Ladies and gentlemen, thank you for standing by. Welcome to the Comtech Telecommunications Corp. Third Quarter Fiscal 2019 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, June 6, 2019.

I would now like to turn the conference over to Mr. Jason DiLorenzo of Comtech Telecommunications. Please go ahead, sir..

Thank you, and good morning. Welcome to the Comtech Telecommunications Corp. conference call for the third quarter of fiscal year 2019. 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 Operating Officer; and Michael Bondi, 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 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 Securities and Exchange Commission filings. I am pleased now to introduce the Chief Executive Officer and President of Comtech, Fred Kornberg.

Fred?.

Thank you, Jason. Good morning, everyone, and thank you for joining us on this call. This morning, we will be discussing our results for our third quarter of fiscal 2019. As you can see from yesterday's press release, our third quarter results excelled on many fronts.

We continue to generate strong operating results, closed on the acquisitions of both Solacom and the GD 911 business and we are well on our way to making fiscal 2019 another successful year.

In fact, given the successful execution of our business strategies to date, we have increased our fiscal 2019 revenue goal to be approximately $660 million and increased our 2019 adjusted EBITDA goal to be $90 million. Both of these metrics are approximately 15% more than the amounts we achieved last year.

As I mentioned before, our third quarter results exceeded our expectations. Our business momentum remains positive and our pipeline of opportunities remains strong. In fact, if order flow remains strong as it has and we achieved all of our fiscal 2019 business goals, it is possible that actual results could be higher than our targeted amounts.

Now I'll turn it over to Mike Bondi, our CFO, who will provide a discussion of our third quarter financial results and some details about our fiscal 2019 guidance. Then Mike Porcelain, our CEO, will provide a discussion of our business segments as well as some initial thoughts about fiscal 2020.

And then I'll come back before opening up to questions and answers. And I'll transfer it now to Mike..

Thank you, Fred, and good morning everyone. As announced yesterday afternoon, our net sales in Q3 of 2019 were $170.4 million, our GAAP operating income was $11.3 million and our adjusted EBITDA, a non-GAAP financial measure, was $24 million. From a geographic perspective, net sales to U.S.

based customers were 73.6% of total net sales with 26.4% to international customers. Bookings of $331.2 million for the third quarter were truly remarkable and resulted in a consolidated book-to-bill ratio of just under 2.0. Both our Commercial Solutions and Government Solutions segments achieved book-to-bill ratios in excess of 1.

We also finished the quarter with record high consolidated backlog of $747.1 million and when you include the unfunded portions of multi-year contracts, including IDIQ contracts that we have received, we have more than $1 billion of visibility into future revenues.

Our gross profit percentage in our third quarter of fiscal 2019 was 37.8%, which was slightly higher than the 37.3% we achieved in Q2 of fiscal 2019. The increase from 37.3% to 37.8% is largely due to a more favorable product mix occurring in our Government Solutions segment.

For fiscal 2019, we expect that our consolidated gross profit percentage will likely approximate a little north of 37%. SG&A expenses were $33.4 million for the three months ended April 30, 2019, or 19.6% of consolidated net sales.

SG&A expenses include $2.5 million of estimated contract settlement costs related to an ongoing repositioning of our Enterprise Technology solution offerings. For the year, SG&A expenses are expected to approximate 20% of net sales.

Research and development expenses were $13.5 million for the third quarter of fiscal 2019 or 7.9% of consolidated net sales.

Of the $13.5 million, we spent $11.6 million in our Commercial Solutions segment and $1.8 million in the Government Solutions segment with the balance representing the amortization of stock-based compensation, which is recorded in our unallocated segment.

For the year, we expect R&D expenses to be higher in dollars, but lower than the percentage we achieved in fiscal 2018 due to the expected increase in fiscal 2019 net sales. Total stock-based compensation expense during Q3 of fiscal 2019 was $1.1 million and for fiscal 2019 we expect stock-based compensation expense to approximate $12 million.

The ultimate amount will be dependent on the finalization of FY 2019 incentive awards, which are anticipated to be largely awarded in the form of fully vested but restricted stock units.

Like we did for the past two years, we believe these awards align our employees and executives with shareholders as these awards cannot be sold for at least a one year period.

