Earnings Call Transcript - CMTL Q3 2022

Operator, Operator

Ladies and gentlemen, thank you for standing by. Welcome to Comtech Telecommunications Corp. Third Quarter Fiscal 2022 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 June 9, 2022. I would now like to turn the conference over to Mr. Robert Samuels of Comtech Telecommunications. Please go ahead, sir.

Robert Samuels, Head of Investor Relations

Thank you and good afternoon everyone, welcome to the Comtech Telecommunications Corp. conference call for the third quarter of fiscal year 2022. With us on the call today are Michael D. Porcelain, President and Chief Executive Officer of Comtech; and Michael Bondi, Chief Financial Officer. I'm Rob Samuels, Comtech's Head of Investor Relations. Before we proceed, 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, Michael Porcelain. Mike?

Michael Porcelain, CEO

Thanks Rob. And I should also say, welcome aboard. I hope that everyone on the call has had an opportunity to review this quarter's Investor’s letter, where I talk about our business in detail and offer our candid assessment of the road ahead for Comtech. Before starting the substantive part of our earnings conference call, I want to remind everyone that in Q2 we changed the format and framework of our quarterly earnings announcement from a press release to a shareholder letter. In the past, we have traditionally issued a quarterly earnings press release that summarized comparative financial results, highlighted a few contract wins and included a quote or two from Management. I thought the shareholder letter format was a better way to communicate with our shareholder base and analysts and provide perspective shareholders a better way to learn more about us. I also thought it provided a good forum to share insights into my thinking and the way I intend to lead Comtech. Since then I've appreciated the feedback we received from investors and analysts, almost all of them overwhelmingly like the new format. Some of the feedback we received was that, since the shareholder letter was substantive, we should allow a bit more time between its release and our earnings call. So we have taken that into consideration, which is why today's call is at 5:00 PM Eastern Time, rather than 4:30 PM as usual time. Also, it was suggested to us that this significantly shorten our prepared remarks and get to the question-and-answer portion of the call quicker. We agree with that suggestion, so our prepared remarks on this call will be a lot shorter than normal. As we start, let me echo a point I made towards the end of our new Q3 investor letter. It's hard not to be affected by the emergencies, disasters and conflicts that confront us every day. Unexpected events demand our attention and response and part of responding to them effectively means giving the right people the best information as quickly as possible. At a very basic level, it highlights just how important Failsafe Communications and Connections are. For our part, everyone at Comtech is continuing to do what we've been doing for decades, ensuring that all of our products and services work for our customers every time, all the time, no matter the conditions. Comtech is the company that connects people when it matters most, and right now I'd argue that Failsafe Communications are as important as they have ever been. Now let's talk about our initiatives and updated guidance. This continues to be a transformative time at Comtech. Like businesses everywhere, we are confronting one of the most difficult operating environments in memory as the global economy struggles to find its footing amidst the pandemic, geopolitical conflict, surging inflationary pressures and supply chain disruptions. Five months in as CEO, I've been dealing with these issues, but I can relay that we are making demonstrable progress in several initiatives vital to the company's future successes. These strategic initiatives include expanding our talent pool to bring fresh ideas, leveraging our market leading positions to capitalize on new multiyear investment cycles, increasing companywide collaboration to exploit emerging opportunities and refreshing our corporate branding. We are also assessing our product lines and reviewing M&A and strategic opportunities to establish priorities and determine appropriate capital allocation. Our team is energized by the exciting trends and opportunities visible in our core markets and we believe Comtech’s technologies and customer relationship position us to capitalize on them. While the long-term prospects for our business are strong, the near-term economic environment promises to be challenging. Right now the business challenges we face appear to be a combination of near-term supply constraints and timing issues. Importantly, none of them appear to be a function of softening demand. In fact, and as I'll talk about shortly, given our growing funnel, I believe the stage is set for sustainable multiyear growth. Given that the economic backdrop is more uncertain than it was earlier in the year, I've become more cautious with regards to our outlook and/or adjusting our financial targets for fiscal '22 as follows. Q4 fiscal 2022 net sales are expected to approximate $123 million, resulting in expected fiscal 2022 net sales to approximate $482 million. Q4 adjusted EBITDA is expected to approximate $11.5 million, resulting in 2022 EBITDA of approximately $38 million. This updated guidance reflects incremental research and development expenses and the removal of several identified and viable opportunities in both our Commercial Solutions and Government Solutions segments that we no longer expect to occur in Q4. Inflation remains a big concern. And in some cases, we are seeing component price increases from 10 to 20 times what we consider normal. We've been successful in some cases to work with our customers to pass along some of these increased costs, but we've had customers push back given their own challenges. The conflict in Ukraine continues to have significant repercussions for our business. We continue with our dialogue with the U.S. government, NATO allies, and the Ukrainian government with respect to a formalized purchase of new troposcatter technology systems for Ukraine. Given their priority for weapon system spending as opposed to communication spending right now, we continue to expect no meaningful bookings or sales for the rest of fiscal 2022. With regard to Russia, we are assuming no new sales