Comtech Telecommunications Corp.

Ladies and gentlemen, thank you for standing by. Welcome to ComTech Telecommunications Corp third quarter fiscal 2021 earnings conference call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. At that time, if you have a question, you will need to press the star and one on your push button phone. As a reminder, this conference is being recorded Tuesday, June 8th, 2021. I would now like to turn the conference over to Mr. Jason DiLorenzo of ComTech Telecommunications. Please go ahead, sir.

Thank you, and good afternoon. Welcome to the ComTech Telecommunications Conference call for the third quarter of fiscal year 2021. With us on the call today are Fred Kornberg, Chairman of the Board and Chief Executive Officer of ComTech, Michael DePorcelin, President and Chief Operating Officer, and Michael Bondi, Chief Financial Officer. Before we proceed, I need to 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. I am pleased now to introduce the Chairman and Chief Executive Officer of Comtech, Fred Kornberg. Fred?

Thank you, Jason. Good afternoon, everyone, and thank you for joining us on this call. Today, we will be discussing the results for our third quarter of fiscal 2021. and our outlook for the full fiscal year. Let me just start this call by saying what I hope will be last words about COVID-19. As you would expect from the news headlines around the world, COVID-19, while clearly receding in the United States, is still a challenge for certain international countries. Normal operations have not really yet resumed, and international business travel is still almost impossible. Nevertheless, as you see from our announcement this afternoon, our operating performance of the third quarter of fiscal 2021 was very solid. Our third quarter net sales were 139.4 million, with adjusted EBITDA of 17.7 million. We look to a strong fiscal 2021, and we now estimate that fiscal 2021 consolidated net sales will be within a range of $580 million to $590 million. Our efforts to streamline our operations are really paying off, and we continue to target adjusted EBITDA in the range of $74 to $76 million. Based on our strong pipeline and year-to-year date business momentum, we anticipate achieving a book-to-bill ratio for fiscal 2021 in excess of 1.0. With positive signs of a post-pandemic recovery continuing, overall demand remains strong and we have recently secured important contract awards and we're excited about our future. All in all, we continue to weather the COVID storm and we continue to see the clouds lifting. Now, let me turn the call over to Michael Bondi, our CFO, who will provide additional commentary about the third quarter financial performance and our business outlook. After that, Michael Porcelain, our president and COO, will provide an update on our total business. Then I will come back before opening up the line of questions and answers to Michael.

