U.S. markets open in 9 hours 20 minutes

Edited Transcript of FEIM earnings conference call or presentation 12-Dec-19 9:30pm GMT

Q2 2020 Frequency Electronics Inc Earnings Call

Mar 30, 2020 (Thomson StreetEvents) -- Edited Transcript of Frequency Electronics Inc earnings conference call or presentation Thursday, December 12, 2019 at 9:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Martin B. Bloch

Frequency Electronics, Inc. - Director

* Stanton David Sloane

Frequency Electronics, Inc. - President, CEO & Director

* Steven L. Bernstein

Frequency Electronics, Inc. - CFO, Secretary & Treasurer

================================================================================

Conference Call Participants

================================================================================

* Brett Reiss

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

* Robert Smith;Center for Performance Investments;Founder

* Sam Rebotsky;SER Asset Management;Portfolio Manager

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Greetings, and welcome to the Frequency Electronics Second Quarter Fiscal Year 2020 Earnings Release Conference Call. (Operator Instructions)

As a reminder, this conference is being recorded.

Any statements made by the company during this conference call regarding the future 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 for today, Mr. Martin Bloch, Executive Chairman of the Board of Frequency Electronics.

--------------------------------------------------------------------------------

Martin B. Bloch, Frequency Electronics, Inc. - Director [2]

--------------------------------------------------------------------------------

Welcome, everybody. I'd like to turn this call over to the Chief Executive Officer, Dr. Stan Sloane. Stan?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Martin. Welcome, everybody. Thanks for dialing in. Let me start off with positive news on the new business front. Number of opportunities we are currently pursuing continues to be robust, about $500 million in potential contracts. We ended the quarter with $40 million of backlog, up from $35 million the previous period. This does not include the contract value, which is not yet fully funded or the value of production options, which are not yet exercised. Quarter 2 ended with the largest backlog the company has seen since quarter 3 of fiscal year 2015.

Subsequent to the quarter end, we added another $4 million of backlog. The increase in backlog is, of course, a good leading indicator of revenue trends. I'm also pleased to tell you that immediately prior to this call, we received another contract for an additional $4.2 million, which is not yet reflected in our backlog numbers. We continue to be cash positive and have no debt.

Now the financial results for the quarter. Steve will walk you through the details, but let me offer a few thoughts before we turn the discussion over to him. Firstly, margin was impacted this quarter by additional engineering costs incurred on a few programs that are finishing up their development phase. Keep in mind, much of what we do is pushing the state of the art and the amount of effort required to solve complex technical issues can sometimes be unforeseen. This is typical of development programs where the technical issues tend to appear at certain cyclical points in the process, and that creates a lumpiness in the amount of engineering needed to resolve them. As we complete development and transition to production on these programs in the coming months, I would anticipate less cost fluctuation. These programs will generate future top line and bottom line growth once through these -- through this transition.

Secondly, revenue reductions resulting from slips in anticipated contract awards impacted not just the top line, but bottom line as well, due to under-absorption of overhead costs. I think the best indicator that this will turn around is what I said in my opening about increasing backlog.

Finally, we will maintain our continuing focus on improving operational efficiency, cost reduction and quality, not to mention technical innovation and excellence.

With that, let me turn the call over to Steve, and he will take you through the financial details. Steve?

--------------------------------------------------------------------------------

Steven L. Bernstein, Frequency Electronics, Inc. - CFO, Secretary & Treasurer [4]

--------------------------------------------------------------------------------

Thank you, Stan. Good afternoon. For the 6 and 3 months ended October 31, 2019, consolidated revenue was $21.6 million and $9.1 million compared to $23.2 million and $12.1 million for the prior fiscal year. The components of revenue for the 6-month period are as follows: revenue from commercial and U.S. government satellite programs was $9.4 million compared to $11.3 million for the same period of the prior fiscal year and accounted for approximately 44% of consolidated revenues compared to 49% for the same period of the prior fiscal year. Revenues on satellite payload contracts are recorded 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 DOD customers, which are recorded in both the FEI-New York and FEI-Zyfer segments are $9 million compared to $10.4 million in the previous fiscal year and accounted for approximately 42% of consolidated revenues compared to 45% for the prior fiscal year.

