Comtech Telecommunications Corp.

Ladies and gentlemen, thank you for standing by. Welcome to ComTech Telecommunications Corps' fourth 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 1 on your push-button phone. As a reminder, this conference is being recorded Monday, October 4th, 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 Corp conference call for the fourth quarter and full fiscal year 2021. With us on the call today are Fred Kornberg, Chairman of the Board and Chief Executive Officer of ComTech, Michael D. Porcelain, 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. And good afternoon, everyone. And thank you for joining us on this call. Today is an exciting day. As I hope you all saw, in addition to announcing our fourth quarter results, our full year results, and our initial fiscal 2022 financial targets, we also announced a leadership change. Mike Porcelain, our president and COO, will become our chief executive officer by the end of calendar year 2021. Mike will also continue as president of ComTech and join our board of directors. In making this change, the board has asked that I take on a senior advisor role on technology matters and continue as a director and a non-executive chairman of the board. As you know, I have worked with Mike for many years and I have tremendous confidence in him. I want to congratulate him on his well-deserved appointment. Mike brings to his new role a track record of professional dedication and achievement and a deep knowledge of ComTech. Our board also recently has taken other important actions. In July, Judy Chambers was appointed to the board bringing fresh perspectives and enhancing diversity. Not only is Judy the second female member of our board, Judy is also the first African American to join the board. She is already making invaluable contributions to ComTech, and we're confident that she will continue to do so for many years ahead. At the same time that Judy joined our board, we also announced that our longest serving outside directors, will be retiring as of the upcoming annual meeting. These directors have been wise stewards of our business, and I want to personally thank them for their tireless efforts on behalf of our shareholders. And in August 2021, we announced that our refreshed board intends to submit a plan to CompTech shareholders to eliminate our staggered three-year terms for our directors. As the company continues building value for our shareholders, our board remains committed to sound corporate governance practices and productive shareholder engagement. Before we turn to the details of our fourth quarter, I also want to acknowledge that we received notice from one of our shareholders, Outerbridge Capital Management, of its intent to nominate three individuals for the election to our board. Our leadership team and members of our board have met several times with Outerbridge since June. We have listened to their perspectives and sought a constructive dialogue. When Outerbridge privately proposed two director candidates at the beginning of August, our board initiated a thoughtful review of the individuals. Outerbridge lately publicly nominated three different individuals to join the board. The Nominating and Governance Committee, once again, is thoroughly reviewing these proposed candidates and following our standard procedures for doing so. At this time, we have nothing further to report on this, and as always, though, we remain open to constructive dialogue with all of our shareholders. With all that out of the way, let's get down to today's business, and let me turn it over to Mike Bondi, our CFO, who will provide a discussion of our financials. And after that, Michael Porcelain will provide an update on our business. Mr. Bondi?