for the foreseeable future. And like other companies, we are continuing to shift certain commercial software development and related support activities conducted in our Russian office to locations outside of the country. Our updated guidance reflects additional expenses of roughly $1.5 million for the quarter or $6 million on an annual basis associated with shifting these development resources. What we are doing at Comtech in the face of these challenges is remaining focused on execution, whether that's making the key investments in our products, people and facilities that reflect and amplify our long-term strategy, ensuring that on a day-to-day basis we are doing everything we can to accelerate sales, win business, ship products and protect our margins. While we continue to work to drive improvements on a day-to-day basis, my greatest optimism for our business is grounded in what we see as a long-term secular investment cycle in our end markets. As part of my assessment of the business, I've been personally speaking with our customers and industry experts in both our satellite and 911 public safety space. Those conversations have convinced me Comtech’s investments will pay off over a period that will last years. In the roughly five months since I took on the role of CEO, I've been making the changes necessary to drive day-to-day performance, while simultaneously ensuring Comtech is in the best possible position to capitalize on the long-term opportunities our markets present. As we execute on these strategic initiatives, I believe we are on a three-year to five-year journey where we will see meaningful progress along the way and creation of shareholder value. So far, I am incredibly proud of the work the entire Comtech team has done these past five months. We've delivered sequential quarters of growing revenue, gross margin and adjusted EBITDA. We've done this despite fast-changing markets and at Comtech that is self-transforming, starting with our people. A key Comtech strategic initiative is to build out leadership and expertise in every area of our business and that's exactly what we've been doing. I want to call out a few of the folks we brought on board. First, during the quarter, we welcomed Maria Hedden as our new Chief Operating Officer. Maria is a true operator and deeply experienced in overseeing multiple manufacturing and engineering organizations across the globe. Another key addition for us, particularly in the context of my commitment to improve shareholder engagement and communications, is Rob Samuels, who joins us as Vice President of IR and Corporate Communications. Rob is on the call today and will become more prominent and visible as time goes on. We also just announced that Tim Jenkins was appointed President of our Safety and Security Technology Product Group effective June 1. Tim has extensive experience in the 911 business and I look forward to his leadership and contributions to our business. Further, we strengthened the leadership team of our US-based satellite-focused business line with the appointment of Jon Opalski as a new divisional Chief Operating Officer and Bob Pescatore as General Manager of Digital Products. Finally, we recently welcomed Ken Peterman as a new independent director to our board. Ken's career spans over 40 years in the defense sector and he has unparalleled credentials across a wide array of markets, both in commercial and government satellite systems. These additions are part of a larger process that I announced at the beginning of the year to ensure we have the right team in place at Comtech. My goal is to ensure that our strategy, the organization, product portfolio, our board and talent deployment all come together. I believe with the right people and strategy, we are looking ahead to a bright future underpinned by investments in our company and strong partnerships with our best customers. For example, just a few weeks ago at the request of the U.S. Army, we conducted in-field demonstrations of our troposcatter equipment in Florida, for both U.S., NATO and allied government customers. The demonstration consisted of end-to-end data communication links showcasing our small, medium and large troposcatter terminals. From what I saw firsthand, no one in the world can do what we do. In the words of our potential customers, these demonstrations vastly exceeded expectations. And I believe there are long-term opportunities for our troposcatter solutions here. We've also been working closely with a number of our current and potential customers and making strategic R&D investments to create or enhance designs for new applications of Comtech gear, or to meet emerging requirements. Our customers know that Comtech is 100% committed to devoting the resources necessary to forge durable long-lasting partnerships. A good example of such a partnership is evident in the continued expansion of our role as a key vendor for a satellite network project undertaken by the Indonesian Ministry of Communications, providing critical communication coverage for unserved and underserved communities across Indonesia. It may be one of the world's largest satellite networks, almost all of it connected securely with Comtech equipment. We take this ongoing partnership to be a validation of our technology and strategic commitment to gain market share in the global VSAT systems and solution market. While 5G infrastructure receives a lot of attention, the fact is, there is a huge and unmet need around the world to provide cellular backhaul for legacy 4G LTE networks like the one in Indonesia. I believe we have the right people and products in place to be winners in this market. In our Next-Gen 911 public safety business, we were awarded a services contract during the quarter to provide our Solacom Guardian call management solution to the London, Ontario, Police Services. The London Police Service is our latest customer in the southern Ontario region, joining the Toronto Paramedic and Toronto Police Services, both of which also recently awarded contracts to Comtech. And as everyone knows, we are performing significant statewide work in Washington, Pennsylvania, Massachusetts, Arizona and South Carolina. Hopefully, it is clear that Comtech, despite the challenges we face, is performing well and demand for our solutions remains healthy and growing. Let me now turn the call over to Mike Bondi to discuss our financial performance in more detail and I will come back and offer some closing remarks.

