Q2 2024 Comtech Telecommunications Corp Earnings Call

Participants

John Ratigan; Chief Corporate Development Officer & Interim CEO; Comtech Telecommunications Corp.

Maria Ceriello

Michael A. Bondi; CFO; Comtech Telecommunications Corp.

Presentation

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 2 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 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, 2 of our biggest current shareholders, White Hat Capital, 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 have been engaging with potential lenders to refinance our existing credit facility and have advanced to 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 multiyear 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 network segment, which extended critical Next Generation 911 services for the state of Washington. Comtech has had a long-standing partnership with the state of Washington for over 8 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 5 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 2 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 and 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?

Michael A. Bondi

Thanks, John. Before discussing the status of our refinancing efforts, let me cover our recent results for Q2. We Consolidated net sales were $134.2 million compared to $151.9 million in the first quarter of fiscal 2024, $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 7, basically, the start of our second quarter. For the 3 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 3 months ended January 31, 2024, was 0.86x. In the second quarter of fiscal 2024, this segment was awarded over $7 million of funded orders from 2 foreign militaries. We are evaluating our next-generation modular, transportable transmission system, or MTTS, Troposcatter solutions. We believe that these 2 new customers could lead to larger scale troposcatter opportunities in the future. Compared to Q2 last year, net sales in our terrestrial and wireless network 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 3 months ended January 31, 2024, was 1.33x 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 entering points, or PSAPs, across Australia through our partnership with Telstra. 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 a 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, offset in part by a lower gross profit percentage during the quarter due to overall product mix changes and lower net sales activity.
As we entered 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 2 years to October 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 the 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.