Frequency Electronics Inc (FEIM) 2007 Q4 法說會逐字稿

Good day and welcome, everyone, to today's Frequency Electronics earnings call. Today's call 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 those forward-looking statements.

Factors that would cause or contribute to such differences are included in the Company's press release and are further detailed in the Company's periodic reports filed with the Securities and Exchange Commission. By making these forward-looking statements, the Company undertakes no obligation to update these statements for revision or change after the date of this conference call.

For opening remarks and introductions, I will now turn the conference over to General Joseph P. Franklin. Please go ahead, sir.

Thank you, Millicent and good morning, everyone. We're very pleased to have you with us this morning and looking forward to hearing your questions after we can run through for you what is going on at Frequency Electronics.

First of all, it is a beautiful day in New York and we wish the same for you folks. I am joined by Martin Bloch, our President and Chief Executive Officer and Alan Miller, our Chief Financial Officer. They will be doing the majority of the presentation.

I'd simply like to introduce this by saying, as we have noted in the press release and I assume all of you have it in hand, that we made some significant investments over the last several weeks and months and they are all associated with expanding our capabilities. We are looking at the satellite business. That now comprises over 50% of our backlog and we expect that to be our largest business area in this coming year. This is something that we have been looking at for some time and we anticipate that space business is again going to be one of Frequency Electronics' major business areas going forward.

At this moment, I would like to say for all of us that we look at Frequency Electronics today as having gotten to the threshold. There is work to be done, but we are going forward and looking at a very, very positive future.

Let me turn now to Alan Miller for our financials and then Martin will follow him with the details. Go ahead, Alan.

Thank you, Joe and good morning, everyone. For fiscal year 2007, revenues were $56.2 million compared to $52.8 million in the year-ago period. This modest revenue improvement was led by year-over-year increases in Telecommunication Infrastructure and Satellite Payloads programs while revenues from our non-US, non-space US government programs, principally from our FEI-Zyfer segment, were lower than the year-ago period.

For the quarter, revenues were $15.5 million, up from the $12.1 million in the preceding quarter of Q3 and as noted by Joe in the press release that based on our current backlog and anticipated bookings, we see this higher revenue rate continuing through the first quarter 2008, which is almost over, and increasing during the balance of this fiscal year.

Cost of sales for fiscal 2007 were $39.1 million compared to $34.2 million in the year-ago period yielding gross margin of $17.1 million in 2007 compared to $18.6 million a year ago. That is a gross margin rate of 30% compared to 35% last year. But as we have highlighted in previous calls, as well as in the press releases, our higher engineering costs on our major satellite programs have kept margins at this level. Our target for fiscal year 2008 is to achieve gross margins between 35% and 38% as you realize the benefits from these investments that we have made and as we continue to expand our capabilities.

Selling, general and administrative expenses for the year were $11.4 million compared to $10.6 million in the year-ago and as a percentage of revenues, our FY '07 expenses are in line with fiscal 2006 at approximately 20% of revenues, which is close to our target of getting under 20%. And as we have repeated in previous calls, during fiscal 2007, Frequency began expensing stock-based compensation under the new requirements and during this fiscal year, $559,000 was expended. About half and half goes to cost of sales and the other half goes to SG&A.

Research and development spending for the year was $9.4 million, up from $6.3 million a year ago by 50% as more resources were committed to Satellite Payload projects and making additional investments to increase our production capacity on a very cost effective basis. In fiscal 2008, we anticipate that the gross dollars, the absolute dollars will be lower and as the revenues increase, it would be much less as a percentage of those revenues.

The result for fiscal 2007 was an operating loss of $3.7 million compared to $1.7 million of operating profit in the year-ago period as the higher engineering costs and additional R&D spending yielded a lower operating result.

Other income for the 2007 year was $1.9 million compared to $4.9 million in the year-ago period and in the year-ago, you may recall that we had some substantial real estate-related transactions that inflated that revenue (inaudible) that source from last year.

Our net loss for the year of 2007 was $257,000 compared to $4.8 million net income and that is $0.03 a share loss versus $0.55 on a diluted basis and just a brief comment on the tax, you note that it is very high rate compared to the operating loss (inaudible) because of the benefits to be achieved from the operating loss carryforwards and the research and development tax credits that are unused for the current year.

For fiscal 2007, Frequency reports cash used in operations of $6.6 million. This is due to the additional operating costs, as well as the $8 million increase in inventory. As we have indicated in the press release, we have increased inventory in certain areas. For example, in the HI-REL area, we have obtained a higher level of parts inventory. It is much more economical to acquire them in larger lots because of the expanding cost and things of that nature and it also enables us then to have a better response time for the customers when they place their orders with us. So we have consciously built up some of the inventory in that area.

