CMTL - NASDAQ

Welcome to Comtech's Fiscal Q4 2023 Earnings Conference Call. As a reminder, this conference is being recorded today, Thursday, October 12, 2023. I would now like to turn the conference over to Mr. Robert Samuels of Comtech. Please go ahead, sir.

Thanks, operator. Good afternoon, everyone, and thanks for taking the time to dial in today. I'm Rob Samuels, Comtech's Head of Investor Relations. Welcome to the Comtech Telecommunication Corp.'s conference call for the fourth quarter fiscal year 2023. Today I'm here with Comtech Chairman, President and Chief Executive Officer, Ken Peterman. We're also joined by Mike Bondi, our CFO. Before we get started today, I'll say that both myself and Ken are always available to answer questions our investors may have. So please get in touch if you want to organize a meeting to talk about the company, our results, or our strategy. We also have a detailed discussion of the quarter in our shareholder letter available on our website. And we have also been working to communicate directly about our business and our market between quarters in our blog, Comtech Signals. Finally, let me remind you of the company's safe harbor language. Certain information presented in this call will include, but not be limited to, information relating to the future performance and financial condition of the company, the company's plans, objectives, and business outlook, and the plans, objectives, and business outlook of the company's management. The company's assumptions regarding such performance, business outlook, and plans are forward-looking in nature and always involve significant risks and uncertainties. Actual results could differ materially from such forward-looking information. Any forward-looking statements are qualified in their entirety by cautionary statements contained in the company's SEC filings. Now, I'm pleased to introduce the President and Chief Executive Officer of Comtech, Ken Peterman. Ken?

