Comtech Expects Flat 2018; US Market An Issue?
If you follow telecom closely yet haven’t heard of Comtech, that’s no surprise.
Acquisition of TCS in 2016 doubled the company’s size
Comtech Telecommunications Corp. is far smaller than the biggest vendors in the market (Huawei, Ericsson, Nokia, Cisco etc). But it’s nearly doubled revenues in the last two years, to $550M for the 12 months ended July 2017. A rough estimate of the telco piece of this is $200M, including both wireless & satellite. It’s worth checking out.
Most of Comtech’s recent growth has come from the acquisition of TeleCommunications Systems (TCS) in Feb 2016. That deal reinforced Comtech’s already strong position supplying specialty transmission and mobile data products to government end users. The deal also gave the company valuable distribution links into wireless operators, where TCS does well with “mission-critical C4ISR solutions and next generation emergency 911 services.”
For the new Comtech, the TCS deal has clearly helped it most in one segment: US customers not part of the federal government (figure, below). That includes US state & local governments, but lots of telcos as well. Comtech’s announced US telco customers include AT&T, Comcast, Sprint, Telefonica, and Verizon.
From zero to $201M in debt
Comtech is in a stronger position post-TCS to sell both to government & wireless telco customers, but the deal came with costs. Prior to buying TCS, Comtech had $151M in cash on hand and no debt (July 2015). After the deal (as of July 2017), Comtech’s cash and cash equivalents balance was just $42M, and it now has $201M in debt.
To service its new debt, it needs growth (among other things). Yet revenues for the three months ended July 2017 fell 3% YoY, and Comtech is guiding the market for just 0-4% revenue growth in FY18. A tighter government spending climate in the US could be an issue. A coming slump in US wireless capex is another likely contributor. (And this is something to look for as Verizon, AT&T, and Sprint report earnings over the next few weeks.) It wouldn’t surprise me if these twin pressures encourage Comtech to make a bolder play in search for growth. As the CEO said on last month’s earnings call, “the integration of our TCS acquisition and focus on gross margin is largely complete. We have now shifted our focus from integration to growing our business.” Turning back to M&A is one option for Comtech, although it could end up being the target.
(Photo credit: Jake Sloop)
