Q4 2023 Frequency Electronics Inc Earnings Call
I.
Greetings and welcome to the Frequency Electronics Fiscal Year End 23 Earnings Release Conference Call. At this time all participants are in a listen-only mode. If anyone should require operator assistance during the conference please press star 0 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 in response to the state public 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.
Thank you and welcome everyone.
Today it's almost exactly one year since I inherited the role of CEO and President of frequency electronics.
and I find myself reflecting on what has transpired during the last year.
It's certainly been.
certainly been a challenge.
Overall, it has been a very positive experience.
And I look forward to a continuation of
that experience over the next couple of years.
There will be more challenges, but I feel confident that the company is on a solid path to continued success and growth.
I'd like to start with some non-financial observations which I think are ultimately very important for the financial health of the company.
Over the past year we've made a number of changes designed to make the company stronger in the long run.
In early September of last year, we had a major layoff and restructuring at our Long Island facility. And before the end of calendar year 2022, we relocated the Zephyr manufacturing capability, which had been moved to Long Island back to their original location in California.
alongside their engineering team. These moves were understandably traumatic and also costly in the short run.
The layoff was costly in terms of workforce morale, and the Zephyr move was costly in dollars and cents.
But both of these moves have made us stronger.
and are now showing positive benefits.
Simultaneously, while all of this was going on, we've made a conscientious effort to harness our strength in science and engineering and in fact to bolster it in such a way that we can remain competitive well into the future.
Over the last year, we've begun to work collaboratively with several of our major customers to develop new approaches to old problems.
which have the potential to improve performance and lower cost in the position, navigation and timing arena.
Similarly, we've reinvigorated our internal RMD program.
to target quantum technology and products which address the move to smaller, lower cost satellite systems.
Our Zephyr division has made a dramatic comeback in fiscal year 2022.
Zephyr suffered an operating loss of over $2 million.
Whereas in fiscal year 2023, which ended April 30th,
Zephyr still had a small overall operating loss of about $160,000.
But much more importantly, in the second half of the year, Zephyr made an operating profit of just over a million dollars. This, in spite of the costs associated with the cross-country move of manufacturing.
John Johan, Zephyr's president, and his team
deserve a lot of credit for making this happen much faster than was originally anticipated.
Furthermore, Zephyr has been awarded several major contracts during fiscal year 2023, which will significantly contribute to the bottom line during fiscal year 2023.
fiscal year 2024 and beyond. And several new contracts are expected in the near future.
Meanwhile, in New York, FDI has regrouped, is smaller after the layoffs, but is coming back strong. Some costly engineering development efforts are finally coming to completion successfully.
Some new contracts are in and proceeding profitably.
and several large satellite program contracts are anticipated over the next six months.
Importantly, after enduring some pretty traumatic changes over the last year,
I believe our workforce morale is high.
There's a spirit of success in the air and I feel we're all working together, not only in New York, but the entire company.
There's a spirit of success in the air, and I feel we're all working together, not only in New York, but the entire company, to do what's necessary to make things happen.
I believe the hole at FEI is greater than the sum of the parts.
and that's a powerful force. So okay for the financial portrait. In the fourth quarter of fiscal 2023, we continued to see the results of the cost cutting efforts and management reorganization.
which has taken place over the last year. Revenue and gross margin have increased substantially for the six month period ended April 30th, 2023. Compared to the six month period ended October 31st, 2023.
as well as in comparison to the same period in fiscal year 2022.
And the company is reporting an operating profit for the second half of the fiscal year.
FEI's backlog at year-end is at a decade high.
and several historically large satellite programs are anticipated during the next six months.
substantiating our confidence in the growth of our primary markets.
Both commercial and government satellite businesses continue to show signs of sustained double-digit growth going forward.
Continued vigilance is required to navigate the challenging economic and geopolitical environment.
But we're nonetheless confident that we are progressing in a positive direction, and we look forward to continuing to improve it.
we are progressing in a positive direction and we look forward to continuing improvement results.