Thank you, Rob. Hello, everyone. Thanks for joining us today. This call and this quarter represent a significant inflection point for Comtech. It not only marks the close of our FY 2023 fiscal year, but also demonstrates the success and substantial positive momentum we are seeing as a result of our One Comtech transformation. In fiscal 2023, we brought 14 historically siloed businesses together and successfully instituted common practices, tools and processes across our new, unified enterprise. We implemented our first-ever comprehensive People Strategy. We established EVOKE, our innovation foundry, and brought on strategic partners who are continuing to work with us to develop and deliver new comprehensive solutions aligned with our vision for smart networks and unique technology convergences that provide our global customers with new forms of connectivity, insights and actionable intelligence that have the potential to fundamentally transform technology landscapes across the globe. As I shared during our Investor Day in June, our customers need more than a vendor. They need a technology partner, one who listens and solves the challenges they're facing every day with the foresight to simultaneously position proactively to address the challenges that are looming on their horizon. Over the past 12 months, we've streamlined our business to better align with the emerging market convergences and technology trajectories, which as you've seen over the past few months alone is driving hundreds of millions of dollars in new business opportunities for Comtech. Our global customers, ranging from the Department of Defense and emergency service providers to commercial mobile network operators and new satellite service providers, they continue to place their trust in Comtech, and these customers are also recognizing the tremendous value our solutions can deliver to address their toughest challenges. This year, we moved proactively, thoughtfully and quickly as a unified enterprise to effectively respond to the increasing pace of change in our end markets, to build on our existing products and bring forward new technologies that underpin modern communications, and to deliver the kinds of solutions and services our customers really need from us. Based on our accomplishments in fiscal 2023, I believe we have excelled at overcoming the challenges posed by that kind of transformational change. Our progress is reflected in both our financial performance and our positioning within the market for growth next year and beyond. Since the start of our One Comtech journey, we have focused on delivering exceptional results for customers. Today, through our renewed and unified customer-centric approach, we are leveraging our culture of innovation, differentiated expertise, technology leadership, and unique understanding of our customers' needs to position Comtech to lead the way in delivering the blended, hybrid, smart-enabled solutions and services that will bring forward smart networks and new technology convergences that can empower a truly connected planet. As we have pursued these strategic goals over the past fiscal year, we have remained focused on the crucial daily work of improving our operations, balance sheet and financial performance. We've made difficult decisions where necessary to empower our teams on the frontline with both the resources they require and the authorities to address our customers' needs. Importantly, we're seeing the results of these efforts every single day. Our teams are empowered to develop new business capture strategies that align with and address our customers' most difficult challenges. And we're winning large and strategically important contracts that accentuate our technology and thought leadership. We are still providing the products and services that Comtech is known for, and our customers are seeing that we can now be relied upon to bring even more comprehensive value, solve their toughest challenges, and apply technology in innovative ways that truly change the game. The updated technology in our next-generation troposcatter family of systems is a great example, which I'll talk more in depth about in just a few minutes. Our relentless attention to performance improvement has not only expanded adjusted EBITDA margins sequentially every quarter of this fiscal year, but also has given us the space we needed to address strategic questions about the composition of our portfolio and the strength of our balance sheet. Importantly, following a careful review of our current business and product lines, and considering the kind of software-defined and solution-based enterprise our customers need us to be in the future, we identified opportunities to rebalance our segments and ultimately choose to divest our solid state power amplifier product line. Upon completing this transaction, in the short term, we anticipate using some or all of the net proceeds from this divestiture to meaningfully reduce our outstanding debt, leverage ratio and interest payments. We're also simultaneously addressing the need to refinance our credit facility, which expires in October 2024. This process is moving forward and we believe we're headed toward a solution. We have engaged in productive discussions with various potential sources of capital, including our existing preferred shareholders regarding alternative investment structures. We are also in discussions with our existing lenders regarding a short-term amendment and extension of our credit facility, if needed in the interim while we move toward completion of a longer-term solution. We anticipate having more to share prior to announcing our first quarter fiscal 2024 results. Overall, I am pleased with the significant progress being made with respect to strengthening our balance sheet. Such efforts, combined with optimizing our cost structure and improving business operations, provide a solid foundation as we look ahead to our ongoing transformation in fiscal 2024. Let me emphasize that the initiatives we have launched and the actions we are taking are working. Simply put, the improvements to our business processes and the increased attention to risk management and process discipline as we implement common systems and platforms across our enterprise have significantly enhanced our ability to identify and exploit synergies, increase cross-collaboration and optimize business execution across the entire organization. Meanwhile, as I shared moments ago, focusing on the differentiated expertise and the diversity of perspective of our people, collaborating with our customers like never before, and leveraging our unique culture of innovation and technology leadership is resulting in our winning significant strategic new business and strengthening our core market positions and enabling us to expand into new market adjacencies in ways that validate that our One Comtech transformation is truly working. Simply put, we're securing significant strategic enduring wins and I think there's more coming, but for now let me highlight a few: the award of the Global Field Service Representative contract from the U.S. Army with an expected value of $544 million; the award of the Enterprise Digital Intermediate Frequency Multi-Carrier, or EDIM, modem contract from the U.S. Army for $48.6 million, plus what we believe could be full-rate production potential of over $1 billion based on the U.S. government's prior fielding of the legacy EBEM modem; an award from the U.S. Army for our next-generation troposcatter systems with an initial contract value of $30 million; building upon our March 2020 contract award to design, deploy and operate a next-generation 911 system for the state of Ohio, $21 million of initial funding on this contract that we believe could be worth approximately $85 million over its lifespan; and being named one of multiple awardees on the Defense Logistics Agency, or DLA, Gateway to Sustainment, indefinite delivery, and indefinite quantity, multiple award contract with a ceiling value of $3.2 billion. These are very significant wins that are a direct result of our business optimization initiatives, our improved enterprise-wide synergy and collaboration, our improving business processes, discipline, and the focus on our strategic growth priorities. These wins also validate our progress toward becoming One Comtech, an industry leader in technology, innovation, and listening to our customers to create the solutions they most value. Through our GFSR award, with an expected value of $544 million, we have been selected to provide critical, ongoing communications and IT infrastructure support for the Army, Air Force, Navy, Marine Corps, and NATO, enabling U.S. and coalition forces to maintain robust, resilient, and secure connectivity for global all-domain operations. Comtech's professional engineering services, our innovation and our extensive portfolio of blended software-defined smart-enabled technologies were critical to our success in winning this business, which will help the DoD and coalition partners maintain information advantage in virtually any environment. While currently under protest by the former incumbent, we believe such protest will be resolved in our favor and we expect the contract to meaningfully contribute to our second half of fiscal 2024 and beyond. Separately, we were awarded a $48.6 million contract by the United States Army to design and deliver new EDIM modems that support U.S. DoD satellite communications, digitization, and modernization programs. Comtech will design, develop, test and deliver EDIM modems and provide hardware, software and sustainment services to support performance enhancements for EDIM solutions over time. Our EDIM modems are designed to support unique U.S. Army and Tri-Service requirements, meaning they can also be used for other branches of the Department of Defense looking to leverage next-generation SATCOM capabilities. Comtech's EDIM modems are expected to replace the Enhanced Bandwidth Efficient Modem, or EBEM, currently supporting Army, Navy and Air Force SATCOM users, and it will replace it with an advanced digital and software defined platform. There are currently tens of thousands of these legacy EBEM modems fielded today and we expect to see replaced as part of this and related efforts. And we feel that the transition to digital SATCOM architectures offers a meaningful advantage that will encourage our customers to expand EDIM adoption well beyond the current EBEM footprint. We believe this EDIM award also means that Comtech's modems are at the heart of the Department of Defense's move to digitized hybrid satellite network architectures. And it puts us in an advanced competitive position as DoD and coalition force communications capabilities are upgraded and modernized. In July, we announced that our market-leading next-generation troposcatter systems were selected by the U.S. Army to support tactical communications and modernization needs in a contract award worth $30 million. Here again, our commitment to innovation and technology leadership drove our success. We believe that our next-generation software-defined troposcatter family of systems represent up to a thousand-fold performance improvement over prior generations. And with the most troposcatter systems deployed in the world today, we are a clear market leader in a technology with a rapidly expanding set of defense and commercial global market applications. Let me take a minute to share just one example of the potential for expanded applications of our next-generation troposcatter systems. Following broad-scale natural disasters such as hurricanes, communications infrastructure has often heavily impacted. As Hurricane Ian, a category 4 storm, made landfall in southwestern Florida in September 2022, the Federal Communications Commission noted close to 18% of cell sites in Florida were out of service, with some counties seeing over 82% of cell sites out of service. This means millions of Floridians lost access to their cell phones, landlines, home internet, cable, or a combination of those, both during and in the aftermath of the storm, not to mention access to 911 emergency life-saving services. Because of these outages, emergency responders could not communicate with their residents in life-threatening situations. Now, troposcatter is unique and that it doesn't rely on the purchase of satellite capacity, and inclement weather, which can interfere with satellite and microwave signals, doesn't have a negative impact on troposcatter signals at all. In fact, bad weather actually enables troposcatter to perform better. In natural disaster scenarios like Hurricane Ian, our next-generation troposcatter systems hold the potential to provide a new mechanism for states' emergency service providers and global communities to sustain resilient and reliable communications infrastructures when it matters most. This is just one application we're excited about and we see other potential commercial opportunities for our troposcatter systems as we continue to integrate and expand our capabilities within the portfolio. Finally, the U.S. Army troposcatter win also validates our recently instituted capture and pricing process improvements and underpins the value of our cost reduction actions and improved program management discipline. In July 2023, we were very excited to finally have received our long-awaited initial funding of $21 million under our next-generation 911 contract with the state of Ohio. This contract, originally awarded to us in March of 2020, has a total expected value of approximately $85 million, and is anticipated to start contributing meaningfully to our net sales in fiscal 2025 and beyond. And finally, in April 2023, Comtech was selected as one of multiple awardees under the Defense Logistics Agency Gateway to Sustainment, indefinite delivery, indefinite quantity, multiple-award contract with a ceiling value of $3.2 billion. This award enables the U.S. Department of Defense and other U.S. government customers purchase a wide range of our capabilities and services in support of the Command, Control, Computers, Communications, Cyber, Intelligence, Surveillance, and Reconnaissance, or C5ISR, operations. Taken together, we believe these significant strategic contracts demonstrate Comtech's steadily improving performance across every facet of our business, and we intend to continue winning more strategic and enduring contracts that validate our ability to continue up-tiering our solutions and services to solve some of the toughest networking and communication challenges the world is facing today, as well as addressing the many challenges we anticipate in the future. The changes my leadership team has implemented at Comtech over the 2023 fiscal year are creating significant competitive advantage for us. Today, we're competing on the value we are delivering to our customers in a currency they understand. These recent contracts I believe represent only the beginnings of new customer engagements, and it is clear we are establishing valuable, long-term partnerships that we intend to continue to expand upon as we look to the future. For our shareholders, it means that Comtech's investments in optimizing operational performance, improving process discipline and applying technology innovation are delivering revenues that create value today. Before I turn to Mike to talk about our results in detail, let me make one last observation about this quarter's financial performance. When I first started as CEO a year or so ago, it was clear that maintaining the status quo was not an option. The onus was on Comtech and its leadership to regain the confidence of our investors, and the only way to do that was through accelerating the decisive and total transformation of the organization. For our investors, this transformation is already translating into improved financial performance. I want to be sure to highlight the following. As a clear indication, we're on the right path. Over the course of the past four quarters, the work we've done at Comtech has resulted in our consolidated net sales increasing sequentially every quarter of the fiscal year. Our adjusted EBITDA margins have also increased sequentially every quarter of the fiscal year. Structurally, Comtech has undergone a series of thoughtful strategic changes that are beginning to manifest in margin improvement and growth. These encompass all aspects of our business, from identifying redundancies within the organization to supply chain management and implementing key performance indicators to ensure we're meeting our customer commitments, all of which I've spoken about over the past three quarters, and we delved into much deeper during our Investor Day in June. During our Investor Day, both Maria Hedden, our COO, and Mike Bondi, our CFO, detailed multiple initiatives that we are implementing to drive operational efficiencies wherever we can. For those of you that may have missed Investor Day, you can find the full presentation and video on the Investor page of our website. And we noted that not only did we identify opportunities ahead of us that would benefit our top-line, we believe we can achieve annual double-digit sales growth over time with significant opportunities to simultaneously drive enduring margin improvement. We are confident that while sales will grow, our margins will grow faster. Now, let me turn to Mike to talk about our results in detail. Mike?

