Maria Ceriello - IR Fred Kornberg - President & CEO Michael Porcelain - SVP & CFO Michael Galletti - COO.

Tim Long - BMO Capital Markets Mark Jordan - Noble Financial Stanley Kovler - Citi Research Mike Latimore - Northland Capital Glen Mattson - Ladenburg Kyle Magnelia - Jefferies.

Ladies and gentlemen, thank you for standing by. Welcome to the Comtech Telecommunication Corp's Second Quarter Fiscal 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session.

[Operator Instructions] As a reminder, this conference is being recorded Thursday, March 9, 2017. I would now like to turn the conference over to Ms. 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 second quarter of fiscal year 2017. With us on the call this morning are Fred Kornberg, Chief Executive Officer and President of Comtech; Michael D.

Porcelain, Senior Vice President and Chief Financial Officer; and Michael Galletti, our Chief Operating 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 Chief Executive Officer and President of Comtech, Fred Kornberg.

Fred?.

Thank you, Maria, and good morning, everyone and thank you for joining us on this call. As announced yesterday afternoon, we reported our second quarter results of $139 million in revenues, and operating profit of $12.8 million and an adjusted EBITDA of $13.5 million.

Consolidated backlog as of January 31, 2017 was $453.3 million and during the second quarter, we achieved bookings of approximately $130.4 million, with particular strength in our commercial solutions segment.

When I resume the CEO role in September of 2016, the first task or first priority that I gave to our management team was to increase shareholder value. To do that, we must be more profitable, we must be more competitive and we must grow.

Today, I can state to them, 'Please, that the progress that we are making on all three fronts.' First, I have updated our fiscal 2017 revenue target to a range of $570 million to $580 million. This new range reflects an updated reflection and assessment of our decision to focus less on bidding on large U.S.

government contracts with low margin conditions and focus more on pursuing U.S. government contracts for our niche products with higher margins. Second, we have been hard to work initiating and achieving cost reductions across the company.

As such, we believe we will be able to mitigate the bottom line impact of this strategy change and are maintaining out adjusted EBITDA goal for the year of approximately 12% of revenues or $70 million. Although there are still work to do, I believe we're in the right path forward.

I will talk more about our implemented changes in our government solution segment in our overall business in a few minutes. But first, let me turn it over to Mike Porcelain, our CFO to discuss our financial results in more detail. Then I'll come back and provide some additional comments.

Mike?.

Thanks, Fred and good morning, everyone. Consolidated net sales for Q2 were $139 million. These sales include approximately $75.9 million of sales as a result of the TCS acquisition. Of the $139 million, approximately 32.1% were generated from U.S.

government and customers, 32.1% from international end customers and 35.8% from domestic commercial end customers. Net sales in our commercial solutions segment were $82.1 million or 59.1% of total net sales.

During Q2, this segment benefited from sales of our location and messaging based platforms and safety and security technology solutions that we now offer as a result of the TCS acquisition. Sales for TCS products in this segment during Q2 were approximately $37.4 million.

The remainder of the segment sales in Q2 consist of Comtech legacy products, which we now refer to as communication technology solutions such as our satellite earth station products from traveling wave to amplifiers. Our book-to-bill in this segment during the quarter was 1.22.

Bookings for our safety and security technologies and our enterprise technology solutions were practically strong. This quarter included incremental orders for existing next generation 911 contracts and renewables of a long-time customers for some of our mapping applications.

In addition, we received significant bookings during the quarter for our amplifiers that are used in the growing in-flight connectivity market. Shipments of these amplifiers and related revenue recognition are expected to occur in the second half of fiscal 2017. We are also expecting additional orders for the in-flight connectivity market in our Q4.

Backlog in this segment is the highest it has been at any quarter end since our acquisition of TCS.

Based on potential orders in our pipeline and the anticipated release of our next version of our Heights Networking platform which is expected to result in an increase in future satellite earth station cells, we ultimately believe that bookings in this segment will remain strong for the second half of fiscal 2017.