Thank you, Fred, and good afternoon, everyone. As Fred mentioned, our net sales were $139.4 million in Q3, which is higher than what we achieved in last year's Q3. Of the $139.4 million of net sales, 79.8% were to the U.S.-based customers, with 20.2% to international customers. Bookings for the third quarter were $115.9 million, and our consolidated book-to-bill ratio was 0.83. We finished the quarter with backlog of $636.5 million. And when you factor in the total unfunded value of certain multi-year contracts that have been awarded to us, but which are not yet in our backlog, we have visibility into approximately $1.1 billion of potential future revenue. Our gross profit percentage in Q3 of fiscal 2021 was 38% as compared to the 39.2% achieved in the third quarter of 2020. The period over period change in our gross profit percentage reflects changes in overall product mix and significant increases in costs due to production delays, minor supply chain disruptions, lower levels of factory utilization, and higher logistics and operational costs resulting from the COVID-19 pandemic. Q3 of fiscal 2021 also reflects a $2 million benefit from the recovery of historical excise tax paid. Based on our expected level and mix of net sales for the remainder of fiscal 2021, we anticipate a consolidated gross margin percentage approximating 36%. SG&A for Q3 of fiscal 2021 was $27 million or 19.4% of consolidated net sales as compared to $32.3 million or 23.9% in Q3 of fiscal 2020. In Q3 fiscal 2021, we incurred $600,000 of restructuring costs related to the shifting of production of many of our key satellite earth station products from our existing Tempe, Arizona locations to a new 146,000 square foot facility in Chandler, Arizona. We expect about another million dollars of such cost in Q4. Turning to R&D, we spent $13.1 million in the third quarter, or 9.4% of net sales. Total stock-based compensation for the third quarter was $1.2 million, and amortization of intangibles was $5.3 million. We continue to expect stock-based compensation to approximate $11 million to $12 million for FY 2021. Our consolidated GAAP operating income was $2.4 million and reflects $5.3 million of acquisition plan expenses, primarily due to the April 2021 settlement of an acquisition-related litigation and our completed acquisition of UHP. Our adjusted EBITDA was $17.7 million or 12.7% of consolidated net sales for the third quarter of fiscal 2021. Adjusted EBITDA in our commercial solution segment was $15.9 million or 17.4% of related sales. And in our government solution segment, it was $3 million or 6.3% of related net sales. For fiscal 2021, using the midpoint of our consolidated net sales and adjusted EBITDA targets, our adjusted EBITDA margin approximates 13%. Now let me talk about interest, taxes, EPS cash flows, and our balance sheet. Interest expense was $1.5 million in the third quarter, and we expect to finish the year with total interest expense of approximately $7 million. Our annual estimated effective tax rate, excluding discrete tax items, is expected to approximate 11.5%. On the bottom line, our GAAP net income in the third quarter of fiscal 2021 was $800,000, or 3 cents per diluted share. Excluding acquisition plan expenses, restructuring costs, COVID-19-related costs, strategic emerging technology costs, and a net discrete tax expense, non-GAAP net income was $6.8 million, or 26 cents per share. Cash generated by operating activities was $6.8 million for the third quarter, and we expect even stronger operating cash inflows for our fourth quarter of fiscal 2021. Our balance sheet as of April 30th, 2021, includes $39.2 million of cash and cash equivalents, and our total debt outstanding was $215 million. Our current secured leverage ratio, as defined in our credit facility, was 2.78 times. Now, I will hand it over to Michael Porcelain. Mike?

