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Edited Transcript of FEIM earnings conference call or presentation 18-Jul-19 8:30pm GMT

Q4 2019 Frequency Electronics Inc Earnings Call

Jul 22, 2019 (Thomson StreetEvents) -- Edited Transcript of Frequency Electronics Inc earnings conference call or presentation Thursday, July 18, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Martin B. Bloch

Frequency Electronics, Inc. - Executive Chairman & Chief Scientist

* Stanton David Sloane

Frequency Electronics, Inc. - President, CEO, COO & Director

* Steven L. Bernstein

Frequency Electronics, Inc. - CFO, Secretary & Treasurer

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Conference Call Participants

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* Brett Reiss

Janney Montgomery Scott LLC - SVP of Private Client Group & Financial Advisor

* George Marema

* Sam Rebotsky

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to your Frequency Electronics Fourth Quarter and Year-End 2019 Earnings Release Conference Call. (Operator Instructions)

And now for opening remarks and introductions, I am pleased to turn the floor to Chairman of the Board, Mr. Martin Bloch. Please go ahead, sir.

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Martin B. Bloch, Frequency Electronics, Inc. - Executive Chairman & Chief Scientist [2]

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Thank you. I have with me the Chief Executive Officer, Stan Sloane; and our Chief Financial Officer, Steve Bernstein. And I'll turn over the first phase of it to Steve. Please begin, Steve.

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Steven L. Bernstein, Frequency Electronics, Inc. - CFO, Secretary & Treasurer [3]

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Thank you, Martin, and good afternoon. Fiscal 2019 consolidated revenues were $49.5 million, up 25% from $39.4 million for the prior fiscal year. The components of revenue are as follows: Revenue from commercial and U.S. government satellite programs increased to $22.8 million compared to $14.2 million for the previous fiscal year and accounted for approximately 46% of consolidated revenues compared to approximately 36% in fiscal 2018; 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 nonspace U.S. government and DoD customers, which were recorded in both the FEI-New York and FEI-Zyfer segments, were $22.7 million (sic) [$22.8 million] compared to $17.6 million in the prior fiscal year.

Other commercial and industrial revenues declined to $4 million compared to $7.6 million in the prior fiscal year. Intersegment revenues are eliminated in consolidation.

For fiscal 2019, the gross profit percentage increased to 31.9% from 13.1% in fiscal 2018. The higher gross profit and gross profit percentage is primarily the result of higher revenues.

Fiscal 2019 gross profit includes a charge of $1.1 million resulting from a new inventory reserve policy implemented at the end of the year. The prior year's gross profit and gross profit percentage reflected significant inventory write-downs.

In fiscal year ended April 30, 2019 and 2018, selling and administrative costs were 24% and 27%, respectively, of consolidated revenue. SG&A decreased as a percentage of consolidated revenue primarily due to the increase in revenue for fiscal 2019. SG&A expense in fiscal 2019 included a onetime charge of approximately $1 million for the loss associated with the sale of the company's wholly owned foreign subsidiary FEI-Asia.

Increases in deferred comp expense and professional fees were partially offset by cost savings from consolidating certain manufacturing from New York -- from New Jersey into the company's New York facility.

As a percentage of consolidated revenue, R&D expense for the years ended April 30, 2019 and 2018, were approximately 13% and 18%, respectively. The $500,000 decrease in expense year-over-year reflects a higher level of customer-funded R&D as a portion of the total R&D effort.

These R&D efforts address large business opportunities in secure communications, command and control and satellite systems that require advanced technologies and capabilities going forward. The funds received in connection with customer-funded R&D are included in revenue and associated expense included in the cost of revenue.

For fiscal year ended April 30, 2019, the company recorded an operating loss of $2.8 million compared to an operating loss of $12.4 million in the prior year. The operating loss reflects approximately $1 million for the loss on the sale of FEI-Asia and the change of $1 million -- charge of $1.1 million related to the company's new inventory reserve policy. The prior year's operating loss included approximately $5.6 million of inventory write-downs and approximately $3 million of unabsorbed manufacturing overhead.

Other income consisted primarily of investment income derived from the company's holdings of marketable securities, which for the current fiscal year, was approximately $300,000 compared to approximately $1.3 million in the fiscal 2018. Fiscal 2018 other income included gains from divesting the company's holdings and equity securities. This yields a pretax loss of approximately $2.5 million compared to a pretax loss of approximately $11.3 million for the previous year.