Michael Bondi, CFO

Thanks Mike. For Q3 fiscal 2022, we recorded $122.1 million of consolidated net sales, of which $88.1 million were reported in our Commercial Solutions segment and $34 million were reported in our Government Solutions segment. Of the $122.1 million of consolidated net sales, 72% were to US-based customers, including 23% to the US government, with the remaining 28% to international customers. Compared to the year ago quarter, our consolidated Q3 fiscal 2022 net sales declined $17.3 million or 12.4%, a large majority of which related to lower revenue in our Government Solutions segment, given the impact of the withdrawal of US troops in Afghanistan last summer, and the impact of the more recent Russia-Ukraine military conflicts creating geopolitical uncertainty in Europe on previously anticipated orders. Gross margins were 38.2%, reflecting slight but sequential improvement from the 38.1% we achieved in the second quarter of fiscal 2022 and 38% we achieved in the third quarter of fiscal 2020. This improvement primarily related to a more favorable product mix during the most recent quarter, as well as a lower provision for warranty obligations, partially offset by cost increases in raw materials, electronic components and labor. Inflationary pressures are real and do not seem to be going away anytime soon. While difficult as it may be, we have initiated conversations with customers about price increases to reflect this and protect our margins. Our selling, general and administrative expenses of $27.6 million or 22.6% of sales reflect tight labor markets and our decision to continue to invest in both existing and new talent. SG&A costs during the most recent fiscal quarter also include $1.6 million of restructuring costs to move and streamline our operations. SG&A expenses in Q3 of fiscal 2021 were $27 million or 19.4% of sales. While we have been prudent, we have been investing in our future and we'll continue to do so. This includes making significant capital expenditures for two new high-volume technology facilities and building our cloud-based computer networks to support our previously announced NG-911 contract wins for the states of Pennsylvania, South Carolina and Arizona. Capital investments for these and other 2022 initiatives are expected to approximate $30 million with related cash outflows now expected to be approximately $25 million in fiscal 2022, of which, $14.4 million have been expended to date. On the R&D side, we continue to make long-term investments. R&D expense in Q3 fiscal 2022 was $14.3 million or 11.7% of sales. And as discussed above, included $900,000 of strategic emerging technology costs. R&D in Q3 fiscal 2021 was $13.1 million or 9.4% of sales. Operating loss in Q3 fiscal 2022 was $600,000 and reflects $1.6 million of restructuring costs, $900,000 of strategic emerging technology costs and $100,000 of incremental operating cost due to the lingering impact of COVID-19. As a result of these and other costs, our GAAP net loss attributable to common stockholders was $1.7 million and GAAP EPS was a loss of $0.06. Excluding dividends to preferred stockholders, our GAAP results would have been breakeven. Our GAAP results also reflect $5.3 million of amortization of intangibles, $2.5 million of depreciation expense, $1.1 million of amortization of stock-based compensation and other costs such as interest and taxes. Excluding former CEO transition payments and costs associated with our settled proxy contest, net cash provided by operating activities for the nine months of fiscal 2022 would have been $21.9 million. During Q3 fiscal 2022, adjusted EBITDA was $11.2 million, a 14.3% sequential increase from Q2 of fiscal 2022. As a percentage of net sales, adjusted EBITDA was 9.2%, an improvement from the 8.1% we achieved in Q2 of fiscal 2022. Our Q3 fiscal 2022 adjusted EBITDA does reflect a decrease from the 17.7% or 12.7% of net sales we achieved in Q3 of 2021. This decrease from the year ago period primarily reflects the impact of lower sales in our Government Solutions segment that were largely driven by significantly lower sales of global field support services and advanced VSAT products as a result of the US government's April 2021 decision to withdraw our troops from Afghanistan and other program changes. With that, I'll hand it back to Mike to wrap up the call.

