Frequency Electronics Inc (FEIM) 2018 Q1 法說會逐字稿

Greetings and welcome to the First Quarter Fiscal Year 2018 Earnings Release Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Joel Girsky, Chairman of the Board. Thank you. You may begin.

Thank you very much. Thanks, everyone, for joining us today to our Q1 call. Sitting here with me is Martin Bloch, our CEO; our new COO, Stan Sloane, listening here with me; and Steve Bernstein, our CFO.

At this particular point in time, Steve, would you please take over?

Thank you, Joel, and good afternoon.

Before we start the call, I'm going to read the safe harbor statement under the Private Securities Litigation Reform Act of 1995. The statements on this call regarding the future constitute forward-looking statements pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. Forward-looking statements inherently involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Factors that would cause or contribute to such differences include, but are not limited to, liability, inability to integrate operations and personal actions by significant customers and competitors, general domestic and international economic conditions, consumer spending trends, reliance on key customers, continued acceptance of company's products in the marketplace, competitive factors, new products and technology changes, product prices and raw material cost, dependence upon third-party vendors, competitive developments, change in manufacturing and transportation cost, the availability of capital and other risks 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 release.

Thank you, Steve. Please continue with the financial report.

In our 2018 10-Q, the financial report, the results of Gillam-FEI for fiscal quarters ending July 31, 2017 and '16 are presented as discontinued operations. Unless otherwise stated, financial results discussed on this call refer to continuing operations.

Revenues from commercial and U.S. government satellite payload programs were approximately $5.2 million compared to $6.3 million for the same period of fiscal '17. Commercial and U.S. government satellite payload programs accounted for approximately 43% of consolidated revenues compared to 55% in the prior year. Based on the company's current backlog, satellite payload business revenues for fiscal year '18 are expected to be lower for the full year compared to prior fiscal year. However, satellite payload revenues will remain a dominant portion of the company's business during the current year with substantial revenue growth to follow when previously delayed and new satellite programs are released.

Sales for U.S. Government/DOD, non-space end use increased to $4.5 million compared to $3.4 million for the same period of fiscal '17. Sales for U.S. Government/DOD, non-space end use accounted for approximately 38% of consolidated revenues compared to 29% of revenues for the same quarter of last year. Revenues from non-space, U.S. Government/DOD customers are expected to increase in both the FEI-New York, including Elcom and Zyfer segments going forward as additional funding is received for several significant U.S. government programs.

Sales of other commercial and industrial applications were approximately $2.3 million compared to $1.9 million for the same period of fiscal 2017. Commercial and industrial applications accounted for approximately 19% of consolidated revenues compared to 16% in the prior year.

Gross margin rate for the quarter ended July 31, 2017 increased to 37.6%, as compared to 33.1% during the first quarter of last year. The first quarter gross margin and operating profit was positively affected by the increase in secure communication/command and control product sales, product mix and effective cost management.

For the 3-month period ended July 31, 2017 and '16, selling and administrative expenses were approximately 23% and 25%, respectively, of consolidated revenues. Reduction in deferred comp expense and reductions in multiple other SG&A expenses were offset by increases in cost consistent with higher revenue in the FEI-Zyfer segment.

The R&D rate for the period ending July 31, 2017 was 14% compared to 12% of sales for the same period of the previous fiscal year. The company expects the accelerated level of internal and customer-funded R&D to continue for the foreseeable future as we address new large opportunities in secure communication/command and control applications, next-generation satellite payload products and additional DOD markets.

Operating profit for the quarter ended July 31, 2017 was $180,000 compared to an operating loss of $408,000 during the first quarter of last year.

Other income, which generally consist of investment income, offset by interest and other expenses, netted to income of $1.1 million for the 3 months ended July 31, 2017, compared to net income of $51,000 for the same period of fiscal '17.

The results for the first quarter of 2017 included a gain on sale of securities of approximately $1 million. This yields pretax income of approximately $1.3 million compared to a pretax loss of $357,000 for the same period last year.

The provision for income taxes is an expense of $485,000 compared to a benefit of $40,000 for the same period last year.

