Comtech Telecommunications Corp. Price & Performance (CMTL)

Actual results could differ materially from forward looking information. Any forward looking statements are qualified in their entirety by questionary statements contained in the company's SEC filings. [indiscernible] With that, I will turn it over to Ken. Ken?

Thank you, Maria, and good afternoon, everyone. I appreciate your taking the time to join us today. Comtech's last conference call was on January 13, 2025. Which was also my first day in the role as President and CEO of the company. I had joined the company shortly before that as an independent director on October 31, and then assumed the role of Executive Chairman on November 26. So I had a little bit of experience with the company when I shared my perspectives that day. A point I emphasized on that conference call as I have done consistently since then with all of Comtech's stakeholders, is that I believe earning trust is the most essential ingredient for success in business. I stated specifically that frankly, the Comtech organization has work to do to earn trust in light of its historically poor track record of financial performance and missed expectations. Our goal of all of our stakeholders and we intend to do that by being transparent holding ourselves accountable and delivering on our promises. On January 13, we were clear and direct. Comtech's recent financial performance was unacceptable. Further, we disclosed our expectation at that time as the company anticipates breaching financial covenants at the end of the quarter on January 31.

And this could have significant consequences for the company. In light of the company's challenges, I announced a comprehensive transformation plan. The key pillars of that transformation plan are: Number one, improving operational discipline. And reducing the cost structure. Number two, deporting the growth and development of successful, high margin business initiatives. Third, conducting a broad review of strategic alternatives Fourth, strengthening the company's capital structure. And fifth, promoting a corporate culture centered on taking pride in our transformation. Resulting in enhanced employee morale and productivity. The early evidence that this transformation plan is gaining traction and credibility is the series of transactions we announced last week to improve the company's capital structure. As anticipated, the company actually did breach the net leverage ratio and the fixed charge coverage ratio covenants as of January 31, by a substantial margin which puts the company in default. On the senior secured term loan the revolving line of credit, and the subordinated debt. These were problems that needed to be solved. Fortunately, we have developed strong relationships of trust and confidence, with the company's secured creditors as well as its preferred shareholders and subordinated debt holders. We demonstrated to each of them the merits of our transformation plan and the progress we are making in executing on that plan.

Consequently, they agreed to support the company in new transactions that not only cured the prior breaches, but improves the company's financial flexibility going forward. This included a new capital infusion of $40,000,000 in the form of subordinated debt the proceeds of which were used to prepay. A portion of the senior secured credit facility. The lenders agreed to waive the prepayment fees that would have been due in accordance with the terms of the credit agreements and agreed to grant waivers to our the breaches that already occurred for the quarter ended January 31 and agreed to suspend certain financial covenant testing till after the quarter ending 10/31/2025. I would like to emphasize that gaining the support of our lenders and creditors in these transactions was the result of demonstrating that each element of our transformation plan has merit. While you will see evidence of the progress of some of these initiatives, and the results discussed today, we do anticipate we will be showing even more demonstrable progress on each of the pillars of our transformation plan in the coming quarters. Before we discuss the specific business units and recent developments, I want to comment briefly on our previously disclosed process.

To broadly explore strategic alternatives. As an update, we have engaged Imperial Capital for the review of strategic alternatives for the terrestrial and wireless business and we have engaged T. D. Cowen for the review of strategic alternatives for the rest of the company including the satellite and space business. We will provide updates on these processes only if and when have something specific to share. Now I'll provide some comments on our business units. Our satellite and space business has underperformed in recent quarters and has been in need of a turnaround. Daniel Gaczynski was appointed President of this business on 11/19/2024 and he's doing a great job. Of addressing historic issues that have undermined performance. And is developing a new approach to optimize the business and drive future profitability and value. Some examples of this new approach include Number one, offering a refocused product portfolio that emphasizes differentiated higher margin offerings. Second, instituting clear lines of accountability resulting in more effective operational discipline. Third, implementing more disciplined approval policies purchasing and inventory management. Fourth, highlighting customer value proposition enabling improved pricing and terms. Fifth, adding strong product management capabilities to ensure alignment among engineering, product, quality and customer expectations. [indiscernible] eliminating slow moving and low margin SKUs.