Turning to our government solution segment, net sales were $56.9 million, or 40.9% of total net sales. During Q2, our government solution segment benefited from a variety of new advanced communication solutions that we now offer as a result of the TCS acquisition. These solutions include field support, space components and cyber training.

Sales of TCS products in this segment during Q2 were approximately $38.5 million, with the remainder of the sales in the segmenting derived from the Comtech legacy products, which includes sales of our over the horizon microwave products, solid-state amplifiers and BFT-1 sustainment and support services.

As Fred will discuss in more detail, we are continuing with our tactical strategy shift in this segment.

In this regard, our book-to-bill ratio during Q2 in this segment was 0.53 and reflects the impact of implementing our strategy, a delay in the receipt of a $20 million plus order that we still expect to receive during the second half of fiscal 2017 and a temporary and brief while ordering by the U.S.

government that we believe occurred as a result of the change in the U.S. presidential administration.

Based on the opportunities and our order pipeline, we believe that order flow in our government solution segment during the third and fourth quarters of fiscal 2017 will significantly increase from the level we achieved on our second quarter of fiscal 2017. Now let me give you some color on our operating metrics.

Our gross profit in Q2 of fiscal 2017 as a percentage of consolidating net sales was 38.3% which was similar to what we achieved in Q1. Although there may be some quarterly fluctuations for the rest of the year, we believe the gross margins for the second half in aggregate will be similar to the level we achieved in Q2.

As discussed on prior calls, as a result of the full year impact of the TCS acquisition, anticipated mix changes and lower year-over-year BFT-1 intellectual property licensing fees, we expect our fiscal 2017 gross margin percentage to be lower than the level we achieved last year.

On the operating side, SG&A expenses were $31 million in Q2 of fiscal 2017 were 22.3% of consolidated sales. Research and development expenses were $13.3 million or 9.6% of consolidated net sales.

Our spending consistent of $11 million of spending in the commercial solutions segment, $2.2 million in spending related to the government solutions segment with the rest constituting amortization of stock-based compensation which is not allocated to our two operating segments.

Total stock based compensation expense which is recorded as an allocated operating expenses was $1 million for the second quarter of fiscal 2017 and we still expect that amortization for the year to approximately $5 million. Amortization of intangibles were $6 million in Q2 of fiscal 2017.

Before discussing our operating income and adjusted EBITDA metrics, let me bring you up to date on several TCS IP litigation matters that have been hanging over our heads for a while. During the quarter, there were several positive events.

First, we did settle a large TCS litigation case with a non-cash settlement of approximately $10 million that dented [ph] to our operating income. Cash payments related to the settlement are expected to occur in the second half of fiscal 2017 and are expected to be immaterial.

Second, we did settle a second case in principal with another party who has sued us for patent infringement. The cash payments associated with this settlement are also expected to be immaterial. Third, we vented a final settlement negotiations in regards to another TCS litigation matter.

This TCS case went back to 2012 and have been many court motions going back. Ultimately, we have decided to settle the matters on terms indicated by the court and are negotiating a final settlement as we speak. Like the other set of lawsuits, this settlement is expected to result in an immaterial amount of cash payments.

We are really pleased with the progress we have made on the TCS intellectual property matters and hope to avoid such in the future. On a GAAP basis, our consolidated operating income was $12.8 million in Q2 of fiscal 2017. Excluding the impact of this non-cash settlement, operating income would have been $2.8 million or 2% of sales.

On a segment basis, operating income at our commercial solution segment was $5.9 million or 7.2% of related segment net sales and operating income in the government solution was $2.3 million or 4% of related segment net sales. Our adjusted EBITDA which excludes the $10 million favorable settlement was $13.5 million or 9.7% of consolidated net sales.

Adjusted EBITDA on our commercial solutions segment was $12.7 million or 50.5% of related sales and then our government solution segment was $4.7 million or 8.3% of relating net sales.

Given our overall sales and spending plans for the remainder of fiscal 2017, we expect that adjusted EBITDA in dollars and as a percentage of net sales will increase in Q3 and Q4 as compared to Q2, with Q4 still expected to be the highest quarter by far. Let me now talk about our taxes, interest expense and our balance sheet.

