Maria Ceriello - Accountant Stan Sloane - President and CEO Mike Porcelain - SVP and CFO.

Mark Jordan - Noble Financial Chris Quilty - Raymond James.

Welcome to Comtech Telecommunication Corp's Third Quarter Fiscal 2016 Earnings Conference Call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions]. As a reminder, this conference is being recorded Thursday, June 9, 2016.

I would now like to turn the conference over to Maria Ceriello of Comtech Telecommunications. Please go ahead, ma'am..

Thank you and good morning. Welcome to the Comtech Telecommunications Corp conference call for the third quarter of fiscal year 2016. With us on the call this morning are Dr. Stanton D. Sloane, President and Chief Executive Officer of Comtech; and Michael D. Porcelain, Senior Vice President and Chief Financial Officer.

Before we proceed, I need to 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 involve certain significant risks and uncertainties, including among others the risks that Comtech's and TCS's businesses will not be integrated successfully. 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 Securities and Exchange Commission filings. I am pleased now to introduce the President and Chief Executive Officer of Comtech, Dr. Stanton Sloane.

Stan?.

Thank you, Maria. Good morning everyone. Thank you for joining us on the call. As announced yesterday afternoon, we reported our third quarter results of $124.2 million in revenue, and adjusted EBITDA of $12.5 million. I am extremely pleased with these results, which only include two full months of TCS operations.

As Mike will discuss during his part of the conference call, this was a complex quarter from a financial perspective, so I will leave the details of this information to Mike. To begin with, I believe the acquisition of TCS is already a success and our integration plans are on-track.

Additionally, although business conditions are still challenging, we are seeing signs of end-market stabilization for our legacy Comtech business, and bookings for both legacy Comtech products and TCS products, across most of our product lines were strong during the most recent quarter.

With much of the integration work behind us, I look forward to a solid finish in fiscal 2016, and I am increasingly optimistic that fiscal 2017 will be a strong year for Comtech. As a sign of our confidence, I am pleased to state that our Board of Directors has established a targeted annual dividend for fiscal 2017 of $1.20.

Although future quarterly dividends and the actual amounts of such dividends are subject to, one, business conditions; two, the terms and conditions of our secured credit facility; and three, ultimately Board approval, our Board does believe that quarterly dividends represent an excellent way to return capital to our shareholders.

I will talk more about the state of the business and TCS later in this conference call, but first, I thought it would be good for Mike Porcelain to start with the financial perspective on our new company.

Mike?.

Thanks, Stan, and good morning everyone. I will speak first about Comtech's combined business, before providing remarks on our updated guidance.

During our third quarter of fiscal 2016, we experienced strong order flow for Comtech's legacy business that benefitted from incremental bookings associated with new advanced communication solutions that we now offer, as a result of the TCS acquisition.

In aggregate, we achieve bookings of approximately $139.2 million during the third quarter of fiscal 2016, which translates into a quarterly book-to-bill ratio of 1.12 compared to an average book-to-bill ratio of 0.81 for the two prior quarters.

CCSL's contributions during the quarter represent roughly two months of operations, which began February 23, 2016, the closing date of the transaction through April 30, 2016. As such, the mix impact on segment sales, gross profit, and other operating metrics, does not reflect a full quarter of TCS contributions.

Additionally, we continue to integrate our two businesses, and we have begun to jointly market our products to facilitate future growth. Thus, over time, historical sales patterns and mix trends will become less relevant and period to period comparisons of sales of legacy Comtech or TCS brands will not be meaningful.

With that said, we would expect to provide as much detail as we can in the future periods. But for now, we would encourage investors to look at overall consolidated results and metrics, until we have reported our results for a few periods. I will point out to you that yesterday afternoon, we filed with the SEC, a recast of our historical segments.

So we hope that this will give you a sense of the sales composition for this quarter, and give you a sense going forward. Consolidated net sales for Q3 were $124.2 million. These sales include approximately $66 million of sales as a result of the TCS acquisition.

