However, from my vantage point, the Comtech I see today rests on a strong foundation. We have best-in-class technology, great people, and a tremendous opportunity to drive profitable growth in our large and growing end markets. What we need is focus, operational discipline, and execution, and I'm excited to help lead the company on that journey. For the last few months, Comtech's board and leadership team have been developing and executing against a transformation strategy that we believe will deliver the best outcome for our customers, our people, and our shareholders. As you know, a process is underway to identify strategic alternatives for our terrestrial and wireless networks business. We believe this is the best way to unlock the value of this business while simplifying our capital structure. We are simultaneously taking a hard look at each of our businesses and product lines to ensure we have the best portfolio to meet our customers' needs and protect and grow our top and bottom lines. Looking ahead, the Comtech I see, which is the Comtech I believe our customers, our people, and our shareholders want, is a pure-play satellite and space communications company ready to serve end markets that are themselves at the beginning of their own technology-driven transformation cycles. This is the area that I focused on throughout my career, and the opportunity these markets represent right now is the reason I joined the company. It's why I've been clear in dozens of conversations with our shareholders and our board that as difficult as the current operating environment has been and as tough as the challenges ahead may be, I'm committed to Comtech. I made a commitment to be direct in my communications with our shareholders, too, so I'll be blunt. Our financial performance for the fourth quarter was below expectations. Importantly, our results were not a function of missed or lost market opportunities. Comtech's technologies, products, and solutions continue to be in demand from our customers, validated by our record-funded backlog of almost $800 million. This, to me, is a critical and direct reflection from our customers that Comtech has a defensible, highly competitive position in the market. However, in our fiscal fourth quarter, a number of individual factors combined to put pressure on our margins. You will see from our filings that while both of our businesses performed roughly in line with revenue expectations, satellite and space in particular experienced a decline in adjusted EBITDA margins. Several quarters of balance sheet-related headwinds impacting manufacturing and deliveries, combined with cost growth on cutting-edge, non-recurring engineering-related programs that are nearing completion, negatively impacted our profitability. We also experienced a delay in the timing of a large troposcatter-related foreign military sales order. The timing and amount of such orders are often difficult to predict due to factors including political influences and defense spending budgets. Taken together, the impact on segment profitability was significant. As I mentioned, for more detail on this, I'd encourage you to review our shareholder letter and SEC filings. Stepping back, and as I wrote in our shareholder letter, the close of our fiscal 2024 fourth quarter provides an opportunity to reflect on both the progress the company has made over the past year, as well as a reminder of how much remains to be done to build the Comtech our customers, our people, and our shareholders want. With our transformation strategy defined, in place, and well underway, I believe we'll get there. We have a lot of work to do, but from my perspective, we're engaging in that work from a position of strength. Time and again, customers turn to Comtech to solve their most challenging communications problems. Now let me turn to the operator to address your questions.

Absolutely. We'll take our first question from Greg Burns with Sidoti & Company. Please go ahead. Your line is open.

Good afternoon. The strategic review process for the terrestrial business, can you maybe give us a little bit more color on the timing of when you expect that to be completed? What kind of process is being run? Is it open or are you dealing directly with specific interested parties? And then assuming some transaction is completed, what do you foresee the capital structure of the standalone satellite business looking like? Do you expect to buy back all the debt and call the preferreds and be left with a clean balance sheet? Thank you.

Hey, Greg. Thanks for the question. So the process has been ongoing for quite some time. It'll be dictated in the public. It'll be public documents surrounding the whole thing. It's been a methodical process that we've been running actually for quite a while now. We're making sure that we proceed through this with great diligence on both sides of these equations. We continue to entertain various factions that want to come forth and take a look at this. And the second part of your question, I believe, dealt with what do we anticipate the cost structure to look like after the divestiture. And certainly I think we can all take a look – as well as the loans. Certainly, as we divest of that part of the business, the cost structure will have to be reduced in order to accommodate the smaller business that we will be at the time of that divestiture. The other question had to do with – what was the third part of that question?

The capital, the capital structure. Do you expect to be able to get the capital structure? Is your goal to pay down all the debt and buy back or call the preferreds?

Yeah, it would be anticipated certainly that we would pay off the loans and do the same thing with the preferred if possible.

Hey Greg, on that point, too, I would just add to what John is saying. Certainly, we're not going to speculate about valuation and things of those related to those matters. But certainly our view is with the liquidation of our own bills and a transaction like that, we would look to simplify our balance.