For the fiscal year ended April 30, 2019, the company recorded a pretax provision of $56,000. For the prior year, the company recorded a tax provision of $11.3 million due to the full valuation allowance against the U.S. deferred tax assets.

Consolidated net loss for the fiscal year ending April 30, 2019, was $2.5 million or $0.28 per share, down from a loss of $23.8 million or $2.69 per share for the prior fiscal year.

The company generated positive cash flow from operations for the full fiscal year 2019 of $2.4 million. Our fully funded backlog at the end of April 2019 was $37 million, up from $30 million at the end of the prior fiscal year.

The company's balance sheet continues to reflect the strong working capital position of over $47 million at April 30, 2019, and the current ratio of over 9:1. The company believes that its liquidity is adequate to meet its operations and investing needs for the next 12 months and the foreseeable future.

I return the call back to you, Martin, and we look forward to your questions later.

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Martin B. Bloch, Frequency Electronics, Inc. - Executive Chairman & Chief Scientist [4]

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Thank you, Steve. I'd like to turn the call over to Stan Sloane. Stan, please proceed.

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Stanton David Sloane, Frequency Electronics, Inc. - President, CEO, COO & Director [5]

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Thank you, Martin. Let me start by saying I'm pleased with this progress this year. I think revenue growth of 25% over the previous fiscal year is a particular highlight. We also continued to have a very robust portfolio of new business opportunities, currently about $450 million of outstanding bids. We've added additional business development resources to not only prosecute those bids but also identify and pursue additional opportunities.

We also continued our efforts to improve operational efficiency, including a new ERP system which will help us plan the projects and monitor costs much more effectively.

We continued a healthy level of investment in internal research and development, advancing several key technologies which we expect to produce significant downstream revenue and earnings.

Disposition of our Asia subsidiary was finalized as well, as Steve mentioned.

Cash flow continued to be positive. Backlog at year-end was up 23% compared to the end of the prior fiscal year.

As we continue to improve our performance, I'm very encouraged by what I see in FEI's future.

Martin?

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Martin B. Bloch, Frequency Electronics, Inc. - Executive Chairman & Chief Scientist [6]

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Thank you, Stan, and thank you for all the effort you are putting in. It is working very hard and -- for all of us.

I would just like to add the following comments before we open up for question and answers.

This is the first time in the history of the company that we have outstanding proposals of over $400 million on programs that will materialize in the very near future. I think it's clear the emphasis of precision time becoming a very, very important commodity and as each day demonstrates. As a typical example, the Galileo system, which is a competitor to our GPS system, just went out of service.

Now if the GPS would go out of service, it would be a major catastrophe. The only safety that involves is for people to have their own precision time in their own environment, like planes, ships, anything mobile or ground assets in order to be able to continue secure communication. So timing is becoming more and more important as we enter a more uncertain environment in this commodity.

Total dependence on GPS has to be supplemented with significant timing investment. And FEI is one of the very few companies in the world that is -- that has the capability to meet demand. And it's our mission to make sure that we have the resources and the product to do it. Stan's responsibility of running the company has given me the luxury of spending more time on advanced product development, and I welcome that position, and I'll do my best to fulfill the mission.

So again, we're looking forward to a bright future on this. And our advanced products are getting a lot of potential. And I emphasize over and over again: timing is becoming more and more critical which each day in our society.

At this time, I'd like to turn over to questions and answers. I would appreciate if you address the question to either Steve Bernstein, Stan Sloane or Martin Bloch.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll take our first question today from Stan (sic) [Sam] Rebotsky from SER Asset Management.

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Sam Rebotsky, [2]

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Congratulations, Stan, Martin and Steve. You seem to have gotten behind you all these things that were dragging. Hopefully going forward, that there's no issues and everything could be profitable. Let's look at the $450 million, Stan. Is that -- what number of years? And when do they make decisions on the bids that were making $450 million?

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Stanton David Sloane, Frequency Electronics, Inc. - President, CEO, COO & Director [3]

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So -- well no, the decisions, in terms of the disposition of those particular bids, that will probably take place in the next 12 to 18 months. Now contract execution associated with those things varies, of course, depending on what the nature of the project is. It could be anywhere from 10 to 12 months to a couple of years or even longer in some cases. A couple of those bids have long production opportunities associated with them and would go on for some period of time.

So it's a mixed bag. But the current bids outstanding will be decided in the relatively near term.