On a period-to-period comparative basis, sales of legacy Comtech products, in particular, our Satellite Earth Station product line and our Over-the-Horizon Microwave product lines, were lower than the comparative Q3 period of last year.

On a segment basis, our Commercial Solutions segment represented 58% of consolidated net sales for the three months ended April 30, 2016, and our Government Solutions segment represented 42%. The range between these percentages over time should tighten.

Net sales of our Commercial Solutions segment were $72 million in Q3 of fiscal 2016 as compared to the $47.5 million we achieved in Q3 of last year, representing a significant increase of 51.6%.

This increase reflects incremental sales of approximately $31 million, as a result of the TCS acquisition, partially offset by lower sales of Comtech legacy products.

While those sales of Comtech legacy products in particular, our Satellite Earth Station products, continue to be impacted by the extremely challenging business conditions that existed earlier in the year, as Stan mentioned, we do believe that marketing conditions are somewhat stabilized.

During the three months ended April 30, 2016, we saw double digit order growth for solutions that include our Satellite Earth Station products, as compared to order flow during the three months ended January 31, 2016.

Additionally, bookings during our most recent quarter for our Traveling Wave Tube Amplifier solutions were the highest all year, and we believe this growth will continue.

During the three months ended, April 30, 2016, our commercial segment benefitted from the sales of location and messaging based platform and safety and security solutions that we now offer, as a result of the TCS acquisition.

Turning to our government solutions segment, net sales were $52.2 million in Q3 of fiscal 2016 as compared with $24.1 million in Q3 of fiscal 2015, an increase of $28.1 million or 116.6%.

The period-over-period increase reflects incremental sales of approximately $34.9 million, as a result of the TCS acquisition, partially offset by lower sales of Comtech legacy products.

The decrease in Comtech legacy products in this segment, during our most recent quarter, reflects significantly lower comparative net sales of Over-The-Horizon Microwave system products, partially offset by increased sales of high power broadband amplifiers and BFT-1 Sustainment Support services.

Sales in both periods include $2.5 million in net sales, related to $10 million BFT-1 intellectual property license fee. During the three months ended April 30, 2016, our Government Solutions segment benefitted from a variety of new advanced communications solutions that we now offer as a result of the TCS acquisition.

These solutions, primarily include, technical and field support, space components and cyber training. Now, let me walk you through our gross margin and operating expense line items, and provide some operating metrics.

Our gross profit in Q3 of fiscal 2016 as a percentage of consolidated net sales was 41.4% versus the 45.1% we achieved in Q3 of last year. This decrease is primarily attributable to overall product mix changes, resulting primarily from the TCS acquisition.

In particular, the inclusion of sales related to TCS government solutions, which have historically had lower gross margins than Comtech's legacy products. We expect that our Q4 gross margin percentage to be meaningfully lower than the 41.4%, given that Q4 will reflect a full three months of TCS sales.

On the expense side, SG&A expenses were $30.4 million, as compared to the $50 million we achieved in Q3 of last year. The increase in spending is primarily attributable to incremental expenses associated with the increase in size of our business, as a result of the TCS acquisition.

As a percentage of consolidated net sales, selling, general and administrative expenses were 24.5% and 20.9% for the three months ended April 30, 2016, and 2015 respectively. Research and development expenses were $12.6 million or 10.1% of consolidated net sales in Q3 of fiscal 2016, versus $8.6 million or 12% in Q3 of fiscal 2015.

This increase in spending is primarily attributable to incremental expenses associated with the TCS product lines, partially offset by lower spending, as a result of cost reduction activities, and the completion of several research and development projects.

Of note, I want to inform you that TCS now complies with Comtech's accounting policies related to software development. Thus, you will see material declines in capitalization of software, as compared to what TCS historically reported. This quarter in fact, we capitalized no software costs and do not currently expect to do so in the foreseeable future.

Total stock based compensation expense, which is recorded in our unallocated segment was $1 million for the third quarter of fiscal 2016, as compared to $1.2 million for the third quarter of fiscal 2015.

