Comtech Telecommunications - Q2 2023

Transcript

Operator (participant)

Welcome to Comtech's fiscal Q2 2023 earnings conference call. As a reminder, this conference is being recorded Thursday, March 9th, 2023. I would now like to turn the conference over to Mr. Robert Samuels of Comtech. Please go ahead, sir.

Robert Samuels (Head of Investor Relations)

Good afternoon, everyone, and thanks for taking the time to dial in today. I'm Rob Samuels, Comtech's Head of Investor Relations. Welcome to the Comtech Telecommunications Corp. conference call for the second quarter of fiscal year 2023. Today I'm here with Comtech Chairman, President, and Chief Executive Officer, Ken Peterman. We're also joined by Mike Bondi, our CFO for our strategy. We also have a detailed discussion of the quarter in our shareholder letter available on our website, and we have also been working to communicate directly about our business and our market between quarters in our blog, Comtech Signal. Finally, let me 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 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 all 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 filing. Now I am pleased to introduce the President and Chief Executive Officer of Comtech, Ken Peterman. Ken.

Ken Peterman (Chairman, President, and CEO)

Hello, everyone, thanks for joining us today. You may recall that in my first letter to you as Comtech's CEO, I spoke of the enormous potential I saw at the company. Our talented people, our innovative spirit, our history of technology leadership, and the opportunity to bring Comtech and our customers into a new era of communications convergence, bridging the digital divide, connecting the unconnected, and democratizing access to information in ways that leave no one behind. More recently, I shared my sense of urgency in driving transformational changes to assimilate our individual businesses together into two segments, improve our operational performance, and deliver the value created by this transformation to you, our shareholders.

Today, I can report that over the course of these past six months, the team has fully committed to rapidly implementing these transformational changes and to our new strategy and culture, what we call One Comtech. I'm gonna talk a little more about what that means for our company and our investors today, I don't wanna bury the headline, which is simply this: It's working. This operational and cultural transformation has taken root and is delivering results, Our financial performance is a direct result of these changes. Now, Mike is gonna speak to our performance in detail, I am pleased to report that during our second quarter, we recorded revenue of $133.7 million, marking our fifth sequential quarter of net sales growth.

Our EBITDA, adjusted EBITDA was $11.3 million or 8.5% of sales, representing strong year-over-year growth as well as a sequential increase over Q1 of fiscal 2023. Our bookings of $167.5 million represented a book-to-bill ratio of 1.25x, and our funded backlog of $702 million is now at a level that we've not seen since July of 2019. While I'm pleased with these results, my leadership team and I remain laser-focused on the potential for Comtech to further expand margins and deliver not just top-line growth, but grow profitably. We are fully committed to unleashing the yet untapped potential of One Comtech to continually improve performance and enhance shareholder value. Our One Comtech financial priorities are clear: grow revenues, increase margins, and reduce leverage in investments in working capital.

In a challenging operating environment, achieving these goals will give Comtech more optionality when it comes to investing in our people, our technology leadership, and our future. The assimilation of our siloed businesses into two segments has provided clarity into opportunities to manage costs, streamline operations, improve efficiency, and accelerate decision-making by eliminating management layers and other redundancies, resulting in a reduction in our workforce. We understand these decisions impact the lives of people we respect and we care deeply about, and are never easy. Nonetheless, these steps are critical to accelerating our anticipated growth and realizing our One Comtech vision. We are improving our internal collaboration, implementing best practices across the enterprise, engaging more effectively with our customers, and identifying new market growth opportunities.

With this enhanced insight, clarity, and operational discipline, we can make more informed decisions about how to allocate the resources we have and put Comtech in the best possible competitive position. Let me explain further how our transformation to One Comtech creates a sustainable competitive advantage for us.

By controlling what we can in a complex operating environment, we can focus our resources to continually drive technology innovation, deliver enhanced customer value, attract and retain the best people, and exploit the enormous opportunity created by the ever-evolving transformation of our global communications infrastructure and the continually expanding appetite for always-on connectivity. Encouraged by the progress that we have made related to our One Comtech transformation, our launch of EVOKE, which is our innovation foundry, and our emerging growth opportunities, the board, together with management, adjusted the company's capital allocation plans and determined to forego a common stock dividend, thereby increasing our financial flexibility. Before I talk a little more about what you can expect from us going forward, let me turn the call over to our CFO, Mike Bondi, so he can walk through our performance this quarter. Mike?

