Frequency Electronics, Inc. (NASDAQ:FEIM)
Q1 2017 Earnings Conference Call
September 19, 2016 01:30 PM ET
Joel Girsky - Chairman
Steven Bernstein - CFO
Martin Bloch - President and CEO
Sam Rebotsky - SER Asset Management
Greetings, and welcome to the Frequency Electronics First Quarter Fiscal Year 2017 Earnings Release Conference Call. At this time, all participants are in a listen-only mode, and a brief question-and-answer session will follow the formal presentation. [Operator Instructions]And 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.
And with that, it's now my pleasure to introduce your host, Joel Girsky, Chairman of the Board of Frequency Electronics.
Thank you very much. Welcome, everyone. I appreciate you’re dialing in and talking to us. Sitting alongside of me is Martin Bloch, CEO of Frequency Electronics; and Steve Bernstein, our CFO.
And I'd like to turn the meeting over right now to Martin please or Steve, why don't we go to Steve? Thanks, Steve.
Thank you, Joel, and good afternoon. Satellite revenues represented approximately 50% of consolidated revenues in Q1 of fiscal 2017 compared to approximately 55% of consolidated revenues in the same period of fiscal 2016. In dollar terms it was down $3.2 million. This was primarily due not to cancellation, but delays in contract awards, many of which are sole-sourced to Frequency Electronics.
Revenues from non-space U.S. Government/DOD programs, including sales by FEI-Elcom and FEI-Zyfer rose to approximately 25% of consolidated revenues in Q1 of fiscal 2017 compared to approximately 20% of consolidated revenues in fiscal 2016.
Revenues from network infrastructure and other commercial products that are reported in the FEI New York, Gillam-FEI and FEI-Zyfer segments were approximately 20% of consolidated revenues about the same as in prior year.
Gross margin was $4.1 million compared to $5.8 million last year yielding a gross margin rate of 32% in Q1 of fiscal 2017 compared to 35% in the prior year. The decrease in gross margin percent was affected by decrease in sales resulting in an increase of unabsorbed overhead. Additionally the product mix included a higher component cost relating to a multi-year low margin contract expected to be completed this fiscal year.
SG&A expenses were $3.3 million as compared to prior year's $3.7 million, a reduction of $350,000. This percentage was over our target of 20% of revenue, but with cost saving measures put into place in fiscal 2016 that will be continued through all of fiscal 2017 lower levels of SG&A expenses will be maintained.
Internal R&D spending in Q1 of fiscal 2017 increased to $1.6 million or about 12% of revenues compared to last year's $1.1 million or 7% of revenues. The increased spending was focused particularly on affordable secure communication products.
Operating loss was approximately $800,000 compared to an operating profit of $900,000 last year. Operating profits were impacted by the decrease in revenue as mentioned earlier. Other income which generally consists of investment income offset by interest and other expenses netted t o income of $50,000 in Q1 of fiscal 2017 compared to a net income of $650,000 in the same period of fiscal 2016.
In fiscal 2016, there was a $400,000 insurance proceed and $175,000 gain on sale of securities, which didn't occur in fiscal 2017. This yields pre-tax loss of $750,000 compared to a pre-tax income of $1.5 million for the same period last year. In spite of our domestic loss, the provision for income tax is a benefit of $40,000 compared to an expense of $700,000 and 44% effective rate last year. Our effective rate is impacted by not receiving credit for any losses at foreign subsidiaries.
Net loss for Q1 of fiscal 2017 is $700,000 or $0.08 per diluted share compared to $900,000 of income or $0.10 per diluted share for Q1 of fiscal 2016. Our backlog at the end of the quarter was $36 million, up from $32 million at year end and up from $22 million at January 31, 2016.
During the first quarter we used cash from operations in the amount of $600,000 compared to $1.8 million in the same period last year. Frequency continues to maintain a very healthy balance sheet with a working capital position of over $75 million.
I will turn the call back to you Martin and we look forward to your questions later.
Welcome everybody. I just will take a moment we usually have our conference call on the 15th. And I'm sorry for the delay, but we had urgent business overseas and I just came in on Sunday that's why we're scheduling it today.
I'd like to address three aspects of Frequency business. Overall revenue went down and we haven't lost any programs, but many of the programs both on government and on commercial space moved to the right. And this program that we expected to book in October of 2015 we were not able to book until April of 2016. And these is programs that's most of them are sole source to Frequency and they have great opportunity for the future. But that definitely impacted our revenue on satellites.
Another reason for the delay of the satellite program in the commercial arena is the redefinition that's taking place in the industry for very exciting future demands in bandwidth and high-definition video worldwide and internet service where enormous increase in bandwidth and high-definition resolution is required on those satellites and satellites have had 20 transponders we’ll have overall 140 transponders, and this we planning delayed many of the programs, which are expected to start breaking at the end of calendar year 2016, that’s what our major customers are advising us and we see progress in that area.