And seventh, launching next generation products with validated customer demand. The positive impact of these actions are already bearing fruit. As starting to be reflected in the second quarter results. That Mike will describe shortly. As for the validation of our progress, on March 10, we announced that our customer, L3 Harris, awarded Comtech's sole source contracts. In excess of $26,000,000 for advanced next generation anti jam modems supporting the U. S. Army and the U. S. Air Force. Daniel will provide further details on how all of these actions are better positioning the satellite and space business going forward. Terrestrial and wireless business continues to perform well. And is poised for growth. Due to the planned launch of new cloud based emergency response products and increased interest from international carriers around our proven five gs location technologies. P and W generally performed in line with our expectations for this quarter while the reduced level of performance was primarily attributed to a one time implementation delay, in Q2 as well as to quarterly variations in deployment timing and sales cycles. We remain confident in the position of this business and strong backlog and continue to take steps to enhance its strategic potential.

Now before I turn the call over to Mike to go through the financials, I wanted to take a moment to talk about our corporate culture. The Comtech organization has had a challenging run over the past few years. I know it has been difficult and frustrating for all of our employees. But it is really gratifying to see how the corporate culture is starting to brighten as employees are increasingly taking pride in the positive trajectory toward a stronger and healthier healthier future for Comtech. I am proud to lead the Comtech organization and I hope every employee partner and stakeholder shares in my enthusiasm and embarking on the journey. For successful future for Comtech. Mike is going to review Comtech's finances now followed by Daniel and Jeff's discussion of the business segments they lead. I'll have some closing remarks then we'll open the call for questions. Mike? Thank you, Ken. Before getting into the detailed results, I would like to first summarize this past quarter for you. Overall, our GAAP results were significantly better sequentially than our first quarter of fiscal twenty twenty five. [indiscernible] While this reflects some meaningful operational improvements, it is primarily due to the fact that the first quarter included several large non cash charges and write downs, which did not repeat in this more recent quarter.

The T and W segment continues to perform well and our Satellite and Space Communications segment reported significantly improved results. On both its top and bottom lines. While we are encouraged by the results, we believe the transformation plan that Ken described will be key to achieving further improvements. Now let's turn to the key metrics for this past quarter. Consolidated net sales were $126,600,000 compared to $134,200,000 a year ago. And $115,800,000 in Q1 of fiscal twenty twenty five. Net sales in both segments will lower this past quarter relative to the prior year period. Compared to last year, net sales in our satellite and space segment during Q2 reflected lower net sales of our troposcata solutions, offset in part by higher net sales of our SATCOM solutions and satellite ground infrastructure solutions. As discussed in our prior earnings call, fiscal twenty twenty four within our TrocoScatter product line, our next generation troposcatter contracts with the U. S. Marine Corps and Army were in full swing with respect to procurement and manufacturing. Today, these contracts have significantly progressed allowing us to begin invoicing and collecting on the unbilled receivables that we had built up in fiscal twenty twenty four.

Collectively, these two programs accounted for approximately $11,000,000 of the quarter over quarter reduction in net sales. [indiscernible] During Q2 of last year, we also had a large sale of Tropo Gear to an international customer, which did not repeat this quarter, and which accounted for approximately $7,000,000 of the decrease in net sales. As for offsetting increases in net sales during the more recent quarter, as compared to last year, satellite and space experienced an uptick in equipment sales to the U. S. Army during the period. For example, under the VSAT III IDIQ contract, [indiscernible] well as from the delivery on an equipment order previously received under the U. S. Army GFSR contract when it was not under protest. [indiscernible] Net sales in the Satellite and Space segment were $73,700,000 in the second quarter a 25% sequential increase driven primarily by higher sales of Satcom solutions to The U. S. Importantly, our operational improvement initiatives have shown appreciable progress as reflected in our segment margins. Which also increased sequentially. Net sales in the T and W segment were $52,900,000 a decrease of 5% from the prior year a decrease of 7% from last quarter. [indiscernible] This is primarily due to the repositioning to sell our five gs and related location based solutions internationally [indiscernible] the timing of our performance on statewide NG911 and coal handling contracts.