Thanks, Ken. For Q4 fiscal 2023, we recorded $148.8 million of consolidated net sales, of which $94.2 million were reported in our Satellite and Space Communications segment and $54.6 million were reported in our Terrestrial and Wireless Network segment. Consolidated fourth quarter sales represented a 9.2% increase over last quarter and our seventh consecutive quarterly increase. Compared to the year-ago quarter, our consolidated Q4 fiscal 2022 net sales increased $21.8 million or 17.2%, reflecting higher net sales in both of our segments. Consolidated net sales for fiscal 2023 were $550 million, of which $337.8 million were related to our Satellite and Space Communication segment and $212.2 million were reported in our Terrestrial and Wireless Network segment. Consolidated gross margins for Q4 and the fiscal year 2023 were 32.7% and 33.5%, respectively, and 35.9% and 37% in the comparable periods of the prior year. The 32.7% we achieved this past quarter reflects a sequential increase from the 31.7% reported in the third quarter of fiscal 2023. Such changes reflect an increase in net sales and overall product mix changes, primarily driven by higher net sales of our troposcatter and SATCOM solutions to U.S. government and international customers in our Satellite and Space Communications segment, including performance on our next-generation troposcatter terminals for the U.S. Marine Corps and VSAT equipment for the U.S. Army. Operating income in Q4 of fiscal 2023 was $1.1 million compared to an operating loss of $2.1 million in Q4 of fiscal 2022. Such operating income reflects higher net sales reported during the quarter, as well as the benefits from profit improvement and lean initiatives implemented during the second half of fiscal 2023. This marks our first quarter of GAAP operating income since Q4 of fiscal 2021. And the more impressive part is that we achieved this all while still incurring incremental expenses associated with our One Comtech transformation and restructuring activities. We think it is important to take a quick second out to thank all of our customers, suppliers, and most importantly, employees who made this happen. As explained in more detail and reconciled in our Form 10-K filed earlier today, we utilize a non-GAAP measure that we refer to as adjusted EBITDA. During Q4 fiscal 2023, adjusted EBITDA was $18.9 million, a 51.2% sequential increase from Q3 fiscal 2023. As a percentage of net sales, adjusted EBITDA was 12.7%, an improvement from the 9.2% we achieved in Q3 fiscal 2023. For the full year, adjusted EBITDA was 9.7%, an increase from the 8.1% we achieved last year. Adjusted EBITDA margin in the more recent period reflects higher net sales and the benefit of our One Comtech lean initiatives implemented in the second half of fiscal 2023, offset in part by a lower gross profit percentage due to shifts in the mix of solutions delivered in 2023. Overall, our consolidated Q4 net sales and adjusted EBITDA were ahead of our guidance provided last quarter and we're pleased to have well exceeded our targets particularly in light of a macro environment that remains challenging and all while undergoing one of the most comprehensive transformations in this company's history. Despite these business conditions and resulting challenges and although we anticipate some variability from time to time as we move through our One Comtech transformational change, for our first quarter of fiscal 2024, we are targeting consolidated net sales to sequentially increase approximately 1% to 4% and for our consolidated adjusted EBITDA margin to range between 11% and 13%. Such targets reflect our assumptions regarding the timing of and performance on orders from the U.S. Army for VSAT equipment, as well as the timing of and our performance on our recently awarded $544 million GFSR contract, which as Ken mentioned earlier, has been protested by the prior service provider. And while we expect a near-term close, such targets also do not assume any divestiture at this time due to the uncertain closing date of the transaction. Now, let me return the call back over to Ken. Ken?