Thank you, and good afternoon, everyone. We are pleased with our Q3 performance, especially given that during the third quarter we continue to operate our business in what remains a difficult operating environment. The good news is that our employees have begun limited travel, mostly in the United States, and have started to return to the office. In-person demonstrations of our solutions are picking up and being scheduled, although such activity in the international market remains limited. As demand slowly picks up across our industry, we are seeing higher logistics and operational costs. Supply chain issues are becoming more prevalent as lead times for certain parts has significantly increased. That all said, these are good problems to have compared to the health issues of COVID. Now let me talk more about our business results. In our commercial solutions segment, net sales were 91.4 million this quarter. We received orders aggregating 75.1 million, resulting in a book-to-bill ratio of 0.82 for this segment. We continue to see positive momentum in our public safety and location technology product lines. Net sales during the quarter for this product line were higher than last year's comparable quarter and reflect the benefit of incremental sales of our next generation 911 and location-based solutions, offset in part by the absence of 911 wireless call routing sales to AT&T. As noted on our last conference call, we were awarded a statewide contract valued up to $175.1 million to design, deploy, and operate next-generation 911 services for the Commonwealth of Pennsylvania. This contract was initially funded at $137.4 million, $111 million of which was booked during our second quarter. Work on this contract has just begun and is expected to ramp up next year. In addition, as discussed in our last conference call, this contract was awarded to us shortly after we announced the receipt of a $54 million contract to design, deploy, and operate next-generation 911 services for the state of South Carolina. We are really pleased with what we are seeing to date in South Carolina. In addition to this current contract starting performance, we are seeing signs from the customer that additional work may be on the way. We believe they have strong interest in our Solicom call handling solution, and we hope to make some announcements here pretty soon. Obviously, the Pennsylvania and South Carolina contracts are important, but don't let them overshadow other important contract awards we received in Q3, including a $9.8 million contract with a major Tier 1 mobile network operator for a broad suite of new capabilities and services centered around virtualized applications and 5G products. We received orders exceeding $3.8 million with a Tier 1 mobile network operator for additional capabilities related to our virtual mobility location center platform. A $1.6 million next-generation 911 services contract to provide Solicom's Guardian call management solution to the Toronto Paramedic Services, the largest municipal paramedic service in Canada. We also received a $1.3 million contract renewal with a Tier 1 mobile network operator to support messaging services. And we received our first international 5G services contract with a leading Tier 1 mobile network operator in Australia. We continue to build out various situational awareness data products for our 911 customers, and we are working on a number of exciting initiatives in the public safety cybersecurity area. All I can say is continue to stay tuned. Now I will discuss our satellite ground station product line, where things do remain challenging but are looking better. Net sales in this product line during Q3 were higher than the comparable three months of fiscal 2020. We benefited this quarter from a number of awards, including a contract valued at more than $3 million for V-band traveling wave tube amplifiers, or TWTAs, to support a new high-speed satellite network. An order valued at more than $2 million for state-of-the-art 500-watt KA-band high-power amplifiers supporting a leading high-throughput satellite customer. We received another $2 million order for rugged KA-band high-power TWTAs for a U.S. military communications system, and an order exceeding $1 million for our Falcon 50KA solid-state power amplifiers for an in-flight connectivity application. and an order exceeding a million for X-band solid-state power amplifiers and block-up converters for a transportable military satellite communication system. In addition, demand for our Heights technology solutions is strong, and we recently received a multimillion-dollar contract award from an international customer. Let me also talk about our acquisition of UHP Networks, which closed during this quarter and which is receiving accolades across our industry. As we have said before, we believe UHP's developed revolutionary technology and it is transforming the growing very small aperture terminal market or VSAT market. With end market for high-speed satellite-based networks significantly growing, we are excited to extend our product offerings to include their TDMA satellite modems. The integration of UHP into our satellite ground station product line and our commercial solution segment is well underway. Now that UHP has full access to our direct and indirect distribution methods, we believe that UHP sales will significantly increase from current levels over the next few years. We are meeting with our customers, discussing with them the benefits of our height solution and our UHP solutions and how our roadmaps will play out. Based on the feedback we have received to date, we have no doubt we are headed in the right direction. Overall, despite navigating 12 months of COVID in fiscal 2021, we remain optimistic that net sales in our commercial solutions segment will be slightly higher than the amount we achieved in fiscal 2020. Now let me turn to our government solutions segment where sales were $48 million as compared to $56.8 million in Q3 of last year. Bookings in our government solution segment came in at $40.7 million with a book-to-bill ratio of 0.85. As everyone knows, period-to-period fluctuations in bookings are normal for this segment. The most recent quarter primarily reflects lower sales of global field support services and other programs with the U.S. Army, offset in part by higher sales of our solid-state high-power amplifiers and also our triple-E, or high-reliability, electronic and electromechanical space components. Last quarter, we announced that we received