Thank you, Fred, and good afternoon, everyone. We are incredibly proud of our performance during fiscal 2021 and ended the year slightly above our full-year guidance. This was a tremendous feat as we continue to navigate the lingering effects of COVID-19 and related issues that have impacted our business since early in calendar year 2020. Net sales were $145.8 million in Q4. Of these sales, 72% were to U.S.-based customers with 28% to international customers. For the year, net sales were $581.7 million, and of these sales, 76.1% were to U.S.-based customers with 23.9% to international customers. Bookings for the fourth quarter were strong. We received $168.2 million in orders, resulting in a book-to-bill ratio of 1.15 times for the quarter. For the year, we achieved bookings of $623.1 million, resulting in a book-to-bill ratio of 1.07 times for the year. higher than what we achieved in fiscal 2020, which was 0.95 times. The full year's performance was strong, given the headwinds we faced from COVID-19, which impacted almost all of our global customers. Our gross profit percentage in Q4 fiscal 2021 was 37.8%, and for the year, it was 36.8%. SG&A for Q4 for fiscal 2021 was $27.8 million, or 19.1 percent of consolidated net sales. For the year, SG&A was 111.8 million, or 19.2 percent of consolidated net sales. Turning to R&D, we invested 11.8 million in the fourth quarter, or 8.1 percent of net sales. For the year, we invested 49.1 million, or 8.4% of consolidated net sales. Total amortization of stock-based compensation during Q4 of fiscal 2021 was $6.8 million, and for the year was $10 million. Total amortization of intangibles was $5.3 million in the fourth quarter of fiscal 2021, and for the year, it was $21 million. Our GAAP operating income for the fourth quarter was $9.7 million and reflects $1.6 million of restructuring costs, a half a million dollars of acquisition plan expenses, and a half a million dollars of COVID-19-related costs. Excluding such costs, non-GAAP operating income in Q4 would have been $12.2 million, or 8.4% of consolidated net sales. As disclosed in our earnings release and discussed on prior conference calls, We had large acquisition plan expenses and other costs during the year. Excluding such costs, non-GAAP operating income for the full fiscal year 2021 would have been $36.1 million, or 6.2% of net sales. Our adjusted EBITDA was $26.4 million, or 18.1% of consolidated net sales, for the fourth quarter. For the year, the $76.5 million of adjusted EBITDA represents 13.2% of our consolidated net sales. On a segment basis, in Q4, our commercial solutions segment contributed $20.2 million of adjusted EBITDA, or 20.4% of related net sales. For the year, it contributed $66.3 million of adjusted EBITDA, or 18.4% of related net sales. Turning to our government solution segment, we had $2.4 million of adjusted EBITDA in Q4, or 5.2% of related net sales. For the year, our government solution segment delivered adjusted EBITDA of $16.3 million, or 7.4% of related net sales. Interest expense was $1.6 million in the fourth quarter, and for fiscal 2021, it was $6.8 million. Our income tax expense in Q4 was only $578,000, and for the year, we actually generated a benefit of $1.5 million. On the bottom line, our gap net income in Q4 2021 was $7.4 million, or $0.28 per diluted share. Non-gap net income for Q4 of 2021 was $6.2 million, or $0.23 per diluted share. For fiscal 2021, our GAAP net loss was $73.5 million, or a loss of $2.86 per diluted share. Non-GAAP net income for fiscal 2021 was $22.4 million, or 86 cents of net income per diluted share. Despite being impacted by COVID-19 for the full fiscal year, our fiscal 2021 non-GAAP net income and EPS represents substantial improvements as compared to fiscal 2020. Details of our non-GAAP reconciling items can be found in the tables at the bottom of today's earnings release. Cash generated by operating activities was $15.9 million for the fourth quarter. For the year, excluding a $70 million merger termination payment, our net cash from operating activities would have been $29.4 million. Our balance sheet As of July 31, 2021, includes $30.9 million of cash and cash equivalents, and our total debt outstanding was $201 million. Our current secured leverage ratio, as defined in our credit facility, was 2.53 times. Now, before turning it over to Mike, let me provide some comments on our initial fiscal 2022 financial targets that we issued earlier. We are targeting fiscal 2022 consolidated net sales within a range of $580 million to $600 million and adjusted EBITDA between $70 million and $76 million. These targets reflect the strength of the company's backlog and a healthy sales pipeline offset by anticipated impacts of COVID-19 and tightening global supply chain constraints. In addition, we expect to incur startup costs associated with the opening of two new high volume technology manufacturing facilities. It is really tough to accurately estimate the extent of those costs because COVID has caused delays in our move and increased our costs due to duplicate facilities that we have to maintain. Also, Our fiscal 2022 financial targets reflect the impact of the recently completed withdrawal of U.S. troops from Afghanistan and other U.S. government program changes we previously announced. We estimate total fiscal 2022 amortization of intangible assets to be around $22 million. Stock-based compensation expense is expected to range from $12 million to $14 million. Interest expense is currently expected to be around $6.5 million in fiscal 2022, and our effective tax rate for fiscal 2022, excluding discrete items, is estimated to approximate 22%. Now some color on the cadence of our expected fiscal 2022 performance. Q1 of fiscal 2022 is expected to be the lowest quarter of financial performance in fiscal 2022. Based on our current expectations of revenues in our government solution segment, we anticipate virtually no adjusted EBITDA in our government solution segment in Q1 or Q2. Additionally, with recent spikes in COVID-19 and supply chain issues, our commercial solution segment is being impacted. These issues are expected to result in lower than typical revenues and adjusted EBITDA for our commercial solution segment in the first half of the fiscal year, but a strong second half as we deliver on our backlog and new orders that are expected to come in. Based on what we are seeing, we believe these constraints represent significant performance headwind and believe that our consolidated Q1 revenues will approximate $115 million with adjusted EBITDA in the neighborhood of $3 million. We are closely monitoring our inventory needs and our supplier base, and we cautiously expect these constraints to ease up during the second half of fiscal 2022. As such, we believe that quarterly results after our Q1 will sequentially improve, with Q4 being the peak quarter in 2022 by far. With backlog of $658.9 million, which is $38 million higher than fiscal 2020 ending backlog, and a strong sales pipeline, we feel pretty good about the full year. Contributing to our confidence is our expectation that our government solution segment will benefit from higher margin programs during the second half of fiscal 2022, including the receipt of new orders for the ComTech Comet and other Tropo scatter solutions. These opportunities are well-defined and feedback from the customer have been terrific. Now I'll hand it over to Michael Porcelain, Mike.

