Comtech Telecommunications Corp. (NASDAQ:CMTL) Q3 2023 Earnings Call Transcript

Comtech Telecommunications Corp. (NASDAQ:CMTL) Q3 2023 Earnings Call Transcript June 8, 2023

Comtech Telecommunications Corp. misses on earnings expectations. Reported EPS is $-0.33 EPS, expectations were $0.14.

Operator: Welcome to Comtech’s Fiscal Q3 2023 Earnings Conference Call. As a reminder, this conference is being recorded today, Thursday, June 8, 2023. I would now like to turn the conference over to Mr. Robert Samuels of Comtech. Please go ahead, sir.

Robert Samuels: 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 the Comtech Telecommunications Corp’s conference call for the third quarter of fiscal year 2023. Today, I’m here with Comtech’s Chairman, President and Chief Executive Officer, Ken Peterman. We’re also joined by Mike Bondi, our CFO. Before we get started today, I’ll 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, Comtech 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. 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, Ken Peterman. Ken?

Ken Peterman: Thanks, Rob. Hello, everyone, and thanks for joining us. In less than two weeks from today, my senior leadership team will spend the day with me speaking in depth about our company and its future at our first ever Investor Day. We are holding this exciting event in our state-of-the-art facility in Chandler, Arizona and we invite you to confirm attendance as soon as possible if you haven’t already. Since I took the role of CEO and President of Comtech just 10 months ago, our business has embarked on a transformational journey that has been both exciting and challenging, filled with notable achievements and valuable discoveries. We set forth on a comprehensive strategy to reshape the enterprise, enhance operational efficiency and usher in a new era of hybridized connectivity with Comtech’s expertise and technology leading the way.

Now, as we approach the end of year one of our journey, I’m proud to report that we are right where we want to be, if not slightly ahead of schedule. The first thing I’ll call out, which Mike will speak to shortly, is that we have delivered three sequential quarters of revenue and adjusted EBITDA improvement. In fact, this marks our 6th consecutive quarter of topline revenue growth, which is to say, I am very pleased with the direction and credibility that we are establishing around our financial performance. As pleased as I am with Comtech’s overall financial performance in the upward trajectory in our results, I want to highlight that since I became CEO and President, we have met or exceeded the guidance we have offered to our investors. That is important to me personally, because I believe this demonstrates that Comtech is intent on meeting several key commitments we made to our investors since day one of my tenure.

Now let’s take a few moments to examine what our collective team has accomplished within just these first 10 months. First, let’s discuss our growth initiatives. We established EVOKE as our technology incubator here at Comtech, securing valuable technology partnerships and beginning a series of collaborative customer workshops to accelerate our ability to support our current and prospective customers with more complete solutions. We strengthened incumbent positions across our portfolio, spanning a variety of attractive growing end markets. And we positioned ourselves to exploit emerging wireless and satellite technology and communications inflection points by leveraging our established market positions as launch platforms for growth. Next, let’s discuss our profit improvement initiatives.

We assimilated our historically disparate siloed businesses in the two streamlined segments, operating on common tools and processes. We launched strategic goal deployment processes throughout the enterprise to measure our progress against meaningful KPIs to establish a foundation from which to significantly improve our operational performance. We implemented profit improvement initiatives that will meaningfully reduce operational costs and improve our margins, financial performance and enhance shareholder value. And finally, we identified opportunities to strengthen our balance sheet and our financial flexibility. Now, as for our human capital, in our ESG DEIB initiatives, we launched our first ever company-wide people strategy, recognizing that people are one of our most important assets.

By solidifying strategic partnerships with leading technology universities, we established our first-ever company-wide university internship program to develop a more robust talent pipeline. And to accelerate our progress toward one Comtech, we continued to attract experienced thought leaders with proven track records and directly relevant industry experience. I must say that I’m particularly excited about the additions of Mr. Don Walther and Ms. Nicole Robinson to our team and I’ll speak to that more a little later. Notably, our people strategy extends beyond the organic development of our talent pipeline and even the addition of proven leaders to our team. Our strategy also includes regular assessments of the capabilities, experiences and skill sets of our Board members to ensure continued alignment with our short and long-term goals and objectives.

