CMTL — Q3 2026 Financial Report Analysis

Comtech's fiscal third quarter (the three months to April 30, 2026; its fiscal year ends July 31) showed revenue down 16.4% to $106.0 million. Most of that drop was planned: management stopped taking low-margin satellite contracts, so gross margin rose to 34.0% even as sales shrank. The bigger news came after the quarter ended. On June 14 Comtech agreed to sell most of its Satellite and Space Communications (S&S) business to an affiliate of Gilat for $157.5 million. Most of the proceeds go to lenders, and what remains of Comtech becomes a public-safety and 9-1-1 software company, to be renamed Allerium. The quarter itself still lost money at every level below operating profit, because interest on Comtech's debt ($11.5 million) is more than twice what the business earns before one-off costs.

At a glance

• $106.0M revenue, down 16.4%. S&S sales fell 25.6% as the company dropped low-margin work such as its VSAT (small satellite dish) services contract. Allerium was flat once you strip out a $3.0 million one-time catch-up bill in last year's quarter.
• 34.0% gross margin, up from 30.7%. Gross margin is the share of revenue left after the direct cost of making the product. Comtech kept more of each sales dollar, but on a smaller revenue base, so gross profit in dollars still fell $2.9 million.
• $11.5M interest expense vs. $5.1M adjusted operating income. Even before amortization, restructuring and stock pay, the business doesn't earn enough to cover its interest bill. Selling S&S to pay down debt is meant to fix exactly that.

The quarter in numbers

Adjusted figures are Comtech's own non-GAAP measures. They add back intangible amortization ($4.6M), restructuring ($2.4M), stock-based compensation ($1.2M) and CEO transition costs, plus depreciation for EBITDA. "Book-to-bill" is new orders divided by revenue: below 1.0x means the company shipped more than it booked in the quarter.

Takeaway: The operating turnaround is real but small next to the balance sheet. Comtech now has five straight quarters of positive operating cash flow and a gross margin up 3.3 points. Yet the quarter's $11.5 million interest charge was more than double its $5.1 million adjusted operating income. The Gilat sale is what changes that math, not quarterly execution. Until the deal closes (it still needs U.S. antitrust and CFIUS foreign-investment clearance), the equity remains a bet on that closing.

Two segments, heading in different directions

Allerium (public safety, 9-1-1 and location services): $55.7M sales, down 5.9%. The prior-year quarter included a $3.0 million "negotiated, retroactive billing event" that recovered costs from earlier quarters. Without it, sales were flat. Segment operating income fell to $4.4 million from $8.4 million. Comtech attributes this mainly to that one-time billing and to higher research and development and go-to-market spending. Allerium's book-to-bill was only 0.32x. Management says that reflects the timing of large multi-year awards, after 1.06x and 2.51x in the first two fiscal quarters. The company points to its Kentucky statewide NG9-1-1 contract (12 call centers migrated in four months) as the kind of win the business runs on. NG9-1-1 is the shift of 9-1-1 networks from voice lines to internet-based systems that can carry text, data and precise location.

S&S (satellite ground equipment, troposcatter radios, antennas, cybersecurity training): $50.3M sales, down 25.6%. The filing ties the decline to "the Company's decision to phase out and eliminate certain low-margin and working-capital-intensive revenues, such as the VSAT Satellite Systems and Services contract." Segment operating income was $1.6 million, against $2.7 million a year earlier, after $0.8 million of restructuring. One positive sign: S&S book-to-bill reached 1.04x, its first quarter above 1.0x since fiscal Q1 2024. This is the business being sold, except for the advanced cybersecurity training work, which Comtech keeps.