Thanks and good afternoon, everyone. First, let me start out by thanking Fred on behalf of myself, the management team, our employees, the board, and our stockholders for his years of dedication, leadership, and service to ComTech and to its customers. At the same time, I am also honored that the board has appointed me CEO. I look forward to continue to work with them, the entire contact team, to implement the range of important initiatives already underway and to carry our strong momentum forward. I do believe we are uniquely positioned to capitalize on the growing demand for satellite ground station infrastructure and next-generation 911 systems. Although we continue to operate our business in an environment where reliable forecasting remains challenging, I am confident that we have the right long-term strategy. In this regard, as you can see from our fourth quarter and fiscal year results, that strategy is clearly paying off. Key bookings received in Q4 include multi-year contracts valued at $23.5 million and $23 million to deploy and operate next-generation 911 services for the states of Arizona and Iowa, respectively. We certainly have a market leadership position in the next generation 911 space. During fiscal 2021, we were awarded multi-year contracts totaling over $200 million. Also, Frost & Sullivan, a leading industry research firm, recognized ComTech for achieving the most significant year-over-year market share increase in this space. We also have a strong leadership position in our satellite air station product line. Here, Northern Sky Research, a leading consulting firm, recognized ComTech as a leader in the growing satellite cellular backflow market. Perhaps the best independent validation of our strength was the fourth quarter award of a multi-year contract from a large new customer to customize ComTech's next generation broadband satellite technology. This was a huge win, and our team did an awesome job in capturing this program. Our next generation satellite earth station product line technology will be customized for this large customer so that it can be used with thousands of low earth orbit or LEO satellites expected to be launched. Based on our current pipeline of opportunities, we believe we have well over a billion dollars of visibility to future potential revenue. And importantly, this does not include LEO opportunities associated with this new large customer, which could amount to several hundreds of millions of dollars of incremental orders to ComTech. Let me now talk about our team's successes in terms of business performance and other contract wins. I also want to touch on the direction of where we see things headed. In our commercial solutions segment, net sales were $99.2 million in Q4 and $360.1 million for fiscal 2021, an increase of 1.8% over fiscal 2020. We received orders totaling $120.8 million in Q4 and $441.3 million for the year, resulting in a very strong book-to-bill ratio for the year for this segment of 1.23%. Looking forward, we expect fiscal 2022 sales in this segment to be higher than the level we achieved in fiscal 2021. We continue to see positive momentum in our public safety and location technology product lines. Net sales during the quarter were higher than last year's comparable quarter, and for the year were slightly higher, reflecting increased sales of next-generation 911 solutions, offset in part by the absence of 911 wireless car routing sales to AT&T. Now, let me highlight some great wins this year that position us for growth. We previously announced a $100 million-plus statewide contract to design, deploy, and operate next-generation 911 services for the Commonwealth of Pennsylvania. Work under this contract is expected to increase in fiscal 22 as compared to 2021. We also received additional orders from our $54 million contract to design, deploy, and operate Next Generation 911 services for the state of South Carolina. We also won a multi-year statewide contract award valued at $35.8 million to design, deploy, and operate Next Generation 911 services for the state of Arizona. The total contract value includes a multi-year contract extension. The contract with Arizona includes implementing our Next Generation 911 solutions to provide citizens with advanced communication capabilities when calling for emergency services, including police, fire, and emergency medical services. Through use of our Next Generation core services technology, Arizona will be able to offer a seamless, coordinated, and efficient Next Generation 911 system to each of the state's local 911 centers. At the same time, the award includes an ability for Arizona to purchase ComTech Solicom call handling solutions for PSAPs, as well as our new cybersecurity software training program that will be available for first responders on a statewide basis. This was the first cyber contract win that included our security software training and solutions, and we hope to have more to come. We also announced a contract award to provide NG911 services for the state of Iowa. This multi-year statewide contract includes extension options and is valued at up to $48.5 million. Initial funding for the contract was $23 million. Additionally, and as mentioned on prior calls, ComTech has been selected as the winner of a multi-year NG911 contract for the state of Ohio. We do anticipate that this contract will be initially funded in our fiscal 2022. Other notable and key contract awards in our Public Safety and Location Technology product line during Q4 include the following. A $7.1 million contract for the deployment of a cellular-based wireless emergency alert solution with AT&T. It will allow citizens in a designated area to receive government-issued alerts on their mobile devices, warning them of imminent threats to life and property based on location, similar to severe weather alerts that you currently receive on your cell phone. Next, we received a contract from a channel partner valued up to $4.7 million to supply new software releases to messaging applications used by a U.S. Tier 1 mobile network operator. Separately, we received another $4 million maintenance renewal to continue to provide messaging application support, also for a U.S. Tier 1 mobile network operator, and the growth in messaging demand. Lastly, we received $3.2 million of additional funding related to a next-generation 911 modernization project for a U.S. military end customer. Solicom will provide this customer with our Guardian call management solution, a full turnkey solution. This solution will be deployed in a redundant multi-geodiverse configuration system, ensuring the highest possible service availability with an intuitive user interface. It will allow government call takers to quickly assess, prioritize, and handle landline, wireless, and voice over IP emergency calls. Call takers can quickly create conferences, transfer calls, determine the location of callers, and replay recently recorded conversations. And as you can see, our call handling solution is extremely robust. As I have stated on prior calls, we are ideally positioned to continue to build out various situational awareness data products for our 911 customers and are working on several exciting initiatives in the public safety area. In addition to incorporating our first cybersecurity software training program in the Next Generation 9-1-1 contract with Arizona, we have now begun marketing a new solution called