Earnings call: Comtech reports growth and refinancing plans in Q2


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Comtech Telecommunications Corp. (NASDAQ:) has revealed a slight increase in net sales and significant growth in adjusted EBITDA for the second quarter of fiscal year 2024. CEO John Ratigan emphasized the company’s refinancing plans as a top priority, with strategic investments bolstering the balance sheet.

The company is engaging with lenders to replace its current credit facility, aiming to improve financial flexibility. CFO Mike Bondi acknowledged challenging business conditions but projected improved sales and EBITDA for fiscal 2024, backed by a strong backlog and revenue visibility.

Comtech also highlighted its next-generation troposcatter solutions and success in securing key contracts, including a $48 million extension from the State of Washington.

Key Takeaways

  • Comtech Telecommunications Corp. reports a slight increase in net sales and a 33% growth in adjusted EBITDA for Q2 fiscal 2024.
  • CEO John Ratigan prioritizes refinancing the existing credit facility, with a $45 million investment from White Hat Capital and Magnetar to strengthen the balance sheet.
  • The company is down-selecting potential lenders for a term loan and asset-based revolving loan.
  • Comtech’s next-generation Modular Transportable Transmission System (MTTS) is being evaluated by militaries, indicating potential future opportunities.
  • The Terrestrial and Wireless Networks segment saw increased net sales, with a book-to-bill ratio of 1.33 times.
  • Gross margin stood at 32.2%, with GAAP operating income at $3 million for the third consecutive positive quarter.
  • Comtech anticipates better financial performance in fiscal 2024 compared to fiscal 2023, with a backlog of $680 million and revenue visibility of approximately $1.6 billion.

Company Outlook

  • Comtech projects an improvement in net sales and adjusted EBITDA for fiscal year 2024.
  • The company has a strong backlog of $680 million and revenue visibility of around $1.6 billion.
  • Refinancing efforts are ongoing to enhance financial stability and flexibility.

Bearish Highlights

  • Challenging business conditions have impacted net sales during the quarter.
  • Recent events have disrupted the momentum of refinancing efforts.

Bullish Highlights

  • Strategic investments and refinancing initiatives are expected to strengthen the company’s balance sheet.
  • Significant contract wins and extensions, such as the $48 million contract from the State of Washington, boost the company’s prospects.
  • Positive trends in the Terrestrial and Wireless Networks segment, including increased net sales and a strong book-to-bill ratio.

Misses

  • Lower sales of location-based solutions partially offset the increased net sales in the Terrestrial and Wireless Networks segment.
  • A low gross profit percentage due to product mix changes and reduced sales activity.

Q&A Highlights

  • The earnings call did not specify any Q&A highlights.

Comtech Telecommunications Corp. has demonstrated resilience in the face of challenging market conditions, with its focus on growth and strategic refinancing poised to enhance its financial outlook.

The company’s progress in developing cutting-edge technology and securing valuable contracts provides a solid foundation for future success. As Comtech continues its refinancing efforts, investors and stakeholders will be closely monitoring the company’s ability to navigate the complexities of the current economic landscape.

InvestingPro Insights

Comtech Telecommunications Corp. (CMTL) has shown tenacity in its financial strategy and product development, as reflected in its recent quarterly results. To provide a more detailed financial perspective, let’s delve into some key metrics and insights from InvestingPro:

  • The company’s market capitalization stands at a modest $130.98 million, suggesting a smaller player within the industry. This size could potentially make it more agile but also more susceptible to market volatility.
  • Comtech is trading at a low Price / Book multiple of 0.3 as of the last twelve months up to Q1 2024, which could indicate that the stock is undervalued relative to its assets. This metric is particularly relevant for investors looking for potential value investments.
  • Despite the positive sales and EBITDA growth reported, the company’s P/E Ratio is currently negative at -5.26, reflecting challenges in generating consistent profits over the recent period.

InvestingPro Tips for Comtech highlight some concerns and potential areas of interest for investors:

1. The company operates with a significant debt burden, which is an important consideration for those assessing the company’s financial health.

2. Comtech has maintained dividend payments for 14 consecutive years, which may appeal to income-focused investors.

For those looking to explore further, there are additional tips available on InvestingPro. In fact, there are 12 more InvestingPro Tips for Comtech, offering a comprehensive analysis for subscribers. To access these insights and make informed investment decisions, use the exclusive coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription. Check out the full list of tips and in-depth metrics at https://www.investing.com/pro/CMTL.