Also in the wireless area, our customers have required us to build up an inventory so we can be responsive to their peak demands and therefore they have also guaranteed that inventory for us. And in the wireline area, particularly with our new US5G product, we must meet the expected demand so we have opportunities coming forward, as Martin will talk about a little bit later on, in the wireline telecommunications area so we have built up an inventory to be responsive to anticipated orders in that area as well.

Finally, as far as backlog is concerned, it is just shy of $45 million as of the end of April and that is up about 22% from the year-ago period. I will now turn the call over to Martin.

Good morning, everyone. I would like to address three areas; problem solutions for 2007, markets and the way forward. And the major problems that we face and I am happy to say that we overcame is the transition that the Company had to make from being able to ship six to seven microwave frequency generators per year to achieving a rate of 10 per month.

This was a much more difficult task than anticipated and it required to invest in R&D so it can be -- the systems can be more producible, as well as training of individuals and additional resources in both automatic test equipment and our personnel in order to meet the larger business demand. I am happy to say that we have accomplished this task and as one of our major programs, we have delivered all of the units except one and the last one is shipping this Friday and it also started shipping on three other satellite programs.

When it comes to market and that hasn't changed, our primary markets are Satellite, military and Telecom Infrastructure. In the Satellite markets, as we have expressed many times in the past, we have a unique opportunity that has been created because FEI made significant investment over the years because it takes a long time to enter this market in establishing our flight worthiness of equipment that can be used in the microwave frequency generators.

So in addition to the basic clock, which has been our main business in satellite, we can supply the additional assets and this basically goes from $500,000 to $1 million per satellite to anywhere from $7 million to $10 million per satellite. And this is a long entry and it takes time and you have to prove that you have qualified assets flying before you are allowed to play in that game and this facilitates us to capture our fourth satellite program in this area and that opportunity is continuing. The best assessment on the street is that the US over the next 10 years will build some place around 200 plus military satellites and 200 plus military satellites.

Commercial.

Commercial satellites. Sorry. And the commercial satellites come from two areas. One is to replace assets that have aged in space and the second is new services that are anticipated to be provided such as [ICore], [Terrastar], [MSV] and others, which will enhance the communications and emergency communications for commercial use with (inaudible).

We have set up a business plan based on -- best average is about 40 satellites a year. We built our business plan on a minimum of 20 satellites and our target is to capture 20% of that marketplace and this is in clocks, as well as microwave frequency sources and while we are very hard in trying to qualify and capture the third pedestal of that market, which is up/down converters. And we have been very successful and we have lots of outstanding proposals in that area and we expect that this will represent more than 50% of FEI's business in New York.

With respect to the military market, that has been a little bit flat and in some respects, moved to the right as primarily exemplified by FEI-Zyfer business and they were -- many of their programs that they were counting on, they didn't lose; they just moved to the right. But it is still a very exciting potential with many of the programs that are offered to us and our primary play in that area is that FEI-Zyfer with their SAASM and GPS technology, FEI in New York with their low GM, high stability and low phase noise technology, which has been the need for next-generation of communication navigation payload delivery and interagency operability and we expect that that market is to grow in the next couple of years.

The third triad of our business is Telecom Infrastructure and I want to divide it into two areas. The wireless business, although it was flat for the industry, we have been very successful in capturing more marketshare and we continue to do it by the new products that we introduce and the patented FE-405A, 505A, the whole family that offers ideal solutions for the larger number of base stations that is required, which require very good timing, but require less power and a more economical clock in this area. As an example of that is our potential markets of WiMAX that is being explored and we are actually doing testing of this market right now.

The second part of the market is the service providers, which is basically the US5G and the US5Ge. The US5G is (inaudible) primarily for the American market and the US5Ge is for the rest of the European and the rest of the world on this. We have invested a lot of effort in this area and we have booked very little in that area. However, we have achieved some significant milestones.

One is we have booked and delivered over 20 systems in Europe for a major -- for a major railroad system integration and they are performing exceptionally well and we have gone through most of the qualification steps and we have actual equipment working in service providers right now in the United States. In our plans, we expect that we will be in a position to get significant business in the future.

One of the big advantages in the design of the US5G and US5Ge is that it is primarily -- we can configure it for both markets by software and this is a great advantage in both manufacturing costs and in the use of (inaudible) in both markets and we have quite a few proposals outstanding for that product.

Now the basic idea is looking what is the way forward and I see that our major difficulties in transitioning from this low-level specialty production with a few various, high-skilled individuals to be able to manufacture this product in larger quantity has been for the most part accomplished. We feel that there is a lot more opportunity than what we have won in that area and we will continue to do modest additional investments in this year in order to be ready for the expanding market.

