Frequency Electronics Inc (FEIM) 2018 Q2 法說會逐字稿

Greetings, and welcome to the Frequency Electronics Second Quarter Fiscal Year 2018 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 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 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, Mr. Joel Girsky, Chairman of the Board of Frequency Electronics.

Thank you. Good afternoon, everyone, and thank you so much for calling in. We certainly appreciate it. Sitting here with me this afternoon is Martin Bloch; Dr. Stan Sloane; and Steve Bernstein, our CFO. Steve, if you would please take the call.

Thank you, Joel, and good afternoon. In our second quarter 10-Q and financial reports, the results of Gillam-FEI for fiscal quarters ending October 31, 2017 and 2016 are presented as discontinued operations. Unless otherwise, stated, financial results discussed on this call refer to continuing operations. For the 6 months ending October 31, 2017, revenues from commercial and U.S. government satellite programs were $9 million compared to $10.6 million for the same period of fiscal year 2017 and accounted for 42% of consolidated revenue compared to 46% in fiscal '17.

Revenue from the satellite market are recorded only in the FEI-New York segment. Revenues from non-space U.S. government/DOD customers, which are recorded in both the FEI-Zyfer and FEI-New York segments, including FEI-Elcom, were $7.7 million compared to $9 million for the same period of fiscal '17 and accounted for approximately 36% of consolidated revenues compared to approximately 39% in fiscal '17.

Other commercial and industrial revenues were approximately $4.7 million compared to $3.5 million and accounted for approximately 22% of consolidated revenues compared to 15% in the prior year. Intersegment revenues are eliminated in consolidation.

For the 6 and 3-month period ended October 31, 2017, gross margin and gross margin rate decreased over the same period in fiscal '17. The gross margin and gross margin rate decrease is primarily due to lower revenue and unabsorbed manufacturing overhead costs.

For the 6-month period ending October 31, 2017 and 2016, selling and administrative expenses were approximately 24% and 25%, respectively, of consolidated revenues. Although the percentage are similar, this represents a gross dollar reduction of $600,000 year-over-year.

Research and development expenditures represent investment intended to keep the company's products at the leading edge of time and frequency technology and enhance future competitiveness. The R&D rate for the 6-month period ending October 31, 2017, was 16% comparable to 15% of sales for the same period of the previous fiscal year. The company expects the level and activity related to R&D to continue through the current year and beyond to address new large opportunities in secure communication, command and control applications, next-generation satellite payload products and additional DOD and commercial markets.

Operating loss for the 6 months ended October 31, 2017, was $1.7 million compared to operating loss of $1.6 million during the same period last year.

Investment income is derived primarily from the company's holdings of marketable securities. For the 3-month ending October 31, 2017, investment income was lower than in the same period of fiscal year 2017, mainly due to in the quarter ending July 31, 2017, the company divested of its holdings in equity securities in its investment account, which were converted to cash.

The company is in the process of evaluating its future cash management strategies. As a result, the company recorded gains of approximately $1 million during the 3 months ending July 31, 2017, as compared to no gain or loss in the same period of fiscal '17. The decrease in the interest expense for the 6 months ending October 31, 2017, compared to the same period of fiscal year '17 is the result of there being no credit line borrowings during the 6 months ending October 31, 2017.

This yields a 6-month pretax loss of $557,000 compared to a pretax loss of $1.4 million for the same period last year. The provision for income taxes is a benefit of $98,000 compared to a benefit of $204,000 for the same period last year. Consolidated net loss from continuing operations for the 6 months ending October 31, 2017, was $459,000 or $0.05 per diluted share compared to a loss of $1.4 million or $0.14 per diluted share for the 6 months ending of the prior year.

