Frequency Electronics Inc (FEIM) Q2 2021 Earnings Call Transcript

Greetings, and welcome to the Frequency Electronics Second Quarter Fiscal Year 2021 Earnings Release Conference Call. 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, Mr. Stanton Sloane, President and CEO. Sir, you may begin.

Thank you, Laura. Good afternoon, everyone. Thank you for joining us on our Q2 fiscal year 2021 call. Steve will walk us through financial details in a minute, but let me kick things off with a couple of highlights. We had what I consider to be a very good quarter. Revenue was up about $1 million quarter-to-quarter, but also up significantly, about 25%, from the comparable periods of fiscal year 2020. We generated net income for the quarter of $329,000, also a significant improvement, and this despite extraordinary legal expenses. Backlog was up to $42 million, a $6 million increase from the end of fiscal year 2020, reflecting the robust set of new business opportunities we have mentioned on the last couple of calls. We generated about $2 million in cash. And we've hired about 18 people in order to meet increasing workloads. I'm pleased with the improvement in financial performance this quarter. I should make a few comments about the COVID-19 situation, as I know it's on everybody's mind. We've managed to maintain production and delivery schedules throughout the pandemic. While we've had some employees who were potentially exposed to COVID-19 through being in close proximity to someone who tested positive, we have had only 3 employees in our New York facility and 2 at our Zyfer facility actually test positive. In an abundance of caution, whenever any employee has been potentially exposed, they are excused from work and must quarantine pending negative test results. Of course, employees who actually test positive are required to follow the CDC guidelines regarding quarantine and subsequent return to work. As before, we have maintained production and delivery schedule through the second wave, but we remain vigilant to impacts. Now let me ask Steve to take us through financial details. Steve?

Thank you, Stan, and good afternoon. For the six months ending October 31, 2020, consolidated revenue was $26.9 million, which is a 25% increase compared to $21.6 million in the same period of the previous fiscal year. The revenue breakdown is as follows: Revenue from commercial and U.S. Government satellite programs was $14.2 million, an increase from $9.4 million in the same period of the previous fiscal year, accounting for approximately 53% of consolidated revenue, up from 44%. Revenue from satellite payload contracts is primarily recognized using the percentage of completion method, with these figures recorded only in the FEI-New York segment. Revenue from non-space U.S. Government and DOD customers, recorded in both FEI-New York and FEI-Zyfer segments, totaled $10.9 million compared to $9 million in the same period of the previous fiscal year, representing approximately 40% of consolidated revenue, down from 42%. Other commercial and industrial revenues were $1.9 million, down from $3.2 million in the prior fiscal year. Intersegment revenues are eliminated during consolidation. For the six-month period ending October 31, 2020, gross margin and gross margin rate saw a significant increase compared to the same period in fiscal year 2020, primarily due to the completion or near completion of several programs that previously incurred high engineering costs during their development phases. For both the six-month periods ending October 31, 2020, and 2019, selling and administrative expenses constituted approximately 27% and 22% of consolidated revenue, respectively. The rise in SG&A expenses is largely attributed to increased professional fees associated with litigation, for which we anticipate insurance reimbursement for part of the costs, as well as some additional insurance expenses. R&D expenses for the six months ending October 31, 2020, and 2019 decreased by $2.2 million to an unspecified amount from $3.7 million, which is a decrease of $1.5 million, making up 8% and 17% of consolidated revenue, respectively. The year-over-year decline in R&D expenses results from the conclusion of previous projects that have transitioned into production, although the company plans to persist in R&D investments to keep its products cutting-edge. For the six months ending October 31, 2020, the company reported an operating loss of $119,000, a significant improvement from a loss of $5.7 million in the previous year, reflecting enhancements in revenue, gross margin, and gross margin rate. Based on our bookings and backlog, we expect the positive trend to continue. Other income largely consists of investment income generated from the company's marketable securities. For the six-month period ending October 31, 2020, investment income included a $105,000 dividend from Morion, down from $125,000 in the same period of fiscal year 2020, resulting in pretax income of around $93,000, compared to a pretax loss of about $5.5 million in the prior year. For the six months ending October 31, 2020, the company recorded a tax provision of $25,000, compared to $29,000 in the same period of fiscal 2020. Consolidated net income for this period was $67,000, or $0.01 per diluted share, compared to a net loss of $5.5 million, or $0.61 per diluted share from the previous year. Our fully funded backlog at the end of October 2020 was approximately $42 million, an increase of around $6 million from the previous year's end on April 30, 2020. The company's balance sheet shows a strong working capital position of about $40 million as of October 31, 2020, with a current ratio of approximately 4.5:1. The company believes its liquidity is sufficient to meet its operating and investing needs for the next 12 months and into the foreseeable future. I will turn the call back to Stan, and we look forward to your questions later.

