Q3 2024 Frequency Electronics Inc Earnings Call

Unknown Attendee: Unknown Attendee, Thomas McClelland, Brett Reiss, Frequency Elect Good afternoon, everyone. We have a mixed story to tell this quarter. On the one hand, we're experiencing continued revenue growth, an all-time record backlog, and continued growing demand for our product. On the other hand, we're reporting a loss for the quarter of $473K. Attributable to technical challenges primarily on a single new development program.

Yeah.

Okay.

Greetings and welcome to the frequency electronics Q3 fiscal 'twenty four 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 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 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 Mei, Cleveland, President and Chief Executive Officer.

Yeah.

Good afternoon, everyone.

We have a mixed story to tell this quarter.

On the one hand, we're experiencing continued revenue growth and all time record backlog.

And continued growing demand for our products.

On the other hand, we're reporting a loss for the quarter of 473 K.

Attributable attributable to technical challenges, primarily on a single new development program.

Thomas McClelland: In order to remain competitive in the long run, it's necessary to take on programs requiring challenging new technology development. Such temporary setbacks are an inevitable part of the equation. In this case, we are aggressively managing the program in question, conservatively assessing its progress, and are confident that the overruns are largely behind us and that, overall, we will still generate a material operating profit for the fiscal year. Furthermore, the knowledge base and lessons learned from such setbacks help position us for improved performance on new business incorporating the new technologies. This quarter highlights the importance of higher gross margins on new business, as we've discussed on previous earnings calls. We're fortunate that currently, there is considerable demand for our product, which allows us to successfully achieve higher gross margins and sometimes to pass on the opportunities in which this is not possible, and will continue to approach our business with this strategy. We anticipate continued long-term growth in our primary and markets of space navigation, secure communication, and timing. Our proven heritage of technical expertise in these disciplines allows us to continue to win new business, as evidenced by the continued growth in backlog and new book. Combined with a disciplined management approach in which problems are identified early, addressed aggressively, and conservatively accounted for.

In order to remain competitive in the long run it's necessary to take on programs requiring challenging new technology development.

Such temporary setbacks are then now for the whole part of the equation.

In this case, we are aggressively managing the program in question.

Conservatively assessing its progress.

And are confident that the overruns are largely behind us and overall, we will still generate a material operating profit for the fiscal year.

Furthermore, the knowledge base and lessons learned from such setbacks helped position us for improved performance on new business, incorporating the new technologies.

This quarter highlights the importance of higher gross margins on new business as we've discussed on previous earnings calls.

We're fortunate that currently there is considerable demand for our products, which allows us to successfully achieve higher.

Gross margins.

Sometimes.

To pass on opportunities in which this is not possible.

We will continue to approach our business with this strategy.

We anticipate continued long term growth in our primary end markets of space navigation secure communication and timing.

Our proven heritage technical expertise in these disciplines allows us to continue to win new business.

As evidenced by the continuous continued growth in backlog in new bookings.

Coupled with our disciplined management approach in which problems are identified early addressed aggressively and conservatively accounted for.

Thomas McClelland: I strongly believe the company is on a trajectory of sustained growth, profitability, and cash flow, albeit with some inevitable wiggles going forward. I'll now turn things over to our CFO, Steve Bernstein, who will fill you in on the financial details. Thank you, Tom. And good afternoon.

I strongly believe the company is on a trajectory of sustained growth.

Profitability and cash flow.

Albeit with some inevitable wiggles going forward.

I'll now turn things over to our CFO, Steve Bernstein, who will fill you in on the financial details.

Thank you Tom and good afternoon.

Steven L. Bernstein: Before I get into the nine month financial results, I wanted to add a comment regarding the results for the three months ending January 31, 2024. As Tom mentioned, during the third quarter of fiscal year 24, the company had a temporary setback on one of our programs. As of today, the issue has been almost fully resolved, with the majority of the related costs having been accounted for during the third quarter of fiscal year 24. We look forward to reporting more favorable results next quarter as the program continues. Despite the setback, there was positive news from the quarter.

Before I get into the nine month financial results I wanted to add a comment regarding the results for the three months ending January 31 2024.

As Tom mentioned during the third quarter of fiscal year 'twenty four the company had a temporary setback on one of our programs as of today. The issue has been almost fully resolved with the majority of the related costs, having been accounted for during the third quarter of fiscal year 2004.