Probably the most second exciting thing that gives Frequency opportunity is the new demand on secured communication and command and control. And basically, I am sure that you’ve been exposed to some of the press articles on GPS, which was the mother of all love to provide precision time for every possible military, as well as, commercial use and we find that this system although has the enormous precision can be easily jammed and what’s more it can be spoofed. So the user does know he is not getting the right timing information causing enormous problems in communication and command and control.
So one of the cure for it is to increase the time, accuracy in each of the users of this from let’s say a minute to a day, which is ideal for FBI’s product that we have developed in this year and that have become actually probably the most offending source for this type of product, both for military and for non-military end use. So the secure communication we have gotten some sole source programs to get started, but, you know, America is great, we solve every problem, but we don’t anticipate the solutions we have to have the problem face us and then we come up with a solution.
Just to look backup, when the earlier satellites I don’t use satellites, but the phone systems were rolled out the wireless phones every base station had an atomic clock, because they needed autonomy of the time and they couldn’t relay at that time in years 2001 to 2008 on GPS, it was new nobody was certain how good it’s going be. So that gave him about a day of operating in case GPS was not available. As GPS became more comfortable that Rubidium clock was replaced very inexpensive quartz clock from $2000 clock to a $5 clock, but was given up in that process is the autonomy from days to literally minutes.
Now many of the secure communication and command have to reverse the process and provide autonomy of time for longer period of time and that provides a great opportunity for our products, both for the military, as well as homeland security as well as many commercial applications there. And we feel that that will give us significant growth from our traditional business of building the 1s and 2Cs and becoming the world supplier of most precision time for space exploration to have applications in very large quantity for secure communication and control and also the increase in opportunity in satellite business, where we’re going from 20 to 120 channels to supply the demand in that area.
Space has invested a lot of efforts being in a position to benefit from that opportunity and the quantity is so large that our emphasis and investment is being made on providing this type of capability which is affordable for the quantity that will be required. So we look forward to significantly growth in both of these areas in future and as Steve has indicated, we have seen the beginning of it and our increase in backlog from our lowest point, what was it $22 million on January 31st to about $38 million.
$36 million today of this area and I just want to emphasize again, that most of this increase in backlog occurred in the late part of 2000 -- fiscal 2016 and beginning of 2017.
With this, I’d like to turn over to you guys, ask any questions that you have in mind.
Thank you, everyone. Ladies and gentlemen, at this time, we’ll be conducting a question-and-answer-session. [Operator Instructions] And our first question comes from the line of Sam Rebotsky from SER Asset Management. Please proceed with your question.
Good afternoon, Martin.
Sam, I knew you were going to be first.
I'm going to be first. I got a lot of good questions for you, Martin, or for Steve. You mentioned -- Steve mentioned that we have a low margin contract that's going to end, I assume you mean in the fiscal year April 30, 2017. How much is left on the contract? How much was the contract? And what is the margin on this low-margin business?
Well, Steve will answer the margin, but I can describe the contract. The contract we took very knowingly was for very specific purpose. As part of being able to obtain a significant increase in business from our satellite customers, we had to demonstrate the ability of produced production space hardware on a large scale.
And on this contract, we had to produce 150 16-channel up down converters, and over 80 method timing systems. And it required a lot of automation and investment in automatic equipment to be able to pull through. We are about 60% complete.
60% -- I would say 70%, 75% complete.
On this contract. And the objective -- we are more than achieved. We are able to ship approximately 10 to 12 systems a month, a very complicated load. And we also resulted in the generation of automatic test sets, which can be used for this program and then with slight modifications for the new anticipated programs on this. But to demonstrate that we can produce the type of quantity was a big question to all our customers, they knew we can build the best of 1 or 2 of a kind, but this is the first time, we were able to demonstrate for space large throughput contract.
So Steve, what is the balance on that contract?
I’d have to look at the exact numbers, but we're going to finish the shipments by April of 2017 going at that rate we're going now. We're on time with everything. And that's when we expect sometime between February and April to finish the contract.
So was the initial contract $5 million, $2 million, another reason I'm trying to understand in other words, as a watch leader to get this business you had to show that you could produce. And presumably it's for all your clients or only one -- or Martin, could you give me more color on that.
I'll be happy to. This is Martin. This contract was for one earth orbiting satellite program. I don't want to go into the exact customer, because it's -- they get sensitive about being identified, but it's one customer and the contract was some place over $25 million.
Okay. So on $25 million, we’re 70%, 75% complete, we took low margins. Now going forward, we expected we've been discussing getting maybe $40 million for satellite. So when are we getting more contracts? How much are we getting for satellite and when is it happening so that we can make profits and we could tell a good story. You say you’ve produced good results for this one satellite customer.
