Comtech Telecommunication (CMTL) Q3 2021 Earnings Call Transcript

Comtech Telecommunication (CMTL -13.12%)
Q3 2021 Earnings Call
Jun 08, 2021, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Comtech Telecommunications Corp. third-quarter fiscal 2021 earnings conference call. At this time, all participants are in a listen-only mode.

Later, we will conduct a question-and-answer session. [Operator instructions] As a reminder, this conference is being recorded Tuesday, June 8, 2021. I would now like to turn the conference over to Mr. Jason DiLorenzo of Comtech Telecommunications.

Please go ahead, sir.

Jason DiLorenzo -- Investor Relations

Thank you and good afternoon. Welcome to the Comtech Telecommunications Corp. conference call for the third quarter of the fiscal year 2021. With us on the call today are Fred Kornberg, chairman of the board and chief executive officer of Comtech; Michael D.

Porcelain, president and chief operating officer; and Michael Bondi, chief financial officer. Before we proceed, I need to 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 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 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 filings. I am pleased now to introduce the chairman and chief executive officer of Comtech, Fred Kornberg. Fred?

Fred Kornberg -- Chairman, President & Chief Executive Officer

Thank you, Jason. Good afternoon, everyone, and thank you for joining us on this call. Today, we will be discussing the results for our third quarter of fiscal 2021 and our outlook for the full fiscal year. Let me just start this call by saying what I hope will be the last word about COVID-19.

As you would expect from the news headlines around the world, COVID-19, while clearly receding in the United States, is still a challenge for certain international countries. Normal operations have not really yet resumed, and international business travel is still almost impossible. Nevertheless, as you see from our announcement this afternoon, our operating performance of the third quarter of fiscal 2021 was very solid. Our third-quarter net sales were $139.4 million with an adjusted EBITDA of $17.7 million.

We look to a strong fiscal 2021. And we now estimate that fiscal 2021 consolidated net sales will be within a range of $580 million to $590 million. Our efforts to streamline our operations are really paying off. And we continue to target adjusted EBITDA in the range of $74 million to $76 million.

Based on our strong pipeline and year-to-date business momentum, we anticipated achieving a book-to-bill ratio in excess of 1.0 for fiscal 2021. With positive signs of a post-pandemic recovery continued, overall demand remains strong. And we have recently secured important contract awards and we're excited about our future. All in all, we continue to weather the COVID storm and we continue to see these clouds lifting.

Now, let me turn the call over to Michael Bondi, our CFO, who will provide additional commentary about the third-quarter financial performance and our business outlook. After that, Michael Porcelain, our president and COO, will provide an update on our total business. Then I will come back before opening up the line to questions and answers. Mike?

Mike Bondi -- Chief Financial and Accounting Officer

Thank you, Fred, and good afternoon, everyone. As Fred mentioned, our net sales were $139.4 million in Q3, which is higher than what we achieved in last year's Q3. Of the $139.4 million of net sales, 79.8% were to U.S.-based customers, with 20.2% to international customers. Bookings for the third quarter were $115.9 million and our consolidated book-to-bill ratio was 0.83.

We finished the quarter with a backlog of $636.5 million. And when you factor in the total unfunded value of certain multiyear contracts that have been awarded to us, but which are not yet in our backlog, we have visibility into approximately $1.1 billion of potential future revenue. Our gross profit percentage in Q3 of fiscal 2021 was 38%, as compared to the 39.2% achieved in the third quarter of 2020. The period-over-period change in our gross profit percentage reflects changes in the overall product mix and significant increases in costs due to production delays, minor supply chain disruptions, lower levels of factory utilization, and higher logistics and operational costs resulting from the COVID-19 pandemic.

Q3 of fiscal 2021 also reflects a $2 million benefit from the recovery of historical excise tax paid. Based on our expected level and mix of net sales for the remainder of fiscal 2021, we anticipate a consolidated gross margin percentage approximating 36%. SG&A for Q3 of fiscal 2021 was $27 million, or 19.4% of consolidated net sales, as compared to $32.3 million, or 23.9% in Q3 of fiscal 2020. In Q3 fiscal 2021, we incurred $600,000 of restructuring costs related to the shifting of production of many of our key satellite earth station products from our existing Tempe, Arizona locations to a new 146,000 square foot facility in Chandler, Arizona.

We expect about another $1 million of such costs in Q4. Turning to R&D, we spent $13.1 million in the third quarter, or 9.4% of net sales. Total stock-based compensation for the third quarter was $1.2 million and amortization of intangibles was $5.3 million. We continue to expect stock-based compensation to approximate $11 million to $12 million for FY 2021.