Michael Porcelain, CEO

Thanks. Last quarter, I spoke about how things were changing at Comtech. And I hope that you, our shareholders can see that we are making important strides in building the company for the long-term, even as we hold our own in a challenging environment. If there is one thing to take away from this call, it is that investors should not conflate timing uncertainty with underlying demand dynamics. Knowledgeable long-term investors will know from experience that our business, particularly as it relates to government and government agency contracts, is difficult to time with precision as policy, procurement and approval processes, all combine to influence execution and delivery dates. The headwinds identified in our conference call here today and in our letter are clearly evident in daily newspaper headlines and have created timing issues with regard to booking certain orders, along with the set of familiar supply chain headaches that hopefully will be going away soon. But our headline is this: the demand side of the equation is healthy in both our next-generation 911 and satellite ground station businesses. Our pipelines remain strong, and we are excited about the opportunities before us. Our government backlog is up from last quarter, and overall demand for our satellite earth station products is solid, and our backlog for these products is beginning to grow. We have visibility into roughly $1.2 billion in revenue. Our investments in products, facilities and people are paying off and will continue to drive our performance as we move forward. To be clear, we're only just at the beginning. Despite these deeply uncertain times, we're confident in the importance and the value of the markets we serve and the way we are servicing them. Thank you for your time and attention. And now, let's take some questions.

Operator, Operator

And we'll first go to George Notter with Jefferies. Please go ahead.

George Notter, Analyst

Hi guys. Thanks very much. I guess maybe I wanted to start out asking about the full-year expectation. I think you took about $40 million out of the full-year expectation. And I know there's a lot of moving parts here, but could you just walk through your view on what pieces of revenue you thought were going to fall in Q4? And how they shifted? And give us an attribution of that delta on expectations?

Michael Bondi, CFO

Sure. Hi, George. This is Mike Bondi. When it came to the fourth quarter, let's start in the commercial solutions segment, we did have some 911 opportunities that we have been tracking for some time. We've been talking about Ohio as one example, where we were thinking the funding was going to get approved. And just based on where we think the vote is at this point in time, and as we said, we think that that's going to fall out in the fall of 2022. And there was going to be sizable bookings that we were expecting. Another smaller order was for another 911 application for a new customer in the Southwest and there that was another multimillion dollar type opportunity that, again, we've been tracking for some time, but just given the delay in their vote to get the project approved, we just thought it was prudent to push that into later in the quarter. And because of the timing, we're still expecting the award; we just don't think we'll be able to generate any revenues in this fourth quarter. So it is like two main themes in the 911 space. We also, as we disclosed, we had some price increases from vendors, which we've tried to pass on to our customers. We had one customer in the Asia region, in the country with the Philippines, and there we told them about the vendor price increases, and ultimately the vendor was unable to move forward at this point in time. So now we have to work on that opportunity to find a workable solution for that customer. Again, we still think it's a viable opportunity, but given the changing dynamics on the component pricing and this is in our government segment, we will have to be pushing that out into Q1 as well, just based on timing. So hopefully that gives you some additional color.

George Notter, Analyst

Got it. So in total, the $40 million or so comes, I guess, evenly from commercial solutions and the government side, is that fair?

Michael Bondi, CFO

Yeah. I would say more so George on the government side.

George Notter, Analyst

Got it. Okay. In the press release, I think you mentioned $10 million associated with this customer in the Philippines. So it seems like there are other pieces on the government side also?

Michael Bondi, CFO

Yeah, I think it's a bunch of various orders, I would say, tied to more changes in defense spending and ongoing budgetary priorities changing on the fly. Again, we still see some opportunities over the long term, but just given the timing of where things are we felt it was appropriate to move that out of the year.

George Notter, Analyst

Got it. And then as you look to next year, obviously, a quarter left in this fiscal year, but as you look at fiscal '23 in any sense for what the top line could look like, obviously you've got a bunch of projects that have been pushed into next year. Obviously, it's a pretty dynamic environment, but any early read on what you think next year could look like?

Michael Porcelain, CEO

Yeah, I think at this point in time, George, we haven't given any guidance yet, but I would say we're looking at Q4 shaping up similar to Q3. And if you just take Q4’s expectations and multiply that by four, I think that's sort of a starting point for how we're thinking about FY '23.

George Notter, Analyst

Got it. Okay. I'll pass it on. Thanks a lot guys.

Operator, Operator

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

Joe Gomes, Analyst

Good afternoon. Thanks for taking the questions Mike and Mike.

Michael Porcelain, CEO

Hi, Joe.

