Comtech Telecommunications Corp.

Welcome to ComTech's Fiscal Q1 2023 Earnings Conference Call. As a reminder, this conference is being recorded Thursday, December 8, 2022. I would now like to turn the conference over to Mr. Robert Samuels of ComTech. Please go ahead, sir.

Good afternoon, everyone, and thanks for taking the time to dial in today. I'm Rob Samuels, ComTech's Head of Investor Relations. Welcome to ComTech Telecommunication Corps' conference call for the first quarter of fiscal year 2023. Today, I'm here with ComTech Chairman, President, and CEO, Ken Peterman. We're also joined by Mike Bondi, our CFO, and we'll also be hearing from Maria Hedden, our Chief Operating Officer. Before we get started today, I'll also say that both myself and Ken are always available to answer questions our investors may have. So please get in touch if you want to organize a meeting to talk about the company, our results, or our strategy. We also have a detailed discussion of the quarter in our shareholder letter available on our website. And we have also been working to communicate directly about our business and our market between quarters in our blog, Contact Signals. Finally, 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. Actor 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, Ken Peterman. Ken?

Hello, everyone, and thanks again for taking the time to dial in today. As you all know, this is still early days in my tenure as CEO and early in the journey for everyone at ComTech as we move to fundamentally transform our business. That said, as we head into a new calendar year and close the books on our first quarter of fiscal 2023, I could not be more pleased with the progress we're making and the opportunities ahead. One thing that I was consistent and clear about from day one in my conversations with everyone from my leadership team, our employees, and our investors was that ComTech needed to move faster than ever before. Our end markets are changing in real time. Our customers' needs are constantly evolving. and new technologies mean that we can offer creative solutions to solve their problems if we as an organization commit to working together as one ComTech. This means sharing our collective expertise, our insights, and abilities to improve everything from our operations to our products and our culture. It's early in the process, but the one ComTech journey is underway and working. I see it every day in our people, and it's also being reflected in our financial performance. In addition to a quarter over quarter increase in consolidated net sales representing the fourth straight quarter of top line sequential growth for ComTech, our bookings of 181 million foreshadows the increasing customer value we are creating as one ComTech. I should also point out that this performance was delivered even as we reorganized our business, continued to restructure our senior leadership team across multiple functions with key appointments, and continue to make changes to improve the functional machinery of our organization. I want to talk a little more about what we've accomplished and what you can expect from us going forward, and I want you to hear directly from our COO, Maria Hedden, as she's in the trenches streamlining and improving our processes so that everything we do at ComTech, we do better, faster, and more efficiently. Before that, I do want to turn the call over to Mike Bondy, our CFO, so he can walk you through our financial performance for the quarter. Mike?

Thanks, Ken. For Q1 fiscal 2023, we recorded $131.1 million of consolidated net sales, of which $80.9 million were recorded in our satellite and space communications segment, and $50.3 million were recorded in our terrestrial and wireless networks segment. Our consolidated first quarter net sales represented a 3.3% increase over last quarter, and as Ken mentioned, our fourth consecutive quarterly increase. Compared to the year-ago quarter, our consolidated Q1 fiscal 2023 net sales increased $14.3 million, or 12.2%, driven by higher revenue in our satellite and space communication segments. Consolidated gross margins were 35.7%, in line with our gross margins achieved in Q1 and Q4 fiscal 2022. Our gross profit percentage in Q1 fiscal 2023 reflects an increase in net sales and overall product mix changes. It also reflects startup costs associated with the opening of our new high-volume technology manufacturing centers, as well as increased costs resulting from the ongoing impacts of COVID-19 and inflationary pressures. As explained in more detail and reconciled in our Form 10-Q filed earlier today, we utilize a non-GAAP measure that we refer to as adjusted EBITDA. Q1 fiscal 2023 adjusted EBITDA was $10.7 million, or 8.2% of consolidated net sales, as compared to $5.5 million, or 4.7%, in Q1 fiscal 2022. The increase, both in dollars and as a percentage of sales, is primarily attributable to the increase in Q1 fiscal 2023 net sales. Sequentially, in line with our prior guidance, adjusted EBITDA in Q1 fiscal 2023 was lower, both in dollars and as a percentage of sales, reflecting overall changes in mix, a general rise in cost due to an inefficient supply chain and inflation, and the settlement last quarter of fiscal 2022 annual incentive compensation with fiscal fully vested share units in lieu of cash. As Ken previously mentioned, bookings during the quarter totaled $181.2 million, representing a 26.9% sequential quarterly increase and a quarterly book to bill ratio of 1.38 times. Our current revenue visibility is approximately $1.1 billion, and is equal to the sum of our $668.2 million of funded backlog plus the total unfunded value of certain multi-year contracts that we have received and from which we expect future orders. Overall, our consolidated Q1 net sales and adjusted EBITDA were ahead of our guidance provided last quarter, and we're pleased to have exceeded our targets and to have increased our funded backlog from July, particularly in light of an economic environment That continues to be challenging. Now let me return the call back over to Ken.

