Frequency Electronics, Inc. (FEIM) Q3 2025 Earnings Report, Transcript and Summary

Greetings, and welcome to the Frequency Electronics' Third Quarter Fiscal 2025 Earnings Release Conference Call. At this time, all participants are in a listen-only mode. [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 the 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, Thomas McClelland, President and Chief Executive Officer.

Good afternoon, everyone. The third quarter of our fiscal year was another excellent financial quarter for the company. For both the quarter and the year-to-date, revenue, gross margin, and operating income have grown substantially. The results reflect continued solid growth in our core businesses, which show every indication of continuing with our backlog still at a historically high-level. In fact, this was the highest revenue quarter for FEI in 10 years. The increase relative to recent quarters, which have also shown an uptrend as compared to recent years, is partially due to the progress made on deliveries related to a specific program, as well as conversion of our historically high backlog into revenue in this quarter. That specific program is expected to contribute additionally over the next few quarters as we deliver additional units and we anticipate similar successor programs. While we do not expect every near-term quarter to look exactly like this, especially given some of the uncertainty in Washington, we do believe that we have demonstrated meaningful revenue and profitability improvement over the past few years and that our increasing strategic importance in the industry and exposure to larger addressable markets such as proliferated satellites and quantum sensing sets us up to continue to deliver higher levels of revenue and profitability in the future. Any given quarter can show variability, but we believe our upward trajectory will continue and based on anticipated future wins, may do so at a faster pace in the medium term than what we have recently experienced. In other words, while the market focuses on near-term industry clouds, we see a future that is bright and actually getting brighter. I've discussed in the past the changes occurring in the space industry, in particular the proliferated satellite concept where lower cost, faster delivery, and higher volume are paramount. Some of our current satellite programs have challenged FEI to demonstrate the ability to deliver space hardware in less than half the time that would historically have been required. We have in turn attempted to inspire our workforce to meet these challenges. As it turns out, there's a good chance that over the next few months, we'll not only meet, but beat some of these expectations. But what has truly impressed me is the level of engagement and dedication to meeting these goals that's exhibited by our employees on a daily basis. In all honesty, I'm more proud of this than the financial results because I believe it's so important to our continued success. Success breeds success, and an engaged and motivated workforce not only allows us to meet our customers' expectation, but also creates an environment which allows us to attract the most talented and capable scientists and engineers, fueling our growth and future success. We've established an environment where our people share in our success as a company, and we'll work hard to continue this going forward. Our financial trajectory is buoyed by the talent, dedication, and motivation of our workforce. And this magnifies our confidence in the financial growth we're projecting. I'll now turn things over to our CFO, Steve Bernstein, who will fill you in on the financial details. Steve?

