Comtech Telecommunications Corp. (CMTL) Earnings Call Transcript & Summary

[ It's Robert ]. So we're here with Michael Bondi, the CFO of Comtech Telecommunications; Michael Porcelain, the COO, will soon to be joining us. Comtech Telecommunications designs, develops, produces and markets, products, systems and services for communication solutions in the United States and internationally. And it operates in 2 segments: the Commercial Solutions and Government Solutions segments. Comtech announced solid Q4 '20 results. And then while this quarter's Q1 '21 guidance is a touch lighter, we are still encouraged by their strong order backlog, a resilient public safety business and exposure to a large growing end market. And so we maintain our buy rating, and we've got a target price of $22 per share on them. And so with that, I'd like to give the call to Michael Bondi to start the presentation.

Hello, everyone. Thank you for expressing interest in Comtech and for joining us here today on Singular Research's virtual investor meeting held on October 29. So thank you, Robert and [ Chris ] and the Singular team for organizing this meeting. For those that are new to Comtech, we have a July 31 fiscal year-end. So just 1 month ago, on September 29 actually, we released our earnings for the fourth quarter and fiscal year ended 2020. Also on October 31, just a few days from now, we'll be completing our first quarter of fiscal 2021. As a result, we will be presenting the updated investor deck from our last earnings call. Our statements here today will generally reflect information through the date of that presentation, and we will not be providing any updates to our targeted performance for Q1 for the fiscal year ending July 31, 2021. Next slide, please, Robert. Before I turn -- okay. Perfect. As a reminder, some of our statements made today during the virtual meeting may be forward-looking in nature. So we caution you to review the disclosures here on Slide 2. Next slide, please? Also regarding Slide 3, we would like to remind you that certain information in our presentation represents non-GAAP financial measures. We caution you to read through these disclosures as well, including the information presented in Appendix 2, which reconciles such financial information to the corresponding GAAP measures. Next slide, please. So now -- perfect. Perfect. Thank you, Robert. So now here's a brief overview of Comtech. Comtech operates in 2 segments: Commercial Solutions and Government Solutions. Within our Commercial Solutions segment, we have 2 main product lines. The first is called Satellite Ground Station Technologies. The second is referred to as Public Safety and Location Technologies. Satellite Ground Station Technologies is a product set that consists mainly of equipment that we sell to mobile network operators for satellite-based communications. As its name suggests all of our equipment, such as satellite earth station modems and amplifiers, are ground-based. That means we do not sell or supply equipment that gets incorporated into, say, an actual satellite, which is lost -- launched into the sky. In terms of our Public Safety and Location Technologies product line, this product set consists of providing 911 call routing and 911 call handling services, principally here in the United States as well as providing location-based technologies for use by mobile network operators around the world. So next, our Government Solutions segment consists of Mission-Critical Technologies and High-Performance Transmission Technologies. With respect to Mission-Critical Technologies, we are a key supplier to large governments, particularly the United States government and also large prime contractors for tactical satellite-based technology solutions, field support services and satellite component supply chain management. The Mission-Critical Technologies group is focused on ensuring that its customers are able to successfully carry out their missions, whatever they be, whether that be communicating in an austere environment on land or at sea, launching or tracking satellites or protecting the cybersecurity posture of their networks. And as for our High-Performance Transmission Technologies product line, here, we are a world leader in the design and supply of troposcatter equipment and a key supplier of radio frequency, also known as RF, solid-state high-power amplifier and switching technologies. Within these 4 areas of focus, in simple terms, when you have critical communications need, Comtech wants to be your go-to supplier. Comtech is known for its continuing investment and commitment to developing technologies. To that end, Comtech employs close to 400 engineers across the company. And we certainly pride ourselves on solving complex communication problems for our customers, whether they be, say, related to backhauling cellular traffic over long distances, upgrading 911 systems, providing 5G location-based services to operators or providing sophisticated amplifier equipment that covers a wide range of frequencies and/or power. Over the years, Comtech has generated profits and positive cash flows. We've paid 41 consecutive quarterly cash dividends. We also recently just announced a new $100 million share repurchase program, which we believe demonstrates our confidence in the underlying value of our stock and in the future. As I will discuss in some more detail later, we also have strong visibility into our future potential revenues with approximately $1.1 billion of combined funded and unfunded backlog as of July 31, 2020. So overall, we believe that our long-term fundamentals remain strong and that we are well positioned for growth in the