Loss from discontinued operations was $408,000 or $0.05 per diluted share compared to a loss of $557,000 or $0.06 per diluted share for the fiscal '17 net of taxes. Consolidated net loss for fiscal '18 is $867,000 or $0.10 cents per diluted share compared to net loss of $1.7 million or $0.20 per diluted share for the prior year. Our fully funded backlog at the end of October 31, 2017, was $21 million compared to $23 million at the end of last quarter and $28 million at the end of fiscal '17.

For the 6 months ending October 31, 2017, the company generated positive cash flow from operations, and the company anticipates positive cash flow going forward for the remainder of the year.

Frequency continues to maintain a very strong balance sheet with a working capital position of over $60 million. We have a healthy cash position of $12.5 million.

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

Good afternoon, everybody. As Joel Girsky, our Chairman, mentioned in the press release, the revenues were down for this year. We are disappointed, but we planned for it. And basically, the satellite industry is in enormous turmoil, and our customers such as Boeing, Lockheed Martin, Orbital have all experienced enormous pressure, where many of their geosynchronous and other satellites were really not awarded for various reasons. The more dynamic reason is addressing new customers, and at the same time, how to integrate new technology in their satellites. Until that settles, obviously, satellite -- commercial satellite industry is not going away. It's just taking a deep breath. In spite of this, during this time, we invested in potential technologies that have paid back, and because of the research and development that we invested, we are looking with high degree of confidence of booking more than $50 million of space business during calendar 2018.

The new products or improvement of the old products to meet the new challenges are getting a lot of attention of all of the divisions of Frequency, and the basic idea is that for space, the products on the future have to be smaller, lower power and more affordable because more channels will be required for the satellites. For the secure communication, for which we have quite a few programs that we're now supplying demonstration systems on this, again when this goes into production, affordability will be a big factor, and the stability as a function of time to give secure systems a longer degree of autonomy are going to be key to the success. We are making great progress in our low g-sensitivity and better hold of our time for our timing system to be able to address this market. And I have high confidence that Frequency will continue to grow and prosper in future years.

I'd like to turn this over for -- to Stan because he's waiting breathlessly to make a few remarks.

Thank you, Martin. And I will make just a couple of brief remarks. First of all, with respect to business operations, we're taking actions to restructure the business and reduce costs. That applies both to our New York and New Jersey businesses. These changes are not finalized yet, but they will be implemented over the next couple of months. We anticipate that, that will produce on the order of several million dollars a year annual savings on an ongoing basis. We also, with respect to new business, Martin mentioned the low phase noise, low g-sensitive technologies. We are increasing our pursuit on the DOD business front, and those particular technologies have applications across the board in secure communications, missiles, mobile platforms such as aircraft, helicopters, UAVs as well as in our more traditional market of precision timing. So that will be an ongoing focus in coming months, and we're pretty excited about the applications there.

Martin, that's all I really have to add.

I can talk for hours, but I'd much rather turn it over to our faithful stockholders, so they can ask embarrassing questions.

(Operator Instructions) Our first question comes from the line of Sam Rebotsky of SER Asset Management.

Could we somehow, as far as the R&D, how much is spent on the cybersecurity and how much on the satellites and what kind of sales have we produced? And in the backlog, we expect to get $50 million in -- how much is that going to be? Is that all satellites?

Okay, go ahead, Sam, sorry. Sam, this is Martin Bloch on this. That $50 million only relates to business that is related to space, either satellites or new development for satellites on this area. That does not include any business that we pursue on the secure communication and other DOD business. That's why I specifically said, this is satellite and related programs to satellite technology.

So as far as -- yes, go ahead.

So the added business that we are pursuing in secure communication and the other areas, this will hopefully add to that number. I'm fairly high confident. If you are asking about the IR&D investment that we have made, some of it which we pay as from -- as a corporation and some, which are sponsored by our customers, the best estimate is, it's about 50-50 related to space as well as to EW and secure communication and positioning technology.

Okay. We talked about getting rid of Gillam before the April 30, 2018, which would be your fiscal year. Is that an accurate date? Or I mean, we'd like to report it in that period, would the sale or transaction occur subsequent to April and is that -- or is that going to be done?

