Frequency Electronics Inc (FEIM) 2005 Q4 法說會逐字稿

Good day and welcome to the Frequency Electronics year-end 2005 earnings release conference call. At this time, I would like to inform you that this conference is being recorded and that all participants are in a listen-only mode. At the request of the Company, we will open the conference up for questions and answers after the presentation.

Statements in this release which are not historical facts are forward-looking and involve risks and uncertainties, including but not limited to the impact of competitive products and pricing, increased investment to support product introduction, market acceptance of products, product transition by the Company and its competitors, currency fluctuation, changes in product sales mix and other risks described in the Company's Registration Statement and other Securities and Exchange Commission filings.

At this time, for opening comments and introductions, I will turn the call over to General Joseph Franklin, Chairman of the Board. Please go ahead.

Thank you very much, Dixie, and good afternoon, everyone. Thank you for your patience. We delayed the call a few minutes because there were a number of you calling in, and we wanted to make sure that you got the full call.

First of all, welcome. I'm joined by Martin Bloch, our Chief Executive Officer, and Alan Miller, Chief Financial Officer. And all of us would like to stress our sympathy and our support for our great friends and allies in London, who suffered an attack today, as other civilized nations have in the last 20 years from the forces of terrorism that the world has finally joined together to defeat. It's not going to be an easy battle. Those of us who live through World War II and beyond are recognizing that this is going on for a long time. And we just have to keep working through it, which is something we will do here for you at Frequency Electronics.

It is a pleasure to welcome you today and to go over the press release that I'm sure all of you have received now. As you can see, once again we increased our revenues, raised our margins and improve our profitability compared to the prior year. This happened in spite of the fact that our large customers, the wireless OEMs, who represent a very, very large market for us in the future, did reduced their requirements to us very sharply in the second half of the year.

We also increased our research and development spending in the second half of the year, and Martin Bloch will talk to you at some length about that. Alan Miller will have the financial report for you with details in just a moment. And let me say at this point, looking ahead, we see today that revenues are going to continue at this slow rate that we have seen in the last half of 2005, but we also believe, based on the bookings that we're seeing right now, that the second half is going to ramp up and we will see somewhat of a reverse of the profile we had in 2005, where we had a fast start and a slow finish.

With that said, let me turn to Martin, who talks in terms of the things we initiated this year -- oh, I'm sorry, I've got Alan going first. Martin -- Alan, of course, the financial details, and what I wanted to say about Martin, we initiated a number of technology developments, we concluded a number and we advanced quite a few during 2005, and we want to talk to you about all of those and their future impact. First, on the financial side, go ahead, Alan.

Thank you, Joe. Good afternoon, everyone. For the year, our revenues were 55.2 million, represented a 10% year-over-year increase from the previous fiscal year, and as Joe indicated, our year-over-year increase was limited by a lower level of telecom activity in the second half of the fiscal year.

Our cost of sales were 37 million, yielding gross margin of 18.2 million or a rate of $0.33 as compared to $0.31 in fiscal '04. Note the favorable operating leverage that the $5 million increase in revenue generated 50% of additional profits that went through our operating profit.

Selling, general and administrative expenses were 11.7 million. This is 21% of revenue, which is approaching our target of 20%. And note this excludes the certain nonrecurring or infrequent expenses that we listed as our compensation charges on the press release. Those compensation charges relate to our principally non-cash adjustment to our deferred comp program based on some actuarial table updates, as well as certain expenses in connection with our real estate transaction that we'll address in a few moments.

Research and development spending was 6.8 million during the year, as compared to 5.2 million last year. And again, as Joe indicated, this reflects, again, an increase in our research and development activities, primarily in the second half of the year.

This yields an operating loss for the year of 1.3 million as compared to last year's $1.6 million loss. Note, however, that we generated operating profits earlier in the year on much higher revenue levels, which again demonstrates our operating leverage.

Interest and other income for the year was 8.4 million, and that includes the 6.9 million on the conversion of our REIT units to common shares and the subsequent sale of some of those shares. We elected to capitalize this year on the substantial appreciation in the value of those units, which occurred only in fiscal 2005.

