Comtech Telecommunications Corp. (CMTL) CEO Michael Porcelain on Q2 2022 Results – Earnings Call Transcript

Comtech Telecommunications Corp. (NASDAQ:CMTL) Q2 2022 Earnings Conference Call March 10, 2022 4:30 PM ET

Company Participants

Jason DiLorenzo – Comtech Telecommunications

Michael Porcelain – Chief Executive Officer and President

Michael Bondi – Chief Financial Officer

Conference Call Participants

Joe Gomes – NOBLE Capital Markets

Asiya Merchant – Citi

Chris Sakai – Singular Research

Chris Quilty – Quilty Analytics

Operator

Ladies and gentlemen, thank you for standing by. Welcome the Comtech Telecommunications Corp. Second Quarter fiscal 2022 Earnings Conference Call. [Operator instructions] As a reminder, this conference is being recorded, Thursday, March 10, 2022.

I would now like to turn the conference over to Mr. Jason DiLorenzo of Comtech Telecommunications. Please go ahead, sir.

Jason DiLorenzo

Thank you, and good afternoon. Welcome to the Comtech Telecommunications Corp. conference call for the second quarter of fiscal year 2022. With us on the call today are Michael D. Porcelain, President and Chief Executive Officer of Comtech; and Michael Bondi, Chief Financial Officer. Before we proceed, I need to 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. I am pleased now to introduce the President and new Chief Executive Officer of Michael Porcelain. Mike?

Michael Porcelain

Thank you, Jason. And good afternoon, everyone. Thanks for joining us today. We’ve got a lot to talk about. But first, let’s have a look at the headline numbers. Comtech consolidated net sales for the second quarter were $120.4 million, up 3.1% sequentially from the first quarter. Adjusted EBITDA and non-GAAP financial measure was $9.8 million, 76.7% sequential increase from the first quarter. New bookings also referred to as orders were $102.9 million, a 19.2% sequential increase from the first quarter resulting in a book-to-bill ratio of 0.86. Our Q2 ending backlog was $611 million, compared to $628.5 million as of the end of Q1. Our revenue visibility is approximately $1.2 billion. We measure this revenue visibility as the sum of our $600 million backlog plus the total unfunded value of certain multi-year contracts that we have received and from which we expect future orders. And we did generate $4.8 million of cash flows from operating activities. This despite making almost $3 million of cash payments for our settled proxy contest.

Our second quarter fiscal 2022 results showed sequential improvements and consolidated net sales bookings and adjusted EBITDA versus Q1 fiscal 2022. Finally, and although I wish we didn’t have to do it, we lowered our fiscal 2022 financial targets and are now shooting for $520 million of revenue and adjusted EBITDA of approximately $50 million. Mike Bondi will discuss these changes in a bit, but first, let me add a few more comments on the quarter and business environment. The second quarter of fiscal year 2022 was clearly transformative for Comtech, I took on a new role as CEO, we welcome new independent members to our board of directors, and we further plans to deploy the proceeds of $100 million strategic growth investment. And finally, we continued to solidify our position as the leading solution provider in our two key end markets, our next generation 911 public safety product line, and our satellite and space communication product lines. Both are at the beginning of a long term investment and upgrade cycle and are expected to significantly grow over the next several years.

We see these two end markets are what Comtech will now call the Failsafe Communications market. This market includes the critical communications infrastructure that people, businesses and governments know they can rely on no matter where they are on land, at sea or in the air, and no matter what’s going on outside from armed conflicts to a natural disaster. For more than 40 years, Comtech’s DNA was developing and manufacturing highly reliable communications equipment. But as market change, so did Comtech. Our customers who are next generation 911 in public safety providers, mobile network operators, governments and defense agencies and other enterprises require communications and data transmission solutions that work every time under the most demanding conditions, as such over the past several years, our DNA has evolved to include more secure and sophisticated wireless technologies, cyber training and public safety software solutions.

With new leadership in place and added flexibility to invest significantly in our strategic initiatives. Our evolution will continue and we are optimistic as we look ahead. Although, we are optimistic, we know that we face short term challenges and continued uncertainties in the second half of our fiscal 2022. We believe these items are appropriately reflected in our updated guidance. For instance, the repercussions of the military conflict between Russia and Ukraine are significant. For Comtech, the current conflict is directly impacting short-term elements of our sales pipeline. Certain customers have paused procurement and deployment of satellite and troposcatter communication systems, and instead began purchasing war-fighting equipment such as anti-tank missiles, and other lethal equipment. The US defense budget and defense budgets worldwide are now being adjusted in real time to reflect the priorities of war in changing European geopolitics.