Looking forward, the company currently expects that its fiscal 2017 effective tax rate excluding discreet items will approximate 35.5%. Interest expense was $2.9 million in the second quarter of fiscal 2017 and principally reflects interest on our secured credit facility.

Base on a tight terms in amount of outstanding debt including capital leases that we currently expect, we estimate that our effective interest rate including amortization of deferred financing cost will range from 4.5% to 5% of total debt. On a cash basis, the issues rate percentage is lower.

At January 31, 2017, we had $63.1 million of cash and cash equivalents and we generated cash flows from operating activities of $17.7 million. I want to point out here that the $10 million non-cash operating income take up that we took in Q2 did not result in cash proceeds to us. The cash flows of $17.7 million were all organic.

Clearly, this was a spectacular quarter of cash flow generation and reflects a concentrated effort across our company to better-manage working capital. Total debt as of January 31, 2017 excluding on amortized deferred financing cost was $253.8 million.

Looking forward, we continue to expect to generate cash flows from our operating activities during the second half of the year. However, because our revenue on adjusted EBITDA will be somewhat backend loaded, we may see some work in capital increases towards the end of the year.

Given our business outlook and our strong cash flows from operating activities, we maintain compliance with our senior credit facility and we believe we will do so for the remainder of the year.

As a point of reference, our leverage ratio of trailing 12 months adjusted EBITDA to net debt was 2.75x as compared to a maximum allowable amount for Q2 of three times -- so we have some flexibility. This maximum allowable ratio of 3.0x will not change in Q3 and will decrease to 2.75x for Q4.

We are -- in order to obtain increased flexibility and other enhancements -- continue to have substansive discussions with our financial lenders. We believe we are on track to obtain additional flexibility, not only for 2017, but 2018 and beyond and hope to announce some enhancement to our credit facilities soon.

Adding it up all in all, it was a really good quarter. On the bottom line, we delivered GAAP diluted EPS of $0.28 per share in Q2 of fiscal 2017, excluding the $10 million non-cash adjusted related to the litigation settlement, our EPS would have been a penny. Now, let me turn it back to Fred who will discuss our business in further details.

Fred?.

Thanks Mike. As I mentioned on our last earnings call in December 2016, we believe our business is at a turning point and I'm really excited about the growth opportunities that are ahead of us. Let me give you some color on what is happening in each of our segments.

In our commercial solutions segment, we are leading provider of satellite communications networks and products such as satellite earth station modems, up and down frequency converters and solid-state and traveling wave tube amplifiers.

We're also a leading provider of public safety systems such as the next-generation 911 technologies and enterprise application technologies such as messaging and trusted location-based technologies. The commercial solution segment on a long term basis should approximate by 50% of our revenues and is aligned with several large-growing end markets.

Our satellite-based communications projects participate in the satellite back haul and network services market. In the satellite modem area, we remain the undisputed leader in single-channel per carrier driven primarily by our proven ability to deliver the most bandwidth efficient modems.

In the last few years, we have also focused on marketing, and research, and development of our new Heights Network Solution for use with the new high throughput satellites. Just this week, we announced our next version of our Heights Dynamic Network Access technology or HDNA at the Satellite 2017 Exhibition in Washington DC.

At the show, we introduced our new HDNA technology, which we believe offers an uncompromised step change and performance and exceptional end user quality of experience.

Heights or HDNA is intended to meet the demands of today's traditional Fixed Satellite Services or FSS while providing distinct advantages for those already using or considering migrating to high throughput satellite systems. This HTS is an entirely new market for us, but one which is much larger than our traditional SCPC market.

As I said, we've been developing Heights now for a couple of years and believe that we will begin to see tangible rewards for this effort in the second half of fiscal 2017 and beyond and as more and more users start to operate over the new HTS or high throughput satellites.

Another area we're excited about is the inflight satellite-based connectivity market. Our solar state power amplifiers help enable commercial airlines to provide in-flight connectivity services to their passengers. Here, we are a qualified supplier on the go-go system.

This is a new and growing market for us and we believe this area will be a significant revenue contributor for Comtech as we rev up shipments in fiscal 2018.