We realized a pretax profit, then, of 7.1 million and a net income up 5 million or $0.58 per diluted share, as compared to $0.04 a share last year.

We continued to generate positive cash flow of $2.5 million from operations and we ended the year with $30.2 million in cash and marketable securities, and that's after a payment of 1.7 million in dividends this past year, as well as a paydown of our credit line that we had established last year.

Receivables were down by 2.3 million at the end of the year to 12.7 million compared to the prior year, primarily as a result of the lower level of sales that were experienced in the last half of the year. Inventory, on the other hand, increased by $1 million to 22.9 million, and for the first time, this increase represents some finished inventory that we were able to put in the warehouse to be able to respond to our former commitments to some of our major key customers. And again, for inventories guaranteed by the customers. Yes, thank you.

Also with respect to the balance sheet, you will note that our property, plant and equipment declined, as well as our long-term obligations. And the principal reasons for those is again related to the real estate transaction that occurred this past year that were kind of claimed at the balance sheet, so to speak, in that respect. Our backlog at the end of the year is $31.3 million, which is up modestly from where it was at the end of Q3.

I will entertain questions a little bit later on. Right now, I will turn it over to Martin.

Stockholders' equity -- do you want to address that? Good afternoon, ladies and gentlemen. I will just briefly go through what happened in 2005. They clearly outlined the points in the press release, and I will pretty much follow along, but you guys have your press release; you can make notes right on there.

Wireline, the major accomplishment that the loan development and test cycle which is routine for this type of product, we had the product being tested with RBOCs and we started contract negotiation with one major of our RBOCs providers, and this is for the US5G. We have also been successful in adopting the US5G, designated US5GE for European market, and got it accepted by a major service provider in Europe.

And we have introduced the UniSync product, which is a GPS-based synchronization system that will be used both by the RBOCs and other service providers, as well as some of the cable providers. And we intend to continue development additional equipment to supply in that market.

On the wireless, we finally got the 4-5G after three years of development and testing on this to get it accepted as a building block for the UMTS and WCDMA and TDSCDMA sales sites, which complements our rubidium products on this. It is a major breakthrough in getting quartz accepted for that application.

In space, we developed and qualified a family of frequency generators to cover a wide frequency range for both military and commercial satellites, and those -- the primary objective is to take advantage of the outsourcing of this type of equipment from space manufacturers to an industry trend which is progressing and offers us many opportunities. These are qualified, they are generic in nature, and we can supply them to many of the companies, and we have many outstanding proposals for that type of equipment right now.

Our highly precisioned C-band to L-band transponder for WAS (ph) has been renamed right now GCCS, has been completed and delivered and will be launched very shortly to supplement the GPS satellites for aircraft landing and for other critical positioning.

The Company was awarded various contracts from Alenia, Boeing, Lockheed Martin, Space Systems/Loral, Northrup Grumman in the U.S., Air Force and others. Industrial, the disability (ph) models of the high-energy clock went through all qualification. We delivered our units to our customer and we just were notified yesterday that they're working very well and they have started testing of those clocks in their test holds and will go into actual drilling holds before the end of this year.

Versions of the 405 quartz clock, which has excellent long-term and short-term stability, were provided for a variety of applications in addition to the wireless, and the acceptance has been very gratifying. Another development which we are building on progressively is the delivering of various software-based control systems and associated hardware, and this is primarily a product of FEI-Gillam.

On the military, major advancements were achieved in low-G sensitivity technology, and a lot of research and development went into those products. As a result of that, the Company was awarded contracts for preproduction units for JSF, the Joint Strike Fighter, the C130 and airborne radar for UAVs and manned aircraft. We have also received a contract to develop the low-G rubidium combination technology for the upgrade of the F-15.

We have also finished development and demonstrated and gone through qualification testing of the rugged family of rubidium clocks, which maintain their accuracy during severe environments in contact with missiles, helicopters and UAVs and manned aircraft. They work in conjunction with the low-G sensitivity clock to provide both great accuracy and low noise on the vibratory environments.