On the other hand, our experience suggests that Comtech will benefit from an uptick in demand as conflict and uncertainties create new and different opportunities for the types of communication solutions we supply. And like many other companies around the world, we are working around supply chain constraints that include component shortages and quality issues, as well as delays. Component prices are up approximately 10% of the past several months, and freight costs in some cases have doubled, we have had trouble getting certain parts like cooling fans and power supplies. In some cases, we have depleted our stock inventory and are now on a waitlist for new components.

Finally, while we are a stronger and more powerful organization for it, we are only just emerging from a drawn-out proxy contest and the distraction of an unsolicited acquisition offer. These events require time and focus from leadership and slow strategic execution. While competitors use the short term uncertainty to their advantage, we did experience a higher level of employee stress and turnover, some bookings and contract wins were delayed, and in some cases, we lost them. Nevertheless, despite all these challenges, Comtech face during the second quarter, our company achieved a solid quarter of financial performance that exceeded our bottom line expectations.

Now let me turn it over our CFO, Mike Bondi for a little more details of the quarter, and then I will come back and provide some more remarks on these key developments.

Michael Bondi

Thanks Mike. And thanks again, everyone for taking the time to join us today. In our December 9 2021 earnings call, Mike discuss the reasons why we believe fiscal 2022 was starting to shape up in line with our expectations for our second quarter and fiscal 2022. Immediately following the Omicron COVID-19 strain surged, closing further delays in an already strained supply chain. Certain suppliers were forced to shut down production and cease deliveries of expected parts. All the parts, which did arrive fell below our quality standards, and we declined to use them. As a result, we were unable to get several millions of dollars of shipments out the door. But nevertheless in line with our thinking at the time, our second quarter results showed improvements in sales, bookings and adjusted EBITDA vs Q1 of fiscal 2022. For Q2 fiscal 2022, we recorded $120.4 million of consolidated net sales, of which $81.3 million were reported in our commercial solution segment, and $39.1 million were reported in our government solution segment.

Both segments reported slightly higher sales than achieved in Q1 fiscal 2022. But lower sales thank than Q2 of fiscal 2021. Of the $120.4 million in consolidated net sales roughly 75% were to US based customers and the balance were two international customers. Compared to the year ago quarter, our consolidated Q2 revenues declined $40.9 million or 25.4%. The large majority of which related to lower revenue from field support activities associated with the withdrawal of US troops in Afghanistan and other program changes. Our gross profit margins in Q2 was 38.1% reflecting improvement from the 35.7% we achieved in the first quarter of fiscal 2022. This improvement related to a more favorable product mix, as well as lower than expected warranty costs in our next generation 911 product line.

Gross margins in Q2 of 2021 was 34.5%. From an OpEx perspective, our SG&A for Q2 of $29.8 million, or 24.8% of consolidated net sales, reflect tight labor markets and decision to continue to invest in both existing and new talent. SG&A costs also include $1.7 million of restructuring costs to move and streamline our operations. SG&A expenses in Q2 of 2021 were $29.5 million, or 18.3% of sales.

On the R&D side, we continue to make long-term investments. R&D investments were $12.6 million, or 10.5% of consolidated net sales. R&D in Q2 2021 was $12.7 million or 7.9% of sales. These expenses were generally in line unexpected with Q1 levels. As it relates to our segments, commercial solutions contributed roughly 67.5% of net sales and $12.5 million of adjusted EBITDA. Government Solutions contributed 32.5% of net sales and roughly $1.6 million of adjusted EBITDA. Investors will also note that we reported a GAAP operating loss this quarter of $24.6 million, which includes charges of $24.8 million, including $13.6 million of CEO leadership transition costs, $9.1 million related to our settled proxy contest, $1.7 million of restructuring costs and $400,000 for COVID-19 incremental operating cost.