The company is committed to moving towards sustained profitability and cash generation going forward.
Further, we remain debt-free with a very strong balance sheet to fund future growth opportunities.
Thank you and I'd like to turn things over now to Steve Bernstein, our Chief Financial Officer.
Thank you, Tom, and good afternoon.
As we move to the financial results, it is important to mention that I will be comparing Q4 of fiscal 23 versus Q4 of fiscal 22 results. Our press release has the full fiscal year results and some of the key metrics. I would also like to mention the improvement in results for the second half of the fiscal 23 compared to the first half of fiscal 23.
23, and operating income loss went from an operating loss of $5.4 million in the first half of fiscal 23 to an operating income of $717,000 in the second half of fiscal 23. Additionally, this is the second quarter in a row that the company is operating income. It is evident by the vast improvement in our results from comparing the second half of fiscal.
period of the prior fiscal year. The components of revenue are as follows. Revenue from commercial and US government satellite programs was approximately $5.1 million, what, 39% of consolidated revenue, compared to $5.2 million, or 51% of consolidated revenue in the same period.
of the prior fiscal year. Revenue 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 FBI New York and FBI's IFRS segments, were $7.3 million compared to $4.7 million in the same period of the prior fiscal year and accounted approximately for 56 percent consolidated revenue compared to 46 percent for the prior fiscal year.
Other commercial and industrial revenue was approximately $563,000 compared to approximately $249,000 in the prior fiscal year. The increase in revenue for the three months ending April 30, 2023 was mainly due to the increase in revenue at the I-Zephyr.
For the three months ended April 30th, 23, gross margin went down and gross margin rate increased as compared to the same period of fiscal year 22. The company is encouraged by the fact that the gross profit percentage for the third and fourth quarter of fiscal year 23 were both over 30% and the company anticipates this trend will continue in fiscal 24.
For the three months ended April 30, 2023 and 22, SG&A expenses were approximately 23 percent and 20 percent respectively of consolidated revenues. The increase in SG&A expense for the three months ending April 30, 2023 as compared to prior year was largely due to reversals.
fiscal 22. Full year SG&A expenses decreased over two million dollars. The company continues to monitor expenses looking for additional cost-effective
R&D expense for the three months ending April 30, 2023 decreased to approximately $658,000 from $1.1 million for the three months ending April 30, 22, a decrease of approximately $450,000 and was approximately 6% and 11% respectively of consolidated revenue.
R&D decreased for the three months ending April 30th, 2023 due to decline dedicated R&D resources are working on two externally funded developmental programs which would not show up in R&D. The company plans to continue to invest in R&D in the future to keep its products at the state of the art. For the three months ending April 30th, 2023 the company recorded a new R&D update for the R&D program. The company is now working on a new R&D update for the R&D program. The company is now working on a new R&D update for the R&D program.
For Q4 fiscal 23, other income consisted primarily of interest expense and miscellaneous income since all marketable securities were sold this year. During the three months ending April 30th, 2022, the company took a $795,000 impairment charge related to the company's investment in Morion.
This yields a pre-tax income of approximately $313,000 compared to an approximately $6.8 million pre-tax loss for the three months ending April 30th, 2022.
For the three months ending April 30th, 23, the company recorded a tax provision of $68,000 compared to a $3,000 tax benefit for the same period of the prior fiscal year.
Consolidated net income for the three months ending April 30, 2023 was approximately $246,000 or 3 cents per share compared to an approximately $6.8 million loss or 74 cents per share for the same period of the previous fiscal year.
Our fully funded backlog at the end of April 23 was approximately 56 million compared to 40 million for the previous fiscal year ended April 30th, 22. In addition, this is the third consecutive quarter in which backlog is greater than $50 million levels the company has not seen in over 10 years while some...
at April 30th, 23, and a current ratio of approximately 1.8 to 1.
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 poll back to Tom and we look forward to your questions later.