The development was completed that we started about 3.5 years ago on the rubidium-based timing system for the advanced EHF satellite, and the first flight unit went through all of the testing and accepted by the customer at the end of April, beginning of May of this year. The Company was awarded the $1.8 million contract for low-G sensitivity clocks for missile applications. We received in excess of a $1 million contract to develop and deliver our frequency reference generator for the end posts, the National Polar-Orbiting Operational Environmental Satellite System, and we received a $2 million contract from a Canadian firm for the data collection, storage and transmission satellite system that is being developed by Canada.

The Company, as we previously reported, also, based on its research and its performance of rubidium clocks on both the Millstein (ph) space and the qualification of the advanced EHF, a $3 million contract to develop atomic clocks for use in the next-generation GPS satellite systems. Most of those products took enormous amount of engineering effort, and I am very gratified for the effort of the whole team to be able to support our production and at the same time develop this product and advance into the next stage to give us the opportunity to capture a larger share of the market.

I would also like to comment in general on business, is that booking for the first month was in excess of $10 million, which is about 35% higher than the year before, and what's also gratifying is that the mix has been changed. It is primarily for military application on this, and the present view is that military business will present a more profitable and a more predictable business than the wireless, which is jumping up and down with unpredictable quantities. We know they will eventually buy it, and unfortunately, we got them to guarantee our inventory, but the changes from month to month is very frustrating.

With that said, thank you, Martin and Alan. We turn to you all now with Q&A. Dixie, you want to introduce that for us?

(Operator Instructions). Hardin Bethea.

A couple of questions, the first one related to the comp charge. Alan, if you could describe that a little more fully, and what portion of that was related to the real estate transaction?

The realty transaction, as I indicated, was $6.9 million, and that is contracted and mandated by an employment contract. There was about a 6% charge; it was $416,000 was for incentive compensation. Because it's compensation, it had to go above the operating profit line, so that was the one component of it.

The other element of it was using updated life expectancy tables. We had to accrue an additional $327,000 to get our liability up to snuff, because people basically are living longer. The last item was related to litigation over at Zoom (ph) related to an employee under the restructuring issue that they had last year.

Okay, and that was the balance?

Yes.

So I just wanted to make sure I got it -- the incentive portion of the charge was 16,000?

416.

416?

Yes.

Can you--?

6%, roughly, of the gain.

And who did that go to?

Well, it hasn't been distributed yet. I don't know if we've made that decision, how it's -- the actual allocation is going to people in the Company.

And could you -- I can follow up with some other questions on that. I guess the second question was, there was a comp charge in the last year as well. How does that differ?

Well, last year is a different flavor. Last year, the largest portion of that was related to the restructuring charge that we took in the French subsidiary that we had shut down, so that was the biggest single component, and then there was also a stock bonus last year that was the other piece of it.

I wondered if you can help me. As I look at the fourth-quarter results, I think what jumps out is commercial communications for the quarter was actually down again sequentially. And I guess what kind of -- you talk about bookings being up, but that is heavily weighted towards the military side or government side. What increased visibility do you have on the commercial side relative to either the timing of things picking back up or the pace of bookings?

This is Martin Bloch. I will take that question on this. We do not have great visibility except the projection of our customers, and they said that business is going to be up. And we have purchase order in place, but we don't know when we're going to be able to ship them, and the only thing we could do is to make them guarantee the inventory.

So they still maintain that business is up and it is going to be used, but we can't predict when it is going to happen on this. There is no question that business is not going away and it is going to be a significant portion of our future business. It is just almost impossible to predict on how they would happen. If you were here, I would show you a chart that on a weekly basis that we get the request the number of systems that we ship vary from 500 to less than 100. I do not know if there has ever been zero on a week, but occasionally that could be zero. So the fluctuations are very frustrating, but we are confident that they are going to get used up.

Do you think we have stabilized at this level, or do you think there is additional, I guess, weakness on the commercial side?

