Frequency Electronics Inc (FEIM) 2024 Q2 法說會逐字稿

Greetings, and welcome to the Frequency Electronics Q2 fiscal '24 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 constitutes forward-looking statements pursuant to the Safe Harbor provisions of the Private Securities Litigation of 1995. Such statements inherently involve uncertainties that could cause actual results to differ materially from the forward-looking statements 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 or revisions or changes after the date of this conference call.

It is now my pleasure to introduce your host, Thomas McClelland, President and Chief Executive Officer.

Thank you and good afternoon, everyone. From a financial point of view, as was the case last quarter, we have encouraging numbers to report and I continue to be confident that we're on a sustainable path of growth and profitability. We have a lot of exciting new business and are confident in our ability to execute profitably going forward.

As everyone should be aware, we publicly announced three relatively large contracts, one right after the other during the month of November. These contracts were a long time in the making and originally we anticipated getting under contract much sooner.

However, in the end, this occurred after the close of Q2 because these contracts have been anticipated for some time. We've been able to prepare ahead of time and are thus in an excellent position to hit the ground running so to speak. We have every reason to be confident in our ability to execute these programs successfully.

In addition, we anticipate additional smaller contracts to be coming online over the next few weeks, slightly months, and we will make public announcements as appropriate. All in all, we're experiencing significant growth and have good reason to believe that this trend will continue going forward, let me briefly highlight the financial results before Steve fills you in on the details.

Revenue, gross margin and operating income are all up compared to Q2 of last fiscal year and holding steady compared to Q1 of this year. The backlog's holding steady at around $50 million at the end of Q2 and is anticipated to grow significantly based on the new orders that we got in November.

So in summary, I believe our efforts have put us on a sustainable positive trajectory of growth in our core business. The company remains committed to achieving sustained profitability and cash generation going forward.

And at this point, I'd like to turn things over to Steve Bernstein, our CFO, who will go through the numbers in a lot more detail.

Thank you, Tom, and good afternoon. For the six months ended October 31, 2023, consolidated revenue was $25.9 million compared to $17.2 million for the same period of the prior fiscal year.

The components of revenue are as follows. Revenue from commercial and US government satellite programs was approximately $9.5 million or 37% compared to $7.8 million or 46% in the same period of the prior fiscal year. Revenues on satellite payload contracts are recognized primarily under the percentage of completion method and are recorded only in the FEI New York segment.

Revenues from non-space US government and DOD customers, which are recorded in both the FEI New York and FEI Zyfer segments were $15.8 million compared to $8 million in the same period of the prior fiscal year and accounted for approximately 58% of consolidated revenue compared to 47% for the prior fiscal year. Other commercial and industrial revenue was $1.4 million for the six months ending October 31, 2023 and 2022.

The significant increase in revenue for the period compared to the same period in the previous fiscal year was related to contract awards, resolution of technical problems from the previous fiscal year, and improvements made by management. For the six months ended October 31, 2023, gross margin and gross margin rate increased as compared to the same period of fiscal year 2023. The gross margin dollar increased as a direct result of increase in revenue.

The gross margin rate increased significantly due to the fact that many of the technical challenges faced in the prior fiscal year have been resolved. And as a result, the related programs are now moving forward and running more efficiently. Previous programs that sustained lower margins due to technical issues are near completion or have completed.

For the six months ending October 31, 2023 and 2022, SG&A expenses were approximately 19% and 23%, respectively, of consolidated revenue. The percentage of consolidated revenue decreased 5% due to an increase in sales for the six months ending October 31, 2023, as compared to the six months ending October 31, 2022. The increase in SG&A expense for the six months ending October 31, 2023 as compared to the prior-year period was largely due to an increase in professional fees, payroll and associated costs.

R&D expense for the six months ending October 31, 2023, decreased to $1.3 million from $1.7 million for the six months period ending October 31, 2022, a decrease of $400,000 and we're approximately 5% and 10%, respectively, of consolidated revenue. R&D decreased for the six months ending October 31, 2023 was primarily due to a shift of employees between production and development depending upon availability, scheduling, and necessity. The company plans to continue to invest in R&D in the future to keep its products at a state of the art.

