Comtech (CMTL) President/COO Michael Porcelain & CFO Michael Bondi – Presentation from NobleCon17

Thanks, Mike, and good afternoon everybody. I hope everyone is safe where they are. As you can see, Mike and I are practicing proper social distancing — he's in his office, and I'm in my attic office here on Long Island, and we rotate every other day. So we thank you for taking this time this afternoon to learn more about Comtech. I'll start with a broad overview and then I'll dig down into certain topics. As Mike said, please feel free to send any Q&A along the way, and we'll respond to them as we get them. Comtech is a market leader in what we refer to as the growing secure wireless communication markets. As I'll talk about, this involves everything from satellites on the ground, ground station equipment, to troposcatter equipment and over-the-horizon equipment, and we provide them through various applications. Comtech is really known for solving complex problems. When you think of a technology company, you can start off thinking about consumer-side companies like Apple, but we really sell to enterprises, large companies around the world that have sophisticated issues, governments around the world, and military customers who have a very specific need that we can help them solve. Comtech has been around since 1967 and has been a public company since the early 1970s, and is really well-respected in our field. We generate profits and cash flows — sometimes you see technology companies that don't do that. I like to say we're a real company. We pay dividends, and we've paid 42 quarters in a row and continue to believe that's a great way to return part of our profits and operating cash flow to our shareholders. We have strong visibility into our future revenues. So despite the coronavirus, things are looking pretty good for us. We have long-term fundamentals and market growth and demand that we believe will drive future revenues, and at the end of the day, we feel pretty good about the future.

Let me talk a little bit about the growing markets that we participate in. I like to summarize them in three different categories. The first is satellite cellular backhaul. When you think of satellites, everybody's first reaction is a satellite in the sky. Well, we don't make satellites in the sky, but we make the satellite equipment that's on the ground that communicates to the satellite in the sky. We're not sure exactly what the percentage is, but I would say maybe 60% or so of our satellite equipment revenue is used in cellular backhaul applications. What this means is if you're a mobile operator anywhere around the world and you want to transmit traffic from a large city to a smaller city, or transmit information from a main city to part of the jungle or across islands or through mountains, you need to use satellite equipment to backhaul that traffic because it's a lot less expensive than running fiber or regular terrestrial towers. So satellite cellular backhaul is an important part of the cellular networks, and as we go from 4G to 5G around the world, it's going to open up tremendous opportunities because there's going to be more data, more information, and more need to have satellite cellular backhaul. So as we look forward to this trend that we expect to occur over the next few years, we believe that will help lift the top and bottom lines of the company. The next market trend that we participate in is what I call next-generation 911 upgrades. Comtech is a leader in 911 systems. We provide call-handling software, which is the product that is used by telephone operators when they pick up the phone, and we actually provide the infrastructure. In simple terms, you can think about it as being 911 on the cloud. States and local municipalities pay us money to maintain, operate, and upgrade their 911 systems so they can do things like providing information to responders. Most of the systems today that exist in the United States and elsewhere in the world are old and need to be upgraded to handle video and text messaging. The third market trend that we see I would define as military communication modernization — sometimes you could even just say government communication modernization. Sometimes you have state embassies or foreign governments that have needs to communicate. Comtech has a specialty here in what we call electronic warfare equipment and high-bandwidth battlefield communications. So again, if you are a government customer and you're in a hostile land or in a different land, you don't have control over the terrestrial tower, so you will need to set up temporary communication systems, which is what we can do. We usually do that through our satellite ground station equipment that we provide, as well as our over-the-horizon microwave equipment, including a new product called the Comet, which I'll also talk about. Adding this up and taking a step back, there is huge growth expected in the satellite constellations around the world. You can think about large billionaires who are putting tremendous investments into the launching of what they call LEO and MEO satellite constellations to provide growth data capacity for customers around the world. Again, we don't provide the satellites that go up in the sky, but we provide the satellite ground station equipment that goes on the ground. So once those satellites go up in the sky, it will require significant investment in ground infrastructure, and we believe we will be poised to benefit from that trend.