Our consolidated GAAP operating income was $2.4 million, and reflects $5.3 million of acquisition plan expenses, primarily due to the April 2021 settlement of acquisition-related litigation and our completed acquisition of UHP. Our adjusted EBITDA was $17.7 million, or 12.7% of consolidated net sales for the third quarter of fiscal 2021. Adjusted EBITDA in our commercial solution segment was $15.9 million, or 17.4% of related sales. And in our government solution segment, it was $3 million, or 6.3% of related net sales.

For fiscal 2021, using the midpoint of our consolidated net sales and adjusted EBITDA targets, our adjusted EBITDA margin approximates 13%. Now, let me talk about interest, taxes, EPS, cash flows, and our balance sheet. Interest expense was $1.5 million in the third quarter, and we expect to finish the year with a total interest expense of approximately 7 million. Our annual estimated effective tax rate excluding discrete tax items is expected to approximate 11.5%.

On the bottom line, our GAAP net income in the third quarter of fiscal 2021 was $800,000, or $0.03 per diluted share. Excluding acquisition plan expenses, restructuring costs, COVID-19 related costs, strategic emerging technology costs, and a net discrete tax expense, non-GAAP net income was $6.8 million, or $0.26 per diluted share. Cash generated by operating activities was $6.8 million for the third quarter, and we expect even stronger operating cash inflows for our fourth quarter of fiscal 2021. Our balance sheet as of April 30, 2021, includes $39.2 million of cash and cash equivalents, and our total debt outstanding was $215 million.

Our current secured leverage ratio, as defined in our credit facility, was 2.78 times. Now, I will hand it over to Michael Porcelain. Mike?

Mike Porcelain -- Senior Vice President and Chief Operating Officer

Thank you and good afternoon, everyone. We are pleased with our Q3 performance, especially given that during the third quarter, we continue to operate our business in what remains a difficult operating environment. The good news is that our employees have begun limited travel mostly in the United States and have started to return to the office. In-person demonstrations of our solutions are picking up and being scheduled for those such activities in the international market remains limited.

As demand slowly picks up across our industry, we are seeing higher logistics and operational costs. Supply chain issues are becoming more prevalent as lead times for certain parts have significantly increased. With that all said, these are good problems to have compared to the health issues of COVID. Now, let me more -- let me talk more about our business results.

In our commercial solution segment, net sales were $91.4 million this quarter. We received what is aggregating $75.1 million, resulting in a book-to-bill ratio of 0.82 for this segment. We continue to see positive momentum in our public safety and location technology product line. Net sales during the quarter for this product line were higher than last year's comparable quarter and reflect the benefit of incremental sales of our Next Generation 911 and location-based solutions offset in part by the options of 911 wireless call routing cells to AT&T.

As noted in our last conference call, we were awarded the statewide contract valued up to $175.1 million to design, deploy, and operate Next Generation 911 services for the Commonwealth of Pennsylvania. This contract was initially funded at $137.4 million, $111 million of which was booked during our second quarter. Work on this contract has just begun and is expected to ramp up next year. In addition, as discussed in our last conference call, this contract was awarded to us shortly after we announced the receipt of a $54 million contract to design, deploy, and operate Next Generation 911 services for the state of South Carolina.

We are really pleased with what we are seeing to date in South Carolina. In addition to this current contract starting performance, we are seeing signs from the customer that additional work may be on the way. We believe they have a strong interest in our Solacom call handling solution and we hope to make some announcements here pretty soon. Obviously, the Pennsylvania and South Carolina contracts are important.

But don't let them overshadow other important contract awards we received in Q3, including a $9.8 million contract with a major Tier 1 mobile network operator for a broad suite of new capabilities and services, centered around virtualized applications and 5G products. We received orders exceeding $3.8 million with a Tier 1 mobile network operator for additional capabilities related to our virtual mobility location center platform. A $1.6 million Next Generation 911 services contract to provide Solacom Guardian call management solution to the Toronto Paramedic Services, the largest municipal paramedic service in Canada. We also received a $1.3 million contract renewal with a Tier 1 mobile network operator to support messaging services.

And we received our first international 5G services contract with a leading Tier 1 mobile network operator in Australia. We continue to build out various situational awareness data products for our 911 customers. And we are working on a number of exciting initiatives in the public safety, cybersecurity area. All I can say is continue to stay tuned.

