Frequency Electronics Inc (FEIM) 2015 Q2 法說會逐字稿

Greetings and welcome to the Frequency Electronics Inc. second-quarter fiscal 2015 earnings release conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). 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 reporting 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, Mr. Martin Bloch, President and CEO for Frequency Electronics. Thank you Mr. Bloch. You may begin.

Good afternoon everybody. General Joe Franklin is busy in Washington, so the conference call will be handled by me and by Alan Miller. And to set it up, Alan Miller will give you a rundown on the financials, so I will give you some color on what Frequency is doing to promote growth and profitability, and then we'll open it to answer some questions. Alan, please.

Thank you Martin, and good afternoon everyone. For the second quarter of fiscal 2015, revenues were $19.2 million, up 13% from last year's $17 million for the second quarter of fiscal 2014. Satellite revenues continue to represent approximately 60% of our consolidated revenues, similar to the ratio in the prior year, but in absolute dollars, space revenues were up nearly 20% year-over-year. Revenues from non-space US government DOD programs, including sales by FEI-Elcom and FEI-Zyfer, accounted for approximately 20% of consolidated revenues, similar to the ratio of such sales in the year-ago quarter.

As we indicated last quarter, FEI-Zyfer had received initial funding on a US government critical GPS anti-spoofing project and during the second quarter began to deliver against that program. When we combine US government DOD non-space revenue with revenue from US government satellite programs, this accounts for approximately half of the second-quarter revenues and a little over 40% of consolidated revenues year-to-date. The remaining 20% of consolidated revenues is from network infrastructure and other commercial products that are recorded in FEI-NY, Gillam-FEI and FEI-Zyfer, which is compared to approximately 25% of consolidated revenues in the second quarter of last year. Overall, we anticipate higher revenues from both space and non-space business areas for the balance of fiscal 2015.

Gross margin for the second quarter was $6.7 million compared to $6.2 million last year, resulting in a gross margin rate of 35% in fiscal 2015's second quarter compared to 37% last year. With higher second-quarter sales volume in the Company's subsidiaries FEI-Zyfer and Gillam-FEI, gross margin rate improved from the 29% rate which we recorded in the first quarter of fiscal 2015.

Product mix remains an important factor in our gross margin rates. As consolidated revenues increase, we expect to realize improved gross margin rates over the remainder of fiscal 2015.

As we continue to control SG&A expenses at 3.5% (sic -- see press release, "$3.5 million"), or 18% of revenues, this is compared to last year's $3.5 million or 20% of those revenues. This level of SG&A expense is very much in line with our target and should be sustained throughout fiscal 2015.

Internal research and development spending in the second quarter was $1.4 million, or 7% of revenues, compared to last year's $1.5 million, or 9% of revenues. Our R&D efforts include investments in products for space, US government DOD and other commercial applications. And we expect the rate of our R&D spending to remain at less than 10% of fiscal 2015 revenues. So this results in operating profit of $1.8 million, or 9.3% of revenues, compared to $1.3 million and 7.4% of revenues in last year's second quarter.

Other income, which generally consists of investment income offset by interest and other expenses, netted to income of $153,000 in fiscal 2015, which is similar to last year before accounting for a gain of $736,000 on the sale of certain manufacturing equipment. So pretax income was $1.9 million in the fiscal 2015 second quarter compared to $2.2 million in the same period last year. The fiscal 2015 tax provision of $660,000 is at an effective rate of 34% compared to last year's $770,000 or a rate of 36%. The effective tax rate is impacted by the exclusion of operating results of our overseas subsidiaries. For the full fiscal 2015, we expect the effective tax rate to be in the mid-30% range. So, net income for the second quarter of fiscal 2015 is $1.3 million, or $0.15 per diluted share, compared to $1.4 million, or $0.16 per diluted share, in fiscal 2014, which also included the one-time gain on equipment sales.

As a result of the timing of billings and milestone payments, we had negative operating cash flow of $2.5 million for the first six months of fiscal 2015. However, in this past second quarter, we generated positive operating cash flow of $3.1 million. With recent billings and milestone payments, we expect to generate positive operating cash flow over the balance of fiscal 2015.

Our backlog at the end of October 2014 was about $52 million which is compared to $48 million at the end of fiscal 2014. And again over 3/4 of our backlog is for long-term satellite programs, split about evenly between commercial and US government programs. Frequency continues to maintain a healthy balance sheet with a strong working capital position of about $80 million, which is more than sufficient to support substantial growth.

I'll turn it over now to Martin and we'll go to your questions later.