Thank you, Tom, and good afternoon. For the nine months ended January 31, 2025, consolidated revenue was $49.8 million compared to $39.7 million for the same period of the prior fiscal year. The components of revenue are as follows. Revenue from commercial and U.S. government satellite programs was approximately $28.8 million, or 58%, compared to $16.3 million, or 41%, in the same period of the prior fiscal year. Revenues on satellite payload contracts are recognized primarily under the percentage of completion method and are recorded only in the FEI New York segment. Revenues from non-space U.S. government and DoD customers, which are recorded in both the FEI New York and FEI-Zyfer segments, were $19.5 million compared to $21.1 million in the same period of the prior fiscal year and accounted for approximately 39% of consolidated revenue compared to 53% for the prior fiscal year. Other commercial and industrial revenues were $1.5 million and $2.3 million for the nine months ending January 31, 2025, and 2024, respectively. The significant increase in revenue for the period was primarily related to an increase in U.S. government customer sales for satellite programs. For the nine months ending January 31, 2025, gross margin and gross margin rate increased as compared to the same period in fiscal year 2024. This is partially due to a large space program that completed major milestones during the nine months ended January 31, 2025, as well as other legacy programs performing well. For the nine months ending January 31, 2025, and 2024, SG&A expenses were approximately 19% of consolidated revenues in each period. The increase in SG&A expenses during the nine months ending January 31, 2025, was mainly related to an increase in payroll related expenses, including stock compensation, incentive approvals based on company performance, costs from the realignment of employees from overhead to SG&A, and the costs related to Frequency Electronics first Quantum Summit in October 2024. The company believes the costs related to SG&A will remain fairly constant throughout the remainder of the fiscal year 2025. R&D expense for the nine months ending January 31, 2025, increased to $4.5 million from $2.3 million, an increase of $2.2 million, and were approximately 9% and 6% respectively of consolidated revenue. The change in R&D expenditures for the nine months ending January 31, 2025, as compared to prior year periods, was primarily due to a focus on advances and modernization of products. The company plans to continue to invest in R&D in the future to keep its products at the state-of-the-art. However, we expect the actual quarterly spend to vary. For the nine months ending January 2025, the company recorded an operating income of $8.5 million compared to an operating income of $2.5 million in the prior year. The increase is partially due to a large space program that completed major milestones in its production during the nine months ending January 31, 2025, as discussed above. However, the increase also is the result of successful efforts of the company to complete complex programs and to work more efficiently in bidding, building and testing our products. The company believes the improved operating income results for the first nine months of the fiscal year are a tangible outcome of these efforts. The company seeks to continue to implement changes to further improve its performance. Other income can be derived from reclaiming of metals, refunds, interest on deferred trust assets or sale of fixed assets. Interest expense is related to the deferred compensation payments made to retired employees. This yields pre-tax income of approximately $8.9 million compared to $3 million for the prior fiscal year. As for the tax provision, the company weighed all available positive and negative evidence and it's more likely than not Q3 2025 deferred tax asset realization assessment. Frequency no longer has cumulative losses in recent years and has earnings in the three and nine months ended January 31, 2025. The company is utilizing its operating loss carry-forwards and is reducing its net deferred tax asset. For the nine months ending January 31, 2025, the company recorded an income tax benefit of $11.6 million, which includes a discrete tax benefit of $11.9 million. The calculation of the overall income tax provision consists of a discrete tax benefit for the release of the valuation allowance offset by current U.S. federal and state income taxes. For the nine months ending January 31, 2024, the company recorded an income tax provision of 19,000. Consolidated net income for the nine months ending January 31, 2025 was $20.5 million or $2.18 per share compared to $3 million or $0.32 per share in the previous fiscal year. Our fully-funded backlog at the end of January 2025 was approximately $73 million compared to approximately $78 million for the previous fiscal year end April 30, 2024. The company's balance sheet continues to reflect a strong working capital position of approximately $27 million at January 31, 2025 and a current ratio of approximately 2.2 to 1. Cash went down by approximately $12.8 million since year-end of this decrease, the dividend paid in Q2 accounted for approximately $9.6 million. The additional $3.2 million decrease was related to timing of billings and revenue. Contract liabilities went down $7.4 million quarter-over-quarter and $6.4 million since year end. Contract liabilities are generated as part of the 606 accounting when the billings are in excess of revenue taken on specific programs. We expect that cash will fluctuate quarter-to-quarter, however, we expect it to trend higher over time. Additionally, the company is debt free. The company believes that its liquidity is adequate to meet its operating investing needs for the next 12 months and the foreseeable future. I will turn the call back to Tom and we look forward to your questions.

Thanks, Steve. We're now ready to take any questions.

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] First question today is coming from George Marema from Pareto Ventures. George, your line is live.

Hey, thanks for taking the call. Hi, Tom.

Hi.

Congrats on the quarter. I was curious on quantum sensing, a little bit more color on that. And also, on your Needham presentation, you kind of presented several different products kind of being feathered out over the next several years. So, the first thing, is quantum sensing sort of the first product set that's coming out? And do you have actual product yet? And do you anticipate any revenue in 2025 calendar year at all?