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Sam Rebotsky, [4]

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Okay. Now the $37 million firm, what was the number at the end of the January quarter? To Steve, do you have that number?

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Steven L. Bernstein, Frequency Electronics, Inc. - CFO, Secretary & Treasurer [5]

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The backlog?

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Sam Rebotsky, [6]

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Yes. The funded backlog at the end of January 31.

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Steven L. Bernstein, Frequency Electronics, Inc. - CFO, Secretary & Treasurer [7]

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It was $39 million.

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Sam Rebotsky, [8]

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So we went down $2 million. Okay. And we did about $13 million in sales, and if you subtract the $1.1 million and the $1 million, you sort of breakeven in this quarter assuming without these items. Is it fair to say that we're -- we'll do more than $13 million going forward per quarter and that this is enough to breakeven or be profitable in each quarter?

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Martin B. Bloch, Frequency Electronics, Inc. - Executive Chairman & Chief Scientist [9]

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Sam, you haven't changed in all the years I know you know, and you know FEI's policy. We do not make any prediction. We just give you a long-term view. So I appreciate the question, but we stand on our legacy.

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Sam Rebotsky, [10]

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All right. This is not a question. Is it fair to say you need $13 million to break even? Because you would have broken even, presumably if you take these $1.1 million and the $1 million. Steve, is this a breakeven if you take those numbers out?

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Stanton David Sloane, Frequency Electronics, Inc. - President, CEO, COO & Director [11]

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This is Stan. Your -- we don't question your arithmetic. I was just telling you that the business is very sensitive to revenue, that the gross margins and the bottom line because we have...

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Martin B. Bloch, Frequency Electronics, Inc. - Executive Chairman & Chief Scientist [12]

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Fixed.

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Stanton David Sloane, Frequency Electronics, Inc. - President, CEO, COO & Director [13]

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Yes, sort of because of the space infrastructure, it is hard to manage costs below that level. So...

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Sam Rebotsky, [14]

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Okay. Then the number of employees we have as of April 30, what was the number of employees compared to the January 31, taking out anything that you may have sold out?

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Stanton David Sloane, Frequency Electronics, Inc. - President, CEO, COO & Director [15]

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So the -- employment across the enterprise is in the 200 range. That does not take into account Asia, which would have been a difference between last year and this year.

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Sam Rebotsky, [16]

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So in the fourth quarter, did we add more employees than in the -- that we had at the end of the third quarter?

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Steven L. Bernstein, Frequency Electronics, Inc. - CFO, Secretary & Treasurer [17]

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No, the same.

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Stanton David Sloane, Frequency Electronics, Inc. - President, CEO, COO & Director [18]

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No.

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Operator [19]

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And we'll take our next question from the line of George Marema with Pareto Ventures.

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George Marema, [20]

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A message -- a question for Stan Sloane. Last couple of years has had a lot of noise in the numbers. What would be sort of a target model, business model you guys are striving for? And if you were -- let's say you do $100 million of revenue for easy math, what kind of gross margins and operating margins would you hope to achieve at that level?

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Stanton David Sloane, Frequency Electronics, Inc. - President, CEO, COO & Director [21]

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At that level, the gross margins, I would think, would be in the 40s. The mix of business, I think, as the company grows, you'll probably see in the near term, the number of bids that we have outstanding in that $450 million number I mentioned are probably more dominated by space-related opportunities. Over time, I would anticipate that the portion that's not space-related would grow. I wouldn't take that with varying gross margin very much but that would be the way we think about it.

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George Marema, [22]

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And what kind of OpEx or net margins would you think you achieve on something like that at that scale?

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Stanton David Sloane, Frequency Electronics, Inc. - President, CEO, COO & Director [23]

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The what?

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Martin B. Bloch, Frequency Electronics, Inc. - Executive Chairman & Chief Scientist [24]

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I think -- say that question again. I'm sorry. This is Martin.

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George Marema, [25]

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Yes. At that level of gross margin revenue, what kind of OpEx, operating expense, or net margin, net income levels, would you hope to achieve?

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Stanton David Sloane, Frequency Electronics, Inc. - President, CEO, COO & Director [26]

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Oh, I see what you're saying. Well, at that level, I would think the bottom line would be double digit -- approaching double digit.

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George Marema, [27]

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So like 10%-ish net income, like $10 million?

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Stanton David Sloane, Frequency Electronics, Inc. - President, CEO, COO & Director [28]

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Yes. For argument sake, sure. Yes.