Amortization of intangibles was $4.5 million in the third quarter of fiscal 2019 in light of the closing on the acquisition of the GD Next Generation 911 business, we now expect intangible asset amortization for Q4 to approximate $5.2 million and for the fiscal 2019 period to approximate $18.3 million.

In aggregate, our consolidated GAAP operating income for the three months ended April 30, 2019 was $11.3 million, or 6.6% of net sales. For the first nine months of 2019, we achieved GAAP operating income of $31 million or 6.3% of net sales.

Excluding the $2.5 million of estimated contract settlement costs and $1.7 million of acquisition plan expenses, our consolidated operating income for the third quarter of fiscal 2019 would have been $15.5 million, or 9.1% of consolidated net sales.

Looking forward and inclusive of $2.2 million of additional acquisition plan expenses and estimated contract settlement costs in the fourth quarter, we believe that we will finish fiscal 2019 with GAAP operating income as a percentage of consolidated net sales of around 5.5%.

Excluding all estimated contract settlement costs, acquisition plan expenses, the favorable settlement of intellectual property litigation and facility exit costs, operating income as a percentage of consolidated net sales for fiscal 2019 is expected to approximate 7%. This represents an increase from the 6.2% we achieved in fiscal 2018.

Our adjusted EBITDA was $24 million, or 14.1% of consolidated net sales for the three months ended April 30, 2019. Adjusted EBITDA in our Commercial Solutions segment was $16.7 million or 18.6% of related net sales. Adjusted EBITDA in our Government Solutions segment was $11.3 million, or 13.9% of related net sales.

Assuming we achieved our fiscal 2019 goals of $660 million in revenue and $90 million of adjusted EBITDA. Adjusted EBITDA as a percentage of consolidated net sales will be similar to the 13.7% we achieved in fiscal 2018. Now, let me talk about interest, taxes, EPS, cash flows and our balance sheet.

Interest expense was $2.2 million for the third quarter of fiscal 2019. For the year, we expect interest expense to approximate $9.4 million. On the tax side, excluding discrete items of $600,000 in the third quarter of fiscal 2019, our effective tax rate was 23%.

On the bottom line, GAAP net income was $7.6 million, or $0.31 per diluted share for the third quarter of fiscal 2019 and $18.9 million, or $0.78 per diluted share for the nine months ended April 30, 2019.

This quarter we are providing comparative non-GAAP metrics to give investors a better sense of our improved operating performance since fiscal 2018. Excluding acquisition plan expenses, estimated contract settlement costs and discrete tax items, our non-GAAP net income for Q3 2019 was $10.3 million, or $0.42 per diluted share.

And for the nine months of fiscal 2019, non-GAAP net income was $25.4 million, or $1.05 per diluted share. The year-to-date non-GAAP metrics for the nine months are over 200% higher than the comparable non-GAAP metrics for the comparable period of the prior year.

For the full year, we expect our fiscal 2019 non-GAAP EPS to be $1.22, which would represent a non-GAAP EPS growth rate of 62.7% when compared to the $0.75 we achieved in fiscal 2018. One of the best ways you can see the strength of our third quarter and year-to-date performance is to look at our GAAP cash flows from operations.

Here our cash flows were extremely strong at $40.8 million for the third quarter of fiscal 2019 and $53.8 million for the first nine months of fiscal 2019.

In fact, our balance sheet at April 30, 2019 reflects $45.2 million of cash and cash equivalents and our total debt outstanding was $175 million, despite the fact that we spend $35.9 million for the acquisitions of Solacom and the GD Next Generation 911 business during the quarter.

Although there are a number of things that can shift both ways, at the moment, we expect operating cash flows for the fourth quarter to be approximately breakeven. So as we stated in our last conference call, we expect $50 million or so of GAAP cash flows from operating activities for fiscal 2019.

Now, I will hand it over to Mike Porcelain to provide some recent developments and additional color for each of our two business segments.

Mike?.

Thank you, Michael. Clearly based on our strong operating results, we believe our business strategies including our acquisitions are paying off. Let me give you some perspectives by segment. First, net sales on our Commercial Solutions segment were $89.6 million this quarter.

Bookings in this segment were exceptionally strong coming in at $230.6 million with a book-to-ratio of 2.57. Our book-to-bill ratio includes the benefit of a large $100 million plus Next Generation 911 award. This quarter was a terrific one for our satellite earth station product line where related quarterly bookings were the highest this year.