Looking at the bottom line, our GAAP net loss attributable to common shareholders in Q2 was $23.5 million, or a $0.89 loss per diluted common share, and our non-GAAP net loss was $694,000, or $0.03 loss per diluted common share. Details reconciling our GAAP to non-GAAP financial measures can be found in our Q2 shareholder letter and Form 10-Q filed earlier today with the SEC. We continue to manage our balance sheet prudently. Cash generated by operating activities in Q2, as Mike said was $4.8 million. And as of January 31, our cash and cash equivalents were $30.9 million. Total debt outstanding was $114.5 million and our secured leverage ratio was 1.95x. Although debt will go up during the second half as we pay off a lot of the costs we incurred with the CEO transition and proxy contest. We have flexibility in our balance sheet given the $100 million raised in October. Before turning the call back to Mike Porcelain to wrap up, I have a few points to make about our updated guidance.

As we discussed in our prior conference calls, reliable forecasting is challenging. During the quarter, the Russia Ukraine military conflict and geopolitical uncertainty in Europe created a new set of pressures. For us, we have specifically changed our expectations related to bookings and revenues associated with large orders for our Comtech COMET troposcatter systems that were originally going to be deployed during the second half of fiscal 2022 in one European country, which we are now disclosing as Ukraine. This country had, and still has an immediate need for wireless communication services for both defensive and communications reasons. Funding for these systems was expected to be provided by the customer and by the US government. Despite ongoing and intense effort to obtain immediate funding to deploy COMET and other satellite related systems, it has now become impossible for us to predict the timing or dollar amount of these awards for the remainder of fiscal 2022.

Additionally, anticipated funding for other awards that we expect it to book and ship has been shifted to other programs, or temporarily delayed as a result of changes in defense spending priorities. The aggregate amount of the aforementioned items approximated $35 million. And we are no longer including these opportunities in our updated fiscal 2022 revenues and adjusted EBITDA targets. Also, as we thought about our adjusted targets for the second half of fiscal 2022, we have tried to account for the impact of global supply chain disruptions on our customers, and the possibility of extended purchase decision cycles or delays in execution. Like many businesses, we anticipate that global supply chain constraints and COVID-19 pandemic aftershocks will continue to pressure our component availability and pricing and impact logistical costs. These disruptions have and are expected to continue to affect our satellite and space communications customers, as well as our NG-911 customers. We are also considering no new sales to Russia.

As a result of these issues, we are no longer including approximately $35 million of revenue in our second half of fiscal 2022, the large majority of which was originally expected to occur in the fourth quarter. Adding these items together, we pretty quickly wind up with around $520 million of revenues and adjusted EBITDA $50 million or 9.6% of expected sales. Q3’s revenues and adjusted EBITDA are expected to be $122 million and $10 million, respectively, with the remainder of our targeted fiscal 2022 revenues and adjusted EBITDA occurring in Q4.

While reliable forecasting remain a challenge, we do believe our targets for the second half are reasonable. Heading into the third quarter, we have approximately 85% and 50%, respectively, of our Q3 and Q4 targeted revenues in our backlog. Historically, these percentages at any given time were lower.

With that now let me turn, return the call to Mike Porcelain.

Michael Porcelain

Thanks Mike. And we’ll get to some questions soon. But I wanted to talk more about how we’re positioning Comtech to bridge the distance between our vision of the future and the opportunity that Failsafe Communications represent for us now. I like to think I’m a realistic person. We know we’re in the right markets. But while having a view of the future is one thing, making sure a company that has the right products and services and selling them in the right channels to the right customers is another. We need to make sure the company itself is invested in the right resources making improvements to both our physical and human capital to execute against our long-term plan. Change doesn’t come easy, and it takes some time to achieve success.

When it comes to our products, we’re ready. You may have seen that we recently announced the launch of our new VSAT platform, ELEVATE, a scalable, reliable software defined satellite communication system that will enable our customers to create private VSAT networks of any size and topology with infinite scalability. We’re incredibly excited about ELEVATE, as it will offer any user the opportunity to build data and communication networks with full functionality on land, at sea or in the air using next generation satellite constellations that are completely private, fast and reliable. The use cases for ELEVATE technology spanned multiple industries because it works everywhere, aerospace, agricultural, land, mobile, maritime, energy, and any other application or geography where a community, government or an enterprise needs reliable secure Failsafe Communications. In a future defined by the increasing proliferation of so called edge devices comprising the Internet of Things we believe that ELEVATE will give Comtech and our customers a competitive edge.

