Comtech Shaking Off the Army Blues, Taking Comfort in Wave of Commercial Orders

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PARIS — Satellite ground equipment manufacturer Comtech Telecommunications Corp. reported increased orders for the three months ending Oct. 31 and told investors that three years of downward revenue spiral will end this year.

Melville, N.Y.-based Comtech, which has suffered dual blows from the 2010 loss of a U.S. Army satellite telecommunications contract and the more recent U.S. government budget freeze, said it expects satellite television broadcasters to accelerate renewal of their ground equipment.

That would be good news for Comtech, which believes its traveling wave tube amplifiers have a cost advantage over broadcasters’ legacy amplifiers that will be more important with the industry-wide move to high-definition television transmissions and, later, ultra-high definition.

Comtech Chief Executive Fred Kornberg said in a Dec. 10 conference call with investors that he expects “dramatic growth in the next few years as broadcasters change out old amplifiers.”

Comtech’s loss of the Blue Force Tracking (BFT)-2 contract with the U.S. Army in 2010 drained the company of its biggest source of revenue. The decline has continued with the across-the-board freeze on government spending, known as sequestration.

For the year ending July 31 Comtech reported $319.8 million in revenue, down nearly 25 percent from the previous year.

For the three months ending Oct. 31, revenue was $83.4 million, down 8.3 percent from the same period a year ago as sales of telecommunications transmission equipment were offset by declines in hardware sales to the U.S. government.

But new orders booked in the three months ending Oct. 31 totaled $76.5 million, up 7 percent from the tally a year earlier. That figure plus other signs from its markets give the company confidence that full-year revenue for the 12 months ending next July 31 will rebound from 2013, Comtech Chief Financial Officer Michael D. Porcelain said during the conference call.

“We’re very pleased with our first-quarter results,” Kornberg said. “Certain of our end markets may be actually improving.”

Comtech forecasts revenue for its current fiscal year to be about $335 million, which would be a 4.7 percent increase over last year.

Comtech management in the past has said it has been frustrated in its attempts to conclude acquisitions — it had nearly $347 million in cash as of Oct. 31 — because the U.S. defense budget’s near-term trend is so difficult to predict that companies cannot set realistic valuations on their businesses.

It is not just the BFT-2 and associated contracts that have weighed on Comtech’s performance. Porcelain said sales of Comtech’s satellite Earth stations are down 35 percent from their peak mainly because of U.S. government cutbacks. Over time, he said, the business should grow at a 10 percent annual rate.

The U.S. Army is maintaining links with Comtech for the BFT-1 deployed units even as it rolls out BFT-2 equipment, provided by ViaSat Inc. of Carlsbad, Calif. The Army is paying Comtech about $20 million per year for Comtech’s intellectual property used on BFT-1 and for support services.

The company continues to believe that the Army will extend, for at least several more years, its contract with Comtech on BFT-1. The current two-year contract expires at the end of March.

Headwind from the U.S. government’s budget issues and the BFT-2 contract, combined with several bright spots in other Comtech businesses, have had the effect of making Comtech much less U.S. government dependent.

For the three months ending Oct. 31, U.S. government business accounted for just 25.6 percent of Comtech’s total revenue, compared with 43.4 percent a year ago. Commercial revenue is now 17.4 percent of the total compared with 13.5 percent last year, and international business is now 57 percent of Comtech sales.

 

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