initial orders related to a new multi-year contract valued up to $235.6 million. $235.7 million to provide ongoing system refurbishment, sustainment services, and baseband equipment to the U.S. Army in support of its secret internet protocol router and non-secure internet protocol router access point or SNAP family of ground satellite terminals. In the third quarter, we received an additional $9.2 million of orders under this contract. Other notable awards given to us during the third quarter include the following. A $6.5 million of funding from the U.S. government for a joint cyber analysis course training solutions. $6.2 million of funding to support the U.S. Army's Project Management Mission Command Blue Force Tracking 1 program. A $3 million order from an overseas agency for the maintenance of downrange tracking stations. We received a $2 million order to provide the U.S. Marine Corps with rugged baseband command and control modules for program manager light armored vehicles. And we received a $1.6 million contract for RF microwave solid state amplifiers from a major domestic prime contractor. Since we last spoke to you, we are seeing changes with respect to short-term prospects for our government solution segment. Specifically, in April 21, the U.S. government announced that it intended to fully withdraw troops from Afghanistan by September 2021. This accelerated plan will result in lower revenues than previously anticipated for certain programs we participate in. In addition, the U.S. presidential administration released its fiscal 22 budget request. This request includes less money for certain legacy programs, but additional funding for modernization and new programs that we will participate on. All in all, we believe these budget changes will benefit us over the longer term, but it will result in our government solution segment revenues at a significantly lower amount than we achieved in fiscal 2020. We are definitively seeing strong interest across the board for our recently introduced ComTech terminals and other new technology solutions that we are actively discussing with our customers. During the third quarter, we conducted successful in-field demonstrations, including our industry-leading troposcatter solution that we are currently providing to the U.S. Marines. Other military commands, including the U.S. Army, are pleased with what they see and have shown strong interest. In addition, as we enter into our fourth quarter in support of the U.S. Army's network modernization efforts, we have been working to respond to a new proposal request related to the development of the Mounted Mission Command Transport, or MMCT, terminal, which is the successor to the U.S. Army's Blue Force Tracking II program. We estimate that there are over 120,000 legacy BFT terminals across the Army and Joint Services, and an ultimate production contract to us could be worth hundreds of millions of dollars. Over the years, we have been providing BFT-1 sustainment services to the U.S. Army, along with other development and engineering-type services, and we believe that we are well-positioned to meaningfully participate on this upcoming program. In addition to the good prospects with respect to this new MMCT program, we are excited about opportunities with a new strategic partner. As announced earlier today, we entered into a strategic technology partnership with Kymeta to broaden its network of antenna terminals through interoperability with our SLM5650B program. The 56B is a U.S. Army Forces Strategic Command Wideband Global SATCOM modem that is used for critical commercial backhaul as well as government and military applications. It's fully compliant with key military standards and complies with and supports FIPS 142 certified encryption. This CHIMETA partnership expands our solution set and capabilities offered to our government and military user base and will benefit both our government and commercial solution segment. Now, before turning it over to Fred, I do want to share with you some good news with respect to emerging satellite opportunities that so many of you have asked us about. As disclosed in our Form 10-Q during the third quarter, we incurred $300,000 of strategic emerging technology costs for next-generation satellite technology, which was used to advance our solution offerings to be used on new broadband satellite constellations. As many of you know, there is widespread industry discussion of next-generation satellite technologies that is likely to be used in the thousands of new LEO, MEO, and even GEO satellites expected to be launched over the next few years. These new satellite constellations, at their core, are being developed and deployed to provide high-quality, high-speed broadband internet access to over 3 billion people across the world and are intended to meet demand for unprecedented data transmission from smart devices. As stated in a variety of industry publications, the investment cycle is well underway, and we believe attention is now turning to equipment that we provide, including ground station equipment, XY antennas, modems, and amplifiers. In order to meet this unique and emerging need, certain technical capabilities need to be expanded, and efforts must be incurred to decrease size, weight, and complexity. This market is new for us, and so during the quarter, we made an initial small investment to jettison our business plan. Although this internal R&D investment cost was small, we do continue to evaluate this new market in relation to our long-term business strategies, and we may incur additional costs over the next 12 months. With that all said, I'm very excited to report at the start of our fourth quarter, we entered into a multi-year agreement enabling a customer to potentially order hundreds of millions of dollars of our next generation satellite earth station technology. Shortly after signing this agreement, we received our first order valued at more than $13 million to make certain customizations on behalf of this customer. Work on these efforts has commenced immediately. I do hope that you understand that due to competitive reasons and non-disclosure agreements, we can't say much more about it. This is a very strategic win for us, and I want to extend my thanks for all the hard work of our team members that made this happen. We expect to fully perform in this initial development work and are very optimistic that future orders will come our way. Now I will turn it back to Fred, who will provide some closing remarks. Fred?

