Frequency Electronics, Inc. (FEIM) Q3 2019 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Frequency Electronics Third Quarter Fiscal Year 2019 Earnings Release Conference Call. [Operator Instructions]. At this time, it is my pleasure to turn the floor over to Martin Bloch. Sir, the floor is yours.

Thank you, Christie. Good afternoon, everybody. First of all, I would like to say that the NASDAQ wire service is having some IT problems, and they have not been successful in releasing our press release, but it's available on our website at this point. It just shows that the need for more precise [Technical Difficulty] necessity. With no further ado, I would like to turn over this call to Steve Bernstein, who will go through the details and then turn it back to me, Steve.

Thank you, Martin, and good afternoon. For the 9 months ended January 31, 2019, consolidated revenue was $36.3 million, up from $31.9 million for the first 9 months of the last fiscal year. The components of revenue are as follows: For the 9 months ended January 31, 2019, revenues from commercial and U.S. Government satellite programs increased to $17.2 million compared to $11.4 million for the same period of fiscal 2018 and accounted for approximately 48% of consolidated revenues compared to approximately 36% in fiscal 2018; revenues on these contracts are recognized primarily under the percentage of completion method; revenue from the satellite payload market are recorded only in the FEI-New York segment; revenues from non-space U.S. government DOD customers, which are recorded in both the FEI-New York and FEI-Zyfer segments were $17.1 million compared to $13.9 million in the same period of fiscal 2018 and accounted for approximately 47% of consolidated revenues compared to approximately 44% in fiscal 2018. Other commercial and industrial revenues declined to $2 million compared to $6.7 million in the prior fiscal year and accounted for approximately 5% of consolidated revenues compared to 20% in the previous year. Intersegment revenues are eliminated in consolidation. For the nine month period ended January 31, 2019, the gross margin rate increased to 34.1% from 12.1% for the same period in fiscal 2018. The increase in gross margin and gross margin rate over the same period of fiscal 2018, primarily resulted from higher revenues, decreased repair cost and reduced manufacturing overhead cost. The prior year's gross margin and gross margin rate reflected significant inventory write-downs. For the 9 months ending January 31, 2019 and 2018, selling and administrative expenses were approximately 22% and 24% respectively of consolidated revenues. For the 3-month period ended January 31, 2019 and 2018, SG&A expenses were approximately 20% and 26% respectively of consolidated revenues. The dollar revenue of SG&A expenses were comparable for both the 9 and 3 months ended January 31, 2019 and '18, however the percentage decreased due to the increase in revenue during the fiscal 2019 year. Research and development expenditures represent investments intended to keep the company's products at the leading edge of time and frequency technology and enhance future competitiveness. R&D expenses were $5.1 million for both the 9 months period ending January 31, 2019 and '18. The R&D rate for the 9-month period ending January 31, 2019, was 14% of sales compared to 16% of sales for the same period of the previous fiscal year. The company expects the total level of activity related to R&D to continue at a similar rate through the balance of the current year and beyond to address new large opportunities and secure communications, command-and-control applications, next-generation satellite payload products and additional DOD and commercial applications. The increase in revenue, gross margin and gross margin rate in the 9 months ending on January 31, 2019 resulted in a reduced operating loss of $539,000 as compared to a loss of $8.9 million for the same period of the preceding fiscal year. Other income includes investments income derived from the company's holdings of marketable securities. Other income for the 9 months ending January 31, 2019, was $409,000 compared to $1.2 million last year. Last year's other income reflects a gain of approximately $1 million from divesting the company's holdings and equity securities in the divestment account. This yields a pretax loss of approximately $130,000 compared to a pretax loss of approximately $7.8 million for the same period last year. For the 9 months ended January 31, 2019, the company recorded a tax provision of $38,000 [Technical Difficulty] from continuing operations for the 9 months ended January 31, 2019, was $168,000 or $0.02 per share compared to a loss of $11.3 million or $1.27 per share for the same period of the prior year. Our fully-funded backlog at the end of January 2019 was $39 million, up from $30 million at the end of the previous fiscal year. The company's balance sheet continues to reflect the strong working capital position of 48 -- $47 million as January 31, 2019, and a current ratio of over 11:1. The company believes its liquidity is adequate to meet its operating and investing needs for the 12 months and for the foreseeable future. I will turn the call back to Martin, and we look forward to your questions later. Thank you.

