Comtech Telecommunications has reported its operating results for the third fiscal quarter ended April 30, 2017 and finalized its fiscal 2017 guidance.
Fiscal 2017 Third Quarter Highlights
Comtech achieved a company-wide book-to-bill ratio (a measure defined as bookings divided by net sales) of 1.06 reflecting strong bookings in its Government Solutions segment. As of April 30, 2017, the Company had backlog of $461.3 million, up from $453.3 million as of January 31, 2017.
GAAP operating income was $10.2 million and GAAP net income was $4.4 million, or $0.19 per diluted share, for the three months ended April 30, 2017, as compared to a GAAP operating loss of $13.4 million and a GAAP net loss of $14.4 million, or $(0.89) per diluted share, for the three months ended April 30, 2016. During the third quarter of fiscal 2017, the Company favorably resolved a TCS intellectual property litigation matter, which resulted in a $2.0 million contribution to GAAP operating income. Excluding the $2.0 million benefit, GAAP diluted EPS would have been $0.13 for the three months ended April 30, 2017.
Adjusted EBITDA (which excludes the $2.0 million favorable settlement discussed above) was $18.1 million for the three months ended April 30, 2017. Adjusted EBITDA is a non-GAAP financial measure which is reconciled to the most directly comparable GAAP financial measure and is more fully defined in the below table.
As of April 30, 2017, the Company had $58.8 million of cash and cash equivalents. During the third quarter of fiscal 2017, the Company generated cash flows from operating activities of $18.3 million. In view of the Company's expectations for continued strong operating cash flows, in June 2017, the Company entered into an amendment of its Secured Credit Facility, which it expects will result in increased operating and acquisition flexibility and simplify the calculations of its financial covenants as compared to the original terms of the Secured Credit Facility. This amendment is more fully discussed in a Form 8-K and Form 10-Q filed by the Company with the Securities and Exchange Commission today.
In May 2017, the Company announced the general availability of its Heights™ Dynamic Network Access Technology ("HEIGHTS"), a potentially revolutionary technology designed to deliver the most Internet Protocol bits per Hertz (per satellite network operator) in its class, as well as robust reliability. To date, customer reaction has been positive, as reflected in the Company's receipt of orders in the third fiscal quarter, and the Company has a growing sales funnel of HEIGHTS opportunities that the Company expects to close.
In commenting on the Company's performance during the third quarter of fiscal 2017, Fred Kornberg, President and Chief Executive Officer, noted: "I am pleased with our third quarter performance on many fronts as we march toward a strong finish to what is turning out to be a successful year."
Mr. Kornberg added: "Although we have just started our fiscal 2018 business planning process, we are seeing positive signs across almost all aspects of our business and believe that fiscal 2018 is shaping up to be a great year."
2017 Fiscal Year Financial Targets
The Company has updated its fiscal 2017 revenue target to a range of $550.0 million to $555.0 million. This new target, which compares to its previous target of $570.0 million to $580.0 million, largely reflects the Company's updated assessment of the impact of its tactical shift in strategy in its Government Solutions segment, a longer sales cycle for its HEIGHTS products and other product mix changes. The Company's fourth quarter is expected to benefit from an increase in orders for its HEIGHTS products; however, given the complexity and sophistication of the HEIGHTS system and the Company's experience since its launch of HEIGHTS, the initial sales cycle will be longer than the Company's prior satellite earth station new product launches. As such, the Company now anticipates that fiscal 2018 will be the break-out year for orders and sales of its HEIGHTS products, rather than the fourth quarter of fiscal 2017.
The Company updated its GAAP diluted EPS goal to approximately $0.67 per diluted share (which includes $0.33 per diluted share related to $12.0 million of favorable TCS intellectual property litigation settlements).
The Company firmed up its Adjusted EBITDA goal to a range of $68.0 million to $70.0 million. The range reflects updated revenue targets, the benefit of additional cost reduction actions and the impact of overall favorable changes in product mix assumptions.
The Company is pursuing a number of awards for large multi-million dollar and multi-year contracts. Although the extent and timing of any of these contract awards is difficult to predict, the Company expects to receive some of these awards shortly. Because of uncertainty regarding contract award and order timing, it is difficult to predict our fourth quarter fiscal 2017 book-to-bill ratio. If some of these large contracts are awarded and orders are booked in the fourth quarter of fiscal 2017, consolidated fourth quarter bookings could be almost twice the level that the Company achieved in its third quarter of fiscal 2017. At the same time, it is possible that the award of these potential large contracts and related orders may slip into fiscal 2018. In either event, these orders, if booked, are expected to benefit fiscal 2018 financial results.
Total annual amortization of intangibles is expected to range from $22.0 million to $24.0 million, total depreciation expense is expected to range from $14.0 million to $15.0 million and total amortization of stock-based compensation is expected to range from $6.0 million to $8.0 million.
Interest expense, on total anticipated borrowings, is expected to approximate $12.0 million (including amortization of deferred financing costs). Such interest expense reflects an expected interest rate ranging from approximately 4.5% to 5.0%. The Company's actual cash borrowing interest rate (which excludes the amortization of deferred financing costs) currently approximates 4.0%.
The Company's effective income tax rate (excluding discrete tax items) is expected to approximate 36.0%.
Based on the anticipated timing of shipments and performance related to orders currently in its backlog, together with anticipated new orders, the Company expects its consolidated net sales and Adjusted EBITDA in its fourth quarter to be the highest of any quarter in fiscal 2017.