Thank you, Steve. We'll be happy to take some questions. Let me turn this back over to Laura, who will explain how to do that. Laura?

Our first question comes from Brett Reiss with Janney Montgomery Scott.

Good quarter. The employment, you hired 18 people. Does that satiate you now, or are you looking to hire even more over and above that?

We will add additional people here going forward. So it's adequate for our current need, but we will be adding some more.

All right. Good. Now last call, I think in response to one of the questioners, you had a billings number that you've got bids outstanding $600 million to $625 million. Is there a number this quarter that you can share with us?

I think you're referring to what I call the opportunity set; in other words, the sum total of everything that we're looking at. That's about $680 million at the moment. Keep in mind, however, that fluctuates pretty regularly as things go in and out. But the current number is about $680 million.

Okay. And one of these days, maybe offline, I can get a tutorial on oscillators. I mean sometimes the news releases talk about oven-controlled quality oscillators and then master oscillators. I mean are all oscillators created equal? Or are there some that are better with higher margins than others? If you could opine on that a little bit, I'd appreciate it.

Yes, that's a good discussion to have offline. The answer is no, they're not all equal.

Our next question comes from the line of an unknown analyst.

Great job. I think that's the first time you've been profitable in a while. Do you need more salespeople?

We're okay at the moment. The team we have is pretty seasoned and doing a really good job of keeping up with all the new business opportunities. For us, we're really not so much what I would call a sales organization. We generate new business generally through writing complicated technical proposals, and that really has to be done here. It's a little different than having what I think you're thinking as salespeople out in the field. We do have representatives that handle that part of the business. But the team here is doing a pretty good job keeping up with everything. Win rates are good, and we're booking things. So I think we're doing well.

All the problem programs, are they completely over?

The few programs that we've been talking about the past couple of quarters are done.

Really? That's great to hear. So do you expect margins to increase now?

We always work hard to keep the margins increasing and revenue increasing. Yes.

Do you expect them to increase at this point?

That's my job. I'm working on it.

All right. How bad were the legal expenses? Can you comment?

Steve mentioned that SG&A had increased, with approximately $1.6 million of that due to professional fees. While it's not solely legal fees, that's the figure we're looking at.

But some you should get back?

We anticipate receiving some of that back, yes.

All right. So you took the hit, but you may get some money back on that.

That's correct.

All right. Just 2 more questions. How is the advanced Electronic Warfare contract coming along? Outcome?

Yes, technically good. There have been some delays in the production contract though. Nothing to do with us. Just the prime contractor had some delays getting the system through their Milestone C event with the government. So that's delayed things a bit. But technically, very well, performing very well technically.

Did you generate any revenue from the past quarter from that?

Not significant, but yes.

A small amount. Is some of the revenue for GPS IIIF included in that?

Yes, there's revenue. We've been on that job now for probably 1.5 years or so. That's progressing through qualification. So yes, there's some revenue in there. I think if you're asking about the production contract, that hasn't started yet.

That's what I was getting at. When do you expect that?

Probably in the next year or so, we'll start to see the initial awards for that. We are also bidding on that particular clock for other projects. So I'm hoping we'll see some additional awards, not just GPS IIIF.

Yes. You just recently had another announcement the other day. I guess that program is continuing well.

Are you referring to the December 3 announcement on the oscillator award? Yes.

Exactly. That's continuing from, I think, last year or a while ago?

Yes. So it's options that were added to a prior contract, which we had talked about before. Keep in mind, that's after the quarter. That's not in the Q2 numbers.

How long is that program going to...

That particular one is about 2 years.

All right. Really a great job. Changes everywhere. Margins up, revenue up.

Our next question comes from the line of Sam Rebotsky with SER Asset Management.

