Q2 2022 Frequency Electronics Inc Earnings Call
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Greetings and welcome to the frequency electronics second quarter fiscal year 'twenty two 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, if anyone should require operator assistance.
During the conference. Please press Star Zero on your telephone keypad 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.
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 release 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 Stanton.
Sloane President and CEO.
Thank you.
Welcome to our second quarter fiscal 'twenty two earnings call. Thanks for joining us.
Before I turn the call over to Steve to take us through the financial details, let me offer a few comments on Q2.
First of all I would say I'm very pleased with the improvement in operating income and net income for the quarter.
Cash generation also very positive so highest it's been with the current cash and marketable securities balance now at approximately $20 6 million.
Course, we continue to be debt free also.
While the revenues were a bit lower for the quarter principally in our XI for operation.
Bookings.
Or just delayed and we do anticipate that they will come in so it's timing.
Moreover, we've got some significant opportunities that we've been pursuing related to advanced technology developments.
We hope to announce contract awards in the near term.
In Q1, and Q2, we ramped up our internal R&D investments and some of these new technologies related to atomic clocks.
Low noise oscillators.
And we expect these to produce long term increases in revenue.
And in positioning the company to compete in the marketplace with next generation products.
If you recall I mentioned those those R&D investments also on our last call said that I was hopeful of important contract awards.
That was followed by the pop perhaps contract from the office of Naval Research, which we announced last quarter.
We are working hard to continue that trend.
Optimistic that we'll see some additional awards in the near term.
I believe we have the right focus on technology I'm very optimistic that we will receive additional contracts for truly groundbreaking product developments.
The research and development investments, we've made are clearly starting to pay off.
But obviously, we're not going to stop there.
Continue to push us into the forefront of precision time generation products.
For government space and telecom applications.
With that I'm going to turn it over to Steve for some comments and then I'll be back with you.
Steve Thank.
Thank you Stan and good afternoon.
For the six months ended October 31, 2021, consolidated revenue was $26 million compared to $27 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 $13 3 million or 51% compared to $14 2 million or 53% 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 FBI New York segment.
Revenues from non space U S government and Vod customers, which are recorded in both the FBI, New York and <unk> segments were $10 6 million compared to $10 9 million in the same period of the prior fiscal year and accounted for approximately 41% of consolidated revenue compared to 40% for.
The prior fiscal year.
Other commercial and industrial revenues were $2 million compared to $1 8 million in the prior fiscal year intersegment revenues are eliminated in consolidation.
For the six months ended October 31, 2021, gross margin and gross margin rate decreased as compared to the same period in fiscal year 'twenty one.
The decrease in gross margin and gross margin rate was due to increased engineering cost on development phase programs that experience, particularly complex technical challenges as well as cost impacts on several programs, resulting from supply chain problems.
Lack of availability of parts and material and our quality problems with traditional vendors, resulting in the need to redesign certain electronic units to replace unavailable parts with different parts that were available in order to maintain contract delivery schedules.
In several cases re procurement of circuit boards and mechanical parts was necessitated by quality issues in the supply chain further contributing to increased costs.
For the six months ended October 31, 2021, and 2020, selling and administrative expenses were approximately 26% and 27% respectively of consolidated revenues. The decrease in SG&A expense is mainly due to the decrease in professional fees. We expect this trend to continue as <unk>.
Fences normalize.
R&D expense for the six months ended October 31, 2021, and 2020 increased to $2 7 million from $2 2 million, an increase of 500000 and were 11% and 8% of consolidated revenue.
R&D increases in the first and second quarters of fiscal 'twenty, two were due to higher than usual levels of internal R&D associated with investments. The company is making in new technology developments related to atomic clocks and low noise oscillators.
That are intended to produce long term increases in revenue and position the company to compete in the marketplace with next generation products. The company plans to continue to invest in R&D to keep its products at the state of the art.
For the six months ended October 31, 2021, the company recorded an operating loss of $1 4 million compared to an operating loss of 120000 in the prior year the.