We look forward to reporting more favorable results next quarter as the program continues despite the setback there was positive news from the quarter fully funded backlog is approximately $67 million.

Steven L. Bernstein: Fully funded backlog of approximately $67 million. Sales continue to increase, our balance sheet remains strong, and we expect positive cash flow going forward. For the nine months ending January 31st, 24, consolidated revenue was 39.7 million compared to 27.8 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 $16.3 million, or 41%, compared to $12.8 million, or 46%, in the same period of the prior fiscal year.

Sales continue to increase our balance sheet remains strong and we expect positive cash flow going forward.

So the nine months ending January 31, 24, consolidated revenue was $39 7 million compared to $27 8 million for the same period.

The prior fiscal year.

The components of revenue are as follows revenue from commercial and U S. Government satellite programs was approximately $16 3 million or 41% compared to $12 8 million or 46% in the same period of the prior fiscal year.

Steven L. Bernstein: Revenues on satellite payload contracts are recorded 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 Zypher segments, were $21.1 million compared to $13 million in the same period of the prior fiscal year and accounted for approximately 53 percent of consolidated revenue compared to 47 percent for the prior fiscal year. Other commercial and industrial revenues were $2.3 million and $2 million for the nine months ending January 31, 1924, and 1923, respectively.

Revenues on satellite payload contracts are recorded primarily under percentage of completion method and are recorded only in the New York segment.

Revenues from non space U S government and Dod customers, which are recorded in both the FBI, New York and <unk> segments were $21 1 million compared to $13 million in the same period of the prior fiscal year and accounted approximately 53% of consolidated revenue compared to $40.

7% for the prior fiscal year.

Other commercial and industrial revenues were $2 3 million and $2 million for the nine months ending January 31, 24, and 23, respectively.

Steven L. Bernstein: The significant increase in revenue for the period was primarily related to increases in U.S. government customer sales both for space and commercial orders. For the nine months ending January 31st, 24, gross margin and gross margin rate increased as compared to the same period in fiscal year 23. Gross margin dollars increased as a direct result of the increase in revenue.

This significant increase in revenue for the period was primarily related to increase in the U S government customer sales both for space and commercial orders.

For the nine months ending January 31, 20 for gross margin and gross margin rate increased as compared to the same period in fiscal year 'twenty three.

The gross margin dollars increased as a direct result of the 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 had been resolved and as a result, the relating programs are now moving forward and running more efficiently.

Steven L. Bernstein: 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 relating programs are now moving forward and running more efficiently. Previous programs that sustained lower margins due to technical issues are near completion or have been completed. For the nine months ending January 31, 2024 and 23, SB&A expenses were approximately 19% and 23%, respectively, of consolidated revenue. The percentage of consolidated revenue decreased 4% due to an increase in sales for the nine months ending January 31, 2024 as compared to the nine months ending January 31, 2023. Similarly, the absolute increase in SG&A expenses for the nine months ending January 31, 2024, as compared to the prior year period, was largely due to bid and proposal costs associated with increased sales and an increase in professional fees and payroll-related costs. R&D expense for the nine months ending January 31st, 24 decreased to $2.3 million from $2.5 million for the nine months ending January 31st, 23, a decrease of $200,000, and we R&D decrease to the nine month ending January 31st, 24 was primarily due to a temporary shift of R&D staff.

Previous programs that sustained lower margins due to technical issues are near completion or have been completed.

For the nine months ending January 31, 'twenty four 'twenty three SG&A expenses were approximately 19% and 23% respectively of consolidated revenue.

As a percentage of consolidated revenue decreased 4% due an increase in sales for the nine months ending January 31, 24 as compared to the nine months ending January 31, 'twenty three similarly, the absolute increase in SG&A expenses for the nine months ending January 31, 24 as compared to the prior year.

Period was largely due to bid and proposal costs associated with increased sales and increase in professional fees and payroll associated costs.

R&D expense for the nine months ending January 31, 2004 decreased to $2 3 million from $2 5 million for the nine months ending January 31, 23, a decrease of 200000.

We're approximately 6% and 9% respectively of consolidated revenue.

R&D decreased for the nine months ending January 31, 24 was primarily due to a temporary shift of R&D staff.