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To that end, it is my pleasure to announce our two newest Board members, effective June 15, 2023. The Honorable Ellen M. Lord. Ms. Lord formally served as the U.S. Under Secretary Defense for Acquisition and Sustainment through January of 2021. In this capacity, Ms. Lord was responsible for the Secretary of Defense for all matters pertaining to acquisition, logistics and materiel readiness. The acquisition workforce itself and even the defense industrial base. Prior to this appointment, Ms. Lord served as the President and Chief Executive Officer of Textron Systems Corporation, a subsidiary of Textron Incorporated, where she led a multi-billion dollar business with a broad range of products and services supporting defense, homeland security, aerospace, infrastructure protection and customers around the world.

Importantly, the same global growth markets that Comtech looks to serve. Lieutenant General Bruce T. Crawford, retired. Lieutenant General Crawford became the U.S. Army’s Chief Information Officer, the CIO G6 in August of 2017 and served in this role through his retirement in July 2020. A recipient of the Distinguished Service Medal with one Oak Leaf Cluster among other awards and decorations, Lieutenant General Crawford was the principal advisor to the Secretary of the U.S. Army, setting strategic direction and objectives for one of the largest employers in the world and supervising all U.S. Army command, control, communications and computers or C4, and information technology functions, making Lieutenant General Crawford an ideal candidate for Comtech’s Board as we seek to serve and support the convergence of multiple network modalities and technology inflections at home and abroad.

Now, let me speak to our financial results. A clear indicator that our commitment to One Comtech is working, will be consistent improvements in our financial performance. For the past several quarters, we have streamlined our business operations and reduced our operating costs. This has enabled us to meet or exceed our financial targets for net sales and adjusted EBITDA, while managing complex economic risks. As you can see from the results reported today, we delivered improved performance, while remaining focused during this transformational period where we are driving significant change across our business. Specifically, Comtech grew net sales for the 6th consecutive quarter. Cash flow provided by operating activities for the quarter was $16.6 million.

We improved adjusted EBITDA to $12.5 million or 9.2% margin. We announced three new EVOKE technology partnerships with Aarna Networks, Descartes Labs and WishKnish in addition to Sirqul, our first publicly announced EVOKE technology partner. And looking ahead, we expect our fourth quarter fiscal 2023 results to improve with consolidated net sales anticipated to grow sequentially between 2% and 4% and for consolidated adjusted EBITDA margins to be in the range of 9.5% to 10.5% of consolidated net sales. We expect to realize ongoing benefits from our investments to restructure and optimize operations. In particular, our benchmarking efforts conducted to-date as a part of this transformation are providing key insights into opportunities to improve efficiencies and accelerate decision making.

At the start of this journey, I stated that we needed to act swiftly and with purpose, and it’s clear that we are meeting this goal. We believe that our lean initiatives implemented during the third and fourth quarters of our fiscal 2023 will yield a more favorable cost structure for our business as we approach the start of our fiscal 2024. These actions target multiple aspects of our business and involve all levels of management as we move aggressively to improve our business processes by leveraging the expertise and proven track record of our refreshed leadership team. We are sensitive, of course, to the impact these changes have on certain members of our team. But remain committed to building a stronger Comtech. As planned, during this past quarter, we completed our migration to our state-of-the art technology and manufacturing facility in Chandler, Arizona.

This facility is at the center of our One Comtech transformation and houses some of our most innovative research and development initiatives, including our EVOKE innovation foundry and our new customer experience center. We look forward to hosting our Investor Day at our Chandler facility on Wednesday, June 21, to offer a first-hand experience of how our vision is becoming a reality. You’ll be able to meet the team during our transformation and have opportunities to experience some of the innovation and cutting-edge technology at the heart of our strategy to drive One Comtech. During our upcoming Investor Day, you will hear us discuss how we are not simply fluent in the future, we are creating it today, bringing to life the future of Comtech and the market itself.

