Frequency Electronics, Inc.

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 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.

Good afternoon, everyone. The fiscal fourth quarter we just reported was the highest revenue quarter for the company in the past 25 years, and I'd like to provide some additional context on that. We've demonstrated strong growth over the past several years, and we believe the growth potential for our company is expanding even further for reasons I'll get into shortly. While we do not provide guidance, given the lumpiness of contract awards, I would be remiss if I did not mention that this recently ended quarter benefited from strong execution that allowed the company to produce revenue on certain programs in fiscal year 25 that we originally expected to produce over a more extended period of time. in fiscal year 25, 26, and beyond. In other words, while the trend here is very much an upward one, I do not think it's prudent to expect every quarter in the near term to look exactly like this from a top line perspective. Though in the medium term, it is directionally where we're headed. It's important to keep in mind that the allocations for space and defense related programs from the recently passed legislation in Congress are very positive for the direction the company is going. But as the bill just passed last week, the additional revenue from those contract awards will flow in over the coming quarters and years as our customers now submit bids for increased available funds. As we position the company to take advantage of all the opportunities we've discussed before and others I'll discuss in a moment, we're also expanding our customer base beyond the traditional prime contractors. We maintain excellent relationships with the traditional primes and are working on numerous projects with them and anticipate meaningful growth with them going forward. But we've also already been actively submitting bids alongside next generation defense companies, which are increasingly getting attention in this administration. We believe this positions FEI extremely well to benefit from industry trends we see playing out over the next 5 to 10 plus years. Some of the opportunities that will further accelerate our growth are Golden Dome were already involved in several key missile programs and anticipate additional opportunities both for terrestrial and space applications. APMT, which is Alternate Position Navigation and Timing, The vulnerability of GPS is well documented at this point, as stories of jamming and spoofing, especially in the Mideast and Eastern Europe corroborate. FEI's quantum magnetometer development, representing an unjammable approach to navigation, is part of a particularly relevant solution. Our small but very high performance rubidium atomic clock, which we've dubbed Turbo for timing units rubidium oscillator, is a key ingredient in other proposed alternate navigation approaches. Another important item is GPS enhancements, such as resilient GPS. augmenting GPS satellites with a large number of lower-cost satellites. Quantum sensing. FDI is well-positioned to succeed in the growing quantum sensor market based on our expertise in atomic clocks. We're currently developing solid-state diamond-based quantum magnetic sensors sensor devices in collaboration with MIT Lincoln Labs. Similarly, we're collaborating with scientists at NIST to develop Rydberg sensors, allowing for extremely compact microwave antennas. Last year, FDI sponsored a quantum summit in New York City to bring together scientists to discuss progress in quantum sensors. I'd like to announce that FEI will host a quantum summit again this year in October, in particular on October 29th and 30th. All in all, I'm happy with our performance, vigilant regarding the changes in Washington, and very enthusiastic about our future.