Thanks, Mike. Before we take your questions, I want to say that I'm excited about the momentum we are building as we progress on our One Comtech journey. Going forward, I'm excited that we're already realizing significant strategic wins and material results that stem directly from our actions. Our implementation of standard tools, procedures and process discipline across the enterprise have been a key driving factor in the improvements we are seeing in our balance sheet and our performance. We have examined everything from supply chains to contract terms and the outcomes are evident in the results you're seeing today. The impact of our cost reduction actions cannot be overemphasized and as difficult as those actions were, they have resulted in a leaner, more agile organization where we are able to identify opportunities and prosecute them in a much faster and more efficient manner than ever before. Our ability to draw from all parts of the business to gather talent and expertise is one of the many advantages of our One Comtech transformation, advantages that will further increase shareholder value as we hone these abilities over the coming months and years. Customers as well are also already benefiting from these actions as we are increasingly able to turn our attention to more thoughtful and comprehensive customer engagement and collaboration strategies to win new business as valued partners with innovative, more comprehensive solutions. Our new business capture processes will continue to improve and enable us to enter new markets by combining technologies from within our existing portfolio as well as engaging with EVOKE partners to create truly cutting-edge innovative capabilities where the end solution is a far greater customer value than any of the individual parts. Today, Comtech is preparing itself for a world where there is not only value in building platforms and services to handle the geometrically increasing amounts of information that the modern world creates, but also able to capture, analyze and act on the information they carry in the near real time, creating new insights, intelligence and smart networks that will change the way we think about connectivity, deliver substantially more customer value and empower a truly connected world. Everything we have done and are doing to create a One Comtech business machinery and culture is being done to put our company on a durable growth trajectory that I believe will sustain for years to come. We're all looking forward to 2024. With that, let me take any questions you may have.