On the satellite, we also are emphasizing to finish the development and implementing the third portion of the satellite market, which is the up/down transceivers and that again will add significant business opportunities in that area.

In the wireline, as I mentioned before, we expect that the US5G and derivative of the US5G will offer us a great opportunity both in the US and the European -- and the European market. We have demonstrated in that test that we can enter our markets like we did with rubidium against that and establish a supplier and capture a significant portion of the market and eventually actually become a dominant supplier and our plan is to do the same in the wireline.

In the wireless, as I indicated, the new technology of that poor man's rubidium or quartz that performed almost as good as the rubidium will enable us to continue to capture marketshare both in the United States and in the rest of the world.

Our one other area that we have invested is the transition that a lot of the manufacturing of our product well done will be done in the Tianjin facility and this is of course for our two primary reasons. First is to be able to be a cost-effective supplier for the largest growing market in China, which we have prototyped many of the equipment builders over there and they want their equipment to be manufactured in China.

And the second is even for the worldwide in order to be competitive and be able to offer our cost-effective solutions for our prime customers, their assembly and test over there is being done very effectively.

And the third, which is equally important, is that that enables us to use our present skills for, especially in New York, to extend and to go after the satellite market because that is the area that we see is the largest growth and this is something that cannot be exported outside of the country for both the commercial and military satellites and the military hardware opportunities must be built on the US soil.

With that, I would like to turn over to questions and answers.

(OPERATOR INSTRUCTIONS). Robert Lampert, RLR Capital.

Good morning, everyone. It seems like we are entering a new era. Would you say that this year, in our 2008, will be the best year that the Company has ever had?

I'm sorry. This is Joe Franklin. Could you repeat your name?

Robert Lampert.

Lampert? Okay. Where are you Robert?

I am in Voorhees, New Jersey.

Okay. Not far from us.

No.

The question I think should be directed to Martin. Go ahead.

Robert, there is no question from the present backlog and the bookings that we have and the outstanding proposals, it would be the best year for revenue that Frequency has had on this item and our emphasis is -- one is to significantly increase our revenue and then of course to put everything in place to maximize our target for gross margins.

As -- Alan, I don't know if you mentioned on this or not, but basically our gross margin in 2007 was 30% overall. Our target for 2008 is 35% to 38% and this -- our model is that in the $60 million -- $60 million in revenue and our target has a maximum potential of 40% and as we increase to the $100 million, our gross margin has opportunities for very significant (inaudible) and that is the game plan -- to do what we can to increase the revenue and with the infrastructure being about fixed, the standard gross margins will significantly grow.

And one other -- I know that we are actively pursuing the China market, but are we also doing anything in India?

Well, India by themselves -- this is Martin again -- India by themselves doesn't have an infrastructure that we have been able to identify. It is usually done by suppliers that we presently do business with, which is primarily Motorola, Lucent, this Lucent-Alcatel in this area and some of the Chinese equipment manufacturers are trying to break into that market. So we are playing in that market by supporting this equipment manufacturer.

Well, thank you. Congratulations. It sounds like we are on the right road.

Thank you very much, Robert.

Thank you, Robert.

[Robert Smith], Centers for Performance.

Hi.

Robert, go ahead. Where are you, Robert?

Well, I am a home-based in New York. I am enjoying Maine at the moment.

Okay. How are the lobsters?

They are fantastic. The $45 million backlog, how does that compare with the last quarter because you have indicated that to watch the backlog for indications as to the opportunities?

The backlog at the end of the third quarter was $42 million, so it is up about $3 million. I should indicate that our book to bill in Q1 of fiscal 2008 is positive, so we expect to see that grow.

Okay. Martin just suggested -- he threw out two figures that $60 million, 40% gross margin optimum and then he mentioned $100 million, just saying that it would be very attractive. Do you have any kind of ballpark estimate of that level?

As soon as possible.

No, I mean the gross margin target at $100 million (inaudible)?

In the high 50s.

High 50s? Well, that is a dramatic possibility. Okay. The comment about the Satellite area being your largest segment in '08, would that be also true going forward beyond that?

Yes. And let me explain the basis of it. There is approximately, at this moment, some older publication and research on the street that over the next 10 years, the United States is going to build approximately 200 military satellites, as well as 200 commercial satellites. This averages out to be about 40 year on this side and our business plan is based on only 20 a year.

Now this is a decrease per satellite manufacturer that was in the heydays of the mid to the late '90s and then there was this dry spell that even went -- the satellites went down. Fortunately for us, that created the best opportunity for us to enter the market because our competition on the equipment that we are building is in-house as large satellite manufacturers and with a lower number of satellites, it becomes -- there are three factors that are driving our opportunity.