Our operating expenses in this period include approximately $17 million of expenses related to our CEO's Focus Acquisition plan, which culminated with the closing of the TCS acquisition. These expenses include significant amounts for, change control payments, severance and professional fees for financial and legal advisors for both Comtech and TCS.

Although subject to change, we currently expect to record additional acquisition plan expenses of approximately $3.9 million during the fourth quarter of fiscal 2016. The company has completed a preliminary analysis and assessment of the fair values of the TCS assets acquired and liabilities assumed.

Based on this preliminary analysis, $280.9 million was allocated to intangibles with finite lives and $127 million was allocated to goodwill. As such, our GAAP operating income in future quarters is going to be significantly impacted by future amortization.

Total amortization of intangibles during the fourth quarter of fiscal 2016, including amortization associated with the TCS assets acquired, is expected to approximate $6 million. Looking forward, based on our preliminary analysis, total annual amortization of intangibles in fiscal 2017 is expected to approximate $22.8 million.

Given the acquisition costs, we have reported a consolidated operating loss of $13.4 million in fiscal 2016. Excluding such amounts, operating income would have been $3.6 million or 2.9% of consolidated net sales.

On a segment basis, operating in the commercial solutions segment was 9.2% of related net sales, and operating income in the government solution segment was 10.7% of related net sales. As a reminder, these metrics will be different going forward, once you add in a full year of TCS operations and a full year of the TCS incremental amortizations.

We expect to provide details on these metrics in our Q4 conference call. Interest expense was $3.5 million; the company's interest expense for the third quarter reflects and going forward, will continue to reflect the cost of borrowings, in part, for the TCS acquisition, and the discharge of the TCS debt that we assumed.

As of April 30, 2016, total debt outstanding, net of $6.2 million of deferred financing costs, and including capital leases, was $351.2 million of which $17.8 million was current.

The blended interest rate during the fourth quarter on our debt is expected to approximate 5%, and looking forward, to fiscal 2017, will represent the same 5% on total debt.

Our income tax this quarter and this year, has been and will be impacted by various items, including the final determination of what items are non-tax deductible, in connection with the TCS acquisition. As such, our GAAP effective tax rate for fiscal 2016, may ultimately change.

Looking forward however, the company currently expects that its fiscal 2017 effective tax rate, excluding discrete items will approximate 37.5%. Adding it all up on the bottom line, we delivered a GAAP diluted EPS loss of $0.89 in Q3 of fiscal 2016.

Now let me provide some additional financial metrics; adjusted EBITDA as defined at the end of our press release that we issued yesterday, was $12.5 million in Q3 of fiscal 2016. Adjusted EBITDA, as a percentage of our consolidated net sales was approximately 10%. At April 30, our backlog was $433.6 million compared to $130 million at April 30, 2015.

Our backlog at April 30, 2016, includes the backlog that we acquired from TCS. At April 30, 2016, we had $69.1 million of cash and cash equivalents. This cash balance does not reflect our Q3 dividend that was paid in May 2016, which approximated $4.9 million.

After payment of these dividends and payment of certain merger and integration expenses that occurred after our Q3, we currently have approximately $50 million in cash and cash equivalents. Also as announced yesterday, our Board of Directors approved a dividend for the fourth quarter of fiscal 2016 of $0.30 per common share.

To-date, and over the past 23 consecutive quarters, we have paid out over $119.1 million of dividends.

Finally, before turning it over to Stan, let me now provide some comments on our guidance; yesterday, we announced that we were updating our fiscal 2016 revenue guidance to a new range of $425 million to $435 million, and our fiscal 2016 adjusted EBITDA guidance to a new range of $44 million to $46 million.

The company's updated fiscal 2016 financial guidance, reflects an updated assessment of the timing of expected orders, anticipated shipment delays related to Over-The-Horizon Microwave equipment orders currently in our backlog, as well as additional legal expenses associated with legacy TCS intellectual property matters, which are discussed in more detail on the company's Form 10-Q filed with the SEC.