Specifically, compared to last year, our T and W results reflect lower net sales of our location based solutions and NextGen nine one services, offset in part by higher sales of our call handling solutions. Consolidated net Long term contracts within our TNW segment in prior periods, which were not expected to repeat this quarter. Our consolidated book to bill ratio, a measure of defined as bookings divided by net sales, for the three months ended 01/31/2025, was 0.63 and was roughly the same ratio for each of our segments. Comtech's consolidated gross margins for the quarter were 26.7%, compared to 32.2% in the second quarter of fiscal twenty twenty four, Gross profit in the more recent quarter significantly improved from the 12.5% reported in the immediately preceding quarter. Due in part to an $11,400,000 non cash charge in the first quarter of fiscal twenty twenty five. [indiscernible] the S and S segment. Related to the write down of inventory. Consolidated operating loss was $10,300,000 in the second quarter compared to operating income of $3,000,000 in the prior year period. Operating loss in the more recent quarters significantly improved from the $129,200,000 operating loss reported in the immediately preceding quarter due in large part to a $79,600,000 non cash charge in the first quarter of fiscal twenty twenty five in the S and S segment related to the impairment of goodwill. [indiscernible] As explained in more detail and reconciled in our Form 10 Q for the quarter, we utilize a non GAAP measure that we refer to as adjusted EBITDA. [indiscernible] Consolidated adjusted EBITDA was $2,900,000 in the second quarter, compared to adjusted EBITDA of $15,100,000 in the prior year period. [indiscernible] Adjusted EBITDA in the more recent quarter significantly improved from the adjusted EBITDA loss of $19,400,000 in the immediately preceding quarter, due in large part to a $17,400,000 non cash charge in the first quarter of fiscal twenty twenty five the S and S segment related to fully reserving for an unbilled receivable. [indiscernible] Turning to the balance sheet, as Ken highlighted in his remarks, we amended our credit facility and subordinated credit facility to among other things waive all defaults specifically the net leverage ratio and fixed charge coverage ratio suspend testing of these covenants until 10/31/2025 We reduced the interest rate on the term loan by four seventy basis points on the and on the revolver loan 15 basis points.

Reduced the minimum quarterly average liquidity requirement for $20,000,000 to $17,500,000 allow for the new $40,000,000 capital infusion in the form of subordinated debt from existing holders subordinated debt. [indiscernible] Of the subordinated debt proceeds received, 27,300,000.0 and 9,100,000.0 respectively net of fees and closing costs, were immediately used to prepay without penalty a portion of the term loan and revolver loan outstanding under the credit facility with $3,200,000 of the revolver loan repayment representing a permanent reduction in commitment related to the revolver loan. Through the combination of reduced debt balances and lower interest rates, we anticipate saving approximately $5,000,000 in near term cash interest expense related to the credit facility. [indiscernible] As of 03/10/2025, our qualified cash and cash equivalents were $21,500,000 Total outstanding borrowings under the credit facility were $168,000,000 of which 23,400,000.0 was drawn on the revolver Total outstanding borrowings under the subordinated credit facility was $65,000,000 and available sources of liquidity approximated $27,400,000 as well as the remaining portion of the committed revolver. For our consolidated unbilled receivables, we were successful this past quarter in lowering such investments in working capital, decreasing them from $112,000,000 as of 10/31/2024 to $86,000,000 as of 01/31/2025. [indiscernible] With respect to cash flows during the three months ended 01/31/2025, we had roughly breakeven operating cash flows.

Cash flows during the more recent period were approximately $20,000,000 better than our first quarter of fiscal twenty twenty five. The operating cash flow for the quarter includes close to $6,000,000 in aggregate of cash payments for restructuring, costs including severance, CEO transition costs and proxy solicitation costs.

