Frequency Electronics, Inc.
Q3 2022 Earnings Call Transcript

Published: 10 Mar 2022

[Operator:]

Greetings and welcome to the Frequency Electronics Third Quarter Fiscal Year 2022 Earnings Release Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. 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 obligations to update these statements for revisions or changes after the date of this conference call. It is now my pleasure to introduce your host, Stanton Sloane, President and CEO.

[Stanton Sloane:]

Thank you. Welcome everybody. I'm glad that you could join us today. Before I turn this over to Steve to take us through the financial details, let me offer a few thoughts. Third quarter is challenging, particularly in our Zyfer operation due to delays in bookings and the reduced revenue that resulted from that. We haven't seen any competitive losses there, just delays, so we anticipate these bookings will still come in. We are taking advantage of the lull in production to transition manufacturing from California to our New York facility, which will have the compound effect of significantly reducing costs at Zyfer and reducing manufacturing overhead costs for the Zyfer products that will be manufactured in New York. This will result in benefits over the long run. In our New York operation, we were hit with a severe round of COVID related employee absences, which affected the quarter's revenue and operating income. Despite the challenges, we saw an increase in revenue for the quarter compared to the first two quarters, as well as compared to Q3 of fiscal year 2021. Bookings for the fiscal year are solid, running well ahead of where we thought we’d be for the year and up about 30% from this point last year for the New York operation and up about 21% overall for the company. Backlog is now up to $41.6 million and the book to bill ratio for the quarter was a healthy 1.27 for the company, but an even better 1.4 in core New York operation. As usual, we generated cash from operations, $4 million for the year so far and cash and marketable securities currently stand at $22.2 million, up $2.1 million from year end fiscal year 2021. We also remain debt free. On the technical front, our digital Rubidium Atomic Clock for the GPS III F program is progressing extremely well through its qualification testing. And we have in production, additional units, one of which will be used for long-term testing on the ground by the government and one which is planned to fly on a GPS III satellite to validate its operation in space. Our Pulsed Optically Pumped Rubidium atomic clock is progressing well in design phase also. Laboratory testing has indicated its performance will be outstanding, ultimately enabling better hold over times and helping mitigate GPS jamming and spoofing. The mercury ion clock development is also underway. In addition to these two Office of Naval Research funded projects, we are pursuing a variety of new technology opportunities with various government agencies for not only advanced atomic clocks, but also some new technologies unrelated to clocks as part of our effort to grow top and bottom line. While I can't go into the details here, these are exciting opportunities, and I look forward to sharing more about these as things progress. With that, let me ask Steve to cover financial details for you. And after that, we will take some questions. Steve?

[Steve Bernstein:]

Thank you, Stan. And good afternoon. For the nine months ended January 31, 2022 consolidated revenue was $38.1 million, compared to $38.6 million for the same period of the prior fiscal year. The components on revenue are as follows

[Stanton Sloane:]

Thank you, Steve. The operator will now explain how you can submit questions. Operator?

[Operator:]

Ladies and gentlemen. The floor is now open for of questions. Your first question is coming from Brett Reiss. Your line is live.

[Brett Reiss:]

Thank you. Hi, Stan. Hi, Steve.

[Stanton Sloane:]

Hi Brett.

[Steven Bernstein:]

Hi.

[Brett Reiss:]

The delays in bookings that you talked about could you go into a little bit more specificity as to what that’s all about?

[Stanton Sloane:]

Well, I don’t really know in a lot of detail other than the bookings that we’ve been anticipating just haven’t been processed through the in this case largest one is through one of the government prime contractors. But why that is, I can’t tell you. I don’t believe it’s tied to the CR, but it just seems to be delayed in getting things out of contract.

[Brett Reiss:]

Do we have like lobbyists or people in Washington that when there are these type of delays, you can make inquiries so that you can find out, how long the delays are going to be. So you can plan our business.