Importantly, while it is vital to look as far down the road as possible and even see around corners, we must not lose sight of the present. For us that means solving our customers’ toughest problems today and strategically partnering with them to leverage our culture of innovation and accelerating technology trajectories to overcome their current and future challenges like never before. Over time, our markets have evolved and are growing. Satellite and terrestrial network infrastructures will blend and hybridize toward ubiquity on a global scale. It’s clear to us that we can create value, not just by transporting data across these blended networks, but by leveraging data to reveal insights that create customer value in new and differentiated ways.

We believe Comtech is well-positioned to exploit the opportunities created by these convergences due to our technology leadership and incumbent positions in the underlying capabilities that provide these data-enabled insights. Further, we expect Comtech’s longstanding technology leadership and increasingly innovative culture to identify new ways to accelerate growth and profitability. The foundation that we’re building today is already delivering improved performance as we launch our lean initiatives, continue to streamline our cost structure, further optimize performance, and instill a culture of discipline and commitment, we are creating a sustainable framework that we believe will create shareholder value for years to come. We’re generally excited about Comtech’s future and we are committed to delivering results every single day for our customers, our partners, employees, and shareholders.

In summary, indicators of our progress are clearly visible all around us. And I believe that our transformation to One Comtech is working and that our future is bright. Mike?

Mike Bondi: Thanks, Ken. For Q3 fiscal 2023, we recorded $136.3 million of consolidated net sales, of which $82.2 million or approximately 60%, were reported in our Satellite and Space Communication segment and $54.1 million were reported in our Terrestrial and Wireless Network segment. Our third quarter net sales represented a 1.9% sequential increase over last quarter and as Ken mentioned, our sixth consecutive quarterly increase. Compared to Q3 fiscal 2022, our Q3 fiscal 2023 net sales increased $14.2 million or 11.6%. Primarily reflecting significantly higher net sales in our Satellite and Space Communication segment. Our consolidated gross profit percentage for Q3 fiscal 2023 was 31.7% and primarily reflects an increase in net sales and overall product mix changes, including significantly higher net sales of our troposcatter and SATCOM solutions to U.S. government customers within our Satellite and Space Communications segment, which as a reminder, historically achieved a lower gross profit percentage than the recurring type software-based sales included in our Terrestrial and Wireless Network segment.

Also contributing to the change in margin, was that Q3 fiscal 2022 benefited from lower warranty expense in light of the reduced level of sales activity during that prior year period. As explained in more detail and reconciled in our Form 10-Q filed earlier today, we utilize a non-GAAP measure that we referred to as adjusted EBITDA. Q3 fiscal 2023 adjusted EBITDA was $12.5 million or 9.2% of consolidated net sales, as compared to $11.2 million or 9.2% of consolidated net sales in Q3 fiscal 2022. The increase in dollars primarily reflects the benefit of our One Comtech lean initiatives implemented through April 30, 2023, offset in part by a lower gross profit percentage. Bookings this past quarter totaled $102.8 million, representing a quarterly book-to-bill ratio of 0.75 times.

Our current revenue visibility approximates $1.1 billion and is equal to the sum of our $668.4 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 Q3 fiscal 2023 net sales and adjusted EBITDA were in line with our guidance provided last quarter. Now, I will turn it back over to Ken for some closing remarks. Ken?

Ken Peterman: Well, thanks, Mike. As excited as we are about how our culture of innovation, technology leadership and the power of collaboration, enabled by our transformation to One Comtech is creating a bright future, we are more deeply focused ever before toward meeting our daily commitments to our customers, our shareholders and ourselves. The foundation that we’re building today is already delivering improved performance. As we launch our lean initiatives, continue to streamline our cost structure, further optimize performance, and instill a culture of discipline and commitment, we are creating a sustainable framework that we believe will create shareholder value for years to come. Now regarding new additions to our leadership team.