On the public safety side, our solutions include 911 call writing for wireless, 911 routing over voice or over internet networks and the next-generation 911 solutions for state and local public safety operations.

We have built partnerships with key system integrators such as Motorola and General Dynamics and we're actively participating in multiple RFP responses. We believe we're seeing the benefit of our overall strategy as our pipeline is full and we move into the last stages of the selection process for several states.

At the same time, we continue to drive our multi-year next-generation e-assignment deployment for the State of Washington and are continuing to deploy the next generation systems in California, Tennessee, Indiana and Florida.

We believe that this market will continue to grow for many years ahead and that the current political environment will be helpful to facilitating such growth. In fact, just a few weeks ago, two U.S. senators -- Senator Bill Nelson of Florida and Senator Amy Klobuchar of Minnesota -- introduced the draft bill called the Next Generation 911 Act of 2017.

This draft bill addresses critical needs for the 911 community and recognizes that a modernized 911 system is a national public safety and Homeland Security priority. If this bill is passed, additional federal grants would become available to local communities across the United States. No doubt this could be very helpful to our growth plans.

Turning to our enterprise and trusted location solution product line, here our solutions include GPS-enabled software which we provide for Verizon's navigator services which makes it easier for users to find, locate and get directions to various points of interest.

We also offer text messaging solutions and believe we are one of the leading providers of text messaging in North America, providing such service to Verizon and other carriers.

We also carry a great platform and high performance toward messaging service or SMS routing including application programming interfaces or APIs for cloud messaging centers, wireless intelligent gateway and a feature-rich operator-grade messaging platform.

We also believe that we can also bring certain of these technologies to international mobile carriers.

We continue to market products and solutions and are pleased with our customer feedback from our newly released location studio trademark system, which was recognized recently by the Cellular Telecommunications Industry Association or CTIA as the winner for the Industrial Internet of Things Product of the Year.

Looking forward, we anticipate future location studio-enabled applications for us in a connected car, the mobile OEM and data analytics domain. At this point, let me address the government markets within our government solution segments where we serve large government end users that require a mission-critical technologies and systems.

Our government solutions are primarily sold to U.S. Department of Defense agencies and primarily consist of C4ISR.

Our solutions include satellite, line of sight and Troposcatter ground terminals -- management and sale of bandwidth and RF power and switching technologies that are used in electronic warfare applications and identification friend or foe applications.

As we announced back in October, we continue to implement the tactical shift in strategy to focus less on larger commodity service contracts with more emphasis on winning contracts for our niche products with higher margins.

Earlier in the week, we announced that Michael Atcheson has joined the company and will now oversee the TCS legacy command and control technologies group. Mike will be leading this tactical shift in strategy going forward. Rising to the rank of colonel in the U.S.

Marine Corp, Mike brings more than 25 years of military and civilian contractor experience and has led a large team of deploying complex high tech defense systems. I'm pleased that Mike has joined our company. Mike's immediate focus is on the number of large opportunities that we are working on including the SNAP VSAT program. The U.S.

Army intends to purchase new SNAP equipment and maintain their fielded SNAP systems for the next several years. We are the incumbent on this contract and getting ready to bid on the next large contract award. Additionally on the BFT-1 front, we continue to work with the U.S.

Army and ultimately expect to receive additional sustaining contract work to continue to perform services beyond March 2017. Based on customer feedback we're getting, we believe the extension of our contract could be in a range of $20 million to $40 million over five years.

This contract is expected to be placed by March 31 of this month to ensure continued service for the U.S. Army. We also believe that the U.S. Army will ultimately purchase the next generation system. A primary goal here is to continue to provide the U.S. Army with outstanding support.

Doing so should position us well to participate in the next generation platform. In a space components technology group, we have several opportunities -- supporting the Japanese exploration agency or otherwise known as JAXA.

We're expecting an award for $20 million, plus during the second half of fiscal 2017 for the upgrade of JAXA's Christmas [indiscernible] down rage tracking ground stations to accommodate the upgrade of existing fleet of launched vehicles.