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George Marema, [29]

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Yes, just rough ballpark stuff, okay. And...

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Martin B. Bloch, Frequency Electronics, Inc. - Executive Chairman & Chief Scientist [30]

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As you understand, this is Martin, that we have a certain fixed expense independent of the level of business, and we are very sensitive, as Stan has stated, to any increase in revenue. So any increase in revenue gives an opportunity to improve our performance.

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George Marema, [31]

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Yes, I'm just trying to get the idea. I'll...

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Martin B. Bloch, Frequency Electronics, Inc. - Executive Chairman & Chief Scientist [32]

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Our emphasis is to capture the market, not on the short-term dollars.

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Operator [33]

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Our next question will come from [Michael Eisner], private investor.

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Unidentified Participant, [34]

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Good year-over-year growth. A question. Is Asia completely written off, there'll be nothing on the first quarter?

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Steven L. Bernstein, Frequency Electronics, Inc. - CFO, Secretary & Treasurer [35]

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Yes. It's -- we sold them on May 21. However, it was an immaterial amount for the 3 weeks, so we had pruned it all. And the end result is there will be no effect of Asia in Q1.

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Unidentified Participant, [36]

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All right, that was -- and this is for Stan. You commented a slip in schedule. Did you mean it got pushed back some contract?

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Stanton David Sloane, Frequency Electronics, Inc. - President, CEO, COO & Director [37]

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Are you referring to the slippage on the new business opportunities?

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Unidentified Participant, [38]

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Press release. Yes. So potential program award slip in schedule.

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Stanton David Sloane, Frequency Electronics, Inc. - President, CEO, COO & Director [39]

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So things just didn't get awarded on the time line that we anticipated. They moved to the right.

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Unidentified Participant, [40]

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Oh, so they're not lost.

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Stanton David Sloane, Frequency Electronics, Inc. - President, CEO, COO & Director [41]

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No. We -- our win rates and our number of proposals are both holding pretty steady. So it's not that we lost it, it's that it slipped to the right.

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Unidentified Participant, [42]

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All right. So you think it would follow over time, or you should get that.

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Stanton David Sloane, Frequency Electronics, Inc. - President, CEO, COO & Director [43]

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Well, they're still out for evaluation. Whether we win them or not is still to be determined. But programs have not -- we didn't lose them in competition. They just haven't been evaluated and awarded yet.

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Unidentified Participant, [44]

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Is that in the $450 million number?

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Stanton David Sloane, Frequency Electronics, Inc. - President, CEO, COO & Director [45]

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Yes.

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Unidentified Participant, [46]

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All right. And...

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Martin B. Bloch, Frequency Electronics, Inc. - Executive Chairman & Chief Scientist [47]

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Mike, this is Martin. I want to emphasize again this is the first time in the history of Frequency since it was established in 1962 that we have firm proposals outstanding. We had lots of opportunity. But this is the first time we have firm proposals outstanding for approximately $450 million. Very high.

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Unidentified Participant, [48]

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On your last call, you had $200 million.

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Martin B. Bloch, Frequency Electronics, Inc. - Executive Chairman & Chief Scientist [49]

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That's correct.

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Unidentified Participant, [50]

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And I would have guessed about 4 months ago, roughly.

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Martin B. Bloch, Frequency Electronics, Inc. - Executive Chairman & Chief Scientist [51]

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Well, we had more opportunities.

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Unidentified Participant, [52]

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All right. And in February 2018, you received a contract -- a development contract for advanced electronic warfare and production. How is that coming along? And what is the size of that market on that?

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Stanton David Sloane, Frequency Electronics, Inc. - President, CEO, COO & Director [53]

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I think you're referring to the Air Force program, the optically pumped rubidium clock.

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Martin B. Bloch, Frequency Electronics, Inc. - Executive Chairman & Chief Scientist [54]

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No...

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Unidentified Participant, [55]

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It was the advanced electronic warfare -- it was a product development that was...

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Martin B. Bloch, Frequency Electronics, Inc. - Executive Chairman & Chief Scientist [56]

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AOEW, yes.

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Stanton David Sloane, Frequency Electronics, Inc. - President, CEO, COO & Director [57]

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Yes, I think you're talking about the Airborne Offshore -- Off-Board Electronic Warfare.

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Unidentified Participant, [58]

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Yes, that's it.

