Frequency Electronics, Inc.

Greetings, and welcome to the Frequency Electronics second 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 telephone keypad. As a reminder, this conference is being recorded. Any statements made by the company during this conference call regarding this feature 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.

Good afternoon, everyone. By all financial metrics, the second quarter of fiscal year 2025 performance was excellent. For both the quarter and the year to date, revenue, gross margin, and operating income have grown substantially. The backlog is also holding strong at $81 million, which is, by the way, an all-time high, compared to $70 million at the end of the first quarter and $78 million at the end of the last fiscal year. The results reflect continued solid growth in our core businesses, which show every indication of continuing. The primary source of growth this year has been the U.S. government space business. The U.S. government space business is responsible for more than half the revenue and operating income for the first half of the current fiscal year. And we're very busy responding to inquiries and writing proposals for new government space programs. As we've discussed in the past, a significant portion of existing as well as new potential space work relates to heritage satellite systems and our core technologies. However, we are seeing a lot more, more and more new business in the proliferated small satellite domain. and it's very clear that this is the direction in which space technology is headed. At this time, less than 10% of our backlog is associated with proliferated small satellites, but it's anticipated that this will grow dramatically over the next decade. The potential is huge, but instead of one or two high-performing systems delivered on a given program, we're looking at hundreds of lower-cost, sometimes lower-performing systems on a given program and continuing replenishment business on those programs to replace systems on satellites which have exceeded their expected lifetime of three to five years. In order to be successful in this domain, we must develop products targeted at this market, In general, our existing technologies packaged in smaller, lower power, lower performing variants. It has become clear over the last few years that a significant amount of this development needs to happen now and must be funded internally. Our R&D expenditures are up this year because of this. Currently, about 10% of revenue compared to about 6% of revenue last fiscal year. It's anticipated that R&D will remain steady at approximately 10% of revenue for the foreseeable future, but we believe that the return on this investment has the potential to be extremely attractive in terms of new business wins with years of follow-on business behind them. In short, we should make it back in spades. In October, FEI hosted the Quantum Sensor Summit in New York City, a technical conference bringing together experts from around the world to share insights and expectations regarding this rapidly developing area of technology. This event was well attended. There were roughly 88 attendees, and we have obtained a lot of positive feedback from it. Quantum sensors is a rapidly developing market, one which FEI is well positioned to participate in based on our existing expertise and one which we are actively pursuing as an additional avenue to continued growth well into the future. Much of the development in this arena will be funded externally on U.S. government R&D programs. And in fact, some government funding is expected within the next two quarters. With a new administration to be sworn in in January, we're cautiously optimistic that a government fiscal year 2025 budget will be passed expeditiously, and that funding will thus be available sooner rather than later. In parallel, we're pursuing cooperative research and development agreements, or CRADAs, with NIST and other government laboratories in order to harvest their expertise in specific quantum technologies. All in all, I'm happy with our performance very excited about our future and proud to lead a workforce of talented and really dedicated individuals who deserve most of the credit for our current success. I'll now turn things over to our CFO, Steve Bernstein, who will fill you in on some of the financial details. Steve?

Thank you, Tom, and good afternoon. For the six-month ended October 31st, 2024, consolidated revenue was $30.9 million compared to $26 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 $17.7 million or 57% compared to $9.5 million or 37% in the same period of the prior fiscal year. Revenue on satellite payload contracts are recognized primarily under the percentage of completion method and recorded only in the FEI New York segment. Revenue from non-space U.S. government and DOD customers, which are recorded in both the FEI New York and FEI Zephyr segments, were $12.1 million compared to $15.1 million in the same period of the prior fiscal year. and accounted for approximately 39% of consolidated revenue compared to 58% for the prior fiscal year. Other commercial and industrial revenue were $1.1 million and $1.4 million for the six months ended October 31st, 24, and 23, respectively. The significant increase in revenue for the period was primarily related to an increase in U.S. government customer sales for space products. For the six months ending October 31st, 24, gross margin and gross margin rate increased as compared to the same period in fiscal year 23. The gross margin dollars increased as direct result of the increase in revenue. The gross margin rate increase was particularly attributable to a large space program that completed a major milestone in its production, as well as the older programs at lower margin are complete or near completion. For the six months ending October 31st, 24, and 23, SG&A expense was approximately 20 percent and 19 percent, respectively, of consolidated revenues. The increase in SG&A expense during the three and six months ending October 31st, 24, was mainly related to an increase in payroll-related expenses, costs from the realignment of employees from overhead to SG&A, and the costs related to Frequency Electronics' first Quantum Summit in October of 24. The annual run rate for SG&A for the year is expected to be approximately $3 million per quarter. It should be noted that the payroll-related expenses, which are driving the majority of the increase, approximately 25% are non-cash transactions, such as stock compensation and 401 expense. R&D expense for the six months ending October 31, 24, increased to $3.1 million from $1.3 million for the six months ending October 31, 24 an increase of approximately 1.8 million and were approximately 10 percent and 5 percent respectively of consolidated revenue. R&D increased for the six months ending October 31st, 24 was primarily due to a focus on advances and modernization of products as opposed to fiscal 24 where the company was primarily focused on customer production orders resulting in much lower R&D expense than initially planned. The company plans to continue to invest in R&D in the future to keep its products at the state of the art. However, actual quarterly spend is expected to vary. For the six months ending October 31st, 24, the company recorded operating income of $5 million compared to operating income of $3 million in the prior year. Operating income increased partially due to large space program that completed a major milestone in its production during the three months ending October 31st, 24, as discussed earlier. However, the increase is also a result of the successful efforts of the company to complete complex and costly programs and to work more efficiently in bidding, building, and testing our products. The company believes the improved operating income results for the first half of this fiscal year are a tangible outcome of these efforts. Other income can be derived from reclaiming of metal, refunds, interest on deferred trust assets, or the sale of fixed assets. Interest expense is related to the deferred compensation payments made to retired employees. This yields pre-tax income of approximately $5.4 million compared to $2.9 million for the prior fiscal year. For the six months ended October 31, 24, the company recorded a tax provision of $272,000 compared to 13,000 for the same period of the prior fiscal year. Consolidated net income for the six months ending October 31st, 24 was 5.1 million or 53 cents per share compared to 2.8 million or 30 cents per share in the previous fiscal year. Our fully funded backlog at the end of October 24 was approximately 81 million compared to approximately 78 million for the previous fiscal year end April 30, 24. The company's balance sheet continues to reflect a strong working capital position of approximately $23 million at October 31st, 24, and a current ratio of approximately 1.8 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'll turn the call back to Tom, and we will look forward to your questions soon.