On the cyber front, we continue to see interest from the VOD and select national intelligent entities for a cyber-training performance scoring tool, which enables real-time performance-based training. As it relates to our over horizon microwave, or troposcatter solutions, there is no doubt that the U.S.

Army now and the Marines have large and critical needs for troposcatter terminal replacements, which we refers to as the Track 170 [ph] replacements. There is now finally a program of record. We have been waiting for this opportunity for a long time and given the size of the program, the U.S. Military intends to seek proposals for the industry.

In summary, over the course of the years of successful in this program, we could generate a couple of hundred million dollars of revenue for Comtech. Based on feedback we have received, we understand the draft RFP will be sent to industry shortly with the final RFP in May 2017. The ultimate award would be some time in 2018.

Given our market leadership and proven history of working with the army and the marines we believe we are well positioned to With that, let me remind you that yesterday, our board of directors declared a dividend for the third quarter of fiscal 2017 with $0.10 to common share payable in May 19, 2017, to shareholders of record that the close of business on April 19, 2017.

Due to dividends remain subject obviously to compliance with financial covenants under our credit facility as well as board approval. Now, I finally would like to close with that I am very pleased with our progress and performance to date. I'm excited about Comtech's future and I believe our best years are ahead of us.

Now, I'd like to proceed to the question-and-answer period.

Operator?.

[Operator Instructions] I'll take our first question from Tim Long of BMO Capital Markets. Please go ahead..

Thank you. Two questions if I could -- first the change in strategy on the government side focus on a little bit more on profitability. I get you for the 12% adjusted EBITDA margin this year, but when should we start to see growth margin benefit and could it be more margin leverage as that strategy plays out into the next few years? That's number one.

And then secondly, Fred, I think you mentioned commercials should ultimately be about 50% of revenues. It's running higher than that now and the government seems like there will be some more focus on profitability.

So how does that 50-50 split work? Is that incumbent on some of these really large troposcatter deals you're talking about? Or what else is going to help offset the strategy changing government to bring that up to closer to half the business? Thank you..

As far as the strategy, as I mentioned in our last call and prior to that, we're really focusing now on government programs more so for our niche products which carry a very good margin. We're obviously not participating in some programs that the TCS Company would have participated in the low margin service contracts.

I think what you are seeing is our down draft in the government business revenues will really occur during 2017 as the same time that we're down drafting in that area and not participating, we are looking and participating in programs that will start or be placed in 2018.

I think as far as growth margin improvement and revenue improvement, I think will start to see the government improvement in that side starting in 2008. As far as the revenue being 50:50 I think our strategy is to maintain that revenue at 50:50 obviously.

Today we have had much more success than the commercial satellite solution segment than we have had with the government solution segment.

But I think we see that, although we see that segment growing in 2018 as well, we see the government business catching up specifically in the area, one area that you mentioned obviously is the Troposcatter business. We have been participating with the army and marines in Tropos area for years. And it's never been fully funded.

Well there is now a program of un-wreck it and the funding associated with it. We will get into $200 million to $300 million for us over five years. Will the immediate impact be that great? Probably not. I think more likely we will see 2018 maybe to the tune of $30 million to $35 million and then the rest of the years to follow. .

Thank you. .

And we will take our next question from Mark Jordan at Noble Financial. Please go ahead.

Good morning gentleman. Quick question on Tropo. You are talking about the RFP thing out near term here.

Do you know if they are going to specify or acquire backward compatibility of Track170?.

It's a good question Mark. I think, we certainly hoping they do because we have supplied our modems into the Track170. I believe the government because it's a lodge program, we will try to not make specific backwind solutions available similar to what we had with the BFT2 situations. So it's something that we are looking at.

I think as far as the RFP coming out I can add some more color for you. We expected momentarily but then we also know that the things do slip. We do think that in May, RFP should be up.

What will happen is as the RFP comes out the army has decided to request all bidders to supply through Tropo terminals through actual field testing to make sure the Tropo terminals will work.

I think that probably puts us at a very good advantage because we have already fielded Tropo systems with the marines and with the army that we have supplied before and some of us our systems are actually nomenclature so we feel pretty good about that.