Joe Gomes, Analyst

So your first kind of wanted to talk a little bit on the satellite contract that's been hanging out there for a while, you guys really haven't said a whole lot about it, kind of beat around the bush. I mean, can you give us any clear insider update as to where we stand on that?

Michael Porcelain, CEO

We are very excited about our involvement in the LEO and MEO markets. As previously mentioned, we have non-disclosure agreements with several key customers, so we cannot discuss specific details. However, public documents, including our shareholder letter, contain relevant information. Most of the satellites under consideration will not be operational for over a year. Consequently, we do not anticipate any revenue from these activities in fiscal year 2022, and we expect only modest revenue in fiscal year 2023. Our belief is that as satellites are launched, ground station equipment will be needed, which will lead to tangible orders for us. We expect to see a noticeable uptick in our participation in 2024, but we do not foresee significant growth in 2023 compared to 2022. While we would welcome earlier developments, we are making progress and are actively collaborating with our customers.

Joe Gomes, Analyst

Okay, thanks for that. And in your prepared remarks, you talked about you're assessing product lines and reviewing M&A opportunities. I was wondering if you might give us a little more color or detail there as to what exactly you're looking for in existing product lines or where kind of broadly you'd be looking at M&A opportunities?

Michael Porcelain, CEO

Right now, the primary area we see potential is in public safety and cybersecurity. We are piloting a smart response software application with some significant customers, and the feedback has been very positive. This requires extensive API connections and information flows. As we consider what our public safety customers need, we see opportunities with technologies and possibly smaller companies that align well with our product line and can enhance our efforts. Cybersecurity is another area we are exploring. We have a substantial contract worth $125 million with the US government for cyber work over the next four to five years, and we currently have several million dollars' worth of contracts with various public service agencies in our 911 segment. Given the current global situation, we recognize that there are ongoing cyber threats, particularly aimed at US government contractors. The 911 public safety system is a critical part of our national infrastructure, and there is a clear demand from state and local municipalities for IT and cyber skills to defend against, monitor, and quickly recover from such attacks. Working with states like Massachusetts and Arizona has revealed more opportunities. For example, our contract with Arizona was the first signed by an existing customer for our cybersecurity solutions. We have a loyal customer base, and we are optimistic about increasing revenue from this area, though it will take time and require funding. If we can execute some smaller acquisitions in this field, it may expedite our growth in these markets.

Joe Gomes, Analyst

Okay, great. If I could sneak in one more here. So we know nine months, or roughly a year or so ago, you had a firm offer, $30 a share for Comtech, closed today at $12.32 and last I looked after markets, it was trading below $11. You have a stock buyback out there, can you just maybe give us your thoughts on does it make sense at this point to maybe start picking up some of the shares at these types of depressed levels, given the fact that you're so excited about the growth opportunities for the company?

Michael Porcelain, CEO

Well, what I would say first is the market as a whole has compressed pretty significantly. I mean, there are various stocks down 50%, 60%, if not more percent. And so, I think the market dynamics right now are pretty volatile and technology stocks, which of course, we participate in, are temporarily suppressed, and that's what I would say. I don't necessarily look at the day-to-day stock price as to what the intrinsic value is of the company at the end of the day. And I think we, as a company, would share that view. So in terms of the stock price today, is it achieved? Sure, I think it is. At the same time, we have a number of initiatives that we're funding, or capital expenditures that we’re funding, we have various commitments to our customers. And so, look, we've always used the phrase, we're going to be opportunistic as we look at a potential buyback. We haven't done anything today, but I would just tell you that, we continue to be of the view that we have a program, and we'll be opportunistic about when we decide to execute on that.

Joe Gomes, Analyst

Okay, great. Thanks for those insights. I'll pass it along.

Operator, Operator

And we will move next to Asiya Merchant with Citi. Please go ahead.

Asiya Merchant, Analyst

Great. Thanks for the opportunity. You guys provided some sort of initial color on fiscal '23 and how we should think about that. Maybe if you can also talk to me about how we should think about EBITDA margins from here? Should we expect some of these price discussions that you're having with your customers to be reflected in perhaps a little bit better margins here? Anything else you're doing to kind of improve the EBITDA margin profile and how we should think about the EBITDA margin profile in '23? And then just a couple of more on the '22, how should we think about cash flow expectations for this year? And then just on this emerging technology, something that you guys exclude from adjusted EBITDA, can you guys provide more color, like, what is that and why is that excluded from adjusted EBITDA? Thank you.