Steve? Thank you, Tom. and good afternoon. For the fiscal year ended April 30th, 2025, consolidated revenue was $69.8 million compared to $55.3 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 $40.9 million, or 59 percent compared to 23 0.2 million or 42 percent 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 Zephyr segments, were 26.5 million compared to 29 million in the same period of the prior fiscal year and accounted for approximately 38% of consolidated revenue compared to 52% for the prior fiscal year. Other commercial industrial revenue was $2.4 million and $3.1 million for the fiscal year ended April 30th, 25 and 24 respectively. The company is encouraged by significant revenue growth compared to the prior fiscal year. The majority of the increase in revenue for fiscal year 25 as compared to fiscal year 24 was a result of increase in sales in U.S. government DOD satellite market. For the fiscal year ending April 30, 2025, the gross profit and gross profit percentage increased as a result of several factors. The increase in gross profit dollars was directly related to the significant increase in revenue over the prior fiscal year period, as well as the increase in gross margin. The majority of the increase in the gross profit percentage as compared to the prior fiscal year was in the FEI New York segment and was attributable to the company's performance on several traditional space programs at higher margin and ahead of schedule. In addition, the company has new programs that are progressing well and the company anticipates they will generate additional revenue and profits. In the fiscal year ending April 30th, 25 and 24, Selling and administrative expenses were 18% of consolidated revenue in both periods. While total SG&A expense increased in fiscal year 25 as compared to the prior fiscal year, SG&A expense remained constant as a percentage of revenue in fiscal year 25. The approximately $2.1 million increase is made up of mainly payroll-related items such as 401 expense, stock option expense, bonus accrual, In addition to these expenses, trade show and related costs also increased during the fiscal year 25. R&D expense for the fiscal year ending April 30, 25 increased to $6.1 million from $3.4 million, an increase of $2.7 million, and were approximately 9 percent and 6 percent respectively of consolidated revenue. The company funded R&D amounts was higher in fiscal year 25 as compared to previous fiscal year, partially because of the previous fiscal year R&D expenditures were lower than planned and some of the expense were subsequently captured in fiscal year 25. The increase in R&D expense also reflects the company's commitment to maintain its technical excellence. The company expects future R&D investment to be in line with or even potentially above historical spending. For the fiscal year ending April 30th, 25, the company recorded operating income of $11.7 million compared to an operating income of $5 million in the prior fiscal year. The increase is mainly attributable to the company's significant increase in revenue and gross margin during fiscal year 25, as noted above, from traditional space programs that have been executed ahead of schedule, well within budget, and technologically performed well. The positive effect of cost-cutting measures instituted by management have also contributed to the increase. The change in other income expense from prior fiscal year was relatively minimal. All three categories presented were slightly lower in fiscal year 25 compared to prior fiscal year. This yields pretax income of approximately $12.1 million compared to $5.5 million for the prior fiscal year. For the fiscal year ending April 30th, 25, the valuation allowance decreased by approximately $13.9 million from the prior fiscal year, primarily due releasing the majority of the valuation allowance recorded against deferred tax asset. This change in estimate occurred in the third quarter of fiscal 25. Consolidated net income for the year ending April 30th, 25 was $23.7 million or $2.46 per share, compared to $5.6 million, or $0.59 per share, in the previous fiscal year. Our fully funded backlog at the end of April 25 was approximately $70 million, compared to $78 million for the previous fiscal year, April 30, 2024. The company's balance sheet continues to reflect strong working capital position of approximately $30 million at April 30, 2025, and the current ratio of approximately 2.3 to 1. Additionally, the company is debt-free. Cash went down by approximately $13.6 million since prior fiscal year end. Of this decrease, the dividend paid in Q2 of fiscal 25 accounted for approximately $9.6 million of it. The additional $4 million decrease was related to timing of billing and revenue. Contract liabilities went down $8.2 million since year end. Contract liabilities are generated as part of 606 accounting when the billings are in excess of revenue taken on specific programs. We expect that cash will fluctuate quarter to quarter. However, we expect its trend to be higher over time. 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. Thanks, Steve.

We're now ready for questions.

At this time, we'll be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, please press star 1 on your phone at this time if you wish to ask a question.

One moment, please, while we pull for questions.

And the first question today is coming from Brett Rice from Johnny Montgomery Scott. Brett, your line is live.

Hi, Tom. Hi, Steve. Can you guys hear me?

Yes. Yes.

Great. Great. You know, Nice quarter, great end of the year. Tom, you rattled off a number of growth potential areas, the Golden Dome, the APMT, resilient GPS. Can you walk me through the processes to how you will allocate corporate time and resources to these various growth opportunities?

Well, I'm not quite sure how to answer that question. We're actively pursuing proposals at this time that are involved in all of those areas. And I think we have ongoing discussions with all our prime customers about these topics as we go and what our capabilities are in this arena.

Tom, I apologize. I didn't ask the question in the right way. Of the five or six areas you mentioned, which one do you think has the greatest impact potential that might lead to a greater allocation of corporate resources and attention.

Okay, I see. Well, you know, that's a little hard to say also. I think the, you know, at the moment I think the quantum sensor area looks quite promising. You know, we know that that GPS is vulnerable and the magnetometer activity that we're working on certainly looks very promising and there's a huge addressable market there in terms of providing alternate to GPS navigation, especially, I think, in commercial aircraft. So that's certainly a big one, but I think Golden Dome looks like a big thing also, but it's a little bit ambiguous as to how the funding is going to happen on that one. So we'll just have to see.

All right. Last one from me. Because of these tremendous growth opportunities, R&D spend is going to move up. We've got a strong balance sheet, but do we have enough cash to fund this? greater amount of R&T that's needed to take advantage of these opportunities?

At this point in time, we are confident that we have adequate cash in order to fund that. We As I stated in the press release, it's really targeted use of internal funds. I think we're being somewhat cautious and careful about just what we spend our resources on, and I think we're in a pretty good position to do that and to continue doing that going forward. but we'll keep an eye on that and have to evaluate that in the future. There are a lot of external funding things that we see and we're working on obtaining, and I think that that supplements our use of internal funds significantly.

Great. Thank you for taking my questions and enjoy the rest of the summer.

Okay. Thank you.

Thank you. And once again, it's star one if you wish to ask a question. The next question is coming from Chris Vachovsky, who's a private investor.

