Comtech Telecommunications Corp.

Ladies and gentlemen, thank you for standing by. Welcome to ComTech Telecommunications Corps' third quarter fiscal 2022 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. 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 Thursday, June 9, 2022. I would now like to turn the conference over to Mr. Robert Samuels of ComTech Telecommunications. Please go ahead, sir.

Thank you, and good afternoon, everyone. Welcome to the ComTech Telecommunications Conference call for the third quarter of fiscal year 2022. With us on the call today are Michael D. Porcelain, President and Chief Executive Officer of ComTech, and Michael Bondi, Chief Financial Officer. I'm Rob Samuels, ComTech's Head of Investor Relations. Before we proceed, let me remind you of the company's safe harbor language. Certain information presented in this call will include, but not be limited to, information relating to the future performance and financial condition of the company, the company's plans, objectives, and business outlook, and the plans, objectives, and business outlook of the company's management. The company's assumptions regarding such performance, business outlook, and plans are forward-looking in nature and involve significant risks and uncertainties. Actual results could differ materially from such forward-looking information. Any forward-looking statements are qualified in their entirety by cautionary statements contained in the company's Securities and Exchange Commission filings. Now I'm pleased to introduce the President and Chief Executive Officer of ComTech, Michael Porcelain. Mike?

Thanks, Rob. And I should also say welcome aboard. I hope that everyone on the call has had an opportunity to review this quarter's investor's letter, where I talk about our business in detail and offer our candid assessment of the road ahead for ComTech. Before starting the substantive part of our earnings conference call, I want to remind everyone that in Q2, we changed the format and framework of our quarterly earnings announcement from a press release to a shareholder letter. In the past, we have traditionally issued a quarterly earnings press release that summarized comparative financial results, highlighted a few contract wins, and included a quote or two for management. I thought the shareholder letter format was a better way to communicate with our shareholder base and analysts and provide prospective shareholders a better way to learn more about us. I also thought it provided a good forum to share insights into my thinking and the way I intend to lead ComTech. Since then, I've appreciated the feedback we received from investors and analysts. Almost all of them overwhelmingly liked the new format. Some of the feedback we received was that since the shareholder letter was substantive, we should allow a bit more time between its release and our earnings call. So we have taken that into consideration, which is why today's call is at 5 p.m. Eastern time rather than 4.30 p.m. its usual time. Also, it was suggested to us to just significantly shorten our prepared remarks and get to the question and answer portion of the call quicker. We agree with that suggestion, so our prepared remarks on this call will be a lot shorter than normal. As we start, let me echo a point I made toward the end of our new Q3 investor letter. It's hard not to be affected by the emergencies, disasters, and conflicts that confront us every day. Unexpected events demand our attention and response, and part of responding to them effectively means giving the right people the best information as quickly as possible. At a very basic level, it highlights just how important fail-safe communications and connections are. For our part, everyone at ComTech is continuing to do what we've been doing for decades, ensuring that all of our products and services work for our customers every time, all the time, no matter the conditions. ComTech is the company that connects people when it matters most, and right now I'd argue that fail-safe communications are as important as they have ever been. Now let's talk about our initiatives and updated guidance. This continues to be a transformative time at ComTech. We, like businesses everywhere, are confronting one of the most difficult operating environments in memory as the global economy struggles to find its footing amidst a pandemic, geopolitical conflict, surging inflationary pressures, and supply chain disruptions. Five months in as CEO, I've been dealing with these issues, but I can relay that we are making demonstrable progress in several initiatives vital to the company's future successes. These strategic initiatives include expanding our talent pool to bring fresh ideas, leveraging our market-leading positions to capitalize on new multi-year investment cycles, increasing company-wide collaboration to exploit emerging opportunities, and refreshing our corporate branding. We are also assessing our product lines and reviewing M&A and strategic opportunities to establish priorities and determine appropriate capital allocation. Our team is energized by the exciting trends and opportunities visible in our core markets, and we believe context technologies and customer relationship position us to capitalize on them. While the long-term prospects for our business are strong, the near-term economic environment promises to be challenging. Right now, the business challenges we face appear to be a combination of near-term supply constraints and timing issues. Importantly, none of them appear to be a function of softening demand. In fact, and as I'll talk about shortly, given our growing funnel, I believe the stage is set for sustainable multi-year growth. Given that the economic backdrop is more uncertain than it was earlier in the year, I've become more cautious with regards to our outlook and are adjusting our financial targets for fiscal 22 as follows. Q4 fiscal 2022 net sales are expected to approximate $123 million, resulting in expected fiscal 22 net sales to approximate $482 million. Q4 adjusted EBITDA is expected to approximate $11.5 million, resulting in 2022 EBITDA of approximately $38 million. This updated guidance reflects incremental research and development expenses and the removal of several identified and viable opportunities in both our commercial solutions and government solution segments that we no longer expect to occur in Q4. Inflation remains a big concern, and in some cases we are seeing component price increases from 10 to 20 times what we would consider normal. We've been successful in some cases to work with our customers to pass along some of these increased costs, but we've had customers push back given their own challenges. The conflict in Ukraine continues to have significant repercussions for our business. We continue with our dialogue with the U.S. government, NATO