[Operator Instructions] We'll move first to Joe Gomes with NOBLE Capital. Your line is open.

Good afternoon. Congrats on the quarter and thanks for taking my questions.

Good morning, Joe.

How are you doing, Joe?

Great. So, just maybe you could give us first off a little bit more details to what was behind the fourth quarter outperformance. As you mentioned, you guys had projected 2% to 4% sequential revenue growth. It came in over 9%. You projected adjusted EBITDA margin in 9.5% to 10.5% and it came at 12.7%, phenomenal results. And I'm just wondering if you give us a little more color as to what drove that.

Sure, Joe, I'll take that first piece. Yeah, certainly coming into the quarter, we had our eye set on executing on our lean initiatives. So certainly, when we're talking about adjusted EBITDA margins, clearly, I think you're seeing the benefits of those actions taken now in the second half of the year. That's definitely driving the bottom-line. In terms of also just the fielding schedules of our customers and the backlog we've been building throughout the year, giving us a nice foundation. We were able to draw upon that in the quarter. So, a lot of things clicked this quarter.

Okay, great. Thanks for that. And on the $544 million contract, again, congrats on winning that, even though it is currently under protest. You mentioned you thought it would start to contribute in the second half of fiscal 2024. Can you give us any kind of insight as to what -- when you think meaningful, what that could possibly mean to the top-line? And on the margins on that contract, in line with higher or lower than the -- kind of the corporate average margin?

Joe, on the revenue profile for the contract, as we were saying in our prepared remarks, certainly, we have to be mindful of the timing of getting started on that. So, when that thing gets fully up and ramped up with all the positions, it's going to be a pretty sizable increase on an annual basis. Going back in time, we had a similar contract and I would say you can kind of use it as a proxy.

Joe, this is Ken. I would also say that while there's a protest in play, that's a pretty routine practice for this particular customer and this particular market segment. So, we're not overly concerned about that. And this task order was awarded on an existing contract vehicle we have with the U.S. Army, which leverages a 10-year, $5.1 billion global tactical communications systems II, or GTACS II, IDIQ contract. The reason I mention that is because it's one of the reasons we're excited about the G2S IDIQ contract that we have with a ceiling of $3.2 billion, because these are the kind of contract vehicles that enable this kind of business to flow to us especially in a dynamic geopolitical environment with sudden and dynamic demand potential.

Thanks for that. And one last one for me. I'll get back in queue. On the sale of the power systems unit, can you give us any kind of color on what that could mean in terms of the revenue and adjusted EBITDA that was related to that business? And is there -- is that kind of in terms of potential sales, or do you continue to look at some other aspects of the Comtech business that might not fit in with the new One Comtech?

Joe, I'll take the first part of that question, and then I think on the strategy going forward, I'll hand it over to Ken. I think in terms of the sizing of this transaction, we won't comment on how much revenue and EBITDA, but you can get a sense for it based on the size of the purchase price, relatively speaking. And in terms of the impact to fiscal '24, obviously, we're subject to customary closing conditions. We're expecting the close to be in the short term. But again, given the timing being a little unknown, it's hard to really decipher what the adjustment would be to the forecast. But I would say at this point, that's probably all we're going to say on the transaction today.

Joe, commenting on the strategic portfolio management activity, this particular business, which is really a solid business, it didn't have a lot of synergy with other parts of our business, it didn't have a lot of synergy with our technology roadmaps and that kind of thing. So that kind of a portfolio management decision, while it's difficult to make, I think it's the right decision for all concerned. Now, portfolio management is something that we're beginning to do on a continuum. It's a part of any business. Management and executive leadership team operations were involved in dynamic market convergences, technology inflections, and I think that that while we don't have anything to say on that, okay, and I'm not forecasting anything I think portfolio management is something that we have a responsibility to do on a continuing basis. That's all I mean to say.