Thank you, Steve. I'd like to turn the call over to now to our Chief Executive Officer, Stan Sloane.

Thanks, Martin. Hello, everybody. As we continue our efforts to improve financial performance, I'm very pleased with the progress in Q3. Revenue increased each quarter of this fiscal year as well as between the comparable quarter and 9 months from last year to this year. Our business is very sensitive to top line numbers. These increases in revenue are a good leading indicator for improving overall financial results going forward. We also continue to focus on operations in our Elcom and Asia subsidiaries with emphasis on improving profitability, rationalizing manufacturing and shaping our business portfolio. Our investments in research and development continue and are producing exciting new opportunities for future programs. The number in total in bids outstanding, the value of the bids outstanding is the largest it has ever been. And while we can't discuss details of bids, several of the opportunities include not only significant customer-funded research and development, but substantial production options as well. While not a Q3 event, I would be remiss if I didn't comment on the announcement yesterday of our contract award from Lockheed Martin space for qualification of our next-generation digital rubidium atomic frequency standard, DRAFS clock for the GPS IIIF program. This is a game changer for us and positions us to provide significant numbers of advanced technology atomic clocks not only for the GPS program, but for other space and terrestrial applications as well. Like Steve, I'll look forward to your questions later. And I'll turn it back to Martin.

Hi, everybody. With all of the nice speeches, I have very little to add. Just I'm very encouraged that we're remaining on track for substantial revenue growth for fiscal 2019, and I'm very delighted with the opportunity that we have on using our quartz rubidium clocks for satellites program, especially the GPS IIIF program. The opportunity is approximately $15 million per satellite and the plan of The United States government is to launch 22 satellites over the next 5 to 8 years. That's a great opportunity, and I want to thank the team at Frequency Electronics for the devoted achievement in research and development. Just for everybody's knowledge, since the company was established, we have supplied redundant timing systems for over 1,000 satellites in orbit and, of course, the longest clock operating in orbit on Voyager 1 and Voyager 2, which was launched in -- when was it 1977? We delivered that clock to JPL in 1973. So that's almost half a century of continuous clock operation on this. We also -- I have to express that part of our opportunity to participate on the GPS IIIF program is the longevity of quartz and atomic clock that we have on orbit and other secured satellites. And of course, as Stan has mentioned, this opportunity opens our clocks for many other military secure programs. I want to express my thanks to the team at Frequency and our appreciation to the customers that have taken us to deliver reliable hardware from now on and on forever. I'd like to turn over this now to question-and-answers, and I would appreciate if the questions address the individual is either Steven Bernstein, Stan Sloane or Martin Bloch. Thank you very much, and I'm looking forward to your questions.

[Operator Instructions]. And our first question comes from Richard John [ph], an Individual Investor.

I'm wondering if you could give us an update, Martin, on the spoofing and jamming opportunities? And what's happening in that part of the business? And also I'm hoping that you could tell us the total number of bids that you have outstanding? You've given the number in the past, and I'm hoping to hear it today.

Well, okay. You're addressing it to me so I'll answer that. The precision timing that we have on the development is applicable to a very large market of mobile and fixed platforms, where our precision time is key to getting secure communication and also positioning there. And that's becoming more and more necessary, because our adversaries are getting smarter and smarter and being able to jam and spoof our GPS and other sources on this. With respect to the number of bids, I can tell you that it's in excess of $200 million, but the exact number is sensitive and no sensitive [indiscernible] is given away to anybody, but we are very encouraged by the number and we are continuously being requested to participate in more and more military satellite, terrestrial application for precision time as well as the commercial satellite arena.

And next we'll move to Sam Rebotsky with SER Asset Management.

So we got $39 million, that's funded backlog, does that include the $5.9 million? And over what period of time is the $5.9 million going to be recorded?

So this is Q3. So the answer to your backlog question is, no, it's not reflected in the backlog yet. The period of performance on that is about 18 months.