future. Okay. Next slide, please, Robert. Actually, we could go to Slide 6. Move it on to Slide 7. Okay. So I figured this is a good starting point for those that are not familiar with the Comtech story, and even those that are familiar with Comtech, it's a good update. So here on Slide 7, this slide provides a brief history of Comtech. Our company was formed in 1967. And for, again, those who knew Comtech back in the day, I would point your focus more to the last 5 years' worth of Comtech's history since that really tells the story of what we do today. Back in the fiscal 2015 time frame, a few years after we lost the BFT recompete to a competitor in fiscal 2010, our consolidated revenues were in the low $300 million range and our adjusted EBITDA was in the low $50 million range. Around that time in fiscal 2014 and '15, the company underwent a strategic alternatives review process and determined based on our strong long-term fundamentals to remain a public company. We also determined that we needed to diversify our company some more so that we were not as heavily dependent on the U.S. Army for revenues. Such a decision ultimately led to our acquisition of TeleCommunications Systems, Inc., which we closed on in February of 2016. Okay. That acquisition immediately doubled the size of Comtech and brought us into some new but complementary markets, namely the 911 call routing business and location-based services business. It also immediately rebuilt our Government Solutions segment as TeleCommunication Systems, Inc. had been awarded some large defense-related contracts at that time. So since 2016, the company has increased in size, primarily through organic growth. However, we have recently acquired a few smaller companies, starting with a company called Solacom Technologies, Inc. in fiscal 2019; followed by a commercial 911 business, spun-off by General Dynamics; and more recently, in fiscal 2020, and CGC and NG-911, Inc. But by and large, since fiscal 2016, the growth that you will see on the next slide was mostly organic. And in summary, a good way to think about this transformation in Comtech business, as we say there in the headline, is that about 60% of Comtech's revenue streams in fiscal 2020 did not exist prior to fiscal 2016. And before moving on to the next slide, I would also like to highlight 2 of our more notable and larger contract wins in fiscal 2020. First, we won a $211 million contract to supply equipment, which is in support of the U.S. Marine Corps next-generation troposcatter system. And second and more recently, we won a statewide contract valued at up to $54 million to design, deploy and operate a Next Generation 901 services platform for the state of South Carolina. Okay. Robert, could we progress to the next slide? Perfect. Okay. Here on Slide 8, on the top, you can see Comtech's historical revenue since 2016. On the top line, prior to the impact of COVID-19 on fiscal '20, we grew at a CAGR of about 17.8%, and with respect to adjusted EBITDA, close to 25%. And as you could see on the chart on the bottom of the slide, our adjusted EBITDA margins historically range from 12% to 14%. In addition to the contributions from the smaller acquisitions I just mentioned, the growth here was also driven by some new product introductions. For example, about 2 years ago, we had announced a new product called Heights. We developed Heights in order to focus on capturing a new aspect of the satellite ground station market. Furthermore, we've been working really hard to build out our relationships with state and local governments in order to tap into the ongoing upgrades cycles for enhanced and Next Generation 911 systems. Now in terms of adjusted EBITDA margins, we often get asked how can we increase that percentage. Well, we say in response, we could easily stop investing in our R&D initiatives to increase our margins. However, we think that our consistent investment of about 8% to 10% of our revenues being poured back into R&D projects has helped us stay competitive. So while cutting R&D may help us in the short term, we don't think that would be good for us long term. And another item to highlight here on this slide on the right side in the bullets, I just wanted to call your attention to our cash flow generation. Our prudent financial management enabled us to generate over $50 million of operating cash flows in fiscal 2020 and flexibility to continue to invest in our business. Okay. Robert, next slide, please. Okay. Perfect. Okay. With respect to being positioned for growth, Slide 9 here highlights the key trends from which we expect to benefit over time. First, Comtech is well known for selling into the cellular satellite backhaul market. As locations around the world continue to migrate from 3G to 4G and 4G to 5G, we think such trend bodes well for Comtech since increased data transmission from wireless devices is expected to result in the need for more satellite backhaul. This would be good for Comtech since we offer a complete set of cellular backhaul capabilities and can provide customers with end-to-end solutions. Also, with more satellites being launched, such as low earth orbit and medium earth orbit satellites and very high-throughput satellites, we believe operators will have to either expand their ground station networks and/or upgrade their existing ground station equipment in order to communicate with these types of satellites. A similar trend exists in our military business. The U.S. government has announced its intent to upgrade and modernize its critical communications posture. As we have good and long-standing relationships with the Army and other military branches, we believe that we can