It was also an exceptionally busy quarter for HEIGHTS bookings and product introductions. HEIGHTS orders this quarter include awards from SES networks for equipment to support its global mobility services and from Claro Argentina to connect world communities for cellular backhaul. These are important and great customer references.

As mentioned in the past, although HEIGHTS products have a long sale cycles, I am pleased to state that we are achieving our fiscal 2019 goals for this product line. In fact, bookings through the first nine months of fiscal 2019 have exceeded that for all the fiscal 2018. Given market perception for HEIGHTS is favorable, we continue to invest in R&D.

And this quarter, we announced an expansion of the HEIGHTS product line with a new low cost high performance H-Pico Remote Gateway. This new product allows us to expand our addressable market and allows us to sell to smaller customers, who have a need for heights performance but at a lower cost.

Given the number of new high-throughput satellites, or HTS satellites they sometimes referred to that are launching and plan, we believe this product line will contribute to sales growth for our satellite earth station product line for many years ahead.

Now let me turn to our Safety & Security Technologies solution line where things are going very well. In fact, irrespective of the acquisitions of Solacom and the GD 911 business, sales for Q3 of fiscal 2019 were higher than any quarter since we first acquired the TCS business. No doubt, we are truly excited about our acquisitions.

Both of them are already having a positive impact. In fact, just before the quarter ended, we did receive a $100 million plus Next Generation 911 award. This five year contract valued in excess of $100 million is to develop, implement and operate a Comtech Next Generation 911 emergency communication system for the Commonwealth of Massachusetts.

This system will consist of a secured cloud based – cloud IP based Next Generation 911 system that we are working to improve the existing system providing best-of-breed solutions to this customer. Let me give some color on this important contract win and the GD 911 acquisition.

For many years, General Dynamics successfully served as the prime integrator for this customer, and we played a small role on this prior contract that is expiring in August 2019.

GD recently completed a large multibillion-dollar military acquisition and they wanted to focus on other markets, so we began working with the Commonwealth and GD to convince this customer to assign the existing contract to us and award us a new five-year contract. It took a lot of work and a lot of meetings.

Ultimately, after nine months or so of effort, we were successful and we were awarded the contract. As such, in order to fulfill this new contract, Comtech agreed to purchase GD state and local government 911 business and immediately hired 60 employees.

This was a really nice acquisition for us, and we are pleased to welcome the many talented employees who have now joined Comtech. Additionally, we want to publicly thank our own employees, our partners and, of course, the Commonwealth. This $100 million-plus win is very important.

First, it solidifies our market leadership for Next Generation 911 systems. When viewed in the context of the existing NG-911 system that we operate for the state of Washington, this contract award gives us important and well-respected customer references on the East Coast and on the West Coast.

Second, because these systems are extremely complex and critical, customers are reluctant to change vendors. Thus, we hope to generate annuity type or repeat revenue for many years. Finally, the acquisition enables us to provide more integrated NG-911 solutions to state and local public safety agencies.

In fact, we are focusing our efforts on this already. Since the closing of the Solacom and GD acquisitions, we have been chasing a number of large promising opportunities in other states. And over time, we believe we will win more than our fair share.

Given all of this activity, let me spend a few moments talking about existing competitive and customer dynamics in the 911 market and how we intend to compete and grow. First, as a reminder, Comtech first entered the 911 space in February of 2016 with the acquisition of TCS.

Now with the recent acquisitions, we are clearly a market leader in this space. To date, customer reaction to the Solacom and GD 911 acquisitions have been extremely positive. We believe customers understand our strategy, and interest in our solutions are increasing.

We continue to spend significant R&D funds in this area and are focusing on developing integrated solutions that work with not only our products but others as well. On the competitive side, there has been various consolidation within the industry.

Not only did Comtec acquired two companies, but Motorola, our largest competitor, has purchased several companies in the call-handling space, and AT&T continues to partner with West Corporation. Given that we have a very small market share of call handling today, we believe we can grow as systems are being refreshed and updated around the country.

As it relates to AT&T, we best describe our relationship with AT&T as a competitor. For example, during the quarter, AT&T awarded us $6.7 million of orders to us. But at the same time, they informed us that they would move all of their 911 call routing solutions to a competitor, West Corporation, on its offshore spaces.