As I mentioned earlier, we are attracting a lot of excitement across our markets. In this quarter, we continued to enhance our leadership team with several key appointments, designed to maximize our ability to compete and deliver across our global market segments. We appointed Don Walther as Comtech’s new Chief Legal Officer and Nicole Robinson as Chief Strategy Officer. Don has significant technology and aerospace industry experience in both public and private companies in the commercial and defense sectors with his previous experiences at ITT and Boeing. He will focus on ensuring Comtech’s competitive differentiation through contracts is preserved and protected. Nicole is well known across our industry. Prior to joining Comtech, she served as President of Ursa Space Systems, a leading satellite intelligence and data analytics provider.

She will focus on creating and implementing priority space business pursuits, oversee the development and implementation of new technologies, orchestrate global growth initiatives, and lead other priorities related the geospatial imagery and data as well as space communications in both U.S. and international markets. Regarding our EVOKE partners. In the early days of my tenure as CEO, we envisioned and then established EVOKE as Comtech’s innovation foundry, which is dedicated to creating and accelerating transformational changes in global technologies and we believe that EVOKE will enhance our existing technologies and service offerings. Examples include, cloud-native satellite ecosystems, 5G advanced services and as-a-service business models.

As well as allow us to pioneer entirely new ideas and opportunities with the benefit of multiple perspectives, industry backgrounds and areas of expertise. Through partnership, we are able to quickly prototype ideas and test the market readiness. This new and rapid method will allow us to expand our capabilities and could potentially allow us to capture market share at an unparalleled rate. During the most recent quarter, we were pleased to announce that we added several new partners to EVOKE’s growing roster, including Aarna Networks, Descartes Labs and WishKnish Corporation. By combining Aarna Networks’ technologies with Comtech’s dynamic cloud platform, the companies anticipate enabling customers to easily add and manage a variety of open architecture cloud-based applications across private, hybrid and public networks in both terrestrial and non-terrestrial environments.

Descartes Labs will work with Comtech to infuse the power of artificial intelligence, machine learning, predictive intelligence and insight monitoring across Comtech’s product offerings. As for WishKnish, we plan to collaborate with them on integrating highly secure, flexible distributed ledger or blockchain technologies across diverse commercial and government applications. Looking ahead, not only can you expect to see Comtech foster partnerships with businesses from multiple sectors, but also with leading universities around the world to ensure we remain at the forefront of emerging technologies. We intend to match the rate of change we see transforming global communications by forging collaborative partnerships across industries and academia to ultimately create value for individuals, communities, governments, and businesses in a new era of connectivity.

So, in summary, as I approach my one-year anniversary leading Comtech, I’m even more excited today than I was on August 10 of last year when I took on this role as your President and Chief Executive Officer. My increasing excitement stems from a variety of factors. The assimilation of our legacy business silos into two business segments, allows us to be more collaborative and agile with respect to decision making. The profit-improvement initiatives we are implementing are further improving efficiencies in our business. The rollout of company-wide processes is instilling stronger and more consistent process discipline, improving operational effectiveness, and optimizing business performance. EVOKE has fostered collaboration with new technology partners and is positioning us for accelerated growth and the ability to exploit the emerging and converging markets and technologies.

Our customer workshops are revealing immediate opportunities to create more comprehensive customer value. As satellite and terrestrial network infrastructures blend and hybridize on a global scale, we believe we can create value, not just by transporting data across these blended networks, but by leveraging data to reveal insights that could create customer value in new, unique, and differentiated ways. Again, I believe that Comtech is positioned to win in a rapidly evolving market that is demanding faster innovation, better collaboration, improved agility, and more comprehensive customer value than ever before. Our communications network infrastructures are evolving and we have clear opportunities to leverage our technology leadership in connectivity and data transport to provide data-enabled customer insights.