But after the field testing trial of about 8 weeks the army will then I suspect and this is just my speculation, they will come back with a best or final and go on from there with a project contract probably in 2018. .

Okay. Michael you have talked about working with the banks to gain greater flexibility which could allow you to do other [indiscernible] and etcetera. On last quarter's call you also said that you thought that getting out of an agreement was fairly imminent.

What seems to have then slipped, is this an issue that is not quite as pressing now or is there some specific sticking point?.

Not exactly, it's a good question mark.

It's the latter given the strong performance that we had during the quarter, there's not an urgent need for us to go out and rush and do amendments so we want to get the right agreement for us, not just the short term but 2018 and beyond so out conversations have been on a week to week basis with the banks as we try to come up with an agreement that makes sense for them and makes sense for us.

We think that we are pretty close to doing that, you know the banks have their own approval requirements that they got to go through so our hope is that we would announce some soon that will give us better flexibility than what we were thinking three months ago. .

Okay. Final question from me. Obviously, good news on the free litigation cases that seem to be settled with sort of nominal cash impact, are those major cases that were outstanding.

What other litigation do you have out there that could be meaningful?.

We did resolve three cases this quarter including the Mississippi case where there was a family that got involved with a 911 situation so we have one outstanding case that we are continuing to work towards an aggressive settlement position. When I say aggressive, we want to do it quick.

We obviously need the other party to do so but I think ultimately we don't think that a settlement would have a material impact on our financial statements. We kind of think we haven't bounded but we haven't been able to come to an exact settlement with the third party yet. But our hope is soon but we need that third party to agree. .

Okay. Thank you very much. .

And we will take our next question from Stanley Kovler of Citi Research. Please go ahead. .

Hi, good morning and thanks for taking my question. I just wanted to ask you if we should be thinking about any potential impacts on your business from the new Persnip program that is being rolled out particularly on the 911 piece. Is there going to be any pull through on that build up on the wireless side? And then I have a follow up thank you..

Yes so in terms of the First Net's program, I think we used kind of ancillary or tangent to our business. We should get pulled through in. It's not going to change our existing business and obviously as the system becomes more important overall, all of the systems need to connect and so we do think that there we will pull through.

The First Net program in totality is something that's been talked about for years and years and is extremely complicated and extremely long cell cycle but there are other companies talking about it having some immediate impact to their numbers.

We still see our best case for growth is on the next gen 911 side whereas companies want to go a text messaging, video over 911 and overall next gen 911 system. That's where we see the immediate growth but First Net overall should benefit us. .

Thanks and could you just provide a little bit more detail on the second half gross margins.

Obviously, we previously expected gross margins to come back in the second half of your fiscal year, more so related to the government business but what should we think about as far as gross margins on the commercial side and with the new programs you have in place for 2018 potentially with Troposcatter programs, could we start to see gross margins get back to over 40% at some point? Thank you..

Sure, Stanley so I would tell you to think about our gross margins more in aggregate than by segment because we do have some inter-company manufacturing that goes on between the segments.

Just a couple of comments, on the government solution segment side we are actually likely to see a down drift in gross margins because of the wind down of the BFT intellectual property thing which by Q4 will no longer be in our financial results so that's a $2.5 million drop if you will. That's the negative.

On the good end we think we are able to absorb it in the numbers given the growth in the other areas and the bookings and margin profiles that we are seeing in our backlog. We would love to get to 40% gross margins in total.

That's certainly a near term target for us and we obviously need the bookings and executions to come in but we did do 38% in change this quarter so it's not a stretch for us to get to 40%.

In our commercial segment Stanley, we have pretty good contribution margins so when we get incremental revenue it's even possible that we can pick up almost 45% to 50% contribution margins, most of that does appear in the gross margin line.

So the way to think about our business is incremental revenue drops to the bottom line real quickly and if you think about the way we are giving you our projections you kind of see that in Q4 that this incremental revenue, we expect our Q4 revenue to be the peak quarter of revenue in this year and resulting adjusted EBITDA margin for the most part is coming from that incremental revenue.

.