Chris, your line is live.

Hello, congratulations on great results. You mentioned the show you mentioned in your press release that there might be some short term uncertainty. Can you elaborate on that?

Well, it I'm not sure uncertainty is the right way to refer to it. I think that there there will be some variability in the timing of contracts, I think, is really what we're talking about. And we've already seen this. The new administration is intent on making their mark on things. So the timing of a lot of programs that are already in the works are changing. We have to deal with that, obviously. I think it's very clear that overall the administration is intent on spending even more money on the things that that are in our area of expertise, but they're going to not necessarily spend them in the same way that was imagined prior to this administration. So this is the thing we just have to roll with the punches in terms of how the timing of these things plays out.

Okay, and you're absolutely right. You did not use the term uncertainty. You used the term variability, which is what I should have said. Okay, so does that include the variability in timing? Does that include stuff that's already in your $70 million backlog?

I'm not quite sure I understand the question.

So the variability issues you mentioned, would those include projects that are already in your $70 million backlog?

No, not really. We don't anticipate any variability in the backlog. The only thing I would say is that contracts can be... terminated. We don't anticipate that with anything in our backlog at this point in time, but that certainly has happened. So I guess in that sense, there's the potential for variability. But the backlog is pretty solid. I think it's with future work that we have to look at the variability and the timing of when things occur.

All right. So you think there will be, with future contracts, there will be some variability in the short term, but in the medium term, you will see certainty, kind of relative certainty for higher growth. Now, what... Could you just tell me, you know, roughly, what do you mean by short-term, mid-term?

I think short term, we're really talking about the next year or so. And medium term, I think we're looking at two to five years. Long term, beyond the five year point.

All right. And I have a question about quantum. Right now, it seems that we're not yet at the point where commercial quantum systems are coming out, but a lot of money is going to research. Would you say that at this research stage, because your timers are probably needed for the research stage as well, would you say this research stage is enough to make a notable revenue

Yes, there's, I think, significant revenue from the research stage. It might better be characterized as development as opposed to research because I think the science is well understood. in these areas is really developing products based on that science that we're working on. And to the extent that this development is externally funded, it certainly generates revenue and indeed profit. So, yeah, I hope that answers your question.

Yeah, oh yeah, it definitely does. And would you expect... would you expect to do have, I mean, would you expect to get externally funded revenue or would your clients be kind of asking you to do some of development on your own income statement as well?

Well, that's a really good question. I think in some cases, we, the, The funding agencies don't have enough money to support all of the work that needs to be done, and so we supplement that with internal funding. But I think that's usually a pretty small amount of the total funding that is to be had. So it's a relatively small thing, and that I think we account for in our budget for internal R&D funding on an annual basis. That is going up a little bit, but just a little bit in order to support these new technologies and things.

Okay, it's good to hear it's a small amount. Well, this is all for me. Good luck again and congratulations again.

Okay, thank you.

Thank you. And once again, it was star one if you wish to ask a question. The next question is coming from Michael Eisner. Michael is a private investor. Hi, how are you?

Hi, Michael.

Did you start working on Lios and linking labs yet?

Yes. Yes.

Yes. Who's paying for that R&D for that?

That's... So we're funded by Leidos at this point in time.

Is that paying for it?

Yes. I'm not sure I understand the question.

You have to do R&D with it.

Go ahead.

I was going to say you have to do R&D on that. It was already proven.

Well, the development, you know, this is development activity, and that is primarily funded by Leidos. Just like the last question, there's a small amount of internal funding that supplements that.

But that's primarily... We get to keep the technology also, right?

Yes.

And is GPS3F back in play? I thought it was over with a while ago. I heard something about that.

No, that's not true. GPS3F is indeed very active. And in fact, we're currently delivering products for the GPS3F program.

Which launch are we up to now?

Well, I don't think... There's GPS-3 and there's GPS-3F. The F, I think, is for follow-on. So the current launches, the last launch that occurred was a GPS-3 launch. And I believe it was... the eighth GPS-3 satellite, if I'm not mistaken.

Yeah, I remember that.

Yeah. So there are still additional GPS-3 satellites to launch. I think nine and ten in particular. And GPS-3F starts with number 11. So no GPS 3F satellites have launched yet.

But they will eventually. That $12 million contract that you just announced, was that a continuation from the previous contract?

Yes, that was.

The one from November of 2023?

I don't remember exactly. Yeah. No, it was not a continuation of those contracts. It was separate.

All right. Let me see. How far are we into the magnetic navigation so we don't get spoofed and everything jammed up?

Well, we're actively pursuing it. I think our development activity is basically a two-year program, and we should have prototype demonstrations at the end of that period.