Further, this value creation can be monetized in innovative ways that we believe will significantly enhance shareholder value. Finally, the hard work we have done these past 10 months is building the foundation we need and paving the way for exciting days ahead. Now in closing, before we take your questions, I’ll quickly make some final observations. We are only 10 months in and we’re only getting started. We have a refreshed leadership team with experience and knowledge who are moving quickly and with purpose. Our Board has also been refreshed with some of the industry’s leading professionals. Our EVOKE partners are some of the most dynamic and exciting experts in their fields and we are leaner and more agile as we relentlessly turn towards the future to solve our customers’ most pressing challenges and bring unprecedented value to them, our people and to our shareholders.

With that, I look forward to meeting with you on June 21. And as always, I appreciate your engagement and continued support. Now, I will turn it back over to Rob.

Robert Samuels: Thanks, Ken. Operator we will now open the call for questions.

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Q&A Session

Operator: Yes, sir. [Operator Instructions] And our first question will come from Joe Gomes with NOBLE Capital. Your line is open.

Joe Gomes: Good evening. Congrats on the quarter. Thanks for taking my questions.

Ken Peterman: Good afternoon, Joe. Good to see you.

Joe Gomes: So wanted to start out on the terrestrial and wireless network segment. Revenues there have been pretty flat over the past five quarters. Bookings have been down for four straight quarters. Just trying to get a better idea of what is occurring in that segment? Maybe give it a little update on some of the 911 clients. You talked previously about getting some of these big states, you know Pennsylvania, South Carolina, et cetera out of the deployment phase. And just trying to get a little better understanding of where that business stands today and where we can see it going here in the near future?

Mike Bondi: Hey, Joe. This is Mike. I’ll take that question. So certainly a good question and one that we do plan to address more in more detail during Investor Day. But broadly speaking, we are expecting growth to come in terms of some of our short-term and long-term initiatives through tracking several state awards. You did reference, some of that we have been tracking like the Ohio opportunity. There we believe that it’s still moving through the House and Senate and going to the Governor for signature. So I think that’s when we will have to just watch the news in the next couple of weeks. In terms of our Southwest customer, I think that one is moving around a little bit in terms of how that may come to us, but we believe that we have services and solutions that only we can provide for that opportunity set.

And so we would expect at some point that to hit. But that’s one to watch. We also had two state RFPs that we had submitted proposal responses for. One was back in December, the other was back in May timeframe. So there, we’re just waiting for the down selection process to start. And then, I would say other initiatives that we’re tracking, would be to sort of bring NG 911 type solutions to military bases. We spent some time trying to assess that market and we believe that, that is good ground for us to attack. Also looking at machine-to-machine and AI solutions, infusing that technology into 911 applications, sort of, taking it up the tier, if you will, to providing as-a-service to those clients. We also have thought about bringing some added insights to the PSAP, so they can do more, say smart dispatching with better analytics in front of them as they are trying to assess emergency situation.

And we also have targeted taking our location-based services platform to international customers. We’ve had really good success here in the U.S. with the Tier 1 carriers enrolling out their 5G platforms. And as we progress with those opportunities, we think that the international market is the next step there. So in 2024, we definitely feel that’s an area we will attack. And generally speaking, I think we have a view of as-a-service, as a theme, as we are trying to transition this segment from being beyond just a 911 upgrade provider or call routing, I think there are other things that we can do for commercial entities and we’ll talk more about that during Investor Day.

Joe Gomes: Okay, thanks. Thank you for that, Mike. And then looking at your SG&A for the quarter, obviously it was impacted by about $4 million restructuring cost. It’s a little bit higher than in Q1 and Q2. If we are looking out here at Q4, should we expect a third quarter type of level or more along the first or second quarter levels in terms of any restructuring charges?

Mike Bondi: Another good question. Yes, I think in terms of our expectations for Q4, with two months to go, I think at this point, it would be reasonable to assume a level similar to what we experienced in Q3.