Thank you, Mike. As I mentioned previously, I am very pleased with how our business is performing during this epidemic. As we enter our fourth quarter, I believe we are on track for a strong finish to fiscal 2021. I'm also very excited about our prospects going into fiscal 2022, including our strengthening positions on the large developing near-term opportunities that Mike just mentioned. Even our business outlook, because of our business outlook, our board of directors has declared a dividend of 10 cents per common share payable on August 20th, 2021 to shareholders of record at the close of business on July 21, 2021. We continue to believe that our dividend program is still a great way to return some capital to our shareholders as we look to grow our business. Now, I would like to proceed to the question and answer part of our conference. Operator?

At this time, if you would like to ask a question, please press the star and one on your . You may remove yourself from the queue at any time by pressing the pound key. Once again, that is star and one to ask a question. We will pause for a moment to allow questions to queue. And it looks like we have a question from Joe Gomez from Noble Capital. Your line is open. Please go ahead.

Thank you. Good afternoon. Hi, Joe. So I know you just mentioned you can't talk a whole lot about the new multi-year agreement, but you did mention you got a first order of $13 million. I was wondering if you might be able to give us a little color on, you know, How long does that last? You know, what's the timing for that $13 million? What kind of would be the next steps in the process once that contract, the $13 million, is completed?

Sure. Well, you know, as we discussed in our 10Q, you know, we are making customizations to our technology. So, I mean, obviously, it's a development contract that we first got. And, you know, as we say, and you're right, I can't say much more, but we think that there's potentially hundreds of millions of dollars that, you know, once that customization is done, that's what we expect.

Okay, thanks on that. And you kind of went over the Pennsylvania and the South Carolina NG 911 opportunities, but I believe there was another one out there that you were chasing. Maybe you could kind of give us a little more color on what else is out there right now that, you know, you're looking for that might be, you know, in the South Carolina and or, you know, Pennsylvania type of size.

Yeah, I mean, there's really – I'd say at this point there's probably two contracts, and we'll probably name them since the information out there is pretty public at this point. So, you know, we're waiting for Ohio to fund, you know, what's probably a triple million-dollar contract. So, you know, north of $100-some-odd million is out there, and we're just sort of waiting on the funding for that particular contract. And we're really waiting on an award announcement, which is more competitive in the state of Arizona. And, you know, those are very near-term opportunities. And, you know, that's pretty much out there for public consumption.

Okay, thanks. And then one last one for me, and I'll get back in queue. You know, bookings in both of the business segments were, you know, 0.8, 0.85%. You mentioned in the government solutions that it's normal to see some fluctuations there. And the commercial side, anything out of the ordinary there, or is that just, again, some more of just your normal fluctuations in business for the quarter there?

Yeah, I mean, obviously in Q2, you know, it's lower than Q2 because we had that large, you know, Pennsylvania booking. But our Q3 bookings was actually higher than what we achieved in Q1 for the commercial segment. So, you know, I would just say it's normal fluctuations up and down. And obviously the international market, you know, is difficult right now. And so, you know, those will eventually come at some point.

Great. Thanks. I'll get back to you.

Our next question comes from Chris Quillity from Quillity Analytics. Your line is open. Please go ahead.

Thanks. Mike, I want to just follow up on that constellation order. I don't know whether you can provide the detail, but are you providing a point solution, i.e., amplifiers or baseband, or are you providing a comprehensive solution for this customer that would range from the gateway to the end-user terminals?

Well, the best answer I'll give you is that we're going to ride the wave of what's happening in the industry, and I can only refer to it as next-generation satellite technology. But I'm not going to get into the specific products that we're putting forth.

Okay. No, you're not building the satellites, at least. All right. I agree with you on that one. I got something from you. Shifting over real quick to the Heights product line, you said you're seeing positive momentum. Just general business trends that you're seeing there in terms of end markets or domestic and international coming back. I know you've got some like oil and gas that tend to be pretty cyclical. Video has moved in cycles. Any color you can give us?

You know, not anything that's different than the last time. I mean, we're a big believer that data transmission and bandwidth needs are going to increase. And, you know, certainly you saw an acceleration of that during the COVID pandemic. The award of heights by this international customer, again, multimillion dollars. I mean, it was incredible. It's a very prominent award in that part of the world, and we actually think that that will lead to additional height sales in there. At the same time, our UHP network solutions, best in breed by far. And obviously, you know that we've had some in-depth experience with satellite companies over the last two years. And UHP is well positioned. And given the growth that's happening with 4G and 5G around the world with mobile network operators, we think UHP and our height solutions are very uniquely positioned. Great.

And shifting over to the government segment of the business, if I read the language correctly, it sounded like there was a significant Afghanistan component to the guide down on the guidance for the government segment. Can you size that for us? Is that stuff that just goes away because troops are not deployed, or does it get reallocated somewhere else and show up later? Sure.

