Frequency Electronics Inc (FEIM) 2016 Q4 法說會逐字稿

Greetings and welcome to the Frequency Electronics fiscal year 2016 earnings release conference call. (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 state pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements inherently involve uncertainties that could cause actual results to differ materially from the forward-looking statements. Factors that would cause or contribute to such differences are included in the Company's press releases and are further detailed in the Company's periodic report filings with the Securities and Exchange Commission.

By making these forward-looking statements, the Company undertakes no obligation to update these statements for revisions or changes after the date of this conference call.

It is now my pleasure to introduce your host, Joel Girsky, Chairman of the Board.

Good afternoon, everybody. I thank you all for calling in.

Sitting alongside of me is Martin Bloch, the Founder and CEO of our Company; and Steve Bernstein, our CFO.

I would like to turn this meeting over right now to Steve and bring us all up to date, Steve. Thank you.

Thank you, Joel. And good afternoon.

Satellite revenues represented approximately 55% of consolidated revenues in fiscal 2016 compared to approximately 60% of consolidated revenues in fiscal 2015. In dollar terms it was down $13.8 million or 30% year-over-year. This was primarily due to delays in contract awards, many of which are sole-sourced to Frequency Electronics.

Revenues from non-space US government DOT programs, including sales by FEI-Elcom and FEI ZYPHER, accounted for approximately 25% of consolidated revenues in fiscal 2016 compared to approximately 20% of consolidated revenue in fiscal 2015. In dollar terms this business area increased $2.1 million year-over-year or 16%.

Revenues from network infrastructure and other commercial products that are reported in the FEI-NY, [Gillam] (technical difficulty) FEI and FEI-Zyfer segments were approximately 20% of consolidated revenues, about the same as the prior year.

Gross margin was $20.4 million compared to $23.5 million last year, yielding a gross margin rate of 34% in fiscal 2016, compared to 31% in prior year. The increase in gross margin percent reflects efficiencies obtained from advanced automated test equipment. Product mix was also a contributing factor as well.

The Company can achieve substantially higher gross margin rates on increased throughput.

SG&A expenses was $13.2 million as compared to prior year's $14.2 million, a reduction of $1 million year-over-year of SG&A expenses. The 2000 percentage was over a target of 20% of revenue. But with cost-saving measures put into place in fiscal 2016 continuing in fiscal 2017, we expect that SG&A will approach or meet our target of 20% of revenue.

Internal R&D spending in fiscal 2016 was $5.9 million or 10% of revenues compared to last year's $5.7 million or 7% of revenues. Our reported R&D includes investments in products for space, US government, DOD and other commercial applications that does not include R&D that is funded by our customers.

Operating profit was $1.3 million compared to $3.7 million last year. Operating profits were affected by decrease in revenues as mentioned earlier. Gillam-FEI, FBEI-Asian and FEI-Elkom, recorded combined operating loss of $3.6 million fiscal 2016 compared to $2.4 million in fiscal 2015.

Other income, which generally consists of investment income offset by interest and other expenses, netted to income of $773,000 in fiscal 2016 compared to net income of $861,000 in fiscal 2015. This yields pretax income of $2.1 million in fiscal 2016 compared to $4.5 million last year. The provision for income tax is $1.1 million or an effective rate of 51.6% compared to $1.7 million and a 37.7% effective rate last year.

Our effective rate is impacted by not receiving credit for any loss and foreign subsidiaries.

Going forward, we anticipate lower effective tax rates. Net income for fiscal 2016 is $1 million or $0.11 per diluted share compared to $2.8 million or $0.32 per diluted share for fiscal 2015.

For the fourth quarter, we generated $950,000 of cash from operations, and for the full fiscal year generated nearly $3 million of positive cash from operations. Our backlog at the end of April 2016 was approximately $32 million compared to approximately $37 million at the end of the prior year and up from $22 million at the end of the previous quarter.

Frequency continues to maintain a very strong balance sheet with levels of cash, marketable securities, debt and working capital comparable to prior year.

I will turn the call back to Martin, and we look forward to your questions later.

Good afternoon, everybody. This is Martin Bloch.

I want to address what, in my mind, is the priorities for Frequency Electronics. First of all is our plans on what we want to move forward with our subsidiaries, primarily FEI, Elkom-FEI, Gillam and FEI-Zyfer.