Okay. I can tell you what our customers tell us. They feel that most of the redefinition of satellite hardware will be complete before calendar year of 2016. And they expect some of the satellite contracts to be released sometimes between now and December. And at that time we will have the opportunity to have more significant content.
It isn’t only us if you take a look at the large satellite manufacturers such as Boeing, Lockheed Martin, Northrop Grumman they all got delayed because the satellites are being reconfigured on that. So we can only tell you what they tell us. They expected to start breaking loose in calendar 2016. And some of the satellites that we have proposals outstanding go from 20 transponders to 140 transponders. And that will give us the opportunity to capture more per satellite.
So as far as we're concerned, they're happy with the backlog that we have the $36 million. What percentage is it higher rates and a normal rate?
The $36 million that we have are primarily…
60% of space.
About 60% plus is space and they vary from the 1s and 2Cs for very unique programs to fairly reasonable like $10 million per satellite.
Okay. I've got to give you a compliment Martin after giving you a hard time.
Well thank you. I can use it after travelling for 19 hours yesterday to come here.
Alright. This is the first time in a long time that you’ve put on the Board, two gentlemen who have a lot of stock, and two gentlemen who work in the industry and their companies have made significant acquisitions. These people are little younger, generally speaking on the balance. But it would be nice that you could look at if you can't get a reasonable backlog where you can good profits and your stock could appreciate you should with their help put the company up for sale and achieve a higher price. But they should help you look for acquisitions that you could add on.
Because the two companies that the gentlemen that are in industry have made substantial acquisitions. They know how to make acquisitions; they could help you do this. And you need people also to tell your story so that you -- that it's not a secret. Evidently Frequency has been a secret for a long time; everybody has been in and out and nothing happen. So let's see what happens. Are we going to look for acquisitions, are we going to look to sell the company, what is the story Martin?
We are on a same page. We have as Joel Girsky has addressed we are on a same page with the additional Board members and opportunities. And we are looking at all aspects of acquisition, merger or partnering in order to take advantage of the business.
And I want to call your attention that you're looking at the satellite opportunity and you're overlooking an opportunity which is probably the larger than the satellite. The secure communication and there are literally hundreds of thousands of applications where our timing is going to become very critical. And that is an opportunity which probably is large or larger than our satellite business. And it's becoming not a luxury it's becoming a necessity because we cannot continue, where our communication and control systems are continuously compromised or jammed.
So that -- so we have both opportunities, and with the help of the additional members on the Board, we hope to move it along faster.
Martin, that's wonderful. And I think you need more sales help to get business sooner than later. And it doesn't make a difference whether it's satellite or whatever it is. We need money to the bottom-line so you could give the stockholders a dividend, so the stock could go up. And the other members of the Board, they don't own much stock, should buy some stock.
Okay. I'll tell them that.
All right. Thank you. I’ll jump back later on.
We will let you Sam.
And our next question comes from the line of Richard Johns, Private Investor. Please proceed with your questions.
Yes, I have a question about the up/down converters and the hundreds of low earth orbiting satellites that seem to be coming. Does every satellite use an up/down converter? Does every satellite have a clock in it?
The answer to both is yes. The only differentiator is how good the clock is, and how many transponders per satellite. Typically, in a test, there have been on a military satellite between five and a dozen type of transponders. And on a commercial satellite between 10 and 30 transponders.
The new demands for bandwidth and high video resolution and internet requires that quantity to go up from the 20s to the 120s. And this is applicable both to the GEOs, the LEOs and the in between. So -- and the transponders are different.
On a LEO, you get more transponders, but you also get a lot more satellites. So each satellite from a network, let's say of 10 satellites, if you go to people like One Web they are looking for 900 satellites to provide this. And on the geosynchronous, you just provide this higher resolution and more bandwidth by having a lot more transponders. Each transponder provides a service to a given set of customers.
Okay, okay. And with respect to the previous question, I just want to say that I'm excited by your story. I believe your story, I've been patient as an investor. And I sure hope you won't be acquired before you are able to come into your glory.
As my mother would say, from your mouth into God's ears.
Gentlemen, there are no further questions at this time. I'll turn it back over to management for any closing remarks.
Okay. I'd like to -- before I turn it over to our new Chairman, I want to express my great appreciation to our previous Chairman, General Joe Franklin, who served the company for over 25 years and did a great job. And I personally want to thank him very much for all his effort. And also to the employees of Frequency Electronics and stockholders are standing by us and letting us the opportunity to expand to our potential. Joel?
Thank you, gentlemen, once again for -- and ladies if there happens to be any for attending our conference call. We will be having our Annual Meeting sometime in early November. We look forward to seeing you in person or getting to talk to you again. With that, have a good day, gentlemen. We appreciate your call. Goodbye.
Ladies and gentlemen, this does conclude our teleconference for today. We thank you for your time and participation, and you may disconnect your lines at this time. Have a wonderful rest of the day.
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