Thanks, Mike. As I said at the top of the call, a big part of our financial performance reflects a lot of hard work that we're doing to improve the core machinery of our business. In my opinion, we have the best people and the best solutions, and we serve the most demanding customers in the world. And we're growing. To support everything we're doing and everything we want to do, We have to make sure that ComTech's organization, operations, and systems can keep pace with where our business is going. A lot of that work is being spearheaded by Maria Hedden, our Chief Operating Officer. Maria joined us in March, bringing over 20 years of executive P&L management experience and a history of improving business performance. At the core of Maria's work is her commitment to a one ComTech strategy, ensuring that everyone at the company shares a common set of tools and processes to improve and optimize everything they do every day. I want you to be able to hear directly from Maria as her work plays such an important role in accelerating the growth and profitability of our business. Maria.

Thanks, Ken. And good to be able to have the opportunity to speak with all of you today. Today is actually the first time I participated on an earnings call, but I think it highlights two things that I expect are important for investors. The first is that context we are making serious strategic commitment to operational integration and excellence, what you've heard Ken call one context. The second is that we are focused on translating that strategic commitment into tangible actions on the ground that improve the way we work and the way we work with each other every day. Our belief is that cumulatively, those actions will make us a stronger company, will directly translate into growth and profitability, and in so doing, deliver value to our shareholders. All of this is to say our one context strategy isn't about ideas as much as it is about actions. Shortly after I arrived, it became clear to me that we already had the single most important resource a company can have in place, a talented, passionate workforce. As I saw it, my job was to ensure that all these talented people had the right organizational machinery around them to support what they were already doing in ways that were more effective, efficient, and scalable. We needed to collectively harmonize our business with best practices through each business unit. That meant everything from optimizing the company's supply chain, our engineering operations, our manufacturing to our sales processes. including pricing and contract reviews. It also meant we had to make sure all our teams were appropriately staffed to not only meet today's needs, but for the growth we anticipate. And it meant a reorganization of our leadership structure to make sure we had the right executives in place, but also create structures to ensure all our leaders had a clear sense of the totality of our business and access to the insights and innovation from across the business. In a very short period of time, we have not only committed ourselves to the idea of one ComTech, but we are implementing it. We have made key appointments and strong hires into leadership positions. We are in the process of a firmware business and operations improvement project to control costs where we can to defend and grow margins while at the same time make deliberate investments to promote our growth and ability to operate at scale. And while this may sound straightforward, we make sure we are talking to each other all of the time. I have instituted a monthly business review process which convenes the entire leadership team for a full day to make sure we celebrate our wins, learn from our losses, and make sure our plans and targets are on track and appropriately resourced. Related, I also hosted a strategic goals deployment session so that I A COO can make sure that the organization has a clear understanding of how to properly support our growth initiatives. There is a lot of change happening at ComTech right now, and in many organizations, change can bring uncertainties and doubt. But at ComTech, I see every day what our financial performance this quarter confirms, that we're making the right kind of changes that are unleashing and empowering our people to do what they already were doing. innovating and delivering the best solutions to our customers around the world. We all know there is a lot of work to do ahead of us, but I have the confidence that the changes we are and will be implementing at ComTech will create permanent competitive advantages for our company and our customers, as well as value for our shareholders. Thank you for your time, and now let me turn to Ken for his closing remarks.

Thanks, Maria. You know, I just want to extend the point Maria was making about the incredible and incredibly positive changes that are happening every day at ComTech. As she said, we made significant changes to our leadership structure and now have executive focused on both our key end markets as well as our key customer segments. Tim Jenkins is our terrestrial and wireless networks segment president, and Justin Wexler is our satellite and space communications segment president. We also appointed Daniel Gazinski, as our Chief Strategy Officer for Defense, and Jay Whitehurst as our Chief Strategy Officer for Commercial. Finally, we appointed Doug Houston, our Vice President of Global Support. Together, it means we have a leadership structure that is ready to partner with customers across business units and has expertise in the specific needs of key customer segments. I believe that with the people we have in place, heading an organization that is itself improving every day, ComTech is poised for a successful year ahead. Before I move on to take questions, let me circle back to our bookings. We shed $181 million for the quarter. We're over 2x higher than our first quarter of last fiscal year. Our investors should take this to be a clear indication that while we continue to improve the machinery of our business, we have not and will not fail to remain completely focused on solving our customers' problems, and creating unprecedented customer value in unique and innovative ways. Our contract wins during the quarter validate not only our unwavering customer focus, but also make it clear that ComTech solutions and services continue to set the standard in every one of our key markets. It never leaves our mind that we have the most demanding customers in the world. Our technology enabled solutions are not just field tested, they're battle tested. We welcome new business at ComTech. but I'm always happy to win repeat business too, because it means that these tough customers have put our products through their paces and we have measured up to their very high standards. Among the contracts we were awarded during the quarter from customers we have worked with before, we saw key wins with the US military as well as for the Ukrainian government, which is adding new communication systems identical to those we donated to them in March of this year. In addition, one of the largest wireless carriers in the United States, renewed our 911 services contract with them. Again, underscoring that across our segments and our end markets, customers have come to know, trust, and depend upon ComTech. With that, let me acknowledge that the road ahead will be challenging, given the macroeconomic environment that combines inflationary pressures, pandemic aftershocks, and unresolved geopolitical tensions. But we believe ComTech has never been better prepared to meet these challenges and take advantage of the opportunities they present. With new leadership, a new organization, a refreshed common operational infrastructure, and an energized and invigorated team, our OneComTech transformation is positioning us for success. OneComTech is working, and we're moving fast, and we are winning in a market that is itself growing. Now finally, I want to take a moment to thank Fred Kornberg for his 50 years of service to ComTech. Next week, Fred will be retiring from our board, and from all of us here at ComTech, we wish him well and thank him for all his contributions over the years. And with that, let me take your questions.