It's more what you said in the earlier part of your comment. You know, look, most, if not all, of the change was related to the withdrawal of troops with Afghanistan. And, you know, I think we've always said publicly if you have a few troops in Afghanistan or in a particular area, you need a communication system. Here, the plan is to fully withdraw troops. So, I mean, you're talking about a dismantling of an infrastructure that was out there. So we don't think that that's coming back in, both to our thinking camp for, you know, unless there's another, you know, ground action or something unexpected that may happen. So, you know, those program changes were announced by the U.S. presidential administration yesterday. during the quarter, so we don't see that revenue coming back. At the same time, we're working through the budget, and, you know, the best example, you know, that I can point to is, look, there were certainly legacy programs that this administration is going to not fund, but at the same time, they're funding next-generation systems, such as the Blue Force Tracking Successor Program. So, I mean, you could see that. I mean, the white paper was out there. We're responding to this finally after so many years. You know, I've told people on the phone, don't even ask me about Blue Force Tracking 3. When I have something to say, then you'll know I'm talking about it because it's real. And, you know, we are responding. We have some pretty good teaming agreements within the work. I'd like to thank that the government will get the band back together, and BFT1 was an extremely successful program. We sold $1.5 billion worth of equipment under the BFT1 program. I'll take half of that, you know, in this next generation cycle. So we're very optimistic that the successor program to the BFT2 program, two and a half program, I guess you could call it, will happen. And, you know, we're going to put forth our best foot forward to the government, and we'll see what happens. But that's an example of where, you know, outside of the short-term noise, the long-term prospects look dynamite.

Great. So technically, I'm not asking a question about it because you brought it up, but is there a determination at this point in terms of frequency band that that system might go? So much of the SATCOM capacity that's being brought online, both GEO and LEO, is KA band, or are we migrating towards military-only X band or staying in KU?

I think the way I would describe it is, look, they certainly want backward compatibility, which is something that Comtech is uniquely positioned to provide as it relates to some of the aviation-type equipment that's still using our equipment today. So obviously we'll have L-band. We previously announced a couple years ago a partnership with Iridium, and I think that you'd be looking to see the Iridium out there. And, yeah, you may see some X-band out there. So I think the government's idea is they don't want to be stocked with one particular satellite band or one particular satellite system. They want the ability that if one part of the system gets jammed, to seamlessly move over to another within the same product. So, you know, we have that capability to have multiple waveforms and multiple modem technologies in the same transceiver.

Great. And I'll do a final question on NextGen 9-11. A lot of money being thrown around by the government nowadays. Obviously, the infrastructure bill hasn't made its way through, but any indications that you're seeing that there might be additional money set aside for those types of systems?

Everyone's talking about it, Chris. So I guess we agree with the philosophy. We hope it happens. It's a question of where that funding winds up. Some states, I think it's fair to say, are waiting to see. A state doesn't want to announce their own funding if they can get the funding from the federal government. So I think there's a little bit of pause by some states. But at the same time, there are other states that do not want to wait. Their local constituents want to move forward. Arizona is an example of it. Ohio is an example of it. We saw it with Pennsylvania. We saw it with South Carolina. So I would say it's all good news either way. If there's more funding, we should benefit from it.

Great. Thanks, guys.

Our next question comes from Asaya Merchant from Citigroup. Your line is open. Please go ahead.

Great. Thank you. Just a question. I mean, given all these initiatives that you're talking about, you know, help us think about growth drivers and sort of even some growth numbers for 22 as it relates to the government and commercial solutions. I mean, should we expect Given the significant drop in government, of course, hopefully it grows in fiscal 22, but what kind of levels are we talking about? Can we come back at some point to where they were in fiscal 20, given all the various initiatives and hopefully the BFT opportunity materializes as well?

I think the BFT opportunity, you know, is probably, you know, again, outside of initial work that we'll be doing, you know, assuming we win this initial opportunity, that revenue is really going to be 23, 24 type revenue. That, you know, it's going to take some time. Might it be a booking in 2022 in the hundreds of millions? Well, yeah, that's a possibility. I mean, the government is giving all signs right now that they're moving forward. Sitting here in the month of, I think it's June, it's just way too early for us to give you some clarity here. We normally don't give our guidance to September. I think, look, the one thing I can say about the government, yeah, it's not, I don't think it's going to grow next year, is what I would say, based on what we see. But again, it's too early to tell. As the programs come in, if they come in on the earlier side, yeah, we might be able to do that. But I think given the Afghanistan Afghanistan withdrawals and what we're seeing on the budget side, I think the government business, you know, as a segment, it will be tough to grow versus, let's say, this year. In terms of our commercial business, I think, yeah, I think all signs are positive.

