Frequency Electronics, Inc. (FEIM) Q4 2016 Earnings Report, Transcript and Summary

Greetings and welcome to the Frequency Electronics Fiscal Year 2016 Earnings Release Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. Any statements made by the company during this conference call regarding the future constitute forward-looking statements pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements inherently involve uncertainties that could cause actual results to differ materially from the forward-looking statements. Factors that would cause or contribute to such differences are included in the company's press releases and are further detailed in the company's periodic report filings with Securities and Exchange Commission. By making these forward-looking statements, the company undertakes no obligation to update these statements for revisions or changes after the date of this conference call. It is now my pleasure to introduce your host, Joel Girsky, Chairman of the Board. Please go ahead.

Good afternoon everybody, and thank you all for calling in. Sitting alongside of me is Martin Bloch, the Founder and CEO of our company; and Steve Bernstein, our CFO. I'll like to turn this meeting over right now to Steve and bring us all up-to-date Steve. Thank you.

Thank you, Joel, and good afternoon. Satellite revenues represented approximately 55% of consolidated revenues in fiscal 2016 compared to approximately 60% of consolidated revenues in fiscal 2015. In dollar terms, it was down $13.8 million, or 30% year-over-year. This is primarily due to delays in contract awards, many of which are sole-source to Frequency Electronics. Revenues from non-space U.S. government DOD programs, including sales by FEI-Elcom and FEI-Zyfer accounted for approximately 25% of consolidated revenues in fiscal 2016 compared to approximately 20% of consolidated revenue in fiscal 2015. In dollar terms, this business area increased $2.1 million year-over-year or 16%. Revenues from network infrastructure and other commercial products that are recorded in the FEI New York, Gillam-FEI, and FEI-Zyfer segments were approximately 20% of consolidated revenues, about the same as the prior year. Gross margin was $20.4 million compared to $23.5 million last year yielding a gross margin rate of 34% in fiscal 2016 compared to 31% in prior year. The increase in gross margin percent reflects efficiencies obtained from advanced automated test equipment. Product mix was also a contributing factor as well. The company can achieve substantially higher gross margin rate on increased throughput. SG&A expenses was $13.2 million as compared to prior year's $14.2 million, a reduction of $1 million year-over-year of SG&A expenses. The 2,000 percentage was over target of 20% of revenue, but with cost saving measures which took place in fiscal 2016 continuing in fiscal 2017, we expect that SG&A will approach or meet our target of 20% of revenue. Internal R&D spending in fiscal 2016 was $5.9 million or 10% of revenues compared to last year's $5.7 million or 7% of revenues. Our reported R&D includes investment in products for space, U.S. government DOD, and other commercial applications, but does not include R&D that is funded by our customers. Operating profit was $1.3 million compared to $3.7 million last year. Operating profits were affected by decrease in revenues as mentioned earlier. Gillam-FEI, FEI-Asia and FEI-Elcom recorded a combined operating loss of $3.6 million for fiscal 2016 compared to $2.4 million in fiscal 2015. Other income which generally consists of investment income offset by interest in other expenses, netted to income of $773,000 in fiscal 2016 compared to net income of $861,000 in fiscal 2015. This yields pretax income of $2.1 million in fiscal 2016 compared to $4.5 million last year. The provision for income tax is $1.1 million or an effective rate of 51.6% compared to $1.7 million and 37.7% effective rate last year. Our effective rate is impacted by not receiving credit for any loss at foreign subsidiaries. Going forward, we anticipate lower effective tax rate. Net income for fiscal 2016 is $1 million or $0.11 per diluted share compared to $2.8 million or $0.32 per diluted share for fiscal 2015. For the fourth quarter, we generated $950,000 of cash from operations, and for the full fiscal year generated nearly $3 million of positive cash from operations. Our backlog at the end of April 2016 was approximately $32 million compared to approximately $37 million at the end of the prior year and up from $22 million at the end of the previous quarter. Frequency continues to maintain a very strong balance sheet with levels of cash, marketable securities, debt, and working capital comparable to prior year. I will turn the call back to Martin and we look forward to your questions later.