really support the U.S. Army here and their long-term initiatives in this area. And on this point, we have made some contract announcements recently. And you can see from the types of orders that we receive that the U.S. government has maintained its commitment to rolling out modernized technologies. And overall, whether it's supplying the Army with critical communications equipment or supplying soldiers with training or other field services, we're there to support them in whatever their initiatives may be. So in summary, we expect that this trend will continue for many years. Now moving on to the third trend. The third trend here that we've highlighted on this slide relates to 911 call handling and 911 call routing services. We believe that the United States is still in the early stages of a multiyear upgrade cycle. State and local governments must upgrade existing 911 call routing and call handling systems to handle newer forms of communications from wireless devices. So whether it be text messaging, sending photos or sending videos to 911 first responders, we believe that 911 call routing and call handling services are becoming more critical for state and local governments. As we noted earlier, for example, with the state of South Carolina, we are capturing our fair share of the business and quickly becoming a market leader with respect to statewide deployments of enhanced and Next Generation 911 platforms, and we have some large opportunities in our pipeline. Next slide, please, Robert. Okay. Great. So Slide 10 shows an overview of our 2 operating segments, including their respective financial results for fiscal 2020. From this slide, you could see that our Commercial Solutions segment and our Government Solutions segment roughly account for about 50% each of our total revenues. For fiscal 2020, the Commercial Solutions segment was 57% of the total, which is up a few basis points from fiscal 2019. But over time, they're generally about 50% each. And here, you could also see the adjusted EBITDA margins for each segment. Given the nature of contracting with the U.S. government and most of our recurring software revenues being generated in the Commercial Solutions segment, our Commercial Solutions segment historically achieves higher adjusted EBITDA margins than our Government Solutions segment. On this slide here, too, we also provide some geography and customer type information for your reference. And as I mentioned earlier, you can see in the pie chart in the middle bottom of the slide, we have a well-diversified customer base. Okay. Next slide please, Robert. Okay. Slide 11 presents a synopsis of some of our recent acquisitions, starting with TeleCommunications Systems, Inc. back in fiscal 2016. This slide gives you a sense for the types of the acquisitions we've done over the past 5 or so years as well as their size. As you can see, we've been very busy trying to further grow Comtech's footprint and capabilities. Each of these acquisitions have been fully integrated into their respective segments. Okay. Next slide, please. Okay. Here on Slide 12, we have some detail on one pending acquisition of UHP. Our agreement to acquire UHP was signed back in November of 2019, and we believe that UHP will further expand our product offerings, particularly within the cellular satellite backhaul markets. UHP is known for its revolutionary TDMA technologies. Today, Comtech does not have a TDMA product set, given our roots in single channel per carrier modems. TDMA, when compared to single channel carrier modems, is at a different end of the technology spectrum. And we believe that with the addition of UHP, Comtech will be able to address a new but complementary satellite ground station market for Comtech. With respect to UHP we disclosed that we renegotiated the purchase price a few months back. Despite UHP press releasing record results for its fiscal year, which ended in April of 2020, we successfully worked with the sellers to lower the purchase price by approximately 24% from $50 million to $38 million and also changed the composition of acquisition consideration to mostly stock with about $5 million payable in cash. As we recently disclosed in our Form 10-K, the acquisition of UHP's sister company located in Moscow is pending regulatory approval in Russia. And we hope that we'll be able to receive approval and close on this acquisition by December 31, 2020. So that is where things generally stand with UHP. As material developments occur, we'll update our public disclosures. Okay. Next slide, please, Robert. Okay. Sometimes it's nice to see some product pictures to put some context around what exactly Satellite Ground Station Technologies manufacturers and delivers to customers as well as public safety. So here, we're giving you some product shots of our modems and amplifiers, along with some of the software-type services we provide for our 991 customers. Here Slide 13 shows, I guess, in more detail about our Satellite Ground Station and public safety product lines. I guess, I want to talk about, first, the single channel per carrier market. Here, single channel per carrier modems -- our single channel per carrier modems are known for their high quality of service and reliability. And as a result, we believe that we've historically captured about 60% of the market for single channel per carrier modems. Our modems have such a good reputation that even the U.S. government procures them from -- for their critical communications needs. And with respect to 911 services, here, we are basically doing 2 types of services, as I mentioned before. The first is taking a 911 call from a mobile wireless device and using our