This decision by AT&T was not surprising to us and we have prepared for it when we won 100% of the business for Verizon. in fact, for the past year or so, we have worked to expand our relationships with other customers, such as Comcast. We have and expect to continue our success with these efforts.

Looking forward, we have a strong base of backlog and growing opportunities and end market conditions for our Safety & Security products to remain healthy. In short, we believe that in aggregate, this business is on track to grow in our fiscal 2020. Now let me turn our attention to our Enterprise Technologies solutions group.

As first discussed on our Q2 conference call, we began an evaluation and repositioning of this location-based products to focus on providing higher-margin solutions. Today, we offer a number of mapping and text messaging applications for end customers. Many of these solutions are repeat-type or annuity-type revenue and generate good profits for us.

However, at the same time, we also provide certain miscellaneous mapping and location services to several customers, which have low margins or which have limited technology lives.

The ultimate goal of our repositioning of our location mapping products is very similar to the 2016, 2017 successful repositioning that we did on our legacy TCS government products group. As such, when we think about revenues for this product line in 2020, it it will be lower, but hopefully with higher profits. Our repositioning is well on its way.

And to date, we have decided to cease performing certain contracts and our living contracts expire without renewals. For example, in Q2, we ceased developing our VirtuMedix platform and stopped performing location services for customers where – whereas we were simply not making any money.

In Q3, we worked with Verizon and are no longer supporting their family locator product line, and we're also expecting our Verizon-navigated business to dwindle with revenues being nominal in 2020. Our enterprise product line includes all TCS legacy call handling solutions.

And in connection with our decision to wind this product – wind down and sell certain customer contracts, we did record a $2.5 million charge in Q3 of 2019, which Mike Bondi had mentioned. In fiscal 2020, all of the remaining contracts will be serviced by Solacom.

On the R&D side, we continue to invest in certain key technologies and areas of growth, such as public safety. All in all, through fiscal 2019 will be a year of solid growth. And when you add it all up, we still believe that fiscal 2020 can be even better.

Now let me turn to our Government Solutions segment where this segment itself had a banner quarter. Net sales were $80.8 million as compared to $57.9 in Q3 of fiscal 2018, representing the substantial increase of 39.6%. Our bookings in our Government Solutions segment were strong.

In fact, we exceeded bookings from each of the first and second quarters of fiscal 2019. Our book-to-bill ratio was 1.24. And during the quarter, we did receive a number of important awards and contracts.

For instance, we received a $42.6 million of order – of orders to supply Manpack Satellite Terminals, networking equipment and other advanced VSAT products to the U.S. Army. These orders were booked pursuant to our $223.4 million Global Tactical Advanced Communication System, or GTACS, contract with the U.S.

Army's program management tactical network, which has a remaining unfunded contract value of $47.3 million as of April 30, 2019. We did also receive $19.8 million of orders to provide sustainment services to the U.S. Army for the SNAP terminal program. We also received $5.2 million of funded order from the U.S.

Army for option year two under our existing Blue Force Tracking sustainment contract. We also received a $3.5 million follow-on satellite service order from a major national security solutions provider, a $2.6 million contract for high-power amplifiers from the U.S. Military.

With all of this activity, fiscal 2019 will be a year of significant growth for the Government Solutions segment. Looking forward, we have a strong pipeline of opportunities still yet to book, and 2020 for this segment is starting to look like a solid year. Now let me turn it back to Fred who will provide some closing remarks.

Fred?.

Thank you, Mike. As I mentioned previously, I, too, am very pleased with how our business is performing to date. Fiscal 2019 is expected to be a terrific year for Comtech. We believe we'll assert that our full year fiscal 2019 expected results illustrate the earnings power of our business and our product leadership positions.

Looking out to fiscal 2020, I'm increasingly excited about our future prospects and the positive trajectory of our business. I think we are well positioned, as Mike said, for another strong year in fiscal 2020. Our business unit management teams are focused on consistent execution, a healthy balance sheet and generating strong cash flow.

Overall, we believe our business strategies will drive shareholder returns over the very long term. Given our strong business outlook, our Board of Directors declared a dividend for the fourth quarter of fiscal 2019 of $0.10 per common share. This is payable on August 16, 2019, to shareholders of record at the close of business on July 17, 2019.