And in our next generation 911 public safety product lines. In March 2022, we announced that our new SmartResponse solution that we have been developing is now compatible with the RapidSOS platform. SmartResponse is a cloud native solution for emergency communication centers that combines the most accurate location data available with caller information, live traffic, weather routing, and points of interest and Department of Transportation camera feeds into a single common operating picture. This product is data agnostic and can interface with any call handling or dispatch platform through its use of flexible application programming interfaces known as APIs. RapidSOS is an emergency response data platform that securely links lifesaving data directly to emergency service providers and first responders. Together these solutions arm emergency communication professionals with the most accurate information available, improving response time and performance in any situation.

Now on to some of our other initiatives. While we have been judicious we’ve been investing in our future, and we will continue to do so. This includes making significant capital expenditures and building out cloud based computer networks to support our previously announced next generation 911 contract wins for the states of Pennsylvania, South Carolina and Arizona. We will also continue investments in capital equipment and building improvements in connection with the opening of a new 146,000 square foot facility in Chandler Arizona, the establishment of a new 56,000 square foot facility in Basingstoke, United Kingdom, and we will also be making other investments in some of our other locations. Although COVID-19 supply chain issues have extended our original build out schedule, both manufacturing centers are expected to support production of next generation broadband satellite technology and should be operational by early fiscal 2023.

With respect to capital investments for these and other initiatives, we expect to spend approximately $30.0 million in fiscal 2022. In the first half so far we have spent $8.8 million in property, plant and equipment. Another initiative is segment reporting. We’re evaluating the change in segment reporting as we want to make sure our businesses and the way we present them to our customers and investors are aligned with the way the market itself is growing and changing, and the way I intend to lead Comtech. We are also reviewing use of non-GAAP metrics with a particular focus on the way we present non-GAAP EPS. Some companies in our markets eliminate amortization of intangibles and stock-based compensation when calculating EPS, we historically have not done so. Several investors have informed us that this difference makes it difficult for them to compare our results to competitors. And we are seriously evaluating changing to this new non-GAAP EPS metric.

During the second half of fiscal 2022, we also expect to continue to invest in our brand, visibility, and people. This includes new social media activities, marketing, and other initiatives that we believe will allow us to achieve our longer-term business goals. Our investment in people is important, and it means continuing to invest in our employees and bringing on new talent. So far, we welcome the new VP of HR, and we have active searches ongoing for new talent in other key areas around the entire company. I hope to announce some exciting new hires very shortly. As an organization, we’re also ensuring that we have the appropriate structure to serve our end markets most effectively. This means a renewed focus on increasing companywide collaboration to exploit emerging opportunities. It also means the creation of two new business units, each of which will have its own agile and nimble business structure, and will formalize and improve our ability to serve US and allied governments as a defense contractor, and establishing major Innovation Center for Comtech’s growing VSAT platforms based in Canada.

This organizational shift, which was first announced on January 27, 2022, is a prime example of how we are transforming ourselves to anticipate and meet the changing needs of our customers. I’ll stop here for questions. But I want to conclude my prepared remarks by stating that this really is a unique and exhilarating time for content. Our markets, our customers and the technologies they need are all transforming as governments and communities everywhere make significant investments in their next generation, Failsafe Communications infrastructure. Comtech, well, we’re transforming alongside them with new leadership, significant investment capital for our strategic initiatives, and advanced technologies that we believe put us in a leader position. We are optimistic, as we look ahead to the future. Reflecting this confidence in our long-term business outlook, our board of directors again declared a dividend of $0.10 per common share payable on May 20, 2022 to shareholders a record at the close of our business on April 20, 2022. Now, let me take your questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions]

And we’ll move first to Joe Gomes with NOBLE Capital Markets.

Joe Gomes

Good afternoon. So obviously a tough operating environment, a lot of things way out of your guys’ control. But you mentioned a couple of times, Mike about your experience suggests that following these types of issues that are occurring in Europe right now that it is a positive for you guys, wondering if you could give us maybe a little more color or detail or examples where you’ve seen that in the past?