Okay, thanks for that, guys. Really appreciate it. And again, congrats on the quarter.

Thank you.

Thank you, Joe.

And we'll move next to Greg Burns with Sidoti. Your line is open.

Thanks. Just to follow up on the GFSR contract and what you're contemplating in your guidance, is that -- is none of that in the guidance for 1Q? And if for whatever reason it closes or starts earlier than you expect, there might be some upside, is that how we should be...

Yeah, Greg, on Q1, I would say, you could think of it's very nominal or anything at this point just given the timing of the award and what's happening.

Okay. And then you didn't mention any update on what's going on with your LEO customer? Are they progressing? Are you getting closer to seeing production orders for them? Like, what's the outlook for that in fiscal '24?

In terms of the timing for that, Greg, certainly we're tracking our progress alongside where the customer wants us to be and where they are on their schedule. I would say, at this point in time, no major changes to our outlook for production orders. I think if we get an order, it would be for the next couple of months of deliveries. So, I wouldn't expect multiple orders. It might be one large order to work from. In terms of the specific timing though, I can't comment on today.

The only thing -- this is Ken. The only thing we can say I think is that it is progressing on the timeline that we expected.

Okay. And then, in terms of the EDIM modem opportunity, are you -- is that a sole source contract or are there multiple vendors that are supplying these modems? And when you think about the conversion or the upgrade opportunity there, is there an upgrade cycle that goes on there or an end of life to these -- the EBEM modems? Like, how should we think about that broader opportunity beyond the first $48 million order that you got?

Well, the EDIM contract, which is the acronym EDIM, okay, is a kind of successor contract to the EBEM, E-B-E-M, contract that was led in 2003. The 2003 contract had a development -- design and development phase along the lines of this current EDEM one, and then it resulted in significant fielded quantities, I believe tens of thousands, perhaps more than 40,000 of the legacy modems were fielded, okay, over the period of 2003 to, say, today, okay? This is a single award program to Comtech. We do have a major subcontractor in iDirect that provides an interference excision capability that has real value in this environment because this is a modem that could be looked at as eight modems in one, and has a significant size weight power advantage over the modems that it's replacing. And it implements next-generation waveforms to enable really to help realize -- DoD to realize its vision of multi-network connectivity over multiple diverse networks simultaneously. So, this modem could easily be viewed. We're really excited about this contract, and I think it holds a potential for tens of thousands of production deliveries as a follow-on. But yes, it's a single award contract.

Okay, great. Then lastly, can you talk about cash flow this quarter? Looks like you built up a little bit of working capital. So, how should we think about cash conversion as we go into fiscal '24?

Joe -- sorry, Greg, on cash flows from ops, I would say, we're taking positive cash flows for the quarter. Certainly, we're always subject to the timing of collections of large receivables. So, I would say, in terms of quantifying a specific number, it's definitely going to be a stronger cash flow than you saw in Q4. And in terms of for the full year, again, not quoting a specific number for the full year and giving full year guidance, but I would say we're going to start returning to more pre-COVID levels of cash generation. And just being mindful, too, in terms of the CapEx and free cash flow, our CapEx targets for this year are around $15 million and probably more skewed towards the first half of the year, but pretty even throughout the year.

Okay. Great, thanks.

And we'll move next to Mike Crawford with B. Riley Securities. Your line is open.

Thank you. Ken, you're talking about your One Comtech initiative, and I'm wondering if you can give us a progress update on one component that I think is not complete yet, and that's this assessment you're doing regarding centralized supply chain operations and management.

Yeah, well, thank you, Mike. By the way, it's good to have you on the call. Let me say first that I think our One Comtech organization had two initiatives -- two thrusts, okay. The first one is to bring the organization together, eliminate redundancy, streamline operations, streamline decision making, and a part of that was enable the significant cost reduction. Second part of that enabled us you can think of the centralized supply chain management operations, engineering, technology, development, so that we looked across our enterprise and we did things once we did it collaboratively and we did it collectively in a way that supported our enterprise collaborative strategy, okay. Supply chain was certainly part of that. We speak now with one voice. We've gone through all of our contracts with respect to identifying opportunities to implement more constructive contract management. We've looked across our supply chain and we're implementing supply chain actions to try to speak with one voice, speak with an amplified voice, and garner the value from that, okay. Now, the other thing is I think also it gives us an opportunity to look at facilities and perhaps look at consolidating facilities. So, clearly this kind of an action bringing the organization together, we've picked some low-hanging fruit, but it is a long process that's going to last really probably well more than another year. We always planned for our discovery phase to last about 10 or 11 months. We actually got through it perhaps a little ahead of that. And then we planned for our implementation phase to implement the actions that came out of that discovery process. We had always planned for that to take 20 to 28 months. And we are operating inside that timeline. So, we're on track. There's much yet to do.