I think we are probably -- we are at the bottom, from what we see on this side and with the opportunities which they tell us is in a -- in their obstacling (ph) gives them a rollout in Japan for more capacity and higher bandwidth, the rollout in China, which can be delayed or accelerated. Nobody exactly knows; it changes from month to month. And the rollout in India, which is a part of their hope for them for the next expansion of this area. From our present view is that we have reached bottom on those areas and it can expand considerably by orders of magnitude.

Okay, that is helpful. Maybe Alan, you could discuss a little bit the gross margin change. Sequentially, revenues were actually up a little bit, and the gross margin was down about 400 basis points, so I'm trying to gain a little bit of insight into the mix?

Well, that really is the issue is it's just the nature of the mix of the sales that occurred. Also, it all depends on how good the performance is in any one particular quarter on some of these major programs. Occasionally, we will run into some test results that have to go back and redo a few things that we did not anticipate initially, so the cost may be a little higher in one quarter than they were in the previous quarter. So there is going to the some fluctuation and variability in that nature.

The year to year, Hardin, the gross margin up from 31 to 33%.

But that's for the full year, actually, on a quarterly basis, actually, yes, the margin is up as well, but on a much lower revenue number.

(MULTIPLE SPEAKERS) number and as I say, some fluctuations depend on the mix (MULTIPLE SPEAKERS)

With our type of business, it is very difficult to model it on a quarter to quarter, and our goal is to produce growth on a year-to-year basis.

To that point, and then I will step back in line, if others want to --

Okay, thank you.

No, one final question, the revenue commentary for 2006 seems to be looking higher. Can you kind of walk through the puts and takes of that?

On why we expect the revenue to be up?

Yes.

Okay. Well, if you had the opportunity to read the press release on just what we have accomplished in 2005 with all this research and development and providing of the prototypes, is we expect some of these programs to mature in later part of 2006. We also are very encouraged by the early increase in bookings that we had the first two months of this year. Our bookings on a year-to-year basis for the same period is up by almost 35%. And like I mentioned before, the bookings were -- the mix was more in the military than in the wireless in the first contracts.

What does that mean for profitability? Because you showed a $5 million increase in year-over-year revenues in 2005, so when you back out the kind of nonrecurring items, including the gain, as well as the comp charge, earnings were slightly up, so--.

Well, I think Alan indicated to you that the incremental earnings were up. When we went from 50 to 55 million, gross margin went to -- from an average of 33% to around 47% -- or 51%, pardon me. And we expect that with increase in volume that our gross margins on an annualized basis will go up considerably.

I guess what still inhibits that gross margin leverage from getting to the bottom line is creeping costs and SG&A and R&D. So the gross margin leverage is really positive, but it's not operating margin leverage. So what are you going to do to better slow that incremental profitability to the bottom line?

Well, Hardin, I think -- we're not satisfied at being a 50, $55 million corporation with investors -- a certain infrastructure to move forward on this point. And any incremental in sales that we increase past that time, a lot of the expenses they fix and the margins go up significantly. So the goal of all of us over here is to increase sales and the profit will automatically follow, and at the same time not neglect the development of new product to be able to continue on.

We know here from your own notes, Martin, that because we're looking at government revenues particularly increasing, there's a lot of customer-funded R&D that will come to us this year, which will also help in that development piece.

Okay, I will step back in line.

Thanks.

Buddy Howard.

Hi, guys, can you hear me okay? A couple of questions for Alan, I guess, first, following up on one of the earlier questions. The compensation charges, how much of those will be recurring? Are those nonrecurring or will those be -- how much of those would be recurring?

At this point, I expect none of those to recur. They are one-time situations.

All three.

The 6.9 million -- in the press release, it said 6.5. Is that a difference in a net number versus a gross, or what is the difference in those two?

Yes, it says net of expenses, and the expense we're referring to is the $400,000 comp charge that we mentioned before.

Okay, I see. All right. The other assets, Alan, also I just noticed went up to 12.1 million from about 9.7. Do you know what would be included in that?