The reported successes and future outlook of Comtech, paired with the InvestingPro data and tips, provide a multifaceted view of the company’s current standing and future potential in the telecommunications sector.

Full transcript – Comtech Telecommunications Corp (CMTL) Q2 2024:

Operator: Welcome to Comtech’s Fiscal Q2 2024 Earnings Conference Call. As a reminder, this conference is being recorded today, Monday, March 18, 2024. I would now like to turn the conference over to Ms. Maria Ceriello of Comtech. Please go ahead, Maria.

Maria Ceriello: Thank you, operator, and thanks to our investors for taking the time to dial in today. Welcome to Comtech Telecommunications Corp.’s conference call for the second quarter of fiscal year 2024. Today, I’m here with Comtech’s Chief Executive Officer, John Ratigan. We’re also joined today by Mike Bondi, Comtech’s CFO. Before we get started today, please note we have a detailed discussion for the quarter in our shareholder letter available on our website. 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 always 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 SEC filings. Due to a number of factors, including our ongoing refinancing efforts and changes in leadership, we will limit today’s call to prepared remarks from management. Now, I’m pleased to introduce Comtech’s CEO, John Ratigan. John?

John Ratigan: Thanks, Maria, and thanks, everyone, for dialing in. Today’s format will be more compact than usual, which I think everyone can appreciate given that I’ve only been in my new role since Wednesday of last week. Today, I want to accomplish two things. First, I want to properly introduce myself. Second, and before Mike discusses our financial performance in more detail, I want to provide some context for our investors, customers, employees and vendors as it relates to what I expect is the market’s single biggest focus regarding the company, strengthening our balance sheet by refinancing our existing credit facility, which matures in October 2024. As I said in our investor letter, while I’m new in the role of Comtech’s CEO, I’m not new to Comtech, our strategy, our markets, or our customers, and I’m not new to being a CEO. Before Comtech, I served as CEO and President of iDirect Government for 20 years, a company delivering secure satellite-based voice, video and data applications with anytime and anywhere connectivity in the air, at sea, and on land. At iDirect Government, I led the team that built the business from the ground up to over $100 million in annual revenue and led the acquisition of GlowLink Communications. I have been involved in network technologies and satellite communications for the majority of my career, and I know what it takes to both lead and grow a business. And while I joined as Comtech’s Chief Corporate Development Officer last fall, my roots here run deeper. I spent 10 years at EF Data Corporation prior to its acquisition by Comtech in July of 2000. It’s fair to say a lot has changed at Comtech since then, and that’s exactly why I chose to return. As Chief Corporate Development Officer, I have already spent months traveling to visit our sites and working closely with leaders across all our businesses, focused on the shared goal of growing our organization in every way. I also believe that as CEO, it’s best practice to be direct with the people you have made commitments to, customers, your employees, vendors, and certainly your shareholders. As it relates to this quarter, I understand that foremost in people’s minds is our refinancing. You should know that it is and will remain my single highest priority until it is complete. Throughout the quarter, the team has been working hard to strengthen our balance sheet. Here’s where we are right now. First, in January, two of our biggest current shareholders, White Hat Capital and Magnetar, agreed to make an additional $45 million strategic investment in Comtech. Both know Comtech very well following an initial investment of $100 million in October of 2021. White Hat’s Co-Founder, Mark Quinlan, joined our Board and has been active in helping promote and accelerate our One Comtech transformation, something he’s now doing as our recently appointed Board Chair. The continued support of Mark, White Hat and Magnetar, particularly given their deep understanding of our