The number has dropped so it is very expensive for them to maintain their in-house capability to build this. Second of all is that the response time has been accelerated from 36 months from cradle to birth of a satellite to more like 18 months so there is a much faster response time that is necessary.

And third there are more players and it is more competitive so our cost is becoming a factor. So for all of those factors, if you happen to have the ticket, which means being in space and having demonstrated that you have reliable factors, assets flying, which takes by the way about five to six years at the best, so I am just -- that gives us a golden opportunity to pursue that type of business.

Okay. What is your opportunity in that area in Europe?

In Europe?

Yes.

Alright. Very small on this. The Europeans buy from the US when they have no other alternative. Otherwise they find every excuse on why the European manufacturer is cheaper. So we do supply some equipment to Europeans like we are building for example the clocks for the next global -- global satellite system for Alenia Alcatel and we are supplying some of the very high-performance clocks for their military assets that they are building -- their secure satellites. But in general they do their best to see, even if they have to compromise some performance, to buy European.

You indicated, I think, Joseph, that you are by and large beyond the excessive engineering -- incremental engineering costs that you had to absorb. Is that true? I mean are we going to see that appear in the first quarter on the absence of those?

Well, a small amount on this item. We are over the hump on this item and the proof is in the pudding. It isn't -- we have shipped -- we have shipped 10 satellites a month compared to seven satellites the previous year, alright? And --

Will you be in the black for the first quarter?

I have no idea on this item. Alan will model it on this -- involved on there.

Well, I mean you're -- (multiple speakers)

I want to emphasize again one basic principle. FEI's business cannot be modeled on a quarter-to-quarter basis the way business comes in and the way we ship and we bill on this.

Yes, but, Martin, you are two-thirds through that period.

I have not looked at it. Alan, I don't know --

We haven't measured it yet at this point in full because you have a lot of issues that you have to deal with to get a real good answer --

I can tell you one thing that our present view is we will definitely be in the black for the year.

Okay. Well, we want to see that top-line growth, but the bottom-line growth is really where I think the stock will perform from. So keep your eye on --

Well, what do you want? One or the other or both?

I want both, but primarily I would say watch that bottom line because everyone else is.

Okay.

Good luck to you guys.

I've got your input.

Thanks.

You know you're talking to the right guy when you talk to Martin Bloch, Robert, let me tell you.

Good luck going forward.

Okay.

Thank you, Robert.

Good input.

[Morgan Frank], Manchester Management.

Hi, guys. Just some housekeeping stuff. What were the revenues by segment for the quarter?

For the quarter?

They were only in the press release for the year and when I tried to back them out, they didn't add up correctly and that's why I am trying to figure that out.

(multiple speakers). For the quarter, the FEI-New York segment was 10.7. The Gillam-FEI was 3.9 and the FEI-Zyfer was 1.4. And that also included intercompany sales of 1.6 intersegment sales.

1.6?

Yes, intercompany and that is mostly Gillam selling to FEI-New York.

Got it. Okay. And what is backlog at this point?

Just under $45 million at the end of April.

Yes. Okay. So you are announcing your book to bill is positive. Thoughts on when the cash train stops?

When -- is that what you said?

Yes. I am wondering when -- I realize there's a lot of investment to make. At what point do you anticipate becoming cash flow positive?

I would say it will either be this quarter, early next. We certainly had some continuing drain early on in this quarter so we had to overcome that. And of course we did also have some positive cash coming in from our Morion investment. That is not operating cash flow. But it did help the top line there.

And then I guess -- see if there is anything else. No, I guess that takes care of me for the moment. Thanks very much.

Thank you, Morgan.

Thank you, Morgan. Good to hear from you.

Chris McDonald, Kennedy Capital.

Hi, guys. Good morning.

Hi, Chris. Where are you stationed?

We are in St. Louis.

Are you really?

Yes.

Do you know [George Erker]?

No.

He has been around in that business there for a long time.

Great. I had a question -- a couple of questions. One was on the wireline business. I think, Alan, you mention some of the inventory build was in anticipation of some business in the US as it relates to wireline. Could you just expand on that a little bit more?

Yes, this is Martin and I can expand on it. The wireline customers have made it clear to us that once they stop placing orders, they want to start shipments in 90 days and it takes approximately six months to build up equipment from scratch. In order to meet that challenge, we have built a certain amount of this equipment for inventory so we can respond to their demand. They made it clear to us that they are very intolerant if you don't start shipping within 90 days.

Okay. And these would be the large telecom companies?

Yes. We are talking about companies like AT&T, West British Telecom. All of the companies worldwide, they somehow have the same formula. We will drag you for years, but when we start needing them, we want to start shipments in 90 days.