Michael Bondi, CFO

Hi, Asiya. This is Mike Bondi. I'll take the first question in terms of the EBITDA margin profile and also even our gross profit margin profile. I think we did show some sequential improvements over the last two quarters, but at the same time, we really are battling with increasing prices for labor and parts and just a sluggish supply chain. So I think overall when we look at 2023, I would say, just in the 10% range is probably for EBITDA margins, where we would end up at this point in time. And there is too much uncertainty as to next year to say we can do better than that right now, but certainly, we'll be working towards that. In terms of the cash flow expectations for this year, we did reevaluate where we are in the year; we spent $14.4 million to date on our CapEx plans of $30 million and just based on where we are in the year and timing, we're expecting the CapEx to be about $25 million. And then when we looked at operating cash flows for the year, while we're at breakeven as our GAAP number that does have the proxy solicitation costs included in that and also we have our former CEO transition costs included in that. And when you back those items out, we'd be roughly around $25 million to $30 million of positive operating cash flows.

Asiya Merchant, Analyst

Yeah, it was at strategic emerging technology. I think you mentioned you exclude that from your adjusted EBITDA. I was just kind of curious what that is and why is that excluded?

Michael Bondi, CFO

Sure. Okay. So as we announced about a year ago, we also had a similar charge of about $300,000. This particular quarter, as Mike was talking about our partnerships with our LEO customers and attacking the MEO market as well. We're working with our customers, we identified some highly technical risky type endeavors that we chose to do ourselves to show our partnership with the customers and to progress in our relationships. And so in this particular quarter, we incurred about $900,000 of those types of costs.

Michael Porcelain, CEO

And, I mean, I think Mike’s description of it was perfect. I think from our perspective, look, there are R&D costs, no doubt about it, right? And what we would emphasize is, today we don't have any revenues associated with these projects. These are things that we are doing, you could call it very much on a speculative basis for us. The LEO market and the MEO market is new, right? Our business historically has been in the GEO market and the high-speed throughput type satellite. So this is an area where I don't want to kind of say it as you're trying to make a learn how a fly flies, but we're trying to develop really cutting-edge technology where we don't have any markets. We have not really identified an end customer for the stuff that we are trying to develop. We have certain contracts, we know what our customer wants, so a lot of this is some of the trial and ballooning, and we feel it's appropriate to call it out because it's something we wouldn't do if we didn't believe in the long-term aspect of the market. And as of today, we don't have any revenues from it, so we think it's proper way to look at the company so people know what we're spending.

Asiya Merchant, Analyst

Okay, that's fair. Can you provide a timeframe for the backlog you have? Do you expect to clear this backlog in the next six months, 12 months, or so, considering the supply chain challenges? What’s the timeline associated with it?

Michael Porcelain, CEO

I think we've always said our backlog is probably more of an 18-month type of a situation, maybe even closer to two years. I think in one trend I would point out to you, our backlog here was slightly down from Q2, about $602 million in the quarter. Right now, we're doing a lot of work in the 911 stuff and we really haven't announced any substantive contract work. But, on one hand, our 911 backlog is sort of going down. But on the other hand, our bookings for our satellite earth station business and some of the other stuff like in our Government segment is actually pretty strong. So you're starting to see some of those trends that we're talking about into our backlog. And as our 911 customers start to come up for renewal, that'll add to the backlog. But if you just look at the $602 million, it's probably somewhere between an 18 month and 24 month sort of an average depending on which bucket it falls in.

Asiya Merchant, Analyst

Okay. Thank you.

Operator, Operator

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

Mick Latimore, Analyst

Yes, thanks. The communications business experienced solid sequential growth. Was this primarily due to the implementation of some of these 911 deals, or what contributed to this growth?

Michael Bondi, CFO

Hi, Mike. This is Mike Bondi. Yes, this quarter we did see an uptick in the commercial sales. We did see some of our satellite ground station product lines do well. And I think also keep in mind last quarter in Q2 we did have some plots that were hung up. And so, you did see some of that pop in Q3 and some of that will also be in Q4. But yes, you're right. You're observing an uptick in the commercial.

Mick Latimore, Analyst

And then these kind of one-time R&D investments, you said $900,000 this quarter, is that something that is going to be sporadic or should we think of that as a cost every quarter going forward?

Michael Porcelain, CEO

Yes, sporadic is the perfect word. It's something that, if we're speaking to our customer or assessing the market, we may have another pop here or there. As Mike mentioned, the last time we decided to make an initiative investment was almost a year ago for a couple of hundred thousand dollars. So I think sporadic is the right way to look at it.

Mick Latimore, Analyst

Okay, got it. And you talk about discussing with your customers, price adjustments given inflation. Are these discussions on contract renewals and new prospect discussions or are you doing that kind of mid-contract as well?