And then sort of related, I was hoping you could share some key components, like I don't know, maybe a dynamic cloud platform of your strategy to become more of a system solutions provider.

That's really the other side of the coin of the discussion that we just had about consolidating or centralizing the 14 siloed businesses into two segments and applying some central oversight and leadership in terms of enterprise-wide actions. The second -- the other side of that coin is consolidating our businesses like this enables us to collaborate more effectively and enables us to offer customers subsystems, systems and services solutions that the individual silos could not do alone, okay. I think that first of all, that's -- one thing is that -- that's what our customers are asking from us. They're asking for more comprehensive systems and services solutions by bringing the technologies, products and capabilities and even the people expertise from across our enterprise together to be able to bring them our comprehensive solutions. Now, the customers are asking us for that and, in this construct, we're able to deliver that. So, I think that that is a -- and by the way, typically in the systems and services market segments, the financial return is much greater, profitability is much greater. So, we're working steadily to move and up-tier our systems and services capabilities in that regard. We're making really good progress along those lines. And I think this GFSR contract and some of the other ones are an example of that.

Okay, great. And then one final question for me is it's nice to see your Terrestrial and Wireless segment margin back over 20% where it used to be fairly consistently, and I'm wondering if it's mostly just job cuts there or what else is at play, and if you think that's sustainable?

Yeah, I think again, this is going to come down to our One Comtech lean initiatives taken. I think you're starting to see the benefit of those actions and certainly getting more work in-house like with Ohio and just kind of building that base of business up and ramping up PSAPs on the systems will certainly give us a better economies of scale, leveraging the infrastructure for supporting that business. So, I think you're seeing both of those kind of happening in this Q4 period.

Great. Thank you.

And we'll move next to Lance Vitanza with TD Cowen. Your line is open. And it looks like Lance may have withdrawn himself. [Operator Instructions] And it does appear -- oh, we do have a follow-up from Greg Burns with Sidoti. Your line is open.

I just wanted to follow up on the margin question just on the -- at the consolidated level. You got back to that, we're close to 13% this quarter, I guess, guiding to 12% at the midpoint. So kind of back to where we were and I think where you were targeting in the near term. So, how should we think about the business from here? Is this a good level? Or is there a next phase of the One Comtech initiative that maybe where you could see margins going higher from here? Thanks.

Greg, on that -- good question. Certainly, as we're looking at the full year and looking at the lean initiatives, we do expect certainly the RIF actions taken last year, that's going to be sort of foundational in each of the quarters. But as we go throughout the quarters, as Ken just alluded to, we have supply chain initiatives, facility initiatives, common tools and platform initiatives. And we're starting to see those getting engaged and driving some of the results in our outlook. So, I would say each quarter you'll see probably progressively better bottom-line margins as the year progresses. I think we're setting our sights higher than where we are today. We're not satisfied with the 12.7% in Q4. Certainly, we want to continue to do better. We had always said as a target, we wanted to get back to at least the 14% we were doing before COVID and then exceed that. So, I think with the trajectory that we're on, I think, we have line of sight for that. In the first quarter, in terms of our guidance, and I think Joe asked the question earlier about sort of the margin profile of some of these new contract wins. I think just given the fielding schedules of the Army and what we're seeing -- being expected of us for deliveries in Q1, I would say, probably our margins are probably going to be slightly down from Q4, what we just reported, but then progressively throughout the year with the mix that we're seeing it would get back to the more historical levels say in the mid-30% range. So, overall, I think it's the lean initiatives and they can help drive it up from here. I don't think this is where we want to stay. I think we still have more to do.

I'll offer -- I'll also offer market perspective on that. I think that you're all aware we're in a very dynamic geopolitical situation globally. And sometimes that imparts sudden changes in mix because the customers in those situations can place sudden orders and they may need something differently than what they planned on needing maybe six months or so ago. So that kind of dynamic and volatility is favorable in a macro sense to our top-line, but it can introduce variability and mix that was unanticipated.

All right. Great. Thank you.

And we do have Lance Vitanza with TD Cowen back in queue. Your line is open.