What the headline numbers hide

• Last year's "profit" was an accounting gain. The prior-year quarter's $33.9 million net income came from a $49.5 million non-cash gain on revaluing warrants and derivatives tied to Comtech's debt and preferred stock. These liabilities shrink on paper when the share price falls. This quarter's equivalent gain was $12.5 million. Strip out those gains and pre-tax loss was about $14.7 million, against about $17.4 million a year ago. That is a modest improvement, not a swing from profit to loss.
• Preferred-stock dividends sit between net loss and the per-share loss. Common shareholders lost $14.3 million ($0.47 a share), compared with the $3.5 million net loss. The $10.8 million gap is dividends on the convertible preferred stock, which accrue and are added to its value rather than paid in cash. The preferred's liquidation preference (what holders are owed ahead of common shareholders) rose to $218.2 million at April 30 and $220.5 million by June 12.
• The debt stack is large and expensive. At April 30 Comtech owed $119.7 million on its senior credit facility and $104.1 million on its subordinated facility. That second figure excludes a further $32.5 million "make-whole" premium owed on $65.0 million of the subordinated loans. Comtech's effective interest rate was about 19.2%, and its cash borrowing rate on the senior facility about 14.1%. The June amendment fixes the senior loan's margin at 10.50% over SOFR (a benchmark short-term rate) through maturity. Cash on hand was $28.5 million, and total liquidity (qualified cash plus undrawn revolver) was $49.4 million.
• Covenants are suspended, not passed. Lenders have again suspended testing of the net leverage, fixed-charge coverage and minimum EBITDA covenants, now through the four quarters ending July 31, 2027. Those are the lender tests that normally limit how much debt a company can carry relative to its earnings. With testing suspended, there is no covenant headroom figure to report. The going-concern warning (an auditor's flag that a company may not survive the next year) was removed in the fiscal 2025 10-K. This 10-Q says management believes cash flow and the revolver are enough for the next year.
• Cash flow came partly from shrinking working capital. Nine-month operating cash flow was $19.1 million, compared with -$19.7 million a year earlier. But $18.0 million of it came from collecting receivables and $5.6 million from cutting inventory, both natural results of a smaller S&S business. That source of cash runs out once the downsizing is done. Capital spending also rose to $5.4 million in the quarter (from $2.5 million), so free cash flow (operating cash flow minus capital spending) was only about $0.7 million.
• Backlog is big but mostly belongs to the business being sold. Funded backlog of $696.1 million is about six and a half quarters of current revenue. The filing says "a substantial portion" will be recognized within 24 months. Management also cites about $1.1 billion of "revenue visibility" by adding unfunded multi-year contract value. The filing does not split backlog between Allerium and S&S, so it doesn't say how much stays with Comtech after the sale.
• Smaller one-offs: $2.4 million of restructuring (compared with $4.3 million last year), and a $1.1 million discrete tax charge, mainly from a valuation allowance on Canadian deferred tax assets. A valuation allowance is a write-down of tax savings the company no longer expects to use.

The Gilat deal and what it does to the balance sheet

Under the June 14 agreement, Gilat affiliate Wavestream buys most of S&S for $157.5 million in cash, of which a $10.0 million advance was paid on signing. Comtech expects net proceeds of about $143–145 million after $12.5–14.5 million of sale costs. Its credit agreements send 65% to the senior facility and 35% to subordinated debt, starting with the subordinated priority term loan. The sale-related prepayment penalty was cut from 2.00% to 1.00%. The preferred holders agreed not to use optional repurchase rights until October 31, 2029 (except in certain asset sales or a change of control), and not to demand cash dividends before October 31, 2028. The $7.99 conversion price stays the same.

Applying those percentages, the senior facility would be mostly repaid. But roughly $50 million going to the subordinated lenders falls well short of that facility's $104.8 million balance (June 12) plus its make-whole premium. The $220 million preferred also stays in place. Post-sale Comtech will be much less leveraged, but it won't be debt-free.

Subsequent filings show the deal was still pending at the end of the fiscal year. On July 31, 2026, Comtech prepaid $6.5 million of senior term loan and $3.5 million of the subordinated priority loan from the advance payment, plus $1.0 million of scheduled principal. Lenders also waived the fiscal 2026 excess-cash-flow prepayment. If the deal fails in certain circumstances, Comtech keeps the $10.0 million advance as its sole remedy.

Outlook

Comtech gives no revenue or earnings guidance. The things to watch in the fiscal 2026 10-K (year ended July 31, 2026, not yet filed as of this writing) and after:

1. Deal closing. HSR antitrust clearance and CFIUS approval are the gating items. The 10-Q warns there is "no assurance" the deal closes on the proposed terms, on time, or at all.
2. Allerium's standalone economics. This quarter Allerium earned $4.4 million of operating income (about 7.9% of its sales) and $10.4 million of adjusted EBITDA. Once S&S is gone, those figures, plus the retained cybersecurity training work, have to carry the remaining debt, the preferred stock and corporate costs. Unallocated corporate costs included $1.4 million of restructuring this quarter alone.
3. Allerium orders. After a 0.32x quarter, a return toward 1.0x or above would back up management's statement that the low ratio was just timing.

Our read: management has delivered the operating discipline it promised, with fewer low-margin contracts, higher gross margin and positive cash flow. But the equity story now depends almost entirely on the sale closing and the proceeds going to the lenders as planned. Without the sale, a business earning about $5 million a quarter on an adjusted operating basis is carrying a 19% effective interest rate.