allies, and the Ukrainian government with respect to a formalized purchase of new troposcatter technology systems for Ukraine. Given their priority for weapons systems spending as opposed to communications spending right now, we continue to expect no meaningful bookings or sales for the rest of fiscal 2022. With regard to Russia, we are assuming no new sales for the foreseeable future. And like other companies, we are continuing to shift certain commercial software development and related support activities conducted in our Russian office to locations outside of the country. Our updated guidance reflects additional expenses of roughly $1.5 million for the quarter or $6 million on an annual basis associated with shifting these development resources. What we're doing at ComTech in the face of these challenges is remaining focused on execution, whether that's making the key investments in our products, people, and facilities that reflect and amplify our long-term strategy, or ensuring that on a day-to-day basis we are doing everything we can to accelerate sales, win business, ship products, and protect our margins. While we continue to work to drive improvements on a day-to-day basis, my greatest optimism for our business is grounded in what we see as a long-term secular investment cycle in our end markets. As part of my assessment of the business, I've been personally speaking with our customers and industry experts in both our satellite and 911 public safety space. Those conversations have convinced me context investments will pay off over a period that will last years. In the roughly five months since I took on the role of CEO, I've been making the changes necessary to drive day-to-day performance while simultaneously ensuring ComTech is in the best possible position to capitalize on the long-term opportunities our markets present. As we execute on these strategic initiatives, I believe we are on a three- to five-year journey where we will see meaningful progress along the way and creation of shareholder value. So far, I am incredibly proud of the work the entire ComTech team has done these past five months. We've delivered sequential quarters of growing revenue, gross margin, and adjusted EBITDA. We've done this despite fast-changing markets at a ComTech that is itself transforming, starting with our people. A key ComTech strategic initiative is to build out leadership and expertise in every area of our business, and that's exactly what we've been doing. I want to call out a few of the folks we've brought on board. First, during the quarter, we welcome Maria Hedden as our new Chief Operating Officer. Maria is a true operator and deeply experienced in overseeing multiple manufacturing and engineering organizations across the globe. Another key addition for us, particularly in the context of my commitment to improve shareholder engagement and communications, is Rob Samuels, who joins us as Vice President of IR and Corporate Communications. Rob is on the call today and will become more prominent and visible as time goes on. We also just announced that Tim Jenkins was appointed president of our safety and security technology product group, effective June 1st. Tim has extensive experience in the 911 business, and I look forward to his leadership and contributions to our business. Further, we strengthened the leadership team of our U.S.-based satellite-focused business line with the appointment of John Opolsky as a new divisional chief operating officer and Bob Pescatori as general manager of digital products. Finally, we recently welcomed Ken Peterman as a new independent director to our board. Ken's career spans over 40 years in the defense sector, and he has unparalleled credentials across a wide array of markets in both commercial and government satellite systems. These additions are part of a larger process that I announced at the beginning of the year to ensure we have the right team in place at ComTech. My goal is to ensure that our strategy, the organization, product portfolio, our board, and talent deployment all come together. I believe with the right people and strategy, we are looking ahead to a bright future underpinned by investments in our company and strong partnerships with our best customers. For example, just a few weeks ago, at the request of the U.S. Army, we conducted infield demonstrations of our troposcatter equipment in Florida for both U.S., NATO, and allied government customers. The demonstration consisted of end-to-end data communication links showcasing our small, medium, and large troposcatter terminals. From what I saw firsthand, no one in the world can do what we do. In the worlds of our potential customers, these demonstrations vastly exceeded expectations. And I believe there are long-term opportunities for our Tropiscata solutions here. We've also been working closely with a number of our current and potential customers and making strategic R&D investments to create or enhance designs for new applications of ComTech gear or to meet emerging requirements. Our customers know that ComTech is 100% committed to devoting the resources necessary to forge durable, long-lasting partnerships. A good example of such partnership is evident in the continued expansion of our role as a key vendor for a satellite network project undertaken by the Indonesia Ministry of Communications, providing critical communication coverage for unserved and underserved communities across Indonesia. It may be one of the world's largest satellite networks in the world, almost all of it connected securely with ComTech equipment. We take this ongoing partnership to be a validation of our technology and strategic commitment to gain market share in the global VSAT systems and solution market. While 5G infrastructure receives a lot of attention, the fact is there is a huge and unmet need around the world to provide cellular backhaul for legacy 4G LTE networks like the one in Indonesia. I believe we have the right people and products in place to be winners in this market. In our next Gen 911 public safety business, we were awarded a small service contract during the quarter to provide our Solicom Guardian call management solution to the London, Ontario Police Services. The London Police Service is our latest customer in the Southern Ontario region, joining the Toronto Paramedic and Toronto Police Services, both of which also recently awarded contracts to Comtech. And as everyone knows, we are performing significant statewide work in Washington, Pennsylvania, Massachusetts, Arizona, and South Carolina. Hopefully, it is clear that the ComTech here, despite the challenges we face, is performing well and demand for our solutions remain healthy and growing. Let me now turn the call over to Mike Bondy to discuss our financial performance in more detail, and I will come back and offer some closing remarks.