So the growth as international comes back, you know, given sort of the midpoint of your guidance and obviously the Afghanistan stuff, Is it reasonable to assume high single-digit growth into next year for the commercial? Yeah. Yeah.

I think that that's possible. We need the international markets to come back. And, you know, it should come. Whether or not it's going to occur in the first six months of 2022, it's too early for us to tell you. But I think we eventually, as you're seeing it in the United States, the market is starting to turn. Unfortunately, you look at areas of the world like India. I mean, India is closed. There's pockets of the world right now where nobody's doing anything, and it's a lot different than what's happening in the U.S. Even Canada, surprisingly so. We have business operations up there, and it's just shut down. So that all being said, you know, when you look at this thing on a 12- to 18-month basis, there's very positive signs in our satellite air station business. This new contract that I mentioned to you, you know, we're talking about hundreds of millions of dollars. And, you know, when that comes, you know, it'll come after, we think, the development part of the program, but we have to kind of work through that.

And what's the competitive dynamics there?

I'll let my competitors share their aspects to it. I can't comment.

And anything, if you can talk about, like, you know, how we should think about margins here across the two segments. You know, if government kind of hangs in there, maybe no growth, but what kind of margins are we now expecting in that segment? segment. I mean, clearly we're going to take them down relative to where we were before. But, you know, off this 8%, 9%, margin for the year?

Yeah, I think our focus for this year was to get higher than 10% adjusted EBITDA margins when we started the year. I think, as we've witnessed with this sudden change by the government with the withdrawal of the troops, it is going to impact our goal. I don't think we're going to do 10% adjusted EBITDA margins in the segment, so, you know, maybe closer to 8% or 9%. I think when – and that's for this year. So, I think, again, as I look forward to next year, I'd like to get us back to the 10%. That's the target. Our commercial segment, you know, we've done pretty well. Each of the first three quarters, we've done north of 17% adjusted EBITDA margins. You know, if we start getting incremental volume on some of these large opportunities that we're talking about, it will come. You know, normally when you do development work, such as customization or customer funding type R&D, margins on those initial programs are relatively low. You get the benefit of production. And, you know, that's a little ways off, but, you know, again, we're talking very large amounts of hardware coming.

Great. Thank you.

Our next question comes from Mike Lattimore from Northland Capital. Your line is open. Please go ahead.

Hi, this is Aditya on behalf of Mike Lattimore. Could you tell me, are you facing any component shortages in your current business environment? And if so, how much impact is it having on the gross margin or revenue?

Sure. We are experiencing what I would call industry-wide shortages. We're not seeing anything specific to us, and it's more in the lead time issue right now. We're not seeing unavailability of parts where you know, a factory went on fire. It's just simply delays in getting parts. So, you know, some of that results in inefficiency in our facility as we just, we build a product and we have to wait until we could deliver it until we get the parts. But, you know, it has negatively impacted our gross margins. I prefer not to tell you, you know, a specific dollar amount, but it is impacting our margins, which we hope will go away. But, you know, we're definitely seeing increased parts and, you similar to what you're reading about on the industry. Freight, for just another example, I mean, freight costs in some areas of the world have tripled. And, you know, we obviously just need to those things. We obviously need to see those come down. We hope that we're not going to experience the costs in some parts of the world that we are seeing right now. We think that's part due to the shutdown, unavailability of labor in certain parts of the world. But, you know, it's real and it's out there.

All right, all right. And my next question would be the Pennsylvania 9-1-1 deal. Can we expect it to start contributing to the revenue from 4Q?

Yeah, we are expecting some Q4 revenue from our Pennsylvania contract, but not a whole heck of a lot. It's really going to turn on next year.