Thanks, Steve. And at this point in time, we will turn over to accept questions from the audience.
Thank you. At this time we will be conducting a question and answer session.
If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue.
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For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
One moment please while we poll for questions. Once again, that's star one if you have a question or a comment. Okay, and our first question comes from.
Brett Rice with Jenny Montgomery, please proceed with your question. Hi Tom, hi Stephen. First applaud it, you know, congratulations on the progress. So nice to see that.
Please proceed with your question. Hi, Tom. Hi, Stephen. First, applaud it and congratulations on the progress. So nice to see that. Thank you.
Now that we're crossed over to profitability, you mentioned funding, being able to self-fund growth opportunities. Could you give us some more color on what you have in mind?
Well, we –
We plan to significantly increase our R&D funding over the next couple of years. In fact, we've budgeted for that in fiscal year 2024.
But of course we're also working pretty aggressively to get internal, external, excuse me, external funding for development efforts. And we're actually seeing that there's a lot of stuff out there that's relevant to the community.
to our areas of expertise in technology. And we're...
vigorously pursuing those development efforts.
Great, great. Grossing revenues that you anticipate in the coming quarters.
Is there anything that can derail that? Like we go into a recession, does that become a headwind?
those revenues come in irrespective of what the macro economy does.
Yeah, you know, of course, there are always things out there that can derail.
stuff, but I think things look very, very positive at this point in time. Our revenue estimates are based on the work that we already have, contracts that we already have andaunAH goes on to jump right to more producer and sales solar features.
and also things that we are very, very confident of getting in the very near future. And I think we are, we're working very carefully to pursue those programs.
in such a way that we can execute them probably.
in such a way that we can execute them properly. And so.
I think because of all of that, we're really quite confident that we'll see significant revenue growth and also profitability.
Is there a book to bill number, Steve?
I don't have it with me. I can get it to you.
I started in printed. It was somewhere in the neighborhood, I believe, of 1.5 to 1, maybe a little bit higher, but I will get you the exact number when we get off the call. I'll email it to you. Right. If that's what it is, it's consistent with what it was last quarter.
Pretty close, yes. I am going to drop back in queue. And once again, thank you for the progress.
Thank you.
The next question is from Robert Smith with the Center for Performance Investing.
The next question is from Robert Smith with the Center for Performance Investing. Please proceed.
Hi, good afternoon. Thanks for taking my questions and thanks for the progress.
Tom, how much of the backlog do you feel is deliverable in fiscal 24?
I
It's tough to estimate, to give an exact number, but I think 75% is a reasonable estimate.
I mean prior calls you said you were going to mount a
effort to tap the small satellite area. Could you give me some color of the progress you are making? Okay, sure. I think
We are working closely with some of the major contractors, the prime contractors on satellite systems.
And I think the most important part at this point in time is really trying to home in exactly how things are going to pan out in the future.
There have been moves to, you know, the people have launched, especially there have been experimental satellites launched by universities and things that are satellites the size of soccer ball and things like that. So we feel pretty strongly that that's
that's not really where things are gonna end up.
We feel that there's a sweet spot that's a little bit bigger than that, a little bit more costly than that, and we're really trying to home in on this.
what we perceive as a sweet spot between low cost and very high performance.
So we're targeting our internal R&D and also efforts that we're making in collaboration with some of the prime contractors.
our internal R&D and also efforts that we're making in collaboration with some of the prime contractors to really.
be able to achieve improved performance over what we can achieve today, but doing it in a smaller package at a lower cost. Exactly where that ends up in specific dollars and cents and specific numbers of kilograms.
remains to be seen. But that in a general sense is where we're headed.
It is a little bit hard to estimate. I think there are some things that currently are scheduled in 2025 kind of timeframe, calendar year 2025, perhaps 2026.
It's a little bit hard to estimate. I think there are some things that currently are scheduled in the 2025 kind of timeframe, calendar year 2025, perhaps 2026. I think…
That's probably what we're looking at.