Deferred taxes is probably the biggest component of that -- nonrecurring deferred taxes and it has some relationship to the transaction that occurred.

Any stock buyback activity?

We did some stock buyback in April before the end of the fiscal year, a nominal amount, about 6000 share or something like that.

And this is probably Joe or Martin, in terms of your customers, where are we in the -- at what stage are they in the process of upgrading to full 3G capability in terms of percentage? Are we at 10% at this stage? Are we at 40%? Can you give some light on that?

You probably can read their projections as well as I can, and I can just paraphrase what I read. I think at this moment that 3G worldwide is about at 10 to 15% implemented, and how fast it's going to be implemented worldwide is the unknown factor.

With Verizon saying they are going to have half the U.S. -- offering 3G to half of the U.S. by the end of the year and that sort of thing, to me it just would almost seem like there has been more of the investment that has already taken place. Do you think that the percentages is really still that low today?

Worldwide, that's what they project. That is quite low. If you eliminate the U.S. and Japan on this, the implementation worldwide is quite limited.

China -- can you kind of give us an update on how things look there?

I'm glad you asked that question. You probably read all the press release that have come out, that a big fight is going on in China. Do they go to 3G now, or do they just implement partially and wait for their homegrown TDSCDMA system. At this point it is in a great flux. What we hear from our customers is that there should be better visibility before the end of the year on this. Their present view is that they are going to implement 25% 3G and the rest of it will be implemented on other type of systems. They're not going to go all the way with the 3G implementation throughout China. But you know, that can change tomorrow.

Okay, good. One last question. On the revenue or the feasibility models for the deep drilling, you do not derive any revenues from these feasibility models, do you?

Well, yes, sure, they pay for the development and the plate for the hardware, and because they went through qualification testing and they want to maintain the legacy that we don't supply to their competitors, they have to order additional models this year.

What were the revenues that you booked on that?

Actually, the total development was like 1.2 million, the development and the delivery of these models, and I think we shipped about, what, one million of this out?

Less than a million this year.

And they're still a little bit less to build them than when we send some aging report on here. And we will book some new revenues this year, but the basic idea is for them to start using these in the field and getting a feel of how many they're going to need.

So it will be several quarters before that really ramps up?

That is for sure.

Morgan Frank.

Hey guys. I just have one quick clarification. When you talk about this year with regard to drilling, is that fiscal year or calendar year?

We always talk about fiscal year.

Next question, can you tell us what the bookings were for the quarter?

Well, we have only two months on this point, and they were 10-plus million.

No, I meant for the April quarter?

The last quarter, you mean.

I just want to validate it. About 12 million for the last quarter. That is an approximate number.

Just as long as we're in the ballpark. Also, just kind of trying to back things out from the yearly numbers. It got a little tricky to figure out what the Gillam revenue was -- Gillam segment revenue was for the quarter and how to balance that with the inner Company. Can you just tell me what the Gillam segment revenue was for the quarter?

Well, you want third-party sales, I presume. It was about 2.5 million was their sales for the quarter.

Okay, and the balance of that would be in your Company.

Yes.

Great. And then when do you expect the US5G to start becoming a revenue-generating product? How much more qualification is there and when will people start buying?

Well, that is a very good question. I wish I could give you a definite answer. We have done our part by getting the equipment through the hoops of qualification and get it in to be tested inside an RBOCs, one of the major four RBOCs, and we started contract negotiations. When they're going to buy is something that we have no visibility on projections. All I can tell you is they must buy and they will need it, and there is a large potential market estimated someplace in excess of $700 million. But when the question is when they are going to break out is hard for me to predict. We have no visibility at this time.

Okay. Last question is on cost going forward. On some of your recent calls, you've talked about SG&A and R&D levels dropping somewhat going forward. Do you still feel comfortable with that guidance, or -- I know there was a pretty good tickup this quarter, so I wanted to see what you felt about costs over the next several--?