Good afternoon everybody. This is Martin Bloch. I want to address what in my mind is the priorities for Frequency Electronics. First of all is our plans on what we want to move forward with our subsidiaries, primarily FEI Elcom, FEI-Gillam, and FEI-Zyfer. FEI-Zyfer has done exceptionally well on that increase in sales and in profitability, and one of the main reasons is secure commutation opportunities which depends on the combined technology that FEI New York has precision timing and FEI-Zyfer, the knowledge of how to combine it with the threats of GPS jamming and spoofing, and we expect our revenues and profitability to continue very well into next and subsequent years. FEI Elcom is a very important resource to FEI, and they provide a lot of the engineering design for our space products and even on their average -- on their own, we see that their revenue will increase, and our objective is to get them profitable in fiscal 2017. FEI-Gillam, we're -- we have an aggressive move to find a solution since they are not anymore crucial to FEI's business, and we want to make sure that we come up with an approach to either breakeven or to find a different solution for them in the very near future. I would like to address the two most exciting avenues of our business, both are dependent on FEI's unique expertise in precision time and low G-sensitivity. Our space business is still one of the main areas and offers great potential both in their routine or the custom geosynchronous satellites as well as the LEO satellites like Iridium and other critical DOD programs. Again precision time, low phase noise is the key ingredient, and of course the future injection into technology to provide more bandwidth and more capacity, is to reduce size and power and waste consumption of each of the products that we have. On this -- on secure communication, precision time and time accuracy is key to eliminate the threat that is now facing almost every industry that is involved in the communication and precision timing from the DOD, fixed and mobile assets, the Homeland Security, and even as down to that commercial trading business and other critical industries. Their precision time and low G-sensitivity and the knowledge of GPS is unique technologies and very few companies in the world have the type of expertise and we expect that business to grow significantly in the near future. To make it possible, FEI is going to add some senior personnel to explore these opportunities because it requires additional people in that area to take advantage of the market opportunities and to cover all of those customers. In summary which I want to leave mostly to your questions on this, the company is healthier. Although our revenues were down as Steve has indicated, we had positive cash flow and we maintained -- and we maintain our capacity to produce space hardware and quantity and were able to demonstrate this to our customers with such program as producing the hardware for the Iridium LEO orbit satellites and our program as Steve has indicated is -- they just moved to the right, but we expect to see significant improvements in calendar 2016. I'd like at this time to turn over to answer some questions. Operator, please go ahead.

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Robert Smith from Center for Performance Investing.

Hi, good afternoon. Thanks for taking my call.

Good afternoon.

Martin can you give us some more color on the possibilities of the private sector in satellite work? Everything I read is that there is a movement toward [indiscernible] getting too much involved in this area.

Yeah, lots of noise in the system and very difficult to evaluate on this area, and as you probably have heard, people are thinking of -- from the thousands of satellites on web 1 [ph] to the 3,000 satellites that Boeing is planning, and we're watching this development and taking a look on how our technologies can be applicable. Obviously for this larger quantity and lower cost satellite, this weight, power is going to be very significant because getting up assets in space is still expensive. So, we look at it and we are, at this time, supplying quite a lot of the type of hardware to DOD's secure satellite. If it's going to be reality, we'll all be smarter, and I would say the next two to three years to see if all of those LEO satellites can be accomplished within the objectives that the people are setting.

Well, when you say you're watching, I mean is there a possibility that you get more proactive and--?

We are proactive. As a typical example, we're supplying -- for all the 82 satellites for the -- Iridium is one example where we are in the LEO business, and we're supplying a lot of hardware to the DOD LEO satellites on this item, and we are taking a close look and are talking to all of the people that are planning those Leo satellites.

Thanks very much. Good luck.

You're welcome.

Thank you. [Operator Instructions] Our next question comes from Sam Rebotsky from SER Asset Management. Hello Sam.

Yeah. Good afternoon, Martin. You have 32 million firm contracts. At the end of the last quarter, it was 22 and you have 150 million to 200 million you were bidding on. What are you bidding on? And what is the expectation of getting firm contracts or -- say in the next quarter, do we expect to get to 50 million firm contracts? We used to have a lot higher firm contracts.

Okay. As I mentioned in my address, we expect that some of the contracts that were delayed by DOD and some of the commercial communication contracts that were delayed because they are re-planning on how to put much more capacity on the same platform to be really materialized in calendar 2016. It's difficult to say as the quarter because we have very little control of it. We know we have lost any of the major contracts and I expected increase in our backlog as we go forward.

Now calendar 2016, we are in July, and so in the next-- pardon.

In the next six months, yes.