Michael Porcelain

Sure. Well, I guess I’d rather not talk about the past, but the present. I mean, if you look at the Ukraine situation itself we’re really talking about the ability of timing right now. We took approximately $35 million of revenue out of our forecast for 2022. The opportunities are still there. There’s ongoing conversations with various parties to obtain funding and logistical to get equipment over there is extremely difficult given the situation there. But that’s an opportunity that is probably actually growing. No matter, it depending on how the outcome occurs or what’s going to be there, the communication infrastructure of the Ukraine country has now been destroyed. So our troposcatter equipment is perfectly aligned to deal with a situation like that. And again, as you think about satellite communication systems and the need for upgraded terrestrial systems, our satellite communication will be, be able to be deployed there at some point. And that’s an example of something that I would say is the future what’s sort of happening now. I think another example is you saw some news in the headline in the last two weeks that a major satellite system of one of our competitors was jammed. And we do a lot with the US government and some of our allied countries that really provide sophisticated components and software and techniques and technologies that will prevent those things from occurring. So again, I think is satellite communication becomes really important. You saw that with Elon Musk shipping terminals over to the Ukraine to expand communications, I think as you look out, you’re going to see that continued demand for what I guess I’ll use our new buzzword Failsafe Communications, but I really believe in it.

Joe Gomes

Okay, thank you for that. And the talk about the satellite ground station, you’ve talked in the past a lot about that contract in that space where you can’t name the other side of the contract, but can you just give us any update there? And what can you give us in terms of that award?

Michael Porcelain

I can’t give you any update, I guess the best way of saying it, given our agreement with our customer, I think I will just point out to you, again, I’ll use the Elon Musk as the example you could see the need for these types of satellite systems that are out there. We’re a big believer that the legal markets going to grow. We believe we have the right next generation broadband satellite technology. We’re building out our facilities to provide that future demand, but I can’t talk anything specific other than we’re heads down. We’re working. We’re working on it.

Joe Gomes

Okay. And the past couple of quarter’s book-to-bill been below one. I mean, as you’re looking out here, especially in this type of environment, do you see that bid pipeline that you think you’d get that book-to-bill back over one year in the short term? Or do you think that it’s a longer term opportunity?

Michael Porcelain

Well, we, I guess the short answer is we actually still believe that our book-to-bill will exceed 1.0 for the year, based on the opportunities in our pipeline, it’d be difficult to say what comes in Q3, and Q4 from a bookings perspective. But we do think our backlog is going to grow pretty nicely in Q3 and Q4. Where we have some large orders that we still expect to close. I think, again, the issue for us, like every other company is going to be can we get it out the door? Some of these things we, I mean, cooling fans and power supplies, things that were available two months ago, have suddenly just dried up. So, yes, the short answer is we feel pretty good book-to-bill, we think we’ll still exceed 1.0, if everything goes the way we’re thinking about it. We’re trying to be thoughtful in our approach. But that’s still our target to exceed 1.0.

Operator

And move next to Asiya Merchant with Citigroup.

Asiya Merchant

Great, thank you very much for the opportunity. If I can just ask the gross margins were a positive surprise in the quarter. Can you just elaborate on that? And as you look out, based on the revenue guidance for the second half of this year, if you can talk about the outlook for margins there. And that’s just on the SG&A side of things, it was a little bit more elevated than what I had in the model. And is it expected to remain at this elevated level, you said you guys are investing. And then lastly, just kind of what your cash flow expectations are for fiscal ‘22. Thank you.

Michael Bondi

Okay. Hi, Asiya. This is Mike Bondi. I’ll take that. In terms of the first question in terms of the margin improvement in Q22, we did see better product mix for sure. And we also had a warranty reversal in the quarter that gave us some uplift there. But even without that we still would have been in the 36% range so that’s something as you asked about the second half of the year, I would imagine that we would continue to be in that range as we have a mix shift in our business to more of a commercial in the second half.

In terms of your second question in terms of G&A being elevated, I just would want to point out in terms of our SG&A and stock-based compensation, we did have three retiring directors this quarter. So we did have about $900,000 of incremental G&A cost. So when you look at the EBITDA though that’s getting added back. And in terms of restructuring costs, we also had some additional restructuring costs related to the facility moving Arizona, as we’re carrying to duplicative rent as we’re building out the facility. But things are progressing nicely there. So hopefully that answered that part of the question.