For the six months ending October 31, 2023, the company reported operating income of $3 million compared to an operating loss of $5.4 million in the prior year. Operating income increased due to the combination of increase in revenue, gross margin, and the effects of cost cutting measures instituted by management that began in fiscal year 2023.

Other income can be derived from reclaiming of metals refunds interest on deferred trust assets or the sale of fixed assets, interest expenses related to deferred compensation payments made to retired employees. This yields pretax income of approximately $2.9 million compared to a $5.4 million pretax loss for the prior fiscal year. For the six months ending October 31, 2023, the company recorded a tax provision of 13,000 compared to 2,000 for the same period of the prior fiscal year.

Consolidated net income for the six months ending October 31, 2023, was $2.8 million or $0.3 per share compared to a $5.4 million loss or $0.58 per share in the previous fiscal year. Our fully funded backlog at the end of October 2023 was approximately $50 million compared to $56 million for the previous fiscal year ending April 30, 2023.

The company's balance sheet continues to reflect a strong working capital position of approximately $25 million at October 31, 2023, and a current ratio of approximately 2 to 1. Additionally, the company is debt-free. The company believes that its liquidity is adequate to meet its operating and investing needs for the next 12 months in the foreseeable future. I will turn the call back to Tom and we'll look for your questions soon.

Thanks, Steve. We will now turn things over three questions.

At this time, we'll be conducting the question-and-answer session. (Operator Instructions)

Brett Reiss, Janney.

Yes, and gentlemen, thanks for the opportunity to asking a question or two and Tom, the StarLink satellite program that Space X has that so many the militaries are using the conflicts that are going on is the satellite sides of those satellites of the size where and you know, our atomic clocks and our frequency generators. Can you touch on these potential sales opportunities?

Well, I can tell you that the StarLink in particular, we have none of our product are on the StarLink satellites at this point in time, nor do we have any anticipated to a presence on the StarLink satellites going forward. However, there are several other similar kind of satellite systems that are in various stages of development and launch in. And we have been talking to several of these the these programs and we do anticipate at some point in the future that we will definitely be involved in these programs.

So one of the important things, Starlink is very much a communication system and where we think that we have a better opportunity is in similar systems that are developing a navigation segment and those systems and their the precision timing becomes so much more important. And that provides a big opportunity for us, and this is a pretty big thing at this point in time.

People are very concerned about the vulnerability of GPS. and the ability to do this. So one thing is to actually take out the GPS satellites, the others to jam the signals from those satellites or to spoof them. And it's much more difficult to jam the signals that come from low earth orbit satellites because the signals are much higher level.

And so so a lot of people, a lot of programs are looking at adding a navigation payload and capability to those systems. And we have a big potential opportunity in those, and we're looking at those very, very carefully.

These are some organizations that are looking to develop these similar systems, do know who they are and you already have your foot in the door or is it's someone that yourselves people have to first get to know?

No, we know who they are, and we do already have our foot in the door in the significant number of these.

Great. I'm going to drop back in queue.

Thanks again for another good quarter and a good holiday to you.

Okay, Brett. Thank you.

Right.

Chris Kotowski, private investor.

Congratulations on great results.

Thank you.

First, digital, does margins go down slightly sequentially because you discussed margin six month basis, but on a quarterly basis, it seems like you sequentially we had slightly larger revenues last quarter. You said in our barring one-time item, your that your operating income was a little bit of a $1 million and now it was a little bit under $1 million.

Yes, that's certainly correct, Tom. But I think the the point I would emphasize, we always anticipate that quarter to quarter, we're going to see some fluctuations in things. As we reported last quarter, there were some one-time events that had a positive impact on those numbers and those those one-time events aren't there this quarter. So I think the way I it strictly speaking, the margin went down a little bit, but I think I would I think realistically I would characterize it as good pretty much holding steady.

Okay. And generally speaking, does your business allow for leverage kind of continuing raising margins as the revenues increase or would that would the government or the government economies kind of like look at that and take that into account when the price of contracts?