With respect to EPS, we currently expect a GAAP diluted EPS for fiscal 2016 will range from a loss of $0.90 to a loss of $0.81. And as I mentioned earlier, our tax rate for fiscal 2016 may ultimately change, as we still need to finalize several aspects of purchase accounting.

As such, don't be surprised if our actual GAAP EPS for 2016 differs from our current estimates. Normally, we don't provide annual guidance for the next fiscal year until September, when we file our annual results with the SEC in our Form 10-K.

However, in light of the complex financial aspects of this transaction, we believe it was better to give you a sense of what we were thinking about, at this particular point, for next year. We have begun our annual planning process, and we are currently targeting fiscal 2017 adjusted EBITDA to range from $70 million to $80 million.

These adjusted EBITDA targets include 12 full months of TCS operations, a full year of synergies and earnings growth, partially offset by incremental legal expenses, related to TCS legacy intellectual property matters. On the synergy front, we are taking what we believe to be a conservative but realistic view of the synergies that we can achieve.

In this regard, we are anticipating total annual synergies of at least $8 million next year, and as we finalize the next phase of our integration plans, we hope to achieve our goal of $12 million, and we will let you know when we do. TCS is a large acquisition, and we obviously want to do it right.

Our goals in year one, are to achieve the reduction of duplicate public company costs; reduce spending on maintaining multiple information technology systems, and obtain increased operating efficiencies throughout the combined companies.

In summary, we believe the financial aspects of this deal are compelling, and we are confident that we will be able to grow the combined business and achieve our expected operating synergies. Now, let me turn it back to Stan, who will discuss our business and outlook in further detail.

Stan?.

Thanks Mike. With the acquisition of TCS now closed, our company looks markedly different. However at our core, we are providers of advanced communication solutions. These solutions deliver proven high levels of reliability, security and availability. TCS acquisition positions us for sustainable growth.

In simple terms, we have more than doubled our annual revenue base, doubled our employee base, and our adjusted EBITDA in fiscal 2017 and expect it to grow in coming years. I believe our business is at a turning point, and I am excited about the growth opportunities I see ahead of us.

With a combination of experience, careful planning and successful execution, we will be able to drive significant shareholder value for many years ahead. The TCS acquisition was a significant step in our strategy of entering complementary markets, and expanding our domestic and international commercial offerings.

In connection with the acquisition, we began managing our combined businesses through two segments, commercial solutions and government solutions. Let me first talk about commercial solutions; which serves commercial customers and smaller governments such as state and local government, that require advanced technologies to meet their needs.

The segment also serves certain government customers including the U.S. government, when they have requirements for off-the-shelf commercial equipment.

I believe this segment is a leading provider of satellite communications, such as satellite earth station modems, Traveling Wave Tube Amplifiers, Public Safety Systems, such as next generation 911 technologies, and enterprise application technologies, such as messaging and trusted location based technologies.

This segment, on a long term basis, should approximate 50% of our revenue, and its aligned with several large growing end markets. Our satellite based communication providers served satellite back-haul and services market, which based on third party reports, is predicted to grow at better than 10%.

We remain the undisputed leader in the satellite earth station, SCPC modem area, driven primarily by our ability to deliver the most bandwidth efficient modems and highest efficiency amplifiers to our end customers.

Currently, many of our legacy Comtech products are sold to international customers, including many in developing countries, that have been negatively impacted by challenging business conditions, including a strong U.S. dollar and relatively low energy prices.

That said, during our most recent quarter, we experienced doubled digit bookings growth as compared to Q2. So it appears that some stability has returned to these markets, and sales of our products should increase next year.

Our satellite based products include our new Heights solution, which is a scalable network platform designed with a service provider in mind.

Heights leverages the single user interface, with a powerful traffic analytics engine, that allows simplified design, implementation, monitoring, control and optimization of networks using our hubs and gateways.

The Heights platform is designed to support the traffic load of demanding premium enterprise users on traditional satellites, as well as the new generation high throughput satellites. While Heights is new to the market, we are already investing in enhancements to the platform that can be used in the markets we had not historically served.