Other commercial and industrial revenues was $3.2 million compared to $1.4 million in the prior fiscal year. Intersegment revenues are eliminated in consolidation.

For the 6- and 3-months periods ended October 31, 2019, gross margin and gross margin rate decreased to 12.8% and negative 13% as compared to 35.8% and 33.1% for the same periods in fiscal 2019. The gross margin and gross margin rate was impacted by increases in engineering costs incurred on several programs, which are in development phase, and which encountered unanticipated development challenges related to customer-driven technical requirements.

GAAP accounting requires that at the time of loss is anticipated on a contract that the entire estimated cost to complete is accrued at that time. In the quarter just ended, we had 2 development programs fall into this accounting with an impact of recognizing approximately $4 million charge to cost of goods sold.

For the 6 and 3 months period ended October 31, 2019, SG&A expenses decreased compared to the same period in fiscal 2019. For the 6 months ended October 31, 2019, and 2018, selling and administrative expenses were approximately 22% of consolidated revenues for both periods. While SG&A expense remains even as a percentage of consolidated revenue during the 6 months ending October 31, 2019, as compared to the 6 months ended October 2018, the actual dollar expenditures decreased by $439,000.

Research and development expenditures represent investment intended to keep company's products at the leading edge of time and frequency technology and enhance future competitiveness. The R&D rate for the 6 months ending October 31, 2019, was 17% of sales compared to 14% of sales for the same period of the previous fiscal year. The R&D rate for the 3 months ended October 31, 2019, was 16% of sales as compared to 13% of sales for the same period of the previous fiscal year. For the 6 and 3 months ending October 31, 2019, the company recorded an operating loss of $5.7 million and $4.9 million compared to $146,000 and $230,000 for the prior fiscal year. The change is largely attributable to the increasing engineering costs described previously, the increased cost affects gross margin and operating income.

Other income consists primarily investment income derived from the company's holdings of marketable securities. For the 6-month period ending October 31, 2019, other income included $125,000 dividend from Morion compared to $105,000 dividend in the previous fiscal year. This yields a pretax loss for the 6 and 3 months period ended October 31, 2019, of approximately $5.5 million and $4.9 million, compared to a pretax income of approximately $131,000 and $92,000 for the prior year. For the 6 months ending October 31, 2019, the company recorded a tax provision of $29,000 compared to $23,000 tax benefit for the same period of fiscal 2019.

For the 6 months ending October 31, 2019, consolidated net loss was $5.5 million or $0.61 per diluted share compared to income of $153,000 or $0.02 per share for the same period of the previous fiscal year. For the 3 months ending October 31, 2019, consolidated net loss was $4.9 million, or $0.54 per diluted share compared to income of $122,000 or $0.01 per diluted share for the same period of the previous fiscal year. For the 6-month period ending October 31, 2019, the company generated positive cash flow from operations of approximately $180,000. Our fully funded backlog at the end of October 2019 was approximately $40 million, up approximately $5 million from the previous quarter. The company's balance sheet continues to reflect a strong working capital position of approximately $40 million at October 31, 2019, debt-free, and a current ratio of over 5.9:1. 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 will turn the call back to Stan, and then we look forward to your questions later.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Steve. I'm sure our thorough commentary has answered every possible question you might have. But nonetheless, if you have additional questions, please feel free to ask, and you can address them to any one of us or we'll be happy to field whatever you might be interested in. Operator? Jess?

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) We'll go first to Brett Reiss at Janney.