Okay. Could you just talk a little bit more about the margin headwinds or the impacts this quarter? What was driving that from an operational perspective? And what are you doing going forward to avoid these types of situations, where you run into these cost overruns and issues like this in the future?

Want me to take it?

Yeah, you take part of the call, and – okay, we're going to split up the answer probably, Greg. In terms of the Q4 performance and some of the adjustments that John was referring to in his opening remarks, we're going through, especially in our satellite and space segment, a few NRE development jobs that will lead to production. Those jobs, as John said, are progressing. And along the way, these are cutting edge technologies. And in the fourth quarter, as we did a hard scrub of those, we made sure that the EACs properly reflected the cost estimates. I would say we believe that the noise is behind us on that front, but these are development jobs. We want to get it right to set our production up for the future. So in terms of the fourth quarter performance, we took our lumps, and certainly each quarter end we'll be looking at those. But I would say, Q4, we did a hard scrub.

Yeah, I would also add, Greg, that probably we have a high percentage of what I would call development jobs, especially in Chandler, right now, in our amplifiers and modems part of the business, where we've got a substantial amount of revenue coming from our development projects. And as intrinsically, those projects are not the highest gross margin. Where the margin comes back into play is when they move into production, and we're certainly hopeful that that is going to occur over the – well, at various times we've got EDIMs with the Army that will be longer, but we've got other things like the A3M with the Army Air Force anti-jam modem that should move into production sooner. So as we cycle those off of the development stage of those projects, we will – the margins, we'll see the margins improve.

Okay. And then, I guess, looking forward I guess, you had to take some bridge financing to get you through this quarter. You had some movement on the unbilled receivables. Like, what's your line of sight on kind of converting those unbilled receivables? And I guess your ability to – going into the first quarter to – maybe it's going to depend on a transaction with the terrestrial business. But if nothing is done, are you going to be able to generate enough cash or satisfy your obligations without taking on additional financing?

Yeah Greg, on that front as you saw in the footnote for the receivables, we did have a very nice reduction in the unbilled. I know total receivables still are at an elevated level, but you can see both on our commercial and our government programs a shift into the billed arena. So we're clicking off the task that we need to do to invoice our customers and receive payment. We did see a reduction. We expect to continue to see that reduction as we complete the deliveries on the Army and Marines next-gen tropo programs. We're in the throes of making those deliveries as we speak. So we do expect that cadence to continue and provide further liquidity to the situation. But yeah, we do expect a decrease, no change in our thinking on that.

Okay, thank you.

Thanks, Greg.

We'll take our next question from Joe Gomes with Noble Capital. Please go ahead. Your line is open.

Good evening. Thanks for taking my questions.

Good evening Joe.

So I wanted to start out in your prepared remarks or in the shareholder letter, I guess I should say, you do talk about and Mike, you touched about it briefly about in the fourth quarter you scrubbed some of these estimates to complete different products. And I'm just wondering, how much, or was it delta from what you originally had estimated as to now after this complete scrub, what is the change there? I mean, how big of a – because it sounds like it was a pretty big change in your estimates, and I'm just trying to get some more color on that.

Yeah, no, good question Joe. I don't think I'll put a specific number on the various programs and our investments that we're making in these programs with, aside with our customer. I would just say that it was more than one contract, but it was contained to the development contracts. And in terms of our fourth quarter performance, as John did mention in his prepared remarks and in the shareholder letter, we were also tracking a fairly large triple scatter order destined for an end customer overseas, and those are very difficult to predict. So we had line of sight to that. It shifted out, came out of the quarter. So on top of the adjustments we were making, that hitting also late in the quarter, and working through that, they added up to a pretty sizable, as John said, significant impact to the fourth quarter. But we're going through these reviews and we're also trying to think about the estimates to complete to getting this done. So hopefully the team did a good job in getting that all behind us.

Okay. Thanks for that. And the TFSR contract, I was under the impression that you had finally got the approval to go ahead, but reading through the K last night, it appears that that contract is still under protest. So just maybe give us a little more color on where that stands. When do you think you are actually going to get the opportunity to start fulfilling that contract and we can start seeing the impact of that on the results here?

