Frequency Electronics, Inc. (NASDAQ:FEIM) Q2 2024 Earnings Call Transcript

Frequency Electronics, Inc. (NASDAQ:FEIM) Q2 2024 Earnings Call Transcript December 12, 2023

Operator: Greetings and welcome to the Frequency Electronics Q2 Fiscal ‘24 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.

Thomas McClelland: Thank you, and good afternoon everyone. From a financial point of view, as was the case last quarter, we have encouraging numbers to report. And I continue to be confident that we’re on a sustainable path of growth and profitability. We have a lot of exciting new business and are confident in our ability to execute profitably going forward. As everyone should be aware, we publicly announced three relatively large contracts, one right after the other during the month of November. These contracts were a long time in the making, and originally we anticipated getting under contract much sooner. However, in the end, this occurred after the close of Q2. Because these contracts have been anticipated for some time, we’ve been able to prepare ahead of time and are thus in an excellent position to hit the ground running so to speak.

We have every reason to be confident in our ability to execute these programs successfully. In addition, we anticipate additional smaller contracts to be coming online over the next few weeks/months. And we will make public announcements as appropriate. All in all, we’re experiencing significant growth and have good reason to believe that this trend will continue going forward. Let me briefly highlight the financial results before Steve fills you in on the details. Revenue, gross margin, and operating income are all up compared to Q2 of last fiscal year and holding steady compared to Q1 of this year. The backlog is holding steady at around $50 million at the end of Q2 and is anticipated to grow significantly based on the new orders that we got in November.

So in summary, I believe our efforts have put us on a sustainable positive trajectory of growth in our core business. The company remains committed to achieving sustained profitability and cash generation going forward. At this point, I’d like to turn things over to Steve Bernstein, our CFO, who will go through the numbers in a lot more detail.

Steve Bernstein: Thank you, Tom, and good afternoon. For the six months ended October 31, 2023, consolidated revenue was $25.9 million compared to $17.2 million for the same period of the prior fiscal year. The components of revenue are as follows. Revenue from commercial and US Government satellite programs was approximately $9.5 million or 37% compared to $7.8 million or 46% 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, US Government, and DOD customers, which are recorded in both the FEI New York and FER Zyfer segments, were $15.8 million compared to $8 million in the same period of the prior fiscal year and accounted for approximately 58% of consolidated revenue compared to 47% for the prior fiscal year.

Other commercial industrial revenue was $1.4 million for the six months ending October 31st, ‘23 and ‘22. The significant increase in revenue for the period compared to the same period in the previous fiscal year was related to contract awards, resolution of technical problems from the previous fiscal year, and improvements made by management. For the sixth month ended October 31, ‘23, gross margin and gross margin rate increased as compared to the same period of fiscal year ‘23. The gross margin dollar increased as a direct result of increase in revenue. The gross margin rate increased significantly due to the fact that many of the technical challenges faced in the prior fiscal year have been resolved and as a result the related programs are now moving forward and running more efficiently.

Previous programs that sustained lower margins due to technical issues are near completion or have completed. For the six months ending October 31, ‘23 and ‘22, SG&A expenses were approximately 19% and 23% respectively of consolidated revenue. The percentage of consolidated revenue decreased 5% due to an increase in sales for the six months ending October 31st, ‘23 as compared to the six months ending October 31st, ‘22. The increase in SG&A expense for the six months ending October 31st, ‘23 as compared to the prior year period was largely due to an increase in professional fees, payroll, and associated costs. R&D expense for the six months ending October 31st, ‘23 decreased to $1.3 million from $1.7 million for the six months period ending October 31st, ‘22, a decrease of $400,000 and were approximately 5% and 10% respectively of consolidated revenue.

R&D decrease for the six months ending October 31, ‘23 was primarily due to a shift of employees between production and development depending upon availability, scheduling, and necessity. The company plans to continue to invest in R&D in the future to keep its products at a state of the art. For the six months ending October 31, ‘23, the company recorded operating income of $3 million compared to an operating loss of $5.4 million in the prior year. Operating income increased due to a combination of increase in revenue, gross margin, and the effects of cost-cutting measures instituted by management that began in fiscal year ‘23. Other income can be derived from reclaiming of metals, refunds, interest on deferred trust assets or the sale of fixed assets, interest expenses related to deferred compensation payments made to retired employees.

This yields pre-tax income of approximately $2.9 million compared to a $5.4 million pre-tax loss for the prior fiscal year. For the six months ending October 31, ‘23, the company recorded a tax provision of $13,000 compared to $2,000 for the same period of the prior fiscal year. Consolidated net income for the six-month ending October 31, ‘23 was $2.8 million, or $0.30 per share, compared to a $5.4 million loss, or $0.58 per share in the previous fiscal year. Our fully funded backlog at the end of October ‘23 was approximately $50 million compared to $56 million for the previous fiscal year ending April 30, 2023. The company’s balance sheet continues to reflect a strong working capital position of approximately $25 million at October 31st, ’23, and a current ratio of approximately 2 to 1.

Additionally, the company is debt free. The company believes that its liquidity is adequate to meet its operating and investing needs for the next 12 months and the foreseeable future. I will turn the call back to Tom and we look for your questions soon.