Steven L. Bernstein: 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 nine months ending January 31st, 24, the company recorded operating income of $2.5 million compared to an operating loss of $5.1 million in the prior year. Operating income increased due to a combination of increased revenue, gross margin, and the effects of certain cost-cutting measures instituted by management that began in fiscal 23. Other income can be derived from reclaiming metals, refunds, interest on deferred trust assets, or the sale of fixed assets, and interest expenses related to deferred compensation payments made to retired employees. This yields pre-tax income of approximately $3 million compared to a $5.7 million pre-tax loss for the prior fiscal year. For the nine months ending January 31st, 24, the company recorded a tax provision of $19,000 compared to $6,000 for the same period of the prior fiscal year. Consolidated net income for the nine months ended January 31st, 24 was $3,032,000 per share compared to a $5.7 million net loss or negative $0.62 per share in the previous fiscal year.

The plan is to continue to invest in R&D in the future to keep its products at the state of the art.

For the nine months ending January 31, 'twenty for the company recorded operating income of $2 5 million compared to an operating loss of $5 1 million in the prior year operating income increased due to a combination of increased revenue gross margin and the effects of certain cost cutting measures instituted by man.

That would be done in fiscal 'twenty right.

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 the FERC compensation payments made to retired employees.

This yields pre tax income of approximately $3 million compared to $5 $7 million pre tax loss for the prior fiscal year.

For the nine months ending January 31, 'twenty four the company recorded a tax provision of $19000 compared to 6000 for the same period of the prior fiscal year.

Consolidated net income for the nine months ended January 31, 24 was 3 million or <unk> 32 per share compared to a $5 7 million net loss or negative <unk> 62 per share in the previous fiscal year.

Steven L. Bernstein: Our fully funded backlog at the end of January 24 was approximately $67 million compared to approximately $56 million for the previous fiscal year end, April 30, 2023. The company's balance sheet continues to reflect a strong working capital position of approximately $24 million at January 31, 2024, and a current ratio of approximately 1.9 to 1. Additionally, the company is debt-free.

Our fully funded backlog at the end of January 24 was approximately $67 million compared to approximately $56 million for the previous fiscal year ended April 32003.

The company's balance sheet continues to reflect strong working capital position of approximately $24 million at January 31, 'twenty four and a current ratio of approximately one nine to one. Additionally, the company is debt free.

Steven L. Bernstein: 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 forward to your questions soon. Thanks, Steve.

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

Operator: I think we have nothing more to say. We can turn things over to questions at, Certainly. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone. The tone will indicate your line is, or star 2 if you would like to remove your, Participants. Speaker Equipment. It may be necessary to pick up your hand.

Thanks, Steve.

I think we are.

I have nothing more to say, we can turn things over for questions at this time.

Secondly at this time, we will be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.

Information tone will indicate your line is in the question queue.

You May press Star two if you would like to remove your question from the queue for.

Brett Reiss: Unknown Attendee, Thomas McClelland, Brett Reiss, Frequency Elect, One moment, please, while we pull the question for today. Brett Richard, a private, I apologize; I had a couple problems there. Can you guys, a couple questions, actually? Can you guys talk about how much of the backlog increase for the quarter was related to the November contracts versus other business? Well, certainly a significant part of it, but it was not completely due to the November contracts.

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.

Yes.

Your first question for today is from Brett.

Richard a private investor.

Okay.

Yeah.

Brett Your line is live.

Hey, I apologize I had a couple of items there.

Can you guys. A couple of questions actually can you guys talk about how much of the backlog increase for the quarter was related to the November contracts versus other business.

Well, certainly a significant part of it.

At.

It was not completely due to the the.

November contracts, we've had additional.

Thomas McClelland: We've had additional new business and we're continuing to get a lot of new business as we speak. So would you say outside of those contracts is business strength versus Q2 or held steady, or I guess any kind of color on that? I think it strengthens.

New business and.

We're we're continuing.

To get.

A lot of new business.

As we speak.

So would you say outside of those contracts this business strengthen birthday, Q2, or hold steady or I guess any kind of color on that.

I think has strengthened.

Steven L. Bernstein: Okay, good to hear. So the second question was about the cost overruns. So the first part of that was, were the cost overruns part of those contracts that were announced in November? Also, quantify. Okay, that's helpful. And can you quantify the dollars? Tell us your story.