Now, I will discuss our satellite ground station product line, where things do remain challenging but are looking better. Net sales in this product line during Q3 were higher than the comparable three months of fiscal 2020. We benefited this quarter from a number of awards including a contract valued at more than $3 million for v-band traveling wave tube amplifiers or TWTAs to support a new high-speed satellite network, an order valued at more than $2 million or state-of-the-art 500-watt Ka-band high-power amplifiers, supporting a leading high throughput satellite customer. We received another $2 million order for rugged Ka-band high-power TWTAs for a U.S.

military communication system. And an order exceeding $1 million for our Falcon 50Ka solid-state power amplifiers for an inflight connectivity application. And an order exceeding $1 million for X-band solid-state power amplifiers and block of converters for a transportable military satellite communication system. In addition, demand for our Heights technology solutions is strong.

And we recently received a multi-million dollar contract award from an international customer. Let me also talk about our acquisition of UHP Networks, which closed during this quarter and which is receiving accolades across our industry. As we have said before, we believe UHP's developed revolutionary technology and is transforming the growing very-small-aperture terminal market or VSAT market. With the end market for high-speed, satellite-based networks significantly growing, we are excited to extend our product offerings to include their TDMA satellite modems.

The integration of UHP into our satellite ground station product line in our commercial solution segment is well on the way. Now that UHP has full access to our direct and indirect distribution methods, we believe that UHP sales will significantly increase from current levels over the next few years. We are meeting with our customers, discussing with them the benefits of our Heights solution and our UHP solutions, and how our roadmaps will play out. Based on the feedback we have received to date, we have no doubt we are headed in the right direction.

Overall, despite navigating 12 months of COVID in fiscal 2021, we remain optimistic that net sales in our commercial solution segment will be slightly higher than the amount we achieved in fiscal 2020. Now, let me turn to our government solution segment where sales were $48 million, as compared to $56.8 million in Q3 of last year. Bookings in our commercial -- in our government solution segment came in at $40.7 million with a book-to-bill ratio of 0.85. As everyone knows, period-to-period fluctuations in bookings are normal for this segment.

The most recent quarter primarily reflects lower sales of global field support services and other programs with the U.S. Army, offset in part by higher sales of our solid-state, high-power amplifiers; and also our EEE, or high-reliability electrical, electronic, and electromechanical space components. Last quarter, we announced that we received initial orders related to a new multi-year contract valued up to $235.7 million to provide ongoing system refurbishment, sustainment services, and baseband equipment to the U.S. Army in support of its Secret Internet Protocol Router and Nonsecure Internet Protocol Router Access Point or SNAP family of ground satellite terminals.

In the third quarter, we received an additional $9.2 million of orders under this contract. Other notable awards given to us during the third quarter include the following: a $6.5 million of funding from the U.S. government for a Joint Cyber Analysis Course training solutions; $6.2 million of funding to support the U.S. Army's project management mission command, Blue Force Tracking-1 program; a $3 million order from an overseas agency for the maintenance of downrange tracking stations.

We received a $2 million order to provide the U.S. Marine Corps with rugged baseband command the control modules for Program Manager Light Armored Vehicles. And we received a $1.6 million contract for RF microwave solid-state amplifiers from a major domestic prime contract. Since we last spoke to you, we are seeing changes with respect to short-term prospects for our government solution segment, specifically on April 21, the U.S.

government announced that they intended to fully withdraw troops from Afghanistan by September 2021. This accelerated plan will result in lower revenues than previously anticipated for certain programs we participate in. In addition, The U.S. presidential administration released its fiscal '22 budget request.

This request includes less money for certain legacy programs but additional funding for modernization and new programs that we will participate in. All in all, we believe these budget changes will benefit us over the longer term but it will result in our government solution segment revenues at a significantly lower amount than we achieved in fiscal 2020. We are definitively seeing strong interest across the board for our recently introduced contact terminals and other new technology solutions that we are actively discussing with our customers. During the third quarter, we conducted successful infield demonstrations, including our industry-leading troposcatter solution that we are currently providing to the U.S.

Marines. Other military commands, including the U.S. Army, are pleased with what they see and have shown strong interest. In addition, as we enter into our fourth quarter in support of the U.S.

Army's network modernization efforts, we've been working to respond to a new proposal request related to the development of the mounted-mission command transport or MMCT terminal, which is the successor to the U.S. Army's Blue Force Tracking-2 program. We estimate that there are over 120,000 legacy BFT terminals across the Army and joint services and an ultimate production contract to us could be worth hundreds of millions of dollars. Over the years, we have been providing BFT-1 sustainment services to the U.S.

Army, along with other development and engineering-type services. And we believe that we are well-positioned to meaningfully participate in this upcoming program. In addition to the good prospects with respect to this new MMCT program, we are excited about opportunities with a new strategic partner. As announced earlier today, we entered into a strategic technology partnership with Kymeta to broaden its network of antenna terminals through interoperability with our SLM-5650B program.