Mike Bondi (CFO)

Thanks, Ken. For Q2 fiscal 2023, we recorded $133.7 million of consolidated net sales, of which $80.4 million were reported in our Satellite and Space Communications segment and $53.3 million were recorded in our Terrestrial and Wireless Networks segment. Our second quarter net sales represented a 2% sequential increase over last quarter and as Ken mentioned, our fifth consecutive quarterly increase. Compared to the year ago quarter, our Q2 fiscal 2023 net sales increased $13.3 million or 11%, reflecting higher net sales in both of our segments. Our consolidated gross profit percentage for Q2 fiscal 2023 was 34.3% as compared to 35.7% and 38.1% for Q1 fiscal 2023 and Q2 fiscal 2022, respectively.

Our gross profit for Q2 fiscal 2023 primarily reflects an increase in net sales and overall product mix changes. For example, in Q2 fiscal 2023, as compared to the prior year quarter, more of our consolidated net sales were reported in our Satellite and Space Communications segment, which historically achieved a lower gross profit percentage than the solution sold by our Terrestrial and Wireless Networks segment, which generally includes more software-based and recurring revenues. Our Q1 fiscal 2023 gross profit percentage benefited from increased sales of our next-generation Troposcatter solutions during that period in support of the Ukrainian government. As explained in more detail and reconciled in our Form 10-Q filed earlier today, we utilize a non-GAAP measure that we refer to as adjusted EBITDA.

Q2 fiscal 2023 adjusted EBITDA was $11.3 million or 8.5% of consolidated net sales as compared to $9.8 million or 8.1% in Q2 fiscal 2022. The increase both in dollars and as a % of sales is primarily attributable to the increase in Q2 fiscal 2023 net sales, offset in part by a lower gross profit %. Q2 fiscal 2023 adjusted EBITDA exceeded our expectations for the quarter and represented a sequential increase from Q1 fiscal 2023, all while simultaneously investing in our One Comtech transformation. As Ken previously mentioned, bookings during the quarter totaled $167.5 million, representing a 62.7% year-over-year increase and a quarterly book-to-bill ratio of 1.25x.

Our current revenue visibility is approximately $1.1 billion and is equal to the sum of our $702 million of funded backlog, plus the total unfunded value of certain multi-year contracts that we have received and from which we expect future orders. Overall, our consolidated Q2 net sales and adjusted EBITDA were in line with or better than our guidance provided last quarter. We are pleased to have increased our funded backlog from October of 2022, particularly in light of an economic environment that continues to be challenging. Ken?

Ken Peterman (Chairman, President, and CEO)

Thanks, Mike. I'm gonna finish up shortly and get to everyone's questions. Before I do, I wanna talk a little bit more about where we are right now and what you can expect from us, all in the context of guidance for next quarter. As I said earlier, we are intensely focused on improving our operational performance and managing our costs so that we can accelerate our growth. It's working. Thanks to the success of our work so far, we believe that we will realize operational efficiencies that improve our margin profile while simultaneously funding investments in innovation and accelerating growth.

Practically speaking, while we anticipate some variability from time to time as we move through this important transformational change, for Q3 fiscal 2023, we expect to achieve sequential consolidated revenue growth in the range of 1%-3% with consolidated adjusted EBITDA margins in the range of 8.5%-10%. A clear example of the investments made possible by our One Comtech initiatives is the recent launch of EVOKE, our innovation foundry. EVOKE extends the One Comtech philosophy to our customers, our partners, and suppliers by bringing them together in a structure designed to foster collaboration and accelerate innovation in global connectivity infrastructures. Not only will EVOKE enhance our existing technology and service offerings, we believe it will also allow us to pioneer entirely new ideas and opportunities with the benefit of combining multiple perspectives, different industry backgrounds, and diverse areas of expertise.