To-date, customer reaction to our Heights platform has been very positive, and we believe that Heights and our advanced VSAT products will contribute meaningful sales in the future. We have also seen very positive customer reaction to our new Superpower Traveling Wave Tube Amplifiers, which were introduced in March 2015.

Our Superpower Amplifiers will not only allow our customers, such as broadcasters, to build out new infrastructure. It will enable the replacement of aged inefficient equipment and their current infrastructure, with a high power, high efficiency broadband amplifiers, necessary for high definition and ultra high definition broadcasting.

During the past year or so, we have also made significant inroads into the high growth in-flight connectivity market. Our solid state power amplifiers help enable commercial airlines to provide in-flight connectivity services to their passengers.

This is a new and growing market for us, and we believe should contribute significant revenue for the next several years. Our Commercial Solutions segment includes two new product lines that we acquired in connection with the TCS acquisition. Let me first talk about Public Safety Solutions; since deploying the first U.S.

wireless E911 solution in 1998, TCS has been a leader in providing public safety solutions. TCS is a pioneer and continues to improve the methods by which U.S. Public Safety Answering Points or PSAPs can receive a wireless or voice-over-internet protocol subscriber's location during calls for emergency assistance.

Public Safety Solutions include 911 call routing for wireless and voice-over-internet protocol network operators, and next-gen 911 solutions for state and local public safety operations. Given all that's going on in the world, it's easy to see how this market should afford growth.

We currently route approximately 50% of all wireless 911 calls and are currently chasing several large contracts with new and existing customers that bode well for future business. The deployment of 911 technology for Wi-Fi calling is also growing fast.

Wireless carriers are eager to offer this service, due to the cost efficiency that they can realize by offloading traffic from their wireless networks in congested urban areas, and a key part of the offering is making 911 service available.

As with their LTE and older networks, operators are turning to content to 911 enabled Wi-Fi voice calling service. During Q3, one of our customers launched their voice-over-Wi-Fi 911 enablement service and we received an $8 million contract related to this.

We believe we are also a leader in providing text-to-911 technology for network operators, who must comply with SEC rules or voluntary commitments. We have now completed PSAP deployments in over 800 of the nation's public safety answering points, with a presence now in 37 states, Puerto Rico and DC.

We believe the next generation 911 market will grow, when we see an increase in statewide and local opportunities, as agency work toward upgrading their 911 systems to become next-gen 911 compliant. We also believe that the next-gen footprint is growing in Texas, California, Connecticut, Florida, Iowa and Tennessee.

New in the quarter, was an award to expand our call handling footprint into Guam, under a three year contract with a large U.S. government agency. As a result of TCS acquisition, Comtech now provides ESInets that is national emergency number association I3 standards compliant, emergency services IP network infrastructure.

We are seeing a significant increase in interested building channel partnerships for these ESI product lines, and during Q3, due to state-wide ESI net contract, with the Midwest State and received orders for new call handling deals for several counties in the Midwest.

Our last solution set in our commercial segment relates to enterprise and trusted location platform markets. Here too, we believe this is a niche, but growing market.

As a result of the TCS acquisition, we now provide location-based wireless infrastructure, applications and solutions, which support the generation and distribution of location information, for both indoor and outdoor environments and telematics and navigation solutions.

Our location-based solutions and telematics and navigation solutions can cover the entire value chain, and is backed by two decades of experience. These solutions include GPS enabled software such as Verizon's navigator service, which makes it easy for users to find, locate, and get directors to nearby restaurants and other points of interest.

While it is true that there are free mapping based solutions such as Google and Apple, TCS offers a concept called trusted location, which offers location aware applications to receive a precise location, using a unique and patented set of libraries which leverage cellular, satellite, Wi-Fi and other datasets.

Unlike other mobile location services, this trusted location is not dependent on carrier networks, and calculated trust score to report back the level of certainty associated with location and authenticity.

Whether it's for credit card security, enterprise mobility management or cross-border compliance for such markets as online gaming, we believe the demand for this type of service is going to grow significantly over time. During Q3, we received a patent for identifying the reliability of mobile location by generating location trust score.

