Frequency Electronics Inc (FEIM) Q4 2023 Earnings Call Transcript

Greetings, and welcome to the Frequency Electronics Fiscal Yearend '23 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, 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 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 final 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 Zyfer 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 costly in the short run. The layoff was costly in terms of workforce morale and the Zyfer 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 costs in the position, navigation, and timing arena. Similarly, we've reinvigorated our internal R&D program to target quantum technology and products, which address the move to smaller lower-cost satellite systems. Our Zyfer division has made a dramatic comeback. In fiscal year 2022, Zyfer suffered an operating loss of over $2 million, whereas in fiscal year 2023, which ended April 30, Zyfer still had a small overall operating loss of about $160,000. But much more importantly, in the second half of the year, Zyfer made an operating profit of just over $1 million. This, in spite of the costs associated with the cross-country move of manufacturing. John, Zyfer's President, and his team deserve a lot of credit for making this happen much faster than was originally anticipated. Furthermore, Zyfer's been awarded several major contracts during fiscal year 2023 which will significantly contribute to the bottom line during fiscal year 2024 and beyond, and several new contracts are expected in the near future. Meanwhile, in New York, FEI has regrouped; we are smaller after the layoffs, but we're 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 dramatic changes over the last year, I believe our workforce morale is high. There is a spirit of success in the air, and I feel we're all working together, not only in New York but across the entire company to do what's necessary to make things happen. I believe the whole at FEI is greater than the sum of the parts, and that's a powerful force. For the financial portrait, in the fourth quarter of fiscal 2023, we continue 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 months period ended April 30, 2023 compared to the six months period ended October 31, 2023, as well as in comparison to the same period in fiscal year 2022. 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 continued improvement in the 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. To the financial results, it is important to mention that I will be comparing Q4 of fiscal '23 versus Q4 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 fiscal '23 compared to the first half of fiscal '23. Revenue increased from $17.2 million during the first half of fiscal '23 to $23.6 million during the second half of fiscal '23. Gross profit percentage went from 2% in the first half of fiscal '23 to 31.8% in the second half of fiscal '23, and operating income 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 consecutive quarter that the company reported operating income. It is evident by the vast improvement in our results from comparing the second half of fiscal '23 to the first half of fiscal '23 that the company is heading in the right direction and the changes that have been previously announced are contributing to this improvement. For the three months ended April 30, '23, consolidated revenue was $13 million compared to $10.2 million for the same period in the prior fiscal year. The components of revenue are as follows: Revenue from commercial and U.S. government satellite programs was approximately $5.1 million or 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 FEI-New York and FEI-Zyfer segments, were $7.3 million compared to $4.7 million in the same period of the prior fiscal year, accounting for approximately 56% of consolidated revenue compared to 46% 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, '23, was mainly due to the increase in revenue at FEI-Zyfer. For the three months ended April 30, '23, gross margin went down and the 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 quarters of fiscal year '23 were both over 30%, and the company anticipates that this trend will continue in fiscal '24. For the three months ended April 30, '23 and '22, SG&A expenses were approximately 23% and 20%, respectively, of consolidated revenues. The increase in SG&A expense for the three months ending April 30, '23, as compared to the prior year, was largely due to reversals in fiscal '22. Full year SG&A expenses decreased over $2 million. The company continues to monitor expenses looking for additional cost-effective ways going forward. R&D expense for the three months ending April 30, '23, 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 30, '23, due to dedicated R&D resources who 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 30, '23, the company recorded operating income of approximately $390,000 compared to an operating loss of approximately $5.9 million in the prior year. Operating income increased due to a combination of an increase in sales over the three months ending April 30, '22, increased gross margin, and effects of changes management has instituted. 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 30, '22, the company took a $795,000 impairment charge related to the company’s investment in Morion, which yields a pretax income of approximately $313,000 compared to an approximately $6.8 million pretax loss for the three months ending April 30, '22. For the three months ending April 30, '23, the company reported 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, '23 was approximately $246,000 or $0.03 per share compared to an approximately $6.8 million loss or $0.74 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 30, '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 of this will turn into revenue and thus come out of backlog this year, we expect additional significant contract awards to be added to backlog in the coming quarters. The company’s balance sheet continues to reflect a strong working capital position of approximately $21 million at April 30, '23 at a current ratio of approximately 1.8:1. Additionally, the company is debt-free. The company believes that its liquidity is adequate to meet its operating and investing needs for the next 12 months and the foreseeable future. I will turn the call back to Tom, and we look 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. And our first question comes from Brett Reiss with Janney Montgomery.