Again, it is a sort of a relative number here, and especially with respect to SG&A. We talk about our target being at 20% of sales. So as sales increase, we should see that ratio approach our target. However, if there is continued softness for the first half of the year, I would not be surprised to see the ratio be in excess of 20% because, as Martin indicated, we are geared to be a higher-volume business here at this point.

Sure. I'm just saying in real terms over the next couple of quarters, taking out the -- you're taking out these compensation charges. Just looking at SG&A, do you expect that to be in real terms up, down or sideways for the next quarter or two?

I would say flat; it may be down slightly.

Great. That takes care of me. Thanks, guys.

Michael Lamari (ph).

Hello, guys. You end up with really a good quarter, a promising quarter, to say the least. At any rate, most of my questions were answered, actually, but I would like to ask you if you have still more of that -- the real estate investment?

Do we have any more left?

Yes.

Yes.

Because the stock is up 33, 34 points.

We actually sold some in May, so there will be some other modest gains to recognize in the Q1, and we still have some shares left.

Okay. And I participated in the program very late. I would like to find out if you mentioned anything about the general backlog that you have at 30 or 40 million?

Yes, there was 31 million we indicated, as of the end of April, I should say.

31 million.

31 million at the end of April.

Thank you and good luck, guys.

Thank you.

Michael Coady.

Thanks. Good afternoon, gentlemen. I also got on the call a little bit late.

Michael, let me ask who are you with?

B. Riley.

And where are you?

In L.A.

In L.A. Thank you.

Sure. You've talked a lot about the government and the military side of the business, and I'm wondering --

Could you speak up, Michael?

Yes. You have talked a lot about the government and military side of the business, and I'm wondering what you see as the market opportunity on the wireline synchronization side and what kind of progress you're making in that market domestically?

On the wireline or wireless?

Wireline.

On the wireline, well, the major breakthrough that we have done is we developed the US5G, which is a major building block for the wireline, and we are addressing a market of someplace in excess of $700 million at the RBOCs and primarily the RBOCs that the other service providers have to implement. And having gone through the hoops and qualifications and having a unit that is being tested by a major RBOCs in their facility and that we have started contract negotiation is the progress that we have made in this year.

Okay, and will this target primarily RBOCs, as you said, or will you also target the smaller carriers with this?

Both. We're going to target initially the RBOCs, because that's the largest portion of the market, and we have introduced a piece of equipment, the UniSync, which will target the other ones as well, and we have adopted the US5G for the European market and have gotten it accepted by one major service provider.

Okay, great. And could you talk about the competitive landscape on the wireline side, if you are seeing -- I mean, obviously you see Symmetricom. Are you seeing more of Emrise through their acquisition of Larus?

Larus? I did not know they purchased Larus. No. When? Symmetricom did not purchase --

No, Emrise.

Who? They're not a major player in this area with a -- competing in this marketplace.

So you think it is pretty much a two-horse race with you and Symmetricom, or--?

It is a two-horse race, and our objective is to capture as much market share as we did on the wireless. We started with introducing the equipment five years ago, and they had 100% of the market, and now we have a good portion of it. And our game plan is the same; it is to capture a good portion of the market of the wireline.

Okay, and how would the US5G compete or compare on price to Symmetricom's?

It is very competitive on this sense. We believe that our equipment is much more user-friendly and has a lot more advanced features. Remember, this is equipment that was developed -- it's the latest piece of equipment introduced, while the Symmetricom equipment is a couple of years old.

Now, Symmetricom recently announced that they won an RFI with SBC and Sprint and another unnamed carrier. Were you a little bit late with the US5G for that, or is there still any opportunity to be involved in that?

There is still opportunity to be involved in it.

Great. Just to switch gears a little bit to talk about the opportunity for you in the next-generation GPS satellites. You said that you are working on a development now? I'm sorry, I missed what you said.

We are under contract to develop a rubidium clock for the next-generation GPS satellites, and as you probably know, the next-generation, they will require someplace around 120 atomic clocks. And we want to capture a portion of that market. The aim of the airports is to establish two sources of supply for that precision clock.