Smart Response. This is a newly developed cloud-based solution that offers a common operational solution that offers first responders an effective data-driven response for security agencies and others. This solution can provide live feeds from traffic cameras, caller information, criminal history, and other key critical information at the tap of a button. The smart response solution empowers PSAP employees to ensure the appropriate resources are on the scene to better service the public in emergency situations. Sales of this product are expected to be nominal in fiscal 22, but we are investing R&D in this product line in 2022 to meet a critical and growing need of 911 operators. All in all, we do believe that potential customers are increasing their funding for next-generation 911 solutions, recognizing the critical importance of upgrading 911 systems. I cannot understate that 911 service is a vital part of U.S. government's nationwide emergency response and disaster preparedness system. In this regard, I want to point out to you that satellite services are playing a more important role in the nationwide 911 network, not only in rural areas, but as backup for public answering points, or PSAPs, and individual callers as well. For instance, in August 2021, it was reported that Apple was working on incorporating satellite capabilities for its iPhone models that will allow users to call and or text in emergency systems. I believe that our satellite systems, including our SCPC and TDMA networking platforms, will be incorporated into 911 systems. Without a doubt, given our expertise in public safety systems and satellite ground station equipment, I believe we are uniquely positioned to be a leader in this growing market. At this point, let me provide some updates on our satellite ground station business itself. Net sales for both the quarter and the year were higher than last year, even though this product line continues to be impacted by the pandemic's effect on customer demand, particularly in international markets, but constitutes a large majority of end users for these solutions. As you know, we did complete our acquisition of UHP Networks in March, and we believe UHP's revolutionary technology has the potential to transform the growing very small aperture terminal market and our participation in it. With end markets for high-speed satellite-based networks significantly growing, we are excited to have extended our product offerings to include UHP's TDMA satellite modems. We are educating our sales force and modifying our sales efforts to establish ourselves as a leader in both TDMA and SCPC solutions. Our customers and the industry are clearly just as excited as we are. For example, because of our UHP acquisition, we were able to announce a strategic technology partnership with Chimeta, a mobile antenna company. Working together with them, we have expanded distribution of our TDMA modems and strengthened our ability to offer integrated VSAT solutions. This partnership expands our solutions and capabilities offered to both our government and military user base, and we expect it to benefit both of our segments over the long term. Other awards for our satellite ground station product line included the following. Multiple contracts aggregating 6.3 million for high power 500 watt KA band TWTAs for high throughput satellite systems. Multiple contracts aggregating $3.6 million from a U.S. systems integrator for X-band solid-state power amplifiers and block-up converters for transportable satellite communication terminals. And a multimillion-dollar order from a leading system integrator in the South Asia for WAN optimization equipment to be utilized by a Ministry of Defense in that region. Despite the impact of COVID-19 and supply chain issues, we still believe our satellite earth station product line is set for growth. We continue to see strong sales pipeline growth for satellite-based cellular backhaul services due to increased penetration of 4G and 5G, particularly in developing parts of the world. There remains a growing need to use satellite network technologies in remote areas where terrestrial network infrastructure is lacking. Now, let me turn to our government solution segment, where we continue to navigate challenging dynamics, including lumpy order flow. Sales in this segment were 46.6 million as compared to 64.7 million in Q4 of last year. Revenues in this segment were significantly impacted by the April 2021 announcement of U.S. troop withdrawals and other U.S. government program changes. Revenues in this segment for each of the first three quarters of fiscal 2022 are expected to be slightly lower than the $46.6 million achieved this quarter. Thereafter, the segment is expected to benefit from increased revenue and higher margin programs, including the receipt of new orders for the ComTech Comet and other Tropiscator solutions. For the full fiscal year, net sales were $221.5 million, which represents a decrease of 15.8% from the prior year. Bookings in our government solutions segment for Q4 were $47.5 million with a book-to-bill ratio of 1.02. For the full fiscal year, bookings were $181.8 million with a book-to-bill ratio of 0.82. Sales and adjusted EBITDA contributions in this segment in the future are expected to come from sales of joint cyber analysis cost training solutions, continuing anticipated awards for high-reliability EEE spaceports and engineering services, including those used to support NASA missions, anticipated orders for our high-power amplifiers, many of which are used in funded electronic warfare programs, large awards for Troposcata systems, including the comet, and deliveries of existing backlog for VSATs, satellite equipment, and XY satellite antennas. With respect to our joint cyber analysis cost training solutions, I am pleased to report that earlier today we announced that we were awarded a five-year IDIQ contract from the U.S. government for joint cyber analysis cost training solutions valued at almost $125 million. This award was a renewal and acknowledges our excellence in developing and delivering complex cybersecurity operations um training at the scale operations and at the scale required by our federal government customers given that this is one of our nation's top priorities we do expect to receive additional funding on this contract over the course of fiscal 2022 and beyond we're honored to continue to perform this important work for our customers Given the expected low level of revenues in this segment and the startup costs relating to the opening of our UK manufacturing center, as Mike had mentioned, adjusted EBITDA in this segment will be unusually low for the first three quarters. But as we look to the second half, we are seeing strong interest across the board for our common Tropa scatter terminals and other new VSAT solutions that we are actively discussing and demonstrating with our customers. Trials and demos are well underway, and in several instances, we have been told we have been selected as the sole source for their needs. Timing on these common and other large trooper scatter programs have always been difficult to predict and lumpy, and 2022 is no different. That said, we view it not as a matter of if, but of when. Overall, it will be a challenging year for this segment, but we are optimistic that we are on the right track. Now, let me turn it back to Fred, who will provide some closing remarks.