In the last few years, we've really transformed the company into what I call a wireless leader, with tremendous investments in research and development and small tactical acquisitions. But just taking a step back, if you look at our composition of our fiscal 2020 revenues, over 60% of our revenues did not exist in fiscal 2015. This just shows you that we have a revamped product line, and it's not necessarily products that are in the lab waiting for somebody to buy — we're out there selling them, they're being accepted by our customers, and we're executing. In 2020, we did $616 million of revenue, over $77 million of adjusted EBITDA, and over a billion dollars worth of visibility in terms of our backlog and existing contracts. We have top-tier engineering talent in our space — over 400 engineering professionals work for the company. We're a small company, no doubt, and we have a market niche, so it's very difficult for somebody to get into this space with the talent that we have. Again, true market leadership positions in satellite ground station equipment, number one or number two across the board. Let me give you a sense for how the company looks financially over the last couple of years. Actually, before I do that, let me just show you the management team here. Sometimes a picture is worth a thousand words, and I think this says it all. You can see how we're organized — each one of our product line managers are truly presidents. We don't call them general managers; they really have a good amount of accountability towards their product, which enables them to be close to the customer, and they're supported by an excellent management team that can help them grow their business.

Back to the financials here. Again, you can see going from 2016 to 2019, before the impact of COVID, the company was tracking at a revenue growth rate of more than 15% a year. On the bottom line, we were tracking more than 20% a year on a compound annual basis, and things were looking pretty good. Unfortunately, as everybody knows, last January when the coronavirus hit China, we were one of the first companies in the world to actually publicly announce that we were seeing some things in China that didn't make a lot of sense to us, and we've been pretty much impacted since last January/February. So our fiscal 2020, you can see we went to $617 million of revenue. We did like every company did cost reductions and so forth to reshape the company from a cost structure to align with the current revenue. As we sit back, we announced in September and reiterated in December that we think we're past the worst of the coronavirus. You can see that on the top line where we're now expecting to show some revenue growth compared to last year. We think fiscal year 2021 is going to be about $620 million, and we're going to be right around $75 million as the midpoint of our guidance that we gave back in December. If things start to improve better and faster than what we're thinking, we could probably do better than this. But certainly, as the vaccine is adopted, we think we're on track to a very good fiscal year 2022.

If you look at our numbers here and read our 10-K and some of our other investor presentations, you'll see that we report our operations in two segments. The commercial solutions segment compromises somewhere between 50% and 60% of our annual revenues, and our government solutions segment fills in the rest. We break it out this way because on the commercial side, we're really selling hardware or software, more simplified products that are ready to go and more turnkey. Certainly our 911 products are complicated pieces of software and hardware, but they're more of a commercial sale, so that business all sits in the commercial solutions segment. As you can see, the adjusted EBITDA margin is over 15% in the past. As volume gets higher, we've shown 19% to 20% EBITDA margin, which is where we'd like to get the company back to as our revenue increases. That gives you a sense of the profit margin and revenue composition for the commercial solutions segment, which includes our satellite ground station and 911 products. On the government side, although it has a good chunk of revenue, our margin here is lower — about 10% adjusted EBITDA margin. It certainly makes sense because a lot of these contracts are cost-plus contracts. With the U.S. government, for instance, they will pay us our actual cost plus 3% to 4% margin. In these cases, we're doing stuff like field support operations for satellite networks, installations, customer maintenance, setting up and dismantling various satellite network or communication systems on behalf of governments. Here the U.S. government represents about 65% of this segment's revenue, but you can also see we have 20% international customers, some of them companies like JAXA, the Japanese Space Agency, where we've been doing work for more than 10 years. Even on the domestic side, we do work for Boeing where we help them manage supply chain operations related to satellite equipment. So it's a pretty diverse product portfolio, but with a common grouping that relates to secure wireless technology communication.

