Comtech Negotiating New BFT-1 Deal; Analysts See Promising Signs for 2012

    “Although we are not yet certain of the exact mix of products and services that we will be asked to continue to supply, we are optimistic that at least one new BFT-1 sustainment contract will be awarded prior to March 31, 2012,” said Kornberg.

    Comtech’s 2012 fiscal second-quarter earnings fell 64 percent, but the company raised its 2012 full-year earnings guidance to $1.34 to $1.44 per company share, from its prior view of $1.25 to $1.37 a share. Comtech also raised the low end of its full-year revenue forecast to project a minimum of between $420 million and $430 million.

    Though the company’s second-quarter revenue and GAAP earnings dropped significantly compared to the same period in 2011, Comtech managed to beat expectations on both metrics. Comtech booked $99.1 million in second quarter revenue of $99.1 million. Analysts projected net sales of $92.8 million on the same basis, though its GAAP reported sales were 39 percent lower than the prior-year quarter’s $162.8 million

    “During the second quarter, we continued to successfully execute our business strategies,” said Kornberg. “Our second quarter results clearly demonstrate that, despite challenging global economic conditions and operating in a period of significant U.S. and foreign government budgetary constraints, our business remains strong and our long-term growth plans remain on track.”

    Raymond James Analyst Chris Quilty said that despite its shortcomings, Comtech’s 2012 second quarter results showed encouraging signs for investors, primarily due to a more upbeat outlook for its battered Mobile Data business.

    “[Comtech’s] Mobile Data upside was a surprise,” Quilty said in a report issued March 9. “Mobile Data revenues were approximately $10 million above our forecast at $25.4 million, reflecting follow-on orders from the U.S. Department of Defense, but a sharp decline in its microsatellite business. Management expressed confidence that it will conclude an IT licensing agreement with the Pentagon and receive a definitive one-year BFT/MTS contract in a matter in a matter of weeks along with a three- to five-year IDIQ sustainment contract.”

   Comtech’s core Telecom business, however, is still struggling with weak margins and a lackluster book-to-bill ratio, according to Quilty, who found the company’s outlook for its Mobile Data segment tenuous, as the company’s current Pentgon contract ends on March 31.

   “Comtech’s Telecom segment, which represents the core growth driver for the Comtech story, experienced an 18 percent sales decline and a sequential 670-basis point decline in EBIT margins to 16.2 percent – its worst performance in nine years,” said Quilty.

   Analysts identified two main factors that are hampering Comtech’s growth:  declining MTS/BFT manufacturing volumes and the completion of two large over-the-horizon microwave projects totaling nearly $50 million.

   Though Quilty acknowledged that neither of these problems are not likely to be resolved soon, the fact that Comtech management affirmed that it is targeting EBIT margins of higher than 20 percent for the 2012 full year should boost investor confidence.

   “Comtech appears to have turned a corner, posting its best EBIT margin in six quarters at 5.3 percent and a marked improvement in orders. Money-losing development projects are in the rearview mirror and recent bomb jamming contracts should yield double-digit margins,” said Quilty.