After two years. All right. Are we the only company that's vertically integrated to produce all this stuff from beginning to end?

Well, I don't know that I can say we're the only company that's vertically integrated, but I think it is indeed true that we are vertically integrated. And as I've said before, I think we... we feel strongly that that's key to our continued success because it allows us to control all, you know, we're working in technology areas that are fairly esoteric and if we rely on other suppliers to provide key ingredients, then we lose control of those key ingredients and it's hard to get the kind of performance that's required in these areas. So we do feel it's key. I think it is a differentiator. There are not so many companies out there that are vertically integrated in the way that we are, but I'd hesitate to say that we have a monopoly on that.

Is microchip, can they do it? We're really not sure. Microchip.

Oh, microchip. I don't think so, no.

Probably not. That's good for us. All right, good job. That's it for me.

Okay, thanks, Michael.

Thank you. Thank you. The next question is coming from George Marima from Parrot Ventures. George, your line is live.

Hey, Tom. Thanks for taking my questions. The first one was on gross margin this quarter was a little bit down. Can you sort of outline the reasons why?

I don't think there's anything super significant. I think, you know, there's just a general lumpiness from quarter to quarter that on how things play out. I think we're pretty comfortable with where the gross margin is overall.

If you look out into this current coming fiscal year, for 25, you're on a 43% gross margin for the year and 37% in this last quarter. Would you be sort of targeting the high 30s or more low 40s for this coming year?

Well, I think we're targeting 40 or more, and where we end up, we'll see. I think, you know, that's where we're, you know, trying to maintain the very disciplined approach in terms of our margins. And so, yeah, that's where we're aiming at. But, you know, we do have to see the timing of things, et cetera, always comes into play.

Okay. And then on quantum sensing, could you sort of maybe characterize or size up a little bit for this coming fiscal year? What kind of development, like revenue opportunity, is there? Is it material, like 10% of your business, or less or more than that? And then, secondly... When would you hope to have product revenue out of this area? How far off?

So I think it's at this, over the next fiscal year, I would anticipate that it's less than 10% of our overall revenue, number one. And number two, I anticipate products Sort of five years out from now. I think that's a reasonable expectation.

Are any of the other newer products coming out before then, these other things you mentioned?

Definitely. We have products which are going to be available Within the next fiscal year, the compact rubidium standard is going to be available.

Is that the turbo you're talking about? Yes. That will be out in this fiscal year, you hope, as product? It will, yes. What kind of addressable market is that, if you can kind of size that up or characterize it?

Well, it's a growing addressable market. I think probably one to two million within the next year or so and growing after that.

Okay. Thank you, Tom. Thank you. And the next question is coming from Brent Garrickson. Brent is a private investor. Brent, your line is live.

Hi, Tom. Thank you for your leadership and thanks to all the employees for their hard work. Much appreciated. My question is, what do you target for SG&A and R&D for 2026 going forward as a percentage of revenue?

I'll let Steve respond to that question.

I believe they'll be very similar to where they are this year. Approximately, SG&A, we ran 18% for the last two years, and R&D, somewhere in the 6% to 8% or 9% range.

And do you target taxes? I mean, I know you didn't have any more carry-forwards, but you had some a few more NOLs left, do you still see taxes in the 1.5% to 2% range?

Again, depending. I think for next year, we'll use more NOLs. We still have a bunch left. But with the new tax law change and stuff, and California is where right now we pay our taxes daily, because they suspended the use of NOLs. I still believe if we have a good year, the majority of it will be covered. Some may not, based on where it comes and so forth. But it will not be a normal 21% tax year next year either.

You still feel it's in the single digits?

Yes.

Last quarter, you said You spoke about SDA bids. Were any of those successful? And what kind of investment expense do you see coming from SDA?

So at this point in time, that's a little bit up in the air, actually. The new administration is rethinking the SDA process. We are still looking at tracking layer activity from SDA, but the transport or data layer is currently being reimagined, and how that's going to play out is not clear at this point in time.

There's no indication of even maybe a timeframe. I know earlier you mentioned short, medium term to be, you know, one to five years or one to two years, do you personally think that it's somewhere in the, within the next, you know, nine to 12 months?

Definitely. I think, yes. Yes. I think something is going to pop within that timeframe. Yeah.

Okay. All right, I'll back out. Thank you for your time.

Okay, thanks.

Thank you. And there were no other questions from the lines at this time. I will now hand the call back to Thomas McClellan for closing remarks.

Okay, I think I'd like to thank everybody for participating in this call and have a nice summer. Thank you.

Thank you. This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.