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Urges the Board to Immediately Explore All Available Strategic Alternatives, Including a Sale of the Company
Looks Forward to Engaging Collaboratively with Management and the Board to Unlock Value for the Benefit of All Shareholders
NEW YORK, June 14, 2021 (GLOBE NEWSWIRE) -- Outerbridge Capital Management, LLC (“Outerbridge”), a shareholder of Comtech Telecommunications Corp. (NASDAQ: CMTL) (“Comtech” or the “Company”), today announced that it has delivered a letter to Comtech’s Board of Directors (the “Board”). Outerbridge believes that while Comtech continues to be a market leader with best-in-class products and strong growth prospects, the Company has been and remains significantly undervalued in the public markets due to, among other things, poor corporate governance, a history of capital misallocation, and a lack of executive succession planning. Due to the issues plaguing the Company and both the Board’s and management’s apparent lack of urgency in addressing these matters, Outerbridge urges Comtech to immediately commence a process to review strategic alternatives, and looks forward to engaging collaboratively with management and the Board.
The full text of the letter can be found below:
June 14, 2021
Board of Directors
Comtech Telecommunications Corp.
68 South Service Road, Suite 230
Melville, New York 11747
Dear Members of the Board:
Outerbridge Capital Management, LLC (“Outerbridge” or “we”) and its affiliates beneficially own over 1% of Comtech Telecommunications Corp.’s (“Comtech” or the “Company”) outstanding shares of common stock. We admire Comtech’s market leadership in exciting product lines such as satellite ground stations, enhanced 911 call routing, and mission critical communications equipment. We also appreciate Comtech’s consistent cash flow generation and the resiliency of its business amidst difficult market environments, including with respect to the challenges posed by the COVID-19 pandemic.
We are further excited by the potential for Comtech to capitalize on significant growth opportunities for its business, particularly in its Commercial Solutions segment. As Comtech’s management and industry analysts have discussed, an upgrade cycle for 911 call routing infrastructure (“Enhanced 911” or “NG911”) is underway across the United States, representing a significant opportunity for the Company’s public safety and location technologies business. Outerbridge believes that the served addressable market (“SAM”) for Comtech from the NG911 opportunity alone could reach into the billions of dollars – a significant sum for a Company with a $600 million base of total revenue. Comtech’s satellite ground station business also stands to benefit from the significant expansion of its SAM as the Company launches new products to address the Time-Division Multiple Access (“TDMA”) market, which is many times larger than the ~$200 million Single Channel Per Carrier (“SCPC”) market Comtech dominates today. The launch of new Low and Mid-Earth Orbit (“LEO” / “MEO”) satellite constellations, such as those planned by SpaceX, Amazon, and others, is also a substantial long-term opportunity for Comtech; indeed, the Company disclosed its first meaningful contract related to this opportunity in its FQ3 10-Q filing, where it indicated that the opportunity from this customer alone could range into the hundreds of millions of dollars. In its volatile and less-profitable Government Solutions segment, Comtech has for years faced significant challenges; however, new U.S. Government RFPs for secure communications, including a modernization of the Blue Force Tracking and Movement Tracking System programs that once represented nearly half of Comtech’s revenues, could reinvigorate growth here as well.
However, Comtech’s strengths and the promise of its growth opportunities are presently overshadowed in the public markets by serious and well-founded concerns, as the markets have adversely (and, we believe, fairly) assessed Comtech’s shortcomings. These include: poor corporate governance, lackluster execution, a questionable history of capital allocation, a lack of executive succession planning, a lack of transparency and accountability, and, most critically, a woeful track record of creating value for public shareholders. To emphasize these points, Comtech’s share price has now declined the day following the reporting of its quarterly financial results seven consecutive times, and its shares are little changed from levels first reached nearly 20 years ago in late 2003. By comparison, the Russell 2000 Index has appreciated by 400% during this timeframe. In our view, the market is clearly signaling that the status quo at Comtech is untenable.
Against this backdrop, we believe it is incumbent upon the Board to immediately assess the risk-adjusted value that could be realized in the future by continuing to attempt to execute as a standalone company against the value that could be realized in the near-term through a sale of the Company. Based on publicly available information and our diligence, we believe a robust process to explore strategic alternatives would produce a better outcome for shareholders than the status quo.
Following its most recently reported FQ3, Comtech’s share price plummeted by nearly 14% in reaction to a substantial downward revision to the Company’s revenue outlook for its Fiscal 2021 ending July 31, and, by extension, its upcoming Fiscal 2022. This negative revision to revenue guidance was attributed to the withdrawal of U.S. Armed Forces from Afghanistan, resulting in lower levels of demand for Comtech’s products in its Government Solutions segment, where the U.S. Armed Forces are the Company’s largest customers.