Thomas McClelland: Thanks Steve. We will now turn things over for any questions.

See also 25 Best Online Psychology Degree Programs Heading Into 2024 and 20 Most Competitive Job Markets in the World.

Q&A Session

Operator: Certainly. At this time, we’ll be conducting a question-and-answer session. [Operator Instructions] And the first question today is coming from Brett Reiss from Janney. Brett, your line is live.

Brett Reiss: Gentlemen, thanks for the opportunity to asking a question or two. Tom, the Starlink satellite program that SpaceX has that so many of the militaries are using in the conflicts that are going on, is the satellite size of those satellites, the size where our atomic clocks and our frequency generators, are these potential sales opportunities?

Thomas McClelland: Well, I can tell you that Starlink in particular, none of our products are on the Starlink satellites at this point in time, nor do we have any anticipated presence on the Starlink satellites going forward. However, there are several other similar kind of satellite systems that are in various stages of development and launch and we have been talking to several of these programs. And we do anticipate at some point in the future that we will definitely be involved in these programs. So one of the important things, Starlink is very much a communication system. Where we think that we have a better opportunity is in similar systems that are developing a navigation segment on those systems. And there the precision timing becomes much more important and that provides a big opportunity for us.

And this is a pretty big thing at this point in time. People are very concerned about the vulnerability of GPS and the ability to — so one thing is to actually take out GPS satellites. The other is to jam the signals from those satellites or to spoof them. And it’s much more difficult to jam the signals that come from low Earth orbit satellites, because the signals are at a much higher level. And so a lot of people, a lot of programs are looking at adding a navigation payload and capability to those systems. And we have a big potential opportunity in those and we’re looking at those very, very carefully.

Brett Reiss: These organizations that are looking to develop these similar systems, do you know who they are and you already have our foot in the door is it someone that your salespeople have to first get to know?

Thomas McClelland: No, we know who they are and we do already have our foot in the door in a significant number of these.

Brett Reiss: Great. I’m going to drop back in queue. Thanks again for another good quarter and good holiday to you.

Thomas McClelland: Okay, thanks, Brett. Thank you.

Operator: Thank you. The next question is coming from [Chris Vatowski] (ph). Chris is a private investor. Chris, your line is live.

Unidentified Analyst: Hello. Congratulations on great results.

Thomas McClelland: Thank you.

Unidentified Analyst: I want to ask first, did the — did margins go down slightly sequentially because you discussed margin of six months basis, but on quarterly basis it seems like you sequentially had slightly larger revenues. Last quarter you said, barring one-time items, your net — your operating income was a little bit over $1 million and now it was a little bit under $1 million.

Steve Bernstein: Yeah, you — that’s certainly correct. But I think the point I would emphasize, we always anticipate that quarter to quarter, we’re going to see some fluctuations in things. As we reported last quarter, there were some one-time events that had a positive impact on those numbers. And those one-time events aren’t there this quarter. So I think the way I, strictly speaking, the margin went down a little bit, but I think I would, I think realistically I would characterize it as pretty much holding steady.

Unidentified Analyst: Okay, and generally speaking, does your business allow for leverage, kind of continuing, raising margins as your revenues increase, or would the government — would the government economists kind of like look at that and take that into account when they price your contracts?

Thomas McClelland: Yeah, we — for our government customer, of course, they scrutinize things pretty carefully and we’re subject to audit of all our numbers on any programs that the ultimate customer is the government. But I think that we feel pretty strongly that our gross margin is going to continue an upward trend. Of course, that’s not going to go on indefinitely. But we’re targeting gross margin of around 50% and we think that we can get there within the next six months to a year.

Unidentified Analyst: That is great to hear. And you — backlogs were kind of a hair down sequentially again, but you still anticipate — to be clear, you still anticipate backlog shooting up again as you win more deals. Is that correct?

Thomas McClelland: That’s definitely correct. Same — I would characterize that the same way. It’s true, literally speaking, the numbers have gone down a little bit over the last quarter, but they’re really pretty much holding steady. And given the new business that we booked in the month of November, and additionally, what we anticipate over the next couple of months, our backlog is definitely going to trend upwards because of that.

Unidentified Analyst: Okay. That’s good to hear. And of the deals you announced, one of them wasn’t a US government customer. Is that still a military deal or is that a civilian deal?

Thomas McClelland: It’s not a military deal. Let me put it that way.

Unidentified Analyst: Do you expect you can enter the civilian markets in any way?

Thomas McClelland: I’m sorry, can you say that again?

Unidentified Analyst: Do you expect to go into civilian markets significantly?

Thomas McClelland: Definitely. It — of course, in the satellite business, the US government has historically been the biggest player. But we — there’s always been — there’s a lot of activity and more and more coming from other arenas. And the $9 million contract that we talked about in our November press release, is an example of that, and we anticipate that there will be more of that going forward.

Unidentified Analyst: Okay, that’s it for me. Congratulations again.

Thomas McClelland: Okay, thank you.

Operator: The next question is coming from Tim Hasara from Sinnet Capital. Tim, your line is live.