Thanks, Mike. For Q3 fiscal 2022, we recorded $122.1 million of consolidated net sales, of which 88.1 million were reported in our commercial solution segment and 34 million were reported in our government solution segment. Of the 122.1 million of consolidated net sales, 72% were to the U.S.-based customers, including 23% to the U.S. government, with the remaining 28% to international customers. Compared to the year-ago quarter, our consolidated Q3 fiscal 2022 net sales declined $17.3 million, or 12.4%, the large majority of which related to lower revenue in our government solutions segment, given the impact of the withdrawal of U.S. troops in Afghanistan last summer, and the impact of the more recent Russia-Ukraine military conflict creating geopolitical uncertainty in Europe on previously anticipated orders. Gross margins were 38.2%, reflecting slight but sequential improvement from the 38.1% we achieved in the second quarter of fiscal 2022, and 38% we achieved in the third quarter of fiscal 2021. This improvement primarily related to a more favorable product mix during the most recent quarter, as well as a lower provision for warranty obligations, partially offset by cost increases in raw materials, electronic components, and labor. Inflationary pressures are real and do not seem to be going away anytime soon. While difficult as it may be, we have initiated conversations with customers about price increases to reflect this and to protect our margins. Our selling general and administrative expenses of $27.6 million, or 22.6% of sales, reflect tight labor markets and our decision to continue to invest in both existing and new talent. SG&A costs during the most recent fiscal quarter will also include $1.6 million of restructuring costs to move and streamline our operations. SG&A expenses in Q3 of fiscal 2021 were $27 million, or 19.4% of sales. While we have been prudent, we have been investing in our future and will continue to do so. This includes making significant capital expenditures for two new high-volume technology facilities and building out cloud-based computer networks to support all previously announced NG911 contract wins for the states of Pennsylvania, South Carolina, and Arizona. Capital investments for these and other 2022 initiatives are expected to approximate $30 million, with related cash outflows now expected to be approximately $25 million in fiscal 2022. of which $14.4 million has been expended to date. On the R&D side, we continue to make long-term investments. R&D expense in Q3 fiscal 2022 was $14.3 million, or 11.7% of sales, and as discussed above, included $900,000 of strategic emerging technology costs. R&D in Q3 fiscal 2021 was $13.1 million, or 9.4% of sales. Operating loss in Q3 fiscal 2022 was $600,000 and reflects $1.6 million of restructuring costs, $900,000 of strategic emerging technology costs, and $100,000 of incremental operating costs due to the lingering impact of COVID-19. As a result of these and other costs, our gap net loss attributable to common stockholders was $1.7 million, and gap EPS was a loss of six cents. Excluding dividends to preferred stockholders, our gap results would have been breakeven. Our gap results also reflect $5.3 million of amortization of intangibles, $2.5 million of depreciation expense, $1.1 million of amortization of stock-based compensation, and other costs such as interest and taxes. Excluding former CEO transition payments and costs associated with our settled proxy contest, net cash provided by operating activities for the nine months of fiscal 2022 would have been $21.9 million. During Q3 fiscal 2022, adjusted EBITDA was $11.2 million, a 14.3% sequential increase from Q2 of fiscal 2022. As a percentage of net sales, adjusted EBITDA was 9.2%, an improvement from the 8.1% we achieved in Q2 of fiscal 2022. Our Q3 fiscal 2022 adjusted EBITDA does reflect a decrease from the $17.7 million, or 12.7% of net sales we achieved in Q3 of 2021. This decrease from the year-ago period primarily reflects the impact of lower sales in our government solutions segment that were largely driven by significantly lower sales of global field support services and advanced VSAT products as a result of the U.S. government's April 2021 decision to withdraw troops from Afghanistan and other program changes. With that, I'll hand it back to Mike to wrap up the call.