--------------------------------------------------------------------------------

Brett Reiss, Janney Montgomery Scott LLC - SVP of Private Client Group & Financial Advisor [2]

--------------------------------------------------------------------------------

I guess my question is to Stan. Stan, do you think, going forward, the time for the decision-makers to make decisions on bids outstanding is going to be longer than the 12 to 18 months. You suggested it would be on past calls? And you've also, on past calls, said your success rate, on bids outstanding historically, was 50% to 70%. Do you think it's -- that's going to be rolled back a little bit?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

So 2 questions. First one, a little hard on timing. There's -- in the commercial world, of course, very hard to predict when decisions are going to be made. On the government side, we have, of course, continuing resolution and other things. I don't -- I would say, I don't think anything is different this quarter than anything we've told you previously, and that would apply also to the second part of your question in terms of win rates.

--------------------------------------------------------------------------------

Brett Reiss, Janney Montgomery Scott LLC - SVP of Private Client Group & Financial Advisor [4]

--------------------------------------------------------------------------------

The reason for the question, when you look -- I looked at your 2019 annual report, and you had $450 million bids outstanding. And embedded in that was $200 million from 4 months ago. We're in December, which is 8 months from the end of April and over a year, with the $200 million that was embedded in some of that $450 million. It's just a little disappointing that we haven't seen more robust rewards with all of these fish hooks you have in the pond.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Well, your numbers, I think you're including production options on existing contracts that we said were opportunities, but the timing on exercise on those, that's a different dynamic than what I think you're thinking about straight up competitive new bids, and those 2 things don't necessarily go together. I mentioned slippage in a couple of awards, and that is referring to new bids, not to slippages on exercise options. On the option side, those things are more tied to a development cycle on the program where we have to engineer. We have to design and produce and qualify initial units, and once that's done, then they have the ability to exercise the option. So I think that's -- I think your numbers include the things that had options on.

--------------------------------------------------------------------------------

Operator [6]

--------------------------------------------------------------------------------

Next, we'll go to [Richard Jones], individual investor.

--------------------------------------------------------------------------------

Unidentified Participant, [7]

--------------------------------------------------------------------------------

My question is about the elevated engineering expenses. How long do you expect that those might continue? I know it's difficult, but I was really kind of floored by the size of the loss. And do you have any more that will have to be kind of written off the way Steve explained the $4 million? Yes, so that's my question.

--------------------------------------------------------------------------------

Stanton David Sloane, Frequency Electronics, Inc. - President, CEO & Director [8]

--------------------------------------------------------------------------------

So the programs that Steve referred to, the development cycle on that will be mostly complete over the next few months. And in terms of future programs, while, obviously, we don't anticipate that. We've made several improvements, I think, in our bid process to try and make sure that doesn't happen, but we do very technical development, and sometimes those things just end up being harder than what you thought.

--------------------------------------------------------------------------------

Unidentified Participant, [9]

--------------------------------------------------------------------------------

You've recorded losses in the last 4 quarters, I think. How long do you think it will be before the company reports a profitable quarter again?

--------------------------------------------------------------------------------

Stanton David Sloane, Frequency Electronics, Inc. - President, CEO & Director [10]

--------------------------------------------------------------------------------

Well, we don't give guidance, of course, but we're working hard to get these development programs finished up, which are driving the current financials. And as I told you, those finish up in the next few months.

--------------------------------------------------------------------------------

Operator [11]

--------------------------------------------------------------------------------

We'll go next to Sam Rebotsky at SER Asset Management.

--------------------------------------------------------------------------------

Sam Rebotsky;SER Asset Management;Portfolio Manager, [12]

--------------------------------------------------------------------------------

The question is for Steve. Of the $4 million, how much was in the first quarter? How much is in the second quarter? And where were the engineering costs kept? Were they in the deferred expense account before you decided? And what decided to charge it off? And what happened?

--------------------------------------------------------------------------------

Steven L. Bernstein, Frequency Electronics, Inc. - CFO, Secretary & Treasurer [13]

--------------------------------------------------------------------------------

Yes, yes. What happened, it's all Q2 costs. So the -- if you look to about $2.1 million of it is that what I said was when you realize that a contract is going to be a loss, you have to accrue that number. So we accrued about $2.1 million of loss contract for those 2 programs. And then...