Thank you Alan. I just want to indicate on where we are going, and as I mentioned before, our greatest challenge in this coming six months is to increase capacity in order to meet our present commitment and anticipated additional future programs that are in the works. We are improving it through. We have taken for major steps. One is to set up a night shift. Second is to transfer our work to Elcom, a subsidiary across the river on the Hudson, and to train them and to get them certified for high rail work. Third is to build, deliver, and put in work automatic test equipment which basically reduced the touch labor and are able to increase throughput. And the fourth, which is equally important, is op train personnel from other commercial and DOD programs to space skills. We are meeting this challenge for present as well as future programs that we are sure to get.

Third, Ku and Ka development is progressing well. We have demonstrated the equipment to our customers. The units were well-received because they are considerably smaller in size and power, and that's where the big advantage lies. We have outstanding proposals for both military and commercial satellite programs. We are ready to accept orders on them now, and expect that we will get some orders on the up-down converters before the end of fiscal 2015.

We are making a lot of progress on the secure timing project that we are honored to have been entrusted with. And this is basically to improve security for communication and to eliminate our multipart problems that exist due to GPS possibly being jammed on this. We have delivered the first phase of the paper program and some demonstration hardware is in the work, and we expect to get additional programs within the next couple of months and want to improve the clock, the timekeeping clock, to make it more rugged and more stable over a harsh environment and to improve the timing accuracy by using low G for mobile platforms. We have a good backlog and many proposals in the works and look forward to increased revenue and profitability for fiscal 2015 and beyond.

And when things are going well, we can make my presentation very short. So, I'd like to open it now to questions and answers. If you would be kind enough to please address your question to either me or Alan, that would be very helpful.

(Operator Instructions). Tristan Thomas, Sidoti and Company.

Hi guys. How are you? A couple of questions. I've been traveling, so I may have missed something. I apologize. Can you just touch on what improved the profitability in Gillam and Zyfer? Was it revenue growth or was it product mix or a combination of the two?

Both.

Both. As you mentioned, in the first quarter, they had some very low levels of sales, and we are happy to see that they were able to pick those values -- that volume up in the second quarter that helped them to really improve their profitability overall.

Okay. So does that mean less?

Tristan, I just want to tell you that we have chosen from a corporate point of view to make FEI-Zyfer the focal point to improve the secure communication program, so they are heading up that effort.

Okay, great. So Alan, just to kind of jump back to what you were saying, so does that mean this level of sales is kind of normalized with what you expect for the balance of the year, or do think you're going to see more growth in some of the secure timing products you are now offering?

Well, I think the level of sales will probably be something comparable going quarter-to-quarter. They only do $2 million to $3 million a quarter. So little ripples here and there will have an impact, but it's much better than what they did last quarter. I think they both were at $1.5 million, and now they're both about $3 million.

Okay. And then one final question regarding that. Can you maybe give a little more color regarding a possible timeframe for some of those new products?

Well, are you talking about the Ku or Ka band converter, or the timing, or both?

The timing.

Well, basically there is a need to improve communication network, to improve security and to improve areas which are close by, multitask or possible interruption of the availability of GPS, and we have come up with an approach that will enable us to do it, and we have demonstrated it on paper. We are building models that will demonstrate that in hardware and after that we will proceed to update many communication sites to this to improve security and performance.

Hello, what's going on?

Hold on one second.

He's on the subway.

The subway?

Sounds like it.

One more follow-on question. So when you're talking about timing going for some of these models, is it a year out? Is it two years out? Any kind of color on that?

I'm sorry, can you repeat it? I didn't understand it. Could you ask it again?

When you mentioned the timeframe in going from some of these models you're developing, when do you think they'll actually contribute revenue? Is it a year, two years?

We're going to see increase in revenue in this fiscal year for FEI-Zyfer, and some advanced development for FEI New York. And implementation of this program is to be done on a very fast basis. We will get better timing as we proceed, but it's a high priority program since this is a risk for all secure communications.

Okay, great. Thank you guys.

Marcel Herbst, Herbst Capital Management.

Good afternoon. Thanks so much for taking my question. Regarding the Ku Ka band converters, and I think the question is for you, Martin, what would be the leadtime once you get a contract win to booking revenues?

Well, that's the game that is very important. You hit the nail right on the head. With this new specialty commercial satellite, the leadtime needs to be very short. We have invested a lot of IR&D in order to be able to respond quickly. From order to flight delivery, we will have to do it in less than a year, in a targeted nine months. This compares to 26 to 36 months for the older design. So this is one of the main objectives -- smaller size, test to response time, less power to be able to put a lot more of them on the same existing platforms.

That's great. And the gross margins on the new converters, is that close to your target range of about 40%?

Alan's are 40%, mine are higher.

