FREQUENCY ELECTRONICS INC Q1 FY2025 earnings call

• Core business growth: Revenue and operating income increased, backlog is historically high, and significant production contracts won in key end markets.
• New technologies: Won contracts for low cost synchronization systems for proliferated satellites, attracting outside funding for quantum sensors, and sponsoring a quantum sensor summit in October to discuss sensor technologies.
• Employee enthusiasm: Disciplined core business approach combined with focus on new technologies fosters positive trajectory, with high employee enthusiasm.

For the three months ended July 31, 2024, consolidated revenue was $15.1 million, up 22% from $12.4 million in the prior year. Revenue from commercial and U.S. Government satellite programs was approximately $8.3 million (55% of total revenue) compared to $4.9 million (39%) in the prior year. Revenues from non-space U.S. Government and DOD customers were $6.3 million (42% of total revenue) compared to $6.9 million (55%) in the prior year. Other commercial and industrial revenues were ~$544,000 vs. ~$672,000 prior year. Gross margin increased due to resolved technical challenges, efficient program execution, and higher margin small jobs. SG&A expenses were ~19% of consolidated revenues, driven by payroll. R&D expenses increased to $1.5 million from $506,000, ~10% of revenue, mainly for product modernization. Operating income was $2.4 million vs. $2.1 million prior year. Backlog at end of Q1 was $70 million, down slightly from prior year but historically high.

• Revenue, profits, and margins expected to continue increasing. - Not anticipating significant overall increase in R&D expenditures; Q1's higher spend was not a steady-state run rate. - Focus on funded backlog and ongoing work on key programs, with unfunded backlog existing but not disclosed prominently.

• Government unpredictability: Challenges in predicting when government work will start, affecting workforce planning. - Zyfer business fluctuations: Lumpiness in business, so fluctuations in Zyfer-related revenues should not be overinterpreted. - Zyfer growth uncertainty: While anticipating growth in Zyfer, fluctuations in non-space activity are part of the business's lumpiness.

Q: Are you working on MEMS technology?

A: We are not internally developing MEMS technology, but we do utilize MEMS technology in some of our products.

Q: Involvement in DARPA Chip-Scale Atomic Clock?

A: Currently, we do not - we're not directly involved in any chip-scale activities at DARPA we have been in the past.

Q: R&D expenses increase?

A: I think you should not extrapolate that out into the future. You do have to realize that something that's going to fluctuate from quarter-to-quarter. And I know it is a little bit higher this quarter. But yes, we do not anticipate significant increase in overall R&D expenditures going forward.

Q: Capacity for growth in new markets?

A: From a plant and equipment point of view, I think we're in pretty good shape. I think the bigger challenge is a people challenge. But plant and equipment, I think we've got plenty of capacity and room to expand.

Q: Tax rate expectation?

A: Well, it's a very interesting question. But I think it'll be a very low tax rate. We do have NOLs. The only issue - and I'm not a tax expert, but I'll tell you, is that California has very different rules on NOLs. And we do a bunch of business in California, so that's why you see the $133,000 tax provision. Most of our income will be covered by NOLs. However, there will be some that are not covered because of California tax rules. So I don't - this year, I do not expect it to be anywhere near a normal 21%, 22%, whatever, it's not going to be.

Q: Backlog from previous contracts?

A: Those three programs you mentioned have different durations. But we are actively working on those. And yes, we have still some unfunded backlog associated with those, but very significant amount of that is funded at this point in time.

Q: Quantum sensors product roadmap?

A: Currently, we do not have any products. We're not shipping for any military missions or anything of that sort at this point in time. But we do anticipate developing products from lab technologies like magnetometers and Rydberg sensors.

Q: CEO on Board of Directors?

A: I don't think I'm in a good position to answer that question. I haven't been invited to the Board at this point in time.