Okay. And the equipment that we are talking about is primarily [think] equipment, is that right?

It is the US5G, which is fortunately that the same inventory can be used both for the European as well as the American market.

Okay. Excellent. Just a question as it relates to the satellite business. Could you -- you mentioned three large programs that you anticipate delivering on going forward. I don't know if you are in a position where you can give further detail on those programs specifically.

Well, I can tell you that our plan is to deliver on all of these programs in fiscal 2008.

And from a size standpoint, are they similar in size to --

They are similar in size to the previous programs we have announced.

Okay. So it is something on the order of maybe 25 to 30 frequency generators per program?

Yes.

So you would anticipate -- you talked about the 10 frequency generators per month production rate and the challenges getting there. Your outlook would be that that is pretty stable going forward for the next couple of quarters at least if it continues to deliver at that rate?

That is our plan.

Are there --

And by the way, because of the testing and aging and qualification that is required, it is not the linear at this point. We might be able to build that, but you might ship six in one month and 14 the other month. I am giving you an average rate.

Yes. Okay. I understand. In order to maintain that rate, are you in a position -- you talked about some outstanding proposals where you would need some large contract wins in the near future or do you feel like your visibility is pretty good there based on what you have booked already?

Well, we have bookings for fiscal 2008, but we will need for the future and this is where I am very happy to report that we have major proposals outstanding on decisions to be made in the next three to six months for additional satellites and we feel very good about winning a good portion of that.

Great. Has your emphasis been more on the military satellite market or has it been commercial or a good mix of both?

It is both because the commercial and military had some distinction. The commercial, generally, have more channels per satellite than the military. Although the future military are following more the commercial models than they -- they want more channels as well. But we are pursuing both commercial and military with the same vengeance.

Okay. Thanks for taking my question.

You are welcome.

Thank you, Chris.

(OPERATOR INSTRUCTIONS). Hardin Bethea, [IDEA Group].

Hi, guys. How are you?

Hi, Hardin.

Good to hear from you. Everything alright down there?

I'm sorry?

Everything alright in Florida?

Yes, everything is fantastic. Couldn't be doing better. Thanks for taking the call. I mean the questions. I guess I would like to hear more about, Alan, some of the things you walked through. If I try to put the pieces together, revenue at or above on a quarterly run rate, the one you just reported for fiscal '08, so somewhere between $60 million and $70 million just to discuss a range.

Your gross margin expectation seems a little conservative given where you have been in the past with that revenue level. And it seems to me that SG&A being relatively well contained as revenues grow and R&D on a dollar basis lower, there is a significant improvement in results expected for the year without being pointed -- pinpointed to a number. Can you -- one thing that moves around a lot that again has caused you some challenges on a quarter-to-quarter basis is the tax rate. So can you help me understand how that will shape up for the year?

Okay. I think we'll start with the top line there. As we have indicated I guess with the (inaudible) that we've had where at least we're going to get $60 million of revenues for the year and growing from there. So we'll hopefully get within that range that you specified there, the upper end I should say.

As far as the gross margin rate is concerned, we agree. Our target, as you know, has been to get to the 40% plus level when we start getting those higher levels of revenues. But as we have indicated in the discussion today, we are still expanding our capacity, so we expect that there will be some impact from that that will probably dampen the gross margins near term and hope to be able to achieve higher rates as we get further into the year and into fiscal 2009.

So, I mean from the April quarter you just reported, margins should improve sequentially based on that lessening of the engineering and R&D-related productivity improvement and cost.

There should be some improvement. As we have said before, quarter to quarter, it is kind of hard to measure it because things happen at these lower levels of sales. The dollars don't have to be all that big to have a hit percentagewise, but we do expect overall that we will see some good improvement year over year.

When you said the dollar -- on a dollar basis, R&D was going to be lower in '08 than '07, how much lower? I mean if it was 9.5 in '07, what should we look for in '08, back to the level that we saw in '06 or somewhere in between?

I would say somewhere in between. '06 was only six and change thereabouts. But as I indicated earlier, I think the level of spending was tailing off, but still some of that was at a little higher level in Q1. So it is not going to come down -- fall off a cliff or anything, but we do anticipate that, at this point of view where we stand right now that the couple million dollars lower in 2008 as compared to 2007. But things again if opportunities present themselves or challenges present themselves, they can spike up. That is our present view. It will probably be a couple million dollars lower. So that is someplace in between six and seven -- 2006, 2007.

Hardin, this is Martin. As you know, our basic formula is to bring IR&D, internally funded research and development, to approximately 10% of revenue. We are going to work very hard in 2008 to get to that number.

Okay. And that is kind of historically where it has been.

Yes.