18 months. Okay.

And it's our challenge to do as best as we can.

Okay. I don't have the previous quarter in front of me. I assume the sales were similar, and I think there was a profit in the previous quarter. I don't have it and put it front. What happened between this quarter and the previous quarter?

I don't have it in front of me either. Steve?

We got right here.

One second. The Q2 was not profitable either. We lost a little bit of money as well. The sales were up quarter-over-quarter by about $1 million from Q2.

Okay. And we lost more in the second quarter, you say, than this quarter?

No. They were about -- I would say, we lost about the same, may be a little more in Q3.

Okay. Okay. Now we spoke of the backlog or bidding or whatever all cut not backlog, all kinds of work that we're bidding on, I think, a number of $200 million had come around, is that a rational number today? I mean, Lockheed seems to be always doing something, there is always contracts and presumably we always are fortunate to probably ride on their coattails. Could you -- can we sort of evaluate where we fit in with all the stuff they're getting?

Well, I'll tell you, we're only participating with programs that are live and have to be visualized in the near future. Just as an example of GPS IIIF program. So they are not high pollutant hypothetical programs. We don't participate in the wild guesses. We put our effort and put our proposals on programs that are either funded or going to be funded and that will be realized within a reasonable period of time. I just want to add one thing on this item, which the team at Frequency is very proud that in spite of the slight losses in our heavy investments in IR&D product development, our cash and receivables from 2018 and 2019 are about the same.

Okay. That sounds good. Now, Stan, the $1 million tax credit is over 10 years. Do we get it sooner if we hire more people sooner? Is it related to how many people we hire? Or is it just over 10-year time frame?

No, it's tied to a number of new jobs we create.

Okay. And how many -- so far, we've created how many jobs?

That's not the number that we want to disclose.

Okay, all right, that's understandable. Well, look, hope you get some business and you get profits, Martin, and you're off to the races. Okay, and get the press releases out on time.

We did get it out on time, blame NASDAQ and their IT department, and they probably didn't have a good atomic clock, that's why they have that problem.

Next we'll move to Michael Iser [ph] a Private Investor.

News they said -- Newsday said you spent $3.5 million for expansion, what's that money going to be spent on?

Variety of infrastructure improvements, building improvements, systems in the building.

All right. And they did comment that you hired -- in the Newsday article that you hired 13 jobs so far. I'm not sure if that number is correct. The Newsday article.

We're not going to comment on that.

Yes, Newsday put that out. I'm just commenting on what they did. And one more question. You said it could be $15 million per satellite with the new digital rubidium atomic clock?

Well, on the clock there's more than one clock on the satellite, but our estimate is about $15 million plus opportunity per satellite.

$50 million?

$15 million.

$15 million per satellite.

$15 million per satellite.

All right. And the $5.9 million contract, was that just to design it or what was that for?

That's for qualification of the clock before you can flag the clocks, you have to go through test and qualification programs. And that's what the initial part is for.

And with your background, this shouldn't really be an issue with that because that's what you have been working on...

It's an evolution of technology we're working since the company was founded. So we're pretty comfortable with it.

And that would be -- how many satellites do you expect the next 5 to 8 years?

Well, the government said, 22 satellites additional on the GPS IIIF as in Frank program.

Yes, because the first 10, you're not going to be on, I assume.

The last 10, this is not counting the first 10. This is the next-generation GPS IIIF 22 satellites is what the government plans to procure.

Is there anyway you can get on the first 10 or no?

We don't know yet. It depends on how fast we finish the qualification and we might be able to get in on an earlier satellite. We're working the problem.

And how many clocks roughly, it would it be per satellite?

Three, plus a possible four.

So it's roughly 3 or 4 clocks per satellite?

Yes. The main mission of the satellite is to carry precision time and also very expensive satellite, but without the clock they don't have a mission.

So they need you?

They need us. Nice to be needed.

Is there a much competition for this? Or you are the only ones?

No, there is another source on this and probably in The United States, that's about it.

You have a proven track record?

We have a great history of over 1,000 clocks in space and also a great history of atomic clocks on secure satellite program. So we're very confident to get more than the share we deserve.