Yes, you know, we for our government customer, of course, they scrutinize things pretty carefully. And we're subject to audit of all our numbers on any programs that the ultimate customers, the government. But I think that to We we we feel pretty strongly that are our gross margin is going to continue on upward trend. Of course, that's not going to go on indefinitely, but we're targeting a gross margin of around 50% and we think that we can get there within the next six months to a year.

It is great to hear. And you on backlogs were all kind of a hair down sequentially again, but you still anticipate to be clear you still anticipate backlogs shooting up again as you win more deals. Is that correct?

That's a that's definitely correct. Same same I would characterize it the same way. It's true. I literally speaking, the numbers have gone down a little bit over the last quarter, but they're really pretty much holding steady. And given that the new business that we booked in the month of November. And additionally, what we anticipate over the next couple of months, our backlog is definitely it's going to trend upward because of that.

Okay. That's good to hear. And the of the deals you announced, one of them was a US government customer. Is that still a military deal or is that a civilian deal?

It is it's not a military deal. Let me put it that way.

Do you do expect to come into the civilian markets in any way?

I'm sorry. Can you say that again?

And do you expect to go into civilian markets significantly?

Definitely. You know it, of course, in the satellite business, the U.S. government has historically been the biggest player but you know, we there's always been there is a lot of activity and more and more coming from other arenas and the $9 million contract that we talked about in our November press release is an example of that and we anticipate that there will be more of that going forward.

Okay. That's it for me. Congratulations again.

Okay. Thank you.

Tim Hasara, Sinnet Capital.

Just I just wonder, did you I just wanted to confirm you said 50% gross margins in the next six months to a year that, Chris?

Yes, because that's our goal.

Right. I would assume the three new contracts that you announced in November would be at much higher gross margin than that and help the mix there. Would that be correct?

In general, that's correct.

And with respect to those three contracts, I would assume that you will book those as the percent of completion through the term, I guess all three of them or approximately five years. Can you do a (multiple speakers)?

Yes, that's the one of them is actually closer to three years, but and one of them. So 18 months on, but they will all be percentage of completion.

And Rich, with respect to the booking those on a quarterly basis, well, can you give us any kind of estimate or guidance, will it be somewhat linear for the amount of the contract are more front-loaded back-loaded? Or what kind of color would help kind of model that?

Yes, I think the you know, it's pretty hard to model, but I would say that is the best approximation would be a linear approximation, probably a little bit more upfront, but APPROXIMATELY linear over the course of the program.

Great. I don't have any other questions.

Thank you.

Thank you.

[Frank Wocinski], private investor.

Hi, and I see your backlog given the new orders in November, your current backlog must be closing in on about $100 million. And in that rate, you're at your inventories, which are which are high is a positive. I assume I'm curious about the the the personnel, though, do you have enough engineers and you have enough people to put out these contracts efficiently?

Okay. So a couple of things to highlight there. First of all, the current backlog is not that 100 million. You have to keep in mind that when we get under contract on these programs. We we we don't get authorized to spend the full amount of the contract. So the backlog is going to go up and is going to go up significantly over over the coming months, but it doesn't all happen at once.

So so just the and that's kind of an important thing to understand. I think that I'd like to address inventory a little bit. I think you're actually right on the money without one. I think on, you know, we're really coming out of the pandemic and this period where we all experienced the supply chain problems. And as part of that to it is pretty important to inventory provided a good buffer to all of the supply chain kind of problems and we're really kind of coming out of that.

And we're at a point where we really want to be much more aggressive in keeping the inventory down and approaching it. And managing that inventory very carefully. But you're right, we do have a very significant inventory. And as we start these programs, especially where we're on really quite historically, quite tight schedules to deliver things. That's a that's a benefit.

Your other part of the question regarding engineers, I think this what I tried to point out in my opening statements is that we've actually been working on these three programs for quite some time and in fact has been fairly frustrating that we didn't get the turndown get under contract on these jobs sooner than we did, but the benefit of that.