Thanks, guys. I apologize for the technical difficulty a second ago, but congrats on the quarter. And I did just have a couple of questions. I wanted to actually go back, I think Joe had asked about the outperformance in the quarter, and you had talked about the lean initiatives. But with respect to the revenues in particular at the outperforming there, would you say that that was most notable in either of your two segments? Or was that sort of better-than-expected revenue growth, was that more broad-based?

I think it's going to be in our Satellite and Space Communications segment for sure. They had a pretty strong quarter when it came to deliveries of troposcatter and SATCOM solutions. We're delivering items off to the U.S. Marine Corps, VSAT equipment for the Army, solid state, microwave, high-power amplifiers. We're also pretty strong this quarter. And so that definitely was giving us a good contribution in Q4.

Great. Okay. So, on the Army contract, I think you mentioned during the Q&A that there was a prior contract that could offer some clues as to how this one might look when it ramps. My question is, does the [GDSR] (ph) contract, does that have a specific targeted lifetime in terms of years? And if so, could you discuss that? If it doesn't have a specific lifetime, maybe you could just remind us how long that prior contract you were thinking about how long that wound up running?

When I was talking about the prior contract, I was talking about EDIM and EBEM, the two modem contracts, and that's one with the production tail. I don't think that's what you're talking about here. You mentioned GFSR, right?

Yes.

Yeah, I think the way to -- Yeah, the GFSR contract, I think the way to think about it is it's close to a five-year type contract. Once you get up running at full scale, could be several hundred positions that the Army is looking to field globally. And so, those fielding plans will be set once we get going. The first quarter or two is going to be a still ramping up mode. Certainly, it's going to be a meaningful annual contribution if you just take a carving up to $544 million over like five years.

Yeah.

Perfect. Now, that's exactly what I was looking for. And then on the Ohio 911 contract, $85 million total, $21 million I think you received I guess as a pre-payment in July and I assume that then you probably booked that as deferred revenue or it's a prepaid amount, so that's going to create some non-cash EBITDA in fiscal '25 when you actually start recognizing that. Is that right? And maybe just talk a little bit about going forward, what the differential between the timing of the future cash inflows versus future revenue recognition, if there is going to be continued differences there?

Lance, on this particular contract, the $21 million was the initial funding that was signed into the budget at the end of July. So, in terms of cash flow, I don't believe there was anything meaningful on that initial funding. What we're going to do now is start the design work and getting ready to architect the platform for the state. And so that's why it's not going to generate meaningful revenues right away. It's something that we'll design, we'll get sign-off from the customer, and then we'll start building the platform. And once we get the platform ready to go live, that's when the revenue will kick in, and that's when will start amortizing the asset that we're creating for this particular project.

The contract is in initial period, two years, and it has options thorough 2031.

Got it. And then just last one for me, and thank you for taking these questions. Could you talk a little bit about how EVOKE has sort of played out in terms of development since the Investor Day? I know obviously the broader story there, which I think it's pretty exciting. I'm just wondering if there's been any update that you can speak to.

We're getting continual and deeper engagement with our EVOKE partners. They're part of the collaborative working sessions we have with certain customers. To give you a little light on this, typical -- in our history satellite -- we think of satellite communications mostly as geospatial satellites, and they acquired their ground infrastructure by buying boxes and then stacking them together. And then the boxes basically stayed in place for the 15 to 20-year life of the satellite. New space at low Earth orbit is very different, because the satellites have to exert energy and propellant just to stay in orbit because the gravitational pull is so much greater at low Earth orbit. So those satellites typically only have a life of four or five years, okay. So, low Earth orbit satellite service providers don't want to buy hardware like the geo satellite providers did where they buy the hardware one time and live with it statically for 20 years. What they want is a ground infrastructure partner that can be largely cloud native that can evolve with them because they have the opportunity to replace their entire satellite constellation every four to five years. In fact, they have to do that. So, they move from gen 1 to gen 2 to gen 3 every five years or so. So, they need a ground infrastructure partner that has an integrated solution that's virtualized. And that's where, frankly, bringing our 14 silos together to be two segments, our new Satellite and Space segment, has the organic capability to support a large degree of that kind of value proposition for those low Earth service satellite providers. But then we need partners in order to augment our organic capability in certain areas and those partners are playing an important role in our ability to be long-term partners and build long-term relationships with LEO satellite providers at both the communications and geospatial domains.

Thanks very much.

Thank you, Lance.

And it does appear that there are no further questions at this time.

Thanks, Ken, Mike, and thanks to everyone for dialing in today. As Ken said, there are additional details about our strategy and performance available in our investor letter and SEC filings, and we'll provide ongoing insights in Signals. And as a reminder, we intend to be as responsive as we can with investors going forward. So, for anyone with questions, please reach out directly and let's connect. This concludes our fourth quarter call. We thank you for your continued support.