Now I'd like to proceed to the question-and-answer part of our conference call.

Operator?.

[Operator Instructions] And we’ll take our first question from Asiya Merchant with Citigroup. Your line is open..

Hi. I hope you can hear me. Congratulations to the team. It was a very strong quarter. Quick question.

On the two acquisitions that you now closed, can you give us some guidance on how they performed during the quarter, what the impact was, how should we think about the outer quarter? And then as we look forward into fiscal 2020, there was a lot of commentary on this trend expected.

So just first, some initial guidance on how we should think about fiscal 2020 as you lap fiscal – the strong results that you're demonstrating in fiscal 2019? Thank you..

Sure. So Solacom is a relatively small acquisition. And so we did have – we will have about four to five months of results in the 2019 numbers.

We don't want to give out some color on it because of the competitive reasons that I mentioned earlier, but you can think about the business as growing on the top line and accretive to our numbers in 2019 as well as 2020. On the GD side, the GD 911 acquisition, I think we only had, like, two days or something of results in Q3 numbers.

So we'll have a full quarter of results. And without divulging information regarding our exact plans, we did talk about $100 million-plus contract over five years. So if you want to just simply do the math of $100 million divided by $5 million, I think that's the way you should think about the GD acquisition.

And then obviously, as we win new programs with all of the solutions that we're working on, we'll provide them to you. But from our perspective, the GD was competitive. It was important for us to win, and we did so. And at the end of the day, it is accretive to our numbers, but it was a competitive deal. .

Great. And so on the margins, if you can just talk about as you look out into fiscal 2020, how you guys think about the margins within the two segments. Obviously, government had a very strong year in fiscal 2019.

How should we think about it in fiscal 2020?.

Yes. And I'd say it's a fair question. I mean, first of all, for our government side, we had a spectacular quarter. In fact, our backlog going into Q3 increased from where we were at Q2. At the same time, as we mentioned earlier, Q4 is going to be lower than our third quarter in that segment.

And as we look forward, some of these solutions that we booked during the quarter are not expected to ship until 2020. So for us, it's a little too premature to give you some guidance on where the segment information is going to come out. But I think, all in all, when we're looking at our business, I think we just focus on our adjusted EBITDA.

And from a percentage increase, we think we could do better than the 13.6% adjusted EBITDA margin that we're somewhat targeting for 2019..

Great. Thank you..

And we’ll take our next question from Chris Quilty with Quilty Analytics. Your line is open..

Thanks. Mike based on your comments, I don't think you're going to answer my question. But I was going to ask what the contribution from Solacom was in the quarter just to figure out the organic growth rate in the commercial side of business. .

Yes you're right. I'm not going to answer that question because I think there are a couple of things. When we look at organic side and stuff, and I would refer you to my comment about the Safety & Security product line being at the highest it was since the acquisition, that did not include the General Dynamics contribution in our third quarter.

And my comment about Solacom being small is accurate. So we do have organic growth in our Safety & Security product line. It's pretty strong actually. And at the same time, offsetting some of that, we do – we're still working through our repositioning in our enterprise and mapping location business.

So when you think about that, we have the navigated business. I think when we bought the business at TCS, maybe, it was around $20 million or so on an annual basis. And since then, we've been working that often and sort of investing that – investing the legacy profit, if you will, into new business lines.

So that $20 million next year is going to be virtually gone. So when we think about organic growth, it's up when you ate it all up. It's much higher in the Safety & Security line and it's lower on the mapping side simply because those Verizon contracts have now really wound down, and we're really not going to talk about them anymore. .

Got you.

Also on the backlog, obviously, you picked up the – or I'm sorry, the order book you picked up $100 million from the GD acquisition, was there also substantial orders that were contributed from Solacom?.

Yes, yes. Solacom had a healthy quarter of bookings..

Okay. And a question on what the margin profile of that business should look like.

I mean as we go into 2020, is there going to be a substantial change due to the mix of the business relative to what we've seen historically?.

I think when you add it all up, it is going to be a function of – in consolidation of what we do on the government side, how much revenue will we get from the government side when it's going to ultimately drive the consolidated number because, obviously, the more government segment revenue that we get in total, that will pull that margin down.