For the cesium?

The cesium, they don't really specify that if it is cesium, rubidium or hydrogen masa (ph), they just want the clock to meet their specification, and all of the three technologies would meet that.

Okay. All right, thank you very much.

You are welcome.

(Operator Instructions). Hardin Bethea.

Maybe Martin, you can talk about some of the timing and market opportunity for the number of different milestones you reached during the past year and how many of those could impact fiscal '06, or in what time period they likely will potentially impact your results?

Okay, I can address it slightly in the order. I see more of a supply of the 405A precision quartz patented clocks for various applications in addition to wireless. And the next area which is -- which will be under contract, not necessarily -- probably not shipped in this year, but contracted this year, is the generic frequency generators for satellite systems. The satellite needs to be upgraded, and contracts are being awarded. Significantly more satellites will be procured this year and next year, and we expect to win a good portion of those frequency generators on this. But as you probably know, satellite hardware has a year to 18-month cycle. But I expect that we are going to win that.

And the next area where I see a significant increase is the low-G sensitivity for various applications. On this, we have prototyped lots of applications, and more and more uses are seeing the advantage of the improvement of effect of 100 to 1 in reduction of noise and in navigation, in precision radar and in secure communications. So those are the areas that I see.

And what we hear from our customers is there should be some increase in the wireless rollout. But again, it is difficult for us to predict on how it is going to happen. If you have seen the projection of the major equipment providers, they still project that there is going to be a 15% increase in calendar of 2005 in this wireless business, although we have so far witnessed a 33% reduction.

So within fiscal year '06, maybe the towards the end of the year, the deep hole clock could show some revenue-generating capability. I guess there is the potential for wireline US5G.

And the military products and the satellites.

So these are incremental to the fiscal year just ended. Is that right? All of those programs?

You are absolutely correct.

And then I think, Martin, you said -- or maybe it was Joe -- the wireless customer base, at least from bookings you are seeing now, might indicate a stronger second half of your fiscal year.

That's correct. That's what they are projecting, Hardin. That is what I said on this. They are projecting that they will have a stronger second half. We have not seen it.

But in terms of your fiscal year, how would that play out? I mean, because (MULTIPLE SPEAKERS)

Well, if they come close to their projections, we should get a significant uptick in those products. They have faced that they are going to have an uptick is that, you know, they guarantee their inventory, which they never did. They wanted to make sure that we had the capability to respond to bursts.

Fair enough. Thanks.

If there are no other further questions, I will now turn the conference back to General Franklin. Please go ahead.

(technical difficulty) Your comments were aimed at, well, can you make an operating profit and so forth. At $10 million quarters, we're not structured to make an operating profit. What we are aiming to do is build our value by creating the advanced technology, because this is what enhances the performance of the critical systems that both our commercial and our government customers need.

We compete at the highest levels there, and as we grow, these lumpy quarters are going to start to smooth out a little bit. Where we are today, as I have said before, is -- it is going to be a slow first part of the year. That is pretty clear to us. But it is also quite evident that we're going to see a ramp-up in the second half of the year, and this is going to result in an incremental increase in our sales.

As I said, we expect the profits to grow, the operating profit as well as our revenues next year. And we look forward to talking to you at the end of September, when our first quarter comes in, which again, I want to emphasize to everybody, is not going to suddenly see a ramp-up unless these major customers are going to accelerate what they have told us they want in the second half of 2006, fiscal 2006.

And Martin mentioned the numbers. They will come in, and we do this week by week, there will be a 500-unit order and then we're down to zero practically in the following week. We see that smoothing out as the Company grows, and that is our intent, to make this Company -- it is not a $50 million company -- we're moving up in the scales and we will see that move again in fiscal 2006.

Thank you all for your time, and also I thank you for your prayers and your blessings for our soldiers in the field. They are doing a job that allows all of us to enjoy the freedom to sit here and talk about these things, which in the long run are important to all of us, but at this moment, not the top priority for our country. Thank you, folks, and our blessings to you, and we will see you in September.

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