All right, all right, fine.

Thank you.

Once again, that is star and 1 to ask a question. We'll take our next question from Kyle McNeely from Jefferies. Your line is open. Please go ahead.

Hi, this is Kyle. I'm for George. Thanks for the question. I wanted to see if you could parse through the updated guidance for the full year a bit more and what's implied for Q4. How much of that guidance is now driven by the inclusion of UHP revenue for the step-down versus the previous guide for the full year? Is that all related to the U.S. government and kind of the budget updates there, or are there other puts and takes to consider in other parts of the business?

Hi, Kyle. In terms of the first question with UHP, I would say still a nominal amount in the year in terms of Q4. Your second question, it was mostly in the government segment, and it was driven by the recent changes that Mike was referring to earlier.

Okay, great. And this is one kind of piggyback on the logistics constraints comment, but you mentioned kind of impact on gross margin, but Is there any way you can frame what the risk may be to net revenue if you see difficulty with the supply chain issues? Is it a percent of revenue, a couple percent, or not really that much of a headwind to revenue as you go through the next couple quarters?

yeah i i think i think the way i would best characterize um the impact to let's say the rest of this year is really not on the revenue side but probably on the margin side so you know within our guidance number you know we're thinking it's going to be somewhere between 74 and 76 if if the component caught if the parts continue to increase or they don't dissipate you know we might we might be on the lower side of that 74 million

but you know depending on that's how i would characterize the the impact it's not we don't necessarily see it on the revenue side it's really on the cost side we're seeing it all right thanks that's helpful and one last one for me uh this is regarding the timing and outlook of the us gov sales um with the budget changes and associated headwinds that you talked about um are they persistent through 2022 which seems to be the natural conclusion And you also mentioned the various next-gen programs, and you talked about the BFT2 one, but I'm sure there's others. I wonder if you can add anything in terms of the timeframe of those and when they would be positioned to come in. Are there any that could be as early as impacting 2022, or are these all kind of 2023 and beyond?

Yeah, it's a mixed answer. You know, look, we have these, like with BFT3, I guess, which I have to start learning the new acronym, which is in the 10Q. But the BFT3 program, you know, it's there, and it's going to be an initial development program that will take some time to work. But the government has indicated that shortly after completion of that work, they intend to issue production awards. and so you know you simply do the math and you're talking about hundreds of millions of dollars of of production available so we could be in a situation where none of that occurs in 2022 or we get big orders and that's a 23 revenue or we get the revenue in 22. that's why we always say it's just too early especially with the bft three program a comet is another example Comment, you know, we were expecting, again, earlier in this year, some orders to come in by Q4, and this is a sort of a quick-ship product. So with the funding situation still not being fully clear yet, yeah, we're not expecting any orders for the product in Q4. So we're not, we're thinking, to your point, it's going to carry over a little bit into fiscal year 2022 until things get sorted away. But if comment orders start to come quickly, then, you know, then that will be a big benefit to the bottom line. I mean, these are hardware products that we make internally. They've got good margins, and we're seeing very, very strong interest, both from the U.S. government and foreign customers. Our Trouble Scatter program is another example. Right now, you know, we've been working with the Marines with the program that we won with our partner. People have asked us time and time again, well, do you have an opportunity to go back to the U.S. Army? And we said, we'll have something to tell you when we have something to tell you. The thing I can tell you right now is we've now demonstrated the solution to the U.S. Army just very recently. So we believe that there's a lot of upside for us in our government segment, despite the decline in revenues that we see today. But at the same time, it's just too early for me to tell you. But when I sit back and I look at it, Asaya asked the question earlier, I kind of think our government segment will be flat. It's going to be tough to grow next year. When I think about everything, we'll see what happens. It's going to come down to funding. And whatever the government does, we'll get clarity over that over the next few months, and we'll give you an update as we learn.

Okay, great.

Thanks a lot.

Once again, that is star and one to ask a question. It appears that we have no further questions at this time. I will now turn the program back over to our speakers for any additional or closing remarks.

Okay, that is the end of today's call. Thank you again for joining us today, and we look forward to speaking with you again in September.

This does conclude today's program.