Fred. Thank you, Mike. As I mentioned before, I am very pleased with how our business is performing in spite of continuing COVID headwinds, particularly some great winds in the fourth quarter. Our 2021 results demonstrate our success in executing our plans. the strong market leadership positions we have, and the resilience of our business. We navigated challenging market conditions, delivered strong financial performance with significant year-over-year bookings and backlog growth, giving us significant comfort with our outlook and visibility into the future. Despite continuing COVID headwinds, I continue to be excited about prospects going into fiscal 2022 and beyond, including strengthening positions on the large developing near-term opportunities that Mike just mentioned. I believe our achievements and prospects confirm that we have the right strategy, the right team, and the right focus to create long-term value for our shareholders. for many years ahead. Reflecting this confidence in our business outlook, our board of directors once again declared a dividend of 10 cents per common share payable on November 12th, 2021 to shareholders of record at the close of business on October 13th, 2021. Now I would like to proceed to the question and answer part of our call. Operator?

At this time, if you would like to ask a question, please press the star and 1 on your touch-tone phone. You may withdraw your question at any time by pressing the pound key. And once again, that is star and 1. And we'll take our first question from Joe Gomes with Noble Capital Markets. Please go ahead.

Good afternoon, Fred and Mike. Congratulations on today's announcements. Thank you, Joe. So you talked a lot about some of these supply chain constraints. And I was wondering, you might give us a little more detail there as much as you can as to what exactly are you referring to here, where it's impacting the most on the company and how quickly you might be able to get past these here.

Sure. If you go back a few months ago when we announced our Q3 call, we disclosed in our 10Q that we saw some sort of extended lead times. And as the quarter continued, things sort of got a little worse. I would say to you that we've seen lead times for parts that are normally 20 to 30 weeks being extended to 40, 50, and in some cases, 60 weeks. And we sort of saw that in the Q4. We probably have about five or six key vendors that have chips to everybody in the industry, so it's not something unique to us. The good thing is that we have pretty good relationships in the sense that we are one of the larger manufacturers of satellite equipment, especially on the West Coast. So we feel we have pretty good visibility as to when supply chain will be coming in, and it's really reflective in the guidance that we put out. So we do think, for us, it's going to ease up really towards the tail end of our Q1. And then, you know, as the quarters come in, we think we've got a good visibility to the parts coming in and our ability to ship, you know, in the latter part of the year.