Again, some of the more specific products — pictures that go along with the words I've been describing. You can see our high-performance satellite modems in the top left-hand corner. These are similar from a simplistic view like a Dell PC server — they go in racks of equipment that are located behind the antenna, along with amplifiers. We have a picture of our solid-state and traveling wave tube amplifiers. All of this satellite ground station equipment enables communication to the satellite. Here we talked about the growth in cellular backhaul that is expected over the next few years. We also have the launching of high-throughput satellites, and something I didn't mention earlier but is really important: the upgrade to high-definition and 4K television broadcasting that's occurring around the world. This type of communication is over satellite, and the more you broadcast in high definition and 4K, the more you need satellite ground station equipment to be updated to handle this capacity. If you turn on your own TV set in your home, even today there's not a lot of 4K broadcasting done, so there's certainly room for growth. The other piece of our segment is our 911 or public safety and location technology. We are one of only two companies in the United States that provide 911 routing. Basically, when you pick up your cell phone and call 911, 50-plus percent of those calls route over a Comtech network. We provide unique location identification to the PSAPs — public safety answering points — where it provides specific location. Probably the number one piece of information a 911 operator needs is your location. I sometimes use this phrase: it's not like an Uber driver trying to deliver your food to your house who can stop and look at which address. First responders need very precise location information. So I use the phrase 'when close enough is not good enough' — we really try to provide the most accurate information possible to first responders, and that's what the state and local municipalities demand, but also what the law demands. When you're in a skyscraper, are you on the 30th floor or the 50th floor? Those things matter. Are you in a closet hiding underneath a desk? We have information that we can provide to first responders when you call 911. So that's the system we provide. The second piece is the next-generation piece. Today around the United States, mostly you cannot send a text message to 911, you can't send a picture to 911, you can't send a video to 911. Although you can do it on Facebook, you can't yet do it on 911. The systems are old, antiquated, and need to be updated to handle that type of information, as well as secure evidence and proper identification of who's sending what. That's what I call the next-generation 911 system. Today we are clearly the number one provider in the United States. We've won the Commonwealth of Massachusetts, the Commonwealth of Pennsylvania, the State of South Carolina, and the State of Washington. These are multi-million dollar contracts that last between five and ten years. There are a number of opportunities at the state level and at the city and local municipality level that we are bidding our services for. All in all, these are great contracts. They're a little bit lumpy and difficult to predict the timing of, but when we get them, we think we're going to have them for a number of years.

Now let me talk about the government side of the business. A picture sometimes says a thousand words here. In almost all of these pictures, it's really satellite equipment or troposcatter equipment, sometimes referred to as over-the-horizon microwave systems. If you're a special operator or special operational troop person out in the field and you have a certain classified operation, we will actually take the equipment, set it up, sometimes be next to the soldier in the field, and when that operation is over, we will dismantle it. Lots of things are classified, but the programs and the equipment — it's just satellite equipment on the ground, very mobile. We've been doing some of these programs for years, like our SNAP program for more than ten years. I mentioned JAXA, which is really the third picture on the top, where you can see ground station towers in Japan, and we've been doing that for 10 to 15 plus years. The lower left box is what we call high-performance transmission technologies — these are really high-power amplifiers used in electronic warfare, jamming amplifiers. It's on Air Force One as a great example. If you're flying over the ocean and you need to communicate, you need to really amplify that signal so it gets from wherever the plane is to the ground equipment. When you're talking about radar and jamming, our amplifiers are key critical components to some of these larger systems. Finally, one product not to gloss over is the Comet, which is the lower right-hand picture. It may look like a typical antenna, but this is troposcatter equipment sitting behind that antenna dish. It is literally the world's smallest troposcatter system. It can be set up within 15 minutes on the ground, enabling transmission from 10 to 20 miles to a couple hundred miles. This is a product we just introduced last year, and almost immediately we started getting orders from the U.S. government and tremendous interest around the world. This really is a game changer because it provides a lot of transmission capability without the requirement to use satellite. Over-the-horizon technology actually bounces the signal off the sky, not using a satellite, so it's a real game changer because the end customer doesn't need a satellite or to arrange for transponder capacity with a third-party provider. They just put the Comet antenna on the ground — one on the left side, one on the right side — and off they go. So it's a real game changer that we developed over many years and finally rolled out last year.

As I mentioned earlier, things are looking pretty good. We have about $600 million of revenue plus that we're expecting this year, and we have almost a billion dollars of what I call visibility to future revenue. $600 million of that is in our backlog already, so almost a year's worth of revenue is in our backlog if you want to simplify things. We also have contracts in place — not contracts we're getting, but contracts in place where we just wait for funding, and we don't necessarily include that in our backlog because it's a little bit more conservative. But adding them up, we have about a billion dollars worth of revenue visibility from existing contracts. As we talked about on our conference call, in the past, probably 40% to 50%, sometimes even 60% of any given quarter's revenue is actually booked and shipped in that quarter. So taking a step back, you can see that we have visibility not just for the next 6 to 12 months, but probably for 24 to 36 months. Things are looking pretty good, and as long as the economy improves and bookings continue to flow in, we think our revenue chart and adjusted EBITDA chart will certainly be heading north.