--------------------------------------------------------------------------------

Sam Rebotsky;SER Asset Management;Portfolio Manager, [14]

--------------------------------------------------------------------------------

And so -- And the rest of the $4 million?

--------------------------------------------------------------------------------

Steven L. Bernstein, Frequency Electronics, Inc. - CFO, Secretary & Treasurer [15]

--------------------------------------------------------------------------------

Is the cost -- the actual cost spent in the jobs this quarter.

--------------------------------------------------------------------------------

Sam Rebotsky;SER Asset Management;Portfolio Manager, [16]

--------------------------------------------------------------------------------

Okay. And as Stan said, this will complete in the next couple of months. Do we have additional revenue? And just this -- a couple of million or so revenue without any gains or losses in the rest of the year.

--------------------------------------------------------------------------------

Stanton David Sloane, Frequency Electronics, Inc. - President, CEO & Director [17]

--------------------------------------------------------------------------------

Well, like I said, we don't give guidance, Sam, but the programs that contributed to the problem this quarter are the ones that I talked about finishing up. Can I guarantee we'll never have another program that has technical problems? No, I can't do that, but I don't foresee. There's nothing sitting there right now that appears to be a problem.

--------------------------------------------------------------------------------

Sam Rebotsky;SER Asset Management;Portfolio Manager, [18]

--------------------------------------------------------------------------------

No, but what I'm saying, what Steve had said, based on the accounting treatment, you're supposed to accrue all costs on a contract, you're not going to make any money. So there's -- so normally, you'll get some more revenue and some more expenses and you'll breakeven on the balance. Let me go to the revenue. You talked about $4 million and $4.2 million potential contracts after the $40 million. Could we define that, Stan, the $4 million additional, that's above the $40 million backlog, and you referred to a $4.2 million. So would that get the backlog up to $48.2 million as of now?

--------------------------------------------------------------------------------

Stanton David Sloane, Frequency Electronics, Inc. - President, CEO & Director [19]

--------------------------------------------------------------------------------

No. The $40 million includes the -- there's 2 numbers. You're talking about the $4 million. The $40 million includes that -- does not include the $4 million yet. On top of that, today, we got another contract just prior to the call for $4.2 million. That's -- and that's in the press release, by the way, that is out this afternoon.

--------------------------------------------------------------------------------

Sam Rebotsky;SER Asset Management;Portfolio Manager, [20]

--------------------------------------------------------------------------------

The $4.2 million, I see approximately $4 million of additional backlog. So it's not $4 million and $4.2 million, its $40 million backlog, plus $4 million, which might be $4.2 million?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Let me -- timing is important here. At the end of the quarter, we had $40 million in backlog, right?

--------------------------------------------------------------------------------

Sam Rebotsky;SER Asset Management;Portfolio Manager, [22]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Subsequent to the end of the quarter, we added $4 million of backlog. That's not reflected in the Q2 numbers. In addition to that today, we were awarded another $4.2 million contract. That also was not in the backlog.

--------------------------------------------------------------------------------

Sam Rebotsky;SER Asset Management;Portfolio Manager, [24]

--------------------------------------------------------------------------------

Okay. And these $4 million and $4.2 million is fully funded?

--------------------------------------------------------------------------------

Stanton David Sloane, Frequency Electronics, Inc. - President, CEO & Director [25]

--------------------------------------------------------------------------------

No.

--------------------------------------------------------------------------------

Sam Rebotsky;SER Asset Management;Portfolio Manager, [26]

--------------------------------------------------------------------------------

They're not fully funded. Okay. Now in the language in the press release, it does not include in the contract, which is not yet fully funded or the value of production options, which are not yet exercised. Could we quantify a number of dollars out there that's not fully funded? We're bidding for about $500 million, but we expect additional revenue, which is not fully funded. Is it $10 million? Is it $20 million? Is it $30 million? What kind of number or what kind of -- and when do we expect these things to get funded?