With regards to inventories, and I guess we have seen it creep -- I mean continue to kind of grow over the course of '07 and while I understand that a large portion of the inventory balances is either guaranteed or contracted, it doesn't seem to be moving. So I guess how quickly is the inventory going to turn? I mean what does the cash cycle look like because I mean you have seen your cash balance shrink and now it is stuck at equipment. So how quickly are we going to turn that back to cash?

Hardin, let me comment from a technical point of view and then Alan can do it from an accounting point of view and let's take each of the areas. The US5G investment that we have, we expect some of it to turn into cash this year. We have potential and we will keep you guys informed as our successes are not so fond of noise in the system and lots of opportunities and we want to see how successful we are in capturing it.

The second area on the wireless -- that's a wildcard. And that is why we made sure that our customers basically guarantee the inventory because they project demand and peak demand, which we have very little control of and we said, okay, we want to be responsive, but you be responsible and they are responsible for a lot of the inventory. I know we have a little bit of carrying costs, but that is in the noise.

On the HI-REL, you are going to see a benefit as our quantity of shipments go up because we will use up some of this inventory or use that inventory to capture significant additional programs. But those are the areas from a technical point of view.

When it comes to proposal activity outstanding or proposals outstanding, can you give me an idea of what that would mean if you were to win the targeted share of the market you expect or that you are seeking? Like if you hit 20% of the proposals outstanding?

We should win approximately -- in the next six to nine months, all in fiscal 2008 -- someplace an additional four to five satellite programs.

Okay.

Any further questions, sir?

No, that is it. I will get back in the queue. Thanks.

Thank you, Hardin.

[Michael Wasserman], Moors &Cabot.

Hi, Mike.

Good morning. Good morning, Martin. How are you how? How are you, General? How are you?

Did it rain in Boston last night?

What's that?

Did it rain in Boston last night?

A little bit overnight, a little bit overnight.

It rained cats and dogs down here.

Weather has been pretty good for this area for a change. Martin, with regard to your comments about satellite launches over the next number of years, you suggested your business plan was 20 and you said you expect to capture 20% of that. So can I infer from that that you expect to be participating in four satellite launches per year with some componentry?

Our initial target was 20 and we are whetting our appetite to take more opportunity.

Right. But your 20% of the 20, is that correct?

That's correct.

Okay. Okay. Another question -- perhaps you can educate me a little bit. Back six, seven years ago roughly, one of the reasons the Company gave for not performing as strongly as was hoped was the delay and all sorts of problems with the 3G launch in the US. The years have gone by and it seems to me that the wireless concerns out there are fighting tooth and nail to improve their systems as rapidly as they can to meet the [fetching] needs of people like me who want faster access via BlackBerry or otherwise and better connectivity and all that stuff. Yet, we don't seem to be really going gung ho, gaining a lot of marketshare in terms of -- or producing the earnings as a result of that. Perhaps you can educate me on what has happened the last six, seven years and whether we are losing that business to competition or what is going on.

Okay, Mike. I guess you weren't on on my statement on this. As a matter of fact --

No, I heard the statements about 5G. I did hear the --

Hello? Can you hear me?

Yes, I hear you. I heard you about 5G.

Well, I can educate -- no, no, not on the 5G. On this wireless business, the business has been flat and all -- what we have been doing in the past couple of years is gain marketshare and that is why we have been able to maintain our sales approximately constant or slightly up for this year. So there was more business, but we captured more business.

With respect to the future potential, I can tell you the rhetoric because I have no way of judging it. If you are talking to the major equipment suppliers, they see a very bright future, but we have heard from them over and over again about the potential expansion in China and India and the expansion of systems like WiMAX and similar systems in the United States.

When this will materialize is -- I have no way of giving you any guidance. All I can tell you is we are participating very actively in prototyping their systems and supporting the equipment manufacturers so they can put those systems out in the field and really try the marketability of the system. So the potential are high. When it is going to happen -- I think a better question would be to ask this from Lucent, Motorola and Nortel and they might have a better reading on that area. To us, they express that it is going to happen very quickly.

Are you suggesting then that the Verizons and AT&Ts of the world are basically saying we don't really care much about US infrastructure improvements of our wireless capability despite the need to do so and customers clamoring for them to do so because if the market isn't expanding then the only inference I can draw is that they are not doing anything about it?

Well, basically if you are a user, you know how many times you lose conductivity and how many times you lose a call on this, but since the consumer is not complaining hard enough, they are doing it very slowly on this. Now the new systems are the ones that are really pushing the market and if those new systems get recognition, that is when the expansion is going to happen. So a WiMAX approach, if this works, will produce wireless at very fantastic type of bandwidth. You will be able to do everything you want to do throughout the major cities in the United States. So people are trying to do that and if, let's say, a WiMAX system goes, you are going to need a half a million base stations just in the US in order to cover it.