Consolidated net income from continuing operations for the quarter ending July 31, 2017 was $830,000 or $0.09 per diluted share compared to a loss of $317,000 or $0.04 per diluted share for Q1 of the prior year.

Loss from discontinued operations was $216,000 or $0.02 per diluted share compared to a loss of $389,000 or $0.04 per diluted share for fiscal '17 net of taxes.

Consolidated net income is $614,000 or $0.07 per diluted share compared to net loss of $700,000 or $0.08 a share -- per diluted share for Q1 of the prior year.

Our fully funded backlog at the end of July 31, '17 was $23 million compared to $28 million at the end of fiscal '17.

For the quarter ended July 31, '17, the company generated positive cash flow from operations of approximately $2.5 million.

Frequency continues to maintain a very strong balance sheet with working capital position of over $60 million. We have a healthy cash position of approximately $12.5 million, an increase of over $2 million from year-end.

At this point, I'd like to turn the call back to Martin. And we look forward to your questions later.

Good afternoon, everybody. First of all, I am very pleased to introduce Stan Sloane. Dr. Stan Sloane has been known to the company for over a year and he has a lot of the attributes which is ideally suited for Chief Operating Officer. And I'm sure that he is going to help the company significantly in pursuing business from DOD and Homeland Security, which is a lot in his past experience. Welcome. Obviously, he has all the answers you want to ask since this is his first day on the job.

Okay. And now with Frequency's position. As you probably know, fiscal calendar '15, '16 and '17 has been the worst years in the satellite business since 2004. Our customers were hit pretty bad. Not that the satellite business are going away, they have just been delayed due to a rethinking of what type of service the service providers want to do and also what type of new technology they want to incorporate in the new satellites.

This, of course, has affected and will affect FEI's revenue because satellites has always been more than 50% of the corporation sales. The lining at the end of this drought is that we now see significant activity in satellites. And in the last couple of weeks, we submitted significant proposals to the industry for the new satellite networks that are being discussed. This should result in contract within the next 6 to 9 months and revenue shortly thereafter of this. Although this can be considered as a terrible thing, there's a silver lining because it gives us opportunity for the first time to use our engineering talent to refresh our product line and to upgrade our space offering to the new requirements which are being generated.

We are also investing, at the same time, in precision time for our secure communication and secure command and control, which is probably going to be the most profitable future of the company since the quantities in that arena are large and they are desperately needed. I would also add that the key element in secure control and communication is precision time. And precision time is one of our great assets, and we are one of the very few companies in the U.S. that has that capability. We also have some seat contracts in the secure communication arena, of which we are delivering hardware to demonstrate the principle that with the approach of precision time, you can overcome the spoofing and jamming of GPS, which is presenting a great threat on to our DOD and Homeland Security on this item.

With this introduction, I would like to open the discussion. So feel free to ask any questions. We will try our best to answer.

(Operator Instructions) Our first question is from [Paul Raffi], private investor.

I'm a private shareholder and I welcome the new COO. My question though is regarding potential merger of -- or even a sellout to another company. As you know, there are other satellite companies, like Norsat in Canada, which recently got bought out. Have you been thinking in those lines? Can we look for something if the price is right?

We are always open to that type of opportunity and that we don't reject anything that makes sense and preserves and brings value to the shareholders. That's something that -- that's our mission. And we are open to any type of that opportunity.

The next question is from Brett Reiss from Janney Montgomery Scott.

Yes, I'm from Janney. And I've been to your annual meeting.

Anytime.

Yes, the backlog dropping down to $23 million from $28 million. That's kind of the lowest I remember it ever being since I've owned the stock. Does that make you nervous? Or should I be nervous?

I'm not nervous. I haven't sold any of my stock. That should be indicating where I feel about it. This -- like I said, if you take a look at our customers like Boeing, SS/Loral, Lockheed Martin, Thales Alenia, this -- they all have had enormous reduction in backlog because people did not buy many satellites during those 3 years. And that is the fact of life on this. However, I just want to tell you. All of them are addressing a very large and emerging market. And from what we see is that satellites are going to be booming in the next couple of years. One of the largest market that everybody is addressing is to provide high-speed, reasonable cost Internet and high-definition video to airplane passengers. And there are 3.7 billion passengers a year. And the key that all are exploring is to be able to provide this type of service worldwide. So the future for satellites looks great and the government satellites are again, they look very promising. And we have some secure programs on satellites and we expect more in that arena. But there's definitely been a gap, and I would be much happier with a larger backlog, but it is what it is.