The positive thing about that is that we've really been preparing for these programs over the last six to nine months. And we have cautiously been increasing our workforce and hiring engineers. So we're really in, I think, a very, very good position in that regard. And I'm very, very optimistic about our ability to work to execute these effectively right from the start.

But I'm a little curious. So I know how you figure the backlog. You got contract awards and say that first went to $25 million. Obviously, you don't take all that $25 million, even though it is awarded, you don't take it into backlog?

No, we only take fully funded backlog. So in that example, let's just say it's $25 million contract. They give you $5 million upfront and then they progressively funded accordingly, we would only put $5 million in backlog.

I understand but I mean, it's not like the rest of that $25 million is contingent on anything other than new delivery in the first $5 million like for like it's not contingent on anything.

It's not contingent on anything and we only report funded backlog.

So the and just to follow up on that, in that particular example, $25 million program which has that completion in 18 months. So I think one of the important ways to look at that is it that that backlog has to surface within the next 18 months and obviously most of it a lot sooner than that. So occasional were our initial turn on those just for a few million dollars, but that has to occur in order for that customer to get that product back in 18 months, they're going to have to turn us on for a lot more money relatively quickly grade.

I understand in that same vein, via the atomic clock, what are which I guess as a potential contract options of $70 million, depending upon the effectiveness of the navigation system performance on a demonstration satellite win is that that demonstration satellite going up? And when do this, when do you expect to receive confirmation that the product has been effective?

So so I think that is currently scheduled for a trial in 2027. So we would anticipate that potentially even well before that. But certainly at that point in time, we would anticipate that the you that would get determined. Let's just put it that way.

Okay.

As you know, this is a new customer for us and I think one of the important things is for that customer to gain confidence in working with the I. and I. So we're doing everything we can to, you know, position ourselves to you and also that those options get to realized.

That it's truly a you don't expect any engineering difficulties like you've gotten past what we have done that on this program, I hope.

No, we do not. In fact, that does one of the things this this is a there's very little new development on. This is basically a building hardware. It's a production job, and you know it. There's there's every reason I believe that we should be very, very successful on this one from Cape.

One final one for me. Your investors looking at FPI. pretty much in a satellite, our program company, but DeZyferand the non satellite business seems to be going quite well. Have either big orders associated with with that business or is it more continuing orders or is it smaller orders, but the numbers are quite impressive how that's going.

Yes, they actually have been very successful over the past couple of quarters in getting new work, completely new stuff and of course, there are also continuing orders on their existing products so far are they they went through a rough patch about a year ago, but perhaps things were moved around their country, but they've surprised us all actually in their ability to turn things around. And things are really just looking really good at Zyfer at this point in time.

And is the are the margins at Zyfer similar to the satellite?Or is there any difference in the margin structure of those two operations?

Yes, I think they're there. I know the numbers aren't that different when you look at them. But I think the details of how you get there are definitely not quite the same.

Well, thank you very much and wish you best of luck in coming quarters.

Thank you.

George Marema, Pareto Ventures.

I had a question about your SG&A R&D expenses is it has a revenues increase and if you get near your gross margin, won't let me ask it differently. You get towards your gross margin goal what would net margins approximately look like?

Steve, I'll let you take that one.

So SG&A on a dollar value number is going to run fairly consistent. I mean, again, if we if we grow substantially, yes, there'll be some more costs in there. But percentage-wise, as you see on it went down to the percentage, the dollars even as a formula of income is down.

So we expect it to stay at that current level where it is now, unless things substantially grow, I'd say in assets for, you know, secular net margins expand and for as a percentage of sales.

Gross margin or SG&A?

No, net margin. Or let's say your gross margin does hit 50%, what would you anticipate the net margin to be?

I would have to look at it, but it will go up. And again, I think like I said, the actual cost structure will be relatively the same are all in all.

Yes. So the SG&A right now is about 2.5 a quarter. You don't expect that to increase too much?

No, I do not that.

Right. And also, Tom, after you've won a couple of these big jobs here recently, Tom, what does the opportunity outlook over the next couple of years look like now the opportunity set pipeline, do you have a sense?