FEI-Zyfer has done exceptionally well. It increased in sales and in profitability, and one of the main reasons is secure communication opportunities, which depends for the combined technology that FEI-NY has precision timing, and FEI-Zyfer the knowledge of how to combine it with the threats of GPS jamming and spoofing, and we expect their revenues and profitability to continue very well into next and subsequent years.

FEI-Elcom is a very important resource to FEI, and they provide a lot of the engineering designs for our space dollars. And even on their [average] they are owned, we see that they revenues will increase, and our objective is to get them profitable in fiscal 2017.

FEI-Gillam -- we have an aggressive move to find a solution, since they are not anymore crucial to FEI's business and we want to make sure that we come up with an approach to either break even or to find a different solution for them in the very near future.

I would like to address the two most exciting avenues of our business. Both are dependent on FEI's unique expertise in precision time and lower g-sensitivity. This is our space business; it's still one of the main areas, and offers great potential both in their routines or the custom geosynchronous satellites as well as the LEO satellites like iridium and other critical DoD programs.

Again, precision time, low-phase noise is a key ingredient and, of course, the future injection into technology to provide more bandwidth and more capacity is to reduce size and power and weight consumption of each of the products that we have.

On secure communication, precision time and time accuracy is key to eliminate the threat that is now facing almost every industry that is involved in communication and precision timing from the DoD fixed and mobile assets to Homeland Security and [evenness] as down to the commercial trading business and other critical industries.

With the precision time and the lower g-sensitivity and the knowledge of GPS is a unique technology, and very few companies in the world have that type of expertise. And we expect that business to grow significantly in the near future.

To make it possible, FEI is going to add some senior personnel to explore these opportunities because it requires additional people in that area to take advantage of the market opportunities and to cover all of those customers.

In summary, which I want to leave mostly to your questions on this, the Company is healthier. Although our revenues were down, as Steve has indicated, we had positive cash flow and we maintained our capacity to produce safe hardware and quantity and were able to demonstrate this to our customers with such programs as producing the hardware for the iridium LEO orbit satellites.

And our programs, as Steve has indicated, is -- they just moved to the right. But we expect to see significant improvement in calendar 2016.

I'd like at this time to turn it over to answer some questions. Operator, please go ahead.

(Operator Instructions) Robert Smith, Center for Performance Investing.

Martin, can you give us some more color on the possibilities of the private sector in satellite work? Everything I read is that there is a movement toward the (technical difficulty) [Senator] getting much involved with this area.

Yes, lots of noise in the system and very difficult to evaluate this area. And as you probably have heard, people are thinking of from the thousands of satellites on [Weblock] to the 3,000 satellites that Boeing is planning. And we are watching this development and taking a look on how our technologies can be applicable.

Obviously, for this larger quantity and lower-cost satellites, this weight/power is going to be very significant because getting up assets in space is still expensive. So we look at it, and we are at this time supplying quite a lot of this type of hardware to DoD secure satellites.

If it is going to be reality, will all be smarter, I would say, in the next two to three years, to see if all those LEO satellites can be accomplished within the objectives that the people are setting.

Well, when you say you are watching, is there a possibility that you get more proactive and --

Oh, we are proactive. As a typical example, we are supplying -- we can offer all the 82 satellites for the iridium as one example where we are in the LEO business and we are supplying a lot of hard work to DoD LEO satellites, this item. And we are taking a close look and are talking to all the people that are planning those LEO satellites.

Thanks very much. Good luck.

Sam Rebotsky, SER Asset Management.

You have $32 million in firm contracts. At the end of the last quarter it was $22 million. And you have $150 million to $200 million you were bidding on. What are you bidding on, and what is the expectation of getting firm contracts, say, in the next quarter? Do we expect to get to $50 million firm contracts? We used to have a lot higher firm contracts.

Okay. As I mentioned in my [address] (technical difficulty), we expect that some of the contracts that were delayed by DoD and some of the commercial communications contracts that were delayed because they are replanning on how to put much more capacity on the same platform to be really materialized in calendar 2016. It's difficult to say as to the quarter because we have very little control of it. We know we haven't lost any of the major contracts, and I expect an increase in our backlog as we go forward.