Okay. Thank you for that insight. And you mentioned some significant CapEx expenditures for the year. I was wondering if you could kind of quantify for us, you know, what was CapEx in fiscal 2021 and how much higher do you think it should be in fiscal 2022?

Hi, Joe. I'll take that. In terms of the CapEx requirements and investments we plan to make next year, in our releases today, we did highlight that we expect it could get up to about $30 million. The timing of that is spread out over the course of 2022. and possibly even into 2023. But those investments are, you know, specific to, you know, a few things that we have going concurrently. We have the NG911 programs that we won, and, you know, we had booked over $200 million in contract value this year. So these investments are to support, you know, those great wins that Comtech had this year. And then also, you know, we have the two new facilities that that we're getting online this year to support our high-volume manufacturing for the next-generation satellite ground station equipment that we expect to sell. So the timing of that, it's a little tricky to pinpoint the exact dollar amount by quarter, but we do see that probably in Q2 and Q3 being at its peak and then tailing off in Q4.

Okay. Thanks for that. And one more for me and I'll get back in the queue. So obviously last quarter you announced the big satellite earth station when, um, you know, going through the release, it looks like you're not including much of anything outside of the initial 13 million order in fiscal 2022 results. I was wondering if you could talk a little bit more about that, how that project is unfolding so far, and also are there other opportunities there which the company is pursuing?

Yeah, Joe, it's a great question. So I would love to share as much detail as possible as I could about the contract, because the excitement that we have internally is just tremendous. You know, it's a large new customer, you know, and certainly, you know, thousands of satellites are expected to be launched, and you could, you know, refer to public documents about that. And You know, look, when we sit back, the best we can tell you is that this is hundreds and hundreds of millions of dollars of opportunities. And, you know, we're the only ones that we're aware of that has announced an award of such size. I can tell you that work is well underway with this customer. You know, we're working hand in hand with them. I can tell you that relationships with this customer are growing every day and are fantastic. You know, we meet with them regularly. including we just had a SATCOM show where we had very good conversations about their needs and some of the things that we can provide to them. As you know, we are an expert not only on the satellite ground station side, but experts on manufacturing, and certainly our decision to build out a new manufacturing center in Chandler should speak for itself. At the same time, You know, we're also, I would say, best in class related to the U.S. military and DOD when it comes to satellites. So I think if you just take all of the data points that we have to offer and what I could share with you, you can kind of connect your own dots. But I am very, you know, subject to a strong nondisclosure with this customer, and that's about the best I could say. But there's nothing but excitement, nothing but good things happening, and let me leave it at that.

All right, sounds good. Thanks, Mike.

We'll take our next question from Mike Lattimore with Northland Capital. Please go ahead.

Thank you. Yeah, and Mike and Fred, congratulations on your new roles there. Sounds great. Thank you. So I guess, Mike, you talked about the pipeline and commercial being strong. Can you just elaborate on that a little more? Is it on NextGen 911, like winning more states, or would it be enhancing services that you're providing that current state wins? And then on the satellite air station side, does that strong pipeline reflect this large customer specifically, or are there others kind of in the mix there?

So, yeah, I guess one way to answer it is the latter part of what you just said, Mike. Our satellite earth station pipeline is strong. Our 911 pipeline is strong. And that excludes those opportunities with our large new customers. So, you know, the basic business of selling satellite modems, amplifiers, our networks is strong on the commercial side and on the defense side. So we do see a growing pipeline. We also have the benefit of the UHP acquisition, and we're offering the UHP satellite network technology to customers, training our sales force, educating them about our capabilities of how we're going to integrate our UHP technology. technology, if you will, with our heights platform. And so that process is well underway. On our 911 business, I could say, and again, I'm not going to point out to you the specific states that we're chasing, although, as I always say, if you look hard enough, you'll find it. But there are several states out there that have big opportunities out there. And we do think that these big opportunities could translate into orders during fiscal 2022. And I would categorize that pipeline as pretty strong. Adding that on top is, you know, this large new opportunity with our large new customer.

Yep. Okay. Great. And then in terms of the Afghan withdrawal, you quantified that a little bit last quarter. I guess any more detail on how we should think about the revenue impact from that withdrawal in 2022 versus 2021?

Sure, Mike, I'll take that. In terms of the impact of that troop withdrawal that's now complete and other program changes that we saw as we were going into Q4, we're expecting that to continue into the third quarter of fiscal 2022. And when we're looking at what we see out there for right now, it's going to roughly be what we did similar to Q4, probably a little bit below that level. for at least the next quarter or two before it starts to pick up as we start moving into higher margin programs later in the year.