So, we do not have any products at this point in time. However, we're anticipating several development contracts over the next year or two. And those will be generating some revenue. I think there are a couple of specific products that we're pretty excited about. I think I have mentioned them in the past. But just to recount that, the first thing that we see on the horizon is a magnetometer. And we are investigating a couple approaches to building these devices. The magnetometer is a device to measure the magnetic field. And that is getting a lot of interest at this point in time because it can be used in GPS-denied environments to perform navigation, not with the same kind of accuracy as GPS, but by utilizing magnetic field maps of the Earth's surface, one, by measuring the magnetic field precisely, one can navigate with a certain resolution on the surface of the Earth. Another major use of magnetometers is in so-called Magnetic Anomaly Detection, or MAD. And one of the main purposes for this is detection of submarines. Another quantum sensor that we're interested in is so-called Rydberg sensor. And this is something that is very, utilizes the same building blocks as our atomic clocks. So, it contains a small cell with rubidium or cesium vapor, but we detect very high energy levels of the rubidium or cesium atoms. And by doing that, one can create a receiving antenna that can be tuned over a wide frequency range. And what's very attractive about that is that typically antennas are sized to the wavelength associated with the signals that they're trying to detect. And so, those antennas can be very large. Typical wavelengths are potentially many feet long. And so, the antennas are large, but with a Rydberg sensor, the size of the antenna is completely decoupled from the wavelength. And so, we can use a small cell, just as we use in our atomic clocks, maybe one centimeter cube in order to detect the signals. So, there's the potential of making very small compact antennas, which is very, very attractive for many applications. So, those are the two primary quantum sensors in the near term that we're looking at. But there are quite a few variations on those ideas that are of interest. And of course, there are other sensors also that we'll consider as we go forward.

Is that part of the -- in the press release you mentioned, you see plenty of new business opportunities anticipate over the next several few quarters. Is that part of quantum sensing or is that more of the legacy business that's referring to?

It's potentially a little of both. The only -- I'd put just a little bit of a qualification on that. I think none of us have a really good crystal ball over what's going on in Washington over the next few months. But we're cautiously optimistic that both, in both the case of our legacy systems and the quantum sensors, that we'll have some new business coming our way.

Thank you, Tom.

Thank you. [Operator Instructions] The next question is coming from Michael Eisner. Michael is a private investor. Michael, your line is live.

Hey, great job.

Thanks, Michael.

Thank you, Mike.

Thank you. In the backlog at $73 million, is any of that from the $11 million contract I think you got in November or December of last year?

Yes. Yes, definitely.

Oh, some of it is in that number.

Yes.

All right, all right. Actually, am I correct, R&D went down from last quarter percentage-wise?

I think it went down just a little bit.

Not dollar-wise, percentage-wise, yes.

Percentage-wise. I think it went down like 2% or something. I just want to confirm right with my numbers.

I think maybe 1%, but yes.

All right. Let me just look at my notes. Are we working with all four prime contractors on [Ostromis] (ph)? On the last quarter, we were working with three.

So, I think you're referring to resilient GPS?

Yes, our GPS.

Yes. Yes, our GPS. Actually, we understand that there are only three at this point in time. One of the four has been cut off, has been discontinued from the effort, and of the three remaining, we are actively participating with two of them. And we believe that we are under consideration for the third, although we haven't had any active communication on that one. The team that was discontinued is one that we did not have any communication with whatsoever.

All right. So, basically, you're maybe at the same point as last call, or maybe you dropped ahead since you made contract with the third contractor.

Yes. Yes.

All right. Now, do you see at this time, do you see any change from the government at this time, or there's no change yet? Because I know you can't time it.

Yes. Well, we have seen nothing specific, certainly nothing specific in the negative sense regarding government activity at this point in time. I think we continue to believe, based on the information that we have at this point, that we're anticipating that some of the programs we expect to get in the near term may get pushed out a little bit in time. But we don't anticipate that any of the programs that are of interest to us will be eliminated. So, that's kind of our worst case view of things at this point in time. But a lot of things going on, and as we all know, that could change one way or the other tomorrow.

All right. Anything could change in this time at work. But eventually, they're going to have to go forward with all these new things they're working on.

Yes, we believe that, in the long run that we still see a growth environment for space and the quantum sensors and other things that we're involved in. So, we're pretty bullish about the medium and long term markets for our products. We don't see, in that sense, we don't see anything negative, but there's always the potential that individual programs get jiggered around one way or the other.

Well, that's the industry you're in, basically. I think I had -- I think that was it. All right, good job. I guess, that's it. Thank you.