Right. Now Martin, since you initiated cost controls, what was the headcount when you initiated cost reductions? What is the headcount now? And what do you think it will be the next couple of quarters?

Well, I -- we have trimmed whatever made sense. And I believe the headcount is now about 145.

175 here(inaudible).

On this -- I can be more precise that the reduction was about 20-plus people. Some of them which made sense and some of them that always happens in a company when you have backlog go down, you take a hard look to see what to do. So we don't foresee any significant reduction in personnel going forward on this, except we are always looking at opportunities to combine operations and to save labor on this point. But the whole concept is to use the resources that we have for the exciting products that we have to develop for space. And especially, the affordable precision timing units that we need for the secure communication and command and control.

Right. Now Martin, the European assets that you're shopping around to sell, can you give us some color on that? How is that going? And have you received any bids on the $5 million copper cable, in connection with that sale?

We have. We don't know how credible they are. But we are committed to get it done in this fiscal year. And we'll advise you as soon as we have solid numbers. We are working very hard to divest ourselves of that operation and it's a must do in this fiscal year.

Okay. I have a couple of others, but I'm going to drop back in queue in case somebody else is on the call that wants to ask questions.

(Operator Instructions) Our next question is from [Richard Johns], private investor.

Martin, does your optimism for the next 9 months or year or so also pertain to the up/down converters?

Yes. Of this, I'll tell you. We have demonstrated in the past 2 years for the first time to be able to do large quantity of up/down converters/receivers on Iridium NEXT. And this was a question on most of our customers. And this is basically -- we have delivered about 3,000 up/down converters, of which 320 of them are in orbit already on Iridium NEXT. So that is the path. We have demonstrated that we can produce in quantity because in the past, we have been the best supplier of unique type of problems and unique type of solutions. To counter that on this, both Loral, Lockheed Martin and Boeing are starving. So our competition, which is in-house, is going to be -- is tough to overcome. But with the new products that we are developing, we feel we have a good crack at it.

Okay. And on the last call, I think you said that your customers thought that many satellite programs might be released around the end of the year. Would you give us an update on that?

That's still the timing that we hear on this. I think O3b is the first victim to be released. And from what we hear from our customers, they think there are going to be significant releases by the end of this calendar year or beginning of next -- or beginning of 2018.

Our next question is from Brett Reiss from Janney Montgomery Scott.

In the past, I think that Sam Rebotsky has always pressed you on -- if there is a breakeven sales number for the company, which you've never really been inclined to disclose. But is the proof in the pudding with the first quarter here? I mean, you did $12 million and you had an operating profit. Is that the breakeven number?

Well, that's as good an indication that I can give at this time on this. To tell any more will only help our competition. So I think that's a good indication.

Now the company's expertise with precision time, is it because of the know-how that the company has developed over the years? Or is it because of the intellectual patent portfolio that you may have in this area? What is the source of that asset that the company enjoys?

It is both. On the low g-sensitivity aspect on this, we have one of the key patents. The rest of it is the technology that we developed. And the know-how in this case is more important than patents on this. As you can see, there are very, very few manufacturers worldwide and even less in the United States that can provide precision time for secure communications. So we are in a unique position and be able to supply units that have reliability, that perform to the new requirements of secure communication and are affordable.

Okay. And one final one. I think in your third quarter call last year, you mentioned that the changes required for the smallest satellites would take 6 to 9 months. And then in today's call, you mentioned that you're seeing significant bidding activity, but it will be another 6 to 9 months before these contracts are awarded and then some time lag thereafter that if we are successful in these bids, that revenues would flow to Frequency. Do I have the time line right?

