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Finally, the Refi is Done. And 3QFY24 Results

Continuing NG911 Services in Massachusetts

Some Encouraging News

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Comtech Telecommunications Corp.

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The Refi
Comtech has finally finished the refinancing. This removes significant uncertainty, but the refinancing came at a cost and the Company must now get back to a normalized business. While Comtech continued to win new business, even during the drawn out refinancing period, the supply chain became constrained as suppliers sought more favorable terms to sell to Comtech and some customers delayed orders. With the refi now behind the Company, we expect to get back to &#8220;business as usual&#8221; but it may take another quarter, or longer, for a full return to normalization. And, we would note, we believe it takes at least a quarter for the &#8220;going concern&#8221; note in Comtech&#8217;s SEC filings to be removed, given it likely will take that long for business to return to normal.
 The new facility consists of a committed $162 million term loan facility and a $60 million revolver loan facility, backed by eligible receivables and inventory. Outstanding borrowings at close approximate $187 million, reflecting $25 million drawn on the revolver. At close, Comtech&#8217;s available sources of liquidity are approximately $63 million consisting of qualified cash and cash equivalents and excess availability under the revolver of approximately $28 million and $35 million respectfully. Significantly, the term loan maturity is not until July 31, 2028, which means the Company shouldn&#8217;t have to repeat this exercise anytime soon.
The deal did come at a cost though. Comtech issued the lenders 1,435,884 warrants, exercisable at $0.10. In addition, interest on the term loan facility currently approximates SOFR plus 9.5%, whereas interest on the asset base revolver currently approximates SOFR plus 5%. Blended, the rate currently approximates 14%. The first covenant testing period is July 31, 2024. On such date, the maximum net leverage ratio is set at 3.25 times trailing 12 months EBITDA, which the Company should make given the expectations for the fiscal fourth quarter. As for minimum fixed charge coverage ratio, that is initially set at 1.2 times. The first step down in the net leverage ratio to 3.15 occurs on July 31, 2025, and the first uptick in the fixed charge coverage ratio to 1.25 occurs on April 30, 2025. Comtech also needs to maintain include an initial minimum trailing 12-month EBITDA of $35 million starting in October of 2025 and a minimum average liquidity of $20 million.
As part of the deal, Comtech also exchanged its Series B convertible preferred shares for a new series of B1 convertible preferred shares. The new Series B1 convertible preferred shares reflect certain changes to consent rights and existing put rights related to payments upon a change of control following specified asset sales; in each case, consistent with the terms of the new credit facility. The powers, preferences, and rights of the Series B1 convertible preferred stock are substantially the same as those of the Series B. The preferred holders&#8217; conversion price and interest rate did not change. However, it does appear the Preferred holders did extract another 5,705 preferred shares out of the transaction. The Preferred holders now hold 171,827.05 preferred shares, which would convert into about 21.5 million CMTL shares.
Third Quarter Results 
 