This technology is a powerful tool for identifying fraud, preventing false positive denials of service, and confirming location compliance for regulated industries, such as financial services and online wagering.

A first of its kind technology, Comtech's location trust score addresses spoofing issues by reporting the level of certainty associated with the location and authenticity of the device, and ensuring that a device location is in a compliant location for financial services and online wagering applications.

We believe this market is poised for significant growth. We now also offer text messaging solutions, and believe we are one of the leading providers of messaging in North America.

We offer carrier grade platforms and high performance short messaging services or SMS routing, including APIs for cloud messaging centers, wireless intelligent gateways and a feature rich operator-grade messaging platform, designed to support both traditional networks and new LTE networks.

Given continued investment by carriers in their networks, we believe this business brings repeat revenue to Comtech, and we can possibly bring certain of these technologies to some of our international mobile carriers.

At this point, when we talk about the government markets in our Government Solutions segment, where we serve large government end users, including those of foreign countries, that require mission critical technologies and systems. Our Government Solutions are primarily sold to U.S.

Department of Defense agencies and primarily consists of C4ISR solutions, that include wireless ground terminals, related support, management and resale satellite bandwidth and information technology outsourcing services.

We engineer, furnish and support ground terminals used for secure satellite base and other line of sight and beyond line of sight communications, as well as related components incorporating government approved cryptological devices and other hardened components for aerospace and defense applications.

Additionally, we provide cyber security services, support and training.

We believe this segment is also a leading provider of communication system elements, such as digital multiplexers, troposcatter modems, amplifiers and frequency converter systems, and RF empowered switching technologies, such as solid state high power broadband amplifiers used in electronic warfare applications and identification friend or foe amplifiers or IFF.

This segment, on a long-term basis, should approximate 50% of our revenue. Like our commercial solution segment, this market is aligned with several large growing end markets. We saw many of our solutions, into what we would call the global C4ISR market, which many third party market studies indicate will grow in the low single digits.

We believe our portion of the market has a higher growth rate, because many of the products we offer relate to satellite and wireless based communication solutions, which we believe is growing faster than the overall market.

Additionally, we believe there is tremendous demand by emerging countries for advanced communication solutions, including troposcatter technologies. We also offer cyber security training solutions.

Let me discuss some of the programs to give you a sense and type of the opportunities in this market; the Army's SIPR NIPR access point program, commonly referred to as SNAP, continues to be a source of business for Comtech.

During the quarter, we received orders for $10.8 million, bringing total funded orders to $40 million, out of the $90 million task order that TCS was previously awarded.

We believe it is likely that the program office is considering an increase in contract ceiling, given their need to acquire additional SNAP equipment and logistic support in the foreseeable future. We believe the Army intends to purchase new SNAP equipment, as well as maintain currently fielded SNAP systems for the next several years.

We anticipate that the Army will initiate a follow-on acquisition for SNAP systems and support in fiscal year 2017. Comtech and TCS have been jointly marketing SNAP 3T Tropo solutions to the Department of Defense for some time.

In the past, sales have been mostly small-scale to select operational units, and to certain test and procurement organizations. Although timing is always difficult to predict, we are optimistic that the Army will begin purchasing these systems in earnest.

The Army has released an RFI for 200 systems, with a formal acquisition expected to be released in the fall. Separately, we have some indications that the U.S.

Marine Corps will use the Army contract vehicle to purchase Tropo systems, and we understand that both the Marines and the Army are collaborating on requirements as well as acquisition strategy. On the cyber training front, we received $13.2 million in orders in Q3, for continued support to the DoD in select National Intelligence Entities.

We also completed development of the next release of our cyber training scoring tool, performance score, which we believe is revolutionary in enabling real time performance based training. It's being adopted by a large trade organization, known as ISACA, which is a major certifying agency for IT and cyber security.

