Frequency Electronics, Inc.

Greetings and welcome to the Frequency Electronics First Quarter Fiscal 2027 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 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.

Thank you, Paul. Good afternoon, and thank you for joining Frequency Electronics' first quarter fiscal year 2027 earnings call. With me today is our Chief Financial Officer, Steve Bernstein. I'm very pleased to report first quarter revenue of $23.5 million, an all-time record for FEI, up 70% year-over-year and up 52% sequentially. As we told you on our fourth quarter 2026 earnings call in July, we expected to return to growth starting in the current fiscal 2027 and this first quarter is a strong proof point of that. Further, this performance gives us increasing confidence in our ability to meet or exceed the $150 million or more in annual revenue that we guided to by fiscal 2029, which ends April 30, 2029. I'll have more to say about that target shortly. Steve will provide additional financial commentary later in the call, but I'd like to highlight a few items. On our July call, we established three-year minimum margin targets of 50% for gross margin and 30% for operating margin, again, by fiscal 2029. In the fiscal first quarter we're reporting today, We generated gross margin of 45.8% and operating margin of 22%, substantial improvements and solid progress on our path towards our minimum targets. As I've mentioned numerous times over the past few years, we did not expect our progress to be perfectly linear on a quarterly basis, whether in revenue or profitability. but the trends we see in revenue backlog and pipeline as well as the internal improvements we've made that we discussed last quarter and the operating leverage we should generate with increasing revenue position us well to meet or exceed those minimum targets. As for backlog, it grew to a new record of 129 million up approximately 82% year-over-year and 16% sequentially. This continued increase in backlog gives further support to our ability to add meaningful growth to FEI in the years to come. As we've discussed before, we expect continued growth in our core space and defense markets while also seeing additional growth coming from new markets such as space, defense, proliferated satellites, quantum sensing, space exploration, and alternative position navigation and timing. Today, I'd like to provide some additional color on several of these markets, all of which build upon our core timing and frequency generation capabilities. So I'm sure you're all familiar with GPS satellites, part of the traditional space business we have sold into. On April 21st of this year, the final GPS-3 satellite was launched, which included FEI's newly developed Digital Rubidium Atomic Frequency Standard, or DRAPS, atomic clock. This enhanced DRAFS clock is currently operational on the GPS satellite, is on order for use on other global navigation satellite systems, and is targeted at future GPS satellites, including the upcoming GPS 3F, or follow-on, launches. This advanced atomic clock is an example of the company's important capabilities Not just to provide the precision time and frequency devices that we've been delivering for the last 65 years, but also our capability to deliver state-of-the-art products with capabilities fueling future technological innovations. You've no doubt seen the news flow over the past several months about the critical need for missile replenishment. with government plans to significantly expand production by 2030. And we've spoken with you before about our content that goes into missile batteries for programs such as Patriot and THAAD. We expect to generate revenue from those programs in 2027 and for years beyond that coming from existing orders. More orders to come and additional orders to meet the needs of allied countries. In addition to this missile battery related work, we're also now bidding on additional missile programs with components that go directly onto the missiles themselves. In some cases, we're being asked to bid on these on-missile programs in order to potentially displace incumbents. There is a secured communication program for the military that we're producing that is a good example of both the higher rate production programs we have spoken about and the push by our customers to deliver more sooner. In this case, we're working on a production contract for over a thousand systems. In addition, The customer on this program is now asking us to increase monthly production by more than 50%, while also promising additional follow-on orders. In other words, we're expanding the total size of an already high-rate production program. For another example of our ability to use internally developed technology for expanded use cases, we're currently exploring potential uses of our mercury ion atomic clock for naval applications. Strategic submarines are a potential use case for advanced atomic clocks because they need to be underwater for months at a time and their timing cannot be updated from GPS satellites while they're underwater. So they'll need a different technology for certain use cases that require very highly accurate timing and our advanced mercury ion clocks may be the solution. We believe this is also a good example of our ability to participate in long-term programs for higher price systems and to do so with external funding. In quantum sensing, were making rapid progress in the development of advanced sensors for magnetic navigation in GPS-denied environments. We just recently delivered a sensor and associated electronics to the Army Research Laboratory for additional testing. Development is ongoing at FEI to make smaller, more capable magnetic sensing systems for ALT P&T applications. Finally, I'd like to discuss the capital raise that we completed right at the end of the first quarter and how that may impact our long-term guidance. We've told you previously that we have sufficient capital in place to meet the minimum $150 million revenue target by fiscal 2029. Numerous customers, however, are asking us to do more for them and to do it more quickly. To meet this customer-driven business expansion, we decided to pursue a secondary offering of our common stock in July, which raised approximately $73 million and also brought several excellent long-term oriented new institutional investors into our shareholder base. Approximately $14 million of the total came in after the quarter ended as the green shoe was exercised. We remain debt-free with a very strong cash position, and we anticipate being a free cash flow generative on an annual basis going forward. We would like to thank Morgan Stanley, our lead bankers on the transaction, and Craig Hallam, who served as book running managers for their hard work on this successful transaction. The capital we raised will allow us to pursue capacity expansion to help meet these additional customer requests, which may have the effect of our both reaching the $150 million minimum target sooner and making that target a substantially larger number by fiscal 2029. We also expect that some of our customers will pay for capacity expansion in certain cases. We expect this additional revenue growth that derives from capacity expansion to be organic and it is likely that if we were to make any acquisitions, they would be small tuck-ins to add to our vertical manufacturing capabilities. In other words, we do not intend to buy revenue, frankly because we don't need to given the strength of our backlog, pipeline, order book and prospects. There's an exceptional amount of growth and value creation to be gained by focusing on what is in front of us without getting distracted by a larger acquisition. We should be able to super serve our customers with this extra capital resulting in additional profitable growth that should benefit our shareholders as well. With that, I'll turn it over to Steve for some financial commentary. and I look forward to taking your questions in the Q&A portion of the call. Steve?