Michael Porcelain, CEO

No, we would love to go back and adjust current contracts to reflect that. However, if we have a fixed price contract with our customers, they expect us to honor it. If they request a change order or something different, we will definitely price it accordingly. There isn’t much room for negotiation. We will price it based on the current labor market and the cost of parts we are encountering. This is one of the challenges we and other companies are facing with inflation. Right now, people are trying to understand that inflation is really around 8%, 9%, or 10%, and they are pausing to see how they will proceed. Some companies may want to order now because they believe inflation will remain high, so it makes sense to get the materials before prices increase further. Conversely, some companies may need to redirect their spending towards fuel or labor instead of hardware. Inflation is indeed affecting us. To address your main question, we are negotiating prices where possible, and for anything new, we will reflect current market conditions.

Mick Latimore, Analyst

Yes, got it. And then with the rest of the U.S. government vertical, I mean, they passed their budget a few months ago. How is visibility into just kind of U.S. government projects for you guys?

Michael Porcelain, CEO

It's tough right now. I think for us that is the war in Ukraine and I think as you read in the headlines, the government is funded, they're having supplemental budgets, the DoD is shifting a lot of their current inventory to Ukraine. And obviously, that's resulting in the Army's budget and the DoD's budget to replace weapons that they may have redeployed to Ukraine, so as opposed to communications equipment. So I think from our perspective, visibility is tough. On the other hand, we have some large opportunities in the troposcatter work, and our view is on the long term that's going to happen. But right now it's difficult to see when we're going to get orders.

Mick Latimore, Analyst

Got it. And just last on 911, how many opportunities do you see in the pipeline for fiscal '23 in terms of new state deals?

Michael Porcelain, CEO

Well, I would say there are certainly the two opportunities that Mike had talked about that we were in Q4. I think that those we hope and will continue to expect that they will become 2023 opportunities. I think we have seen a pause in some of the larger procurements that are out there in the 911 space. And I think again, between inflation costs that the states are experiencing and the need to raise taxes, if you will, on their side to pay for other types of things. I think we are seeing a little bit of a lull in new next-generation 911 procurements. So I don't want to call out competitive stuff; there are a few things out there that we are bidding on. So it's not to say that there is none, but there's certainly nothing on the scale of, let's say, California was or Arizona was.

Mick Latimore, Analyst

Yes, perfect. Very good. Thanks.

Operator, Operator

And let's move next to Chris Quilty with Quilty Analytics. Please go ahead.

Chris Quilty, Analyst

Hi everyone. Thank you. I appreciate the shareholder letter and the additional time to read it, as I'm a slow reader. I have some housekeeping questions for Mike, the other Mike. You had significant capital expenditures this quarter, and while you provided an update on the full year, it seems the property, plant, and equipment didn't increase much sequentially. Was there a specific reason for this decrease?

Michael Porcelain, CEO

Nothing stands out, Chris.

Chris Quilty, Analyst

Okay. And also you had mentioned in your dialogue, the CEO transition costs. But as I look at the table for the adjusted EBITDA calculation, there's nothing that shows in this quarter on the adjusted EBITDA that was last quarter? Am I missing something there?

Michael Bondi, CFO

All of the CEO transition costs were expensed in full in the second quarter. So I think the total was about $13.6 million.

Michael Porcelain, CEO

Chris, you may be conflating the expense, which is Q2 versus the payment of it, which is really in the Q3 quarter.

Chris Quilty, Analyst

For the cash flow side of it. Okay. Got it.

Michael Porcelain, CEO

Yeah. Correct.

Chris Quilty, Analyst

All right. And also inventory levels understandably have been ticking up a bit here. Should we expect them to remain at a little bit of an elevated level on a go-forward basis?

Michael Bondi, CFO

Yes, Chris.

Chris Quilty, Analyst

Or is the current quarter sort of a good run rate or might we see them tick up a little bit?

Michael Porcelain, CEO

No. If we're able, Q4 inventory level is a good number moving forward, as Mike mentioned. I agree with that. However, we are still short on inventory to ship products. Our hope is to continue receiving parts, and we are starting to see some improvements in that area. As Mike stated, this was one reason why Q2 performed better in the commercial segment as we moved into Q3. We are beginning to receive parts more consistently. Nonetheless, we want to secure additional parts to ensure we can deliver to our customers. Overall, considering everything, I would say that Q4 is likely the right number to focus on.

Chris Quilty, Analyst

And commend you on the donation of the troposystems to Ukraine. But a question here, are there opportunities for FMS type funding for that equipment shipment in Ukraine? Are there any ongoing discussions? And I guess just more broadly, I think you mentioned in your letter that you're seeing broader interest, can you maybe add a little bit of substance or sort of sizing on how that opportunity is looking today versus perhaps where you were a year ago in terms of the pipeline?