At this time, if you would like to ask a question, please press the star and one on your touch-tone phone. You may withdraw yourself from the queue at any time by pressing star two. Once more, that is star and one to join the queue. And we'll move first to Joe Gomes with Noble Capital. Please go ahead.

Good evening. Thanks for taking my questions. Hi, Joe. Good evening, Joe.

So, Ken, I wanted to ask, You know, you've now got a quarter under your belt. You know, maybe a little more, you know, detail or color on your observations, your evaluations, your conclusions. You know, you did some of that in your prepared remarks. Maybe you can dive a little bit deeper in that. And where are you getting any pushback, if you're getting any pushback, on some of these, you know, changes that you're making to the organization?

Yeah, thanks, Joe.

I'm going to offer a perspective on that. And then if Marie or Mike want to chime in, they can with respect to the lens through which they look through. But I'll tell you that, first of all, the move to one ComTech is challenging. And obviously, our biggest challenge here in the beginning is aligning our various businesses on the common operating practices and common operating systems. We're moving through that aggressively, and we've baselined the current configuration, the current operating processes that they operate on. We've put an integrated master schedule together that transitions them. We've prioritized those tasks, and we've put key metrics and key performance indicators in place so that we can measure our performance on that. And we're able to forecast at this juncture when and how much the return on that investment might be and on what programs. So the good news is we're moving ahead on that, and the team is very excited about it. Secondly, I'll say that we've launched a number of crucial initiatives. One of those is the launch of the Innovation Foundry, our technical incubator, if you will, that's being led by our chief growth officer. I'm really excited about that, Jill, because we've identified already some initial partners who can bring exciting and relevant technologies into that technology incubator so that we can assess and blend them with our own capabilities to demonstrate how they improve customer value and how they improve customer outcomes. And in this kind of a controlled environment, we can even quantify what we think that customer value might be. That's really significant. So one of the things is I'm really excited and enthusiastic about the Innovation Foundry and how that provides a lens through which we can up-tier our capabilities to the systems and services level and measure the performance that that brings our customers.

Okay, great. Thank you for that. Pardon me. Maybe you could talk a little bit more on the terrestrial business. It, you know, was down sequentially, you know, maybe a little more color detail, you know, how is it the 9-1-1, you know, market opportunities out there, the deployments, you know, in Pennsylvania, Arizona, some of the other states that you've won. Are we making any move there, you know, getting those deployments up and running? Any color there on the terrestrial business would be great. Thank you.

Sure. Sure, Joe, thanks. I'm going to let Mike jump in on that.

Sure. Joe, on the terrestrial and wireless business, as background, again, an early part of fiscal 21, we announced winning several large 5G location-based services contracts. Those software contracts definitely contributed to a favorable sales mix that we disclosed last year in Q2 and Q3. Also, coming in fiscal 22, and especially in Q2, Just to remind everybody, we did have a $2.5 million benefit to cost of sales that was the result of reducing a warranty accrual due to lower than expected warranty claims in that 911 product area. So certainly we had some favorable headwinds last year. When you look at the sales and the adjusted EBITDA contribution in Q1 of fiscal 23, as we stated before, you know, we're subject to mixed changes. And, you know, the recently awarded statewide NG911 contracts, you know, as we disclosed, generally have lower upfront margins, lower than our 911 wireless call routing services. And that's generally because the legacy 911 call routing services are based on advanced and mature software. Whereas you have to keep in mind the new contracts that were winning in the 911 area, the NG911 area, those contracts were recently won We're installing the infrastructure, and it's going to take some time as we turn on the PSAPs to absorb that upfront cost. And in terms of improving margins over time, the more PSAPs we light up on the recurring service, our expectations are to have a better bottom line. So to answer your question in terms of the progress on Pennsylvania, South Carolina, Arizona, those big contracts that we won, I think we are very happy with the progress. on all three of those contracts. We're getting towards the tail end of the deployment portions of those contracts where we're spending the CapEx, and we have been lining up the PSAPs. And so we're very encouraged by that progress. And as we move into 2023, we're likely to see more of those PSAPs go live.