[Stanton Sloane:]

You can’t lobby the government prime contractors. So in the case where they’re the customer, having people in Washington lobby things doesn’t really do anything. We have access, of course, to government budget information, and all the exhibits and all that stuff, which we look at pretty regularly. Those are of interest when you’re looking at the program level, but you have to remember, we’re not the prime contractor, we’re a second tier provider to the prime contractors.

[Brett Reiss:]

Okay. The move of manufacturing from California to New York, can you quantify what the cost savings, what’s the run rate on the cost savings going forward?

[Stanton Sloane:]

I don’t want to put a number out, but I’ll tell you that, it does two things. It reduces the cost out in California, because of course for a given number of manufacturing people there. We don’t the same number of manufacturing people here, because we have other, the administrative or the staff or overhead portions of manufacturing don’t need to be replicated here. So if you take the cost out of California, the overall cost to manufacture that same product here is less. And how much less depends on the revenue and some other factors. So I’m not going to predict a precise amount, but it’s a pretty significant effect.

[Brett Reiss:]

Right. Right. One last question and I’m going to refer to a transcript, I subscribe to David Rosenberg, he’s an Economist in Canada and he had as a special guest Pippa Malmgren, who’s an expert on cyber security threats and among other things, she lectures at Sandhurst in Great Britain. And I’m kind of quoting from her last talk, which was about a week ago, understanding the strategic importance of space is crucial, because you can see what’s happening on the ground, because you can control everybody else’s access to the main things that we care about these days, which is the digital domain. Can you cut off in entire nation’s access to GPS, because you knock out their satellites and space? Yes, you can. We’ve seen recently major incidents between the United States, Russia and China in space. And then she went on to name, two examples, which were not in the mainstream media, it was chilling, listening to her describe what’s going on. Aren’t the various things, the clocks and the ability to prevent spoofing and control satellites? I mean, aren’t we in the catbird seat for order flow with where unfortunately the world is going.

[Stanton Sloane:]

So that’s a very complicated thing to ponder and of course, there’s all sorts of ways you can affect GPS, everything from denial of service type stuff to kinetic attacks. I have to leave that for the government folks in terms of their strategy. But what I would say is that the better clock you have up there, the more hold over you have. So if you’re going to, for example, jam the GPS signal, then the clock becomes critically important, because you need the satellite to be able to maintain, sync until you get the signal back. So from that point of view, I would argue, yes, we’d produce very high performance clocks. That’s our specialty here. And a lot of the programs we’re working on, obviously GPS are – that’s the intent to provide better capability.

[Brett Reiss:]

Stanton you’ve been doing a fantastic job. But are you frustrated that the order flow has not been more robust to date?

[Stanton Sloane:]

Well, I think it’s been pretty robust. I mean – I guess, you can you can be the turtle or the hare. In my mind, the continuous improvement is a pretty good strategy. And that’s what I see. So, I think we’re doing pretty good. Every now and then you get these extremely large opportunities that come along and we’ll continue to chase those. But I think overall our strategy in terms of growing the revenue base is panning out. I would appoint to the two in our contracts as a great example of that. And in my comments, I mentioned we’re chasing some new stuff that’s a little different than our traditional business as another way to go about that. And as long as I can keep incrementally growing the business, I’m pretty happy.

[Brett Reiss:]

Okay, great. Thank you for answering my questions. I’ll drop back in queue. Thank you.

[Stanton Sloane:]

You bet.

[Operator:]

Your next question is coming from Michael Eisner . Your line is live.

[Unidentified Analyst:]

Thank you. Hi. How’s the COVID situation in New York now?

[Stanton Sloane:]

Settle down now. We had a bout of it here in the – basically in January and we had quite a number of folks out 30, 32 or 33 folks out with it. And why it, because we didn’t have any significant effects prior to that in terms of our employees and why it hit us in January, I really can’t tell you. But it seems to settle down. I think we’re at the moment we have one employee who’s out for testing positive and expect him back next week. So, it seems okay now, but it did hit us in January.

