Frequency Electronics - Earnings Call - Q4 2025

Executive Summary

• Q4 FY2025 was FEIM’s highest revenue quarter in 25 years at $19.99M, with diluted EPS of $0.34; FY25 revenue rose to $69.81M and net income to $23.80M, aided by a Q3 valuation allowance release on deferred tax assets.
• Against S&P Global consensus, Q4 beat on revenue by ~21.8% ($19.99M vs $16.41M*) and on EPS by $0.07 ($0.34 vs $0.27*) as execution pulled forward program revenue; management cautioned near-term variability despite a positive medium-term trajectory.
• Mix shifted toward satellite payloads (60% of Q4 revenue vs 44% YoY), while backlog ended at ~$70M (down from $78M at FY24-end and $73M at Q3-end) reflecting conversion of backlog to revenue and timing of awards.
• Management targets gross margin “~40% or more” going forward (Q4 was ~37.5% vs FY25 ~43%); SG&A ~18% of revenue and R&D 6–9% are expected, with taxes remaining single-digit due to NOLs utilization.
• Product catalysts include the new TURbO compact rubidium atomic clock (initial FY26 orders of ~$1–$2M referenced on call; company clarified a larger TAM, estimating a $20M+ opportunity by FY27), and externally funded quantum sensing programs (magnetometer, Rydberg sensor).

What Went Well and What Went Wrong

• What Went Well

  • Record quarterly revenue (25-year high) on strong execution and accelerated milestone completions; CEO: “In fact, the fourth quarter was the highest revenue quarter for the company in the past twenty-five years!”.
  • Mix/pricing: Satellite payload revenue rose to ~$12.1M (60% mix) in Q4 vs ~$6.9M (44%) a year ago, supporting strong FY gross margins (~43%) despite Q4 mix normalization.
  • New product momentum: TURbO compact rubidium atomic clock launched with initial orders and a clarified $20M+ FY27 market opportunity; management also highlighted externally funded quantum sensor development (magnetometer, Rydberg).

• What Went Wrong

  • Near-term variability: Management emphasized “lumpiness” and timing changes in government procurement; not every quarter will replicate Q4’s performance despite an upward medium-term trend.
  • Backlog softened to ~$70M at FY-end vs $73M in Q3 and $78M at FY24-end, reflecting conversions and timing of new awards (and a rethinking of SDA transport/data layer).
  • Cash declined to $4.72M, largely due to a $9.6M special dividend paid in Q2 FY25 and timing of billings; management expects cash to fluctuate quarter to quarter.

Transcript

Speaker 2

Greetings and welcome to the Frequency Electronics Fiscal Year End 2025 Earnings Release Conference Call. At this time, all participants are in listen-only mode. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. 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, Thomas McClelland, President and Chief Executive Officer.

Speaker 1

Good afternoon, everyone. The fiscal fourth quarter we just reported was the highest revenue quarter for the company in the past 25 years, and I'd like to provide some additional context on that. We've demonstrated strong growth over the past several years, and we believe the growth potential for our company is expanding even further for reasons I'll get into shortly. While we do not provide guidance given the lumpiness of contract awards, I would be remiss if I did not mention that this recently ended quarter benefited from strong execution that allowed the company to produce revenue on certain programs in fiscal year 2025 that we originally expected to produce over a more extended period of time in fiscal year 2025, 2026, and beyond.

In other words, while the trend here is very much an upward one, I do not think it's prudent to expect every quarter in the near term to look exactly like this from a top-line perspective, though in the medium term, it is directionally where we're headed. It's important to keep in mind that the allocations for space and defense-related programs from the recently passed legislation in Congress are very positive for the direction the company is going. As the bill just passed last week, the additional revenue from those contract awards will flow in over the coming quarters and years as our customers now submit bids for increased available funds. Critically, as we position the company to take advantage of all the opportunities we've discussed before and others I'll discuss in a moment, we're also expanding our customer base beyond the traditional prime contractors.

We maintain excellent relationships with the traditional primes and are working on numerous projects with them and anticipate meaningful growth with them going forward. We've also already been actively submitting bids alongside next-generation defense companies, which are increasingly getting attention in this administration. We believe this positions Frequency Electronics, Inc. extremely well to benefit from industry trends we see playing out over the next 5 to 10+ years. Some of the opportunities that will further accelerate our growth are Golden Dome. We're already involved in several key missile programs and anticipate additional opportunities both for terrestrial and space applications. APNT, which is alternate position, navigation, and timing. The vulnerability of GPS is well documented at this point, as stories of jamming and spoofing, especially in the Mideast and Eastern Europe, corroborate. Frequency Electronics, Inc.'s quantum magnetometer development, representing an unjammable approach to navigation, is part of a particularly relevant solution.