Great. Thanks for the insights there, guys. I'll get back in queue. Thanks again.

Thank you.

And we'll take our next question from George Notter with Jeffries. Please go ahead.

Hi, guys. Thanks very much. You mentioned the $181 million number in bookings for the quarter. I assume that included some big, chunky contracts. I think during the quarter you announced a tropo deal with the U.S. military for $50 million. I assume that ran through that bookings number. Are there any other kind of chunkier pieces in there as well?

I'll take that, George. We did in our 10Q, we tried to give some color on the largest of the orders. It's also included in the shareholder letter. And I think as you have outlined, we definitely had the next-gen troposcatter terminals. That order was nice to see. It came in bigger than we were expecting. So that was a great award. We also had the Ukrainian Comets that was received in the first quarter. We made really good progress this quarter in the first quarter delivering on those 80 units. And in terms of, you know, the next item I would say we call out, we have a large tier one carrier that we provide core routing services for that customer. And in the first quarter, we renewed our annual contract. Those are probably, you know, the largest. We had some additional reset orders with the U.S. Army and some other key wins. But, you know, certainly those were the three largest that we would call out.

Got it. Okay.

Yeah. George, I will tell you that as we bring our business together, we are seeing our addressable and serviceable markets expand as we look to harness the enterprise-wide capability of OneComTech, and that enables us to move up tier into the systems and services segment. So we're pretty enthusiastic about the opportunities that's revealing to us, and we're seeing customers even engage with us directly to better understand how this expanded value proposition can create value for them. We're engaging directly with both satellite and terrestrial customers. We have strategic partnering discussions underway. In the upcoming 30, even within the next 30 days, we're hosting technology workshops and leveraging the innovation foundry to demonstrate and quantify these enhanced capabilities in a customer context. So looking forward, our customers are aligned with us in this expanded value proposition. That's expanding our new business funnel going forward.

Got it. Okay, a quick question on the balance sheet also. I think you guys have about $130 million drawn on the credit line, the revolver, right now. I know that expires in the fall of next year. Could you kind of talk about your plans to kind of deal with that, given where the balance sheet is right now?

Sure, George. In terms of the debt on the balance sheet, it's actually a little north of what you just said, but more importantly, I would add, About a week ago, we did announce through 8K that we did basically amend our credit facility. So in the presentation on our balance sheet, you see it as long-term. It's because we were successful in getting our lenders to move forward with an amended deal. We did change some of the deal terms to be more representative of today's business, but that was a syndication we announced last week. We're very pleased with that and very thankful, you know, in this environment. Obviously, you're reading a lot of news reports. There's a lot of skittishness out there with the lenders, you know, dealing with the global recession potentially, higher default rates. And so, you know, navigating through that in this environment, we're very pleased with the outcome. And it gives us the flexibility to operate.

Got it. Great. Thank you very much. I'll take a look at the AK. Appreciate it, guys. Thank you. You too.

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

Great. Yeah, thank you. Yeah, definitely hit the ground running here. Looks good. Just on the gross margin, can you just kind of go through a little bit of the, you know, the drivers and headwinds you're seeing on gross margin this year? You know, just trying to get a sense of where that might go over time here.

Sure. In terms of, you know, our guidance, you know, I certainly would be mindful that we're only giving guidance for Q2. We're certainly in an economic environment that's challenging, as Ken mentioned, and as we disclosed, we definitely have seen inflationary pressures. Supply chains are still not running optimally. And, you know, against that background, and backdrop. You know, we're pleased with our performance in Q1. We think that, you know, over time our margins will improve. But, you know, we do have a lot of backlog in our terrestrial and wireless network segment. A lot of that backlog is multi-year in nature, you know, and that was set up, you know, a year or so ago. So, it will take some time to burn off that backlog. But when and where we can, we are resetting that backlog with higher pricing that is market-based, taking into account inflationary pressures. Certainly for the rest of the year, it's a little too early to call. We're pleased with the fact that we're holding the line and able to keep that 35%. As I pointed out last year in Q2 and Q1, we certainly had some favorability based on the mix at the time, but when you isolate those out, we're sitting in that mid-30% range. Our goal and the targets for us are certainly higher, but right now we're not going to you know, go beyond what we're saying for Q2's guidance on the top and bottom line.

I will tell you, Mike, I'll tell you also that we are making great progress. I'd like to give Maria a chance to jump in here, but we clearly have the bus headed in the right direction. We got the right people in the bus. We got the right people in the right seats. We provided some details on that in the shareholder letter with respect to who some of those people are. These are seasoned veterans that have done this kind of thing before of bringing siloed businesses together. And so maybe just a word from Maria with respect to the metrics, the KPIs, the way you're tracking that on the integrated master schedule and driving the team against clear goals.