Mike, if I could also just give you another data point just to look at with public numbers. If you look at what our government segment did last year in Q1 and Q2 and just sort of averaged it out, you can see on the average for Q1 and Q2 of last year, we did about $64, $65 million of revenue. And if you look, you know, if you look at Q3, Q4, it came down. quite sudden, the impact. But you can see we did less than $50 million or $48 million in Q3, $46 million in Q3. And as we said in our prepared remarks, we do think we're going to bounce around the $40 million level for Q1, Q2, Q3. That difference on the quarterly run rate is about the difference we're seeing due to the withdrawal and the other changes in the government programs. And You know, the one thing, again, timing is always difficult for us to predict, but we're assuming we're going to be able to get these comet orders in in the second half and ship them in Q4. They could come in earlier, you know, where, you know, maybe Q3 is a lot better than what we're thinking, but we'd like to think we're taking a cautious view at the moment in terms of timing. But, you know, we use the word lumpy because the programs are difficult to predict.

All right, all right. Okay, got it. And then just last on international data. How is the pipeline activity internationally? Are some of these, I don't know, comet, troposcatter opportunities there as well? Just a little more color on international would be great.

Yeah, on the tropo side and the comet, there are international opportunities as well as regular tropo scatter opportunities. You know, despite COVID restrictions, we were able to, as I call, sneak in a couple of travel visits overseas. And I don't mean, you know, sneak in where we did something improper, but we were able to get them in before the restrictions came back into place. So we were able to get some demos overseas done, and we've been told, you know, in some cases we're sole source and those opportunities are moving. So, yeah, on the tropical side, it's both. On the international side, you know, we're definitely getting impacted on the satellite ground station part of the business. The SATCOM show that took place in September had virtually no one from Europe there. So that was a little disappointment that we do think will impact our 2022 thought process, but that's reflective in the guidance we're giving. All right. Okay. Great. Yeah. Thanks a lot. Good luck. Thank you.

We'll move next to Caleb Henry with Quilty Analytics. Please go ahead.

hi uh two questions from me first i don't know if it's too early or not but uh we're kind of seeing some momentum with the space development agency on their own military leo constellation uh they've talked about that one going up to i think 1000 max so separate from your commercial project but i was just curious if you see any opportunity with the sda or if the the u.s military's interest in leo constellations is having any impact on the ground equipment that you're providing or even doing R&D on?

Yeah, I don't want to tell you what we're doing from a competitive perspective. You know, I'll refer to my remarks about, you know, our strength in the defense side, and I think we could be a thought leader in the LEO space, but let me just keep it at that.

Okay. And then my other question was just on the cybersecurity of the $125 million IDIQ. Can you talk about some of the demand drivers for cyber training? And I guess where you're seeing that come from, if it's just within, if it's just for military applications, or if you're also seeing this from like state and local government or even satellite operators?

Yeah, it's really two pieces. The $125 million contract is somewhat of a renewal, but increased funding versus what we've had in prior years. So we're expecting to get funding throughout the year off that $125 million and, again, continue the work that we've done with truly the Department of Homeland Security and Special Operations over the course of the year. That's where that contract really focuses in on. The contract award that we actually got did exceed our original thinking by multiples of millions, and that is the evidence to us of the demand for cyber courses related to the government. At the same time, we've taken our competencies that we've learned on that contract and have applied it to the public safety market. It's an initiative that we've been working over the last 12 months, and we were successful in getting the state of Arizona to include the cyber training offering to PSAPs in the state of Arizona. It was our first contract win, and we're in the process of talking to other states, including those states that we do business with. And we're optimistic that we could really build a new product line in the public safety market, given our expertise as it relates to cyber training. I mean, clearly, as I mentioned, the 911 service is a vital part of the government's emergency response and disaster preparedness system. It's going to be hacked. It will be hacked. time and time again, and to make sure that it's not hacked or that employees are trained on how to handle it, we think we could help our 911 customers deal with it both on a reactive basis and a proactive basis as well.

Thank you.

And we'll take our next question from Kyle McNeely with Jefferies. Please go ahead.

Hi, great. Thanks a lot for the question. Congrats from us as well on the management announcement. Best of luck in the new roles all around. I guess I want to ask a little bit about TDMA and SCPC, and I wanted to see if you could give us a sense for how your satellite ground station revenue mix of TDMA-type use cases is tracking versus your internal plan for heights and UHP. And I guess I consider that to be height's which could be targeted at previously TDMA use cases and UHP. Is there a way for you to quantify how much is heightened UHP as a percentage of total ground station right now and where that might go in the future, maybe into 2022?