Thank you. And I guess if I could just follow up on, could you give us an update on your other verticals like the manufacturing or the energy verticals and what you are seeing in those areas? Thank you very much. .

Yes, when you say the energy side Stanley I am assuming what we are seeing on the international market side on our satellite earth station business. We do see some continued challenging conditions in the international markets. Although oil prices have rebounded the dollar continues to be strong overseas.

You know from that perspective our international market is still struggling. On the other hand there has been this huge pent up demand that's been built as a result of the high products so we hoped that this Washington D.C.

satellite show which is really, it's one of the premier show in our specific space was ultimately result in the orders and based on the feedback we are hearing, we seem to be on track for that to occur.

In terms of the manufacturing vertical, I am assuming you referring to the somewhat of the connected car market that we are involved with on the enterprise base and again it's a longer term play.

The manufacturing vertical using that is not a material portion of our business but it is a growth area that we are focusing in and you know that will take some time to play out. .

Thank you. .

And we will take our next question from Mike Latimore from Northland Capital. Please go ahead. .

Hey thanks. Very nice quarter there guys.

Just looking at the commercial segment for the second; the 911 services within that, is that revenue area growing? And then second did you say you had a kind of big renewal contract in the quarter?.

Sure, yes. The revenue in the 911 portion of the business that we call safety and security is growing and it's growing very nicely.

During the quarter in addition to some contract renewals that occurred during the quarter we actually did get some additional work related to the state of Washington and as that contract scope continues to increase which is one of the nice things about these large contracts that as you get more deeply involved with the customer, things become bigger and more important and you can get to pick up some additional work.

So yes, the revenue is growing and the opportunity is growing, we see some good things ahead of us. .

And the Washington deal do you expect, how is the deployment going there? Do you expect an uptick in deployment in the fourth quarter?.

The answer is yes and it is reflected in our guidance and in our thinking. You will see that in our Q4 which one of the reasons is that the Q4 revenue and adjusted EBITDA is expected to be higher. That stuff is in our backlog and based on the timing and deployment and the way revenue recognition works, we should see that benefitting Q4. .

And then Mike did you say you expect EBITDA to grow sequentially through the last quarter?.

Yes, we are expecting. I mean we did $13.5 million of EBITDA in Q2 and we are expecting just a few million dollar increase in Q3 with significant EBITDA in our Q4 as the revenue comes in. .

And last, there was a litigation settlement, do you see a notable drop in the legal costs next quarter?.

Yes absolutely true which is why our EBITDA in the second half is going to be better. We still have that one case that's out there where spending still continues but yes exactly as a result of the settlements of these lawsuits we are expecting our legal spends to drop absolutely. .

Thank you..

And we will take our next question from Glen Mattson of Ladenburg. Please go ahead. .

Hi, thanks for taking the question.

You used to quantify that in the past, the litigation expense, what it would be for the rest of the year? Do you do that still?.

Well we have thrown that number somewhere between $5 million and $10 million and we have not been specific about it because we obviously we didn't want the other party to get a sense of how we were looking at the cases, so we are down to sort of one case. It's obviously, will be on the lower side of that number is the way to think about it.

But there is definitely a drop in spending to the first half to the second half..

Okay. Great and then on the next gen 911, interesting comment, that you are in the late stages of selection for it.

Can you talk about some of the dynamics that are going on there? Perhaps your partnership with Motorola and GB are helping but some of the reasons why you think you are going to win or what the competitive landscape is as you look to close those deals?.

Generally, I think we are partnered with as you have mentioned, Motorola and GB and typically the third bidder is usually someone like AT&T so we kind of have two-thirds of a chance of winning in these contracts. And all of these areas in the pipeline, you can assume that all three of those prime contractors are still involved. .

Okay.

So is it, are the service levels about the same and you are competing on price in some cases or is there competitive advantage out of it you think?.

The competitive advantage is in different reach of our partners. But I think it's not a total let's say qualified bid and low price, each bid is different. .

Okay.

And then I guess on the, did you see some are renewal for mapping or was that with your largest customer?.

Yes..

Okay.

Was there a multi-year deal, year-to-year, how does that work?.