Yeah, thanks, Ken. So just a couple things on that. So obviously, We've rolled out some of our people strategy and what we've done with that, but clearly some of the new processes that have been instituted over the last quarter that is focused on really understanding some of our business risks, understanding those key performance indicators. As Ken mentioned, I hosted a full-day session of developing what our stretch objectives and what we needed to do And really, that's driving visibility and alignment across the organization to stay focused on really being able to grow the organization while continuing to perform day to day on our expectations.

Yeah, great. And then maybe just on the pipeline itself, you know, I mean, I guess you kind of called out the macroeconomic geopolitical. effects here, but also you've obviously had strong demand. So maybe just in terms of the pipeline, how healthy is it? What areas are particularly prominent in the pipeline here?

Sure. I'll speak to that. I tell you, both our segments have some pretty exciting growth potential. In our satellite and space segment, we're now able to move up here to offer systems and services that our individual siloed businesses could not offer before. This significantly expands our market opportunities. It enables us to offer customers significantly greater value. It significantly expands our market opportunities and it expands the size of our new business funnel. Now we're able to offer customers in the satellite and space arena significantly greater value proposition because it creates significantly more customer value. And we can move then to more innovative business models that enable us to monetize that value proposition more effectively. So we're excited about that. Now, in terrestrial and wireless, We're expanding both geographically, and we're also increasing the number of transactions that we handle with respect to either 911 calls or location-based queries. So the number of transactions, as that increases, and in fact, as we move toward machine-to-machine 911-like calls and not just human-to-human, that will increase another and make available another dimension of growth for ComTech. Thirdly, as the satellite and terrestrial network infrastructures converge, we see yet gross opportunities in another dimension. And you see that with devices now offering multiple connectivity choices, terrestrial like Bluetooth, Wi-Fi and cellular, but also satellite connectivity to LEO. And you see multiple devices and device providers moving in that direction. So at the end of the day, we see significant growth potential in each of our individual segments, as well as at the enterprise level through the convergence of satellite and trusted domains, where ComTech is uniquely advantaged.

It's just last one. Tropo scatter, is that a big part of the pipeline? Are there big deals out there?

Well, we see Tropo as an exciting technology that complements SATCOM because when SATCOM tends to degrade in its performance, such as in a hurricane where you have extremely heavy rain, Tropo scatter actually improves in its performance envelope because it operates by bouncing the signal, the propagated signal off of particles, and the more particles there are, generally the better it works. So it becomes a natural companion to SATCOM, and we see opportunity there in the traditional military and defense environment, but we also see opportunity commercially in terms of connecting oil and gas enterprises, providing robust connectivity between critical operation centers like hospitals, firehouses, law enforcement, emergency operations centers in a hurricane or other kind of a situation. So we see that technology being able to expand in the defense market because of the success it's having in the peer adversary conflict. We see it moving into new markets as well, adjacencies commercially, as well as at the enterprise level like oil and gas. So we see that as a significant growth opportunity for us.

Great. Sounds good. Thank you.

Thank you, Mike.

And we'll take our next question from Chris Sakai with Singular Research. Please go ahead.

Hi, guys. This is the same for Chris. You know, in light of for you taking Helm, Chem, and the temporary headwinds to free cash flow, Has there been a discussion around commitment to and or growth of dividends?

Well, yes, I can tell you we look at deployment of capital on a regular basis. We try to optimize that with respect to driving our business performance and creating shareholder value. We deal with that at the board level. So, yes, there's continuing conversations in that regard. Our capital allocation plans are continually discussed, reviewed. I point you to our disclosure in the liquidity section of our 10Q, but I don't have anything specifically that I'm going to say on that right now beyond that, beyond the fact that we continually look at it.

Okay. The company's international customer base as a percentage has stayed constant, lasting. a couple of years, last five years or so, around one quarter, and correct me if I'm wrong. So can you comment on the dynamics of business development internationally and the sales and marketing effort internationally, maybe how it is per se and how it is different from domestic dynamics?

We have a dedicated sales team that serves the international market We have a dedicated sale team that serves the defense market and then the domestic market as well. I think our international presence is about 21.2%, so you're right in the sense that it's about a quarter of our business. But it's going to benefit, and as part of this one ComTech transformation in ways that seem to me, going in, that they're going to be at least as favorable as our domestic and defense business and the reason I say that is because as we move to ground satellite ground infrastructure and maybe providing that as a system or providing that as a service International customers have the opportunity to benefit that as well. As we see the international community migrate from 2G and 3G to 4G, 5G technologies in the terrestrial wireless market, we see the opportunity that that will benefit us. And we see the opportunity to extend our location-based services into the international market in a bigger way too. So we think our, you know, really the several legs of our business all can move into the international market. And as we up-tier our capabilities, and our marketing schemes, the international market will benefit by that, the same as our domestic and defense activities.