We also have a proven record of successful acquisitions. Going back to 2015 when we made an acquisition of TCS, which got us into the 911 space, and since then we've done some tactical acquisitions in the 911 area to really boost our capabilities. Even in January of this year, we announced and closed on an acquisition of a high-precision antenna company that will allow us to participate in this growing LEO market. CGC — you probably haven't heard of the name — but it is a true leader in providing antenna solutions for LEO and MEO satellite constellations, with great programs and great customers, and we think that's really going to generate some of our growth over the next couple of years. We do have one pending acquisition, a small company called UHP Networks, primarily based in Canada. In December of 2020, almost a year since we first announced the acquisition, we actually announced that we were extending the timeline for us to close the acquisition to February 28, 2021. We've been having some very good discussions to figure out a way to close this transaction. We hope to have what I call pretty good news to announce between now and February 28, 2021, and we're really excited about bringing UHP into the Comtech family. It is a leader in what I would call TDMA technology. Back in November 2019, when we first announced this acquisition, we said bar none that UHP had the best TDMA technology that existed in the marketplace. You could call it groundbreaking, disruptive, and every sort of word you could possibly think of with the technology. We're looking forward to it. We believe once this acquisition closes, we'll be able to provide our customers an end-to-end solution over the next several years as they would like to have one system in place. For those that know us, we have a great product called Heights, which is a network platform we offer our satellite customers who require SCPC or high bandwidth. UHP is much better technology on the low side, so if you have low data needs, it will allow us to provide customers with a low data transmission requirement and graduate with them to higher bandwidth requirements for our Heights products whenever they want to. So this is a really good acquisition we're excited about. None of this is in our current projections that we've talked about, and I'll just reiterate them on the next page. Back in December, with COVID as a background and things still being shaky out there, we still think $610 to $630 as of December is a reasonable number. We gave guidance of $74 to $76 million in terms of EBITDA. Just like you, we're sitting here looking at things in the press every day, but I can tell you sitting here today we feel pretty good. We think we're past the worst of the coronavirus. We're talking to customers with large opportunities that really didn't exist a year ago, six months ago, even, and we feel pretty good about where we're headed.

In summary, Comtech is a true market leader, number one or number two in each of our markets. We are an engineering and technology company with over 400 engineers. Growing markets underlie our products and future revenues. We've been around for a long time, so we've been through good times and bad times. The management team as a whole has navigated through this coronavirus pretty well. At the end of the day, we feel pretty good and look forward to reporting good news over the next few quarters and years. With that, that's the end of my prepared remarks, so I guess I will turn it over to Joe from Noble if he or anybody else has any other questions.

Thanks, Michael, really appreciate a very in-depth presentation. This is Joe Gomez, the Noble analyst on Comtech Telecommunications. We're starting the Q&A session. If you wish to ask a question, please click on the lower right corner of the video window. Michael, I'm going to start with the satellite business. As you mentioned, there have been literally thousands of LEO/MEO satellites proposed to go up in these huge constellations. So assuming these start to come to fruition, what does that mean? Does each satellite need its own ground station, or is it one ground station for every ten satellites? How does that benefit Comtech's ground station business?

I'm going to simplify things. It requires a lot of ground stations. There's no magic formula, Joe. If you have one satellite in the sky, right off the bat you need at least one satellite ground station. But where you need that satellite ground station equipment is for every single customer that would like to communicate directly to that satellite. So in some cases, you could have one satellite and 100 different satellite ground station spots communicating with that satellite. Add another satellite, and some of that same ground station equipment using the appropriate antenna, such as our XY antenna, will be able to connect to that second satellite and third satellites. What's happening here on the LEO side is these very bright billionaires, as I like to refer to them, are launching hundreds if not thousands of satellites that are lower Earth — they're closer to the Earth than historical satellites. So the need is to have high tracking capability, very sophisticated software, and you have to be able to handoff and move from one satellite to the next. That's some of our equipment such as our Heights platform, some of the stuff that UHP will bring to the table. So it's multiples upon multiples we're talking about, and a lot of the equipment out there needs to be upgraded, some of it needs to be new. Comtech's perspective is we are independent. Some of the systems out there are closed-ended — they want to have proprietary type equipment, so we're not going to provide to everybody. But I think that's a fallacy for some of these customers because large companies that are going to be using some of this bandwidth will want interoperability among many different satellite brand operators, and that's our business. We don't make satellites, so we're independent, vendor neutral. We'll work with anybody's satellite, and that's where customers are pulling the industry into a very broad, independent, vendor-neutral type solution over time. So that's where we see the opportunity. You could call us the ones providing the shovels to everybody digging the gold. We feel pretty good that there's an enormous growth opportunity as these satellites get launched. There's a twofold effect: there's an initial equipment need when they launch a satellite because you need to communicate with that satellite once it gets up in the sky, and then there's a second wave that comes along with it, which is the actual end customers. So the initial customers need satellite ground station equipment to communicate with that satellite, and then as they start rolling out applications to end customers — whether consumers or small businesses — you need to add more satellite ground station equipment, which we think we're going to be in the business with.