Next six months. Do we -- how many another -- what is the number of the contracts we're bidding on, is it similar to the 150 million to 200 million or is it less?

It's more.

It's more. What number is it?

Well, some place over -- I mean we have my proposals outstanding for someplace around $200 million breadth of opportunities.

Okay. And how many -- how much do we have on a satellite dollar amount today compared to the last year and what do we expect to have on a satellite?

Well, at this moment , we range for some place between $5 million and $10 million, and our objective is to get between $20 million and $40 million per satellite.

So, we've expected this 20 to 40 for a long time, do you think we will achieve it this year and what we need to get there?

I'm working very hard to achieve it. There are some factors that because of the slowdown – remember our biggest competition for getting more content is our customer, and as the business a slowed down -- , our customers pulled in a lot of their opportunities in-house. But that is a short-term. As soon as there was an increase in the releases of their commercial and military satellites, I'm confident that wse will have the increase our trans value [ph].

Now, you speak of the senior personnel that you're hiring. Will they help? Are they in the sales areas or will they help you get contracts? So, what do you need to do? You need--

Primarily. In the following programs and providing support to our customers, so we can get a bigger portion of the content, the key elements or precision time. Most of our customers are stuck. They got to buy it from us. The wraparound electronics is where we need help with this type senior people to make it happen.

Okay. Now, as far as the research and development. Did I understand that Joel said we pay this out of our pocket or this 5.929 million, how much do we payout of our pocket and how much is reimbursed by the customer?

Well, that's $5.7 million was -- was it 5.9?

5.9.

$5.9 million. This is what FEI sponsored from their own pockets. That does not include additional research and development that were paid by our customers.

So, this is a lot of money to spend, and we're not getting a lot of return. When do you think we're going to get return for all this money we're spending on R&D?

Well, within the next year, I expect to see progress.

Okay. I got-

By the way, it's not a lot of money to spend in R&D. I just want to tell you also and as an example of [Indiscernible] Tech, their budget, 22% of a year of revenue. So, 10% is really a modest amount of investment in the future.

Okay, Martin. I'm going to step out of the queue and come back, if there's nobody else.

Okay.

Thank you.

Thank you. Our next question comes from Alex Gates from Clayton Partners.

I'm sorry. I didn’t hear.

Hi, Martin, it's Alex from Clayton Partners. I had a question for you--

Can you speak up, I can hardly hear you?

Okay. Hold on one second. Could you hear me better now?

You bet.

All right. Great. I had a question for you on the Gillam segment. I think you had mentioned in your prepared comments that you had a plan to get that to either breakeven for find a solution quickly. I was just wondering if you could elaborate a little bit on how you could get that to breakeven.

Okay. Well, basically, me and Ollie were on the -- on their during the Brussels attack unfortunately, we'd never made it. I missed that Brussel airport attack by a couple of hours and just to go thoroughly on what we can do to reduce cost and increase their revenues on this area. And this is on our plan to -- to do it as soon as possible. We're talking days not years on this. And if we cannot do that on this then we'll do our best to find a better home for them. Their mission of precision timing implementation into the copper is something that's not anymore core FEI's business, nor is the copper telecommunication actually a core for anybody's business. People have switched to fiber and satellite rather than copper. That's what their specialty was.

Right. Right. I'm just wondering if there's anything tangible you could comment like are you cutting headcount there or anything.

Well, we have -- that's exactly European is complicated on reducing headcount but that's our objective we have already started the steps and we expect to reduce headcount and to see what type of other business they can capture our side of the copper business. So, we will attack it with a vengeance I give you my personal promise on that.

All right, great. And then my last question is it looks like in the press release you mentioned funding issues as one of the reasons that the revenue was down. I was just wondering if you could elaborate a bit on that and maybe which constellations or which part of the business that's affecting?

I don't -- can you repeat the question?

Sure. You the mentioned government funding as an issue, I believe, in the press release.

Yeah. Government funding I -- it wasn’t an issue of the government well then we should initial getting it released him and that many of the secure satellite where the funding was there, but for some reason, which is beyond my paygrade is to understand on how the government schedules and funds this programs and we had a couple programs that moved to the right because the funding was there, but it was released. And we see it being released now.

Okay. And is this something that we could see in a press release moving forward from you guys when the fund eventually [ph]?

If you take a look a little bit back from - I think it was end of April beginning of May. We had two releases indicating this thought of that process I think one was the secure satellite for 15 million and a commercial satellite program for $5.5 million and there are quite a few other programs in the same type of state.