All right.

Thank you. And the next question is coming from Frank Wisniewski. Frank is a private investor.

Hi, thanks for taking my call, my questions. First, you mentioned quite a bit about the engineering strength and your ability to procure more scientists and technicians. Is that actually loosening up a bit in this environment?

Well, I think that for the last year or so, I think we've seen a pretty tight market. And it's a challenge to attract talented scientists and engineers. But in particular, with the U.S. government, we have, of course, we work very closely with a number of government labs. And we have seen, of course, more than anything else, a lot of confusion. But we've, in fact, had several scientists at government labs say that they would be willing to make a move at this point in time. So, I think that the way we're looking at it is we think there's a potential for opportunities, depending on what goes on with some of the government labs. And I think we're trying to be prepared to act aggressively if and when opportunities show themselves in this regard.

Yes. That's good news. I know you also emphasized how you're rewarding your current employees, which is important. Second question, I was glad to see that the non-space DOD and government business sales turned around in the third quarter. Is that a trend that's likely to continue now?

We do anticipate that that's going to continue. I think, certainly for the next year and potentially longer.

Great. And finally, could you bring us up to date in what you're doing in proliferated satellites? You mentioned it. And that's obviously a huge potential market. You mentioned your turnaround time going lower and/or decreasing. Could you flesh that out a little bit for me, please?

Yes, so I think there are several things that we're involved in at this point in time. So, probably the biggest thing for us is in the classified satellite world. Obviously, there's a limit to what we can talk about in that regard. But we're involved in several programs. And those are very much in this proliferated satellite vein. The emphasis is on smaller, cheaper, and fast delivery, with the idea that the space assets, instead of having a lifetime of 15 years, will have a lifetime of three to five years. And obviously, when the assets have a lifetime of three to five years, we need to be able to replace them in a three to five year time frame. The other major proliferated satellite system that we're getting involved in currently is with the SDA, the Space Development Agency. And we're actually in the process of bidding on some activity on this one as we speak. And again, we consider a pretty important one. We're looking at it very carefully. There's the potential that we will need to invest as a company. We feel that this is pretty important going forward. And I think in the long run, there's a huge potential for us. But we need to invest in order to be able to participate in this. In particular, we need to adapt some of our smaller products that we typically sell for terrestrial applications. We need to adapt those for the space environment. And we have to be able to ensure that they survive the radiation environment in space. The lifetime in space is anticipated to be less, but they still have to survive the radiation environment. And in particular, one of the ways that we make things smaller is by adding a lot of digital circuitry. And digital circuitry is inherently sensitive to radiation. So, there's a pretty tricky development process that we have to go through to ensure that we have reliable products for those applications. But anyway, those are the activities that we're currently involved in.

To follow-up on that, are there commercial opportunities in the proliferated satellite? Those two programs that you mentioned sounded both government.

Well, there are certainly a number of commercial satellite programs. There's the potential for us to get involved in those. But in general, where we shine is when there are high stability, high performance kind of requirements. And a lot of the commercial applications have much lower kind of requirements that don't necessarily involve the hardware that we specialize in. So, I think that we've certainly considered those programs. But I think at this point in time, our ability to compete for the absolute lowest cost products where there's no kind of high performance requirement, our ability to compete in that arena is pretty limited. And I think we'll look at those things and consider it. But we have to be pretty careful about venturing into that territory.

Okay. And in the high reliability area that you specialize in, particularly in the proliferated satellite area, who is your competition?

Well, there are a number of potential competitors. Certainly, I think Microchip is probably the most prominent. They have a product family called the Chip-Scale Atomic Clock, CSAC. And this is being thrown at a number of these proliferated satellite programs. But I think we have heard and I think have reason to believe that there are some significant limitations of that product family in the radiation environment of space. And that's something that we're trying to address pretty carefully.

Great. Thank you very much. I look forward to talking to you next quarter.

Okay, thank you.

Thank you. And next, we have a follow-up question coming from Michael Eisner. Michael, your line is live.

Hi. At this time and over the years, do we have the most opportunities going forward?

I'm not quite sure I understand. We certainly do have --

I'm sorry?

