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 Telecommunicat ...

PART I. FINANCIAL INFORMATION [Item 1. Financial Statements](index=3&type=section&id=Item%201.%20Financial%20Statements) The company reported a **$21.9 million net loss** for the quarter due to decreased sales and one-time expenses, despite positive operating cash flow [Condensed Consolidated Balance Sheets](index=3&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) Total assets remained stable at **$994.9 million**, while liabilities decreased due to debt reduction, offset by **$101.9 million** in new convertible preferred stock Condensed Consolidated Balance Sheet Highlights (in thousands) | Balance Sheet Item | Jan 31, 2022 | July 31, 2021 | | :--- | :--- | :--- | | **Total Assets** | **$994,854** | **$993,111** | | Cash and cash equivalents | $30,918 | $30,861 | | Inventories, net | $90,274 | $80,358 | | Goodwill | $347,692 | $347,698 | | **Total Liabilities** | **$425,123** | **$492,392** | | Non-current portion of long-term debt | $114,500 | $201,000 | | **Convertible preferred stock** | **$101,867** | **$—** | | **Total stockholders' equity** | **$467,864** | **$500,719** | [Condensed Consolidated Statements of Operations](index=4&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) The company reported a **$21.9 million net loss** for the quarter, driven by a **25.4% decline in net sales** and significant one-time transition and solicitation costs Statement of Operations Highlights (in thousands, except per share data) | Metric | Three Months Ended Jan 31, 2022 | Three Months Ended Jan 31, 2021 | | :--- | :--- | :--- | | Net sales | $120,381 | $161,292 | | Gross profit | $45,858 | $55,680 | | CEO transition costs | $13,554 | $— | | Proxy solicitation costs | $9,086 | $— | | Operating (loss) income | $(24,590) | $5,402 | | Net (loss) income | $(21,874) | $4,205 | | Net (loss) income per diluted share | $(0.89) | $0.17 | [Condensed Consolidated Statements of Cash Flows](index=9&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Operating cash flow significantly improved to **$9.6 million** for the six-month period, despite increased investing activities and debt repayment from preferred stock proceeds Cash Flow Summary (in thousands) | Cash Flow Activity | Six Months Ended Jan 31, 2022 | Six Months Ended Jan 31, 2021 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $9,551 | $(63,372) | | Net cash used in investing activities | $(8,811) | $(4,436) | | Net cash (used in) provided by financing activities | $(683) | $50,864 | | **Net increase (decrease) in cash** | **$57** | **$(16,944)** | [Notes to Condensed Consolidated Financial Statements](index=11&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) Key notes include **$13.6 million** in CEO transition costs, the **$100 million** convertible preferred stock issuance, segment revenue details, and successful goodwill impairment testing - On December 31, 2021, Michael D. Porcelain was appointed CEO. The company incurred **$13.6 million** in CEO transition costs during the quarter, with **$10.3 million** for severance and the remainder for a technology advisory role[31](index=31&type=chunk) - In October 2021, the company issued **100,000 shares of Series A Convertible Preferred Stock** for **$100 million**. The stock carries a **6.5% dividend** and is classified as temporary equity on the balance sheet[170](index=170&type=chunk)[173](index=173&type=chunk)[179](index=179&type=chunk) - The company's annual goodwill impairment test on August 1, 2021, concluded no impairment, with reporting units exceeding carrying values by at least **22.7%** and **94.1%**[157](index=157&type=chunk)[159](index=159&type=chunk) Revenue by Segment (Three Months Ended Jan 31, 2022, in thousands) | Segment | Revenue | | :--- | :--- | | Commercial Solutions | $81,277 | | Government Solutions | $39,104 | | **Total** | **$120,381** | [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=39&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management attributes the **25.4% decline in Q2 net sales** to segment-specific factors and lowered fiscal 2022 guidance due to the Russia/Ukraine conflict and supply chain issues [Business Outlook for Fiscal 2022](index=45&type=section&id=Business%20Outlook%20for%20Fiscal%202022) The company lowered its fiscal 2022 financial targets due to the Russia/Ukraine conflict, which impacted sales, and ongoing global supply chain constraints Revised Fiscal 2022 Financial Targets | Metric | Previous Target | Revised Target | | :--- | :--- | :--- | | Consolidated Net Sales | $580.0M - $600.0M | ~$520.0M | | Adjusted EBITDA | $70.0M - $76.0M | ~$50.0M | - The Russia/Ukraine military conflict is directly impacting the sales pipeline, causing a pause in procurement as customers shift spending to war-fighting equipment, delaying large expected orders for COMET™ troposcatter systems for Ukraine[246](index=246&type=chunk)[250](index=250&type=chunk) - The company faces significant supply chain constraints, including component shortages, quality issues, and inflation, with freight costs in