Okay, great.

And we will release them. Whenever we can, we will release them.

Okay. Good to hear. Thanks Martin. That's all now questions.

You're welcome.

Thank you. Our next question comes from Michael Eisner, a Private Investor.

Hi, how are you?

Okay. You said Michael Eisner.

Yes, can you hear me?

I can hear you Michael Eisner.

Those people you mentioned, did they start yet?

I've been negotiating with a couple of the past couple months we are ready to conclude. We have not started anybody at this time, but I expect results in a very, very, very short future.

Are they one of the six major companies you deal with?

We're not at liberty to hire people from our customers. That's that the silent agreement, unless those people are retired or laid off by those companies. But yes, some of the people are the people that either on early retirement or they had been released by the companies, because if you follow the press, there'd be some major layout in some of our customers.

Okay. So, you expect something and Tomahawk okay see you expect something soon there?

Yes.

And you mentioned M&A in the press release. You guys held up, were you planning on doing something?

Well, I think it's appropriate to get our revenue up and our profit up before it makes sense.

Okay. One final question. If you have to close July down without cost to not cost a lot?

Well, that's what we're looking at. It's difficult to define that this time European conflicts are a lot more complicated than the U.S. and we will have this answers in the very near future. We're looking to get that possibility.

Okay. Thank you.

You're welcome.

Thank you. [Operator Instructions] Our next question is a follow-up from Sam Rebotsky from SER Asset Management.

Yeah, Martin. I guess the question really is as far as Investor Relations, investment banking, somebody to help you tell the story. I think it's about time you were more aggressive in telling his story and if you need to hire more people as you're trying to sell the contracts, to sell the frequency products because as I keep repeating. In 1981 Bear Stearns raised at $40 a share and you had a 100 million market cap. And now you have maybe 70 million -- I don't have the exact number in front of me, but you---

94 million to-date.

Right. But the stock was $40 today. The stock is $10, $11 and all the things have happened may be it is you get more aggressive and tell the story and do something to maybe they'll need some help with the investment bankers to create a greater valuation for frequency.

Okay. I will definitely take your puts and bring it to the attention of the responsible people old the especially or you look because look Yahoo took a long time took four years and then they made a marriage with Verizon. All right so I think it's sooner than later we should start telling the story. Thank you.

We'll do that.

Thank you. [Operator Instructions]. Our next question comes from Richard [Indiscernible], a Private Investor.

Yes, thank you. It's my recollection that the things that are going to take the company.

I'm sorry. We can't hear you, can you?

Okay. I'll try to speak louder. It's my recollection that the things that are going to take the company from 5 million to 10 million up to 20 million to 40 million per satellite are primarily the uptime converters are there are the things involved?

I guess. The up/down converters the main area of acceleration because I know -- you have a triple timing systems so you have some RF and you have let's say, 20 microwave sources on a satellite then you can have as many as 140 uptown converters. So, there's the volume and that's one of the areas. Another area which we have been reasonably good success is to wrap around more electronics about timing systems to increase their actual timing unit from approximately $1 million per satellite to -- the most expensive one volume one who are now delivering $6 million per satellite. So, that is also an edited function that we're working very hard to provide the timing and the distribution for all of the systems on satellite.

Okay. And of the company's new products that you just described, how many of the six principal customers are -- have decided to take it in-house?

On the primary product, on this point, they haven't got a choice. The timing they can't do in-house. When you're talking about the up/down converters, on this I would say that to my knowledge at least three of the big ones have taken a lot of this work in-house in order to maintain their level of personnel because you know they cut down as much as possible, but they want to maintain the level of expertise in-house. So, when the next generation of satellites are released, they're in a position to manage it.

Okay. And do you have to give up on those three customers for the new product?

No. It’s a temporary thing. As soon as -- as they start getting overloaded, cost and performance is going to overtake the [Indiscernible].

Okay. I see. Thank you.

At this time, we have no further questions. I will turn the call back over to our speakers for closing comments.

Gentlemen, thank you very, very much for participating in today's call. On behalf of our Board, I would personally like to thank all of our employees for their continued diligence in our growth. Additionally, our shareholders, thank you also for your continued trust in Frequency Electronics. Our future is in front of us. It’s a good win. I look forward to seeing you all in person in November and thank you once again to calling. Good night now.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.