The 56B is a U.S. Army Forces Strategic Command, wideband global SATCOM modem that is used for critical commercial backhaul, as well as government and military applications. It's fully compliant with key military standards and complies with and supports FIPS 140-2 certified encryption. This Kymeta partnership expands our solution set and capabilities offered to our government and military user base and will benefit both our government and commercial solution segment.

Now, before turning it over to Fred, I do want to share with you some good news with respect to emerging satellite opportunities that so many of you have asked us about. As disclosed in our Form 10-Q, during this third quarter, we incur $300,000 or strategic emerging technology cost for next-generation satellite technology, which was used to advance our solution offerings to be used on new broadband satellite constellations. As many of you know, there is widespread industry discussion of next-generation satellite technologies that are likely to be used in the thousands of new LEO, MEO, and even GEO satellites expected to be launched over the next few years. These new satellite constellations, at their core, are being developed and deployed to provide high-quality, high-speed broadband internet access to over 3 billion people across the world and are intended to meet the demand for unprecedented data transmission from smart devices.

As stated in a variety of industry publications, the investment cycle is well under way. And we believe attention is now turning to the equipment that we provide, including ground station equipment, X-Y antennas, modems, and amplifiers. In order to meet this unique and emerging need, certain technical capabilities need to be expanded and efforts must be encouraged to decrease size, weight, and complexity. This market is new for us, and so during the quarter, we made an initial small investment to jettison our business plan. Although this internal R&D investment cost was small, we do continue to evaluate this new market in relation to our long-term business strategies and we may incur additional costs over the next 12 months.

With that all said, I'm very excited to report at the start of our fourth quarter, we entered into a multi-year agreement, enabling the customer to potentially order hundreds of millions of dollars of our next-generation satellite earth station technology. Shortly after signing this agreement, we received our first order valued at more than $13 million to make certain customizations on behalf of this customer. Work on these efforts has commenced immediately. I do hope that you understand that due to competitive reasons and nondisclosure agreements, we can't say much more about it.

This is a very strategic way for us. And I want to extend my thanks for all the hard work of our team members to make -- that made this happen. We expect to fully perform in this initial development work and are very optimistic that future orders will come our way. Now, I will turn it back to Fred, who will provide some closing remarks.

Fred?

Fred Kornberg -- Chairman, President & Chief Executive Officer

Thank you, Mike. As I mentioned previously, am very pleased with how our business is performing during this epidemic. As we enter our fourth quarter, I believe we are on track for a strong finish to fiscal 2021. I'm also very excited about our prospects going into fiscal 2022, including our strengthening positions on the large developing near-term opportunities that Mike just mentioned.

Even our business outlook -- because of our business outlook, our board of directors has declared a dividend of 10%, $0.10 per common share payable on August 20, 2021 to shareholders of record at the close of business on July 21, 2021. We continue to believe that our dividend program is still a great way to return some capital to our shareholders as we look to grow our business. Now, I would like to proceed to the question-and-answer part of our conference. Operator?

Questions & Answers:

Operator

[Operator instructions] And it looks like we have a question from Joe Gomes from NOBLE Capital. Your line is open. Please go ahead.

Joe Gomes -- NOBLE Capital Markets -- Analyst

Thank you. Good afternoon.

Mike Porcelain -- Senior Vice President and Chief Operating Officer

Hi, Joe.

Joe Gomes -- NOBLE Capital Markets -- Analyst

So I know you just mentioned you can't talk a whole lot about the new multi-year agreement, but you did mention you got the first order of 13 million. I was wondering if you might be able to give us a little color on, you know, how long does that last, what's the timing for that 30 million, what kind of -- would be the next steps in the process once that contract, the 13 million, is completed?

Mike Porcelain -- Senior Vice President and Chief Operating Officer

Sure. Well, you know, as we discussed in our 10-Q, you know, we are making customizations to our technology. So I mean, obviously, it's a just development contract that we first got. And you know, as we say, and you're right, I can't say much more, but we think that there's potentially hundreds of millions of dollars that, you know, once that customization is done, that's what we expect.

Joe Gomes -- NOBLE Capital Markets -- Analyst

OK, thanks for that. And you kind of went over the Pennsylvania and the South Carolina NG911 opportunity, right? I believe there was another one out there that you were chasing. Maybe you could kind of give us a little more color on what else is out there right now that you're looking for that might be in the South Carolina and or Pennsylvania type of size?