technologies, we are routing that call to a public safety answering point. We refer to this service as our 911 call routing business. We also have our enhanced and Next Generation 911 call handling business, which is addressing the ongoing upgrade of technologies at the state and local levels to be able to transmit and receive those newer forms of 911-related communications, namely those text messages, photos and videos. Also, we have advanced location-based technologies, which provide a trusted location of a mobile device, and when and where possible, we are incorporating that into our 911 services. When you look at this segment overall, again, while it might shift from period to period, Satellite Ground Station and Public Safety and Location Technologies also each account for about 50% of total segment revenues. Okay. Next slide, please, Robert. Okay. So Slide 14 shows some further detail about our Mission-Critical Technologies and High-Performance Transmission Technologies product sets. As I stated earlier, we are supplying U.S. Army with various forms of equipment to support their critical communications needs. If they want a flyaway kit with an antenna, say, a modem and an amplifier, we will procure and supply that for them. If a customer wants us to buy space components for them or build and maintain a ground station for them, we'll do that, too. We also have programs where we maintain some of the Army's equipment, for example, the SNAP terminal there in the middle on the top in the product pictures. And again, whatever the Army asks of us, we will support their needs. If they need us to go into the field with soldiers and sit side-by-side with them and become their communications expert, we will do that as well. From a historical revenue perspective, most of the revenue in this segment does come from sales of our Mission-Critical Technologies. Now on the bottom of the slide, you will see some of our High-Performance Transmission Technology products, which consist of our troposcatter, also known as over-the-horizon; radios and microwave systems; and also our solid-state power amplifiers. Within our over-the-horizon product set, we recently introduced a Comtech COMET, which is a picture that we have shown on this slide of what it looks like. It is a rapidly deployable, low-power, airline checkable, medium-range over-the-horizon microwave troposcatter terminal. The COMET is ideally suited for situations where high bandwidth backhaul communications are required, extending critical services into areas where there may be no communications infrastructure, for example, or the infrastructure has been destroyed. The COMET is the first of its kind, it's capable of being transported in carrying cases by individual personnel and can be set up in under 15 minutes. U.S. Special Forces have already begun procuring and deploying the COMET for high-reliability, mission-essential communications, and we are very excited about this new product. Next slide, please, Robert. Perfect, thank you. Okay. As I mentioned earlier, we have about $1 billion of visibility into our future potential revenues. On the left side of the slide, you will see our funded Commercial Solutions and Government Solutions segment backlog. In the middle of the slide, we are highlighting the unfunded portions of contracts with customers. And more specifically, the amounts in the middle column are where we have a signed contract in-house, but the customer has not yet actually funded it with an order. However, based on our knowledge of the programs and the initiatives of other customers, we feel confident that such orders will be placed in the future. So now on the right side of the slide, when you add it all up, it's over $1 billion of funded and unfunded backlog. And when you look at the timing of that future revenue, we generally view it as turning to revenue over the next 24 months or so, keeping in mind that a lot of our backlog in the Satellite Ground Station product line tends to be quicker turn orders. As we highlight here, this does not include the impact of any pending acquisitions. And overall, just to give you an example of, say, what would be considered an unfunded amount, that would be included in the middle column there. We recently announced a $54 billion (sic) [ $54 million ] contract with the state of South Carolina, of which $16 million was initially funded. So the remaining balance of that $54 million is reflected in the middle column. Okay. Next slide, please. Okay. Slide 16 here has a summary of our targeted guidance issued on our last earnings call in late September. Given where we are in Q1 of fiscal 2021, and as I mentioned at the onset of this presentation, we will not be commenting further at this point on our targeted guidance, I will say, however, that as we entered fiscal 2021, although things were still fluid, we reinstated guidance and our initial thinking was that we could do better in fiscal 2021 than we did in fiscal 2020. Next slide, please. So sort of a recap here. On this slide, we just wanted to, again, highlight we are a leading supplier of secure wireless communications solutions, for example, in our single channel per carrier modem business as well as in our 911 call routing and call handling business. We are committed to innovation and engineering and have a strong and talented workforce. We have a solid history of long-term capital return to stockholders and a deep management team with significant years of experience. And In summary, we believe we are well positioned for growth based on the long-term fundamentals of the markets in which we operate. That concludes the prepared portion of our presentation. Thank you.