But if you look at what we did in Q3, on the commercial side, for example, we did a little under 19% adjusted EBITDA margins, 18.6% to be precise. And then if you actually look at what we did in our government segment at 13.9%, that was pretty impressive and well above our target of, let's say, 10%. We think we've hit that target for the year.

So when we're thinking about fiscal 2019 by segment, we're probably around 18% to 19% for the Commercial Solutions segment, including the impact of GD, which is now sort of in there for the quarter. So if you run the math, we’re still above about 18% or so, we're thinking, for the Commercial Solutions segment.

On the government side, we are expecting, just simply because of timing, probably the lowest quarter of revenue in the Government Solutions segment in Q4. I don't think we're going to get to that 10% margin number in Q4. But for the year, we'll be double digits, and I think that's the starting point.

That's why I say when we add it all up and we think about next year, we think, at the end of the day, we should be higher than next year. Our commercial business, we think, is certainly going to grow. Government is a little bit of a question mark in terms of how much growth we will have.

But when you still eat it all up, you have lumpiness, but we still think we're going to be higher than the adjusted EBITDA percentage margin and in terms of dollars as well. .

Got you. And you mentioned it, but I think these were record EBITDA margins for the government business in Q3.

Was there any one particular onetime gains or issues in there? Or was this just a strong quarter with strong mix and good operating leverage?.

No. It's exactly what you said. We did $80 million-plus of revenue and almost 14%. And if you go back, Chris, just for a little data point, you go back to Q1, we did 11.2%, 11.6%. So we've been really working efficiencies and cost reduction efforts as well as product mix improvements, and it's something that is going to continue.

But again, our Q4 revenue in the segment is going to be a lot lower than what we just achieved. So margins won't be at 10%. But yes, we think we hit the 10% goal that we set at the beginning of the year. And again, it's a little too premature for us to tell you what that number would be for 2020. But in aggregate, we think we're going to be higher. .

Got you. And final question, you really didn't mention much about either troposcatter or Blue Force Tracking. And if there's been no change, that's fine. I'm assuming that's the reason there wasn't a mention.

But any particular updates with either of those programs? I know that on the tropo, the announcement came out that Raytheon was awarded the contract on the Army..

That's right. I would say it's probably the most important comment or update to make to you is that the way we're looking at 2019 and 2020 they're not in our thinking cap from our financial modeling or our numbers. We're – if they happen, it's going to be great. But let me address the two programs specifically and tell you.

So yes, during the quarter, there was a public announcement by the government that Raytheon was awarded the contract. And obviously, the U.S. Army program protest is over. There is an announcement that's out there that the U.S.

Marines have decided to move forward with their own program, and we're in the process of responding to that RPF with our existing partner, if you will. The fact that the Army program is over, and I think we've mentioned this before, it does give us an opportunity to work on the U.S. Army program.

And we're going to try to figure out a way to do that and get back in there. But for the moment, we're not considering ourselves to have any revenue in that program, and we'll ultimately see what the Marines does. But again, that's not in our numbers and our thinking cap for next year. There will be upside to our thought process.

On the Blue Force Tracking side, nothing has really changed. With the exception of continued conversations with the U.S. Army, we are expecting to receive some smaller R&D funded orders that are somewhat critical in the sense to their strategy, and we hope to announce them soon, but we're not ready to.

But if we do get those contracts, I think that, that's a great strategic point for where that – where the decision point may ultimately go to. But again, we're not thinking about that. It's just too binary for us, and nothing is in our numbers..

Very, good thank you..

We will take our next question from Joe Gomes with NOBLE Capital. Your line is open..

Good morning and great quarter guys..

Thank you..

Quick question. Would – did you see over – but we've seeing here some pull forward of some business into Q3 to that – by looking at your Q4 guide, it's about $164.5 million of revenue that's – would be down year-over-year and it is below what the consensus estimate for revenues for the fourth quarter were.

So just wondering if you might have seen some of the revenues that you would originally expect in the fourth quarter were pulled into the third..

Yes. The short answer is absolutely. Our government business, in particular, is lumpy so that's really what drove that. And if you just do the math, our government business was – did $88.8 million this quarter versus $57 million last year, so there's a 38% increase. Now I'd love to grow at 38%, but that's just not going to – that's not going to happen.