Now, let me turn the call over to Daniel. Daniel? Thanks, Mike. First, I want to underscore Ken's comments about organizational improvement. Simplifying the segment structure, a top priority. Our employees have embraced the clear lines of accountability that the new structure enables. There is a direct connection between the S and S segment's progress on margins and our operational improvements, 10 plus percent reduction of segment staff and product rationalization. Alongside these organizational changes, we've addressed policies and processes to ensure that purchasing and inventory management are well coordinated and subject to appropriate reviews. Our plan is having a positive effect. Regarding product rationalization, we are migrating customers to modern products and discontinuing products with negative or no gross margin. Those discontinued products represented less than 10% S and S revenue over the trailing twelve months The wind down of our steerable antenna business is also being finalized. A separate initiative underway in the S and S segment has been to adjust our go to market process. As a result, we have seen early success in negotiating more favorable contract terms leading to better management of working capital in the future as we cycle out older contracts from backlog.

We continue to monitor the ongoing stop work related to our next generation Troplo Scatter contract in support of the U. S. Marine Corps. And while we do not have any material updates relative to our previous disclosures and SEC filings, we anticipate learning more in the near future. In closing, our S and S segment delivered meaningful top and bottom line improvement in Q2. These improvements resulted directly from a shift in corporate culture accountability that has reinvigorated the organization. I've seen tremendous efforts by our employees to take ownership of their projects and be accountable for performance at a local level. These operational improvements benefit not only our financial performance, but our customer satisfaction and confidence. We recognize there is more to do and we'll continue to drive good decision making cost reduction and rationalization throughout the organization. I'll now turn it over to Jeff to discuss our Terrestrial and Wireless segment. Jeff? Thanks, Daniel.

Overall, our Trustron wireless performance has met our expectations for Q2. Given the public safety and carrier technologies, entail long sales cycles, large backlogs and multiyear contracts comparisons of our T and W bookings can fluctuate from quarter to quarter. As a reminder, KMW has three divisions: First, CLT. This division focuses on wireless carriers network solutions related to location, emergency notification, and messaging. SALT's five gs cloud based location services are really gaining traction with global wireless carriers.

Second, SST. This is our largest in terms of revenue. This serves as the core of next generation nine zero one networks. We currently support 11 states and multiple regions in The United States, with plans to expand to additional states and regions soon. Third CST or Solacom the fastest growing [indiscernible] serves local dispatch centers with hosted and local applications. For managing emergency responses. In our SST division, we were recently notified of a NextGen nine zero one related award. And in contract negotiations with a state in the Southeastern part of The United States and estimated to be worth north of 25,000,000 over five years. Such a broad network, of mission critical customers, we're developing a plan to leverage our nationwide scale to reduce significant network expenses by interconnecting various jurisdictions and offering new customers enhanced redundancy options. Through adjacent regions and data centers. Along with our development efforts, this focus is on bringing more core Next Gen N1 technologies in house reducing our reliance on third parties and improving our gross margins across existing and new customers. In our CLT division, we booked one of a series of anticipated purchase orders with Vodafone. Beginning in The United Kingdom.

We are currently negotiating the statement of work, which will likely expand beyond this initial region potentially adding 30 plus more with this global wireless carrier over time. This award directly relates to our new location based solutions developed for our major U. S. Carriers, which we have focused on selling internationally. [indiscernible] expect other U. K.-based wireless carrier orders as they work to meet regulatory regulatory requirements around location technologies. In Q2, also saw significant interest from major Canadian wireless carriers. Which we're hopeful will translate into orders booked into the future. Our CLT division also recently secured a unique application using our location based technologies to serve Polaris. For continued support of their motorcycles and off road vehicles. This award represents a five year contract valued at approximately $8,000,000 As for CST, Solacom, it continues to be our fastest growing segment. Our CST division is diligently developing our next generation secure cloud based nine eleven call handling platform. [indiscernible] which when launched is expected to grow our competitive position. Not only in North America, but also globally for emergency response. As for other updates in CST, the U. S. Navy support contract has been extended and an entire Eastern Canadian province has initiated a significant change order.

