Comtech Telecommunications Corp. (CMTL) Earnings

Management highlights

- Transformation Plan Progress * ComTech has delivered on all four pillars of its 2025 transformation plan: restored operational discipline, achieved five consecutive quarters of positive operating cash flow, completed a comprehensive strategic alternatives review, and strengthened the company's capital structure * Operational discipline and streamlined cost structure have been embedded across the company, maintaining ~$50 million of available liquidity and restoring stakeholder credibility with lenders, customers and suppliers * The going concern qualification was previously removed from the company's financial statements following creditor covenant accommodations - Strategic Transaction Announcement * ComTech has closed a transaction to sell most of its S&S segment to Galat for $157.5 million, with net proceeds to ComTech expected to be $143 million to $145 million * Retained S&S assets include a cybersecurity business with ~$20 million annual revenue and ~$3 million EBITDA, two small operations in Florida and Georgia, and rights to legacy accounts receivable * 65% of net sale proceeds will be used to prepay the majority of the company's senior secured credit facility, and 35% will be used to prepay outstanding subordinated debt, starting with the subordinated priority term loan * New credit agreement amendments extend covenant testing holidays for net leverage, fixed charge coverage and minimum EBITDA covenants until the four-quarter period ending July 31, 2027, strengthening long-term financial flexibility * The transaction sharpens ComTech's full strategic focus on Illyrium's public safety business, positioning the company to capitalize on growing demand for data-driven, AI-enabled emergency communications - Operational Highlights * S&S secured key Q3 awards including over $7 million for rapidly deployable troposcatter systems for an international government customer, ~$6 million in incremental cybersecurity training funding for U.S. government customers, ~$4.9 million for antenna design and manufacturing, and over $10 million in post-quarter orders for EHF LEO satellite communications prototypes * Illyrium increased R&D and go-to-market investment in the quarter to extend its Next Generation 911 (NG911) product leadership. Key wins include the statewide Kentucky NG911 program, which migrated 12 Public Safety Answering Points in its first four months of operation, plus more than a dozen NG911 upgrades across Canada in FY26, and a new purpose-built facility opened in Gatineau, Quebec * Illyrium has a growing portfolio of cloud-native, AI-enabled capabilities for emergency call handling, location-based services and data management, with a large and growing share of recurring revenue from long-term customer contracts with high switching costs

Guidance

ComTech did not provide formal full-year or long-term financial guidance in this call. Management confirmed that after the S&S sale and debt paydown, the pro forma adjusted EBITDA for the remaining business is $34 million, which already reflects $12 million in expected corporate cost savings from the post-transaction transition. Management noted Illyrium has significant long-term growth opportunity driven by expanding addressable market from new emergency devices (wearables, connected vehicles, smart speakers) and new delivery models (satellite networks), and expects to expand margins via operating leverage as the business scales.

Segment performance

ComTech reported consolidated net sales of $106 million for Q3 FY26, down from $126.8 million in Q3 FY25. Consolidated gross profit was $36.1 million (34% of net sales), up from $38.9 million (30.7% of net sales) year-over-year. The company reported an operating loss of $3.1 million, compared to a $1.5 million operating loss in the prior year period. Adjusted operating income (excluding amortization, restructuring, stock-based compensation and transition costs) was $5.1 million (4.8% of net sales), and adjusted EBITDA was $8.2 million (≈8% of net sales). Operating cash flow was $6.1 million positive, marking the fifth consecutive quarter of positive operating cash flow. 1. Satellite and Space Communications (S&S): Net sales were $50.3 million, equal to 47.5% of consolidated net sales. Operating income was $1.6 million, down from $2.7 million year-over-year. Adjusted EBITDA was $4.1 million, equal to ≈8% of segment net sales, down from $5.7 million in Q3 FY25. The decrease in net sales reflects the planned phase-out of low-margin, capital-intensive revenue lines. S&S achieved a book-to-bill ratio of 1.04 in the quarter, its first ratio over 1.0 since Q1 FY24. 2. Illyrium (Public Safety): Net sales were $55.7 million, equal to 52.5% of consolidated net sales, a $5.9 million decrease year-over-year that is fully explained by a $3 million one-time retroactive billing benefit in Q3 FY25; core revenue was consistent with the prior year. Operating income was $4.4 million, and adjusted EBITDA was $10.4 million, equal to ≈19% of segment net sales. The quarter's 0.32 book-to-bill ratio reflects typical timing of large multi-year contract awards, following strong book-to-bill ratios of 1.06 and 2.51 in the first two quarters of FY26.

Risks & headwinds

All forward-looking statements regarding the transaction, post-transaction performance and growth of Illyrium are noted to involve significant risks and uncertainties, and actual results could differ materially from expectations. Key pending risks include waiting for required regulatory approval for the S&S sale, with transition activities planned to commence only after approval is received. There is also competitive risk for upcoming contract re-competes in the public safety market, even with management's confidence in ComTech's competitive advantages.

Analyst Q&A

• Q: The S&S segment turnaround still has room to run. Why sell the business now instead of waiting to maximize value further?

  A: ComTech has evaluated strategic alternatives to address its high-cost capital structure since 2024. Management chose to wait to negotiate from a position of strength after the turnaround progressed enough to deliver a strong valuation, and the resulting transaction leaves the remaining business well-positioned to focus exclusively on high-growth Illyrium. Management views this outcome as the optimal path for long-term shareholder value.

• Q: What will the company's capital structure look like one year from now after the S&S sale proceeds are applied?

  A: 65% of net proceeds will pay down almost the entire outstanding senior term loan. The remaining 35% of proceeds will fully pay off the most recent subordinated debt tranche, and management expects to then pay down or refinance the remaining subordinated debt. The company expects to emerge with a clean, healthy long-term capital structure.

• Q: What is Illyrium's expected long-term revenue growth and profitability trajectory?

  A: Management declined to provide formal guidance, but confirmed a low-single-digit to mid-single-digit annual growth assumption is reasonable. Profitability will improve as scale drives operating leverage, particularly as the company leverages its existing infrastructure for new statewide NG911 contracts. Management is investing in R&D now to expand the company's total addressable market by adding new emergency workflow capabilities.

• Q: Will the S&S sale trigger a change of control that would increase obligations under the company's convertible preferred stock?

  A: All stakeholders (lenders, preferred shareholders, and the buyer) have agreed the transaction does not constitute a change of control, so no increased liquidation preferences or other accelerated obligations will be triggered.