In terms of cash flows for the year, I guess our expectations at this point in time, taking everything into consideration, is we’re expecting somewhere in between $5 million and $10 million for the year. And obviously, for the quarterly numbers, it’s subject to timing of cash collections and things like that. But I think when you take into account, the one-time charges we had taken in Q2, namely the proxy contest, cash payments that we’ll be making, as well as the CEO transition cost, when you back that out of the number think about it as adding back another $17 million of cash. So you could really be thinking about like $22 million to $27 million. So that’ll be in terms of our cash outlook for cash flows from operations for this year at this point in time.

Asiya Merchant

Okay, great. And then just a little bit on the next generation 911. If you can focus a little bit more on that, is that like the competitive dynamic there? Are you noticing something that is requiring more investment there? If I read correctly through my comments if you can just elaborate a little bit on the competitive dynamics in that space? Thank you.

Michael Porcelain

Sure. I think anybody in the satellite world is talking about LEOs and that’s the topic of the day, along with the launching of new high throughput satellite HTS satellites. There’s a whole bunch, though, of new frequencies coming on higher band frequencies, such as V band, and people are spending that to go after that bandwidth because people need that additional capacity and speed from a competitive landscape, if you will, at least my sense of it right now, is that there’s a little bit of a pause out there. So some customers are trying to figure out what they want to do with their network, which system they’re going to buy, are they going to be an open platform? Are they going to go with a closed platform? Our strategy has been to date and we’ll continue to be is we’re going to be an open independent provider, we’re going to serve as everybody that we can service. So I think, from my own perspective, the launching of the Leo satellite systems and all of the conversations that’s causing some people to pause, and I think there’s a little bit of pressure on pricing, if you will, overall in the marketplace, as people are chasing things. And again, I think that’s why when we look at it, we sit back and we go back to our acquisition of UHP. And our entry into the TDMA market that we did in 2019, we viewed this as a huge opportunity, because Comtech didn’t provide TDMA technology before so we’re going after enterprises around the world that had installed base of very old TDMA networks. And as they go to these new platforms, you need to change an upgrade. And that’s our sort of our playing field for us from a competitive perspective. Other competitors out there have to defend their platform. And so long as we’re investing in what we consider to be the best in breed TDMA technology platform, combining it with the best and breed of our SEPC technology and our modulation techniques. We think we are positioned well, to gain I would say more than our fair share, as the market grows. So again, as these Leo launches, and as systems get upgraded. I think that’s when we’re going to see the growth that everybody is been talking about in the industry. But right now there’s a little bit of a pause. COVID has slowed things down, Omicron clearly again, everybody thought it was coming back and still delayed things. But I still think that there’s this overtone of just a pause in the environment as people are making decisions or what they really want to do. I don’t know if that’s helpful, but that I guess is the color. The way I’m viewing it from my seat.

Operator

And we move next to Chris Sakai with Singular Research.

Chris Sakai

Hi, good afternoon. I just had some questions. I know in your prepared remarks, you mentioned, governments were changing their budgets. And I wanted to ask how have you guys seen this already because of the Russian Ukraine war and how is it affecting you?

Michael Porcelain

Sure. I mean, directly from the customer is how we’re seeing it. I mean, we’ve been tracking a number of opportunities, not only the Ukraine, COMET but other types of equipment with our customers. And obviously, that would include the US government. And, again, not to disclose specific things. It is stuff that you’re reading in the news, the Javelin missile, the Ukraine government is buying lots of UK missiles. So that’s an example where stuff that was supposed to go for our stuff got temporarily shifted.

Chris Sakai

Okay. And then, I guess, have you guys done some sort of sensitivity analysis or something to I mean, to sort of, I mean, to see was this war expands will — how much will that affect your revenue and guidance going forward?

Michael Porcelain

Yes, I think right now we’re going to watch it play out live. Again from our perspective, we think the second half of the year, as we talked earlier, we’re going to be able to book more than 1.0. So we think the opportunities that we’re seeing will come in, but we’ll have to see how it plays out live. But again, if you look at all of the wars that we’ve been experienced, at least, through my lifetime here, it’s always resulted in an increase in satellite communications, at some point during the process. So I think that’s that, same time, though then to not under emphasize it is in the 911 portion of the business. I mean, you’re reading every day, about 911 systems being attacked, and being something from a cyber-war perspective. So as we talk to our customers we’re finding that they have a need for increased services and stuff like that, and how to best help them protect their networks. And given that we do some of the major states in the United States, our customers are talking to us about how we could help them and work with them to prevent the 911 system from being cyber-attacks. So I think those types of things are they’re just real examples of things that I think will benefit from.