So yes, part of the reason why our Q4 number has changed is we do get pull-in from the government business into Q3. So yes, that did happen..

Okay.

And seeing as things are so – going so well here recently, I mean, what are you guys looking at that could be – that could upset the apple cart here? What are your major concerns going forward that would be a momentum changer from what we've seen recently?.

Well, Joe, it's actually a great question. And I would say to you at the moment, we've kind of considered our concerns on our guidance. I will almost tell you that our guidance would have been higher than what we said.

But in light of what's happening in China, for instance, and some of the trade issues that are out there with Huawei, I mean, we are a supplier to Huawei and stuff. We've taken them out of our numbers. China, we do sell a couple of million dollars a year of equipment to them. We've taken them out of our numbers.

So we're not expecting to be able to ship to Huawei in next year. And in Q4, we've taken them out of our thinking cap. Same thing with China. We just think for political reasons and for things to settle down, that's backing the bid. But those were the concerns that we do have. And from a business perspective, we are focused on them every day.

We want to figure out how to ship to our customers and meet their needs. So we are actually focusing on it. But from a numbers perspective, we've taken them out of our thinking cap and given you the guidance that we think is very achievable to hit. And we're feeling extremely confident about where we're headed in terms of 2020. .

Great, thanks. Again great quarter..

Thank you..

We'll take our next question from Mike Latimore with Northland Capital. Your line is open..

Just to be clear, Mike, I think you said that you think that FY 2020 commercial segment could be even better than FY19.

Are you basically saying you're expecting some growth there? Is that the basic interpretation?.

I'm sorry. Which segment did you – I couldn't hear..

Commercial..

Yes, our commercial business, I think, will healthily grow in terms of revenue and EBITDA contributions, yes..

Okay.

And between the repositioning of some of the products in that segment and then the AT&T that you mentioned, what is the combined kind of revenue amounts that are associated with those two factors?.

Well, all those are – I did call out our Verizon Navigator business as a whole because I think if you go back over the last three years, it – that's about $20 million worth of revenue that we are effectively absorbing in our organic growth rate.

So in our commercial segment, one way to think about it is our – net-net of the AT&T decision, our satellite earth station business is growing. our Safety & Security business is growing and our ENT business is going to be down a lot next year. But all in all, that commercial segment is going to grow, and a lot of that growth is organic..

That's great. And then on the statewide Next Gen 911 opportunities, you talked about seeing some – a large opportunity there. I guess I assume you were already pursuing those prior to the GD acquisition, so I'm just kind of curious how far into some of the sales cycles are you on some of these.

How long has it been going on?.

Well, actually, it's an interesting question. Yes, there were some programs that we were not actually chasing that – the GD 911 business had some key relationships in there, which is one of the things that was pretty attractive to us. So we actually, because of the GD acquisition, are now in a couple of different opportunities that we were not in.

And then there are a couple of states, California being one of them, that has been a program that's out there. But the California program, and I don't know the exact dates on this, so don't hold me to this, it sort of came out, I think, after we did the Solacom acquisition and while we were talking to GD in the Commonwealth.

So as we were going through our proposal process, we put forward together a combined solution that we think is very attractive, and I'll use California as an example because it is a public RFP. And I actually think the responses just went in maybe a week ago or maybe they're due this week. But the timing is right around here.

So we weren't too far into the opportunities, I guess, is the ultimate answer here. These new opportunities are coming out there. The states are moving it. We've talked about this business being at a growth inflection point.

And although it's lumpy, similar to the government business, right, we can't tell you when we'll get a $100 million contract, but there's an example of how it comes. But from our perspective, we're clearly the market leader. We – we're doing the state of Washington on the West Coast, a key customer reference.

And now we have convinced the state of – the Commonwealth of Massachusetts on the East Coast. So we think we're the only ones. We have the two largest contracts, we think, in the United States in this stuff. And when you talk to companies like Ohio and California, we're very excited about our opportunity. And now it's just up to us to win..

Got it, got it.

And then on HEIGHTS, the wireless backhaul opportunity there, is that a big part of the pipeline? Or was the Claro thing kind of more of a one-off here?.

No. The Claro was not one-off. But again, we've always talked about having key customer reference points. So having Claro purchase the equipment down in that part of the world is very, very helpful to us from a customer reference point. And we continue to do testing, let's say, including in North America or in spot.