Yeah Joe, I wish I had a great answer for you, but I don't, right. That is clearly extended way beyond any protest that I've ever been involved in. Every time it is reawarded, a new protest is filed. Every time you file a new protest, it's got to be on something that is not previously been protested. And it goes through the GAO on that, and we remain hopeful, right. I see almost it's biweekly, there's an update on it, but it has not yet been full and final determination to end the protest. I wish I had a better answer for you, right, because then I'd have a better answer for us. We're hopeful that it's soon, but there are no guarantees on it.

Okay, thanks. And then just, if I'm looking at your R&D expenses as a percent of revenues, your 4.5% in ‘24, which is down from 8.8% in ‘23, which is down from 10.8% in ‘22. Are we under-investing in R&D here at this point in time or is this – we've completed some big programs that are R&D related and we're comfortable at this 4.5% of revenue level? Because it is a pretty big substantial decline over the past three years in terms of the amount of R&D that is being spent.

Yeah, Joe, I'll take the first part and then hand it off to John. I think what's important to also note is that the stated R&D expense on the P&L is just one line. We also have R&D that sits in cost of sales and I would point you to upfront in the K. We talk about the trend in our R&D coming down, but at the same time you have the customer funded going up substantially from $10 million to almost $19 million over the course of the last three years. So I think it's part of our initiatives to have the customer help pay for some of the development. So you don't see it as reported R&D. You see it as part of revenues and cost of sales. And as John mentioned, these jobs inherently generally have lower margins, but we're also getting part of the bill footed by the customer. And also we had spent some time this year prioritizing our resources, going through our transformation to focus on now, the programs we think that have the highest margin potential and ones that will unlock sales, as opposed to trying to feed legacy programs that maybe don't have the right ROI on it. I don't know if there's anything else.

Yeah, so I obviously concur with Mike on that. So as I indicated during my remarks and certainly the way that we're operating now, we've got quite a few development projects underway in our facilities, and many of those are customer funded. So instead of dramatically increasing our total cost of engineering expense, obviously we're trying to utilize the valuable resources we have in the best way we can, especially as those projects move from the development phase into the production phase. I don't want to be trying to replace or have to get rid of that engineering talent. So I'm comfortable with what we're doing now, and as you may or may not remember, I don't know how closely you follow us, but we recently introduced the digital common ground series of satellite modems that we'll bring out over the course of the next year, and that is a major R&D project that we're undergoing along. That one is a similar project to the Army modem that we're building, which are both fully digital modems. So we are spending money. We know how important that is, but I think we've got the right balance.

Okay, great. Thanks Eric. I'll get back in queue.

Thank you.

We'll take our next question from Mike Crawford with Riley Securities. Please go ahead.

Thank you, B. Riley Securities. So absent further EACs, given that Q1 ends today, what type of revenue and growth margin should we expect in terms of a range for this quarterly period that ends today?

Yeah. So what we expect for Q1 is the revenue to stay about the same as it was in Q4, and we are expecting certainly greater EBITDA than we achieved in Q4. We're not prepared to give a range on that, but we're prepared to say that we're going to have greater EBITDA than we had in Q4.

Yeah, Mike, I would add to what John's saying, is keeping in mind, you referenced the EACs, put that aside. But we also just announced a strategy to transform our business. Yeah, and we also had just announced the wind down of Basingstoke, and while that's substantially done, we still have a few more things to get done, and that's tracking very nicely according to our plan. But those things create some uncertainty on the bottom line, I think, as John said, on the top line. I think we have decent visibility right now. We still have to close the books and go through with that process. But certainly when it comes to bottom line performance, I want to just kind of talk in terms of non-Basingstoke, because that's a little bit of an unknown, but yeah, as we go through our restructuring there.

And with these $124 million of unbilled or so that remained at July, at what level should we look for those to decline to in this period that ends today? And what is the rough composition of those, like versus Troposcatter versus maybe software delivered to wireless carriers, etc.?

Yeah, I'll take that.

Yeah, I was going to say, do we know the percentages?

Yeah, so in terms of our liquidation plan, I would first point you to the footnote that breaks out the unbilled. And you can see the distribution between T&W, which is more software development and customer acceptance versus Satellite and Space, which is more let's get the products out and delivered so we can invoice that milestone. Certainly the large majority is falling in Satellite and Space. Typical programs we've discussed in the past, like the U.S. Army, NextGen Tropo project, which was about $30 million, and we're well into the deliveries now on that one. Same thing with the larger U.S. Marine Corps order, which we're also making deliveries of all the systems to our prime in support of the Marines program. And at this point in time, our deliveries, we are well advanced in the delivery and ramping up to that state where we expect it to be. And if we continue this up, I think it will be invoiced timely, and then with typical payment terms for those contracts, with the Army probably paying a little bit faster than the Marines, just given the nature of the contract.