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

At this time, if you would like to ask a question, please press the star and 1 on your touchtone phone. You may withdraw your question at any time by pressing the pound key. And once again, that is star and 1 on your push-button phone. And we'll move first to George Nodder with Jeffrey. Please go ahead.

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

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

Got it. So in aggregate, the $40 million or so comes, I guess, evenly across commercial solutions versus the government side then? Is that fair?

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

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

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

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

Yeah, I think at this point in time, George, we haven't given any guidance yet. But I would say, you know, we're looking at Q4 shaping up similar to Q3. And if you just take Q4's expectations and multiply that by four, I think that's sort of a starting point for how we're thinking about FY23. Got it. Okay. Okay, I'll pass it on. Thanks a lot, guys. Thank you.

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

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

Sure.

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

Yeah, I mean, I think we're extremely excited about our participation in the LEO market and the MEO market in a very broad sense. As we've mentioned to you before, we obviously have non-disclosure agreements with several of our key customers in this market, so we're not going to speak specific to any particular customer. Our view is you could look at what the public documents are, and I would point you to our shareholder letter where we've kind of made a few comments that we feel are relevant to us. First, as you think about the satellites, the public documents that have been filed with various FCCs and industry reports that are available, the majority of these satellites are not going to occur for, you know, more than a year plus. So when we take a look at it and map out the lining of our participation in those markets as a whole, we don't really have any revenue in fiscal year 2022 related to those things, and I would say we're probably going to have modest revenues in fiscal year 2023. But clearly our belief is as satellites broadly get launched, and again, not trying to be specific to any customer, but as satellites go launched, you need those ground station equipment. And I think that's when you'll sort of see tangible orders come in from our view is when we'll start to see that at the bottom line. So I do think it's a – Twenty-four perspective is where you start to see sort of that bump in our participation. But, you know, we're not looking for much more participation in 23 than in 2022. We'd love for it to come in earlier than that, and, you know, we'll see how things play out. But we're making progress, and we're hard at work working with our customers.

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

Yeah, I would say right now the biggest area we see at the moment, and, you know, things can change from, you know, quarter to quarter or period to period, is really in public safety and cybersecurity. You know, we have a smart response software application that, you know, we're piloting with some real nice big customers out there. Feedback is real good. It requires us to, you know, have a lot of API information and API connections and information flows to go in there. So as we look at the types of functions and features that our public safety customers want, that is an area where we see potential. You know, technologies, I would call them, and maybe some smaller companies that could fit right into our product line and would be synergistic to the efforts that we're doing. At the same time, I think cybersecurity is an area that we are looking at. We do have a very large contract, $125 million, with the U.S. government that we're performing cyber work for for the next four or five years. We have a couple of million dollars' worth of work with various public service agencies today in our 911 segment. As we look at the landscape, you see that every day with the war in the Ukraine, foreign nationals, wherever they may be, are attacking both U.S. government-secured contractors. The 911 public safety system is part of our national infrastructure. And we see a need out there by state and local municipalities that do not have the IT skill or the cyber skill necessary to defend those attacks, if not monitor those attacks, and if not be in a position to, if they are attacked, to get those systems up and running again. So again, as we work with our customers, Commonwealth of Massachusetts, state of Arizona, for instance, we see opportunities there. And I think I would point to when we won the contract with Arizona, it was the first contract that uh one of our existing customers signed for you know some of our cyber security solutions so again we have a good captive uh if you will uh or loyal customer base and so just within our own customer base we're optimistic that we could grow uh you know the revenue that we're getting from that line but those things take time and obviously you need funding but I think if we were able to make some smaller acquisitions in that area, it might accelerate our participation in those markets.

