Frequency Electronics, Inc.

Greetings, and welcome to the Frequency Electronics second quarter fiscal 2026 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. I will now turn the conference over to your host, Thomas McClelland, President and Chief Executive Officer. Sir, the floor is yours.

Good afternoon. and thank you for joining Frequency Electronics' second quarter fiscal year 2026 earnings call. With me today is our Chief Financial Officer, Steve Bernstein. On our first quarter fiscal 2026 earnings call in September, I discussed two near-term factors that produced a quarter with lower revenue than recent trend levels suggested. The first factor was that strong execution in fiscal 2025 allowed the company to produce revenue on certain programs in fiscal 2025 that we had originally expected to produce over a more extended period of time in fiscal 2026, essentially pulling forward some revenue. The second factor was customer-driven delays on a few key programs that pushed revenue recognition out of the fiscal first quarter. Despite those issues, I noted on that call that six weeks into the second quarter, we saw that those delays were behind us making significant progress towards a bigger book of business. I'm pleased to report on today's call that our second quarter performance was very strong across a number of key metrics as we resumed our revenue uptrend and have numerous proof points to support our belief that this will be a strong multi-year growth period for the company. Steve will provide more financial details later in the call, but I want to take a few moments to highlight several important data points and trends. For this quarter, we reported revenue of $17.1 million, up 24% sequentially. This was the third highest quarter of revenue in the past decade, with only two higher in that period having occurred in the third and fourth quarters of last fiscal year. In short, though our business does not proceed in a perfectly linear fashion, we have established a new higher baseline upon which we expect to build in the years ahead. To illustrate that point, our quarter end backlog was $82 million, the highest in company history, and up 17% since our fiscal year end in April, as we continue to book new business that is funded. Many of the contracts we sign have initial funded portions which are only a fraction of the full contract award with additional funding that comes later in the course of the contract, meaning that the funded backlog we show is conservative relative to our bookings and that existing contracts can continue to contribute to backlog in the years to come. While backlog in any given quarter can fluctuate based on newly funded awards and what is converted into revenue in a given quarter, based on what we are seeing coming down the road, we believe it's reasonable that we could see backlog north of 100 million in the not too distant future. Critically, this growth in backlog that we're describing is coming from our strong existing business. We know that many of you are excited for the growth prospects that we have coming in the future in large and growing end markets, such as quantum sensing, proliferated satellites, and alternative navigation and timing, or alt-PNT programs. We share that optimism and expect to participate meaningfully as these sectors expand. Critically, while these white space opportunities are much larger than our historical markets, we're not standing around waiting with nothing to show for it in the interim. These new markets will be additive to what is already a strong and growing current business, as evidenced by our strong performance this quarter and the growth in funded backlog. We anticipate multiple awards in the coming months, some of which are as large or larger than the biggest ones we have historically announced. This is today's core business, which itself has years of profitable growth potential, and upon which the future growth opportunities in quantum sensing, magnetometers, and other alt-P&T technologies and timing solutions as well as proliferated satellites will be additive. In other words, we can be a substantially larger company in the years to come as we layer new growth opportunities which are built upon our industry-leading capabilities on top of a strong and growing core business. It's exciting to work with some of the next generation defense companies and they will be part of our growth story, especially in new technologies. At the same time, our longstanding strategic partnerships with the major prime contractors are also very important for our current and future business, and we have advantaged positions with them on many programs because of our technological capabilities. In multiple cases, We are sole source providers and we're often the partner of multiple primes competing for the same government programs, meaning we can win regardless of whom the government selects as the prime on a given program. Turning to space, this means a significant and expanding market for us. We've been participating in space business for decades and we see a long runway of growth ahead. For example, the U.S. Space Force recently launched Navigation Technology Satellite 3, known as NTS-3, Experimental Navigation Satellite, a major milestone aimed at advancing more resilient next-generation PNT architectures. Our technology is on board this satellite and underscores the strategic relevance of the solutions that FEI provides. We also have a strong and growing defense business that is booming and which we envision growing sharply for many years to come. In our last call, we highlighted the number of the critical multi-domain defense systems we're involved with. We anticipate much continued growth from these programs as well as new ones. Just last week, the Missile Defense Agency announced it has begun phase one of awarding contracts for the Scalable Homeland Innovative Enterprise Layered Defense Program, otherwise known as SHIELD, which is part of the Golden Dome Initiative. We anticipate our technology being part of multiple bid winners programs. Defense spending continues to increase, particularly in missiles, munitions, and other modernization initiatives. As an example of rapidly increasing scale, last week the Pentagon announced plans to procure 200,000 drones by 2027. While not all of those require high-end precision timing, this illustrates the magnitude of modernization underway and the breadth of defense and space technology initiatives we will participate in. As we've shown over the past few quarters, the path there is not likely to be linear on a quarter-to-quarter basis, but the underlying strength in our core business and the growth prospects in our new areas support a consistent multi-year up and to the right trajectory from a market share leader with growing strategic importance in its industry. We look forward to continuing to demonstrate this in the quarters and years to come. Two final notes on scheduling before I turn things over to Steve. Out of respect for our friends in the federal government who could not attend our previously scheduled quantum sensing conference in October due to the government shutdown, we moved the conference to January 14th to 16th in New York City. We have an excellent agenda that will cover quantum policy, multiple military missions that envision utilizing quantum technology application research from leading national and academic labs, as well as updates on clock and oscillator applications. We look forward to hosting this event next month and gathering many of the leading players in the industry, many of whom we're already working with to build out our quantum future. Additional details related to this event are available on our website. In addition, we look forward to meeting with many of you at the Needham Growth Conference in New York City in January. And now I'll turn the call over to Steve to provide some more financial details. And I look forward to taking your questions during the Q&A session following Steve's remarks. Steve?