Our first publicly announced partnership speaks directly to the spirit of innovation. We're working on what we call Smart Operations with Seattle-based tech pioneer Sirqul. Using Comtech's expertise in connectivity and real-time location tracking, Smart Operations applications are anticipated to allow enterprises the ability to leverage the real-time data provided by Internet of Things devices to develop actionable business and operations insights, and instantly respond to changing environmental and market dynamics. This has vast implications for everything from retail and office space management to agriculture, heavy industry, advanced manufacturing, logistics, education, defense, and more on a global scale. You can expect to see Comtech foster new and expanded relationships across multiple sectors, as well as with leading universities around the world to ensure we are always at the cutting edge of the emerging technologies needed to continually innovate and create customer value.

Before I take your questions, let me close by saying that this is an exciting time for Comtech because I believe the opportunities ahead of us are expanding dramatically. Our commitment is to continue to grow, drive improved profitability, enhance long-term shareholder value by continually striving to be the most innovative, collaborative, and customer-focused company in our current and future global markets. Finally, we'd love to invite everyone to meet with us and learn more at our Investor Day, which we'll be hosting on Wednesday, June 21st, at our state-of-the-art facility in Chandler, Arizona. Please reach out to Rob for a formal invitation. I think we're gonna have a great time and learn a lot from each other. With that, let's get to questions.

Operator (participant)

At this time, if you would like to ask a question, please press star one on your touch-tone phone. You may withdraw your question at any time by pressing star two. We'll go first to Joe Gomes with Noble Capital. Your line is open.

Joe Gomes (Senior Generalist Analyst)

Thanks. Good afternoon, Ken and Mike.

Ken Peterman (Chairman, President, and CEO)

Hi, Joe.

Mike Bondi (CFO)

Good afternoon, Joe.

Joe Gomes (Senior Generalist Analyst)

I wanted to start out on the gross margin. I mean, you could give us a little more color. You talked about, you know, it's down because of the increase of revenues as a whole from the satellite business. You know, how big is the delta between the satellite and terrestrial businesses? If we do see satellite continue to outpace growth at terrestrial, we can kinda figure out where those gross margins may be going.

Mike Bondi (CFO)

Sure. I'll take that, Joe. In terms of the gross margins, again, we don't disclose each of the segments, but I would always offer this when looking at Terrestrial and Wireless, that is software based. There is recurring revenues in that revenue mix. You know, the software that we have is developed on the 911 side of the house. In terms of location-based services, it's also cutting-edge technologies that we're creating, so we're getting a premium for the work that we do. You know, there's more of a solution there that we're selling. You know, in terms of the gross margin on the Satellite and Space side, that's more akin to modems and amplifiers and other things that we're selling from a product perspective.

As we're, you know, looking forward, trying to move up the tier in terms of what we're providing and not just think of it as a box or, you know, a particular product, but more as a service that we could offer to the customer. I think we'll start to see a, you know, a convergence of the gross margins in those two segments and then probably exceed what we're doing today, you know, in terms of historical run rates for the margin in Satellite and Space. I think the story here is it's one of a change in mix within Terrestrial and Wireless. Last year, we did have more LBS software sales in there.

That has transited to now more NG911 sales in the current period, as we're turning on PSAPs within our 911 deployments. There is a mix change going on there. At the same time, you also had seen some increase in the first half for Satellite and Space with the COMET that we had sold off to the Ukrainian government in support of their efforts there. We did have a good dose of product go out in Q1 and some of it in Q2, but the bulk of it was in Q1. When you're looking at Satellite and Space in terms of their EBITDA profile, you could see, you know, the impact from quarter to quarter sequentially.

Joe Gomes (Senior Generalist Analyst)

Yeah, thanks for that. In terms of, you mentioned PSAPs, and, you know, where are we in terms of the numbers of those that are going live here over the, you know, the first two quarters of the year?

Mike Bondi (CFO)

Yeah. In terms of specific numbers, I think, you know, I would focus in on a large customer like Pennsylvania and South Carolina and Arizona. I think they are making good progress, getting out of the deployment phase of those contracts and, turning on, you know, certain regions within each of the states. In, in terms of a specific number of PSAPs, I'm not gonna be able to quantify that for you today, but, it is growing each, you know, each period that we're reporting. They are making good progress, on those deployments.