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

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

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

And we'll move next to Asia Merchant with Citi. Please go ahead.

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

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

And in terms of the third question,

Yeah, it was a strategic emerging technology. I think you mentioned you exclude that from your adjustment. I'm kind of curious what that is and why is that excluded? Thank you.

Oh, sure. Okay. So as we announced about a year ago, we also had a similar charge of about $300,000. This particular quarter, you know, as Mike was talking about our partnerships with our Leo customers and attacking the meal market as well, working with our customers, we identified some highly technical, risky-type endeavors that we chose to do ourselves to show our partnership with the customers and to progress in our relationships. And so in this particular quarter, we incurred about $900,000 of those types of costs. You know, and I'm not disowning it.

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

So we think it's a proper way to look at the company so people know what we're spending.

Okay, that's fair. And then just this is more like, you know, the backlog that you guys have. Is there like a timeframe associated with it? Like, do you expect to fulfill this backlog, which may be, you know, because you have supply chain issues right now? Do you expect to fulfill this backlog in the next six months, 12 months? Like what's kind of the timeframe associated with the backlog?

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

Okay, thank you.

And we'll move next to Mike Lattimore with Northwind Capital. Please go ahead.

Yeah, thanks. The communications business grew pretty well sequentially. Is that just sort of deploying some of these 911 deals, or what caused that growth?

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

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

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

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

No, it's, I mean, obviously, we'd love to go back and adjust, you know, current contracts that provide for that. But, you know, obviously, if we have a firm fixed price contract with our customers, you know, our folks expect us to honor it. But, you know, if they have a change order or something that they want us to do differently, you know, we're certainly going to be pricing it. It's really there's not much in negotiation. We're certainly going to be pricing it, you know, reflecting the current labor market and the cost parts that we're seeing. And I would say to you, I mean, I think this is one of the issues that we and other companies are facing with inflation. I think right now people are trying to understand is inflation really at 8 percent, 9 percent, 10 percent. And so they're pausing. Right. people are waiting to see what they're going to do. In some cases, you might have some companies that just want to order because they think inflation is going to be continued at this number. So you might as well get the stuff now before it gets more costly. On the other hand, I think there are some companies that have to redirect some of their spending to fuel or labor as opposed to, let's say, hardware. So I think inflation is hurting us that. But, you know, go back to your core question. We're negotiating prices where we can. And anything that's new, we're going to be, you know, reflective of where market conditions are today.

Yeah. And then with the U.S. government vertical, I mean, they passed their budget a few months ago. How is visibility in this kind of U.S. government projects for you guys?

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

Got it. And just last on 9-1-1, How many opportunities do you see in the pipeline for fiscal 23, in terms of like new state deals?

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

Yeah. Okay.

Very good.

Thanks.

And we'll move next to Chris Quilty with Quilty Analytics. Please go ahead.

Hi, guys. Thanks. And, again, I do appreciate both the shareholder letter and the extra half hour to read it. I'm a slow reader. Mostly some housekeeping questions here for Mike, the other Mike. But, you know, you had a large CapEx here in the quarter, and I think you just gave us an update on the full year, but it didn't seem like the PP&E went up all that much sequentially. Was there something in specific that dropped out?

Nothing stands out. Okay.

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

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

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

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

Yeah, correct.

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

Yes, Chris.

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

No, look, if we're able to – certainly the Q4 inventory level is probably a good number going forward. You know, at the numbers Mike was talking about, I would agree with that. I think we're still short of inventory to ship products. So, you know, the hope is that we can continue to start to get parts. We're starting to see that break through a little bit. Like, as Mike mentioned, it's one of the reasons why Q2 went – was a little bit better in the commercial segment going to Q3. So we're starting to see parts come in a little bit better. But I think, you know, we're going to want to secure parts to make sure that we could deliver our stuff to our customers. But all in all, you add it up, I would say the Q4 number is probably the right number to think about.

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

I think the funnel for us, Chris,

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

On the topic of Ukraine, I think you quantified in your letter the revenue exposure to Russia. Can you just clarify, I mean, is that primarily in the Earth Station business, or does that spread across other segments?

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

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

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

But a lot of interest, and we think it's going well.

Thank you.

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

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

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

Okay, thanks for that, Ann.

I wanted to ask about your updated guidance. How much of this is still anticipating the Russia war prolonging into, say, the fourth or by the end of the year?

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

Okay, thanks for your questions, or thanks for your answers. You're welcome, Chris.

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

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

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