The factors cited above in the gross margin discussion our Apple to operating income as well is important to mention that for the three months period ending October 31, 2021. The company reported an operating profit of 303000, a significant improvement from the first quarter.
Other income.
I'm sorry for the six months ended October 31 2021.
The company recorded an operating loss of $1 4 million compared to an operating loss of 120000 in the prior year.
You bet.
Other income consisted primarily of investment income derived from the company's holdings of marketable securities.
Earnings on Securities May vary based on fluctuating interest rates dividend payout levels and the timing of purchases sales redemptions or maturities of securities for.
For the six months ended October 31, 2021 investment income included 123000 dividend from Morion compared to 105000 dividend from Morion in the same period in fiscal 'twenty one.
This yields a pretax loss of approximately $1 1 million compared to 92000 of pre tax income for the prior year.
For the six months ending October 31, 2021, the company recorded a tax provision of $2000 compared to 25000 for the prior fiscal year.
Consolidated net loss for the six months ending October 31, 2021 was $1 1 million or <unk> 12 per share compared to 67000 of net income or <unk> <unk> per share in the previous fiscal year.
Our fully funded backlog at the end of October 'twenty, one was approximately $38 million down approximately $2 million from the previous fiscal year ended April 32021, the company's balance sheet continues to reflect a strong working capital position of approximately 40 million at October 31 2021.
And a current ratio of approximately 5% to one. 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 foreseeable future I will call turn the call back to stand and we look forward to your questions.
Thanks, Steve.
I will turn the call over to the operator, now who will explain how you may ask your questions operator.
Certainly ladies and gentlemen, the floor is now open for your questions.
We'd like to enter the queue to ask a question at this time you May press star one on your telephone keypad to enter the queue.
Ask if listing on speakerphone. This afternoon to please pickup your handset while asking your question.
Optimal sound quality.
Once again, ladies and gentlemen, you May press star one on your telephone keypad at this time to ask some questions. Please hold a moment, while we poll for questions.
And we do have a person in queue and once again as a reminder, ladies and gentlemen, you May press star one on your telephone keypad at this time enter the queue to ask a question.
And we have a question from Michael Eisner.
Oh, Hi online.
Good job.
The last two contracts you announced.
September.
Told us what percent of that is in the backlog.
Well I will give you a percent collectively it's around $5 million, a little over $5 million between the two contracts.
That's what I meant.
So about $5 million.
As of now how are the supply chain.
Custom any delays.
Well, we're seeing longer times, two to get parts and materials.
I think thats.
Universal.
That's just us our customers are telling us they have the same issues. So.
Basic electrical parts are taking longer.
And.
We're doing our best to keep ahead of that but.
I'm hopeful that things will start to settle down.
We have seen.
I'm sorry.
We have seen some delays in delivery of parts.
All companies have and delays I just want to know how extreme.
Did you I think you're working on to finish qualifications for GPS III F.
Stock deduction, if I remember.
That's correct.
Where did you finish qualifications or where are you with that.
It's not quite finished but it's getting pretty close.
Qual program.
Should be complete within the next I'd.
I'd say month or two.
And at that point, we will.
A long term aging test, which we have to go through but.
But the <unk> program will essentially be finished.
Shortly.
So how long after that's complete can you stopped production.
We can start production today.
I think the question is how.
How far along do we need to be before the customers are prepared to.
Issue options to us.
Theoretically it could be at the end of that aging process.
But they'll do it sooner I think our track record and performance on the clock is such that it.
It's low risk order it now so.
We're working hard to get them to order it but I can't tell you how that will come out yet.
It will be a couple of months.
Thats probably likely.
Alright and.
And did you hire more people I think he had like 255 employees.
This quarter.
Yeah, we're pretty stable since last quarter I don't think we've changed much in employment.
We have some.
Job openings, which were planning to fill up the total number of employees from last quarters about the same.
C may hire a few more.
Yes.
We have some openings and we're actively recruiting.
The heart is still hard to find people.
Always hard to find good people, we've been pretty successful in our recruiting efforts.
<unk> by that so I don't think we'll have a problem well qualified people I should say.
Alright, good job overall, it made money in the $12 9 million.