Chris Sakai

Okay, great. And then I guess the comment on these the next generation 911 systems, I mean, as we head out of, hopefully, out of the pandemic, are you seeing or can you — do you think you’ll expect more states to hop on board?

Michael Porcelain

We do. Yes. I mean the short answer is do, we do our second half guidance does assume that we got a couple of, I’ll say, smaller size contracts, but we are expecting to receive funding for at least one new customer in the second half of our fiscal 2022. There’s another a number of opportunities that are out there, but those types of things are very lumpy and difficult to predict and not to forget about Ohio. Ohio is a contract that we’ve won. It’s more than it is north of $100 million. It’s not in our backlog where we have a contract that signed and we’re working very actively with the state legislator and the government of Ohio to fund that contract. And I think I mentioned in our last conference call, and if not, it’s certainly public knowledge. This is a contract that has bipartisan funding support. It’s a question in Ohio, how much tax are going to increase to fund the contract, as well as other initiatives that they’re working through, but they’re making progress and our hope is still by the end of fiscal 2022 that contract will be awarded to us with funding.

Operator

And we’ll take our next question from Chris Quilty from Quilty Analytics.

Chris Quilty

Hey, Mike. You had mentioned some of the supply chain issues that I’ve heard in the last month here, several of your competitors mentioned price increases. Is that something that you’ve done or are considering?

Michael Porcelain

Chris, and I apologize, it was a little low for us to hear the first part of that question.

Chris Quilty

I was just saying that several of your competitors over the last month on their conference calls have talked about the same supply chain issues and the fact that they’re raising prices. And I was wondering if that’s something that you’ve done, or are considering doing?

Michael Porcelain

I would answer the latter. We haven’t done it yet. We’ve been holding our prices that we’ve committed to for the items in our backlog. There have been a few contracts that have been new that we actually have obtained price increases for and some of that will flow through the P&L and in future quarters, but we are considering it, but we haven’t done anything yet. One of the benefits of our UHP product line, for instance, it’s a low cost product line. So it was one of the reasons we purchased it back in 2019. Because we felt that we could enter the market in such a way that will allow smaller customers to buy the TDMA platform, and then scale up as they need to. And I think we want to keep to that dynamic. But look, the short answer is we always like to raise our prices. And when we can, we will but we haven’t done anything across the board yet.

Chris Quilty

Right. And I for one, commend you on the shareholder letter. I think that’s a good format. Lots of information, I could use some more time to read it before the call. And to that point, looks like the midpoint revenue came down by $70 million as I was scanning through the letter I saw $35 million mentioned twice. Can you just give a breakdown of where you’re taking the guidance down on the revenue side?

Michael Bondi

Sure, Chris, this is Mike. In terms of the $70 million reduction, we’re thinking about it is $35 million coming from things stemming from Russia, Ukraine, and defense budgets. The other $35 million is more in our commercial space supply tray, change driven and disruptions and just timing but overall, as we’re looking at the next two quarters, we’re seeing Q3 being more similar, almost exact to like Q2, at this point in time and with the uptick in Q4. So most of the reduction, you could say is in the current quarter, Q3 with the peak quarter being Q4 still.

Chris Quilty

Thank you. And I know you’re looking to change your reporting. But in the past, you’ve kind of broken out language around the earth station business and whether it was up or down and trends, there’s any details you can provide?

Michael Porcelain

Yes, I’d say our satellite earth station business is down versus last year. And that’s really because of the supply chain component issues that we’re seeing in the marketplace. I take as Mike had mentioned, when you look at year-over-year stuff, and some of the guidance, I mean, our revenue is going to be down versus last year, most of that’s going to be in our government segment, a significant portion of that, due to the Afghanistan withdrawals. And now of course with lower COMET not being in there as a replacement. But our commercial segment as a whole is going to be slightly down, I think at this point versus 2021. Whether it’s down 5%, 8% or something like that, I think we’ll see as the year progresses, because there’s obviously some pluses and minuses. But the short answer is our satellite earth station business is down. Our next generation businesses is doing well. And I think that trend will reverse as the supply chain issues leave us and hopefully we’ll be able to get those COMET in next year.

Chris Quilty

Got it and sticking with the earth station, the ELEVATE product line, is that a replacement for or is it separate from the Height platform, which is only a couple years old?

