Comtech’s Products Enable Soldiers To Stay In Touch

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Comtech’s Products Enable Soldiers To Stay In Touch


Posted 12/13/2006

Sometimes, the saying goes, it’s better to be lucky than good. Better still is to be both.
The U.S. military’s ongoing operations in Iraq and other remote parts of the globe have driven demand for all sorts of communications technologies.

That’s fortuitous for Comtech Telecommunications. (CMTL) It makes equipment such as modems that can cram more data through congested satellites and systems that can bypass those orbiting communications platforms altogether by bouncing signals off the Earth’s lower atmosphere. That has brought major new contracts with the U.S. military, an endorsement that opens doors to even more contacts with other nations and their armed forces. But the Melville, N.Y.-based company has done more than just be in the right technology space at the right time, says James McIlree, an analyst with C.E. Unterberg.

“They’ve done a very good job at keeping their product line fresh. And these guys have been very good at leading the market in product development,” he said. “I think they’ve been skillful as well as lucky, and that’s what you hope for.”

Comtech makes a range of hardware used by satellite systems integrators, communications service providers, defense contractors and oil companies. Earnings were down in its fiscal first quarter, hurt by lower sales in two of its three business areas: mobile data communications and radio frequency microwave amplifiers. For the quarter ended Oct. 31, it posted $10.8 million in earnings, or 41 cents per share, down from $11.5 million, or 43 cents per share, a year earlier. Revenue fell 8.9% to $97.1 million.

Beats Estimates

The results were enough to cheer investors. Analysts surveyed by Thomson Financial had expected earnings per share of 33 cents on $92.4 million in revenue. Company executives couldn’t be reached for comment. But in a December conference call, they said backlog had grown to $210.4 million in the first quarter, from $186 million three months earlier. Comtech told investors to look for $1.86-$1.88 per share in 2007 on $440 million-$450 million in revenue. In 2006, the company saw earnings per share of $1.72 on $392 million in revenue. Leading the charge is the company’s telecommunications transmission segment, which includes satellite communications systems, line-of-site radio systems and the over-the-horizon troposcatter modems.

Since May, the Defense Department has paid the company $34 million to upgrade 220 of the the military’s AN/TRC-170 terminals, a decades-old, over-the-horizon communications system that’s pulling heavy duty in Iraq. Earlier this month, the company announced another $4.3 million contract with a military subcontractor to help install $155,000 upgrade kits, service them, and train personnel on their use. Tropo systems are used in places where terrain makes traditional line-of-sight radio transmissions impossible. By bouncing signals off the troposphere — the layer of dense air about seven miles up — signals can travel about 150 miles, much farther than traditional radio systems. And Comtech’s upgrades increase the bandwidth from a few megabits per second to 16 megabits.

While satellite bandwidth is expensive, the troposphere is free. And, the company said, its systems are much more secure than satellite transmissions. Comtech didn’t invent troposcatter transmission. A similar principal allows AM radio signals to cover longer distances at night by bouncing off the atmosphere. Defense contracting giant Raytheon (RTN) developed the AN/TRC-170 system in the 1970s. It was deployed heavily in the first Gulf War. But the military didn’t fully embrace it again until the Iraq War, as the demands of data-intensive modern warfare strained satellite communication systems.

Comtech is near the end of a multiyear, $77 million communications project with a North African nation that it has not identified. The company said it expects more contracts from that nation for later stages of the project. Mark Jordan, an analyst with A.G. Edwards, says the project involves linking together a radar network around that country’s borders. He says the next installment could be worth another $40 million. There are other business opportunities within that unnamed nation too, Jordan says. There’s more business to be had in places such as Libya, which Jordan speculates has aging troposcatter communications infrastructure. After turning away from its terrorist past, the country is open for business again.

Offshore Communications

Don’t forget the price of oil, McIlree says. While small in scale compared with the military business, Comtech’s technology is in demand to keep distant offshore oil- drilling platforms in contact.
“Right now, I think the greater opportunity is in the military side,” McIlree said. “But with oil, there’s pretty good demand for that also.”
Comtech has also been an aggressive acquirer, picking up technologies and finding markets for them. In the first quarter, it completed a $2.7 million acquisition of Insite Consulting. While that software company contributed little to first-quarter results, Comtech picked up a new product — a software system being developed for NATO to allow tracking of friendly forces on the battlefield via satellite.
But it’s the U.S. military’s renewed embrace of troposcatter communications that’s serving as a sort of Good Housekeeping seal of approval as Comtech shops the technology to other nations. “Having the U.S. Army doing this is a significant plus from the credibility standpoint,” Jordan said. “I think to some extent they were running into potential customers saying, ‘Well if it’s so great, why isn’t your country using it?’ “