The rule is optional renewals and it is on a year-to-year basis. .

Okay, great. Thanks guys. .

We will take our next question from Kyle Magnelia from Jefferies. Please go ahead..

Hi, Thanks this is Kyle for [indiscernible]. Just wanted to ask a little bit more about your segments and how they interact for the rest of the year for you. Specifically in light of your revised guidance.

Would a majority of that revision come out of the government's solution segment, given your commentary about transitioning away from the lower margin revenue and I guess could there also be some additional growth enquiry commercials so the step down in government might be even more than the $25 million than the difference in your guidance?.

Yes, Kyle so most of the revenue assessments we have made is really in the government side of the camp. We are expecting our sales in Q3 to be slightly lower than Q2 and that will be in the government segment.

We are expecting our commercial segment to be the same or slightly higher in Q3 with incremental increases in Q4 most of that coming from the H products that we are expecting to deliver in Q4 along with the inflight entertainment amplifiers that we have in our backlog.

So the backlog is short of supporting a trajectory if you will of commercial business sort of being slight similar to what we did in Q2, slightly higher in Q3 with significant increase in Q4.

Our government side is kind of saying slightly lower n Q3 with a big pick up in Q4 and again a lot of that is supported in back log already, given that we have $453 million in our backlog at the moment, we expect obviously incremental bookings n Q3.

The $20 million order that we are expecting shortly and there's all other stuff that we expect to incur in 2017 that will also result in revenue in Q4. .

Okay, thanks. And then I believe you mentioned earlier that the government solution segment may actually have lower margins in the back half of the year than in the beginning because of the DIT license revenue coming up.

I am just trying to reconcile the lower revenue versus the re-confirmation of your EBITDA guidance and are there any other items at play that we should be thinking about?.

Sure again same comment and again think of it from an EBITDA perspective. Our EBITDA in our government segment will be impacted as that IP fees sort of rolls off.

But offsetting that will be the incremental revenue from these contracts in Q4 so again from a segment perspective we are expecting a drop in EBITDA in our government segment in Q3 before it increases to Q4 for Q4 being our peak. On the commercial side we are expecting sequential growth in EBITDA.

So even though we are expecting our revenue in our commercial segment to be the same or slightly higher in Q3 was increased further in Q4 and EBITDA will follow along that same trajectory.

During the quarter we have also made cost reductions, and so those cost reductions are not yet reflected in our Q2 results so to speak and you will see it will come into play in Q3 and Q4.

We know which is why I think earlier in the call if you think about Q3 in total we did $13.5 million of EBITDA in Q2, you can think of Q3 being higher by a couple of million on the EBITDA line in aggregate with the rest coming in Q4 supported by our backlog and in the timing of the stuff that we have been talking about..

Okay.

Can you give an instance once you have gone into a normalized steady state of business once the lower margin governor of it comes out, how much of a gross margin impact there might be in the longer term, is it like 200 basis points, is it more, is it less?.

Well, I think the way I will say this way is we still need some time for it shake out. We are targeting a spread mentioned 12% adjusted EBITDA margins total.

If you look at it by segment, commercial segment did 15.5% EBITDA in Q2, we think with incremental revenue and incremental profit we can get that close to 20% and that's not a crazy number and if you look at Q4 of 2016, we did 19.3% adjusted EBITDA margins, we do need the revenue to come in to achieve that but that's the way we are thinking about it.

IN government solutions segment there's a lots of blended mix, could we get to a 10% margin basis that's not unreasonable and so obviously on a longer term basis we would be, we would certainly say that we would like to be higher than 12%.

We are not going to put out a number at this point, we need these contracts to come in and still work through our cost reductions more specifically, but in aggregate we have a longer term plan to achieve higher than 12% adjusted EBITDA margins but that's the number we are shooting at right now and that's what we would like to achieve that first. .

Okay. Thanks a lot. .

It appears that we have no further questions at this time. I would like to turn the call back over to the company. .

Okay. I would like to thank everyone for joining us today and we look forward to speaking with you again in June. Thank you very much. .

This concludes your teleconference. Thank you for your participation. You may now disconnect..