Our small but very high-performance rubidium atomic clock, which we've dubbed TURbO for Timing Units Rubidium Oscillator, is a key ingredient in other proposed alternate navigation approaches. Another important item is GPS enhancements, such as resilient GPS, augmenting GPS satellites with a large number of lower-cost satellites. Quantum sensing. Frequency Electronics, Inc. is well positioned to succeed in the growing quantum sensor market based on our expertise in atomic clocks. We're currently developing solid-state diamond-based quantum magnetic sensor devices in collaboration with MIT Lincoln Laboratory. Similarly, we're collaborating with scientists at NIST to develop Rydberg sensors, allowing for extremely compact microwave antennas. Last year, Frequency Electronics, Inc. sponsored a quantum summit in New York City to bring together scientists to discuss progress in quantum sensors. I'd like to announce that Frequency Electronics, Inc. will host a quantum summit again this year in October, in particular on October 29th and 30th.

All in all, I'm happy with our performance, vigilant regarding the changes in Washington, and very enthusiastic about our future. Steve.

Speaker 2

Thank you, Tom, and good afternoon. For the fiscal year ended April 30, 2025, consolidated revenue was $69.8 million compared to $55.3 million for the same period of the prior fiscal year. The components of revenue are as follows: revenue from commercial and U.S. government satellite programs was approximately $40.9 million, or 59%, compared to $23.2 million, or 42%, in the same period of the prior fiscal year. Revenue 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 U.S. government and Department of Defense customers, which are recorded in both the FEI New York and FEI Zephyr segments, were $26.5 million compared to $29 million in the same period of the prior fiscal year and accounted for approximately 38% of consolidated revenue compared to 52% for the prior fiscal year.

Other commercial industrial revenue was $2.4 million and $3.1 million for the fiscal year ended April 30, 2025 and 2024, respectively. The company is encouraged by significant revenue growth compared to the prior fiscal year. The majority of the increase in revenue for fiscal year 2025 as compared to fiscal year 2024 was a result of increase in sales in the U.S. government Department of Defense satellite market. For the fiscal year ending April 30, 2025, the gross profit and gross profit percentage increased as a result of several factors. The increase in gross profit dollars was directly related to the significant increase in revenue over the prior fiscal year period, as well as the increase in gross margin.

The majority of the increase in the gross profit percentage as compared to the prior fiscal year was in the FEI New York segment and was attributable to the company's performance on several traditional space programs at higher margin and ahead of schedule. In addition, the company has new programs that are progressing well, and the company anticipates they will generate additional revenue and profits. In the fiscal year ending April 30, 2025 and 2024, selling and administrative expenses were 18% of consolidated revenue in both periods. While total SG&A expense increased in fiscal year 2025 as compared to the prior fiscal year, SG&A expense remained constant as a percentage of revenue in fiscal year 2025. The approximately $2.1 million increase is made up of mainly payroll-related items such as 401(k) expense, stock option expense, and bonus accrual.

In addition to these expenses, trade show and related costs also increased during the fiscal year 2025. R&D expense for the fiscal year ending April 30, 2025 increased to $6.1 million from $3.4 million, an increase of $2.7 million, and were approximately 9% and 6% respectively of consolidated revenue. The company-funded R&D amounts were higher in fiscal year 2025 as compared to previous fiscal year, partially because the previous fiscal year R&D expenditures were lower than planned and some of the expense was subsequently captured in fiscal year 2025. The increase in R&D expense also reflects the company's commitment to maintain its technical excellence. The company expects future R&D investment to be in line with or even potentially above historical spending. For the fiscal year ending April 30, 2025, the company recorded operating income of $11.7 million compared to an operating income of $5 million in the prior fiscal year.

The increase is mainly attributable to the company's significant increase in revenue and gross margin during fiscal year 2025, as noted above, from traditional space programs that have been executed ahead of schedule, well within budget, and technologically performed well. The positive effect of cost-cutting measures instituted by management have also contributed to the increase. The change in other income expense from the prior fiscal year was relatively minimal. All three categories presented were slightly lower in fiscal year 2025 compared to the prior fiscal year. This yields pre-tax income of approximately $12.1 million compared to $5.5 million for the prior fiscal year. For the fiscal year ending April 30, 2025, the valuation allowance decreased by approximately $13.9 million from the prior fiscal year, primarily due to releasing the majority of the valuation allowance recorded against the deferred tax asset.