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Stanton David Sloane, Frequency Electronics, Inc. - President, CEO, COO & Director [59]

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Yes, that's progressing pretty well. We in fact are getting ready to deliver the first -- it's what's called the master reference oscillator. That's getting delivered in the next few days. And that's a product being developed here in New York. Over at Elcom they're doing the other couple of pieces of that project. And those are going to be delivered in the next probably 30 to 45 days. So that program is progressing pretty well. Extremely state-of-the-art technology, really advanced stuff. So it's pretty encouraging.

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Martin B. Bloch, Frequency Electronics, Inc. - Executive Chairman & Chief Scientist [60]

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And a big investment.

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Unidentified Participant, [61]

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What was that?

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Martin B. Bloch, Frequency Electronics, Inc. - Executive Chairman & Chief Scientist [62]

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And a big investment that we have done in order to be in the game.

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Unidentified Participant, [63]

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You mean R&D-wise?

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Martin B. Bloch, Frequency Electronics, Inc. - Executive Chairman & Chief Scientist [64]

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That's correct.

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Unidentified Participant, [65]

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And what size is the market on that?

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Stanton David Sloane, Frequency Electronics, Inc. - President, CEO, COO & Director [66]

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That could be -- well, the particular project is -- could be in the $70 million range, eventually. That's clearly not on contract, but this will become the standard part of the shipboard of EW suite that Navy has. But what's probably also as important is that the product that's being developed for AOEW is applicable for a whole lot of other EW systems. We've already had several inquiries. In fact, we have a couple of bids out for that same product, not for that particular program but for other programs. So that's pretty exciting.

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Unidentified Participant, [67]

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Is anyone else -- other companies working on this?

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Martin B. Bloch, Frequency Electronics, Inc. - Executive Chairman & Chief Scientist [68]

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I'm sure.

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Stanton David Sloane, Frequency Electronics, Inc. - President, CEO, COO & Director [69]

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Well, other companies obviously produce EW stuff. I'm not aware -- it's a little more complicated because AOEW is part of a larger EW program for the Navy, and I'm not sure what other people are doing on other parts of it. But the part we're doing, we believe we're the single source for the particular modules that we're developing.

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Unidentified Participant, [70]

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And you put all -- most of the R&D is already done or a good part.

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Stanton David Sloane, Frequency Electronics, Inc. - President, CEO, COO & Director [71]

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A good part of it is. We still have some to finish up, but that's true.

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Unidentified Participant, [72]

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All right. One more question. GPS is huge in space. How is the digital rubidium atomic clock coming along contract?

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Martin B. Bloch, Frequency Electronics, Inc. - Executive Chairman & Chief Scientist [73]

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Excellent.

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Stanton David Sloane, Frequency Electronics, Inc. - President, CEO, COO & Director [74]

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Doing very well. The initial clock is in production, being produced. It's in manufacturing now. It's progressing well.

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Unidentified Participant, [75]

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You think you can get that?

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Stanton David Sloane, Frequency Electronics, Inc. - President, CEO, COO & Director [76]

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Well, we got that. That one's on contract. So the question is it has to be tested, evaluated and qualified. But we're highly optimistic that we are going to get significant production resulting from that.

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Unidentified Participant, [77]

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That's the iridium. Correct?

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Martin B. Bloch, Frequency Electronics, Inc. - Executive Chairman & Chief Scientist [78]

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No. That's -- the iridium has all been done, delivered and in space. This is the GPS IIIF.

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Unidentified Participant, [79]

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IIIF. I'm sorry. The GPS IIIF rather.

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Stanton David Sloane, Frequency Electronics, Inc. - President, CEO, COO & Director [80]

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Right, right.

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Operator [81]

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We'll move next to the line of Brett Reiss with Janney.

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Brett Reiss, Janney Montgomery Scott LLC - SVP of Private Client Group & Financial Advisor [82]

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I guess this is for Stan. There's language in the press release that you're pleased that you executed on several very technical development programs. Could you just explain that a little bit further? And couch your explanation. You're talking to a nonengineer.

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Martin B. Bloch, Frequency Electronics, Inc. - Executive Chairman & Chief Scientist [83]

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So that's going to be difficult.

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Stanton David Sloane, Frequency Electronics, Inc. - President, CEO, COO & Director [84]

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So the R&D developments include activities related to optically pumped rubidium clocks, advanced quartz oscillators and what I would describe as some other miscellaneous technologies. But we do things here that are very high end in performance in the quartz oscillator realm. Being one example, very low-phase noise, low g-sensitive oscillators. That's been a fair chunk of the IR&D development last year.