Our present view is that it will be done before April 30. Understand, we are putting a lot of effort to get it done earlier. But I'm 90% confident, if not more, that we'll be able to accomplish it before April 30 in fiscal 2018.

Okay. And just one further before I get back into the queue. With our year ending April 30 and we expect to get $50 million of business, do we appear to be -- with the backlog 21 versus 23 or 21 versus 28, will we be sufficient, will we have more than $11 million or $12 million, so we could at least break even in the quarter and then subsequently make more, so we can make a profit?

Okay, Sam. At this moment, it depends on timing, and that's something that, unfortunately, we have very little control. Programs that we expected in July, August, September have all moved to the right, and we have a very, very high degree of confidence that they are ours. But how much contribution they are going to make to the fourth quarter is hard to predict at this time, but we'll keep you abreast. But what is most important is to look forward to a profitable fiscal 2019, and that's my mission. And I want to make sure, and I'm sure that Stan is going to contribute significantly to that success.

Our next question comes from the line of [Richard Johns], a private investor.

I have a question, Martin, about the up/down converters. It's something I've never understood. Basically, you said, I believe, that you had a customer, Iridium, and you've supplied the up/down converters for their satellites. I know that they send a lot of satellites up, maybe more than 60 or something like that.

Not quite. I'll give you an update on that. Go ahead.

Okay. But what I don't understand is that you also said in the past that this additional business, up/down converters and et cetera, might enable you to earn revenues of up to $20 million per satellite, but the Iridium satellites couldn't have produced anything more than several million a piece, because they just didn't add up to that much. So could you give me some understanding on that, please?

Absolutely. The Iridium is an up/down converter at L band because it's primarily for telephony, and we are supplying a large -- it's our first really production job on converters. We are providing over -- close to 3,000 converters for the 82 satellites. Up to date, there are 30 satellites in orbit and an additional 10 satellites will be launched on December 22. And the one in orbits are performing very well and that is a plus. With respect to the higher frequency, like Ku band and Ka band converters, this is where the satellite industry is in turmoil. They are getting new customers and with new requirements and nothing of any significant has been awarded to our customers. So we did not get any significant business on the higher-frequency converters. We have some classified programs that we provided, but that's a small quantity. And we are all waiting breathlessly to see how it's going to shake out. The preliminary view is that they are going to need a lot more channels, but they are going to have to be the smaller lighter weight because the same launch vehicles will have to put up much more converter to provide the bandwidth that they anticipate. As you probably have read, their largest customer that they want to address is the 3.5 billion passengers on aircraft, where they want to provide inexpensive Internet and high-definition video for that market, and everybody is scrambling to see how it can be done and to provide this market.

In the meantime, our customers didn't get any business, and when they don't get any business, guess what, they don't order from us. So that's something that everybody is very anxious waiting to see how it shakes out. I want to emphasize again, commercial and military satellites are not out of business. They are just redefining the needs in the near future. We have every expectation to see that 2018 is going to be the shakeout year. And that's why I want to emphasize again, very highly confident on that $50 million opportunity in satellite and satellite-related work in calendar 2018.

Okay, okay. And is this $20 million -- up to $20 million figure per satellite, is that still a reasonable prospect?

It's a reasonable prospect on this except it's going to take a lot more -- a few more converters than we originally planned. There are going to be more converters, but they'll have to be smaller and more affordable. Because to provide this bandwidth, you'll need much -- many, many more channels on those satellites than as done in the past. But that's still a good objective.

Our next question comes from the line of [Michael Eisner] , a private investor.

Can you comment on what the backlog is today?

I think that the backlog, the funded backlog is $21.2 million. And this, as you know, by our definition, we don't count in backlog, the contract value. We only report the funded contract value of the contracts.

But you feel confident you're going to get $50 million just in the satellites, not counting Zyfer?