Now, calendar 2016 -- we're in July.

(Multiple speakers) six months.

Pardon?

In the next six months, yes.

Next six months? What is the number of contracts we are bidding on? Is it similar to the 150 to 200? Or is it less?

It's more.

It's more? What number is it?

Well, someplace over -- we have proposals outstanding for someplace around over $200 million worth of opportunities.

Okay. And how much do we have on a satellite dollar amount today, compared to the last year? And what do we expect to have on a satellite?

Well, at this moment we arrange from some place between $5 million and $10 million, and our objective is to get between $20 million and $40 million per satellite.

So we have expected this $20 million to $40 million for a long time. Do you think we will achieve it this year? Or do we need to get there?

I am working very hard to achieve it. There are some sectors that, because of the slowdown on this -- remember, our biggest competition for getting more content is our customers. And as their business slowed down, our customers pulled in a lot of opportunities in-house. But that is short term. As soon as there is an increase in their releases of their commercial and military satellites I am confident then that we will have opportunity to increase our content.

Now, you speak of the senior personnel that you are hiring. Will they help -- are they in the sales area or will they help you get contracts? Or what do you need to do? Do you need --?

Primarily in following programs and providing support to our customers so we can get a bigger portion of the content. The key element of precision time -- most of our customers are stock; they have got to buy from us. The wraparound electronics is where we need help with this type of senior people to make it happen.

Okay. Now, as far as the research and development, did I understand that Joel said that we pay this out of our pocket or -- this $5,929,000, how much do we paid out of our pocket and how much is reimbursed by a customer?

Well, the $5.7 million was -- was it 5.9?

9.

$5.9 million -- this is what FEI sponsored from their own pockets. That does not include the additional research and development that we are paid by our customers.

This is a lot of money to spend, and we're not getting a lot of return. When do you think we're going to get return for all this money we are spending on R&D?

Well, within the next year I expect to see progress.

Okay. I got a (multiple speakers) --

By the way, it's not a lot of money to spend in IR&D. I just want to tell you and as an example of Hewlett-Packard, their budget was 22% a year of revenue. So 10% is really a modest amount of investment in our future.

Martin, I'm going to step out of the queue and come back if there's nobody else. Thank you.

Alex Gates, Clayton Partners.

I had a question for you --

Can you speak up? I can hardly hear you.

I had a question for you on the Gillam segment. I think you had mentioned in your prepared comments that you had a plan to get that to either breakeven or find solution quickly. I was just wondering if you could elaborate a little bit on how you could get that to breakeven.

Okay. Well, basically me and Olly were on their during the Brussels attack, unfortunately; we never made it. I missed the Brussels Airport attack by a couple of hours. This goes through thoroughly on you can do to reduce costs and increase their revenues on this area, and this is on our plan to do it as soon as possible.

We are talking days, not years. And if we cannot do that, then we will do our best to find a better home for them.

Their mission of precision time implementation into the copper is something that's not anymore core FEI's business, nor is the copper telecommunication actually a core for anybody's business. People have switched to fiber and satellite rather than copper. That's where their specialty was.

Right, right. I'm just wondering if there's anything tangible you can comment. Like are you cutting headcount there, or anything like that?

Well, we have -- that's exactly it. European is complicated on reducing headcount. But that's our objective. We have already started the steps and we expect to reduce headcount and to see what type of other business they can capture outside of the copper business. So we will attack it with a vengeance. I give you my personal promise on that.

All right, great. And then my last question is it looks like in the press release you mentioned funding issues as one of the reasons that the revenue was down. I was just wondering if you could elaborate a bit on that and maybe which constellations or which part of the business that has affected.

I don't -- can you repeat that question?

Sure. You mentioned government funding as an issue, I believe, in the press release.

Yes, oh yes. Government funding -- it wasn't an issue of the government funding; it was an issue of getting it released. There are many of the secure satellites that the funding was there but for some reason which is beyond my pay grade is to understand on how the government schedules and funds these programs. And we had a couple of programs that moved to the right because the funding was there but it was not released. And we see it being released now.

Okay. And is it something that we can see in a press release moving forward from you guys when the funding is released?