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Martin B. Bloch, Frequency Electronics, Inc. - Executive Chairman & Chief Scientist [85]

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For the layman -- this is Martin Bloch. For the layman, I can explain. Now precision time is becoming more and more important and becoming very important on mobile platforms. So on mobile platforms, you have the motion and the vibration that affect the accuracy, and we have a key patent. And we also have the best performance of g-sensitivity in the field. But that's a big part of our development, both in quartz and in quartz-controlled atomic standards.

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Stanton David Sloane, Frequency Electronics, Inc. - President, CEO, COO & Director [86]

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And to help you understand why that's important. So if you -- for example, radar systems and electronic warfare systems, noise that comes from oscillators and other sources affects the radar performance. So having a very high-performance oscillator means that you're going to have a better-performing radar.

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Brett Reiss, Janney Montgomery Scott LLC - SVP of Private Client Group & Financial Advisor [87]

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Okay. So since you were successful in what you've just cataloged to me, was the -- it should not be an impediment to sales since you've been successful in your execution in these technical development program.

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Stanton David Sloane, Frequency Electronics, Inc. - President, CEO, COO & Director [88]

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I'm not sure what you mean by impediment to sales. It's an advantage to sales, I think.

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Martin B. Bloch, Frequency Electronics, Inc. - Executive Chairman & Chief Scientist [89]

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Let me take it. We have provided this type of technology to about a dozen programs, and that is part of the $450 million proposals we have outstanding. So we have done the heavy lifting. Now it's a matter of making sure that we cash in on the production that is bound to follow.

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Brett Reiss, Janney Montgomery Scott LLC - SVP of Private Client Group & Financial Advisor [90]

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Okay. So you have to go to the customer base and educate them that you have successful products in these areas because you've executed on these technical development programs.

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Martin B. Bloch, Frequency Electronics, Inc. - Executive Chairman & Chief Scientist [91]

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Well, in many cases, we have delivered the engineering models to the customers. So the majority of our critical customers know our capability, and our mission is to get the production.

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Brett Reiss, Janney Montgomery Scott LLC - SVP of Private Client Group & Financial Advisor [92]

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Now the key opinion leaders at the customer level that will make the decision to purchase your product, is it a long time lag? Or once they've looked and kicked the tires and see that you've got the goods, you can get a fairly quick decision.

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Martin B. Bloch, Frequency Electronics, Inc. - Executive Chairman & Chief Scientist [93]

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The answer is yes to both. Some of the programs are going to mature fairly quickly. And because they are urgent and some will require significant development because this product has to be incorporated with a much larger system to provide the total land support for the military to provide secured timing for the mobile environment.

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Operator [94]

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(Operator Instructions) We'll go next to [Michael Cooper], a private investor.

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Unidentified Participant, [95]

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Congratulations on your Q4 results, which I think are up 76% over Q4 2018 which is a pretty good number.

One main question here -- no, maybe 2 and then just a comment on Stan's math on $100 million revenue. So first question is, what is your capacity before you have to invest in new plant and equipment and/or staffing up more? I think you've been through a good staff rejuvenation. But what could you produce with this investment in facilities and infrastructure that you've got going now?

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Stanton David Sloane, Frequency Electronics, Inc. - President, CEO, COO & Director [96]

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So I'll give you a couple of answers. One, the revenue base in the business here has been sized $80 million, and so obviously, we're capable of running at that capacity. I would tell you that given the facility here, we could -- I don't think, $100 million of revenue, assuming current product mixes and things, I don't think that would be a problem. I would tell you that as the revenue picks up, we would handle that capacity a couple of ways, including some outsourcing and other things. So I don't think that would be a problem.

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Martin B. Bloch, Frequency Electronics, Inc. - Executive Chairman & Chief Scientist [97]

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I want to add to Stan's saying. One of the great advantages that FEI has is that the key building blocks like the quartz resonator and the atomic clocks we build from raw material to finish product. So that part, we are in great shape to be able to react very quickly and to get the necessary performance. And the wrap around electronics, as Sam has indicated, there is no reason why we couldn't outsource quite easily to get it done and to keep our facility, and I think Stan is very conservative by saying $100 million in these facilities should not represent a problem.