Okay, so this quarter benefited from military sales, foreign military sales for your beyond line of sight communication terminals and for Ukrainian government. To an extent, you can give us color Do you think next quarter and how long do you think any color you can give this would be a benefit?

What I can tell you is something we've said in our blogs as well as our other communications, and that is the most effective marketing person in the world is a customer in a uniform. a uniformed son or daughter who is in a conflict or otherwise in the service of the nation. And the Ukraine is a great example because they're in a conflict with what we like to say is a peer adversary. And our equipment is present. Our equipment is working. So that becomes a test that has a greater value than any marketing brochure or podcast that I've ever seen. So, yes, we do expect that to have an extended benefit that continues the viability of our equipment and extends its value because it works. It works in the toughest of environments, proven.

Absolutely, yeah. And it develops a great narrative for the stock, too. And finally, you know, it's a very long-term question. And so if you can comment on this. So the recent iPhone models have this emergency SOS. So in that regard, do you think this product from Apple or, you know, if you kind of draw a trend line what they might come next year in their products, it would be a competitive threat or a substitution possibility? or you see it the way that Apple's foray as a complementer to companies offering.

Well, I'll tell you, the convergence of satellite and terrestrial network infrastructures we see as a significant opportunity for ComTech because we have technology leadership in both of those domains. They have traditionally been different domains with different devices, different frequency bands, and, frankly, different players. We've been strong and are strong. in both of those domains. And so as that convergence of satellite and threshold comes together, we see ComTech uniquely positioned to take advantage of that. I'll say that as a first point. The second point that I'll say is sometimes the future is predicted by looking at the past. And when we saw the flip phone, which was voice only, move to the BlackBerry, what you saw is the BlackBerry took market share away from the providers that only had voice. But when you saw the smartphone emerge, it introduced the opportunity for many more applications. Many more apps could run on the smartphone. So when the smartphone was introduced, it didn't just take market share from the Blackberry. It in fact created a much larger market of new apps that had never been done before that created enormous customer or user value. Apps such as downloading your boarding pass, making restaurant reservations, online banking. I don't need to list them. You see them on your phone. Okay, so in the second case, the smartphone's introduction didn't just take market share from the incumbent. It expanded the entire ecosystem. So now bringing your attention to looking forward. None of us know right now whether the convergence of satellite and terrestrial is going to behave like the former, where it's going to take market share from those providers that do not provide SATCOM, or whether it will create an explosion in the ecosystem of new apps and new capabilities that create an expanded market for everyone. So I'm not going to make a prediction except to say that I think ComTech, reiterate my first point, ComTech is, I think, very advantageously positioned because of our strength in both satellite and terrestrial network technologies and location-based services. So that's one of the reasons, one of the driving reasons we brought our siloed businesses together so we could up-tier our capabilities and take advantage of this kind of a market inflection.

Thank you. Thank you so much. Good luck to you and the new team. I appreciate it.

Thank you. Thank you.

And once again, for your questions, that is star and one. We'll move next to Greg Burns with Sidoti Company. Please go ahead.

Good afternoon. With the technology... The terrestrial and wireless segment, what is a good target or steady state margin profile for that business?

Yeah, I think historically we saw, you know, because it was combined with our commercial segment, you saw the EBITDA profile there. You know, going forward, certainly we're at a point where we're seeing, you know, convergence of two types of revenue streams at the same time. and the building up of the NG911 revenue. So right now, I'd say initially, as we absorb those upfront costs, the EBITDA contribution will be sort of what you're seeing right now, because we're in between those large 5G LBS contracts. As we announced in Q4, we had a nice-sized order come through, but You'll see the revenues from that ramp up towards the tail end of this year. So right now, you're getting more of a mix of our NG911 revenues. And as we said, flip on more PSAPs and start leveraging the infrastructure over a broader base of recurring services. The EBITDA profile will improve. I'm not going to give a specific percentage, but it's certainly higher than what it is right now because we're just at the front end of those contracts.

Can you give like a range, like high teens, low twenties? Like what should investors be expecting from this business as these 911 deals scale up?

I'll answer it this way in a more broader answer. In the past couple of years, you've seen our EBITDA contributions come down from say the 14% that we were doing pre-COVID. As a company in all of our product areas, not just in the 911 area, We want to get back to those historical levels, and if not exceed that. As we've articulated, we have a lot of initiatives going on right now. And once we start to bear fruit, our expectation is that we will get there. So I don't want to overstate we have a lot of work to do. It's certainly a challenging environment. But in the next couple of years, I would expect us to get back to that level.

Okay. On the contract with Verizon, how many years was that extended for, and was there any change in pricing?

That contract was an annual renewal. It was, at this point in time, annual renewals. And in terms of pricing, just due to competitive aspects of it, we have a very good relationship with our Tier 1 carrier, and it was a seamless type of renewal. Just rolled forward.

Okay.

The TROPO deliveries to the Marines, or maybe that was in bookings, can you just remind us the total size of that contract that you were awarded, and how much of that have you delivered on?