And within those contracts, there's some extended payment terms that they've put in there, right. It's like a 45 or 60 day capability to pay. But what we saw in Q1 was a steady roll-off as well of that unbilled.

That's good to hear.

The team is doing a great job getting it delivered.

And then just regarding margin, I know you have all of these additional legal and consulting costs associated with the decision to exit the one business, the strategic review, the proxy fight. But just when you get down to these modem, these digital modem development programs, where you are getting kind of paid to develop them by your customers, but is there any reason to think that when you come out the other side of that into production, that it's not going to be more close, similar to past margin experience?

No, no. The production margins are much better than the development margins. The development margins we go through, and that's certainly what we've had the EAC write down for the fourth quarter, right. So once we start moving into volume is where we shine, right. That's where we've got the surface mount machines, the factory. We just move it into production, and it becomes a steady kind of business for us, and the margins are much better. And I'm not saying that we're not worried about the margins when it moves into production.

And I think you said A3M first, and maybe is that something that we could expect to start occurring in the second fiscal quarter into January, or when should we look for this transformation of that business production to occur?

Yeah, I think we're winding down the development part of that, and I believe that in the second and third quarters of the year, we'll get a little bit more in the second, and I expect more in the third. But we'll certainly have some substantial revenue in ‘25 and beyond. Actually, it should go on for quite a number of years.

Yeah. Well, okay. I'll just end with one final question on different topics. So now that the 10-K is filed, when would you by statute need to hold your AGM, and when do you expect to set a date for that?

Yeah, if you're referring to the shareholder meeting and setting a date, we'll be putting out information at the appropriate time. I'm not going to make any comments on it at this time.

Okay. All right. Thank you very much.

Thanks Mike.

We'll take our next question from George Notter with Jefferies. Please go ahead. Your line is open.

Hi there. I'm wondering if you can make any comments on the progress you're making in the potential sale of the terrestrial and wireless business. If I go back from memory, I think there were prior management teams that also, I think, looked at selling these assets, and I guess I'm just trying to handicap the likelihood of getting to a successful sale. I'm wondering how fresh this asset is on the marketplace.

So, the process has been ongoing. I can't comment a lot on where the process is and when we anticipate that it would come to a conclusion. What we do know with great certainty is that the business, the T&W business is clearly, as all of you guys know, an undervalued asset in the market. It is an extraordinary business performing incredibly well for us. We've got a great management team in there. They are well-received in the market. Their backlog is strong. They are continuing to improve their margins. It is a very attractive business. We feel it's really the only great way to unlock the value of that business for our shareholders. We're certainly trying to drive all the great things out of the business we can, and we certainly see that as a way to do that. But I can't comment further on where we are in that process or speculate on whether we'll be successful or not, but we certainly hope to.

Got it. Also, and then the other one I wanted to, the Basingstoke facility, can you give us a sense for how much revenue and how much cost structure was associated with that business? Obviously, that would be coming out of the financials, but what would that look like?

Again, probably won't give a specific number, George, but certainly it was enough size and scale to get heavy focus from management to invest in that business unit. Just at this point in time, it wasn't coming to fruition, but it definitely is a significant impact on our results for the year and curtailing that loss going forward. We think it will be a meaningful reduction in expenditures that will significantly improve our bottom line in that segment.

Got it. Can you tell us how many... I'm sorry.

I'm not going to put a specific number on it.

Got it. Can you tell us how many people are in it, that business line?

Under five at this point in time, George.

Under five employees in that business?

It's wound down in Bas now.

Was that your question?

And can you tell us what it was in terms of the employment in that business?

I think John gave a little color on that.

I want to say it was about 100.

Okay. Great. Thank you very much.

You're welcome. Thanks, George.

There are no further questions on the line at this time. I will turn the program over to our speakers for any additional or closing remarks.

Yeah, I don't have any further comments. I appreciate everybody taking the time to listen to us this afternoon, and I hope everyone has a happy Halloween, and we will talk again in another quarter.

This does conclude today's program. Thank you for your participation, and you may now disconnect.