Joe Gomes (Senior Generalist Analyst)

On schedule.

Mike Bondi (CFO)

Get, yeah, on schedule and moving into more of that recurring revenue phase that we like. The more recurring revenue that you bring on, you have those fixed costs that were put in place on day one, we'll see a better leverage model on the margin side.

Joe Gomes (Senior Generalist Analyst)

Okay. Ken, you talked a lot about a lot of the initiatives and a lot of the potential there. As we're looking forward, what are some of the near-term milestones that you're looking at to judge the success of the One Comtech program?

Ken Peterman (Chairman, President, and CEO)

Sure, Joe. Of course, in the, in the short term, as we assimilate our individual businesses into segments. We're identifying redundancies, streamlining operations. We're able to perform more agilely as a business, and actually we have better clarity wherein we can make more informed decisions collectively and collaboratively on how to operate the business. We're able to speak to the supply chain in an amplified voice, so we're able to increase efficiency. That's why you're seeing us increase the adjusted EBITDA guidance as we move into Q3. Okay. Now, with respect to EVOKE and our innovation foundry, it has two purposes that have immediate value. The first thing is that we're bringing our various technologies together from across the enterprise, and you can think of those as a toolbox or as building blocks.

We're able to then collectively bring those building blocks together, compound their individual value in terms of technology leadership, and then create value for customers that is more comprehensive, so we can move up into subsystems, systems, and even services. By putting those building blocks together, we're able to demonstrate or quantify, or calculate, what our value proposition is at a comprehensive level, to a customer. For example, instead of talking about a technology advantage of a modem or an amplifier, in DBs or in a technical jargon, we're able to quantify, that value proposition to a customer in terms of, for example, additional subscribers that might be supported on a satellite channel, in order to raise the revenue that a given satellite channel, can produce for that operator.

Because we compounded the technology advantage of our modem with our amplifier, with our antenna, with the other equipments that we have. That dialogue is ongoing, and we're very encouraged by the feedback we're getting by some of our customers in terms of the excitement over that potential value creation. The milestones I would forecast over the next two quarters is that we will develop and have developed what we first call concepts. We move those to what we call minimally viable products or MVPs that help the customer conceptualize the value proposition and to quantify it with us in a customer currency.

We then would move to a pilot where the customer is excited, puts some skin in the game, and funds us to run a pilot where they can quantify and prove out the value creation that we forecast. Finally, the customer would say, "This is exciting. Let's go live. I want that value creation to be to come to me as quickly as possible." I can tell you that while we've not made any announcements yet, we actually have MVPs that are created. We have a couple of those have gotten great customer excitement, and we're moving into the pilots where we'll see some small contracts awards to move forward in that in the near future.

As we move toward our Investor Day in June and then into our fourth quarter, you're gonna hear news about that. Those milestones are in place. The team is managing to that. Like I say, I'm pleased with the performance we're seeing so far.

Joe Gomes (Senior Generalist Analyst)

Great. Thanks for that insight, Ken. I'll get back in queue. Let someone else ask some questions.

Ken Peterman (Chairman, President, and CEO)

Mm-hmm.

Operator (participant)

We'll move next to Greg Burns with Sidoti. Your line is open.

Greg Burns (Senior Equity Research Analyst)

Yeah, Jim. In terms of the dividend, usually, you know, you see a company cut the dividend as a defensive measure, but, you know, it seems like your business is, you know, recovering some from, you know, about a year ago. Can you just talk about the thought process behind eliminating the dividend and where you're gonna reallocate that capital? Is it gonna go towards paying down the debt?

Ken Peterman (Chairman, President, and CEO)

Sure. This is Ken. I'll respond to that from a, from a philosophy level, okay? Our responsibility, of course, is to deploy capital, where it'll get the highest return and create the greatest value. In fact, that's what a responsible board and CEO does. When we see a better use of capital, then as responsible stewards of that capital, we should invest it accordingly. Given our vision and our strategy, given our expanding opportunity set, which I described in response to Joe Gomes' question a few minutes ago, we have the ability to really compound capital if we invest it appropriately. We're now informed, and excited to some extent about the progress we've made and the future we see.