Greg, just to be clear, you're talking about the Marine contract for NextGen TROPO? Yes. Okay, that's the contract we won about two years ago. I think the headline ceiling was 200 plus million, maybe 213 million. We initially got a $13 million order to run out the first leg of prototypes, which we delivered about a year ago. And they've been using them in the field and testing them. And this particular go around, it was a 50 plus million dollar order that we received, which is sort of the first production run. You know, in terms of their needs for it, it's something that they, you know, have a need and a desire for. It's going to take some time to get the deliveries out, you know, based on the fact that it's a very large order. But globally, there's still a lot of headroom left on that contract. But, you know, in terms of our outlook, we're just focusing on the current order that we have.

Okay. And then the award to the U.S. Army, I think at the time when you were awarded the The Marine contract, the U.S. Army had a larger contract that they awarded to someone else. Is what you were awarded this quarter part of that? Are they coming back to market? What is the opportunity there?

What we were awarded this quarter is completely independent of the Army situation. The Army situation is one that we are exploring. And Working toward, because our equipment, as I mentioned before, our equipment is proven in battle, and obviously that's a heck of a credential. So what we're doing is trying to leverage that and have exploratory discussions that can lead to something that helps the Army be more effective as they get in the fight. But we don't have any more to say on that right now.

Okay, and then on the E911 side, any update on Ohio? Is there any line of sight on when funding might be approved for that contract?

Want me to take that one? Yeah, yeah, yeah.

So in terms of Ohio, you know, I think at this point it's not likely to be voted on before the end of the year. You know, in our view, just to remind everybody that that was just a booking this year. and there was likely no revenue contribution just given that you have to do a lot of design work up front. But, you know, we are working very closely with our end customer. They certainly have a need and a desire for the application and, you know, trying to figure out the next steps, you know, in terms of what kind of funding we can get. You know, our view right now in terms of our outlook is, you know, it's certainly a large contract potential. It could be north of $100 million, but right now, you know, in terms of setting our own expectations, we're viewing it as, you know, it's something that could be in the short term to get a booking, but, you know, in terms of revenue contribution or EBITDA contribution, it wouldn't be until next year. And it's, you know, likely to be something that's going to be a function of how much funding they give us up front. I don't think they'll, at this point, give us the whole thing up front. It might be in increments, but, you know, it's still, you know, the story needs to be told there. I think we have to wait for the next session to see how the vote goes.

Okay. And the pipeline for E911, is there any other large state contracts that are up for bid that we should be focusing on?

Yes, there are other opportunities. So despite getting pushed out for us, Ohio, we certainly have identified other near-term opportunities. We're not sitting idle. In terms of the competitive nature of those procurements, I'm not going to name the states or the regions, but there are a handful of those that are coming to market and will be responding. And, you know, I think with our, you know, recent wins and our capabilities, we think we have good positioning there, but, you know, we'll have more to report on that in the future.

Okay. And then lastly, you're bringing on that added capacity in Arizona now. And I think a large part of that is to satisfy some of their high volume, some new high volume customers. production for the new LEO and MEO satellite networks that are out there. Is there any update on when those might ramp up and start contributing to revenue?

Yeah, go ahead.

Sure. In terms of our progress here with our large LEO customer, as we announced last quarter, we expanded our relationship Certainly there is a desire to move fast and the facility that we are bringing online has the capabilities to meet the high volume demands that we would expect from this contract over time. And in terms of where we're sitting with the customer, like I said, things are progressing. We expanded the relationship. We're talking about other aspects of that relationship and other areas of this overall relationship. And, you know, we'll see in terms of our timing for production orders, you know, I think that's still early to call. But as we always said, it could be later in this year, early part of next year with revenue contributions in 2024. But it's certainly going in the right direction. I don't know if anybody else wants to say anything.

Yeah, just some other things in addition to what Mike shared. Obviously, there's a couple of development contracts that we're moving into production phase. And with the rollout of our new S&T line, it will definitely make us more efficient as we build those units and continue to drive production bodies higher for that facility. So we definitely are planning as part of that release and opening of the facility to drive additional throughput through the facility and workload in that area.

All right, perfect. Thank you.

And we'll take our last question from Asia Merchant with Citigroup. Please go ahead.

Great. Thanks for the opportunity. So a lot of questions have been asked. I just wanted to ask about cash flow. You know, it was a drawdown this quarter as well on your cash flow from operations. And how should we think about the cash trajectory for the remainder of the year?