So again, long sales cycle in the business. But now that we're seeing some of these names and our customers are being delightful enough to allow us to use their names out there as customer reference points, that's going to be helpful, we think, in terms of closing additional deals. .

Sure. Thanks. Thanks a lot..

And we'll take our final question from George Notter with Jefferies. Your line is open..

Hi guys, this is Kyle on for George. Thanks a lot for the question. And congrats on the results. Wanted to ask a little bit more about the GD acquisition and maybe if you can add anything around the shape of how that revenue might come in.

Will it be more ratable? Is it going to be pretty regular over the course of that contract? Or would it be front-end or back-end loaded? I believe I saw when – in your disclosures that it starts in August, the beginning of August.

So anything you can add there on how we should think about how that comes in would be helpful?.

Yes. And you're correct on the date. So the – I would tell – well, the public safety business as a whole, Kyle, is similar to the SaaS, Software-as-a-Service, models that we have. I mean we don't call it out like that, but it is sort of software as a model business.

It's a cloud-based solution that we're selling to the state – Commonwealth of Massachusetts. So in simple terms, it's a $100 million-plus contract. The $100 million divided by 5, it's $20 million a year for that contract starting in August. .

Okay, great. Thanks a lot. And then,. I guess kind of connected to that, how much of the backlog addition this quarter and the bookings? I know you mentioned that $100 million went into the bookings this quarter.

Between GD and Solacom, how much of the backlog was acquisition-related? And how much of the bookings were acquisition-related?.

Well, from a simple mathematical point, right, our backlog, we finished at $747 million. So if you just take off that $100 million-plus contract, you're at $647 million. And again, without putting a number on there, Solacom is a small company and growing. And I don't want to say anything else other than that.

So most of what we achieved in Q3 is organic..

The biggest driver is the $100 million, maybe a little bit more from Solacom, but not as meaningful as that, and that's a good way to think about. And then I guess changing gears a little bit here on the HEIGHTS pipeline. Want to ask a little bit more about the strength in HEIGHTS right now. I know you said that it has longer sales cycles.

But now that you're well underway with some of these sales cycles with various customers, should we start seeing business for that product line to start flow pretty – flowing in pretty regularly? Or are there are some lumpiness to your – the sales cycles? Is there anything else – also I guess, is there anything else you can add to what the pipeline looks like for HEIGHTS? Are there any verticals or industries that you're seeing more activity or less activity in?.

So yes, I guess, probably the most important comment I'll make on HEIGHTS is that in the first nine months of this year, we achieved more bookings in HEIGHTS than we did all of last year, so we're hitting our goals. I can tell you, as we think about 2020, that business again could maybe even double from the current level that we're doing.

And again, it's a little too premature for us to give you specifics, but we are seeing increased momentum in HEIGHTS. The HEIGHTS product line itself does have a long sales cycle. It – I don't want to say it comes in clumps or lumpy, but it just takes a long time to predict exactly when the order is going to close.

But I would say, there's a little bit of lumpiness in terms of order flow. So we don't get concerned about it because it's a solution sale. And once we get it in, it's important. So net-net, business is up, opportunities are up. And we think, 2020, the business could in fact double from existing levels.

But we'll have more to talk about that in September..

Okay. Great. Fantastic.

And are there any concentrations of industries you're most successful in? Any kind of customer groups that go up?.

Well, it's an interesting – I would answer the question this way. Right now, the government doesn't seem to be interested in the HEIGHTS product. They seem to be purchasing on our SC/UPC product line and so they continue to be highly interested in that line. So we're not spending a lot of effort on the sales side with the government side.

We're introducing to them. We'll get them a little comfortable, but that's not where our efforts are. We're seeing efforts broad based across the entire commercial markets, whether it be the Caribbean – the Carnival Cruise Lines or the cruise ships and cellular backhaul and the opportunities we had with SES and Argentina Claro.

So we are – that – we're seeing it pretty broad based on the enterprise side..

Okay, great. That’s great. That’s it from me. Thanks a lot..

And there are no further questions on the line. I'll turn the call back over to the speakers for any closing remarks..

Okay. Well, thanks again, for joining us today, and we look forward to speaking with you again in September. Thank you very much..

This does conclude today's program. You may disconnect at any time..