And I think you shared with us that you felt that there was a considerable addressable market there.
but you would all give me some you know average kind of
that I could work with and get my arms around? That's a little bit tough to do. You know, the satellite business is definitely growing and the trend is toward the...
the systems that involve a very large number of low Earth orbit satellites.
you know, the systems that involve a very large number of low Earth orbit satellites.
I think it remains to be seen exactly how big that market becomes.
I think it remains to be seen exactly how big that market becomes.
It's not redirecting. I mean you understand what the potential is and you're going to go for it, right? Can you repeat that I'm sorry I didn't quite Yeah, I I think I assume that you you understand fully what the potential is and you're going to go for it.
understand what the potential is and you're going to go for it. Can you repeat that? I'm sorry. I didn't quite catch it. Yeah, I assume that you understand fully what the potential is and you're going to go for it. Oh yes.
Yes. Well, there are two aspects to that. One is what the potential is, but I think the other very important thing is that that's the direction the satellite business is going.
And if we don't pursue it, the satellite business starts to disappear. So yeah, I understand.
Well, the recognition is powerful. I wish you well. Thanks so much.
I wish you well. Thanks so much. Thank you.
Once again, if you have a question or a comment, please press star one. The next question comes from Michael Eisner, private investor. Michael, please proceed. Hi. Great job. We've seen a 22% increase in revenue from previous quarter.
Can you continue that growth? Well, I don't want to talk about specific numbers, but we feel very confident that we'll have continued growth. Okay.
How is any part delays or inflation causing any problems? Oh, we're continually dealing with problems. That's really a part of the business.
But I think things are, in that regard, things are easing up. We're seeing less difficulty than we were three months ago or six months ago.
I think more and more we certainly encounter much longer lead times on parts than what historically we're used to, but more and more we see that we're given...
initially lead times of six months or even a year, but then we actually receive delivery of parts in two or three months.
And so that's very encouraging, but we still have to deal with long lead times and the challenges associated with that. Okay, so the part where it's getting less. This has been going on for a couple of years now, so as long as it keeps on going slightly less.
Is I hear you right is Xypho all in New York now?
No, no, sorry for the confusion. Zifer, a year ago,
Zypher was split and their manufacturing was being done here in New York. The engineering was out at their facility in Orange County, California. And we made a decision to move the manufacturing.
The move to do the manufacturing here in New York we feel was a mistake and it was to have the manufacturing separate from the engineering was problematic and so we made the decision to move this back.
speak for themselves. I think we're pretty happy that we did things and it happened a lot faster than we originally expected.
All right, so that's back in California completely. Yes. All right. You know you said the R&D some of its going to be paid. I saw your R&D went down and you started talking about they will probably go up in the next couple of years.
Is frequency going to be paying that or external pay is?
Well, we, so, you know, we're aggressively pursuing.
any development efforts that we can get funded externally.
That's the thing that makes the most sense.
for us as a small company. But we also anticipate that internally funded R&D is going to increase over the next couple of years.
with revenue so the percentage will...
equal out.
Yeah, I think R&D will go up or the opposite.
They kind of work, maybe not exact timing, but they're kind of in sync.
I'm sorry? Yes, I think that's a reasonable assumption.
Okay, and how many employees do you have at this point? Roughly. I think we have roughly 180 employees. Overall, I think we have roughly 180 employees.
And how many employees do you have at this point? I think we have roughly 180 employees overall.
Yeah, overall. Overall, yeah. And final question. Last quarter you talked about GPS 3 and 3F. I think there were two units that they were, I think one they were testing and one was the life test.
with the National Research Laboratories. How is that coming along? So the testing was supposed to take place at the Naval Research Laboratory. That's still gonna take place, but the government funding is...
to support that testing isn't going to be available, at least that's what we're told, until roughly the end of this calendar year. So we have agreed that we will be able to provide
to, we've agreed that we're going to keep the unit here at FEI and do some testing in vacuum simulating the space environment.
from now until the end of the year. Just to be able to get additional data on the performance of that unit.