While this development is understandable in itself, Comtech’s inability to foresee or to communicate the risks of this impending event (which had been widely telegraphed for months by both the previous and incoming presidential administrations) goes to the crux of what we believe is widespread investor discontent surrounding the Company. Year after year, Comtech’s investors have witnessed the Company’s inability to execute on its targets, to communicate transparently, and, ultimately, to efficiently operate the business and deliver results for its shareholders. And although Comtech’s COO Michael Porcelain offered by way of explanation on the Company’s FQ3 earnings call that, “I think we’ve always said publicly, if you have a few troops in Afghanistan or in a particular area, you need the communication system, [but] here, the plan is to fully withdraw troops,” we were unable to locate any mention of Afghanistan on Comtech earnings calls dating back to 2012, nor any mention of such in its 10-K risk factor disclosures. Certainly, the enthusiastic tone displayed by Comtech management regarding the business on its prior FQ2 earnings call (“If the issues from COVID-19 fade away, as we expect them to, Fiscal 2022 will become a banner year for Comtech”) would strike most as premature.
Other points of emphasis that speak to Comtech’s weak financial performance and corporate governance include:
We believe Comtech’s adjusted EBITDA has declined organically over a 10-year timeframe, even adjusting for the competitive loss of the Blue Force Tracking and Movement Tracking System programs that occurred starting in 2010.
Since concluding a previous review of strategic alternatives in 2014, Comtech’s share price has declined by 43%. And since Comtech subsequently announced the largest acquisition in the Company’s history of TeleCommunications Systems, Inc. in 2015, Comtech’s share price has declined by 10%, while its balance sheet has moved from a significant net cash position to one of net leverage.
In January of 2020, Comtech again attempted to consummate a significant merger, this time with Israel-based Gilat Satellite Networks (“Gilat”). Comtech shares responded with an 18% decline in value the day of the transaction’s announcement, and ultimately declined in value by as much as 70% as investors wrestled with the impacts of COVID-19 and contemplated what would have been, in our view, the dangerously high leverage profile of the combined company. Comtech ultimately paid a $70 million break-up fee ($2.70 / share) to Gilat to abandon the merger.
Comtech’s Chairman and CEO Fred Kornberg has served in the CEO role since 1976, and while he surely deserves due credit for the Company’s early successes and achievements, he and the remainder of the long-tenured directors on the Board should equally share blame for presiding over the past 10 to 20 years of stagnation. Furthermore, the Board has not conveyed to shareholders an appropriate succession plan for Mr. Kornberg, which we believe to be of pronounced interest given his age and 50-year tenure at the Company’s helm, including during the aforementioned period of poor performance. We note that other senior executives have also held long tenures at Comtech, and believe that any succession planning should involve the retention of a highly credentialed national executive search firm with a focus first and foremost on finding qualified external candidates with fresh perspectives.
Outerbridge believes that Comtech’s considerable intrinsic value can and must be unlocked for the benefit of all shareholders. The Company should immediately retain a financial advisor to conduct a fulsome, clear-eyed, and dispassionate review of strategic alternatives. Given the problems enumerated herein and the apparent lack of executive initiative, the most likely outcome of such a process would appear to be the sale of the Company to a strategic or financial suitor at a significant premium to its current trading levels. Comparable publicly traded companies in the Aerospace & Defense and Communications Equipment sectors today trade for approximately 12x their calendar year 2022 EBITDA estimates, while Comtech trades for just 8.8x. A sale at 12x CY22 EBITDA in-line with peer valuations would imply a share price for Comtech of $32, representing nearly 50% upside from Friday’s closing price. However, upside to $40 or more could easily be justified given Comtech’s defensible market leadership in multiple high-growth areas. The Company should also be attractive to suitors given the likely recovery in FY23 and beyond of its Government Solutions segment from trough levels if certain large contracts are awarded to the Company.
Outerbridge believes that the substantial and certain value creation that could arise from such a sale process would likely be far more attractive to Comtech shareholders on a risk-adjusted and net-present-value basis, as compared to the Company continuing to execute its business plan as a public company under existing management. Should the Board elect instead to continue as a standalone Company, we believe substantial changes will be required to ensure that Comtech executes against the significant growth opportunities in front of it, and finally delivers for shareholders.
We are open to discussion with management and the Board on these issues, and look forward to a productive dialogue.
Chief Investment Officer
About Outerbridge Capital Management, LLC
Outerbridge Capital Management, LLC is a New York-based investment adviser that typically invests across the technology and technology-impacted sectors. As part of its investment process, Outerbridge regularly conducts significant due diligence on its portfolio companies and engages constructively with both management teams and boards where appropriate.