company, our markets and our strategic vision, is not only appreciated, but we also take it as a validation of the underlying strength and long-term potential of our business. Second, we’ve been engaging with potential lenders to refinance our existing credit facility, and have advanced into what we believe are productive negotiations. We expect to replace our existing credit facility and look forward to sharing more details once we have finalized our important work here. Mike will discuss our results in more detail, but let me offer the headline numbers here. Our consolidated net sales increased slightly year-over-year to $134.2 million compared to $133.7 million in the second quarter of fiscal 2023. Gross margin was 32.2% compared to 31.5% in our first quarter of fiscal 2024. And our adjusted EBITDA was $15.1 million as compared to $11.3 million in the second quarter of fiscal 2023. What this shows is that despite net sales coming in roughly flat year-over-year, our adjusted EBITDA grew 33% over the same time period achieving an 11% adjusted EBITDA margin. This overall increase in profitability is a reflection of the operational improvements we have undertaken through the One Comtech lean initiatives over the past year. We believe the sequential decline in net sales and, in turn, adjusted EBITDA is attributable, in large part, to temporary uncertainties created by the refinancing overhang. And as a reminder, this is the first quarter we were reporting after completing the sale of PST in early November 2023. But, as I look forward, I believe we will win back any ground loss during the first half of our fiscal year. Overall demand for our products remains healthy as the Comtech team continues to secure key wins for our business with backlog reaching $680 million. Our previously announced multi-year Global Field Services Representative contract with the U.S. Army with a total potential value of $544 million was protested by the incumbent in November 2023. The protest was dismissed in January in Comtech’s favor. However, the incumbent has protested again, but I am confident that we’ll see another favorable outcome and expect this contract to contribute significantly to our top-line shortly thereafter. We also secured a significant win from our Terrestrial and Wireless Networks segment, which extended critical next-generation 911 services for the state of Washington. Comtech has had a longstanding partnership with the state of Washington for over eight years to deploy one of the most robust and advanced next-generation 911 systems in the United States. This contract extension is valued at $48 million over the next five years with the option to extend further through 2034. We had other call handling wins in Australia, Canada and the U.S. as our Solacom product line continues to expand its market share within these regions. Our satellite and space team continues to sell our market leading troposcatter communications equipment to our allies around the world with the team securing notable bookings from two foreign militaries this quarter. More broadly, we have roughly $1.6 billion in visible revenue, a strong position to be in with meaningful opportunities ahead for future growth. Before I turn to Mike, let me step back and make a larger observation. Roughly 18 months ago, Comtech embarked on a journey to drive meaningful growth with improved profitability. It involved the execution of the most significant transformation in Comtech’s history and a path we remain committed to. Accordingly, we’re focused on ensuring that Comtech is not only a stable combination of the right people and processes in place that our business operations rest upon a solid foundation that includes an innovative culture, technology leadership, an intense focus on the customer, and importantly a steadily improving balance sheet. As I said earlier, I’m well aware of how important our balance sheet is. We have done and will continue to put in the hard work necessary to build a bigger, stronger, more profitable business. We continue to attract exceptional talent to the company and add to our high-quality management team, and we continue to add impactful members to our senior leadership team precisely because we expect to grow. With that said, let me turn the mic over to Mike Bondi, our CFO, to discuss our financials. Mike?