More or less on this item. There's been -- most of our -- we only give you the information that we get from our prime customers. And from the last briefing at the satellite conference in Washington that I was in March on this, they all indicated that what they expected to be placed at the -- in the middle of 2017 has moved to the end of '17, beginning of '18. So we can only transfer to you the projection that our customers made. But we see activity and we see that the service providers are getting interested in getting into space and start taking advantage of this new opportunity. So there's some urgency in moving on. So I think the projection now is a little bit more real.

Right. Now Dr. Sloane coming on board. I looked at his resume, which is incredibly impressive.

Thank you. I pick -- I will pick the best. You know that.

Yes, yes. Well, is it his -- he's had tremendous success as an operator. And he's had success acquiring things, selling things. What skill set most attracted you to have him come on board to Frequency?

All of the above. And most important and is immediate is his great past experience with DOD and Homeland Security experience and know-how.

Our next question is from [Michael Eisner], private investor.

I'm glad to see you finally focusing just on technology.

Thank you.

We don't need you to do paperwork.

I know. As I put in the release, I'm looking forward to that. And I welcome Stan, and I'm going to make sure he works very hard so I can do what I can do best.

I think I told you like 5 years ago, just do technology.

Thank you. I finally take your advice. It takes some time.

After 5 years.

Well, it takes some time. Good things take a little longer.

Two questions. You have a press release a couple of weeks ago or a month ago. And in the bottom of the press release, you mentioned atomic clocks.

On the press release?

Rubidium atomic clocks. Is that something new you're focusing on?

Well, we are. I don't remember a press release on this. But we are focusing on improving the existing atomic clocks to make them more precise and more affordable. And we have a continuous program of looking to what improvement in atomic clocks because the better, the accurate, the stability you can get, the better security it provides to our customers. So this is a constant effort that we are putting in.

It was the one on the 48th anniversary of NASA and the Voyager.

Oh, yes, this is -- yes, we are -- now I remember that you mentioned. The conjunction over there is to really celebrate the longest-operating clocks in space on the Voyager 1 and Voyager 2. And we did mention that we are working on optically pumped rubidiums which will give us approximately an order of magnitude better stability than what we are now making. And this is still a major effort that we are undertaking to do.

Yes. You said a 10 to 1 improvement, do you see a market for that?

You bet on this. The more precise you have a clock, the better you can implement secure communication, navigation and control. So every improvement in stability of the clock has enormous paybacks.

All right. And this may be for Dr. Sloane. I guess you've been there a year.

Wait. You can't attack him, [Mike], his first day on the job. So let me...

No, he's been around a year. He knows what's going on. I'm not going to attack him. I'm not going to -- you do have an impressive resume. But what do you think is your first focus? You've been around the company for a while.

Only as a director on this item. This is the few days that he has been actually seeing the inside working of the company.

Oh, really? And...

Stan, if you want to make a short remark on this, feel free to do so.

Well, I think, in terms of focus, it's to try to help Martin with some of the operations and offload some of the administrative burden so we can improve our DOD bookings and I want to focus a lot on new business also.

Acquisitions, I think, was mentioned.

Always on the table.

Always on the table. All right. And I think I may have missed the first minute. You're looking for a CEO now?

I don't think I'm ready to discuss on this. But if you read the press release that we did this morning, I think you'll see the path forward on this point -- in this direction.

Yes, no -- only because you mentioned it, not me. That was in the press release.

Well, read the press release. That's my objective on this, to migrate to a position and what I am best suited for.

Technology. Okay. Are you going to say something?

You're welcome. No, that's all I'm willing to say at this time.

If there are no further questions, I would now like to turn the call back to Joel Girsky for closing remarks.

Joel?

Thanks, everyone, for listening in. There were some very insightful questions. And hopefully, the answers that Martin and Stan gave satisfy everybody. Just know that a lot of people here are working real hard to have a successful company. Thank you for your indulgence. Thank you for your confidence. And we look forward to seeing you at our annual meeting.

And I also want to thank all the people at Frequency that are really working hard during this trying time through our new product development and fulfilling the requirements that we now have on our books. Again, I'm looking forward to seeing you on November 8 for a stockholders' meeting on this. And I'm sure we'll have more questions and answers at that time.

Thank you.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.