Will it go? I haven't got the vaguest idea. Since we did not take a chance on this, we are supporting it very hard and make sure that we are supplying the clocks for this visibility test programs that are now in process and China is again -- it is a wildcard. We have lots of promises, but very little booking. So all we could do is prototype all the equipment manufacturers there and hoping that their promises are going to be turned into reality.

Last question. Alan, what is the -- you may have mentioned this, but what is the cash balance at the end of the quarter?

It was, including marketable securities, around $15.4 million.

$15.4 million?

Yes.

Okay. Thank you, gentlemen.

Thank you, Mike.

Keep well.

Robert Smith.

This is a little early, but looking out, if there is a change in administration, what kind of policy do you think might arise toward the satellite program.

Okay. This isn't Fox News you know.

Pardon?

We are not Fox News here, but I don't know. We are not listening to the President because we are having this conference call, but I don't think it will affect the commercial satellite.

Well, no, not the commercial; I am talking about the military.

On the military satellite, I don't think it will affect the military satellites either because these are not satellites that are being launched for the -- wishful for any administration. I can give you an example. On the GPS system, they need to update with GPS 3 on this and that is for example approximately 40 to 60 satellites that we need for the coverage and all of us have gotten married to that system. I don't think we can live without it and the military definitely cannot live without it. So independent of Democrats or Republicans, a system like this is -- I think close to one billion worldwide users will have to be supported and implemented and updated.

The other area of secure communication and surveillance are becoming more intense in wider areas. So my own personal belief is that independent of the administration, the assets that we will need in the future will have to be funded. They might be pushed a little bit to the right depending on the priorities established, but I don't think we can do without them and live in reasonable security and knowledge in the future.

I guess with the new administration, there would be a push to the left, though. That is a touch of humor.

Well, either to the left or to the right.

Robert, I don't think you can equate the '90s -- the 1990s to the 1930s when we cut up our battleships and sank them and so forth way back under the (inaudible) and so forth. In the '90s, the Cold War was over; things were going down. There is a brand new and as yet very difficult to define threat and that is not going to cause any administration, no matter where they are, right or left, to say, well, there is no need for us to protect ourselves anymore.

Well, are you alluding to China or Homeland Security basically?

Homeland Security. Personal viewpoint -- China is winning their battle right now and it is all commercial. They would be idiotic --

It would be idiotic to start any military action. Why do it when you can do it with love; why do it with anger?

Thank you.

You have got some great wisdom there, Robert. Thanks for asking the questions.

Dr. Lampert.

This is not a question. The other gentleman that was talking about the 3G, I don't know if all of you were aware, I'm sure you were, that the new iPhone had to be in an operating system called EDGE. Even though it is slow, they would rather have used the 3G, but AT&T wasn't ready with the 3G yet and that is why the iPhone had to settle for a slower system using EDGE and most smart people know if they are going to buy an iPhone, they are going to wait four to six months before they buy it since the 3G system is supposed to be much better in about six months. Now of course that is some speculation, but I just thought I'd share that.

That's a very good comment on this and as you have probably known, this is about two years behind the initial hype of the 3G system being implemented. So it has been a slow rollout.

Right. Well, one of the companies that I am very fond of is a company called InterDigital who is working with Infineon and they have made chips and stuff for 3G that is supposed to now really get going and they are also working with Cingular. So I am hoping that that really materializes because that could be a good thing all around.

Yes, and that would be good for Frequency Electronics. So we are all waiting -- I know it is going to come. The question is how much and how fast.

The other comment -- I do -- I know a lot of times, most of the contracts you get are with certainly large companies and it is hard for you to talk about it, but I would love to see you put out some more announcements if you can.

We are as one extreme of the scale compared to some of our quasi competitors that put a press release every time somebody goes to the bathroom and we will try to do a better job.

Thank you.

Hardin Bethea.

Hi. The question goes back to how investors are going to best be able to judge the success of the activities you have undertaken in the last couple of quarters that have significantly dampened results. And so I mean I would hope that, Martin, you and Alan and Joe would provide a little more granularity on how investors are going to be able to judge whether you are successful or not in the cash and really earnings of the Company that you invested in increased capabilities. So how are we best going to be able to judge that in the landscape --?

This is Martin and this is my view. There are some simple barometers which will indicate. A) is our revenue; B) is our backlog; and C) is our ability to keep our backlog positive to improve our book to ship ratio. Those are the three parameters that will give you the guidance in which direction we are going.

Martin, okay, because I was afraid you were going to leave one out.

Which one is that?

That one was profitability.

