Comtech’s Outlook Brightens on New Orders from Military Customers

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PARIS — Satellite ground equipment provider Comtech Telecommunications Corp. said new orders from the U.S. government booked so far in 2013 may mean the company has turned the corner after two years of bad news following the loss of a U.S. military contract and the downturn in its international commercial satellite Earth station business.

Melville, N.Y.-based Comtech said it is particularly hopeful that a recent development contract with the U.S. Space and Naval Warfare Systems Command for a new-generation processor will place the company in the ranks of contractors for U.S. protected military satellite communications work.

In a June 7 conference call with investors, Comtech Chief Executive Fred Kornberg said that after two years of reduced contract intake, Comtech orders for the three months ending April 30 exceeded the company’s deliveries. He said early indications are that this performance will be repeated in the current quarter, giving Comtech a book-to-bill ratio of one for the fiscal year ending July 31.

“I can’t say things have meaningfully improved from the last quarter, but I can say that we achieved our highest booking quarter for the year, including a number of strategic orders that bode well for our future,” Kornberg said.

Exhibit A in Comtech’s orders is the Space and Naval Warfare Systems Command order, with a value of up to $29 million. Comtech has received the first two tranches of this contract, for a total of $8.5 million, to develop an Advanced TDMA Interface Processor, or ATIP. Comtech is developing this as an outgrowth of its work on its VSAT, or very small aperture terminal, commercial satellite product line.

Kornberg said that if the ATIP work for the Navy goes as expected, it will proceed from development to actual production of hardware — a higher-margin undertaking — with applications that include a potentially larger user in the U.S. Army.

“This contract is strategically important for us as it enters us into the protected milsatcom market,” Kornberg said. “It opens the door for us.”

Comtech’s 2010 loss of the contract to build the Army’s second-generation satellite-based Blue Force Tracking system, BFT-2, was a blow to its Mobile Data Communications division. When combined with the U.S. Defense Department budget cuts, sequestration and a period of low spending by some of Comtech’s commercial customers, it caused a steep drop in Comtech’s business base.

It did not help that during this period Comtech was forced to close its microsatellite division for lack of orders.

Kornberg said sequestration remains a serious issue but that the blanket freeze on certain Defense Department programs has now been replaced by a prioritization of spending. The result was new orders in the three months ending April 30 and the promise of more.

While it lost the BFT-2 contract to ViaSat Inc. of Carlsbad, Calif., Comtech has an ongoing BFT-1 sustainment, or maintenance, contract with the U.S. Army that includes $10 million per year in revenue from Comtech-owned intellectual property that remains instrumental to BFT-1.

How long Comtech’s BFT-1 business will continue depends on how quickly the Army puts the BFT-2 gear into the field. Kornberg in the past has said he is hopeful that the annual maintenance work could continue until 2020.

Asked whether BFT-2 deployment is occurring, he said: “We certainly don’t see it. That doesn’t mean some is not happening. Basically the Blue Force Tracking program appears to be kind of at a standstill.”

Having lost BFT-2, Comtech had been preparing for BFT-3, which is based on X-band satellite transmissions. But with the U.S. defense budget prospects still clouded, BFT-3 is an unlikely near-term possibility.

“The government has essentially told us that right now there’s no money for development of the X-band,” Kornberg said. “They have no intention to look at it until probably late 2014 or maybe 2015.”

Comtech’s Mobile Data Communications division reported revenue of $8.3 million in the three months ending April 30, mainly as a result of BFT-1 maintenance work and including $2.5 million in licensing payments from the Army.

Comtech Chief Financial Officer Michael D. Porcelain said the Army, pleading budget stresses, recently requested that a three-year, $81 million BFT-1 maintenance contract be converted into a two-year, $43.6 million contract. The company accepted this and in return was paid $20.8 million for the second year’s work. This includes the $10 million annual license fee.

Comtech’s 500-watt traveling wave tube amplifier, now used by several U.S. military and commercial Ka-band consumer broadband satellite programs, is suffering from what Kornberg said is a focus by telecommunications carriers on building out their urban and suburban terrestrial wireless networks to 3G and 4G/LTE standards.

Kornberg said he remains convinced that government incentives to telecommunications companies to provide connectivity to rural and other off-the-grid regions ultimately will stimulate this market for satellite broadband and result in Comtech orders.