--------------------------------------------------------------------------------

Stanton David Sloane, Frequency Electronics, Inc. - President, CEO & Director [27]

--------------------------------------------------------------------------------

So let me -- just to make sure I get you on the right baseline, in our backlog is only what is funded. So we have some contracts that -- where we have funding, and that funding is reflected in the backlog, but the contract value is higher than that. So the funding is not yet received, is not yet authorized. The likelihood that those will be funded is very high. In addition to that, we have contracts that have options, for example, production options. Those, of course, don't go into backlog, 2 things happen. One is the option has to be exercised. And secondly, it has to be funded. So for example, if you have an option for production for something for $10 and they exercise the option, but they only fund $2 of it, then only $2 goes into backlog, okay? Now in terms of the difference between what's actually on contract, what's not funded, to be honest with you, I don't have a precise number, and that goes up and down because stuff goes into backlog, then it comes out of revenue, and that fluctuates. So I don't want to give you a number because it probably would change daily.

--------------------------------------------------------------------------------

Sam Rebotsky;SER Asset Management;Portfolio Manager, [28]

--------------------------------------------------------------------------------

Right, right. I'm just looking for a range. In other words, if we have a $40 million backlog, and plus we have $4 million and $2 million and which is potentially getting funded, do we have another $20 million or $30 million that needs -- that is we expect to get funded or could be funded because we started...

--------------------------------------------------------------------------------

Stanton David Sloane, Frequency Electronics, Inc. - President, CEO & Director [29]

--------------------------------------------------------------------------------

I'm not going to give you a number -- but if I were to sit down and do the calculation, I think your number is probably higher.

--------------------------------------------------------------------------------

Sam Rebotsky;SER Asset Management;Portfolio Manager, [30]

--------------------------------------------------------------------------------

Okay, okay. And are we finding with the bids, the $500 million bids, is that -- that's basically the same from the last quarter. And would it appear that it's the same players, there's nothing that significantly changed. And is the contract sizes $50 million, $20 million, is it 10 contracts? I'm trying to just how many people are we bidding for, just some kind of ramifications?

--------------------------------------------------------------------------------

Stanton David Sloane, Frequency Electronics, Inc. - President, CEO & Director [31]

--------------------------------------------------------------------------------

First of all, our bids range from, Jeez, I think we had 1 the other day for $3,500 and a range to hundreds of millions of dollars. It's a mix but, of course, the larger ones typically include options. The total number of bids that we're pursuing us. I don't know, it's a pretty big spreadsheet. So I don't want to give you a number, but its significant numbers. Not a whole lot has changed on the larger bids between last quarter and this. There has been some, as I mentioned earlier, just some delays in people making decisions, but no significant differences.

--------------------------------------------------------------------------------

Sam Rebotsky;SER Asset Management;Portfolio Manager, [32]

--------------------------------------------------------------------------------

All right. Hopefully, you've taken your medicine and you'll bid better that there -- you've bid on a contract that you have enough in there for Frequency to make a profit. Good luck, guys.

--------------------------------------------------------------------------------

Operator [33]

--------------------------------------------------------------------------------

And we'll move to private investor, [Michael Eisner].

--------------------------------------------------------------------------------

Unidentified Participant, [34]

--------------------------------------------------------------------------------

This question is for Stan. You had a $4.5 million contract on October 24 of the base systems, and you had a $3 million contract with the government on November 18. Are you counting any of that? Is that in the $4 million plus in backlog you mentioned?

--------------------------------------------------------------------------------

Stanton David Sloane, Frequency Electronics, Inc. - President, CEO & Director [35]

--------------------------------------------------------------------------------

Yes, I think so. Steve, is all of it in there?

--------------------------------------------------------------------------------

Steven L. Bernstein, Frequency Electronics, Inc. - CFO, Secretary & Treasurer [36]

--------------------------------------------------------------------------------

No, the backlog that I reported, the $40 million does not include that because those were after October 31.

--------------------------------------------------------------------------------

Unidentified Participant, [37]

--------------------------------------------------------------------------------

No, I understand that, but is that in that $4 million that you mentioned?