Hi, Tom. Hi, Stephen. First, applaud and congratulations on the progress. So nice to see that.

Thank you.

Now that we're crossed over to profitability, you mentioned being able to self-fund growth opportunities. Could you give us some more color on what you have in mind?

Well, 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 external funding for development efforts. And we're actually seeing that there's a lot of stuff out there that's relevant to our areas of expertise in technology. And we're vigorously pursuing those development efforts.

Right, great. This growth in revenues that you anticipate in the coming quarters, is there anything that can derail that? If we go into a recession, does that become a headwind or do those revenues come in irrespective of what the macro economy does?

Yes. Of course, there are always things out there that can derail things. But I think things look very, very positive at this point in time. Our revenue estimates are based on work that we already have, contracts that we already have, and also things that we are very, very confident of getting in the very near future. I think we are working very carefully to pursue those programs in such a way that we can execute them profitably. And so I think because of all of that, we're really quite confident that we'll see significant revenue growth and also profitability.

Right. Is there a book-to-bill number, Steve?

I don't have it with me. I can get it to you, starting printed. It was somewhere in the neighborhood, I believe, of 1.5:1, maybe a little bit higher, but I will get to the exact number when we get off the call. I'll e-mail it to you.

Right. If that's what it is, it's consistent with what it was last quarter?

Pretty close, yes.

I'm 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. 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?

It's difficult to provide an exact figure, but I believe that 75% is a sensible estimate.

Okay. And in prior calls, you said you were going to mount a distinct effort to tap the small satellite area. Could you kind of give me some color as to the progress you're making?

We are collaborating closely with major prime contractors on satellite systems. Right now, our focus is on understanding how future developments will unfold. There have been launches of smaller experimental satellites, particularly by universities, but we believe that the direction will ultimately be different. We see a better opportunity that is slightly larger and more costly than those small satellites. Our aim is to find a balance between low cost and high performance. We're concentrating our research and development efforts, along with those in partnership with prime contractors, to enhance performance while also minimizing size and cost. The exact financial and weight parameters are still to be determined, but that's the general direction we are pursuing.

And when do you think we see some actual product and revenue?

That'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.

Yeah. And I think you shared with us that you felt that there was a considerable addressable market there. Could you at all give me some average kind of figure that I can work with and get my arms around?

That's a little bit tough to do. The satellite business is definitely growing. And the trend is towards systems that involve a very large number of low earth orbit satellites. So I think it remains to be seen exactly how big that market becomes.

But you're certainly kind of if not redirecting, I mean you understand what the potential is and you're going to go for it?

Oh, yes, yes.

Okay. All right thanks and… yeah, sorry.

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.

Yeah, I understand. Well, the recognition is powerful. I wish you well. Thanks so much.

Thank you.

Next question comes from Michael Eisner, Private Investor. Michael, please proceed.

Hi. Great job. 22% increase in revenue from the previous quarter. Do you feel you can continue that growth?

Well, I don't want to talk about specific numbers, but we feel very confident that we will have continued growth.

How are delays or inflation causing any problems?

Well, we're continually dealing with problems. That's really a part of the business. But I think 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 received 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 delays are getting less. This has been going on for a couple of years now.

Yeah.