Sure. Just to, you know, level set, too, for the quarter, Asiya, Keep in mind that we did pay out about $4 million in CDO transition costs during the quarter, so just making sure you're aware of that. In light of our backlog growing about $50 million this quarter, we certainly felt that it was prudent to start the procurement cycle of some specific items to support that increase in backlog. And from an investing perspective, CapEx in Q1 might look a little high right now, but keep in mind that at the end of last year, we had about $6 million of unpaid capital purchases, so that hit in Q1. And coming off of a $30 million target for last year, holistically, we spent about $25 million of that, $26 million. So where we can, we are trying to be very prudent about the timing and the amounts of what we're spending. Certainly, we have you know, thoughts of growth in our future. And so we will continue to make those investments. But at the same time, we're also seeing the Chandler facility move coming towards its end. You know, the Pennsylvania contract, Arizona contract, and South Carolina contract, you know, in the 911 space, we're also getting those PSAPs on to the system. So we should start to see that CapEx start to, you know, turn back to more historical levels. You know, in terms of cash flows for Q2, We still have some other initiatives that we're working on. I would say we're not going to give specific guidance on CapEx for Q2, but it's going to be probably still elevated and then trail off towards the back half of the year. But in terms of overall cash flow generation, we're trying to be mindful of a leverage ratio now that we have a new credit facility in place. We have some flexibility to operate and to support some of these large bookings, so Overall for the year, I'm not going to give a specific number. We do at this point expect to be positive, but there's a lot of year left. We still have some pipeline opportunities that may hit. And so right now we're just going to keep our comments down to Q2.

Okay. And then just, you know, there are these one-off charges that kind of seem to show up in the non-GAAP adjusted, you know, strategic technology costs and things like this. Is this something that's recurring? And then if so, why not just include it in your regular R&D or OpEx?

In terms of the strategic emerging technology costs, it is specific to a type of technology and customer set as we're evaluating this market. It's not recurring in nature, save for the opportunities that are very near term in front of us. We would not likely be spending that, but because of those opportunities, we've made a decision as a company to go above and beyond to show our potential customers and existing customers that we're here to partner with them. So it will be something that is not going to be there forever, but right now it's a very competitive marketplace. There's a lot of opportunity to grab, and so we're going to make those investments to secure for the long term.

Okay. And then I know you guys talked about EBITDA margins and how, you know, currently there's puts and takes to that, specifically on, you know, why it's hanging around the 8% levels. I know you guys are not guiding, but is it fair to assume that, you know, by the end of the year, at least, as you exit into fiscal, as you exit this fiscal year, maybe even into early next year, we should get back to margins, you know, with the double digits? level versus these high single-digit margins that you are right now at?

I see. I would love to address that question, you know, with a definitive, you know, and percentage. But, you know, right now, while we're encouraged at the start of Q1 and going into Q2, it's just a little too early for us to call in terms of this challenging environment that we're still navigating through. And, you know, so we're going to keep our comments to, you know, our top line and bottom line growth for Q2 at this point.

Okay, I'm sorry, one last one. So a lot of our telecom equipment companies are reporting better results. And some of it's just a function of better supply chain that's allowing them to convert, you know, elevated levels of backlog into revenues. Can you give some color on how much perhaps that was an effect on the revenues that were, you know, better than what was expected for the quarter?

Yeah, I mean, I would say this, Situ.

Our trajectory, we certainly are pleased with our trajectory having four quarters of sequential growth. So I know we're being compared to maybe others in the industry, but certainly with what we had to face in 2022 with certain specific headwinds in our business and then the Russia-Ukraine war, it's nice to see that we've been growing our backlog and having such a strong bookings quarter. So it's in our backlog. We now just need to execute on it supply chain you know we're aware of what we have to work around namely long lead items and making sure we procure timely enough to deliver on time but you know I think we are building a good foundation to continue our growth I'd like to add to that if we just take a minute and then I can have Maria add some color to one of the significant

value propositions of bringing our siloed businesses together as one ComTech is we can now deal with our supply chain with a single voice, an amplified voice. And instead of maybe ordering perhaps the same part through two different businesses in smaller quantities, we can speak with a louder voice and consolidate those buys, and we should see a benefit from that. In addition, we're doing some strategic sourcing. We've brought some seasoned veterans on board. I'll have Maria offer another comment to extend into that part of the discussion.

Yeah, thanks, Ken. So we brought on Don Bach as our VP of Operations, and one of his initial charters is really to drive strategic sourcing. He has his team around him. He's identified some near-term opportunities. And obviously, that will definitely be impacting our ability in the supply chain to be able to leverage that and drive more efficiencies across the entire business instead of it being stovepiped as it is today.

When we talk about improving the machinery of our business operations, that's the kind of thing we're talking about.

Makes sense. Thank you.

It does appear there are no further questions at this time. I would now like to turn it back to Robert Samuels for any closing remarks.

Just thanks to Ken, Mike, and Maria, and thanks to everyone for dialing in today. As Ken said, there are additional details about our strategy and performance. available in our investor letter and SEC filings. And we'll provide ongoing insights in our signals blog. And as a reminder, we intend to be as responsive as we can with investors going forward. So for anyone with questions, please just reach out to me directly and let's connect. This concludes our first quarter call. Happy holidays to our employees, customers, suppliers, and shareholders. We thank you for your continued support.

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