The opportunities are look really great.You know, we are you might imagine that we got the been been working on these these three jobs for some time, and we finally got them and that's it. But the reality is that we were just actually overwhelmed with the opportunities at this point in time. Space is a is booming and I don't see that turning around anytime soon, but there are a lot more.

You mentioned you may have some small wins here in the coming week flash month. Do you are there any big ones in the pipeline or that there are you want to moderate what's going on out there?

There are definitely some other big things in the pipeline. But the you know, the big things don't happen overnight. You know, some of the very there's kind of a constant, a barrage of smaller things coming in the big ones, you know, I think I would look for some things to materialize in it. Is it six to nine months perhaps.

Okay. And if I may ask one last one, U.S. and since you are there for many years there, I know you're new is the CEO., but you have some history with the company. Can you kind of maybe compare and contrast or describe maybe qualitatively the difference between today and sitting back around 2018, there was a similar, I say, setup in terms of huge opportunities, a lot of wins, but it just didn't really materialize. What kind of happened then what's to prevent that from everything to kind of fall apart again now?

Yes. A very good question. And the of course, there's there are no guarantees in life, but I think we are we are doing some things differently. I think that if we look historically, we've had a lot of difficulty with the what we refer to as NRE. programs, a nonrecurring engineering or a lot of new development activity.

Historically, when when those turn into a later on into production. We've been able to do those very profitably, but we have been challenged with the development. And I think one thing that I've made a real effort to do differently is we're bidding these things differently. And I think to some extent, you know, a lot of my experience here over many years, I have been involved in an awful lot of these development programs.

And I know the pitfalls and the difficulties. And I think we are we're pushing back really hard and we're making sure that we bid these in a way that we are, we feel confident that we can be profitable. And so, you know, I think it is I think it does us. So one of the elements I think then the rest is just kind of the devil's in the details. I think if we look at the specific programs that have just come online in November, I think these have a smaller non-recurring engineering component to them, there are much more production. And those historically we have been very effective on.

So we're confident in that regard. And I think the rest of it is just the I think one of the problems starting in 2018 is it, you know, the top management to really didn't understand the program, so very well. And so so we really didn't we just kind of ended up behind the eight ball from the start in some cases. And the I think I'm actively involved in these programs and I'm committed to making sure that they execute effectively going forward. And I think so. So that's my take on things. It's a really good question. But you know, we'll just have to see how things go going forward.

I appreciate the candor. And if I may slip in one real one last quick one here on and I know you guys don't give guidance you guys as a company have good visibility quarter to quarter on what revenues and costs look like or you don't have much visibility?

No, we have we have pretty good visibility.

Can you consider giving quarterly guidance at quarter end?

Steve?

As of now, we don't guide going forward. Maybe we will continue in the future, but not for now.

Thank you.

Okay.

Michael Eisner, private investor.

Hi. How many employees do you have at this time?

We have for just about 200 employees, including all three sites at this point.

That's full-time.

Yes.

And some you have some part-time also, right.

We have some part-time marine work with some consultants and we have some contracts with some outside engineering contractors.

All right. So hire more people did three contracts, the first two, you know, the technology is already proven and the first two, the $25 million and the $19 million?

Yes.

That's great. Now, can they can these companies we deal with? Can they give you more business and these two contracts?

Yes.

Just the first positive, like, for example, the $25 million that will be done roughly two years or so that could go for another $20 million say?

Well, it's to I want to make sure I don't mislead in that particular case. It's not like there are contract options going forward, but that is a major a satellite to supplier and we had many, many contracts with that particular company over the years, and we will have many more going forward.

In fact, we do currently have other contracts with the with that company. And I I have every reason to believe that if we are successful on that particular program, that that will lead to other as our satellite programs for us going forward.

It should work using technology that worked before?

Yes, absolutely. One of the this one of the things we pointed out in the press release is that this is a $25 million program, but from beginning to end this 18 month time period. And the in a way, this is the ultimate customer is a U.S. government and this is sort of a test to see if we and of course, our customer can deliver in the this shortened period of time.