Mike Porcelain -- Senior Vice President and Chief Operating Officer

Yeah, I mean, there's really -- I'd say at this point, there's probably two contracts and we'll probably name them since the information out there is pretty public at this point. So you know, we're waiting for Ohio to fund, you know, what's probably a triple million-dollar contract. So you know, north of $100-some odd million is out there and we are just sort of waiting on the funding for that particular contract. And we're really waiting on an award announcement, which is more competitive in the state of Arizona.

And you know, those are very near-term opportunities. And that's pretty much out there for public consumption.

Joe Gomes -- NOBLE Capital Markets -- Analyst

OK, thanks. And then, one last one for me and I'll get back in the queue. You know, bookings in both of the business segments were, you know, 0.8 and 0.85. You know, you mentioned in the government solutions that it's normal to see some fluctuations there.

And the commercial side, anything out of the ordinary there, or is that just, again, some more of just your normal fluctuations in business for the quarter there?

Mike Porcelain -- Senior Vice President and Chief Operating Officer

Yeah, I mean, obviously in Q2, you know, it's lower than Q2 because we had that large, you know, Pennsylvania booking. But our Q3 bookings were actually higher than what we achieved in Q1 for the commercial segment. So you know, I would just say it's normal fluctuations up and down. And obviously, the international market, you know, is difficult right now.

And so, you know, those will eventually come at some point.

Joe Gomes -- NOBLE Capital Markets -- Analyst

Great. Thanks. I'll get back in the queue.

Operator

Our next question comes from Chris Quilty from Quilty Analytics. Your line is open. Please go ahead.

Chris Quilty -- Quilty Analytics -- Analyst

Thanks. Mike, I want to just follow up on that constellation order. I don't know whether you can provide the detail, but are you providing a point solution, i.e. amplifiers or baseband? Or are you providing a comprehensive solution for this customer that would range from the gateway to the end-user terminal?

Mike Porcelain -- Senior Vice President and Chief Operating Officer

Well, the best answer I'll give you is that we're going to ride the wave of what's happening in the industry and I can only refer to it as next-generation satellite technology. But I'm not going to get into the specific products that we're putting forth.

Chris Quilty -- Quilty Analytics -- Analyst

OK. I know you're not building the satellites, at least.

Mike Porcelain -- Senior Vice President and Chief Operating Officer

All right, you can get -- I agree with you on that one.

Chris Quilty -- Quilty Analytics -- Analyst

I got something from you. Shifting over real quick to the Heights product line, you said you're seeing positive momentum. Just general business trends that you're seeing there in terms of end markets or domestic and international coming back. I know you've got some, you know, like oil and gas that tend to be pretty cyclical, video has moved in cycles.

Any color you can give us?

Mike Porcelain -- Senior Vice President and Chief Operating Officer

You know, nothing is different than the last time. I mean, we both -- we're a big believer that data transmission and bandwidth needs are going to increase. And certainly, saw an acceleration of that during the COVID pandemic. The award of Heights by this international customer, again, multi-million dollars.

I mean, it was -- it's a very prominent award in that part of the world. And we actually think that that will lead to additional Heights sales in there. And at the same time, you know, our UHP Network solution is best-in-breed by far. And obviously, you know that we've had some in-depth experience with satellite companies over the last two years and UHP is well-positioned.

And given the growth that's happening with 4G and 5G around the world with mobile network operators, we think UHP and our Heights solutions are very uniquely positioned.

Chris Quilty -- Quilty Analytics -- Analyst

Great. And shifting over to the government segment of the business. If I read the language correctly, it sounded like there was a significant Afghanistan component to the guide down, you know, on the guidance for the government segment. Can you cite that for us? Is that stuff that just goes away because troops are not deployed or does it get reallocated somewhere else and show up later?

Mike Porcelain -- Senior Vice President and Chief Operating Officer

It's more of what you said in the earlier part of your comment. You know, look, most of, if not all, of the change, was related to the withdrawal of troops with Afghanistan. And you know, I think we've always said publicly if you have a few troops in Afghanistan or in a particular area, you need a communications system. Here, the plan is to fully withdraw troops.

So, I mean, you're talking about a dismantling of an infrastructure that was out there. So we don't think that's coming back in both to, you know, to our thinking camp for, you know, unless there's another, you know, ground action or something unexpected that that may happen. So, you know, those program changes were announced by the U.S. presidential administration during the quarter.

So we don't see that revenue coming back. At the same time, we're working through the budget. And you know, the best example that I can point to is, look, there were certainly legacy programs that this administration is going to not fund, but at the same time, they're funding next-generation systems such as the Blue Force Tracking successor program. So I mean, you can see that, I mean, the white paper was out there, we're responding.

We're responding to this finally after so many years, you know, I've told people on the phone, don't even ask me about Blue Force Tracking-3. When I have something to say, then you'll know I'm talking about it because it's real. And you know, we are responding. We have some pretty good teaming agreements within the work.