Okay.

Good to hear so the second question was about the.

The cost overruns. So first first part of that was.

Where the cost overruns part of those contracts that were announced in November.

Also normally quantify okay. Okay. That's helpful and can you quantify the dollar impact of those.

Okay.

Steven L. Bernstein: I don't know, Steve, you want to address that? It was approximately, give or take, about $1.8 million effect on that particular program. Okay. Alright, so that's a pretty, pretty substantial effect margin. So absent that, you were probably somewhere in the mid-30s, something like that.

Uh huh.

I don't know, Steve if you want to.

Okay.

It was approximately give or take about 1.8 million dollar effect on that particular product.

Okay.

Alright, so that's pretty pretty substantial margin. So absent that you were probably somewhere in the mid <unk> something like that.

Unknown Attendee: Yes. Okay, so there was one more question on that too. So we were halfway through the quarter.

Yes.

So one more question on that too so we were halfway through the quarter.

Thomas McClelland: Unknown Attendee, Thomas McClelland, Brett Reiss, Frequency Elect, When we had the last conference call, there wasn't any sign of this. When did management become aware of these problems? And were you aware of them from the beginning?

Yeah.

When we had the last conference call there wasn't any sign of this when did management become aware of these problems and.

Were you aware of them from the beginning or was there a gap here in realizing the issues that can you talk about that a little bit.

Yeah, we can talk about that a little bit I think these are all issues that came up.

Thomas McClelland: Or, you know, was there a gap here in realizing the issues? Can you talk about that a little bit? Yeah, we can talk about that a little bit. I think these are issues that came up in the middle to the end of December, primarily. And there was a little bit of a snowball effect.

In in.

The middle to the end of December primarily.

And there they are.

A little bit of a snowball effect.

Thomas McClelland: And I think the point I'd really like to make about this is that, you know, I have a lot of experience dealing with this kind of technical problem. And one of the worst things we can do is try to provide a quick fix. And what we usually find when we do that sort of thing is that we pay for it in spades. Unknown Attendee, Thomas McClelland, Brett Reiss, Frequency Elect. And unfortunately, in the short run, it's a little bit more costly to do things that way. But I think that by doing that, we're able to contain the problem, and we have a lot of confidence that we won't have additional problems down the road. Okay, and on that last call, you talked about targeting, ultimately, 50% margins within six months to a year? Does this change any of that? Well, no, it doesn't change any of that.

And I think the point I'd really like to make about this is that are we.

I have a lot of experience dealing with this kind of technical problem.

One of the worst things we can do is try to.

To provide a quick fix and what we usually find one weight.

When we do that sort of thing is that we pay for it in spades.

Down the road. So we are we didn't approach things. This way, we spent significantly more resources and dealing with this problem.

And unfortunately in the short run, it's a little bit more costly to do things that way.

I think that.

By doing that we're able to contain the problem and we have a lot of confidence.

We want to have additional problems down the road.

Okay and is this a zoo last call you talked about targeting ultimately you know 50% margins within six months or a year does this change any of that.

Well no it doesn't change any of that but I would like to discuss that a little bit.

Thomas McClelland: But I would like to discuss that a little bit. You know, we certainly, you used the right words, we target a gross margin of 50%. And we're continuing to do that. I tried to talk a little bit about that a few minutes ago.

We certainly are you.

You used the right word we target gross margin of 50% and we're continuing to do that.

Alright, I tried to talk a little bit about that in a few minutes ago, but I think we do need to understand that.

Thomas McClelland: But I think we do need to understand that. We're in a situation at this point in time where we have a growing market and our technology is sound and needed, and in many cases, there's very little competition. Under those conditions, we can attain potentially a 50% gross margin and sometimes even better. But we can't always do that, and when there's competition, then obviously it becomes more difficult to do that.

We're in a situation at this point in time, where we have a growing market and our technology is sound and needed and.

And in many cases, there was very little competition under those conditions, we can attain a D&O potentially a 50% gross margin and sometimes even better.

But we can't always do that and when there are.

There is competition, then obviously it becomes more difficult to do that and of course.

Brett Reiss: And, of course, as we have been talking about, there will always be technical challenges, and so we certainly have to expect that there will be some wiggles in the gross margin as we deal with those kinds of things. Gotcha. Okay. Appreciate the time, guys. I'm going to jump back in here. I might have, Thank you.