All right, and those, oh, I'm sorry, one thing. All the satellite programs you talked about, are we going to see that all at once in the backlog or just the pieces like we usually do?
Well, you know, it's impossible to predict that exactly.
where there are several major programs that we anticipate in the very near future, it's conceivable that those could...
arrive almost simultaneously, but it's also very conceivable that they could be stretched out a bit. It is one of the frustrations, but the realities of this business, that these things, you know.
They tend to stretch out in time more than we would like.
Yeah, it's basically out of your control. When it comes in, it comes in.
Yep. Basically. Thank you for your time. I appreciate it. Great job. Okay. Thank you. Next question comes from Greg Roder with Adirondack Funds. Please proceed.
Hi, thank you for taking my call. I'm new to the frequency electronic story. So I'm just curious about the backlog growth is very impressive. And I'm curious as to.
Was that a function of the primes getting back into their good graces? Or was there a function of, is one big order from a prime or what have you? Any.
Any color you could offer on the backlog would be helpful. Thank you. Yeah, I think that's a combination of things. I would say it is distinctly not really a question of getting back into the good graces of the process.
that of course there will be ups and downs but that's a trend that we have every reason to believe is going to continue well into the future.
I think part of that backlog is, a significant part of it is non-space things. And I think we've seen substantial,
backlog increase at Zephyr, and there are several programs there that are very, very encouraging, and we anticipate a lot of follow-on to those programs. We have some development programs there, and there's a lot of potential.
looks like a one-off blip at this point.
we anticipate this to persist into the future. That was very helpful. Thank you and good luck. Okay, the next question comes from Robert Smith. A follow-up from Robert Smith with the Center for Performance Investing. Please proceed.
Hi Tom, so
You've helmed the company for about a year and I was wondering what the principal learnings you've taken in this time frame and how is your optimism still present? Has it increased? Or how are you looking at the future?
You've helmed the company for about a year and I was wondering what the principal learnings you've taken in this time frame and how is your optimism still present? Has it increased or how are you looking at the future? Well I'm consultants
Okay, yeah, I've been here for about a year. It's a new experience for me, frankly, but I have to say I'm, it's on a day to day basis, it's pretty challenging, sometimes pretty frustrating, but I think overall I'm enjoying it and I think I'm very optimistic.
about the future at this point. I will say that, you know, I'm not a newcomer to frequency electronics. I have been here for most of my career, close to 40 years at this point in time. But...
It's really one year as CEO . Yeah, I well understand that you have a great knowledge of the company, and I'm counting on that to take it forward. I mean, and I was wondering, in this one year since you've been at the helm, I mean, is there any particular...
that you've gained from the Spanish point of being a leader? Well, I think there are a lot of insights. I don't think there's one major thing that I can point my finger at, but I think there are a lot of little things.
I think primarily it's attention to detail that I think is the important thing at this point. It's a lot of hard work and paying attention to the details. I think we're working hard to, when we look at new business, we want to make sure that we're doing the right thing.
that we can take it on and pursue it profitably.
that we can take it on and pursue it profitably.
you know, as opposed to just seeking new business.
But yeah, other than that, I think it's the devil's in the details. Do you feel that you have the people in place that provided adequate support to you?
Well that's a really good question. I think we do. But we're looking at potentially some very significant growth and we are looking at this, you know, over the last year we had some significant cutbacks. But at this point in time we're looking at potentially growing our workforce.
we're going to be very cautious in doing that. At the same time, I think what is most important...
We have a number of people with many years of expertise.
And we're looking to train a new generation of people.
And also to get new talent in science and engineering that have an expertise in some new approaches to old technologies. And I think that's really important for keeping frequency.
Thank you. I wish you good luck. Thank you.
We have no further questions in queue.
Okay, with that I think...
We can end the call. I'd like to thank you all for participating in this call.
I look forward to our next call after the first quarter.
Thank you. Thank you. This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.