Typically a program like this would take roughly three years to do the same thing. We're trying to do it in and have that time. And so where we are, we see this is a big challenge, but it's one that we are pretty confident that we can do. And and I think if we're successful, I think there is going to be a lot more business behind it.

That's good to hear. But at this point, these are these three contracts, I assume you already started working on them?

That's correct, yes.

So the clock is already ticking the YieldStar just today or the dated contract was the right thing came and yes, everybody does (multiple speakers)

We are we are moving forward very aggressively on all of these.

And the $9 million one, is that is that new technology or you had did that work before?

No, that's not. That's not new technology for us. That's a base a base. The atomic frequency standard but that is an existing FDA product that has already gone through qualification testing and so forth and so on. And so so that is one that we really do not anticipate any major difficulties in the it's just straight manufacturing.

All right. And who owns the technology for that you or the customer?

We own technology.

Is that on all three times X?

Yes.

Today, once you make it for them, they can take the work to someone else.

No, no, definitely not.

Right. So you get you get the RD., which is key and that when you mentioned it could be $70 million over six years. Is that what? Because they don't want to give you the whole thing at once they want --

Well so so I have to be careful what I say because we as part of this contract, there's a lot of specific information that we're not able to divulge, but that the this is a navigation satellite system. And so the idea is we have the products that we're going to deliver on this contract are going to go on demonstration satellites. And if that demonstration satellite is successful, then there is a very high probability that those options will be exercised.

Now the other thing to keep in mind, if you read about a lot of these satellite systems. Those are all kind of, you know, independent of FTI.'s participation in these programs. There's a you know, it's very expensive to a to a launch a satellite system, there are all kinds of considerations. And so so there are many things other than just the DA product we deliver for the satellite that can 10 cause of problems for the ultimate success of that satellite system. And those things are completely out of our control.

And so so there are a number of other reasons that our customer could decide down the road, not to go forward with this system, things that have nothing to do with F. FEI I. And we I think we have a reason to which I can't go into too believes that that is unlikely.

But nonetheless, we have to recognize that those are possibilities but tight. I think, of course, the other side of it is that the if if they were not successful and delivering on time or our products don't work the way anticipated, then obviously our customer would have the opportunity to trade to procure those products from somebody else. We think that's highly unlikely, and it's hard to imagine that that would be cost effective for our customer.

So setting aside, so part of this, that is completely out of our control that the system doesn't go forward because of the financial things or other other things that have nothing to do with our products. We set that aside and look at the part that we can control. I think we're we feel that we're in a really good position. And I think it is very likely that one way or another, those options will get exercised.

For example, someone may make depart in Attachie fewer, pardon, if they can make it, that would be an example something could go wrong. Hyprotech?

Yes, that's the kind of thing that could go wrong. And you know, we've the E&O. I am not going to speak specifically about this program, but we've seen where other space programs had, you know, the whole program was put together and the plans were to launch satellites in Russia.

And then over the last couple of years, all of the things that have gone on in the geopolitical realm. Russian arrangements with the US. are suddenly not very good. And so those launch opportunities disappear. And so so now the customer making that system is scrambling to find other kind of launch sources someplace else in the world that delays programs.

And then when things are delayed, DNO, people are investing money and goes out in time and the things things become a lot more challenging. So So just by way of example, of other things that can throw a monkey wrench into these kind of programs. So I probably shouldn't we are I'm sitting here being negative about this kind of thing, but I think those are the kind of things that I could imagine that would would it potentially be a problem.

If you if you pay attention to the commercial satellite programs that people talk about, somebody mentioned StarLink earlier and there are many other these systems. There's a good number of them that never really end up getting launched.

So and yet that so that can always happen, but you are comfortable with these three contracts?

Yes.

And then third, the third one is that the three year one, you said three years before?

That's correct. Yes.

Three year. Right. So all these contracts could go anything you can do more work on. But right now you expect a couple of just smaller contracts over the next couple of months?

That's correct, right.

And I think in that space exiting is launching that half the Rockets at this 0.8?

I don't know the exact number, but they're pretty busy, yes.