I'd like to think that the government will get the band back together and BFT-1 was an extremely successful program. We sold one $1.5 billion worth of equipment under the BFT-1 program. I'll take half of that, you know, in this next-generation cycle. So we're very optimistic that the successful program to the BFT-2 program, 2.5 program, I guess you could call it, will happen.

And you know, we're going to put forth our best foot forward to the government, and we'll see what happens. But that's an example of where, you know, outside of the short-term noise, the long-term prospects look dynamite.

Chris Quilty -- Quilty Analytics -- Analyst

Great. So technically, I'm not asking you a question about it because you brought it up. But is there a determination at this point, in terms of a frequency band, that that system might go? So much of the SATCOM capacity that's being brought online, both GEO and LEO, is Ka-band, or are we, you know, migrating toward military-only X-band or staying in Ku?

Mike Porcelain -- Senior Vice President and Chief Operating Officer

I think the way I would describe it is that they certainly want backward compatibility, which is something that Comtech is uniquely positioned to provide as it relates to some of the aviation types of equipment that are still using our equipment today. So obviously, we'll have L-band. We previously announced a couple of years ago a partnership with Iridium. And I think that you'd be looking to see the Iridium out there, and yeah, you may see some X-band out there.

So I think the government's idea is they don't want to be stuck with one particular satellite band or one particular satellite system. They want the ability that if one part of the system gets jammed that to seamlessly move over to another within the same product. So you know, we have that capability to have multiple waveforms and multiple modem technologies in the same transceiver.

Chris Quilty -- Quilty Analytics -- Analyst

Great. And I'll do a final question on Next Generation 911. A lot of money being thrown around by the government nowadays. Obviously, the infrastructure bill hasn't made its way through.

But any indications that you're seeing that there might be additional money set aside for those types of systems?

Mike Porcelain -- Senior Vice President and Chief Operating Officer

Everyone's talking about it, Chris, so I guess we agree with the philosophy. We hope it happens. It's a question of where that funding winds up. Some states, I think it's fair to say, are waiting to see, you know, the state doesn't want to announce that their own funding if they can get the funding from the federal government.

So that's -- and I think there's a little bit of pause by some states, but at the same time, there are other states that do not want to wait. Their local constituents want to move forward. Arizona is an example of it. Ohio is an example of it.

We saw it with Pennsylvania. We saw it with South Carolina. So I would say it's all good news either way. If there's more funding, it's what -- we should benefit from it.

Chris Quilty -- Quilty Analytics -- Analyst

Great. Thanks, guys.

Operator

Our next question comes from Asiya Merchant from Citigroup. Your line is open. Please go ahead.

Asiya Merchant -- Citi -- Analyst

Great. Thank you. Just a question, I mean, given all these initiatives that you're talking about, you know, help us think about growth drivers and sort of even some growth numbers for '22 as it relates to the government and commercial solutions. I mean, should we expect, given the significant drop in government, of course, hopefully, growth in fiscal '22, but what kind of levels are we talking about? Can we come back at some point to where they were in fiscal '20, given all the various initiatives and hopefully the BFT opportunity materializes as well?

Mike Porcelain -- Senior Vice President and Chief Operating Officer

I think the BFT opportunity is probably, you know, again, that's outside of initial work that will be doing, you know, assuming we win this initial opportunity. That revenue is really going to be '23, '24-type revenue. That you know, it's going to take some time, might it be a booking in 2022 in the hundreds of millions, well, yeah, that's a possibility. I mean, the government is giving all signs right now that they're moving forward.

Sitting here in the month of, I think, it's June, it's just way too early for us to give you some clarity here. We normally don't give out our guidance until September. I think, look, the one thing I can say about the government, yeah, it's not -- I don't think it's going to grow next year is what I would say based on what we see. But again, it's too early to tell.

As the programs come in, we -- if they come in on the earlier side, yeah, we might be able to do that. But I think given the Afghanistan withdrawals and what we're seeing on the budget side, I think the government business, you know, as a segment, it'll be tough to grow versus, let's say, this year. In terms of our commercial business, I think, yeah. I think we're -- all signs are positive.

Asiya Merchant -- Citi -- Analyst

So the growth as international comes back, you know, given sort of the midpoint of your guidance and, obviously, the Afghanistan stuff, is it reasonable to assume high single-digit growth into next year for the commercial? All stuff along that's more familiar with the COVID?

Mike Porcelain -- Senior Vice President and Chief Operating Officer

Yeah, I think that's possible. We need the international markets to come back and, you know, it should come. Whether or not it's going to occur in the first six months of 2022, it's too early for us to tell you. But I think we eventually, as you're seeing in the United States, the market is starting to turn.