Let's switch gears to the next-gen 911 business. I think you even made an announcement this morning of another win in Toronto. You seem to be putting out these press releases on a regular basis of wins, as you mentioned in Pennsylvania, Massachusetts, South Carolina. What is driving your ability to win these contracts over your competition?

There's an undertone of tremendous market demand for upgrading 911 systems, so that's certainly providing the demand. Why we think we're winning? We pretty much think we have the best technology out there, being validated by our customers. As you go, some of the historical systems that exist are deployed by very large companies and they're old — they work like old software works. I'm sure everybody has experienced somewhere along the line that you may have a piece of software in a shop somewhere that's is fulfilling a function that was developed 25 years ago. So it's very difficult to take old software and make it modern. What's happening is as these states go to modernize their equipment, they're going out to bid, which is giving us the opportunity for them to see new technology, new ways of doing things. If you remember in 2019, we did a small tuck-in acquisition called Solacom, which is literally taking market share from our competitors. That's what's giving us the growth here — we're taking market share because our technology is a lot better than our competitors. The other thing I do tell people, Joe, so you can understand: look, we're a small company, we're not $50 billion in revenue. I'm not going to compete in New York City against a $50 billion company. I don't sell handheld radios or certain equipment that other companies can package in. But where I do provide better service is clearly with smaller customers in the United States. We're much more nimble. We can do things very specific for the customers that the bigger companies just don't want to do or just don't seem to be able to handle. We have feet on the ground in some of these locations and have developed strong relationships over the years. So we're not going to win 100% market share, but we feel pretty good about where we're focusing, and we have the right strategy in place. These contracts take several years to be awarded, we've put a lot of homework in in the last few years, and we think we're seeing some of that benefit today.

Great. And if we look at some of the government solutions business, a lot of that goes to defense. We have a new administration coming in, questions about the size of the defense budget. As I sit here looking at the defense budget, there is a big shift in priorities to a lot of digitization products for the military as opposed to big iron — another battleship or another aircraft carrier. What are your thoughts on the new administration and defense budget and where it could be going, hopefully benefiting Comtech?

It's a good question, Joe. Since I've been with the company since 2002, what I've seen during political presidential changeovers or administration changeovers is it's generally been neutral to us, with the exception of war. War is a different category — you know, the sky's the limit in terms of revenue. But we're not in that type of political environment around the world. There is a tremendous need, and we've had it for several years, for upgrades to communication to transmit that digital data you're talking about. So for us, the new administration that's scheduled to take office tomorrow, we think will actually be beneficial to us simply because for the last four years, the prior administration really hasn't focused on states, if you will. By that I mean embassies around the world — there hasn't been a lot of activity overseas in terms of political influence by the U.S. government. It's likely that the equipment that existed four years ago, which was already ten years old, is now 15 years old, so some of that stuff will get upgraded. One thing that's clear is the U.S. government is looking to an infrastructure bill to generate spending. As a company domiciled primarily in the United States with our manufacturing facilities, we think we're going to pick up our fair share of infrastructure spending, and infrastructure spending will certainly be used for new communication equipment including our 911 stuff. 911 is a win-win — consumers and citizens will get upgraded 911 systems, each state will be able to get access to federal money, and our view is Comtech should get some of that access. The infrastructure bill may take some time, but we think those trends bode well for us in this new administration.

Great. We've got about two minutes. I'm going to ask one more question for a quick answer. This past fall you announced a $100 million stock buyback. What are your thoughts on that at this point in time?

I'll summarize it this way. When we announced the $100 million buyback, we told people we would be opportunistic about buying stock. We do think our stock is undervalued. Even at today's prices at $22, if you look back at the stock chart in January of 2020, we were at $35 to $36 a share. It's the same company, albeit we got a little bit impacted by COVID. In the last seven to eight months, we've been impacted by an acquisition we announced and then terminated, so that certainly caused the stock to go down to lower levels. But as you look at the trend over the last six months or so, we were as low as $14 and change, $13 and change. I think the stock market is starting to realize Comtech is a growing company. The growth trends that existed in January when we were a $30-plus stock are the same growth trends now, and now the trajectory is headed back up. All in all, we'll be opportunistic about our stock buybacks because we do think the stock is undervalued.

Great, Michael. This has been fantastic. I want to thank both of you, Michaels, for presenting here at NobleCon 17 and taking the time. We really appreciate it. We look forward to seeing how 2021 unfolds, and good luck going forward.

Thank you, Joe, for hosting us. Have a good day. Thanks everybody for joining. Thank you.