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Unidentified Participant, [98]

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Okay. Great. Now just on -- Stan, on your math when you ran a $10 million number when you get to 100 -- $10 million net income number after you get to $100 million revenue. I didn't like that number all that much for a $100 million market cap company. So I just sketched out some numbers here. I mean, really, if you're running at 40% gross margin, so that'll be $40 million on $100 million revenue, and then you're removing your SG&A, which doesn't seem to move in -- it seems very stable over time. And your R&D expenses if you keep those stable, looks to me like a number closer to $25 million, net profit before tax, on $100 million revenue. Does that sound more -- I mean it sounds more enticing to me as an investor. Does it sound more in the realm -- I know you just kind of threw it up, pretty quick number at that $10 million.

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Stanton David Sloane, Frequency Electronics, Inc. - President, CEO, COO & Director [99]

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So we should be able to do that or better at that sort of revenue number, the $10 million or better. How much better, your arithmetic is not too far out, but I think it will be a little more conservative.

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Unidentified Participant, [100]

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Okay. Okay. Understood. And just the last, can you talk a little bit more about the NASA program that you just launched that you announced a week ago or so? And then a little bit more about some of these new large opportunities that you're referring to? I just want -- give us some color on...

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Stanton David Sloane, Frequency Electronics, Inc. - President, CEO, COO & Director [101]

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I think you are referring to the NASA -- the Deep Space Atomic Clock press release.

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Unidentified Participant, [102]

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Yes.

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Stanton David Sloane, Frequency Electronics, Inc. - President, CEO, COO & Director [103]

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Yes. So for that program for JPL, we produced the Ultra Stable Oscillator, which is a high-precision quartz oscillator, which is -- which the mercury-ion clock in the DSAC relies on. And so that was our role.

The other opportunities in that $450-plus million include things related to GPS. There's some large -- there's a couple of large commercial satellite constellations that are possibilities, and then there's a few classified programs that are a pretty good size. So it's a pretty broad mix. And it's -- the good part of it is it's not highly dependent on what are a couple of extreme large opportunities. There's numerous opportunities that make up the $450 million, so I like that. It makes me feel more comfortable that the outlook is more likely to happen.

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Martin B. Bloch, Frequency Electronics, Inc. - Executive Chairman & Chief Scientist [104]

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And this is Martin Bloch. Again, to supplement it on this. We have great opportunities in space both for military classified programs and commercial. But what's also very exciting is that precision time is becoming a necessity for many terrestrial applications. And between the atomic clock, the good quartz, others, and the low g-sensitivity, we have a lot of opportunity for us to take advantage of it.

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Operator [105]

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(Operator Instructions) We'll take a follow-up from Sam Rebotsky.

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Sam Rebotsky, [106]

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The July 1, the NASA, do we have a number? Is that in the $37 million backlog that we could attribute to that program? Or do we need somebody to make a decision on that?

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Stanton David Sloane, Frequency Electronics, Inc. - President, CEO, COO & Director [107]

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Are you referring to the NASA launch I just talked about, the Deep Space Atomic Clock...

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Sam Rebotsky, [108]

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Yes.

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Stanton David Sloane, Frequency Electronics, Inc. - President, CEO, COO & Director [109]

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That's revenue in -- that was sold 2 years ago or 3 years ago.

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Martin B. Bloch, Frequency Electronics, Inc. - Executive Chairman & Chief Scientist [110]

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Yes, that's old.

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Sam Rebotsky, [111]

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That's old so we don't have any backlog, any -- this -- the fact that they just launched it, we don't have more business than we have in backlog to produce more of this item.

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Martin B. Bloch, Frequency Electronics, Inc. - Executive Chairman & Chief Scientist [112]

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Similar items we have in the backlog for other programs. That precision quartz clock was developed for many DoD and secure programs. It's a key building block, and we have contracts that are employing the same technology.

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Sam Rebotsky, [113]

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And do we have some kind of statement of approval of the quality of our product in this launch, it's succeeded, or do we need to wait for somebody to tell us it worked 100% and better than that?

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Martin B. Bloch, Frequency Electronics, Inc. - Executive Chairman & Chief Scientist [114]

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Well, it was just launched on the 22nd of June, and it's going to be monitored for the next year and we'll get data. I'm sure that we'll make a point on the next conference call to give you an update.

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Sam Rebotsky, [115]

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Okay. And relative to the cybersecurity of GPS and the spoofing, has that revenue been growing? Is this an area that you're exerting some pressure? Does our product differentiate from others for cybersecurity going forward?