some cases doubling[251](index=251&type=chunk) - Fiscal 2022 capital expenditures are expected to be approximately **$30.0 million**, focused on building out cloud networks for NG-911 contracts and establishing new manufacturing facilities in Arizona and the UK[256](index=256&type=chunk) [Comparison of Results of Operations](index=47&type=section&id=Comparison%20of%20Results%20of%20Operations) Consolidated net sales declined **25.4%** to **$120.4 million** due to decreases in both Commercial and Government Solutions segments, despite an improved gross profit margin of **38.1%** Net Sales by Segment (Three Months Ended Jan 31) | Segment | 2022 (in millions) | 2021 (in millions) | % Change | | :--- | :--- | :--- | :--- | | Commercial Solutions | $81.3 | $87.8 | -7.4% | | Government Solutions | $39.1 | $73.5 | -46.8% | | **Consolidated** | **$120.4** | **$161.3** | **-25.4%** | - Gross profit margin increased from **34.5% to 38.1%** year-over-year for the quarter, primarily due to a favorable product mix and a **$2.5 million** benefit from a reduction in a warranty accrual[279](index=279&type=chunk) - The Q2 FY22 GAAP operating loss of **$24.6 million** was driven by **$13.6 million** in CEO transition costs and **$9.1 million** in proxy solicitation costs, with adjusted operating income at **$0.1 million** excluding these items[300](index=300&type=chunk) Adjusted EBITDA by Segment (Three Months Ended Jan 31) | Segment | 2022 (in millions) | 2021 (in millions) | | :--- | :--- | :--- | | Commercial Solutions | $12.5 | $16.2 | | Government Solutions | $1.6 | $6.6 | | **Consolidated** | **$9.8** | **$18.1** | [Liquidity and Capital Resources](index=62&type=section&id=Liquidity%20and%20Capital%20Resources) The company held **$30.9 million** in cash, generated **$9.6 million** from operations, and used **$100 million** in preferred stock proceeds to repay **$86.5 million** in debt - The company's cash and cash equivalents stood at **$30.9 million** as of January 31, 2022[405](index=405&type=chunk) - In October 2021, the company received **$100.0 million** in proceeds from the issuance of Convertible Preferred Stock[407](index=407&type=chunk) - The outstanding balance on the Credit Facility was **$114.5 million** as of January 31, 2022, with the facility maturing in October 2023[425](index=425&type=chunk) Contractual Cash Obligations (in thousands) | Obligation | Total | Remainder of 2022 | 2023 and 2024 | 2025 and 2026 | After 2026 | | :--- | :--- | :--- | :--- | :--- | :--- | | Credit Facility (principal & interest) | $119,677 | $1,500 | $118,177 | $— | $— | | Lease obligations | $69,307 | $5,990 | $18,950 | $15,127 | $29,240 | | **Total** | **$188,984** | **$7,490** | **$137,127** | **$15,127** | **$29,240** | [Quantitative and Qualitative Disclosures About Market Risk](index=67&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company's primary market risk is interest rate fluctuations on its variable-rate Credit Facility, with a **10% change impacting annual interest expense by $0.2 million** - The company is subject to interest rate risk from its variable-rate Credit Facility, where a hypothetical **10% change in interest rates** would alter annual interest expense by approximately **$0.2 million**[461](index=461&type=chunk) [Controls and Procedures](index=68&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were effective, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the reporting period[466](index=466&type=chunk) - No material changes were made to the internal control over financial reporting during the most recent fiscal quarter[467](index=467&type=chunk) PART II. OTHER INFORMATION [Legal Proceedings](index=69&type=section&id=Item%201.%20Legal%20Proceedings) Legal matters include a settled class action related to preferred stock issuance and other routine actions not expected to have a material adverse effect - A putative class action lawsuit related to the convertible preferred stock issuance was settled, with claims dismissed, and remaining obligations are not expected to have a material adverse effect[183](index=183&type=chunk) - The company is subject to other pending legal actions and indemnification demands in the ordinary course of business, which are not expected to be materially adverse[185](index=185&type=chunk)[186](index=186&type=chunk) [Risk Factors](index=69&type=section&id=Item%201A.%20Risk%20Factors) New risk factors include ongoing global supply chain constraints impacting costs and availability, and the Russia/Ukraine conflict disrupting the sales pipeline - Significant global supply chain strain for components is adversely affecting availability, lead times, and cost, potentially impacting revenue and financial results[476](index=476&type=chunk)[477](index=477&type=chunk)[479](index=479&type=chunk) - The Russia/Ukraine military conflict is a new risk, impacting the sales pipeline as customers pause orders and reallocate funds, with new sales to Russia halted and uncertainty over large potential orders for Ukraine[485](index=485&type=chunk)[487](index=487&type=chunk)[488](index=488&type=chunk)