You know, unfortunately, you look at areas of the world like India. I mean, India is closed. You know, there's just -- there are pockets of the world right now where nobody's doing anything. And it's a lot different than what's happening in the U.S.

Even Canada, surprisingly so. We have business operations up there and, you know, it's just shut down. So that all being said, you know, when you look at this thing on a 12-to- 18-month basis, there are very positive signs in our satellite station business. This new contract that I mentioned to you, you know, we're talking about hundreds of millions of dollars.

And you know, when that comes, you know, it'll come after we think the development part of the program. But we have to kind of work through that.

Asiya Merchant -- Citi -- Analyst

And what are the competitive dynamics there?

Mike Porcelain -- Senior Vice President and Chief Operating Officer

I'll let my competitors share their aspects of it. I can't comment.

Asiya Merchant -- Citi -- Analyst

And anything, if you can talk about, like how we should think about margins here across the two segments? You know, if the government kind of hangs in there, maybe no growth, but what kind of margins are we now expecting in that segment? I mean, clearly, we're going to take them down relative to where we were before. But you know, of this, 8%, 9% margin for the year, yeah?

Mike Porcelain -- Senior Vice President and Chief Operating Officer

I think, yeah. I think our focus for this year was to get higher than 10%, just the EBITDA margins. You know, when we started the year, I think, as we've witnessed with this sudden change by the government with the withdrawal of the troops, it is going to impact our goal. I don't think we're going to do 10% adjusted EBITDA margins in the segment.

So you know, maybe closer to 8% or 9%. I think when -- then that's for this year. So I think, again, as I look forward to next year, I'd like to get us back to the 10%, that's the target. Our commercial segment, you know, we've done pretty well.

Each of the first three quarters, we've done north of 17% adjusted EBITDA margins. You know, if we start getting incremental volume on some of these large opportunities that we're talking about, it will come. Normally when you do development work such as customization or customer-funding type R&D, margins on those initial programs are relatively low. You get the benefit of production.

And you know, that's it's a little ways off. But you know, again, we're talking very large amounts of hardware coming.

Asiya Merchant -- Citi -- Analyst

Great. Thank you.

Operator

Our next question comes from Mike Latimore from Northland Capital. Your line is open. Please go ahead.

Aditya Dagaonkar -- Northland Securities -- Analyst

Hi, this is Aditya on behalf of Mike Latimore. Could you tell me are you facing any component shortages in your current business environment? And if so, how much impact is it having on the gross margin or revenue?

Mike Porcelain -- Senior Vice President and Chief Operating Officer

Sure. We are experiencing what I would call industrywide shortages. We're not seeing anything specific to us, and it's more in the lead time issue right now. We're not seeing on availability -- unavailability of parts where, you know, a factory is burned -- went on fire.

It just simply delays in getting parts. So you know, some of that results in inefficiency in our facility is we just -- we build a product and we have to wait until we could deliver it until we get the parts. But you know, it has negatively impacted gross margins. I prefer not to tell you, you know, a specific dollar amount, but it is impacting on margins, which we hope will go away.

But you know, we're definitely seeing increased parts and similar to what you're reading about on the industry. Freight is just another example. I mean, freight costs in some areas of the world have tripled. And you know, we obviously just need to those things -- we obviously need to see those come down.

We hope that we're not going to experience the costs in some parts of the world that we are seeing right now. We think that's partly due to the shutdown on the availability of labor in certain parts of the world. But it's real, and it's out there.

Aditya Dagaonkar -- Northland Securities -- Analyst

All right, all right. And my next question would be the Pennsylvania 911 deal. Can we expect it to start contributing to the revenue from Q4?

Mike Porcelain -- Senior Vice President and Chief Operating Officer

Yeah, we are expecting some Q4 revenue from our Pennsylvania contract, but not a whole heck of a lot. It's really going to turn on next year.

Aditya Dagaonkar -- Northland Securities -- Analyst

All right, all right. Thank you. 

Operator

[Operator instructions] We'll take our next question from Kyle McNealy from Jefferies. Your line is open. Please go ahead.

Kyle McNeal -- Jefferies -- Analyst

Hi, this is Kyle on for George. Thanks for the question. Wanted to see if you could parse through the updated guidance for the full year a bit more and what's implied for Q4? How much of that guidance is now driven by the inclusion of UHP revenue? And for the step down versus the previous guidance for the full year, is that all related to the U.S. government and kind of the budget updates there, or are there other puts and takes to consider in other parts of the business?