Revenue.
Thank you. Thank you.
Thank you once again as a reminder, ladies and gentlemen, anybody who would like to enter the queue May press star one on the telephone keypad at this time to ask a question.
So we have a question coming from Brett Reece Janney Montgomery Scott. Your line is live. Please go ahead.
Istent and Hi, Steve.
Hi, Brett.
Could you just.
Give me a brief too.
Tutorial what is a low noise oscillator used for.
They're critically important for communications and radars and other systems.
Where you want the <unk>.
Purity of the frequency to be very good. So you don't want a lot of noise it's noise.
Also the frequency that contributes to it so.
Basically it's a high performance oscillator.
Yes, we can.
Call It high performance instead of low noise, but.
But they are they are very important for us.
Things like radar.
Medications electronic warfare.
Okay.
And.
Is there like a total addressable market.
Metric on that and who would your major competitors be in that part of the business.
Well, there's a variety of competitors, depending on what level of performance you're specifying so.
Difficult.
To give you an answer the market size for for the kind of oscillators that we produce here.
It was probably a couple of hundred million dollars.
<unk>.
Hello.
Yes.
You cut out Im sorry, I don't know whether its my end or your end.
A few hundred million dollars and what is the.
The market for that kind of will also later.
Okay, and who are who are our major competitors.
So a variety of people depending on.
Then on.
Particular specifications that you have but right.
Asian competitors at the low end you have European competitors.
That produce.
Fairly similar types of oscillators.
And then there's a variety of competitors in the U S. Depending on whether you're talking about.
Basic resonator part or the finished oscillator product.
Would there be an inclination by U S customers to buy that type of product from a U S manufacturer as opposed to a foreign manufacturer.
For government military yes.
Okay.
The R&D, which keeps.
Moving up is it kind of equally divided between the atomic clock initiative and the low.
Noise Oscillated I guess, we carrier.
Are you most excited about and see the most opportunity for the company.
So.
Total R&D program lately is more biased towards the atomic clocks and.
Let me spend a little bit of time on that because I think it's really important to understand what we're doing to position the company for the long term.
These.
The optically pumped.
Clock that we announced last quarter.
It will result in.
A new type of atomic clock.
This is <unk>.
Significantly improved performance over the current.
We're bidding type atomic clocks.
And.
And that.
Is going to open up Cigna.
A significant market opportunity for us.
Were competing for some other technologies like I said in my comments on I'm optimistic that we're going to win one or more of those things.
The more of these new tech.
Technology clocks and oscillators.
That we have.
The more that we can think about the company having significant upside in terms of revenue.
These things are.
Developmental so you can't look at.
Next quarter's financial performance.
Being significantly.
Affected by these although they do produce revenue.
But you got to think about the long term effects of these things for the company. It's significant you're talking about opening up hundreds of millions of dollars of market opportunity from these new products. So.
I want to make sure I convey that because.
We tend to.
Get wrapped up in the current quarter or last quarter's financial performance and I don't want to imply that we're not focused on continually improving that we are but you really got to think about what we're doing with the company for the long term.
These things are very significant technical developments and advancements you really got to think about it a little differently you think about the company a little differently now.
Right right.
There isn't a day and that goes by that you don't read about the.
Increasing competition between the United States and China.
Satellite space Arena.
Our all.
I take it that that's.
As a K.
Tailwind.
For potential market opportunities not not a headwind.
Oh, Yes, I think we are.
<unk>.
So it's easy for me to get excited about these new technology developments, but.
From a from a.
Our national from the U S perspective.
Staying ahead of the players that you just referred to is critically important so.
To me, it's a very significant tailwind that's why the government is investing in development of these new technologies.
That that's the best indicator that I can tell you that theres going to be a tremendous market there.
<unk>, they're funding it so.
I think we're very well positioned.
Right.
Thank you for taking my questions and if I don't speak to you or Steve.
Before the holidays have a good holiday and a good new year.
You too thanks.
Thank you. Your next question is coming from Richard Johns.
Richard Your line is live please go ahead.
Good afternoon.
Hi.