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Martin B. Bloch, Frequency Electronics, Inc. - Executive Chairman & Chief Scientist [116]

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Yes, the short answer is yes.

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Sam Rebotsky, [117]

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Okay. And now that you have such a good story to tell, when are you ready to make some presentations? And where are you going to make the presentations?

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Martin B. Bloch, Frequency Electronics, Inc. - Executive Chairman & Chief Scientist [118]

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We will advise you, Sam. It's on the plate.

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Stanton David Sloane, Frequency Electronics, Inc. - President, CEO, COO & Director [119]

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We don't have them scheduled, but I'm anxious now. I think we do have a good story, so we're going to get on that.

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Sam Rebotsky, [120]

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I think -- and as far as I can see, there shouldn't be any negatives to bite you. So you should be -- everything should be kind of positive going forward. So good luck, guys. You've been working hard. And let's make the stock go up.

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Martin B. Bloch, Frequency Electronics, Inc. - Executive Chairman & Chief Scientist [121]

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From your mouth into God's ears.

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Sam Rebotsky, [122]

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All right. Maybe God's listening.

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Stanton David Sloane, Frequency Electronics, Inc. - President, CEO, COO & Director [123]

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He's sitting right here next to me.

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Operator [124]

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We'll move now to a follow-up from [Michael Eisner].

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Martin B. Bloch, Frequency Electronics, Inc. - Executive Chairman & Chief Scientist [125]

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Mike, only a short one.

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Unidentified Participant, [126]

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All right. Who was the main builder for the Galileo contract?

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Martin B. Bloch, Frequency Electronics, Inc. - Executive Chairman & Chief Scientist [127]

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Say that again.

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Unidentified Participant, [128]

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The Galileo that just had the issue.

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Martin B. Bloch, Frequency Electronics, Inc. - Executive Chairman & Chief Scientist [129]

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Yes, all of the Europeans have decided that they do not want any U.S. product involved. So this was a total European effort.

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Unidentified Participant, [130]

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Any -- are any of those people competition to you though, in EMEA?

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Martin B. Bloch, Frequency Electronics, Inc. - Executive Chairman & Chief Scientist [131]

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No. No, because the U.S. has the same type of policy: we don't want any foreign clocks on U.S. critical missions.

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Unidentified Participant, [132]

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All right. So this is actually, I hate to say it, good news because they're looking at the quality of companies that work on GPS.

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Martin B. Bloch, Frequency Electronics, Inc. - Executive Chairman & Chief Scientist [133]

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Well, Mike, to me the good news is that the importance on having your own timing because any type of satellite system can be -- go out of sync or be jammed or spoofed, so precision time is becoming a more important commodity.

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Unidentified Participant, [134]

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Which is what you are known for.

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Martin B. Bloch, Frequency Electronics, Inc. - Executive Chairman & Chief Scientist [135]

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That's our specialty.

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Unidentified Participant, [136]

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And a final thing. The $37 million Air Force contract, how is that going?

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Martin B. Bloch, Frequency Electronics, Inc. - Executive Chairman & Chief Scientist [137]

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Slow.

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Unidentified Participant, [138]

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Why is that?

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Martin B. Bloch, Frequency Electronics, Inc. - Executive Chairman & Chief Scientist [139]

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Say that again.

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Unidentified Participant, [140]

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Why is it going slow?

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Martin B. Bloch, Frequency Electronics, Inc. - Executive Chairman & Chief Scientist [141]

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It's going slow for reason of new breakthroughs in technology, and that the Air Force is trickling out very little funding.

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Unidentified Participant, [142]

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All right. Do you think it's going to be complete though?

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Martin B. Bloch, Frequency Electronics, Inc. - Executive Chairman & Chief Scientist [143]

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One way or another, we will complete it.

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Operator [144]

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And at this time, we have no further questions from the phones. I will turn it back to the leadership team for any additional or closing remarks.

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Martin B. Bloch, Frequency Electronics, Inc. - Executive Chairman & Chief Scientist [145]

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Okay. Again, thank you all for participating. We are working hard for -- to make opportunities come through. I want to thank all the participants and my personal express as usual to the employees of the FEI family who make our future possible.

Thank you again, and we'll be talking to you in September. Thank you.

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Operator [146]

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Ladies and gentlemen, this does conclude today's meeting. And we thank you all for your participation. You may now disconnect your lines, and we hope that you enjoy the rest of your day.