Mike Bondi: Thanks, John. Before discussing the status of our refinancing efforts, let me cover our recent results for Q2. Consolidated net sales were $134.2 million compared to $151.9 million in the first quarter of fiscal 2024 and $133.7 million in the second quarter of fiscal 2023. Although higher than last year, net sales during our second quarter of fiscal 2024, primarily in our Satellite and Space Communications segment, reflect delays in the timing of our receipt of and performance on orders, principally a result of the challenging business conditions, which we believe temporarily slowed down our receipt of orders from customers as well as components from suppliers. While we have worked to resolve such conditions, for example, by substantially reducing the level of accounts payable around quarter-end, such challenging business conditions during December 2023 and January of 2024 resulted in our performance on orders shifting to the third quarter and, in some cases, fourth quarter of fiscal 2024. Also, as John referenced, net sales in our Satellite and Space Communications segment for the second quarter of fiscal 2024 reflect the PST divestiture completed on November 7th, basically the start of our second quarter. For the three months ended January 31, 2024, net sales in our Satellite and Space Communications segment primarily reflect higher net sales of our troposcatter and SATCOM solutions to U.S. Government and customers, including progress toward delivering next-generation troposcatter terminals to both the Marine Corps and Army, more than offset by lower net sales resulting from the PST divestiture and of satellite ground station solutions, including our X/Y steerable antennas. Our book-to-bill ratio, a measure defined as bookings divided by net sales, in this segment for the three months ended January 31, 2024 was 0.86 times. In the second quarter of fiscal 2024, this segment was awarded over $7 million of funded orders from two foreign militaries, who are evaluating our next-generation Modular Transportable Transmission System, or MTTS, troposcatter solutions. We believe that these two new customers could lead to larger scale troposcatter opportunities in the future. Compared to Q2 last year, net sales in our Terrestrial and Wireless Networks segment reflect higher net sales of our NG-911 and call handling services, offset in part by lower net sales of our location-based solutions. Our book-to-bill ratio in this segment for the three months ended January 31, 2024 was 1.33 times, led by the $48 million State of Washington NG-911 contract extension John discussed earlier. Also, we extended critical call handling services provided to public safety answering points, or PSAPs, across Australia through our partnership with Telstra (OTC:). These services, valued at approximately $6 million over the next several years, support Australia’s 000, or 911 equivalent, emergency communications. Gross margin was 32.2% compared to 31.5% in our first quarter of fiscal 2024 and 34.3% in our second quarter of fiscal 2023. GAAP operating income in Q2 fiscal 2024 was $3 million compared to an operating loss of $0.8 million in Q2 of fiscal 2023. While both quarters include restructuring charges, GAAP operating income in the more recent quarter includes an estimated gain on the PST divestiture as well as the benefits from profit improvement initiatives that we actioned in the second half of fiscal 2023. Importantly, Q2 fiscal 2024 marks our third consecutive quarter of GAAP operating income since Q4 of fiscal 2021. As explained in more detail and reconciled in our Form 10-Q filed earlier today, we utilize the non-GAAP measure that we refer to as adjusted EBITDA. For Q2 fiscal 2024, adjusted EBITDA was $15.1 million. As a percentage of net sales, adjusted EBITDA was 11.3%, an improvement from the $11.3 million, or 8.5%, we achieved in Q2 of fiscal 2023. The increase in adjusted EBITDA, both in dollars and as a percentage of net sales, reflects lower research and development expenses in both of our reportable operating segments and the benefit of our One Comtech lean initiatives, all set in part by a low gross profit percentage during the quarter due to overall product mix changes and lower net sales activity. As we enter the third quarter of fiscal 2024, business conditions continue to be challenging and the operating environment is largely unpredictable. Despite these business conditions and resulting challenges, and although we anticipate some variability from time to time, as disclosed today in our 10-Q, we expect net sales and adjusted EBITDA for fiscal 2024 to be better than fiscal 2023. Such expectation considers our strong backlog of $680 million as of January 31, 2024, and revenue visibility of approximately $1.6 billion. Now, before turning the call back over to John to wrap up, I’ll provide an update on our refinancing efforts. The team has been hard at work evaluating alternatives and supporting extensive due diligence with potential new lenders. We’ve made tremendous progress on this front during the second quarter. As mentioned, we cleared the divestiture of PST in November, we addressed the restructuring of our convertible preferred stock in late January by upsizing the investment and among other changes, moving the optional redemption date out two years to October of 2028. And on the heels of that, pressing ahead with our refinancing efforts, we down selected from a pool of well-known lenders and centered around the debt capital structure consisting of a term loan coupled with an asset-based revolving loan. Obviously, the events of last week have interrupted the momentum gained with respect to our refinancing efforts, but I and the rest of the executive management team remain confident that we will get this resolved as one of our highest priorities. Now, let me turn the call back over to John.

John Ratigan: Thanks, Mike. Before we end the call and get back to work, I’ll offer a final thought. As I said at the top of the call, I take seriously my commitment to the company, employees, customers, vendors, and investors. You can expect me to be direct in my communications and clear about my priorities. Our top priority right now is strengthening our balance sheet. We completed the first step toward this objective with a strategic growth investment announced in January. We are working diligently to complete the final step of refinancing in the near term. When I joined Comtech, I was enthusiastic about the opportunities that lay ahead for the company. Today, I am proud to lead this talented organization. We have end markets that are changing and growing, the best people and products in the industry and in our growing sales and visible revenues, a vote of confidence and appreciation from our customers that Comtech is the right partner to help them navigate a challenging landscape. Thank you again for your time today. I look forward to getting to know many of you in the days and weeks ahead. And operator, that ends our call for today.

Operator: Thank you, sir. This does conclude today’s program. Thank you for your participation. You may disconnect at any time.

Q –:

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