Thank you, Tom, and good afternoon. For the three months ended October 31st, 2025, consolidated revenue was $17.1 million compared to $15.8 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 $4.6 million or 27% compared to $9.4 million or 59% 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. Revenue from non-space U.S. government and Department of Defense customers, which are recorded in both the FEI New York and FEI Zephyr segments, were $11.9 million compared to $5.8 million in the same period of the prior fiscal year and accounted for approximately 69 percent of consolidated revenue compared to 37% for the prior fiscal year. Other commercial industrial revenues were approximately $560,000 compared to approximately $591,000 in the prior fiscal year. Revenue for the three months ending October 31st, 2025 was higher than revenue prior fiscal period due to an increase in non-space Department of Defense products in the FBI ZIPR segment This increase was in both shipment-based products as well as products accounted for under the percentage of completion method. For the three months ending October 31st, 2025, both gross margin and gross margin rate decreased compared to the same period of the prior fiscal year. The decrease in gross margin and gross margin rate were attributable to a change in the mix of high margin production satellite programs in the prior year periods versus lower margin programs with significant non-recurring engineering efforts during the three and six months ending October 31st, 2025. We demonstrated meaningful operating leverage in the business as compared to Q1. Our gross margins often have some variability depending on the shipments in a given quarter or the amount of new engineering development versus repeat business throughout a period. but we remain committed to ongoing improvements in profitability across our business. We have made excellent strides in this regard in the past few years and it continues to be an area of emphasis. For the three months ended October 31st, 25 and 24, selling and general administrative expenses were approximately 21% of consolidated revenues. The increase in SG&A expense during the three months ending October 31st, 25 was due to the fluctuation in the various expense accounts that make up SG&A. R&D expense for the three months ending October 31st, 25 decreased to approximately $1.2 million from $1.6 million for the three months ended October 31st, 24, a decrease of approximately $400,000 and were approximately 7% and 10% respectively of consolidated revenue. Fluctuation in R&D expenditures will occur in some periods due to current operational needs supporting ongoing programs. 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 October 31st, 25, the company recorded operating income of approximately $1.7 million compared to operating income of approximately $2.6 million in the prior fiscal year. Operating income decreased due to lower gross margin and increased SG&A as described above. Other income expense net is derived from various sources. The majority of the approximately 0.2 million of investing income for the three months ended October 31st, 25 was from interest income and unrealized gain on assets held in the Frequency Electronics Deferred Com Trust. This yields a pre-tax income of approximately $1.8 million for the three months ending October 31, 25, compared to an approximately $2.7 million pre-tax income for the three months ending October 31, 24. For the three months ended October 31, 25, the company recorded a tax benefit of $31,000 compared to a tax provision of $139,000 for the same period of the prior fiscal year. Consolidated net income for the three months ending October 31st, 25 was approximately $1.8 million or $0.18 per share compared to approximately $2.7 million or $0.28 per share for the same period of the previous fiscal year. Our fully funded backlog at the end of October 25 was approximately $82 million compared to approximately $70 million for the previous fiscal year ended April 30th, 25. The company's balance sheet continues to reflect a strong working capital position of approximately $31 million in October 31st, 25, and a current ratio of approximately 2.6 to 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.