The $50 million that we have targeted is satellite and satellite-related business. This does not count any of the secure communication that Zyfer is pursuing, and they have been very successful in providing a feasibility system in field testing and whatever that happens that will be additive to that number.

A while ago, you mentioned you're going to -- you were looking to save $5 million during this year on cost savings. How is that coming along?

I have to take a look. I think over the past year and half, we've reduced by about $5 million in cost, and Stan has undertaken the task of improving our efficiency by combining New York and Elcom production operation right here at -- in our New York facility. And we are looking very hard to see what other savings we can achieve without sacrificing our capability and our research objectives that we want to achieve.

I think your lease is up next year in Elcom from your, I think your annual (inaudible)

Yes, that's a minor thing. We'll move into a smaller facility at significant savings as part of the savings involved and that will become our research and development center for EW and other secure applications, and the manufacturing of the product will be done in New York.

Final question. I don't mean to question you, but you're saying $50 million in satellites. You sound pretty confident about that. What gives on that?

Well, that's the investment we made in IR&D and the proposals that we have submitted for these programs and the feedback we're getting from our customers, that we have great probability of getting the jobs.

Some of the bigger companies won't try keeping it in-house or they need you this point?

No, they can't. The majority of this work is a technology difficulty that they cannot keep it in-house.

(Operator Instructions) We have a follow-up question from the line of Sam Rebotsky of SER Asset Management.

I'm welcome back.

Well, you are welcome, as always, Sam. Go ahead.

Martin, I brought up making acquisition. With Stan onboard, you have the ability to look at a lot of other deals besides consolidating and getting rid of Gillam. It seems very desirable to bulk up profitable acquisitions to kick the tires a lot more. What results have you had? What have you been looking at? And could you hope to make an acquisition and how soon?

Well, we are always looking at opportunities. And you're right on this. With Stan on board on this, he will have to earn his keep and that's an added task that he has. And definitely, the idea is to look for acquisitions that aid us in our quest. And this is basically that will supplement our main objective of precision time, low phase, low g-sensitivity and programs in EW and secure communication. And one of the other technologies is companies that can reduce the size because that's becoming a major problem to build things smaller with the same performance, and we will definitely keep our eyes open, Sam.

But how many companies are you presently looking at that fit your requirements to bulk up and increase the sales? Are you looking at 1 company, 2 companies in the $10 million to $20 million or a $50 million? What kind of parameters do you have currently?

Well, like I said, since we have NDAs with everybody we're talking about, I'll much rather not define it at this stage. All I can tell you is we are looking for that opportunities, and it's not just a matter of increasing sales, it's increasing sales and profitability with a good future. That's the commitment I have to make to you and to all the shareholders.

Okay. I agree with you, and I believe to the extent that you start -- I mean, I believe you're looking at things, but to the extent that you find something, whether it's a high sales or a low sales, that's good profitability that you could acquire at an appropriate price. This will help your stock improve and then give you more flexibility with a higher stock price. With your stock currently at this level and there is no -- it's too cheap to give your stock, but if your stock could appreciate, and I think the Street would look at you better if you found companies that could improve profitability. And it's not your sales, but profitability. So that's my assumption.

And a good growth opportunity in the future. They have to have all of that.

Exactly. Yes. But there must be one out there for you.

Well, I'm sure there is.

Our next question comes from the line of [Michael Cooper] , a private investor.

I have a couple questions here.

Mike, do you have -- are you speaking through the speakerphone?

No, but I've got headset on, hang on.

Okay. We can hardly hear you.

Is that better?

Yes, much better. Thank you.

Okay. So one question on the competitive landscape. I think it was Microsemi breaking out their frequency and timing equipment and couple of weeks ago, I think, they released their quarter. And they seem to indicate that they were seeing increasing revenue on this side of the business, and they also talked about increasing market share. Are they directly competing with you in your overall business? And should I view their renewing success as a good sign that the market is starting to inch forward and maybe, some contracts are being released? Or is it just kind of -- you're dealing with long time frames in all your contracts. Is it just an indication that you are coming along and in the next quarter or so we're going to start to see this kind of progress with Frequency?