Let me clarify one point. Martin talked about delivery time of the Ka bands. Most of these programs are going to be large enough that we will recognize revenue almost immediately because they're going to be on percentage of completion basis. So we don't have to wait until delivery to recognize revenue in other words.

I see. That's helpful. With your current capacity, how many satellite contracts could you accept?

Well, we are putting the things in work that we wanted -- we don't want to be limited. I just want to tell you that in order to satisfy our business plan, we only have to capture three or four. And that's the capacity we are preparing by the second shift, by getting FEI-Zyfer to be able to do it, and the investment in up and automatic test equipment that we've already done at this point, and with a decrease of people in the commercial and DOD to up-train those people which takes a long time, but the long journey starts with the first step. So we feel that that is necessary for us to do it.

Okay. Now, I read that, on another topic, Google plans to deploy a proprietary fleet of 180 low-Earth orbit satellites in a five-year mission to deploy broadband services.

Yes.

I was wondering, is this a project that you would be bidding on or is this a different technology that's needed there?

No, we might be bidding on, but I don't really -- I have to see their plan and their architecture. There have been those plans a couple of times in existence. The first time it was 900 satellites to provide this inexpensive access. So I don't know the technology they want to deploy, but when there are satellites and they need synchronization, timing will be a necessary part of the satellite.

Good. And moving on to the M2M technology, you mentioned that France will choose out of the two companies a winner that where the winner gets 2/3 of the volume while the runner-up will get 1/3. And I was wondering. Has this race been decided yet?

No. This is up in the air. And if one supplier has technical issues or performance issues, the other supplier will get all of it.

Okay. Is this anywhere closer to a decision time or are they still saying soon?

No, all I can tell you is that we have been asked to do everything in our power to accelerate the program, and we are doing that.

Okay. Thank you very much.

Sam Rebotsky, SER Asset Management.

Good afternoon Martin and Alan. It was nice to see you in person. Now, as far as the up-down converter, is there, say, between a 1 and a 10, with 10 being the highest, do we expect to receive by April an order? Have the various people that are looking at what you are doing prepared, do you think, to give you an order before April 30 of the current fiscal year?

I would give it a 7 to an 8.

7 to an 8, Okay. And as far as the next year, do you think we would be at $20 million-plus satellites versus $10 million to $20 million -- $5 million to $10 million?

As my mother would say, from your mouth into God's ear.

Okay, okay.

That is if we win. The basic idea at this moment, we are $5 million to $10 million per satellite, and winning a converter job on one of the satellites will easily put us in that range.

Okay. So but now based on what you expect for the rest of the current year, you expect to do more or less in the $20 million per quarter range, for the January and April quarter. Is that --

On the grounds that it might incriminate me, we have never given projections and I am too old to start now.

But you said you're going to do what you did in the current quarter for the rest of the year, is that what you just said?

No, I didn't say it. Alan indicated that we plan to have increase in revenue and profitability for this year compared to fiscal 2014, and I can definitely tell you that that's the case.

Okay.

Fixed numbers is out of my league.

Okay. And the backlog at the end of the previous quarter was $57 million. Now we are down to $52 million. So without the major satellite contract, do you think we will be improving what we are doing now above the $57 million backlog?

Alan, I don't know. What was it in April?

It was $48 million, we were at $57 million at the end of July. But he is correct. To use a technical term, we're lumpy. We know that.

I will tell you, we only report programs that are fully funded. And we are now in negotiation with three major programs that we have. They are secure. They are ours. But until the contract is negotiated, we are being incrementally funded. As soon as this is done, our backlog will be up to the same level.

Okay.

We are really in good shape on having enough backlog and enough in the pipeline to support our increased revenue and profitability for fiscal 2015 and beyond.

So also as far as what we are bidding on, is it fair to say we are bidding on more contracts today versus the previous quarter, or is it the same?

Probably more. I would have to take a look at this. There are lots of proposals that we are working on on a day-to-day basis. I didn't take the numerics, but it's as equal or more than previous times.

Okay. All right. Hopefully, in the next quarters, you can make everybody happy and make some more profits and more sales.

We made profit, Sam.

More, more profit.

Okay, okay. That's my pleasure. Greedy. My objective is profitability and growth, and we need both.

All right. Good luck. Nice to meet you in person.

Thank you. Ladies and gentlemen, we have no further questions at this time. I would now like to turn the floor back over to management for closing remarks.

Again, I would like to express my appreciation to all our shareholders and to the employees of Frequency. We are all working hard to move this company and its products forward. And I want to wish everybody a happy holiday season from all of the management and employees of Frequency Electronics.

Thank you ladies and gentlemen. This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day.