So as long as it keeps on going slightly less. Did I hear you right, is Zyfer all in New York now?

No, sorry for the confusion. Zyfer was split a year ago, with manufacturing conducted in New York and engineering at their facility in Orange County, California. We decided to move manufacturing back to California, where it originally was. This change took place over the last fiscal year. We felt that the decision to manufacture in New York was a mistake since separating manufacturing from engineering created issues. Therefore, we opted to revert to the original arrangement. While this meant returning to where we started and incurring significant costs in the process, we believe the results speak for themselves. We're pleased with the outcome, and the transition occurred more quickly than we initially anticipated.

All right. So that's back in California completely?

Yes.

You mentioned that some of the R&D expenses will be covered. I noticed that your R&D spending has decreased, and you suggested it might increase in the next few years. Will Frequency be responsible for that, or will it be funded by external sources?

Well, so 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, will the percentage balance out?

Yeah, I think…

As revenue increases, R&D will either increase or decrease accordingly. The timing may not be exact, but they tend to be aligned.

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.

Yes, overall.

Yes.

Final question. Last quarter, you mentioned GPS III and IIIF, with one unit being tested and another undergoing a live test with the National Research Laboratories. How is that progressing?

So the testing was supposed to take place at the Naval Research Laboratory. That's still going to take place, but the government funding 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'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.

The calendar year?

Yes, just to be able to get additional data on the performance of that unit.

All right. I have a question about the satellite programs you mentioned. Will we see them all at once in the backlog, or will they come in pieces like usual?

Well, it's impossible to predict that exactly; 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's one of the frustrations, but the realities of this business that these things tend to stretch out in time more than we would like.

Yes. It's basically out of your control when it comes in, it comes in, basically.

Yes.

Thank you for your time. I appreciate. Great job.

Okay, thank you.

Next question comes from Greg Roeder with Adirondack Funds. Please proceed.

Hi, thank you for taking my call. I'm new to the Frequency Electronics 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 is one big order from a prime or what have you? Any color you could offer on the backlog would be helpful. Thank you.

Yes. 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 primes. I think it is fundamentally about the growth in the market, and to a large extent this growth in the space market. And that's something 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, a significant part of it, is non-space things. And I think we've seen substantial backlog increase at Zyfer. There are several programs there that are very, very encouraging, and we anticipate a lot of follow-ons to those programs. We have some development programs there, and there's a lot of potential for follow-on afterward. So I think we're really pretty positive at this point in time. Of course, we don't have a perfect crystal ball, but it does in no way look 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.

The next question comes 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?

Well, I've been here for about a year, and it's been a new experience for me. I have to say that on a day-to-day basis, it can be quite challenging and sometimes frustrating. However, I think we are all enjoying it and I am very optimistic about the future. Although I've been with Frequency Electronics for nearly 40 years, this is my first year as CEO.

I well understand that you have a great knowledge of the company, and I'm counting on that to take us forward. And I was wondering if one year since you've been at the home. I mean is there any particular insights that you've gained from the vantage point as being a leader?

I believe there are many insights, but nothing major stands out. Instead, it's the small things that matter. At this stage, I think attention to detail is crucial. It requires a lot of hard work and focus on those details. When we consider new business opportunities, our goal is to ensure that we can pursue them profitably rather than just chasing after new ventures. Ultimately, the key lies in the details.

Do you feel that you have the people in place to provide adequate support for you?

That's a great question. I believe we do have the right people in place. We're anticipating significant growth and, after making considerable cutbacks over the past year, we're now considering expanding our workforce. We'll approach this cautiously. It's essential that we have experienced staff, and we're focused on training a new generation while also attracting new talent in science and engineering who can bring innovative approaches to established technologies. This is crucial for ensuring Frequency Electronics remains viable as a technology company in the future.

So that would come with new hires?

Well, it's partly with new hires, yes, and it's partly with training people that we already have on the workforce.

Thank you. 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. And 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.