It's not really your concern. You just make the product. And I think that's all I had to ask. It sounds like the backlog is going to grow and your revenue went up this quarter. So that's always been it's been going up like a year and a half. So good job there and the backlog buildup for a while.

Okay.

Thank you for your time.

Okay, thanks, Mike.

Thank you. Frank Gasker, private investor.

Thanks for taking my call. I'm going to say something about uptime. It present technology, but future technology, in particular, several, if not quarters years ago, there was mention of an atomic clock, which could in fact be a game changer. I haven't heard much about that since. Could you elaborate on that in a way?

Yes. So so we are currently working on a an advanced atomic clock. And in fact, we're going to do a <unk> a demonstration tomorrow for a government customer on that one. That's a pulsed optically pumped rubidium standard that technology we anticipate should make an order of magnitude improvement in the capability of these kind of clocks.

Now the demonstration that we're doing tomorrow actually is not for a space based atomic clock is for a for terrestrial applications. But we do believe that this technology is definitely something that can work very effectively in this space environment also some.

So that's just one thing. I think that the the we would there are some other technologies in terms of even more advanced clocks that we are seeking funding rather than they did for us to develop those technologies on internal FPA money is probably not feasible. So we are seeking sources of external funding at this point in time, and we'll see over the next year or two, whether we can be successful at that.

In addition, I think one of the things we think is very important and we are pursuing with internal funding is a smaller, lower cost, atomic clocks and also court space clocks for space applications, but with an emphasis on very high performance.

So I know I've talked about this previously on these calls. But I think we feel strongly that the trick is to find a sweet spot for a lot of these U.S. satellite programs to lower orbit satellite programs and the sweet spot is a is that finding the right compromise between low cost, small size, low power, low cost and high performance?

I think we've seen many of the satellites since StarLink is actually an example where the emphasis is on low cost, but the performance capabilities in terms of precision frequency and time are very, very limited. And so so once you add the navigation component of those satellites, much better performance starts to become necessary and we think that's where where we can make a big contribution and the for working on that.

Yes, thank you. Thank you very much for getting me in detail that. I just had one more Star short aspect to that. The test you said tomorrow is that in fact, then going to show a significant increase in clocks capability?

Yes, yes, it is it. We believe that that technology is capable of even more. You know, we're going to buy by one measure we're going to demonstrate to roughly an order of magnitude improvement over over what we typically do with our current products. But we think that technology is capable of even another order of magnitude improvements if things are optimized appropriately, you have to keep in mind this particular development.

You know, the there are, does it not just do whatever you need to do to get the best performance possible. It's a, I guess, the best performance possible, but you have to keep the power dissipation below a certain amount, the size below a certain amount the weight below a certain amount and so forth and so on has the work over a wide temperature range.

And so so that's where we end up where we are. It's the performance that can be achieved given the constraints that we have to operate in. And so yes, depending on the application, the particular application, this is one particular example. And we do see a very significant performance improvement. But if if we remove some of the constraints that we have in this particular application, we can do much better.

Okay. Thank you very much for the responses and the improvement have a good day.

Okay. Thank you.

Richard Johns, private investor.

Thank you. Tom, you were talking earlier about changes in your bidding processes. I wonder if you'd expand on that a little further. Would you characterize the contracts, the large and small contracts you're winning as a fixed price contract?

Most of the contracts we're bidding on our fixed price contracts. We do from time to time have a cost-plus contracts, but in general it's fixed price contracts. I think you know I in terms of expanding on things beyond that, let me just say I think that the And yes, I have been here for almost 40 years. So I do have a lot of experience on these programs. And I think that I have a pretty good sense of what we can achieve. And and I think I have a pretty good understanding of our business and our customers and what the needs are and so forth and so on.

So I think I know part of the trick in this regard is is knowing just how to go about things. And I think in some cases, you know, we we are we are not the sole source. We are virtually a sole source because nobody else can provide. Nobody else has the technology or the demonstrated capability to live to deliver the product that's needed. And in those cases, you know, we shouldn't be giving anything away and I think we've been working very hard to work towards outline. In other cases, you know, there's a we have to look at the potential going forward.