Well, if you take a look a little bit back, I think it was end of April, beginning of May, we had two releases indicating the start of that process. I think one was a secure satellite for [$50] (technical difficulty) million and a commercial satellite program for $5.5 million. And there are quite a few other programs in the same type of state.

Okay, great.

And we will release them. Whenever we can, we will release.

Okay, good to hear. Thanks, Martin.

[Michael Eisner], private investor.

Those senior people you mentioned -- did they start yet?

I have been negotiating with a couple of them in the past couple of months. We are ready to conclude. We have not started anybody at this time, but I expect results in the very, very short future.

Are they from one of the six major companies you deal with?

We are not at liberty to quiet from our customers. That's a silent agreement, unless those people are retired or laid off by those companies. But yes, some of the people are the people that either took early retirement or they have been released by the companies because, if you follow the press, there have been some major layoffs in some of our customers.

Okay. So you expect some soon there?

Yes.

And you mentioned M&A in the press release. You got held up. Were you planning on doing something?

Well, I think it's appropriate to get our revenue and our profit up before it makes sense, Mike.

Okay. One final question -- if you have to close July down, will that cost a lot?

That is what we're looking at. It's difficult to define at this time. European companies have conflicts a lot more complicated than the US. And we will have the answers in the very near future. We are looking at that possibility.

Okay, thank you.

(Operator Instructions) Sam Rebotsky, SER Asset Management.

I guess the question really is, as far as investor relations, investment banking, somebody to help you tell the story. I think it's about time you were more aggressive in telling your story.

And if you need to hire more people as you are trying to sell the contracts, to sell the Frequency products, because, as I keep repeating, in 1981 Bear Stearns raised at $40 a share, and you had $100 million market cap. And now you have maybe $70 million. I don't have the exact number in front of it, but --

$94 million to date.

Right. But the stock was $40. Today the stock is $10-$11. And all the things that have happened -- maybe, as you get more aggressive and tell the story and do something, to maybe there needs some help with the investment bankers to create a greater valuation for Frequency.

I will definitely take your inputs and bring it to the attention of responsible people, especially the Board.

Because, look, Yahoo! took a long time, four years; and then they made a marriage with Verizon.

(Multiple speakers).

All right, so I think it's sooner than later we should start telling the story. Thank you.

We will do that.

(Operator Instructions) [Richard Johns], a private investor.

It's my collection that the things that are going to take the Company --

I'm sorry; we can't hear you. Can you --?

Okay, I'll try to speak louder. It's my recollection that the things that are going to take the Company from $5 million to $10 million up to $20 million to $40 million per satellite are primarily up/down converters. Are there other things involved?

Yes. The ups/down converters is the main area of acceleration because, you know, you have a triple (technical difficulty) timing systems, and you have some RF -- and you have, let's say, 20 microwave [saucer center] satellites, and you can have as many as 140 up/down converters. So there is a value, and that's one of the areas.

Another area in which we have seen recently good success is to wrap around more electronics about our timing system, increase the actual timing unit from approximately $1 million per satellite to the most expensive one we are now delivering is $6 million per satellite. So that is also an additive function that we are working very hard to provide the timing and the distribution for all of the systems and satellites.

Okay. And of the Company's new products that you just described, how many of the six principal customers have decided to take in-house?

On the primary products on this point, they haven't got a choice. The timing they can't do in-house. When you are talking about the up/down converters, this site was placed -- to my knowledge, at least three of the big ones have taken a lot of this work in-house in order to maintain their level of personnel because they cut down as much as simple but they want to maintain the level of their expertise in-house so when the next generation of satellites are released they are in a position to manage it.

Okay. And do you have to give up on those three customers for the new products?

No, no.

No?

It's a temporary thing. As soon as they start getting overloaded, cost and performance is going to overtake the easier ways.

Okay, I see. Thank you.

At this time we have no further questions. I will turn it back over to our speakers for closing comments.

Thank you very, very much for participating in today's call. On behalf of our Board I would personally like to thank all of our employees for their continued diligence and our growth. Additionally, our shareholders -- thank you also for your continued trust and Frequency Electronics. Our future is in front of us. It's a good one. I look forward to seeing you in person in November. And thank you once again for calling. Good night, now.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time (inaudible) presentation.