Comtech Sees Continued Growth Despite Loss of Two U.S. Army Contracts

by

PARIS — Satellite ground communications equipment provider Comtech Telecommunications Corp. on Sept. 28 sought to convince investors that there is life, and revenue growth, after the loss of two key satellite communications contracts for the U.S. Army.

Melville, N.Y.-based Comtech said that when the company’s two showcase Army contracts are removed from its books, its remaining business is smaller but still profitable and growing, albeit slowly.

Comtech has performed several large repurchases of its stock, and twice increased the dividend in recent months, to help investors ride out the storm caused by the coming disappearance of the Army’s Blue Force Tracking (BFT-1) and Movement Tracking System (MTS) contracts.

BFT’s second-generation satellite communications system is being merged with MTS as part of a second-generation contract won by ViaSat Corp. of Carlsbad, Calif.

Comtech officials have not obscured the effect of the loss on their company. Since 1999, BFT-1 and MTS have provided some $1.5 billion in revenue to Comtech. For the year ending July 31, they accounted for 40 percent of the company’s revenue even if payments already were dropping from 2010 levels.

To make matters worse, the Army has hinted that in the coming months, as it begins to transition to BFT-2, it may decide to purchase satellite capacity for BFT-1 and MTS on its own, taking Comtech out of the loop.

In a Sept. 28 conference call with investors and a Sept. 27 filing with the U.S. Securities and Exchange Commission (SEC), Comtech officials said they would draw the line there.

If the Army buys satellite capacity for BFT-1 and MTS directly, or reduces Comtech’s ongoing “sustainment” contract for BFT-1 and MTS transceivers, Comtech will charge the Army a separate fee for the use of the company’s intellectual property.

Comtech has shipped some 139,000 BFT-1 mobile satellite transceivers, and 47,000 MTS units. Both are still in use, and the speed with which the Army will phase out the first-generation system is unclear.

Comtech Chief Executive Fred Kornberg said the company hired an outside expert to set a value for the Comtech intellectual property embedded in the first-generation system. He said the Army has been informed of the price, which he declined to disclose. Kornberg said the Army has indicated it may seek system-upkeep work from Comtech for several years as BFT-2 gradually replaces the first-generation system.

Comtech purchases satellite capacity from commercial satellite fleet operators and sells it as part of a package that includes the BFT-1 and MTS contract hardware.

Comtech stressed in its SEC filing that it would go the extra mile for the Army in easing the transition to the ViaSat hardware, especially since the Army is already sending out signals that it has begun thinking about a third-generation BFT competition around 2015.

The BFT-3 contract may feature use of X-band capacity on the U.S. Defense Department’s Wideband Global Satcom satellites, now being deployed, rather than a bundled purchase of hardware and commercial satellite bandwidth as part of the BFT-3 bid.

Comtech said it would be among the bidders for the work.

Stripping out the BFT-1 and MTS work, Comtech reported revenue of about $364 million for the 12 months ending July 2011, an increase of about 2.5 percent compared with 2010, again after removing the two big Army contracts.

Comtech Chief Financial Officer Michael D. Porcelain said during the conference call that despite rough weather ahead for the U.S. government budget — the source of about 60 percent of Comtech’s revenue — the company believes the coming year will see a similar growth in this business.

Comtech builds telecommunications transmission equipment for U.S. and foreign customers, including a North African government the company expects to formalize a contract early in 2012. It is also a major builder of satellite Earth station gear and ground-based satellite communications amplifiers.

Porcelain said the company’s microsatellite product line, designed for spacecraft weighing 400 kilograms or less, is proving more profitable than the company had envisioned. Comtech is providing the satellite platform, or bus, to the U.S. Naval Research Laboratory for a star-mapping satellite called Joint Milli-Arcsecond Pathfinder Survey, or JMAPS, under two contracts with a combined value of $43.4 million.

Kornberg said Comtech has high hopes to be able to extend this business to other U.S. government agencies with a need for small, low-cost payloads in orbit, and to the commercial sector as well.