And our partner in Australia, Telstra, has awarded us a substantial technology refresh order. All of which we believe bodes well for our call handling business. With that, I'll turn it back to Ken for some final comments. Thank you, Jeff. I want to close with a brief summary. The performance in the second quarter of twenty twenty five reflects the initial impact of our transformation plan. To recap, the elements of our transformation plan are: number one, earning the trust of all key stakeholders with transparency accountability and delivering on our promises. Number two, improving operational discipline reducing the cost structure. Third, supporting the growth and development of successful, high margin business initiatives. Fourth, conducting a broad review of strategic alternatives Fifth, strengthening the capital structure. And finally, sixth, promoting a corporate culture that is centered on taking pride in our transformation resulting in enhanced employee morale and productivity. We are delighted in strengthening the capital structure with the recently announced capital infusion coupled with the amendments to the credit agreement and we do believe this is a validation of the trust and confidence our lenders and creditors have in the merits and early results of our transformation plan.

Operator, please open the call to questions.

Certainly. At this We will go first to Greg Burns with Sidoti and Company.

Good afternoon.

Can you just talk about maybe the progress you're making in terms of cost optimization in the satellite business? How far along are you in that process? Is it all reflected in this quarter's results or is there more to be gained in coming quarters?

I'm going to start Greg, and then I'll turn it over to Daniel for some more specifics. So it's a continuous process. So So we announced the transformation plan on January 13. Now there was some work that was taking place before that, to start reducing the cost structure. But this is an ongoing process. And we are it's not just about reducing Comtech, it's about being more efficient in how we operate. And being more targeted in the business that we choose to take on and what we choose not to take on. Historically, this company has taken on very low margin and frankly, in some cases, negative gross margin business. We need to be better at assessing what our cost is going into a job, pricing it appropriately and taking it on. So it's not just about reducing cost it's an element of it. It's about running the business more efficiently and targeting business opportunities where we can justify appropriate gross margins. Daniel, you want to add anything to that?

Absolutely. So I think a couple of points worth mentioning here. First, as Ken mentioned, this process is ongoing and something that we'll continue to thoughtfully evaluate I would say certainly, many of the cost reduction efforts that have already been deployed were accomplished during our second quarter. And so there's a partial benefit that's reflected there for some of those. But the product rationalization process and the effort to move into some higher margin areas are kind of a continuing ongoing effort We are in the process today still working through some of the committed backlog. On existing products and existing contracts. That we are have some additional time to perform under as well. Okay. Thanks. And then maybe in terms of looking forward and and targeting maybe some some higher margin business You announced the $26,000,000 order with L3 for A3M modems. Can you just maybe talk about some of these higher margin programs that you're that you've been doing development work for over the last maybe year or two are now potentially going into production this year? What should we think of looking forward in terms of opportunities for growth in some of these areas where you've been doing development work?

Again, I'll start and Daniel can add if he likes. We're not going to comment on gross margins of any particular job. I assume you can appreciate that. But the company's aggregate gross margins have been weighted down by in the incorporation of frankly inappropriate jobs. And we are going to be more selective. So when you see our gross margin going forward, We are hoping that it will improve partly as a result of improved product mix. We are deliberately not going to accept jobs going forward. As the company has done in the past that are very low, thin even negative gross margins. So that in and of itself is going to improve the mix. The other thing I'll add to that is we are going to do a better job of leveraging our differentiated and proprietary technologies and providing improved service to our customers that enable us to solve our customer problems better and where we can deserve better gross margins than what the company has charged for similar programs in the past but as we provide a better, more differentiated solution, we do deserve improved gross margins. Daniel, do you want to add to that?

Ken, I think I agree with those points. On A3M specifically, certainly, we're very pleased to see a program that we've worked through the development phase over the past several years beginning to transition into production contract awards, I think it reflects the continued level of confidence from both our end users within the U. S. DoD and other partners as well as with our direct customer in L3Harris we're continuing to focus on delivering differentiated capabilities that offer meaningful understandable customer value that allows us to capture meaningful margins. Okay.

And then just lastly, on the cash flow and you're working through some of your unbilled receivables. What do you think or what is your outlook for the cash flow in the second half of the year? Do you expect to be cash flow positive?