Company Overview - Comtech's FY2021 revenue was approximately $582 million[3], with an adjusted EBITDA of $77 million[3] - The company expects future revenue of $1.2 billion from a significant new business pipeline[3] - Comtech has paid cash dividends for 46 consecutive quarters[3] Market Position and Growth - The NextGen 911 public safety market is expected to grow more than 2x from 2020 to 2026, reaching $1.7 billion[3] - The satellite ground station equipment market is expected to grow nearly 2x from 2020 to 2029, reaching $9 billion[3] - Comtech is the fastest-growing NG911 provider in the U S [11] Financial Performance and Guidance - FY2022 revenue guidance is approximately $590 million[18] - FY2022 adjusted EBITDA guidance is approximately $73 million[18] - Q1 FY2022 revenue was $116 8 million with adjusted EBITDA of $5 5 million, representing 4 7% of net sales[27] Segment Performance - In Q1 FY22, Commercial Solutions revenue was $78 9 million with an adjusted EBITDA of $9 1 million (11 5% of revenue)[26] - Government Solutions revenue in Q1 FY22 was $37 8 million with an adjusted EBITDA of $0 6 million (1 6% of revenue)[26]

Financial Data and Key Metrics Changes - For Q1 of fiscal 2022, net sales were $116.8 million, with a gross profit percentage of 35.7% and adjusted EBITDA of $5.5 million, representing 4.7% of consolidated net sales [13][20][21] - The company targets fiscal 2022 net sales between $580 million and $600 million and adjusted EBITDA between $70 million and $76 million, reflecting a strong backlog and sales pipeline [14][24] - GAAP net loss for Q1 was $6 million, or $0.43 per diluted common share, while non-GAAP loss was $4 million, or $0.15 per diluted common share [21] Business Line Data and Key Metrics Changes - The commercial solutions segment reported net sales of $78.9 million in Q1, with a book-to-bill ratio of 0.77x, and is expected to accelerate sales over the fiscal year [32] - The government solutions segment had net sales of $37.8 million, a decline from the previous year, impacted by U.S. government program changes [53] - Adjusted EBITDA contributions were $9.1 million from the commercial solutions segment and $600,000 from the government solutions segment [20] Market Data and Key Metrics Changes - The total addressable market for SATCOM communications equipment is projected to grow from $5 billion to $9 billion by 2029, while the ng-911 market is expected to grow from $689 million to $1.7 billion by 2026 [12] - The backlog at the end of Q1 was $628.5 million, which is $23 million higher than the backlog a year ago [27] Company Strategy and Development Direction - The company is focused on capitalizing on the growing demand for satellite ground station infrastructure and next-generation 911 systems, with a strong emphasis on R&D and strategic investments [12][61] - A $100 million strategic growth investment has been secured to enhance financial flexibility and support long-term strategies [8][23] - The company plans to modernize its corporate branding and expand its talent pool, including filling key executive roles [65][66] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the company's positioning to capture growth opportunities despite challenges from COVID-19 and supply chain disruptions [6][12] - The company anticipates that supply chain constraints will ease in the second half of fiscal 2022, allowing for improved performance [27] - Management highlighted the importance of next-generation 911 solutions and the critical role of satellite services in emergency response systems [42][45] Other Important Information - The company has received several significant contract awards for next-generation 911 services across various states, including Pennsylvania, South Carolina, and Arizona [34][35][36] - The company is also focusing on enhancing its satellite ground station business and addressing U.S. government needs related to supply chain risks and cybersecurity [50][52] Q&A Session Summary Question: Update on Ohio funding and lost contracts - Management indicated that the delay in Ohio funding is due to legislative processes, but there is bipartisan support for the contract [74][75] - A notable lost contract was in California, where the state chose a competitor, but management remains optimistic about future opportunities [76][77] Question: Insights on Troposcatter contracts - Management expressed confidence in receiving Troposcatter contracts due to the needs of a foreign government and U.S. government collaboration [82] Question: Satellite backup services for PSAPs - Management noted that there is a significant market for satellite backup services for PSAPs, particularly in rural areas, but funding remains a challenge [86][88] Question: Interest in acquisitions - Management confirmed that acquisitions are part of the strategy, particularly in software and technology areas that complement existing product lines [92][94] Question: R&D and marketing investments - Management indicated that approximately $3 million is being invested in new opportunities, particularly in LEO and MEO markets [103][104]

Index UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) ☒ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended October 31, 2021 ☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File Number: 0-7928 (Exact name of registrant as specified in its charter) Delaware 11-2139466 (State or other jurisdiction of incorporation /organization) (I.R.S. Employer ...

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