We're choosing to be responsible stewards and implement the strategies that we believe is most appropriate.

Greg Burns (Senior Equity Research Analyst)

Okay. in terms of the EBITDA margin guidance, the improvement that you're projecting there, how much of that is mid versus the benefits you're seeing from One Comtech? That range, you know, when we look at that range up to 10%, what are the puts and takes that might take you to the top end of that range?

Mike Bondi (CFO)

Yeah. Hi, Greg. In terms of the margin, you know, profile for the next, you know, two quarters, as we're thinking about Q3, we certainly are being mindful of still, you know, an economic environment that's challenging. At the same time, as Ken mentioned, we're very excited about the progress we're making with EVOKE and other initiatives. You know, we did announce today some other actions that we're taking, and I think when we look at the puts and takes, I think we definitely move forward in executing on the initiatives today, you know, trying to secure that higher end. I think we still have some work to do. We still have investments that we're making. You know, the things that we announced today in terms of our workforce, that's just one element.

We still have, you know, systems that we're implementing and processes that we're streamlining, that's going to take some time. Yeah, as we think about puts and takes, you know, certainly we have a nice book of business, if you will, with, you know, over $700 million of funded backlog now, which is a nice accomplishment for the company going back, you know, several years. We haven't been at that level. It's a function of us executing on that backlog, you know, pursuing these new endeavors with EVOKE. We're very excited to see, you know, these emerging growth opportunities. You know, as we're thinking of ourselves now as more of a growth story, I think we're trying to, you know, invest appropriately to capture that growth and move the company forward to the next chapter.

Greg Burns (Senior Equity Research Analyst)

You know, I guess you're getting a little bit maybe more visibility on some of the One Comtech initiatives. So do you have, like, a target or is there anything you would quantify for us in terms of, you know, maybe where that margin might go? Or do you have a target range that you're shooting for over the next, you know, couple years?

Ken Peterman (Chairman, President, and CEO)

Yeah. First of all, this is Ken. That's a good question. Thanks. In the re-segmenting of our business and assimilating our business units, we've moved to common tools, common platforms so that our business is running holistically now, and moving toward the same set of practice. Okay? In fact, we've restructured leadership teams, centralized functional areas of responsibility like contracts, operations, supply chain management, and that's streamlined operations. It's improving performance, eliminating redundancy and enhancing collaboration. Internally, we have established a set of key performance indicators, metrics, and milestones that we are working and managing to on a weekly and monthly basis.

We're hitting those, and that's what's giving us the insight and confidence to forecast the improved adjusted EBITDA margin that you suggested, that you alluded to. That's why we're saying 8.5%-10% adjusted EBITDA as we move into the third quarter. We do believe that we're on a path to get back to our historical EBITDA levels, which pre-COVID, were in the 14% range. Okay? We're excited about the ability to get to there. As we look at EVOKE, and the initiatives that we see there, many of those are gonna be software systems and services solutions, where the business models are traditionally profit margins that are more favorable than equipment sales.

We're looking forward, in the future, to going, to north of that.

Greg Burns (Senior Equity Research Analyst)

All right, perfect. Thank you.

Operator (participant)

We'll take our next question from Asiya Merchant with Citigroup. Your line is open.

Asiya Merchant (VP and Analyst)

Great. Thank you for the opportunity. Just in your guidance, should we expect kind of both segments to do, you know, around the same, or are you guys still expecting, you know, terrestrial here to be a little bit more tempered? The same thing on margins as well. Like, should we expect any one segment margins, mix shift or otherwise to do better?

Mike Bondi (CFO)

I'll take that and then, you know, if Ken wants to add to it. The way we're thinking about Q3, certainly on the top line it's 1%-3%. You could see what the Terrestrial and Wireless Networks business has been doing. We did book some orders a quarter or so ago that are still yet to ramp up, you know, and as we continue to turn on those PSAPs, I would say, you know, you would continue to see that growth each quarter. In terms of Satellite and Space Communications, I think, you know, in terms of the opportunities that we've just secured, we just announced and we'll have some more details in a press release soon to come, we just won a multimillion-dollar contract that we are very excited about.

