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Comtech (CMTL) Poised for Growth Amidst Refinancing Success and Robust Backlog
Published on September 24, 2024 | Ticker: CMTL

Comtech Telecommunications Corp. (NASDAQ:CMTL) is a leading global provider of next-generation 911 emergency systems and secure wireless and satellite communications technologies. The company has recently navigated a challenging period, but with the successful completion of a $222 million refinancing and a strengthened balance sheet, Comtech is now well-positioned to capitalize on growing demand for its mission-critical solutions.

Financial Overview

For the fiscal year ended July 31, 2023, Comtech reported annual net income of -$26.9 million and annual revenue of $549.9 million. The company's annual operating cash flow was -$4.4 million, and annual free cash flow was -$22.7 million. These financial results reflect the company's efforts to transform and integrate its individual businesses into two segments - Satellite and Space Communications, and Terrestrial and Wireless Networks.

In the third quarter of fiscal 2024, Comtech reported consolidated net sales of $128.1 million, compared to $136.3 million in the prior-year period. This decrease was primarily driven by lower net sales in the Satellite and Space Communications segment, which were impacted by the company's efforts to refinance its prior credit facility. Gross margin for the quarter was 30.4%, compared to 31.7% in the same period last year.

The company reported a GAAP operating loss of $3.5 million in the third quarter, which included $2.5 million in CEO transition costs. On a non-GAAP basis, Comtech's adjusted EBITDA was $11.9 million, or 9.3% of consolidated net sales, compared to $12.5 million, or 9.2%, in the prior-year period.

Refinancing Success and Strengthened Balance Sheet

A key highlight for Comtech was the successful completion of a $222 million refinancing in June 2024, which replaced the company's prior credit facility. The new credit facility consists of a $162 million term loan and a $60 million revolver loan facility, with an expected maturity date of July 31, 2028. This refinancing has significantly strengthened Comtech's balance sheet and liquidity position, providing the company with greater financial flexibility to execute on its growth strategies.

At the close of the refinancing, Comtech's available sources of liquidity approximate $63 million, consisting of qualified cash and cash equivalents of approximately $28 million and $35 million of excess availability under the revolver. The new credit facility also includes financial covenants, such as a maximum net leverage ratio of 3.25x and a minimum fixed charge coverage ratio of 1.2x, which the company expects to maintain compliance with going forward.

Robust Backlog and Expanding Footprint

Comtech's backlog remains strong, standing at $653.4 million as of April 30, 2024. This, combined with the company's revenue visibility of approximately $1.5 billion, provides a solid foundation for future growth. The company's recent contract wins further demonstrate its competitive positioning and the mission-critical nature of its solutions.

In the Satellite and Space Communications segment, Comtech continues to make progress on delivering next-generation troposcatter terminals to the U.S. Marine Corps and U.S. Army, with over $13.5 million in new orders received from the U.S. Army during the third quarter. The company also secured a $5.5 million order for operational support and maintenance from the Japan Aerospace Exploration Agency, as well as a $5 million contract from a Canadian customer to upgrade a previously deployed troposcatter system.

The Terrestrial and Wireless Networks segment has also seen notable successes, including a multi-year extension for critical NG-911 services valued at over $10 million, a $7 million extension of short messaging service software engineering services to a large international mobile network operator, and a $4 million NG-911 call handling services contract for PSAPs located in Canada. Importantly, Comtech was awarded a significant contract with the Commonwealth of Massachusetts for the continued operation and maintenance of the state's NG-911 system, with a potential total contract value exceeding $250 million over the initial five-year term and five-year option period.

Strengthened Leadership Team

Comtech has also made strategic hires to bolster its leadership team, further positioning the company for success. In April 2024, the company appointed Jeff Robertson as President of the Terrestrial and Wireless Networks segment, bringing extensive industry experience and a track record of driving operational improvements and digital transformation initiatives. Additionally, Comtech hired Tom Guthrie as Chief Operating Officer and General Manager for its location-based technologies business, and John Whitehead as General Manager for its safety and securities business.

On the Satellite and Space Communications side, Comtech welcomed Roly Rigual as Vice President of Sales and Business Development. Rigual's deep understanding of both satellite and terrestrial wireless markets aligns well with the company's strategic priorities across its global customer base.

Outlook and Conclusion

As Comtech enters the fourth quarter of fiscal 2024, the company acknowledges that business conditions remain challenging and the operating environment is largely unpredictable. However, with the successful completion of the refinancing, the company is now better positioned to navigate these uncertainties and focus on executing against its robust backlog and growing pipeline of opportunities.

Comtech's CEO, John Ratigan, remains optimistic about the company's future, stating, "Comtech is a good business that offers mission-critical solutions to the world's most demanding customers. We've got some of the best people and technologies in the market, and the markets we are selling into are themselves growing. Taken together, I remain optimistic about our future and our ability to create value for all of our stakeholders."

Given Comtech's strengthened financial position, expanded leadership team, and the mission-critical nature of its solutions, the company appears well-positioned to capitalize on the growing demand for its offerings in the Satellite and Space Communications and Terrestrial and Wireless Networks markets. As the company continues to execute on its strategic initiatives, investors may find Comtech's long-term growth prospects increasingly compelling.

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