As we have been talking about there will always be a technical challenges and so so.

Yeah.

We certainly have to expect that there will be some wiggles in the gross margin as we deal with those kind of things.

Gotcha Okay.

I appreciate the time guys will get back in queue I might have one more here in a bit thanks.

Thank you.

Marcel Hurst: Your next question for today is from Marcel Hurst with Hurst Capital. Hello, good afternoon. And thank you for taking my question, which is about GPS. I understand that the Space System Command has put a major focus on improving the current medium-Earth orbit GPS constellation. This would complement, from what I understand, all the GPS 3 and GPS 3F programs.

Your next.

Question for today is from Marcel Herbst with first capital.

Yeah.

Hello, Good afternoon, and thank you for taking my question, which is about GPS satellites.

I understand that a space that simple amount has put a major focus on improving the current medium earth orbit constellation and.

This would complement from what I understand all of our GPS III G. P. S. Rehab programs I was wondering if you consider such GBS consolidations, an opportunity or a future growth driver and how far he involved et cetera.

Thomas McClelland: I was wondering if you consider such GPS constellations an opportunity or future growth driver and how far you're involved. Yeah, we certainly consider it a future opportunity. And in fact, we have a lot of ongoing activity in this regard. I think what you're talking about is an effort by Space Systems Command, which is responsible for GPS, to field a new set of satellites which would orbit in similar orbits but would be designed a little bit differently than the current GPS satellites. The current GPS satellites are designed, the satellites that are being launched at this point in time are designed to have a lifetime in space of 15 years. Earlier GPS satellites were only designed to have a lifetime of about seven and a half years, but some of those satellites are still working after 25 years.

Yes, we certainly consider it as a future opportunity.

In fact, we have.

A lot of ongoing activity in this regard.

I think what you're talking about is an effort space systems command.

<unk>, which is responsible for G. P S two field.

A new set of satellites, which would orbitz and similar orbits but would be.

Be designed a little bit differently than the current GPS satellites.

Current GPS satellites are designed the satellites that are being launched at this point in time our design.

Designed to have a lifetime in space of 15 years earlier GPS satellites are we're only designed to have a lifetime of about seven and a half years, but some of those satellites are still working after 25 years. So the new approach that is being pushed at this point in time.

Thomas McClelland: So the new approach that is being pushed at this point in time is satellites with a lifetime of three years in space. And there's even an acceptance of the idea that not all of the satellites will even last for three years. Of course, along with this, there's a desire to be able to launch those satellites much more rapidly than these satellites which have been launched to date.

As satellites with a lifetime of three years in the space.

And and there's even an acceptance of the idea that not all of the satellites will even last for three years.

Of course, along with US there's a desire to be able to launch those satellites much more rapidly.

And then there's a the satellites, which have been launched to date and there's of course, along with that the desire for those satellites to be a lot less expensive.

Thomas McClelland: And there's, of course, along with that, the desire for those satellites to be a lot less expensive. So we're actively participating. We have had conversations with people from the Space Systems Command related to this, and we're actively pursuing some of the early attempts at prototype satellites, and obviously the atomic clocks that go on them.

So we're actively participating we have had conversations with the people from the space systems command relate.

Related to this and we're actively pursuing some of the early attempts at a prototype satellites.

The obviously the atomic clocks that go on them.

So so yes, we're interested and we're actively involved and we see it as potentially a very important part of our future.

Thomas McClelland: So yes, we're interested, and we're actively involved, and we see it as potentially a very important part of our future. That sounds really great. Can you quantify the opportunity for us in some way? It's pretty hard to do that at this point in time because, you know, the way things are being advertised to us at this point is being put forward in phases, and, you know, so the initial phases are pretty small in terms of quantities of things. But I think over the next two years, we'll start to get a much better feeling about where all of this is going. All right. Thank you. Good luck!

Oh that sounds really great.

Can you.

Quantifying the opportunity for us in some way.

It's pretty hard to do that at this point in time because.

Oh, we the waste way things are being advertised to us at this point. This is this being put forward in phases and.

So the initial phases are are pretty small in terms of quantities of things so, but I think over the next two years, we'll start to get a much better feeling about where all of this is going.

Alright. Thank you good luck.