All right. And what percent of the program of all this do you expect to get if there is no competition out there?

That's something only god knows.

And next we move to Michael Cooper [ph], an Investor.

The company seems to be turning around nicely and getting into the market. I had a question about, I think, Stan Sloane had given a presentation to an investor group about a year ago and talked about $1 billion worth of DOD opportunities within some area of the DOD budget. And if I'm not mistaken, Frequency Electronics was -- had some kind of [indiscernible] into a range of contracts within that $1 billion market potential and you are working through probably some engineering contract or something like that, if my understanding is correct. Can you talk about the progress on those programs? And where that's going? And then my second question today...

Stan, you take it please.

So we're little hard to hear you. We have a communication -- there is noise in here, but I think you are referring probably to the Cowen or Needham conferences, which we presented at last year. The number you are referring to was an effort on my part was the size the market of opportunity for the types of technology that we have. That is what I think, you're referring to. And I guess, the rest of your question, what was the other part?

So I think that you had been starting some contracts, some early small number of contracts into various areas of that $1 billion market, and I was just wondering how those contracts were progressing? Are they opening up to the larger revenue? And are they unfolding to continue to look like a future $1 billion market potential kind of thing?

So we just announced yesterday, one of those obviously is GPS IIIF. So my take on things are progressing as we project it.

It looks very promising. Thank you very much for the good question.

And just two other small questions. One on your shift over to more off-the-shelf products. How is that progressing? And then my second question...

Off-the-shelf?

Yes. I'm not sure where you're getting that from. I don't think, certainly not the way we characterize the business. Our business here is involves a lot of R&D and nonrecurring engineering development, typically products or by and large are customer, semi-customer based on core technologies, but usually adapted for specific missions.

There might be a large quantity, but they are not off-the-shelf. They're are mission specific.

Okay. And then my only other question is I have been reading a lot of news around the requirement for enhanced GPS for things like intelligent highways, autonomous cars and IoT in the finance sector. They are all seem to be looking more heavily at GPS and secure GPS and timing signals. How does Frequency Electronics get into any of those markets in any way? Or is it just Department of Defense they will be looking at?

This is Martin. What you emphasizes is exactly what it is. There are more and more needs for GPS-related timing, however our GPS has 2 problems. It can be easily jammed for less than $100 worth of electronics, you can jam the GPS signal within a half-a-mile area. And if you have a smarter adversary, it can be spoofed that means that you don't know it's been jammed, but you don't get the accuracy. And to solve in part this problem is to have your own precision time available and that's the market we're addressing and we're very excited about this market.

And next we move on to Richard John [ph], an Individual Investor.

You've given an example of your recent progress in space with the Lockheed order, could you give us a feel about why you are excited at this point about the spoofing and jamming? Can you talk a little bit about the recent activity in that area? And how you think the prospect of orders is coming on?

Well, basically, I think if you listen to any type of report on this jamming and spoofing of GPS has become a commonplace and it affects the military as well as many commercial operations and definitely homeland security. So every place you turn, you need more precise time and that's our mission. This is to get more precise time available to those market at an affordable price, and that's where we have invested a lot of our effort and we're very excited about this upcoming market.

And now we move on to Michael Iser [ph] a Private Investor.

I had just a follow-up question. On the digital rubidium atomic clock, besides the Lockheed GPS IIIF, what size of the market is it out there besides just Lockheed?

So that clock is not unique to the GPS IIIF satellite. It can be used on any satellite that would require high precision timing sources, the next-generation of rubidium clocks for space. So the market significant would be potentially applicable to every secure communication system, every satellite that requires that sort of timing.

So do you see this just as beginning of selling this type of clock?

It's the first program for this specific design. Yes.

And with that, there appear to be no further questions at this time. I'll turn it back over to Martin for closing remarks.

Okay. Thank you very much, Christie, on this again. Thank you for listening on this. We are working hard to -- with our products and to improve the top line, because that's the mission. We improve the top line, the bottom line follows automatically. Thank you very much for listening. And Stan, thank you, and Steve for giving a clear presentation. We'll talk to you in 4 months. Have a good summer. Bye.

That does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time, and have a great day.