As such, we expect orders for this product to increase over the next 12 months. On the BFT-1 front, in Q3, U.S. Army exercised option year two of the company's three year Blueforce Tracking BFT-1 sustainment contract, and related BFT-1 intellectual property license agreement.

Bookings were $20.3 million, of which $10 million were from the first intellectual license -- final intellectual payment. $10 million was continued support, and $300,000 was for equipment orders. We continue to work with the U.S. Army and ultimately expect to receive additional sustainment contract work to continue perform services beyond March 2017.

Additionally, we believe that the U.S. Army will ultimately purchase the next generation system. Our primary goal now, is to continue to provide U.S. Army with outstanding support. Doing so should position us well to participate in next generation platforms.

Finally, as it relates to our Over-The-Rise microwave solutions, shortly after Q3 closed, we received a $7 million contract to design and install a number of fixed troposcatter terminals for our foreign customer. We are bidding on additional international opportunities in the Middle East, Australia, Asia, South America and Africa.

We have shifted our timing of some of these contract awards to fiscal 2017, and obviously, timing always remains difficult to predict. Nevertheless, I believe, we will receive some significant orders during fiscal 2017, which will contribute to next year's results and beyond.

All in all, let me conclude the conference call by saying I believe our business is poised for growth in 2017 and beyond. I want to express my sincere thanks to the many Comtech and TCS employees who made the acquisition possible.

I am very excited about the future prospects of the combined company, and believe we will make TCS acquisition a rewarding transaction for our customers, our employees and our shareholders. With that, I'd like to proceed to the Q&A part of the conference call.

Operator?.

[Operator Instructions]. And we will go ahead and take our first question from Mark Jordan with Noble Financial. Your line is open..

Thank you. Question relative to the integration expenses; in your press release, I think you stated that you are estimating $24.6 million acquisition expenses through the fourth quarter or through the end of this fiscal year. I believe when the acquisition was made, you are estimating acquisition related expenses in excess of $40 million.

I guess my question is two-fold, one, are you -- do you have any expenses that will fall into fiscal 2017 or so could you quantify it? And secondly, if it's all contained here in the current year, what has changed that calls for a lower level of acquisition related expenses?.

Sure Mark. Let me just -- to clarify and confirm. We are still expecting $48 million of total merger and acquisition expenditures, as we talked about in the press release. Some of those expenditures are effectively capitalized, as part of the purchase price accounting.

So for example, we had a little under $10 million of costs with our secured credit cost facility, which would be capitalized on the balance sheet as part of deferred financing costs. And a portion of those costs were incurred by TCS, prior to the acquisition closing.

So in the January and early February timeframe, some of those expenses were effectively recorded on the income statement of TCS. So when you add everything up, it's about $48 million from a modeling perspective.

But, you're correct, with what you see in the P&L for Q3 and $3.9 million is our current estimate for Q4 that would be it, in terms of what's going to hit the P&L for 2016. At this moment, we are not expecting any of the transaction costs to roll into 2017.

So that would kind of wrap up by the end of our Q4, everything will sort of be wrapped up in a bowtie..

Okay. Thank you for clarifying that.

So then simplistically, that $10 million of capitalized interest costs will flow through, is included in your 5% average fully loaded costs that you talked about in the press release?.

Absolutely..

Okay. Final question for me, relative to the satellite modem business, that's a churns business, a book and ship business.

Clearly, you saw an uptick in order rates, what gives you a feeling that this stabilization or improvement in order rates in the most recent quarter is reflective of the longer term trend that will show improvement?.

So I would point principally to oil price and oil prices are back up a bit. And it seems to me, my observation is that we seem to be very sensitive to the oil prices. So I think that's probably the most encouraging [indiscernible]. I think the dollar exchange rate has stabilized a bit. Those are probably the principal things..

And I guess related to that, how much of those orders those orders are to some extent non-deferrable, because your customers are running up into capacity issues? Is that also something since you have had lot of delays, is that maybe impacting also?.

So, I will answer that two ways. One is, our customers over time have to replace equipment. I mean, they just have to, things wear out. So what happens when things slow down, is there is a build-up in demand. There is pent-up demand for it.