You know that that may be there is a new development and and a it's something that we want to invest in with the idea that we will there will be a significant business going forward. And you know, we can we are we want to make sure we have the opportunity to participate in that. And so I think the trick is is having a good enough understanding of where things are on the other hand, to invest in a new program where we we end up taking on a lot of risk and there's not much potential.

So it's a one shot program or whatever. It doesn't really make sense to invest in that. And I can tell you over the last year, I can think of specific cases where we we lost the program, but we kind of did that knowingly. We know there was competition and there just wasn't much potential beyond the particular program. And we we could have taken those Poracota gotten those programs. We know what are taken, but we will lost money and it just doesn't make any sense to do that. So I don't know if that's a helpful answer.

Yes, yes, that's that sounds as if you're going about the process in a very reasonable fashion. I am I have another question about your income taxes. They were tiny in the recent quarters as compared with the historic tax rate on you. Is that because of loss carry forwards or and when do you expect to get back to what I believe was more like a rate in a mid 20s or around there When do you think you go back to that kind of tax rate?

We do it is because of NOLs, the tax are paying now was mandatory state taxes and things of that nature, um, I can't predict exactly when the NOLs run out, but I can tell you as you see the performance in the last couple of years, we have a bunch of NOLs going forward that we will be using for a while.

Okay. Okay. All right. That's it for me. Thanks very much through the good work you're doing.

Okay, thanks.

Jeffrey Cohen, Mulholland Capital Management.

Yes, good afternoon. And I hope I appreciate all the color as other callers have reflected. And just real quick, you talked about a target gross margin above 50%. What sort of quarterly revenue run rate with that contemplate?

Yes, yes, Steve, do you want to?

We don't, we're not fully on ready to guide how revenue will grow long term. We believe it will grow and from there, we'll see the efficiency we get from the growth and the margin.

Yes. No, I appreciate that. But I mean, if a 50% gross margin is your target you must have some sort of underlying assumption in terms of what sort of revenues you'd need to get there. So that's done my that's my cost. (multiple speakers)

Well, I maybe sidetrack well, I know you put things differently because I don't think it's that that target is not really based on a particular revenue goal. I think that target is based was really a question of how we're bidding new business and the and that's the target for new business is a gross margin of 50%.

And you know what I just talked about a particular contract that we lost. And that's because, you know, when we bid at that 50%, we didn't get it and that made sense in that particular case. Now there there are going to be some cases where we're going to bid at a lower gross margin because there's good reason to do that. But in general, you know, we're really targeting 50%. And that's kind of a baseline approach to things. And it's really it's really not to us. It's that that is not based on the particular revenue assumptions.

Okay. But just so I'm clear you're not you're not talking about your your six to 12 month goal being your necessarily getting 50% gross margin on your contracts. You're talking about being able to show that in a quarterly report?

Correct. I'm not quite sure I understand the distinction there.

Well, I think there's the distinction between bidding a project at a 50% gross margin and actually bringing that now to your financial results.

Okay, that's that's certainly true.

When you put out that target, you're talking about the latter, correct?

Yes.

Okay. Can you quantify your bidding activity at all, you know, the amount of outstanding bids or the sales funnel are in some way quantify?

I don't think I'm prepared to do that in a very meaningful fashion, qualitatively very qualitatively. I think the pipeline is pretty full at this point in time. We we have a tremendous amount of bidding activity going on. But the I yes, I'm not really in a position to put the total dollar amount on things at this time.

Okay. And Steve, I was just curious, you said if you have a lot of NOLs. Can you what would they be on a cumulative basis, roughly?

I don't have the exact number, but I'll say it's at approximately $20 million give or take our current.

All right. That's all I had. Thanks so much.

Okay. All right. Thank you.

Thank you. And that's all of the questions that we had. I would now like to hand the call back to Tom McClelland for his closing remarks.

Okay. Thank you. I think we are we've been on the call for quite a while at this point in time. I appreciate everybody's participation and I'd like to wish everybody happy and healthy holidays and that's it. Thank you very much.

This does conclude today's conference. You may disconnect your lines at this time and have a wonderful day and thank you for your participation.