Comtech continued to experience challenging business conditions as a result of the Company&#8217;s focus on its refinancing. However, with the new credit agreement in place, the Company&#8217;s attention has turned to fulfilling its backlog and growing the business. The Company has a head start with its recent contract with the state of Massachusetts approved in May of 2024 and three new international customers placing orders to evaluate the Company&#8217;s&nbsp;next-generation modular transportable transmission systems. We believe that with the refinancing in the rearview mirror, management can now work on the Company&#8217;s operating efficiency and future growth among its two segments.
Consolidated net sales for the quarter was $128.1 million compared to $136.3 million in the previous year, a decrease of $8.2 million or 6.0%. Continued challenging conditions related to the refinancing efforts have slowed down the Company&#8217;s receipt of components from suppliers and ability to deliver finished products. With the refinancing out of the way, we expect the Company to start back up on its supply chain and begin to work on its backlog.
 Comtech&#8217;s&nbsp;Satellite and Space Communications segment revenue was $71.4 million, a decrease of $10.8 million from $82.2 million in the prior year. Higher sales of the Company&#8217;s troposcatter solutions partially offset lower net sales of&nbsp;high-power solid-state amplifiers, COMET tropo terminals, and VSAT SATCOM equipment. As a reminder, PST was divested in November of 2023 and net sales reflect the absence of it. For the Terrestrial and Wireless Networks segment, net sales totaled $56.6 million compared to $54.1 million last year, an increase of $2.5 million. Higher net sales of Comtech&#8217;s NG911 and call handling services led the way towards the increase, as it more than offset the lower net sales of the Company&#8217;s located-based solutions.
Gross profit totaled $39.0 million in the third quarter down from $43.1 million in the prior year. Gross margin was 30.4% compared to 31.7% in the third quarter last year. The reduced gross margin dollars and percentage reflect the drop in revenue as well as mix.
During the quarter, Comtech incurred CEO transition costs of $2.5 million related to the termination of former CEO Mr. Peterman. GAAP operating loss was $3.5 million, compared to GAAP operating income of $3.0 million in the second quarter of fiscal 2024, and a GAAP operating loss of $5.3 million in the third quarter of fiscal 2023. Adjusted EBITDA in the quarter was $11.9 million, or a margin of 9.3%, compared to $12.5 million, or 9.2%, in the previous year, and $15.1 million, or a 11.3% margin the second quarter of fiscal 2024. Lower net sales, lower gross profit, and higher SG&amp;A expenses due to the One Comtech lean initiatives negatively impacted adjusted EBITDA.
On a reported basis, consolidated net loss for the third quarter was $1.0 million, or $0.04 per share, compared to a loss of $9.2 million, or $0.33, in the prior year. The recent period incurred a $6.4 million benefit from the change in fair value of warrants, with no similar happening in 2023. Other notable adjustments in the quarter were restructuring costs of $2.1 million, the aforementioned CEO transition costs, and strategic emerging technology costs of $0.7 million. With these adjustments, adjusted net income was $5.7 million, or $0.20 per share, compared to $3.0 million or $0.11 in the previous year.
Orders and Backlog
 Comtech&#8217;s order flow and backlog remain solid, in spite of the refi uncertainty push to the right from customers. During the fiscal third quarter of 2024, consolidated net bookings were $101.7 million, representing a quarterly book-to-bill ratio of 0.79x. Terrestrial and Wireless Networks segment posted a book-to-bill ratio of 0.72x in the quarter, while the Satellite and Space segment posted a 0.85x book-to-bill. Among the key awards in the quarter were:
Satellite &amp; Space Communications:
<ul>
<li>Awarded over $13.5 million of funded orders from the U.S. Army for VSAT equipment and related services.</li>
<li>Awarded over $6.0 million of funding from the U.S. Army for cyber training related solutions.</li>
<li>Won over $5.5 million in operational support and maintenance orders from the Japan Aerospace Exploration Agency.</li>
<li>Awarded over $5.0 million of funding from a Canadian customer to upgrade a previously deployed troposcatter system.</li>
<li>Won an order from an international military, who is evaluating the COMET troposcatter solutions.</li>
</ul>
Terrestrial &amp; Wireless Networks:
<ul>
<li>Extended critical NG-911 services for a large county in a Midwestern state with a total potential value exceeding $10.0 million.</li>
<li>Extended short messaging service software engineering services to a large international mobile network operator; such extension is valued at over $7.0 million.</li>
<li>Awarded a multi-year NG-911 call handling services contract, aggregating over $4.0 million, for PSAPs located in Canada. 
 </li>
</ul>
And, not to forget, post quarter was the Commonwealth of Massachusetts NG911 award, with an initial value around $140 million. This will be added to book-to-bill for the fourth quarter and increase year-end backlog.
Speaking of backlog, Comtech ended the quarter with a backlog of $653.4 million compared to $662.2 million as of July 31, 2023, and $668.4 million as of April 30, 2023. Revenue visibility was approximately $1.5 billion, or nearly three years of revenue at the current run rate. Assuming operations return to normal, the large backlog, combined with growing end markets, will be a positive driver for Comtech&#8217;s forward operating results, in our view.&nbsp;
Unbilled Receivables
 With the refi behind, management&#8217;s key focus will now be on&nbsp;the acceleration of the cash conversion cycle. Specifically, its focus on unbilled receivables, which have grown since the refi saga began. At the end of fiscal 2023 (July 31, 2023), unbilled receivables totaled $81.6 million split into $54.4 million from Commercial and International customers and $27.2 million from the U.S. Government. By the end of the fiscal third quarter, unbilled receivables had grown to $141.2 million, with Commercial and International customers representing $76.9 million and U.S. Government clients representing $64.3 million.
Part of the reason for the growth was the push to the right from the supply chain during the refi saga, resulting in Comtech not being able to deliver products to customers. This should now change, enabling the Company to deliver products on a faster basis. Already, receivables from the U.S. Government grew to $21.3 million at the end of the fiscal third quarter from $9.8 million at the end of the second fiscal quarter. Collection of unbilled receivables will provide significant cash flow to Comtech.
Updated Projections 
 
 The refi is the first step in returning to a normalized operating environment. We believe it likely will take another quarter before all is returned to normal. Fiscal fourth quarter results should be similar to the third quarter of fiscal 2024.&nbsp; We revised our projections accordingly. We are&nbsp; now projecting revenue of $130 million and adjusted EBITDA of $11.9 million. GAAP net loss is estimated at $7 million, or a loss of $0.24 per share. Adjusted EPS is estimated at $0.20. In the year ago quarter, Comtech reported revenue of $148.8 million, adjusted EBITDA of $18.9 million, a GAAP net loss of $5.3 million, or a loss of $0.19 per share, and adjusted EPS of $0.29.
For the full fiscal 2024, we are at revenue of $544.2 million, adjusted EBITDA of $57.3 million, a GAAP net loss of $41.8 million, or a loss of $1.46 per share, and adjusted EPS of $0.49.

Comtech Telecommunications Corp. (CMTL)

Finally, the Refi is Done. And 3QFY24 Results

Fundamental Analysis:

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New Award from Texas (CMTL)

Finally, the Refi is Done. And 3QFY24 Results (CMTL)

Continuing NG911 Services in Massachusetts (CMTL)

Some Encouraging News (CMTL)

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