This change in estimate occurred in the third quarter of fiscal 2025. Consolidated net income for the year ending April 30, 2025 was $23.7 million, or $2.46 per share, compared to $5.6 million, or $0.59 per share in the previous fiscal year. Our fully funded backlog at the end of April 2025 was approximately $70 million, compared to $78 million for the previous fiscal year, April 30, 2024. The company's balance sheet continues to reflect a strong working capital position of approximately $30 million at April 30, 2025, and a current ratio of approximately 2.3 to 1. Additionally, the company is debt-free. Cash went down by approximately $13.6 million since the prior fiscal year end. Of this decrease, the dividend paid in Q2 of fiscal 2025 accounted for approximately $9.6 million of it. The additional $4 million decrease was related to the timing of billing and revenue.

Contract liabilities went down $8.2 million since year end. Contract liabilities are generated as part of 606 accounting when the billings are in excess of revenue taken on specific programs. We expect that cash will fluctuate quarter to quarter, however, we expect its trend to be higher over time. The company believes that its liquidity is adequate to meet its operating and investing needs for the next 12 months and the foreseeable future. I will turn the call back to Tom, and we look forward to your questions shortly.

Speaker 1

Thanks, Steve. We're now ready for questions.

Speaker 3

Certainly. At this time, we'll be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, please press star one on your phone at this time if you wish to ask a question. One moment, please, while we pull for questions. The first question today is coming from Brett Rice from Channing Montgomery Scott. Brett, your line is live.

Hi, Tom. Hi, Steve. Can you guys hear me?

Speaker 1

Yes. Yes.

Great. Great. Nice quarter, great end of the year. Tom, you rattled off a number of growth potential areas: the Golden Dome, the APNT, resilient GPS. Can you walk me through the processes to how you will allocate corporate time and resources to these various growth opportunities?

I'm not quite sure how to answer that question. We're actively pursuing proposals at this time that are involved in all of those areas. I think we have ongoing discussions with all our prime customers about these topics as we go and what our capabilities are in this arena.

Tom, I apologize. I didn't ask the question in the right way. Of the five or six areas you mentioned, which one do you think has the greatest potential that might lead to a greater allocation of corporate resources and attention?

I see. That's a little hard to say also. At the moment, I think the quantum sensor area looks quite promising. We know that GPS is vulnerable, and the magnetometer activity that we're working on certainly looks very promising. There's a huge addressable market there in terms of providing alternates to GPS navigation, especially in commercial aircraft. That's certainly a big one. I think Golden Dome looks like a big thing also, but it's a little bit ambiguous as to how the funding is going to happen on that one. We'll just have to see.

All right. Last one from me. Because of these tremendous growth opportunities, R&D spend is going to move up. We've got a strong balance sheet, but do we have enough cash to fund this greater amount of R&D that's needed to take advantage of these opportunities?

At this point in time, we are confident that we have adequate cash in order to fund that. As I stated in the press release, it's really a targeted use of internal funds. I think we're being somewhat cautious and careful about just what we spend our resources on. I think we're in a pretty good position to do that and to continue doing that going forward. We'll keep an eye on that and have to evaluate that in the future. There are a lot of external funding things that we see and we're working on obtaining. I think that supplements our use of internal funds significantly.

Great. Thank you for taking my questions and enjoy the rest of the summer.

Okay. Thank you.

Speaker 3

Thank you. Once again, it's star one if you wish to ask a question. The next question is coming from Chris Fitchovsky, who is a private investor. Chris, your line is live.

Hello. Congratulations on great results. You mentioned in your press release that there might be some short-term uncertainty. Can you elaborate on that?

Speaker 1

I'm not sure uncertainty is the right way to refer to it. I think that there will be some variability in the timing of contracts, I think, is really what we're talking about. We've already seen this. The new administration is intent on making their mark on things. The timing of a lot of programs that are already in the works are changing. We just have to deal with that, obviously. I think it's very clear that overall the administration is intent on spending even more money on the things that are in our area of expertise. They're going to not necessarily spend them in the same way that was imagined prior to this administration. This is the thing we just have to roll with the punches in terms of how the timing of these things plays out.

Okay. You're absolutely right. If you do not use the term uncertainty, you use the term variability, which is what I should have said. Does that include the variability in timing? Does that include stuff that's already in your $70 million backlog?

I'm not quite sure I understand the question.

Do the variability issues you mentioned include projects that are already in your $70 million backlog, or is it new?