Thank you, Tom, and good afternoon. As Tom highlighted, it's a great start to our fiscal 27 and a strong start to achieving our three-year targets. For the three months ended July 31, 26, revenue from commercial and U.S. government communications satellite programs was $11.8 million and accounted for approximately 50% of consolidated revenue compared to 6.5 million and approximately 47% of consolidated revenue during the same period in the prior fiscal year. Revenue is recognized primarily over time under the percentage of completion method. Revenue from the satellite market are recorded in the FBI New York segment. Revenue from non-space U.S. government Department of Defense customers, which are recorded in both the FEI New York and FEI Zephyr segments, were $11.1 million and accounted for approximately 47% of consolidated revenue for the three months ended July 31, 26, compared to $6.9 million and approximately 50% of consolidated revenue during the same period in the prior fiscal year. Other commercial industrial revenue for the three months ended July 31, 26 and 25 accounted for approximately 3% of consolidated revenue and were $605,000 and $439,000 respectively. The revenue for the three months ending July 31, 26 was significantly higher in both segments and in consolidation by approximately 70% or $9.6 million over the same quarter of the prior fiscal year. Revenue from commercial and U.S. government Communication Satellite Programs increased $5.2 million and over 80% and revenue from non-space U.S. Government Department of Defense customers increased $4.2 million and over 61% over the same period in the prior fiscal year. For the three months ended July 31, 26, both gross margin and gross margin rate increased compared to the same period in the prior fiscal year. The increase in gross margin is attributable to the $9.6 million increase in revenue compared to the same period in the prior fiscal year. The 9% improvement in gross margin rate is attributable to higher production levels driving efficiencies in labor, overhead allocation, product mix, and also partially due to efficiencies recognized as programs mature. For the three months ended July 31st, 26 and 25, Selling general administrative expenses were approximately 18% and 26% respectively of consolidated revenues, a decrease of approximately 8%. However, the actual expenditures increased by half a million. The increase in SG&A expenses during the three months ending July 31, 26 related mostly to compensation expenses. SG&A as a percentage of revenue decreased 8% over the same period in the prior fiscal year, demonstrating positive operating leverage given the higher revenue base and because the prior year included strategic headcount additions and process optimizations that were implemented to support growth in fiscal 27 and beyond, which caused SG&A as a percentage of revenue to be higher in fiscal 26. Research and development expenditures represent investments intended to keep the company's products at the leading edge of time and frequency technology and enhance future competitiveness. Fluctuations 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 July 31, 26, operating income was $5.2 million, or 22% of revenue, an increase significantly compared to the prior fiscal year period's $364,000 operating income due to the higher revenue, gross margin, and operational efficiencies that described above. The majority of the approximately $0.1 million of investment income for the three months ended July 31, 26 was from interest income and unrealized gains on assets held in the Frequency Electronics Deferred Compensation Trust. This yields a pre-tax income of approximately 5.2 million for the three months ending July 31st, 26 compared to approximately 557,000 pre-tax income for the three months ending July 31st, 25. Consolidated net income for the three months ending July 31st, 26 is approximately 4.2 million or 41 cents per share compared to 634,000 were $0.07 per share for the same period in the prior fiscal year. Our fully funding backlog at the end of July was approximately $129 million, a new company high, compared to approximately $111 million for the previous fiscal year ending April 30, 26, and compared to approximately $71 million in the year-ago period. The company's balance sheet continues to reflect a strong working capital position of approximately $90 million and a current ratio of approximately 5.3 to 1, helped by the company's stock offering, which increased further following the exercise of the green shoe after the quarter ended. 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'll turn the call back to Tom and we look forward to your questions.