It's for us, it's a greenfield. It's a new relationship with a new customer, at a size we haven't seen before, or at least for a long time. you know, that we believe will give us some nice uplift for the second half of the year. you know, with an opportunity like that and some others, I think we'll see probably good growth in the Satellite and Space business. At the same time, you know, we don't wanna get too far ahead of ourselves, and we'd go only one quarter out at this juncture with the 1%-3% in total and consolidated.

Asiya Merchant (VP and Analyst)

Okay. Thank you.

Ken Peterman (Chairman, President, and CEO)

I'll, I'll-

Asiya Merchant (VP and Analyst)

One more. Go ahead. Sorry.

Ken Peterman (Chairman, President, and CEO)

This is Ken. I was just gonna say that we have identified some of our more entrepreneurially oriented growth-minded leaders, and those are the ones that are strategizing with us regarding EVOKE, our innovation foundry. They're beginning to conceptualize these more comprehensive up-tiered value propositions and using the EVOKE venue as a technology incubator and an innovation foundry for the integration of other key ingredients, such as blockchain, cloud computing, AI, machine learning, and other things that we can implement on private networks to serve customers and create customer value. You know that we announced Sirqul as our first publicly announced technology partner. Those opportunities hold, we think enormous promise for us.

Asiya Merchant (VP and Analyst)

You know, somebody earlier asked a question about the dividends, you know, forgoing the dividend this quarter and maybe perhaps even next quarter, from what I understand from the press release. What exactly is the cash outlay, you know, that is involved in this relationship with EVOKE? How much cash on this from the cash flow are you planning to put into this that resulted in forgoing the dividend? Is it comparable to the dividend amount? Is it substantially more? Just trying to, you know, get some clarity on that.

Ken Peterman (Chairman, President, and CEO)

Well, this is Ken. I'll take that. I'll tell you that our technology leadership across the enterprise in what were our individual businesses and are now aggregated into these two segments, our technology leadership is astounding, and it's broad and comprehensive. It touches all different points of the terrestrial and wireless and location-based services domain. Frankly, when we pull that together, it just takes a little salt and pepper sprinkled on that in order to create a blended solution that is, that offers significant customer value.

As we launched EVOKE, engaged with our critical strategic technology partners, we've established an advisory group that involves third parties that are experts in these domains and understand some of the military and commercial problems that need to be solved. We don't find that we need to invest very much. At the end, we also believe are finding that it's an extremely accelerated timeline in terms of weeks to develop a minimally viable product that we can demonstrate to a customer and then work with them to envision how they can put that aggregated capability to work for them. You know, from our perspective, we're bringing mature technologies forward, and we're just integrating them together in new ways.

Our technology partners enable us to bring mature, companion technologies and integrate them rapidly. We're not looking at, long-term, high, cost, development cycles. We're much more agile and moving much more quickly than that.

Asiya Merchant (VP and Analyst)

Okay. I'll talk to you guys after the call. It's just a little bit still of a head-scratcher why the dividend seems to have foregone if the investment is, you know, that significant.

Mike Bondi (CFO)

I think, Stacia, you know, in terms of the financial flexibility that we get out of that, you know, easily $13 million in cash that we can redeploy into our initiatives to accelerate the things that we're doing. You know, we see growth ahead of us, the sooner we get through the transformation, the sooner we can tap into that growth. When we look back at interest rates being where they are, and, you know, getting more rhetoric about, you know, more rate hikes, when you start to think about it, you know, with interest on top of it and where our leverage is and where our leverage is going into the next 2 or 3 quarters, you know, with the step downs on the facility, this just gives us the flexibility for us to move faster...

Ken Peterman (Chairman, President, and CEO)

Yeah.

Mike Bondi (CFO)

on these initiatives.