No, not really. The $70 million, we don't anticipate any variability in the backlog. The only thing I would say is that the contracts can be terminated. We don't anticipate that with anything in our backlog at this point in time. That certainly has happened. I guess in that sense, there's the potential for variability. The backlog is pretty solid. I think it's with the future work that we have to look at the variability and the timing of when things occur.

All right. You think there'll be, with future contracts, some variability in the short term, but in the medium term, you'll see certainty, kind of relative certainty for higher growth. What can you just tell me, you know, roughly what do you mean by short term, midterm?

I think short term, we're really talking about the next year or so. Medium term, I think we're looking at two to five years. Long term, beyond the five-year point.

All right. I had a question about quantum. Right now, it seems that we're not yet at the point where commercial quantum systems are coming out, but a lot of money is going into research. Would you say that at this research stage, because you know, your timers are probably needed for the research stage as well, would you say this research stage is enough to make, you know, kind of like a notable revenue?

Yes. Yes. I think significant revenue from the research stage might better be characterized as development as opposed to research because the science is well understood in these areas. It's really developing products based on that science that we're working on. To the extent that this development is externally funded, it certainly generates revenue and indeed profit. I hope that answers your question.

Yeah, oh, yeah, definitely does. Would you expect to get the externally funded revenue, or would your clients be kind of asking you to do some of the development on your own income statement as well?

That's a really good question. I think in some cases, the funding agencies don't have enough money to support all of the work that needs to be done. We supplement that with internal funding. I think that's usually a pretty small amount of the total funding that is to be had. It's a relatively small thing, and I think we account for that in our budget for internal R&D funding on an annual basis. That is going up a little bit, but just a little bit in order to support these new technologies and things.

Okay. It's good to hear it's a small amount. This is all for me. Good luck again and congratulations again.

Okay, thank you.

Speaker 3

Thank you. Once again, it is star one if you wish to ask a question. The next question is coming from Michael Eisner. Michael is a private investor.

Speaker 5

Hi. How are you?

Speaker 1

Hi, Michael.

Speaker 5

Did you start working on the virus and linking labs yet?

Yes. Yes.

I see it. Who's paying for that R&D for that?

Speaker 1

We're funded by Leidos at this point in time.

Speaker 5

Is that paying for it?

Speaker 1

I'm not sure I understand the question.

Speaker 5

You have to do R&D with.

Speaker 1

Go ahead.

Speaker 5

I said you have to do R&D on that, or is it already proven?

Speaker 1

The development, you know, this is development activity, and that is primarily funded by Leidos. Just like the last question, there's a small amount of internal funding that supplements that. That's primarily.

Speaker 5

We get to keep the technology also, right?

Speaker 1

Yes.

Speaker 5

Is GPS3F back in play? I thought it was over with a while ago. I heard something about that.

Speaker 1

No, that's not true. GPS3F is indeed very active. In fact, we're currently delivering products for the GPS3F program.

Speaker 5

Which launch are we up to now?

Speaker 1

I don't think so. There's GPS3 and there's GPS3F. The F, I think, is for follow-on. The current launches, the last launch that occurred was a GPS3 launch. I believe it was the eighth GPS3 satellite, if I'm not mistaken.

Speaker 5

I'm on the next one. Yeah, I remember that.

Speaker 1

There are still additional GPS3 satellites to launch, I think 9 and 10 in particular. GPS3F starts with number 11. No GPS3F satellites have launched yet.

Speaker 5

They will eventually. That $12 million contract that you just announced, was that a continuation from a previous contract?

Speaker 1

Yes, that was.

Speaker 5

The one for like November of 2023?

Speaker 1

I don't remember exactly. No, it was not a continuation of those contracts. It was separate.

Speaker 5

All right. Let me see. You mentioned that, how far are we into the magnetic navigation so we don't get spoofed and everything jammed up?

Speaker 1

We're actively pursuing it. I think our development activity is basically a two-year program, and we should have prototype demonstrations at the end of that period.

Speaker 5

Two years. All right. Are we the only one that's vertically integrated, the only company that's vertically integrated to produce all this stuff from beginning to end?

Speaker 1

I don't know that I can say we're the only company that's vertically integrated, but I think it is indeed true that we are vertically integrated. As I've said before, I think we feel strongly that that's key to our continued success because it allows us to control all, you know, we're working in technology areas that are fairly esoteric. If we rely on other suppliers to provide key ingredients, then we lose control of those key ingredients, and it's hard to get the kind of performance that's required in these areas. We do feel it's key. I think it is a differentiator. There are not so many companies out there that are vertically integrated in the way that we are, but I'd hesitate to say that we have a monopoly on that.