Well, this goes out dramatically. The infrastructure is there. If we increase our revenue, profit will more than catch up. We have the same building; we have the same quality system; we have the same pretty much overhead structure and it is basic mathematics on this. If you increase the revenue and the menu of your fixed expenses are the same or increase very slightly, your gross profit goes up automatically. So that is the key. (multiple speakers).

Right, but I guess the same -- the expectation was for profitability and increased profitability for 2007 and we sit here today with $4 million or so more in revenue and $5 million more in costs, $6 million, $7 million, $8 million, $10 millions more in costs and I mean I am just counting through the income statement. The result is almost $4 million operating loss and I don't want to be sitting in the same position a year from now talking about further investment that was required to meet demand.

Alright. But we have also accomplished some major milestones and this is basically, which I wish you were in my moccasins to see the effort that it took to go from six to seven microwaves frequency sources a year to 10 a month, which is 120 per year. It was a monumental effort and we felt that this was the right direction because of the opportunities that the corporation has. It is no fun being stagnant at $50 million to $60 million forever for you guys and for me personally. So the opportunity that we are exploiting and I feel very positive about being able to move forward.

So I guess a quarter ago or two quarters ago when you started to incur these costs, you had said this period that we are now ending, so the first quarter of '08 as kind of the end of the impact from those costs. Is the expectation still reasonable?

Hardin, I know you for many years and you always try to measure Frequency on a quarter-to-quarter basis. I know you are measured on a quarter-to-quarter basis, but our business and the lumpiness are such that we cannot really make judgments on a quarter-to-quarter basis and you can't pinpoint me to that because I can't do that.

I want to emphasize again what we clearly said on this. If you are looking for 2008 on this, our present view is to have significant increase in revenue and significant increase in profitability. And this is in spite of making additional investment in trying to capture business. There have been enormous opportunities. It would be foolish for us not to take the opportunity to finally really break out of our sphere and get significant growth of the Company.

I might also add that during this year, we have invested in a company called Elcom and that was done in order to be able to introduce additional technology in space application on this and by the way, that took away from the cash as well, but we felt that that was a very good investment. And so I think if you look in the past, the investments we made in real estate and some other companies have been very, very profitable for Frequency Electronics.

I look at '06 as maybe a more normal example of the Company's cost structure and how results should flow through if revenue growth is achieved. Gross margin in '06 was I think 35%, a little over on $53 million in revenue. And you are saying you have the same expectation for gross profit or gross margin on $60 million to 70 million in revenue. Either that is conservative or the costs that you have incurred are more permanent. So again, I hope it is the former. I fear it is the latter.

So again -- I mean you are going to have to give investors confidence moving forward that the investments you have made have been -- are going to have a positive return. And one way to do that is to use your cash, use your balance sheet when you have the confidence to repurchase your stock to increase your dividends. These are all things that the Company should consider as signals to investors they are confident in the Company's future.

Hardin, I guess we didn't speak to some of those issues because, as I indicated, there is going to be continuing investment required in order to continue to increase the [taxes]. We are going to realize the results obviously of the investments that we have already made, which us why we see an improvement in the gross margin rate, as well as a reduction in the R&D spending.

But on the other side, we also see opportunities that we may use the cash for other purposes. We haven't talked so much about it today, but we still have our eyes open for acquisitions or some joint venture type things like the Elcom thing that we did. So what is the right level of cash, it is not a huge number at this point in time relative to what we could possibly do with it in other venues like making additional investment. So we know we talked about the stock buyback and additional dividends in the past, but I don't think that is the direction we are looking for at this point in time.

But we will discuss in the next board meeting as we always do and bring up your suggestion every time.

Yes, now you have committed to do that and I appreciate it.

I will do that. And you committed that the next time to New York you will come and visit us.

That's right.

Okay. And gentlemen, we have time for one more question.

Robert Smith, Centers for Performance.

Just a request that in the next earnings release you toss in the backlog number.

In the press release itself?

Yes.

Yes, we will be happy to do that. That is a good suggestion.

Thanks very much.

Thank you very much.

And that would conclude our question-and-answer session. At this time, I'd like to turn the program back to our speakers for any additional or closing comments.

Thank you very much, Millicent. We really appreciate your helping out with this call for us. Thanks to you all, gents. Excellent questions and excellent discussion. We are really looking forward to these next several quarters. 2008 is a year, as we said, that we are focusing on those revenues and we hear you, Hardin. As we go forward, this is a company that has always been looking at profit. I thank you all once again and wish you all well and thank you and ask you also to God bless all of our soldiers.

Bye, everybody. Have a good summer and we will talk again -- when? In September. Bye, everybody.

Thank you, everyone, for your participation on today's conference call. You may disconnect at this time.