[Unidentified Analyst:]

Well, I had COVID, the Omicron at beginning of January, it was very high level then. The supply chain going forward from now, not in the court, how is it looking?

[Stanton Sloane:]

Well, there’s still issues in the supply chain and there’s two things. One is shortages or delays if you will. A lot of stuff, a lot of the parts that we use, we used to be get in a few weeks, some of them now are, are four, six, 12 months deliveries. That’s one problem. The other problem of court costs are going up. I think you see in the news, you know things that are sourced from Russia, nickel and titanium, and some of those things are all going up pretty rapidly. So that’s the next challenge. On the component parts side, the issues seem to me to be more in the active components. So, things that are the more expensive and longer lead things seem to be more problematic. But I’m hoping that will start to down a bit. Of course the Ukrainian situation throws a wrench in a lot of different things, because of raw materials. But that’s where we are – we’re holding our own so far, but we have, as we said in the comments, we have had some delays and some of those cause other costs, because you got to read stuff to for components source.

[Unidentified Analyst:]

Yeah. Every, every company’s had delays, it’s nothing at your fault. You said GPS III, I think, did you mean GPS IIIF in your comments?

[Stanton Sloane:]

No. No. I meant GPS III. We’re going to fly one of DRAF units on a GPS III satellite to it’s basically a demo because satellite is designed for not for our clock, but they’re going to put our clock on there, so they can demonstrate its performance in space.

[Unidentified Analyst:]

You didn’t think you – I think last call to call before you didn’t think they were going – you’re going to get on GPS III, but you are going to get one.

[Stanton Sloane:]

Yes, we are. Yes.

[Unidentified Analyst:]

And if everything goes good one, you start production of GPS IIIF?

[Stanton Sloane:]

We are in the cycle on GPS IIIF with qual unit, that’s going through the final stages of qualification. We do not yet have orders for the flight units. But I would expect that to be imminent soon as we finish qual here.

[Unidentified Analyst:]

Like a month or two?

[Stanton Sloane:]

A couple of months.

[Unidentified Analyst:]

Oh, still a couple of months.

[Stanton Sloane:]

Well look, they made it elect – the unit I don't want to get too much into detail, but the unit has a qualification program after that qualification program, it has what's called a long term aging test. But once we're with the qual program, we've basically proven the design of the clock. And my hope is that at that point, they'll start to exercise flight option to not wait all the way through the long-term aging test. But I don't know that yet.

[Unidentified Analyst:]

Would that mean – that would mean the continuous stream of revenue if they approve it?

[Stanton Sloane:]

Well, sure. Yeah. If they exercise the options. Yes.

[Unidentified Analyst:]

Well, there's, I don't know. I figure how many clocks in the GPS 3F was it 21?

[Stanton Sloane:]

No, there's 22 satellites. But some of the initial satellites are already in production and of course those don't have our clocks on them yet, because we're not through qual.

[Unidentified Analyst:]

Yeah. The first 10 or 11, I think it was. You said you got money from Morion. Is that going to be a problem in the future? They're there in Russia, right?

[Stanton Sloane:]

Yeah. Yes they are. We get dividends where we have a small equity position in Morion and we get dividends from them. It's not substantial and frankly I don't expect to get them anymore. So given things are, we're just not – we're not we're not dependent on Morion for anything and I wouldn't expect that we will be able to do much business with them in the future.

[Unidentified Analyst:]

And the Ruble is worthless. Going back to Sam's question on Zyfer are you moving the production and keeping the technology out there? How are you doing this?

[Stan Sloane:]

Yes. Manufacturing will move. You could think it's analogous to them deciding to have a contract manufacturer of the unit. The engineering, development and everything else will remain there as it is. We're just going to shift the manufacturing part here.

[Unidentified Analyst:]

So that means are you going to a small office?