Ken Peterman (Chairman, President, and CEO)

This is Ken. I don't wanna leave you with the impression that we're moving the money from the dividend to fund EVOKE, okay? EVOKE is not consuming any kind of anything like that. We're preserving that cash so that we're better able to apply it and accelerate our penetration in new markets, our ability to create customer value, after we get a customer that says, "Yes, I want this." We wanna be poised and ready to go. It's to preserve that flexibility so that we can capitalize on the growth opportunities we see.

Asiya Merchant (VP and Analyst)

Okay. Thank you for that clarification.

Ken Peterman (Chairman, President, and CEO)

You're welcome.

Asiya Merchant (VP and Analyst)

Okay.

Operator (participant)

We'll move next to George Notter with Jefferies. Your line is open.

George Notter (Managing Director and Equity Research Analyst)

Hi, guys. Thanks very much. I guess I was just curious about the revolver. Looks like you grew the revolver about $19 million sequentially. I haven't seen the cash flow statement yet, but there's definitely some cash burn here. I guess in that context, I certainly understand the move with the dividend. Could you tell me what the cost is on the revolver right now? I believe that's floating rate. I'm just kind of wondering where that is.

Mike Bondi (CFO)

Yeah. There's two metrics I'll quote. One is with the amortization of the deferred financing cost, that's roughly 8.8%. If you strip that, you know, the non-cash portion of it, the cash borrowing rate is about 8.4% right now.

George Notter (Managing Director and Equity Research Analyst)

Got it. Okay. I mean, have you guys thought about, you know, trying to do something on the cap structure here? I mean, try to get some more permanent financing in? I mean, anything that you guys are kind of noodling on that, is worth chatting about right now? Any, any options you guys see here?

Mike Bondi (CFO)

Without getting too specific about our internal plans, I would say we're not sitting idle. Everything that we're doing is, you know, coordinated to our plans. We are focused on the growth and to be ready to, you know, move faster, we will need to address our facility. Back in November, when we signed that, it was a two-year extension, but the reality is you'll be negotiating pretty soon.

You know, with that in mind and seeing our trajectory going in the right direction, and hopefully the market starts to ease up a little bit, that, you know, we're certainly mindful that we're not out of the woods in that regard. You know, we're gonna try to time that appropriately so that we're ready for the next stage of growth to address, you know, some new initiatives from Ken. We are not sitting idle. We are putting thought into that as well on top of these One Comtech transformational type initiatives.

George Notter (Managing Director and Equity Research Analyst)

Got it. Okay. As, as you think about just the cost structure of the company, I mean, you guys mentioned earlier there were some headcount reductions and, you know, I know you guys are consolidating some ERP systems. I know there's a bunch of heavy lifting there, but can you talk about, you know, what that translates into in terms of improved cost structure? Is there a target on annual savings that you guys are looking at or anything you can give us in terms of that benefit?

Ken Peterman (Chairman, President, and CEO)

We've clearly set internal targets. We clearly are managing to those key performance indicators. Mike will give you a little bit of insight.

Mike Bondi (CFO)

Sure. We didn't put a specific percentage or number of heads in the disclosures. You know, we're trying to be mindful of that. We're still making investments in our business. To give you some context, we figured you guys, you know, would ask. We point to 2020 when we had reduced our workforce. At that time, it was about 10%. The reduction that we're talking about here today is not as large as that. It was a meaningful, you know, action that we took to move us forward. You're seeing it in the EBITDA contribution in our guidance. That's how I would think about it for right now. Certainly when you think about Q3 versus Q4, the actions that we're talking about, we're undertaking them now, full quarter's benefit of them.

In Q4, you would see likely the full magnitude of that action. Plus the other things that we're looking at, you know, like you said, ERP systems, looking at our facilities, and just, you know, streamlining our processes and getting improved efficiencies. As Ken is mentioning, we also will be moved into our Chandler facility, in the upcoming weeks. That will also be behind us. You know, it'd be nice to see that chapter close, and we can move forward all in one building.

George Notter (Managing Director and Equity Research Analyst)

Got it. Okay. Great. Thanks very much, guys. I appreciate it.

Mike Bondi (CFO)

Sure.

Ken Peterman (Chairman, President, and CEO)

Sure.

Operator (participant)

We'll take our next question from Chris Sakai with Singular Research. Your line is open.