Speaker 5

Is Microchip, can they do it? We're really not sure. Microchip.

Speaker 1

Oh, microchip? I don't think so, no.

Speaker 5

Okay, that's good for us. All right, good job. That's it for me.

Speaker 1

Okay. Thanks, Michael.

Speaker 5

Thank you.

Speaker 3

Thank you. The next question is coming from George Marema from Pareto Ventures. George, your line is live.

Speaker 0

Hey, Tom. Thanks for taking my questions. The first one was on gross margin this quarter, it was a little bit down. Can you sort of outline the reasons why?

Speaker 1

I don't think there's anything super significant. I think just a general lumpiness from quarter to quarter on how things play out. I think we're pretty comfortable with where the gross margin is overall.

Speaker 0

If you look out into this current coming fiscal year, for 2025, you were on a 43% gross margin for the year and 37% in this last quarter. Would you be sort of targeting the high 30s or more low 40s for this coming year?

Speaker 1

I think we're targeting 40 or more, and where we end up, we'll see. I think that's where we're trying to maintain a very disciplined approach in terms of our margins. That's where we're aiming, but we do have to see the timing of things, etc., always comes into play.

Speaker 0

Okay. On quantum sensing, can you sort of maybe characterize or size up a little bit for this coming fiscal year? What kind of development, like revenue opportunity, is there? Is it material, like 10% of your business or less or more than that? Secondly, when would you hope to have product revenue out of this area? How far off?

Speaker 1

I think it's at this over the next fiscal year, I would anticipate that it's less than 10% of our overall revenue, number one. Number two, I anticipate the products sort of five years out from now. I think that's a reasonable expectation.

Speaker 0

Okay. Are any of the other newer products coming out before then, these other things you mentioned?

Speaker 1

Definitely. We have products which are going to be available within the next fiscal year. The compact rubidium standard is going to be available. Yeah.

Speaker 0

Is that the TURbO you're talking about?

Speaker 1

Yes.

Speaker 0

That'll be out in this fiscal year, you hope, this product?

Speaker 1

It will, yes.

Speaker 0

What kind of addressable market is that if you can kind of size that up or characterize it?

Speaker 1

It's a growing addressable market. I think probably $1 to $2 million within the next year or so, and growing after that.

Speaker 0

Okay. Thank you, Tom.

Speaker 3

Thank you. The next question is coming from Brent Garrixon. Brent is a private investor. Brent, your line is live.

Speaker 0

Hi, Tom. Thank you for your leadership and thanks to all the employees for their hard work. Much appreciated. My question is, what do you target for SG&A and R&D for 2026 going forward as a % of revenue?

Speaker 1

I'll let Steve respond to that question.

I believe they'll be very similar to where they are this year. Approximately, SG&A, we ran 18% for the last two years, and R&D somewhere in the 6% to 8% or 9% range.

Speaker 0

Do you target taxes? I mean, I know you didn't have any more carryforwards, but you had a few more NOLs left. Do you still see taxes in the 1.5% to 2% range?

Again, depending, I think for next year, we'll use more NOLs. We still have a bunch left. With the new tax law changing stuff, and California is where right now we pay our taxes because they suspended the use of NOLs, I still believe if we have a good year, the majority of it will be covered. Some may not based on where it comes and so forth. It will not be a normal 21% tax year next year either.

You still feel it's in the single digits?

Yes.

Okay. Last quarter, you spoke about SDA bids. Were any of those successful, and what kind of investment expense do you see coming from SDA?

Speaker 1

At this point in time, that's a little bit up in the air, actually. The new administration is rethinking the SDA process. We are still looking at tracking layer activity from SDA, but the transport or data layer is currently being reimagined, and how that's going to play out is not clear at this point in time.

Speaker 0

There's no indication of even maybe a timeframe. I know you earlier mentioned short, medium term to be, you know, one to five years or one to two years. Do you personally think that it's somewhere in the within the next, you know, 9 to 12 months?

Speaker 1

I think yes, I think something is going to pop within that timeframe.

Speaker 0

Okay. All right. I'll back out. Thank you for your time.

Speaker 1

Okay. Thanks.

Speaker 3

Thank you. There were no other questions from the lines at this time. I will now hand the call back to Thomas McClelland for closing remarks.

Speaker 1

Okay, I think I'd like to thank everybody for participating in this call and have a nice summer. Thank you.

Speaker 3

Thank you. This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.