Projections, but Mike, maybe you can give them some color on that.

Yes. I was just going to say, we're probably not going to give any specific guidance on that, Greg. But in terms of our trajectory on the unbilled, we are working through as you can see, each quarter chipping away at the growth we had experienced last year. I think that coupled with our cost reduction initiatives a focus on being mindful of our CapEx requirements. We are certainly having a view that we're trying to improve our cash position with profitable business going forward. So our expectation is we'll continue to do better. But we still have some more work to do.

All right. Thank you.

We will go next to Griffin Boss with B. Riley Securities.

Hi, good afternoon. Thanks for taking my questions.

I'd like to drill down into some of the questions Greg just asked there with maybe a little bit more pointed question. I'm curious with the deliberate decision to not accept low margin bookings or business, which I appreciate. Is there any color you can provide in terms of what you believe could be a sustainable margin profile for space and satellite and TAW in general, not thinking into specific programs on a go forward basis. Assuming this S and S gets back to normal operations post restructuring that historically was maybe a 10% EBITDA business, T and W maybe 20%, just generalizing perhaps any more color on kind of a go forward basis with these new new bookings profile that you're targeting?

We're not giving guidance. So we do aim to improve the gross margins through better cost discipline, better product mix, and improved product positioning that enable us to justify better gross margins by delivering better value to our customers. We're not in a position to give you specific numbers on what that gross margin is. At this time. [indiscernible] just shifting gear related to the unfavorable ruling after what I believe was the fifth protest by the incumbent on GFSR. I appreciate this news occurred today, but is there just curious, is there anything Comtech can do to reprotess this yourselves? And even so, if there is something you could do related to GFSR, is that something that you even want to spend time on at this time given the low margin profile of that contract?

Good question. And we are As you know that we were alerted today of the GEO's decision we are going to consider our options in light of the their decision on the protest. There is room for us to respond But as you also observed, the the margin is very low there as well. So we are considering our options Daniel, do you want to provide any further color on that?

Ken, I think I agree with the summary.

It's relatively fresh news at this point. There are a number of options available to us that we're in the process of evaluating and assessing at this point.

Okay, fair enough. Thanks for that. And then maybe one more if I could just more broadly on T and W, maybe for Ken or for Jeff. Just curious if you had any commentary around the SEC release there kind of meeting agenda for their their meeting later in March and it really highlighted their commitment to ensure NG911 resilience accessibility. Just curious if there was anything on that front that maybe you wanted to comment on or anything in that that surprised you or improves your confidence in that part of the business going forward?

Jeff, do you want to take that question? Sure. Yes. Griffin, thank you for question. Yes, we were anticipating the FCC's agenda coming out. There's really two key things there that are exciting for us. One, there's a a focus on location accuracy. And since we are the key supplier to wireless carriers for location accuracy, It really helps our business and gives us a small opportunity there within the carriers themselves. They specifically call out Z AXESS, which is the floor someone's on when they dial emergency. So that's also something we are we do and offer to wireless carriers. But the second part to your point is they also talked about next gen [indiscernible] In the agenda. And it's kind of what I talked about in my prepared comments is as we interconnect the networks, adding additional resiliency to the network is something we're looking at doing and the FCC's just kind of enhancing that mandate and looking for vendors to comment on. So we will be preparing some replies and comments for them and some recommendations. Along that. But we're already kind of doing that and anticipated their move there. So but both were we thought were very favorable for our business at T and W. T and W. Great.

Thanks for that color, Jeff. And thanks to everyone taking my questions. Appreciate it.

It appears that we have no further questions at this time. I will turn the the program back over to Mr. Ken Traub for any additional or closing remarks.

Thank you, operator. For those of you who are attending the SaaS Show in DC this week, we hope you find a chance to stop by our booth and meet some of the Comtech team members. We really look forward to speaking with you all on our next earnings call for fiscal Q3. Thank you all very much. And have a good evening.

Thank you. This concludes today's program. Thank you for your participation. May disconnect at any time.