[Stan Sloane:]

Well, no, not smaller office. I mean, it will absorb their manufacturing into the current facility.

[Unidentified Analyst:]

Well, manufacturing not office a manufacturing plant.

[Stan Sloane:]

Yeah. We'll absorb that here. We don't need any additional space.

[Unidentified Analyst:]

No. Would you? I know you could, no, you have space in New York, but will you reduce space in California?

[Stan Sloane:]

Yeah, eventually. Yes. We have a lease and of course we have to either sublet part of the building or when we renew the lease we won't need all that space.

[Unidentified Analyst:]

When's the lease up?

[Stan Sloane:]

I think it's got another couple of years.

[Unidentified Analyst:]

All right. So you cut. All right. So how long is that going to take to move into New York?

[Stan Sloane:]

Probably another month.

[Unidentified Analyst:]

All right. So that's going to save some, some good money on people.

[Stanton Sloane:]

Yes.

[Unidentified Analyst:]

You're not going to have to hire any new people in New York for this, do you?

[Stanton Sloane:]

Yes. We will hire additional manufacturing people, but we won't replace the manufacturing workforce out there one-for-one. We won't need the infrastructure part. We already have that here. All we need is the people that do assembly.

[Unidentified Analyst:]

How many people do you have in California?

[Stanton Sloane:]

Now there's roughly 32 or three, I think.

[Unidentified Analyst:]

All right. And I know I'm asking a lot of questions. Just get this over with. The mercury ion atomic clock, how much of that is in the backlog?

[Stanton Sloane:]

Oh, let's see. In the backlog on mercury ion atomic clock, do you know ? It would be the first piece, so it's rough, these are approximations it's about $2 million

[Unidentified Analyst:]

And the same thing for the space-qualified precision oscillators?

[Stanton Sloane:]

You're talking about the POPRAFS rowing our contract?

[Unidentified Analyst:]

It was announced October 15th.

[Stanton Sloane:]

October 15th.

[Unidentified Analyst:]

I'm sorry, I didn't have, no the pulsed optically pumped bigger in September. How much of that is Backlog?

[Stanton Sloane:]

That's roughly the same.

[Unidentified Analyst:]

$2 million?

[Stanton Sloane:]

Roughly, yes.

[Unidentified Analyst:]

And the other one, the final one, the October 15th contract, do you – if you don't know it's...

[Stanton Sloane:]

I don't have the press release in front of me. I don't remember which one that is, sorry.

[Unidentified Analyst:]

No, it's okay. What's he bids outstanding at this point?

[Stanton Sloane:]

Bids outstanding. I don't know offhand. I'm going to guess probably couple $100 million.

[Unidentified Analyst:]

And you expect to get most of it?

[Stanton Sloane:]

Well, we don't win a 100% of things. Our win rates have run in the 30% to 40% range.

[Unidentified Analyst:]

Yes. You trade and if you take out the cash, you’re about $6 of share or $6.20 a share.

[Stanton Sloane:]

Yes. I'm not sure a current market conditions are a good calibrator but okay.

[Unidentified Analyst:]

No, I'm just saying it's ridiculous because your technology you have in the plant, is worth a lot and yeah. You take out the…

[Stanton Sloane:]

We're underappreciated. This is a national asset.

[Unidentified Analyst:]

Yes.

[Stanton Sloane:]

I agree with you.

[Unidentified Analyst:]

All right. Sorry, I asked so many questions about…

[Stanton Sloane:]

That's quite alright

[Unidentified Analyst:]

Well I have you. Thank you.

[Stanton Sloane:]

You bet.

[Operator:]

There are no further questions from the lines at this time. I would now like to turn the floor back to Stanton Sloane for closing remarks.

[Stanton Sloane:]

Great. Thank you. Well, thank you everybody. I'm glad you're able to join us today. Until we talk to you next quarter, please stay safe and healthy. Have a great day. Thank you very much.

[Operator:]

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