We certainly do have plenty of opportunities at this point in time.

Well, it sounds like the company is getting into more stuff than years ago, different product lines and all this. So, I'm saying there's more possible contracts for you going forward.

Okay, that's something I haven't tried to evaluate quantitatively in terms of the number of contracts. But I think our strategy is we want to be successful a decade into the future and more. And we feel that in order to do that, we need to update our existing product line and potentially expand into other things, quantum sensors and so forth and so on, as we've discussed. And so, in the process of doing that, yes, we're getting into different product lines. And there are certainly additional opportunities that show themselves in those areas.

All right, thank you.

Thank you. And the next question is coming from Robert Smith from the Center of Performance Investing. Robert, your line is live.

Thank you. Good afternoon. Thanks for taking my questions. And thanks for your leadership, Tom.

Thank you.

When you say the company has to look toward increasing investment in these areas, so to speak, of hardening, does the company have the financial resources to do this at the present time?

Good question. We do have adequate resources. Obviously, they're finite. But I think we feel at this point in time that we have adequate resources to invest the way we need to. That could change in the future. But I think we actually have a concern that we want to be careful and thoughtful in how we invest our resources. And we're all watching all sorts of changes in Washington. And as we look at proliferated satellites and things like that, the requirements are changing. And the approach that the government is using is changing on a regular basis. So, we want to be a little bit cautious. And I think if we had infinite resources at this point, I think it is likely that we would squander a significant amount of those resources, given the environment. So, I think we feel that we're in a good position financially. We have the resources to invest cautiously and responsibly. And in the near term, that's the approach that we're trying to follow.

Is the complexion of the business, does that provide opportunities for collaboration?

Well, it certainly does. And we're pursuing those rather aggressively at the moment. And we are in contact with a lot of government labs and several other companies. And we are actively pursuing teaming agreements. I think our feeling is that we can tap into the technical expertise at some of the national laboratories and very effectively learn from the knowledge in those places, which is really state-of-the-art with respect to atomic clocks and quantum sensors. And there are companies that we're actively pursuing teaming arrangements with in order to buttress our product line.

Can you characterize the bidding environment? Is it attracting new entrants? Or is it the familiar faces?

Well, it's a little of both. It kind of depends on the program. I think certainly for the proliferated satellite, in that arena, I think that part of the goal certainly we're involved in, as I've described earlier, in government programs in this arena. And I think the government has made it clear that they're actively pursuing non-traditional players in terms of the prime contractors. That's very clear. I think, on the other hand, we're also involved in legacy space programs. And those, I think, are much more the usual cast of characters that we're used to over the last couple of decades.

Yes. Well, thanks again, and good luck going forward. Again, on your leadership, which has been outstanding.

Thanks.

Thank you. And we have a follow-up coming next from George Marema from Pareto Ventures. George, your line is live.

Thanks. A quick one for Steve, for this quarter, is the fully diluted adjusted earnings per share, is it what $0.36, is that correct, or something different?

For this quarter, I don't have this quarter in front of me. I can get it or you. I only have the nine months to-date right now.

Okay. And then, for calendar '25, what deferred tax rate you're modeling out going forward?

It's hard to say because of the adjustments that we just made with the evaluation and everything else. And we still do have NOL. So, I don't think it's going to be a normal tax rate yet.

So, if I model for 10, 15-ish, is that kind of warm you think, or --

No. I don't think so. I think it should be lower. I think the only major place for paying taxes right now is some federal, but the larger portion is California, because they suspended the utilization of NOLs. So, as year-to-date, our expenses are approximately 300k.

Okay.

So, technically whatever we are subject to for California, we will have to pay, but the remaining of it is pretty much covered by NOLs.

Okay. Thanks for the details, Steve. I will follow-up on the other things.

Okay. Not a problem.

Thank you.

Thank you. There are no other questions at this time. I would now like to hand the call back to Thomas McClelland for closing remarks.

Okay. I think I don't have anything further to say, but I would like to thank everybody for participating, and until next time, thanks.

Thank you. This does conclude today's conference. You may disconnect your lines at this time. And have a wonderful day.