So some of what, I think we are seeing is, is the result of people just -- to a point where you got to start replacing stuff. Oil price is a catalyst for that. I think probably, oil price is more about stability, than it is to absolute number. And so, the outlook for the oil prices I think is, better than it has been quite some time.

I think it’s a combination of two things..

Okay. Thank you very much..

And we will take your next question from Chris Quilty. Your line is open..

Thank you.

Gentlemen, I was hoping you could comment a little bit about the troposcatter Over-The-Horizon pipeline and how you view that? And additionally, if you can talk about the current projects you have running right now, where they stand in a typical sort of two to three year deployment schedule, and what you have in terms of visibility for the next year?.

So on tropo, we have an existing customer in the Middle East that we continue to provide support for, that has been ongoing for some time. On the new orders front, there are several -- I talked about SNAPs, so I won't dwell on that one. But on the international front, there are several significant orders that we have been pursuing for a while.

One of which we just mentioned in the call, and we are open for a couple of those, and it will come through. Those are typically direct contracts. There was one that we were pursuing, that was a FMS sale, but for the most part, they are direct commercial.

Typical period of performance on those things is like two to three years, and then they typically have a sustaining tail for the logistics that goes on for several years after that. So that's sort of the outlook.

The thing that -- the dynamic in the tropo arena that I would mention to you, is the fact that we now have modems that are capable of running at much higher bandwidth. And that enables tropo for a lot of applications that previously they weren't viable for.

So what we have seen lately, is an increase in interest from a lot of places that -- mostly international and the problem is converting that interest into contracts. And that's sort of where we are in the cycle.

Some places can do that very quickly, some places take a long time, because they have to go through extensive procurement bureaucracies, but that's sort of where things stand. On SNAP front, military, I mentioned the RFI. So that's a pretty good indicator that the U.S. government is going to move out on a procurement. So that one is pretty encouraging..

Got you.

And looks like this is the last BFT license rolling through; can you talk about what you see in the opportunities in that business area? I know a couple of years ago, you talked about looking at potential commercial applications for the core technology, and with the TCS acquisition, I think you pick up either some products or capabilities there.

Is there something that you plan on trying to reconstitute and target?.

So on BFT, couple of things. One, irrespective of the license fee, the government is going to operate BFT for some years. I mean, we do anticipate to continue to support that product for the U.S. government. We are also pursuing a couple of international programs that would include version of the BFT-1 transceiver.

Those are in competition, so I don't want to talk too much about them. But we are pursuing those, and they could be significant. I don't know, you mentioned commercial, I don't know if you would call those commercial, those are direct sales to a foreign government.

Other than that, I think the biggest opportunity on the BFT arena is whatever is the follow-on with the U.S. government and the government is going to have some sort of follow-on.

They have had a couple of programs, BFT-2, BFT-2.5, and we are trying to do today is, is to be positioned for whatever the follow-on is, it's not defined as a particular procurement program at the moment. But we know it's coming..

Great. And final question, just on the Heights platform, you seem to have had some success.

Can you characterize either by type of customer or vertical market, domestic, international, where are you seeing traction?.

So Heights is applicable for a variety of verticals. It’s intended for operators, whereas we traditionally had sold components, this is more of a system application. So it enables the operators to control all of the peripheral devices on the network, optimize the network traffic and do that through a single platform that we provide.

That's how to think about Heights. So it’s applicable in all verticals that we serve, so that's M&O, Maritime, whatever, and that's the way that we are going to market with it. Several initial expressions of interest appears to be very much -- a lot of customer interest has been -- do a couple of shows.

We have a couple of demo systems that we are showing to customers, so that's sort of where Heights is at the moment..

Perfect. Thank you..

You bet..

[Operator Instructions]. And there are no more further questions. I would like to turn the conference back to the company..

Great. Thank you. Thanks again for joining us today. We look forward to speaking with you again in September. Have a great day..

And this concludes today's program. Thank you for your participation. You may now disconnect..