Mike Bondi -- Chief Financial and Accounting Officer

In terms of the first question with the UHP, I would say it is still a nominal amount in the year in terms of Q4. Your second question, yeah, it was mostly in the government segment and it was driven by the recent changes that Mike was referring to earlier.

Kyle McNeal -- Jefferies -- Analyst

That's great. And this is one kind of piggyback on the logistics constraints comment. But you mentioned kind of impact on gross margin, but is there any way you can frame, you know, what the risk may be to net revenue if you see a difficulty with the supply chain issues, like is it a percent of revenue, a couple of percent or not really that much of a headwind to revenue as you go through the next couple of quarters?

Mike Porcelain -- Senior Vice President and Chief Operating Officer

Yeah, I think the way I would best characterize the impact to, let's say, the rest of this year is really not on the revenue side, but probably on the margin side. So you know, within our guidance number, you know, we're thinking it's going to be somewhere between 74 and 76 if the component parts continue to increase or they don't dissipate. And we might be on the lower side of that 74 million. But you know, depending on -- that's how I would characterize the impact.

It's not -- we don't necessarily see it on the revenue side. It's really on the cost side that we're seeing it.

Kyle McNeal -- Jefferies -- Analyst

All right, thanks. That's helpful. And one last one for me. This is regarding the timing and outlook of the USCA sales.

With the budget changes and associated headwinds that you talked about, are they persistent through 2022, which seems to be the natural conclusion? And you also mentioned the various next-gen programs, and you know, you talked about the BFT-2, but I'm sure there are others. I wonder if you can add anything in terms of the time frame of those and when they would be positioned to come in? Are there any that could be as early as impacting 2022, or are these all kind of 2023 and beyond?

Mike Porcelain -- Senior Vice President and Chief Operating Officer

Yeah, it's a mixed answer. You know, look, we have these -- with BFT-3, I guess, which I have to start learning the new acronym, which is in the 10-Q. But the BFT-3 program, it's there. And it's going to be an initial development program that will take some time to work.

But the government has indicated that shortly after completion of that work, they intend to issue production awards. And so you know, you simply do the math, and you're talking about hundreds of millions of dollars of production available. So we could be in a situation where none of that occurs in 2022 or we get big orders. And that's a '23 revenue, or we get the revenue in '22.

That's why we always say it's just too early, especially with the BFT-3 program. COMET is another example. COMET, you know, we were expecting, again, earlier in this year some orders to come in by Q4, and this is a sort of a quick ship product. So with the funding situation still not being fully clear yet, yeah, we're not expecting any orders for the product in Q4.

So we're not -- we're thinking to your point is going to carry over a little bit into the fiscal year 2022 until things get sorted away. But if COMET orders start to come quickly, then that will be a big benefit to the bottom line. I mean, these are compute -- hardware products that we make internally. They got good margins. And we're seeing very, very strong interest both from the U.S.

government and foreign customers. Our troposcatter program is another example. Right now, you know, we've been working with the Marines with the program that we want with our partner. People have asked us time and time again, well, do you have an opportunity to go back to the U.S.

Army? And we said we'll have something to tell you when we have something to tell you. The thing I can tell you right now is we've now demonstrated the solution to the U.S. Army just very recently. So we believe that there's a lot of upside for us in our government segment, despite the decline in revenues that we see today.

But at the same time, it's just too early for me to tell you. But when I sit back and I look at it, Asiya asked the question earlier, that kind of thing on government segment, it'd be flat. It's going to be tough to grow next year when I think about everything. We'll see what happens.

It's going to come down to funding. And whatever the government does, we'll get clarity over that over the next few months. And we'll give you an update as we learn.

Kyle McNeal -- Jefferies -- Analyst

OK, great. Thanks a lot.

Operator

[Operator instructions] It appears that we have no further questions at this time. I will now turn the program back over to our speakers for any additional or closing remarks.

Fred Kornberg -- Chairman, President & Chief Executive Officer

OK, that is the end of today's call. Thank you again for joining us today. And we look forward to speaking with you again in September.

Operator

[Operator signoff]

Duration: 51 minutes

Call participants:

Jason DiLorenzo -- Investor Relations

Fred Kornberg -- Chairman, President & Chief Executive Officer

Mike Bondi -- Chief Financial and Accounting Officer

Mike Porcelain -- Senior Vice President and Chief Operating Officer

Joe Gomes -- NOBLE Capital Markets -- Analyst

Chris Quilty -- Quilty Analytics -- Analyst

Asiya Merchant -- Citi -- Analyst

Aditya Dagaonkar -- Northland Securities -- Analyst

Kyle McNeal -- Jefferies -- Analyst

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