Thank you. Thank you.

Marcel Hurst: Thank you. Your next question for today is from Michael Eisner with Frequency. All right. Hi Michael.

Yeah.

Okay.

Your next question for today is from Michael Eisner with frequency.

Hi.

Hi, Michael.

Michael Eisner: All right, I think you said none of this was the three November project, is that correct? That's correct. That's correct, to go ahead.

I think you said none of this was the three November projects.

Is that correct that's correct that's correct.

Are those.

Go ahead I'm sorry.

Thomas McClelland: Yes, the losses for the quarter have nothing to do with the contracts that were awarded in November. So those are still on schedule. All right, great.

Yes, the the losses for the quarter have nothing to do with the contracts that.

We're awarded in November.

So those are still on schedule.

Those are still a lot of schedule yes.

Alright, great and is any of the.

Thomas McClelland: And is any of the revenue part of those projects that you did for the core? Yes, yes. And that will continue to be the case going forward. Yeah, you know, in the initial phase of these programs, revenue is relatively minimal; we're mostly procuring parts, and that doesn't translate into significant revenue until we start doing something with those parts.

Revenue part of those projects.

You did for the quarter.

Yes, yes, and the debt will continue to be the case going forward.

Yeah, you know.

The initial phase of these programs the revenue is relatively minimal or mostly for procuring parts.

And that does or doesn't translate into significant revenue.

Until we start doing something with those parts.

Thomas McClelland: But we're sort of shifting into high gear, one of those programs in particular, and a second one that is not far behind. So we'll start to see significant revenue due to those programs as we go forward, in the fourth quarter. Yes. All right, is the project? I guess there was something new that got you had problems, Is the client upset?

But where we're sort of shifting.

Shifting into high gear.

Uh huh.

One of those programs in particular on the second one is not far behind so we'll start to see a significant revenue due to those programs as we go forward.

In the fourth quarter.

Yes.

Alright.

No.

Is the company.

Project I guess, there was something new that get you had problems with is to client upset.

Thomas McClelland: Well, I don't think anybody is jumping up and down for joy because of it, but I think we're working with our customer. And I think we have things Unknown Attendee, Thomas McClelland, Brett Reiss, Frequency Elect. All right, was that a big part of the 67 million backlog or the new part, like the last 17 million? No, no, it wasn't any. The increase in backlog. It wasn't involved in that.

Well I don't think anybody is is.

Jumping up and down for joy because of it.

But I think.

We're working with our customer.

And I think we have things.

Under control.

All right is that was that a big part of the 67 million backlog with a new pot.

The last 17 million.

No no it wasn't any.

The increase in backlog it was wasn't involved in that those are programs that are.

Thomas McClelland: There's a program that, you know, we've been working on for some time. Okay, I'm not sure if you can comment on where the big increase came from. I don't think it's appropriate to go into any details; you have to understand that our customers don't like us to talk about the details of their programs. All right, and you said the project, the problem is mostly resolved, and the costs are mostly accounted for. Yeah, the costs are definitely accounted for, and the problems are resolved. That's correct. Unknown Attendee, Thomas McClelland, Brett Reiss, Frequency Elect. In this quarter, the fourth, you should be okay. Yes. Thank you. Tim Hesara, Yes, just with respect to the three new contracts, how are they going to go into backlog? Unknown Attendee, Thomas McClelland, Brett Reiss, Frequency Elect, the value of the three.

Has hit you know we've been working on for some time.

And I'm not sure if you can comment where the big increase came from.

Uh huh.

I don't think it appropriate to go into any details you have to understand that our our customers Oh don't like us to talk about the details of their programs.

Hi.

And you said the project and the problem is mostly resolved.

Cost mostly accounted for.

Yes, the costs are definitely accounted for.

And and the problems are resolved that's correct.

So you'd be back on schedule on that schedule, but.

This quarter the fourth you should be okay.

Yes.

Okay. Thank you.

Yeah.

Your next question is from Tim Massaro with Sydney capital.

Yes, just with respect to the three new contracts how are they going to go into backlog here.

Exactly I assume the full amount hasnt put in there given the.

The value of the three.