It's actually a good question, Kyle. I would say our early read, we've only owned the UHP business since March of 2021, and I think our early read is that there's a lot of demand for TDMA solutions, and maybe there's a bigger market On the TDMA side versus maybe our Heights product line, I think we're adjusting that as we speak to customers in terms of, you know, would they prefer a TDMA solution versus a Heights? So I would say to you that there's been a tilt in our thinking more towards TDMA than our Heights just in terms of that. Is that a 5% swing, 10% swing in the thought process? Too early for me to say, but that's an early observation that I think we have. And we'll see how that plays out.

Is there an approximate, like, overall mix of the UHP plus heights that you have in your revenue stream right now, like as of Q4?

Yeah, I would prefer not to disclose that, you know, again, for competitive reasons. It's a very small portion of our business. I mean, we talked about UHP itself being a small product line addition, and I just think at this point, you know, I just want to stick to the qualitative comments rather than the quantitative piece.

Okay. Yeah, fair enough. That's fine. And then what's your assumption for the COVID and supply chain issues that you mentioned continuing to weigh on 2022? Do you have a specific timeframe when that will normalize as contemplated in your guidance? Like, when does it get better? I mean, you talked about the second half being much bigger than the first half, so perhaps it's around the middle of the year, but... What should we think about kind of being past the worst of it or, you know, when you start seeing it normalize within the 2022 fiscal year?

I think it will be at the start of our Q3. I think, look, we're seeing – we definitely have visibility, we think, to our supply chain constraints that we're seeing. Again, we've kind of working with our vendors, and, you know, Mike's thinking – Revenue for Q1 is going to be about $1.15 in terms of revenue. And we talk about nominal improvement. In Q2, you could probably take that number up by 10% in Q2 just to sort of give you a sense of the way we're thinking about it. But it's going to be a Q3, Q4 event where we do think things will start to get back to normal, if you will. And certainly, by Q4, we should be humming again. Again, maybe it comes earlier, Kyle, but, you know, we're using the words. We're taking a cautious view and maybe a realistic view at the same time.

Okay, great. Yep, thank you.

And once again, for your questions today, that is star and one. We'll move next to Asia Merchant with Citibank. Please go ahead.

Hi, congratulations again, Mike and Fred. Most of my questions have been answered here, but in terms of EBITDA as it relates to clearly the supply chain disruptions and the COVID anticipated effects that you're seeing, can you kind of talk a little bit about, you know, what would EBITDA have been without these in each of, you know, probably in your commercial segment the most, because obviously your government is also seeing lots of revenues from the Afghan program. But just at least if you could guide us on, you know, what was your commercial EBITDA expected to be without the supply chain disruptions that you guys are thinking about now?

This is Mike. I'll take that. In terms of the first quarter, we have definitely a few things going on with respect to COVID and the supply chain. We are seeing the impact of that. We also, in terms of our EBITDA guidance, we're also considering that we're migrating our production to a new facility, and that's ongoing during the first half for sure. In terms of what it could have been, you know, had these, you know, supply chain issues not sort of surfaced in recent months, you know, I would say it would be, you know, back to our historical EBITDA margins minus those, you know, events. But just with where we are, you know, two months into the quarter already, you know, it's basically what we see today, you know, looking out for the next month.

Okay. And then in terms of cash flow, Mike, I know you talked about a heavier capex cycle in fiscal 22, how should I think about cash flow generation as a percentage of revenues for fiscal 22?

Yeah, I think it's early in the year to give a precise number, but we're thinking, as we normally do, have strong cash flows for the full year from operations. We do see things rebounding. and leveraging our balance sheet, collecting our receivables in the first couple of quarters of the year. So I think when we boil it all together, we do expect to see traditional cash flows from operations that we normally would throw off to support our cash investments and CapEx and other endeavors.

Okay, so you wouldn't be taking on any additional debt here?

Throughout the quarters, there's a likelihood that we could borrow on our facility. We have room on our facility to support the cash investments that we're, you know, incurring to build out the facilities as well as the NG911 projects. But, you know, I think it's going to be more in the Q2, Q3 timeframe where we'll see maybe higher levels of debt, and then it'll throttle down back to, you know, existing levels that we see today towards the end of FY22. Okay. Thank you.

It does appear there are no further questions at this time.

Okay, that concludes today's call. Thank you again for joining us today, and we look forward to speaking with you again in December. Thank you very much.

This does conclude today's program. Thank you for your participation.