I just wanted to try to continue the conversation you were just having I.
Uh huh.
You know I'm an old guy.
I'm not sure what the long term is going to bring for me.
And I understand that you've made great technical advances recently.
I'm encouraged that.
They might bring revenues in the long term, but over.
Over the past three or four or five years, we've talked about.
We've talked about bids out there for five six $700 million worth of.
Possible orders.
And we were hoping that maybe we'd get half of those.
And the company is still moving along at a quarterly rate of 12 13 million and.
And revenues.
And so it seems to me that.
In the relatively near term.
Or at least you know well.
Yeah, the relatively near term.
We do the start.
Getting revenues from all of those bids that we put we put out there in recent years.
While we certainly hope so you have to you have to bid then you have to win the bid before it converts to revenue. So we're working hard to keep that pipeline going.
Yes.
So as those things are adjudicated and get on contract then youll start to see revenue pick up.
And so is your message really that.
The new exciting technical developments that you've achieved.
And bring in.
Significant revenues in the long term.
But that in the near to intermediate term.
The companies are going to start to.
See a surge in revenues related to this bill.
Business that I've been talking about.
Well, we're always working hard to get the revenue Batesville. So.
We did everything we could bid thats a near term thing my point about the longer term was that.
If you think about the company's growth over the long term.
Don't see it being.
<unk>.
Sort of a linear process I think it's going to be a large step function.
That's the way I see the market and that's how I think these products will end up in the marketplace between here and there we keep bidding we keep.
We are working on improving profitability and operational efficiency and that sort of stuff. So.
Mhm.
For the company to get through $100 million in revenues.
Or are we going to need that big step in the long term or are we are are we going to get there sooner.
Sooner than that.
I wish we could get there Monday, but.
You talked about doubling the revenue.
That's pretty challenging so it takes it takes some time to do that well I'm not.
I got to say, it's Dan I'm, not timid about talking about a doubling of revenue because.
When we were talking about the five 600 $700 million of bids out there.
The next question was well how long would it take for those bids to turn into revenues and my recollection of the answer.
And I know that you know you don't have a crystal ball, but my recollection of the answer was.
Maybe within two years.
The bids would turn into orders.
And.
And that was more than two years ago.
So.
Uh huh.
You know I'm feeling a little frustrated.
Well, we're working hard to take.
To get the revenue up so all I can tell you is everybody's got their nose to the grindstone.
Okay alright, thank you.
Thank you and as a reminder, ladies and gentlemen, if anyone would like to enter the queue.
Star one on your telephone keypad.
We do have a follow up question from Michael Eisner.
Michael. Please go ahead. Thank you one final question that contract to a 12 can amount to post.
<unk> stopped the key pumped through rubidium Hum.
Is there anyone in the U S.
Make the same product and quality.
No not that I'm aware of.
Alright.
Is there anyone you want.
You haven't even heard of anyone doing it huh.
The Europeans are researching.
Similar technology, that's actually how we got started on this a.
A few years ago, but I'm not aware of them having a.
Our product ready for market.
As far as I know, it's still a research over there.
So where the well even if they had something the government right now once probably everything made in the in the U S.
For government and military programs Thats true statements.
We'll probably be at this clock, we're talking about that.
You're allowed to say, whether it's military government so it.
It does say that the company was from the office of Naval Research Yes.
So.
So we're the only one that.
Can do this at this point.
Well, let me let me.
I don't want to misstate Im not aware of anyone else working on the pulse optically pumped rubidium clock here in the U S.
We are not aware of it.
That could be I understand.
Today, they can be.
Putting on any news.
Basically.
Alright.
Alright, thank you.
You bet.
And there are no further questions in queue at this time I would now like to turn the floor back to Stanton Sloane for closing remarks.
Thank you and thanks, everyone.
From all of US here at <unk>, we wish everybody a happy safe healthy holiday and a great 2020 to look forward to talking to you on the next call. Thank you everybody.
Thank you ladies and gentlemen, this does conclude today's conference call. You may disconnect. Your phone lines at this time and have a wonderful day. Thank you for your participation.
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