Thomas McClelland: Correct, so our backlog is fully funded, so as the programs get funded, that additional amount will be added to backlog, and then the revenue obviously taken on the program is subtracted from backlog. So these programs, as we get them, we're typically funded for a fraction of the total contract amount, and that fraction that we're funded for is what goes into backlog. Okay, understood. Hi, thanks for taking the call.

Correct. So our backlog is fully funded so as the programs get funded that additional.

Amounts will be added to backlog and then the revenue obviously taken on the program subtract it from backlog.

So these programs as we get them, we're typically funded.

For a fraction of the total contract amount and that fraction that were funded for us what goes into backlog.

Okay.

Okay understood. Thank you.

Your next question for today is from Frank with Misty, a private investor.

Hi, Thanks for taking the call.

Unknown Attendee: I get a couple things, but mainly, All these conference calls and, you know, concentrate on the satellite business, which is justifiable. That's where a lot of the growth is. But Zyphus seems to be coming along extremely well.

Alright, I got a couple of things, but mainly.

All of these conference calls and ER.

That's been trained on the satellite business, which is justifiable, that's where a lot of the growth is but <unk> seems to be coming along extremely well.

Thomas McClelland: In fact, it's over half your business for the nine months, I guess. Could you bring us up to date on what's going on there? How much of that is a backlog business as opposed to a turn business? Oh... It's a mix of some of each. I think they The, They turn things over a lot more rapidly than we do in the satellite business. Unknown Attendee.

In fact that drove a half your business for the nine months I guess could you bring us up to date on what's going on there how much of the how much of that is a backlog business.

As opposed to a turns business.

Yes.

Uh huh.

So.

It's.

You know some of some of each I think are they oh.

Yeah.

Uh huh.

They turn things over a lot more rapidly than we do.

In the satellite business.

Unknown Attendee: I don't have any specific numbers off the top of my head. They, there are a couple of programs at Cypher which are longer term. But they have a tremendous amount of business, which is essentially an off-the-shelf product, on an as-needed basis. I'm not sure that answers your question, but... Well, I guess the question basically is, how predictable is that cipher business? I mean, it's been growing very, very nicely over the last couple years. And, you know, how predictable is it? And what kind of margins are there? I think when you talk about 50% margins, are you talking corporate-wide or just in the satellite business? Well, we're talking corporate-wide. Number one.

I I don't have any specific numbers off the top of my head.

They are there.

There are a couple of programs that seifer, which are longer term.

But they have to do a tremendous amount of our business which is.

Essentially our off the shelf products.

On an as needed basis.

I'm not sure that answers your question, but.

Well I guess, yes.

I guess the graduate basically is how predictable is that right for a business.

I mean, it's been growing very very nicely over the last a couple of years and.

And.

How predictable it is and what kind of margins I think when you're talking about 50% margins are you talking corporate wide or just in the satellite business.

Well, we're talking corporate wide.

Sure.

Thomas McClelland: So the margins of Zypher must be pretty good on a gross basis, too. They are, yes. And is that, and how predictable is that? Do you, you know, is that something that you can model out pretty well, or because it's so much of a turn business, it's, it's more variable? Well, it's potentially more variable, but it has been pretty predictable for the last couple of years. But yeah, it is potentially more variable, obviously, because of changing economic conditions and so forth. And is most of that business DOD or government related?

So imagine a day for it must be pretty good on a gross basis turbine.

They are yes.

Right and is that and how predictable is that you know is that is that something that you can model out pretty well or because it's so much of a turns business. It's it's more variable.

Well, it's potentially more variable I think has been pretty predictable for the last couple of years, but Ah Ah yeah. It is potentially more variable obviously in changing economic conditions and so forth.

And is most of that business had a D O D a government related.

Unknown Attendee: Yes. Thanks a lot. Yeah, thank you. We have reached the end of the question and answer session, and I will now turn the call over to Thomas. Unknown Attendee, Thomas McClelland, Brett Reiss, Frequency Elect. All right. I'd just like to thank everybody for participating in this call. And we'll talk again, and another quarter. Thank you very much. This concludes today's conference, and you may disconnect your lines at, Thank you.

Yes.

Okay. Thanks, a lot.

Yes. Thank you.

We have reached the end of the question and answer session and I will now turn the call over to Thomas for closing remarks.

Okay.

Alright, I'd just like to thank everybody for participating in this call.

And.

Well talk again.

Another quarter. Thank you very much.

This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.