Michael Porcelain

Oh, it’s really separate system. It’s taking, Height is really I guess the way I would describe it is we’ve got Heights to the point where we think it’s pretty fully developed for what we want it to be. It’s really for very high, very powerful networks that are say on the more smaller side of the campus, not necessarily something that would scale to 10,000 – 15,000. So what we’re doing is with our expertise and the type of technology that we develop in house, we’re able to take that and sort of create a new product line called Fidelity. And so some of that will be backward compatible over time right. So but the customers have Heights, we’re going to continue to support them. And there’s many customers that have a need for a system that does exactly what Heights does. It’s a very, very sophisticated system. We think that there’s some government customers out there that very interested in doing it, as well as some international customer. So Heights is good product line. It’s going to be there. But ELEVATE is really a brand new product for us, a brand new product, taking the best in breed for what we have out there. And that’s what we’re focusing on.

Chris Quilty

And final question on the earth station. Haven’t heard you talk much about 5G networks and the impact of 3G PP standards. And I’m assuming both of those capabilities are designed into the new platform.

Michael Porcelain

What I would say to you is, I was just in Arizona talking about it. And I don’t want to say much, except to say that we’re pretty visible in the 5G space. Our location business itself has a lot of dominance in the 5G space, particularly with the location side. And as we take what we have in our relationships in there, yes, we’re working on some things, but I don’t want to share our thought plans just yet.

Chris Quilty

Final question was at the theme song, the frozen I heard on your cell phone?

Michael Porcelain

I’m not sure.

Chris Quilty

No comment. Okay.

Operator

We’ll move next to Mike Latimore with Northland Capital.

Unidentified Analyst

Hi, this is Aditya added on behalf of Mike Latimore. Could you tell me what percentage of your 911 business is recurring revenue? And are you seeing some international opportunities for your 911 technologies?

Michael Bondi

Sure, I’ll cover the first part about the recurring revenue. That’s something we’ve been watching, we don’t report anything specific. But if we think about our 911 business, a good portion of it is recurring, especially on the 911 call routing side. Those tend to be nice long-term contracts that are pretty level in their revenue, the 911 upgrade cycle, those types of contracts have sort of two phases to them. First is the implementation phase. And then once you get into the recurring piece, those contracts usually run 3, 5, 7 years. So a good portion of the NG-911 business that we’ve won, would fall into that recurring category. And in terms of the second question, can you just repeat the second question?

Unidentified Analyst

International opportunities, yes.

Michael Bondi

Yes. I think in that area, we, just to remind you, we do full handling in Australia. So we do triple zero. We do also work in New Zealand. We’ve also have been winning some call handling work up in Canada. So in Canada, a lot of the cities have been upgrading to hard, cyber hard in their networks and putting in more robust Solacom Guardian call handling solutions. So we’ve been making good inroads there. And those are nice recurring type contracts as well, a little bit of upfront implementation, and then maybe one or two year contract period that we look to get renewals on.

Unidentified Analyst

Alright, can you also give some color on if you have acquisitions? That’s an important plan for this particular year?

Michael Porcelain

Well, yes, I think the short answer is probably yes. But we’re being very cautious about the market as a whole. We raised $100 million for the reasons that we started back in October of 2021. I think time has proved out the intelligence of that investment in the sense we, it’s really provided us flexibility to our balance sheet, in light of everything that’s going on in the world. So I think that just turned out to be just a fantastic decision. As you can see interest rates are now increasing and the availability for capital is difficult, but at the same time, you’re seeing some depressed pricing in M&A. So as a result of all of these market conditions, pricing, I think, on the M&A side has come down which could prove advantageous to us as we look through it, but I would say our number one focus at the moment is execution of the things that we have in backlog, securing the opportunities that we are chasing, and really positioning the company for growth for next year by itself. And that’s going to be my focus for the next six months. But certainly if something attractive comes along, when you look into 2023, more maybe the second half of ‘22 some that makes sense. Yes, we have the flexibility to do it. So that’s how I’d answer your question.

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

Michael Porcelain

Well, okay, really, that concludes today’s call. I really want to thank everybody for joining us today. We look forward to speaking with you again in June. Thanks everybody.

Operator

This does conclude today’s conference call. Thank you for your participation. You may disconnect at any time and have a wonderful afternoon.

Source link