Chris Sakai (Equity Research Analyst)

Oh, hi. Yes, it's Singular Research. Just had a question on the supply chain. How are you seeing it? How are lead times there?

Mike Bondi (CFO)

Hi, Chris. This is Mike. In terms of supply chain, I think we have determined that right now, the part shortages don't seem to be the problem. Lead times certainly still seem to be long. We're mindful of that. We do have a lot of backlog, so we are looking at that backlog and making sure we're placing those purchase orders timely. That's part of the reason why you see the use of cash. You know, as we are building, you know, backlog above the $700 million level, you also have to support that with inventory procurement and also, you know, receivables. You know, from a supply chain perspective, I don't think we're out of the woods yet. I think Maria would also agree with me on that.

I think we still have, you know, things to keep an eye on, but I think it's getting better. We're not, we're not fully behind that.

Ken Peterman (Chairman, President, and CEO)

I'll say, too, this is Ken. I think it's getting better when we look at our core business, because we're learning how to manage that. We're able to speak with an amplified voice now, across all the businesses. In addition to that, when we think of the up-tiered business in systems, and services, those supply chain questions are still a little bit open as we move into some of those new markets that we're excited about. That's why we say, we're still a little cautious. We may see some variability from time to time because we're stretching into some things, that are different than what we've traditionally done.

Chris Sakai (Equity Research Analyst)

Okay, thanks for that. Then can you talk about your recent VSAT orders from the U.S. government? Do you expect more, and how much more?

Mike Bondi (CFO)

Yeah, Chris, in terms of the VSAT, this is a contract we've had with the Army for quite some time, you know. We always say with the Army, they have a very unpredictable funding schedule, and sometimes we don't always know exactly what they're doing. Sometimes orders will, you know, you know, show up where we thought it'd be a little bit later in the quarter, and maybe it shows up early and vice versa. I think in our disclosures today, we talk about the variability from time to time. The, the VSAT equipment that we've sold here or will be selling, and shipping shortly, you know, it's a function of that. It's, it's things that sometimes are just hard to predict, but we have the contract vehicle.

You know, the Army, we have a good relationship with them over the years. Yeah, we would expect to see some more to come, but, you know, nothing to put a specific dollar amount on.

Ken Peterman (Chairman, President, and CEO)

Yeah, I, and I'll just chip in, because, you know, we are aggressively working that. Our technology is state-of-the-art in things like troposcatter as well as the VSAT terminals. You saw the president's budget come out today, and it's up. It's trending upward. In addition to this is, we're approaching fiscal year-end for the government, and sometimes with our contract vehicles that are in place, they sweep up funds that didn't get spent on something else, and we benefit from that. While we're not forecasting that right now, we're aggressively working to take advantage of those kinds of opportunities.

Chris Sakai (Equity Research Analyst)

Okay, great. Can you talk about, how orders are coming in from the Ukrainian government? Are they continuing on the same pace as before or tapering off? Can you shed some light there?

Ken Peterman (Chairman, President, and CEO)

I don't feel comfortable speaking to that directly, at this time. I'll tell you that, as we've said before, there is no better marketing testimony in the world than folks that are in the fight with a sophisticated peer adversary, and the equipment that they're buying from us works in that tough environment. We anticipate that puts us in a very strong position.

Chris Sakai (Equity Research Analyst)

Okay, thanks for the answers.

Mike Bondi (CFO)

Thank you, Chris.

Operator (participant)

It does appear there are no further questions at this time. I would now like to turn it back to Robert Samuels for any closing remarks.

Robert Samuels (Head of Investor Relations)

Thanks, operator. Thanks, Ken and Mike and everyone for dialing in today. As Ken said, there are additional details about our strategy and performance available in our investor letter and SEC filings, and we'll provide ongoing insights in our Signals blog. As a reminder, we intend to be as responsive as we can with investors going forward. For anyone with questions, please reach out to me directly and let's connect. This concludes our second quarter call. We thank you all for your continued support.

Operator (participant)

This does conclude today's program. Thank you for your participation. You may disconnect at any time. Have a wonderful evening.