Wonderful job. Nobody is disappointed. So do you think we're ready to tell the story? Or when do you think we're going to be ready to share our performance with other investors?

I'm ready to tell the story. I think we got a great story.

Okay. Okay. Now one of the things, I'm not sure you're aware of this. It just was released earlier today. A company, Abracon, acquires Fox Electronics, and they're a frequency control supplier headquartered in Fort Myers, Florida. Do they compete with you? Do you compete with them? How large are they? And what kind of products do they have if they do compete with you?

I'm not familiar with the company. The name seems familiar and the fact that they are based in Fort Myers sounds promising. However, I don't know the specifics, and as far as I know, they are not our main competitor for finished oscillators. I haven't encountered them.

Since early '19, Fox has focused on US innovation for the frequency control market with a series of quick-turn crystal oscillators.

Yes. Well, a lot of people make crystal oscillators. As somebody said before, an oscillator can be many things.

Ladies and gentlemen, we have reached the end of today's question-and-answer session. I would like to turn this call back over to Mr. Stanton Sloane for closing remarks.

Great. Thank you, Laura. Let me just finish by wishing everybody a happy and healthy holiday season and also, I hope, a great 2021. Thanks for joining us today, and we look forward to talking to you next quarter.

Mr. Stanton, there's actually one more question that just popped up.

Okay.

Our next question comes from the line of Michael Walterman with Moors.

Is it fair to say that given that we had a Republican President and a Republican-controlled Senate, the past 4 years have been a bit disappointing in terms of business generated for frequency that's government related? And what might the new administration perhaps do that would make things better or worse for frequency, specifically in your judgment?

In my opinion, we've fared pretty well. We're winning a tremendous amount of new business. So I don't see that as a disappointment. As to the new administration, I suspect they'll be driven largely by global geopolitics and other factors that influence defense budgets. Investment in space, I think, is likely to continue. It looks like they're going to continue to invest in the Navy. So what that translates into in terms of growth or not in the defense budgets obviously remains to be seen. But I think that's a much bigger driver for us than politics. Laura, any further questions?

Yes, one more just came in. The next question comes from Richard Johns.

Nice to see the improvement. And in past years, management in giving a rough idea of what the income statement might look like going forward, management has talked about SG&A being about 20% and R&D being roughly 10%. I know that you can't pin it down exactly. But are those good numbers to think about going forward?

Yes. Generally speaking, I think. We had this period, obviously, where we had some anomalies with professional fees, but yes, ballpark.

Okay. All right. And you mentioned that you're up for telling your story. Have you signed up with any specific brokers to present at conferences coming up?

We will be presenting at the Needham Conference in January. That's the only one we've signed up for, but we'll be looking for some others.

Okay. Good. And you mentioned that your win rate is pretty good. In past calls, I believe you've said that if you could win half of that $680 million number, then that would be what you would be happy with and kind of expect. Is that an accurate idea going forward?

A 50% win rate is pretty good performance, in my opinion. And we're close to that now. Remember that we bid fairly large contracts. So any one contract swings that number one month to the next. But that's a good ballpark target. If we could do 50%, I'd say we're doing quite well.

Okay. And my last question, you've mentioned in the past the potential for addressing issues related to spoofing and jamming. Could you provide an update on the current status and future prospects for that?

So for us, that all boils down to timing, specifically the ability to hold over. In other words, if you're receiving a GPS signal and that signal gets jammed or spoofed, you want to be able to maintain the time reference while you don’t have that signal. So in order to do that, you need a very precise clock. And the more precise your clock is, the more time you have from when the signal gets jammed to when you can sync back up again. In other words, you have longer holdover. So for us, everything is about better and better clocks. Our rubidium clocks today are very high performance. That's what's going onto GPS IIIF. And we're working on some advanced technologies for the future that will improve the performance of those even more. So that's really what it's about for us.

Okay. And is the potential for the clocks and related equipment in that particular area of spoofing and jamming, do you still think it has a lot of potential?

Yes. That problem is just increasing significantly. I mentioned earlier about the defense budgets and investment in space. The government is going to continue to invest to deal with that problem because adversaries are getting better and better at those counter-timing, counter-GPS sort of systems. So I think that's a great place to be. I believe that's going to be a good growth area for the future.

Okay. Great. And way to go in the quarter.

There are no further questions at this time. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Enjoy the rest of your evening.