Frequency Electronics, Inc.

Greetings and welcome to the Frequency Electronics first quarter fiscal 25 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 phone 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 harbour 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. Good afternoon, everyone. I'm pleased to report our first quarter results coming in very much in line with expectations. as articulated when we reported the fiscal year 2024 results. Revenue for the first quarter of fiscal year 2025 increased by 22%, and operating income improved by 15% compared to the first quarter of the previous year. We believe revenue, profits, and margins should continue to increase going forward. The backlog of 70 million at the end of Q1 is down slightly from the high of 78 million at the end of the last fiscal year, but it's up substantially from previous years and represents a historically high value for the company. We continue to win significant production contracts in our primary end markets of space, navigation, secure communication, and timing, and anticipate healthy margins on these. This creates some breathing room to work on developing new technologies and also to participate in higher risk programs targeted at developing products for low cost proliferated satellite systems. In fact, we're beginning to see some success in these endeavors in two primary areas that have much larger addressable markets than our core legacy offerings have historically enjoyed. First, we've won some initial contracts for developing low-cost synchronization systems for proliferated satellite programs. We've had a number of questions on prior earnings calls about our ability to participate in the market for so-called small sat programs. which are generally lower cost and produced in higher numbers. These initial contracts are a good indication of our ability to successfully compete and win in this large and growing portion of the space market. Second, we're also attracting outside funding for quantum sensors. As one example, we're working on quantum magnetometer applications which utilize some of the physics building blocks of our core atomic clock technologies and can be utilized as sensors for navigation purposes in GPS-denied environments. This is just one of several new quantum applications which have been developed in physics laboratories around the world and which our company is well-positioned to transition from the laboratory into developing developed products which work in challenging real-world environments. Quantum is also a very large and growing end market, and we're excited about our prospects for participating in it. In order to stimulate further progress in quantum sensor technology, our company is sponsoring a quantum sensor summit in New York City in early October. This scientific conference will bring together leaders from government, university, and private sector laboratories to discuss sensor technologies and how best to realize their potential, and also to ensure that our country maintains a leadership role in this arena. We're excited about the enthusiasm which has developed around this event. Details related to the event are available at the Frequency Electronics website for anyone interested. All in all, this is an exciting time for our company. Combining the disciplined approach to our core business, which is growing, with a studied approach to new technologies, which can sustain us and foster additional growth in the future, puts us on a solid, positive trajectory as a company. The excitement is tangible. As I engage with our employees on a daily basis, there's an enthusiasm and drive apparent, which frankly is unique in the 40 years I've been at FEI. With the support of our board, we've incentivized employees and fostered an environment where everyone benefits from the success of the company. There's plenty of hard work ahead of us, but I'm personally energized and committed to the continued growth of our company. 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. For the three months ended July 31, 2024, consolidated revenue was $15.1 million. compared to $12.4 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 $8.3 million, or 55%, compared to $4.9 million, or 39%, in the same period of the prior fiscal year. Revenues 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 Zephyr segments, were 6.3 million compared to 6.9 million in the same period of the prior fiscal year and accounted for approximately 42 percent of consolidated revenue compared to 55 percent for the prior fiscal year. Other commercial and industrial revenues were approximately $5,544,000 compared to approximately $672,000 in the prior fiscal year. The significant increase in revenue for this quarter compared to the same quarter in the previous fiscal year was reflected in both segments and primarily related to increases in government space of approximately $3.4 million in sales from space U.S. government customers offset by a decrease of approximately half a million in sales from non-space U.S. government customers. For the three months ending July 31st, 2024, gross margin and gross margin rate increased compared to the same period in the prior fiscal year. The gross margin dollars increased mainly due to the increase in revenue and the gross margin rate increased due to the fact that many of the technical challenges faced in prior fiscal year have been resolved and as a result, the related programs are now moving forward and running more efficiently. Additionally, there were many smaller jobs that were completed at higher margins. This is the highest gross margin the company has recorded on a consolidated business in the last 24 years, and while there will likely still be quarter-to-quarter variability, we believe this is indicative of a direction we can continue to move in when we are producing efficiently and solving engineering challenges in a timely manner. For the three months ending July 31st, 24 and 23, SG&A expenses were approximately 19 percent of consolidated revenues. The increase in SG&A expenses is related to an increase in payroll-related expense. R&D expense for the three months ending July 31st, 24 increased to approximately $1.5 million from 506,000 for the three months ending July 31st, 23, an increase of approximately 982,000 and were approximately 10% and 4% respectively of consolidated revenue. R&D increases for the three months ending July 31st, 24 was primarily due to a focus on advances in modernization of products. The company plans to continue to invest in R&D in the future to keep its products at the state of the art However, we expect the actual quarterly spend to vary. For the three months ending July 31, 24, the company recorded operating income of approximately $2.4 million compared to operating income of approximately $2.1 million in the prior fiscal year. Operating income increased due to higher revenue and gross margin percent while set by higher R&D spend. Other income expense net is derived from various sources. The income can come from reclaiming of metal, refunds of sale of fixed assets, interest expenses related to deferred comp payments made to retired employees. The majority of the approximately $0.2 million of investment income for the three months ending July 31, 24 was from assets in high-yield treasury funds. This yields a pre-tax income of approximately $2.5 million for the three months ending July 31, 2024, compared to approximately $2.1 million pre-tax income for the three months ending July 31, 2023. For the three months ending July 31, 2024, the company recorded a tax provision of $133,000 compared to $7,000 for the same period of the prior fiscal year. Consolidated income for the three months ending July 31st, 24 was approximately 2.4 million or 25 cents per share compared to approximately 2 million or 22 cents per share for the same period of the previous fiscal year. Our fully funded backlog at the end of July 24 was approximately 70 million compared to approximately 78 million for the previous fiscal year ended April 30th, 24. The company's balance sheet continues to reflect a strong working capital position of approximately $21 million at July 31, 2024, and a current ratio of approximately 1.5 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 call back to Tom, and we look forward to your questions shortly.