Michael Porcelain, CEO

I think the funnel for us, Chris, has grown significantly. We've mentioned in the past, obviously, we have the $400 million plus contract or so for our troposcatter program with the Marines. We do think that that's going to continue to come. We do know that there's another company out there that's much larger than us that has a $600 million contract for troposcatter stuff with the Army. And as I put a nice big picture in the letter for something that I took with my iPhone, the Army attended a demonstration of our equipment at their request. So when I look at the opportunities, I would say, growing with the DoD as they see what's happening in the world and the need to have redundant communications and an ability to make sure that they can communicate in other modes other than satellite, and that's just with the DoD. You're also seeing NATO governments, not to point out a specific country, but it’s more than one country that attended our demo down there. And we're seeing that Comtech is being hardwired into some procurement of communications in certain overseas procurement. Is certain equipment compatible with it? So again, these systems take a long time. I've used a phrase in the past and the company has used a phrase, it's lumpy, very difficult to predict. Right now, we don't really have much in our backlog. We don't have much in our order flow and the way we're thinking about. And I think our view and our philosophy right now is, look, we could tell you the funnel is growing, but it's very difficult to tell you when we're going to get an order, and we would rather be in a position to tell you when we got the order rather than put it into our guidance or something like that and just miss it because of timing. So that's going to really be our philosophy on this. But all in all, the opportunities are definitively growing. And again, it also applies to Ukraine, and we continue to have conversations with them.

Chris Quilty, Analyst

Topic on Ukraine, I think you quantified in your letter the revenue exposure to Russia. Can you just clarify? I mean, is that primarily in the earth station business or does that spread across other segments?

Michael Porcelain, CEO

Most of it is in the satellite earth station business, but there was other equipment that we would provide to Russia, but not anymore.

Chris Quilty, Analyst

Great. And final question, early days yet, but any thoughts on the Elevate product line?

Michael Porcelain, CEO

I hate to use these words excitement; a lot of interest, but that's what we have. The Elevate product is designed to work with not only the existing GEO satellites, but the new LEO satellites and stuff like that. So it's part of R&D investments that we're making, but we do hope to announce some release dates. I'd like to say by the end of the calendar year, but our marketing guys might have better visibility as to when it's going to be a shippable product, but a lot of interest and we think it's going well.

Chris Quilty, Analyst

Thank you.

Operator, Operator

And we'll move next to Chris Sakai with Singular Research. Please go ahead.

Chris Sakai, Analyst

Hi, good afternoon. Just a question on, I guess, there was some $1.6 million spent in restructuring costs for SG&A. Just wondering is this going to lower SG&A in the next quarter or next year? How should we think about that?

Michael Bondi, CFO

Hi, Chris. Mike again. In terms of the restructuring costs there, for the most part, that's relating to our facility moves that we've had ongoing this year. And as we said in our filings, we do expect that to continue into the first part of 2023. So we do expect it to continue. I think that was one part of your question. As we get into the new facility, for example, in Chandler, Arizona, we would think that that would abate because we're going to have one facility as opposed to the multiple facilities that were ongoing. But yes, I think you'd also have to consider at the same time while that might go away, we also have inflationary pressures that we don't want to understate and labor costs and other things. So that's something that we're still working through to figure out for 2023. And so at that point, I would say, don't expect just a wholesale drop off of the $1.6 million.

Chris Sakai, Analyst

Thanks for that. I wanted to ask about your updated guidance. How much of this still anticipates the reservoir prolonging into the fourth quarter?

Michael Bondi, CFO

Yes. I think this is the view that we think it's going to be prolonged. It certainly has been to date and we would expect it to continue into the fourth quarter. And just with defense spending priority still literally being defined, that's why we adjusted our guidance for some of the awards that we had been tracking that we still think are viable. But just as Mike said, as weapons systems are getting priority over communication systems, we just felt it was prudent to push those out.

Chris Sakai, Analyst

Thank you for your questions and for your answers.

Michael Bondi, CFO

You're welcome, Chris.

Operator, Operator

And it does appear there are no further questions at this time.

Michael Porcelain, CEO

Hey, great. Well, we appreciate everybody's participation on this call. Thanks for your time and attention. And if anyone has any additional follow-up questions, feel free to reach out to Rob directly or Mike, and we'll be happy to answer them. Thanks very much and we look forward to speaking to you guys sometime in mid-September, most likely.

Operator, Operator

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