Okay. Let me separate and then free set, but the first on this is Microsemi a competitor to FEI? In some respect, they are. We've experienced very little competition from them in space, but in some of the other areas on timing, they have competed, and I think if they report the possibility of increased sales, that's a good sign for everybody. When it comes to our pursuit, this -- there are very few companies in the world and maybe 2 companies in the United States that have the technology to support the next generation of secure communication and the next generation of satellite timing, and we are one of the very few. And I believe we are the best on this area. So -- and the idea that we are looking forward to book some $50-plus million worth of satellite and satellite-related business in calendar '18 indicates that we see the trough leveling off and that there are people shaking out programs in the near future.

So the answers is, both, I think their indication is positive, but in some of the major satellite programs, they are little or no competition.

Okay, great. My second question is around your commercial and GPS operations. And can you give a little bit more flavor on the financial performance of that division? I think you are -- you still...

Are you talking FEI-Zyfer?

Yes. Well, you've broken it out on your financials. It went from $3.5 million to $4.7 million this quarter? So just around that. And the gross margins in that business and is your sales momentum increasing there? Should we be looking at these types of very robust revenue gains over the next few quarters in that division?

Well, we are looking -- again, I do not know exact definition. So I'll do my best to answer your question. If you are looking -- are we looking for increased booking in secure communication and business at Elcom and FEI-Zyfer, the answer is yes. We are looking to book additional revenues in that area. And as I emphasized in the past, I personally see that a secure market, secure communication and synchronization and EW to be as big or bigger market than space. And that's because there are so many opportunities and such a great need to improve our secure communication, navigation and positioning on this. So FEI-Elcom and FEI-Zyfer are pursuing business and they -- I expect that they will have significant success in this coming calendar year. How much of it will fall in fiscal 2018 is hard to predict.

Okay.

Did I answer you?

Yes. Now on the gross margin side. Are your gross margins higher in that area than your 33-ish, 35-ish percent that you report kind of generally?

Well, FEI-Zyfer's margin are much higher on this area -- on this. But we have to take it with a grain of salt because the key -- one of the key ingredients in their systems is the precision time that's manufactured at FEI, and I believe that we sell that product to them at 0 profit. So they have the profit on the timing units that we make it at FEI-New York, which is a key building block, so -- but their profit margins are definitely, considerably higher than New York.

Our profit margins are very dependent on volume, because you need a fixed amount of technology and support personnel to run the business. As our revenue increase, you can see significant improvement in our margins on this. The key is that we have to increase our revenue.

Okay. And you are -- I mean, what was it? Around 40% or even closer to 40% or 50% revenue increase quarter-over-quarter?

No.

Overall number.

In that division?

No. In that division, yes. At FEI-Zyfer, yes. They have great performance. I want to indicate again, remember, that the timing portion of the systems that they are delivering in industry is shipped by FEI-New York at 0 profit in New York.

Our next question comes from the line of [Michael Eisner] , a private investor.

I can't hear you. Can you speak up, please?

Our next question comes from the line of [Michael Eisner] , a private investor.

They answered on Zyfer.

There are no further questions over the audio portion of the conference. I would now like to turn the conference back over to management for concluding remarks.

Gentlemen, thank you all for calling in and your interest in Frequency Electronics. We certainly appreciate it. Please understand that there's a bunch of employees here who are breaking their rear-ends hard to achieve the success we all want. And on behalf of all of those employees and the management, who's sitting here with me, we wish you all a really happy, healthy holiday season and good New Year. Thank you very much. We'll talk you at the end of Q3.

Thanks, everybody.

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time. And have a wonderful rest of your day.