--------------------------------------------------------------------------------

Stanton David Sloane, Frequency Electronics, Inc. - President, CEO & Director [38]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Steven L. Bernstein, Frequency Electronics, Inc. - CFO, Secretary & Treasurer [39]

--------------------------------------------------------------------------------

The answer would be yes. And the additional, yes.

--------------------------------------------------------------------------------

Stanton David Sloane, Frequency Electronics, Inc. - President, CEO & Director [40]

--------------------------------------------------------------------------------

It will show up in the next -- this current quarter.

--------------------------------------------------------------------------------

Steven L. Bernstein, Frequency Electronics, Inc. - CFO, Secretary & Treasurer [41]

--------------------------------------------------------------------------------

This current quarter.

--------------------------------------------------------------------------------

Unidentified Participant, [42]

--------------------------------------------------------------------------------

And are you counting that $4.2 million as part of backlog or possible or opened?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

No, that's not funded. We have not included that in backlog. We won't include until it's funded.

--------------------------------------------------------------------------------

Unidentified Participant, [44]

--------------------------------------------------------------------------------

The $4 million is funded, but not the $4.2 million.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes, correct.

--------------------------------------------------------------------------------

Unidentified Participant, [46]

--------------------------------------------------------------------------------

I think everyone was confused by that.

--------------------------------------------------------------------------------

Stanton David Sloane, Frequency Electronics, Inc. - President, CEO & Director [47]

--------------------------------------------------------------------------------

Most of it. I know it is confusing. The accounting is becoming more complex in the development of atomic clocks here, but we understand.

--------------------------------------------------------------------------------

Unidentified Participant, [48]

--------------------------------------------------------------------------------

All right. In the press release, when are you going to transition to production, where we see revenue on top line revenue?

--------------------------------------------------------------------------------

Stanton David Sloane, Frequency Electronics, Inc. - President, CEO & Director [49]

--------------------------------------------------------------------------------

Well, on the program -- those specific programs that I referred to, that's what I was talking about, those finish up the development cycle over the next few months. And we have a lot of ongoing programs that are in production, not in development, but those specific programs in the next few months.

--------------------------------------------------------------------------------

Unidentified Participant, [50]

--------------------------------------------------------------------------------

So hurt you so much, stuff just moved to the right this past quarter?

--------------------------------------------------------------------------------

Stanton David Sloane, Frequency Electronics, Inc. - President, CEO & Director [51]

--------------------------------------------------------------------------------

Yes, sort of a convergence of problems. The slippage in a couple of anticipated awards that would have converted to revenue, we had assumed. Secondly, these problems that we're talking about on the current program performance, and then, of course, the effect of the accounting, the percent complete accounting, that Steve referred to, sort of has a double effect.

--------------------------------------------------------------------------------

Unidentified Participant, [52]

--------------------------------------------------------------------------------

All right. How is the GPS IIIF coming along?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Excellently. The program -- the development program is going very well, and we're very pleased with the results. Of course, we still have a lot ahead of us. We got a lot of qualification and testing, but the units are -- the initial units is in assembly and will be going into test before too long.

--------------------------------------------------------------------------------

Unidentified Participant, [54]

--------------------------------------------------------------------------------

I assume you didn't add any more to the backlog on that.

--------------------------------------------------------------------------------

Stanton David Sloane, Frequency Electronics, Inc. - President, CEO & Director [55]

--------------------------------------------------------------------------------

Not on that one, but we have several opportunities in that $500 million number that relate to that.

--------------------------------------------------------------------------------

Unidentified Participant, [56]

--------------------------------------------------------------------------------

Because I think at the annual meeting, I think there was like $100 million in backlog on that or in the fund, what we call that -- not backlog, outstanding bids?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

So bids, yes. Specifically related to GPS, it's a pretty significant number.

--------------------------------------------------------------------------------

Unidentified Participant, [58]

--------------------------------------------------------------------------------

Yes. 1.5 years ago, you had -- you received an Elcom contract for advanced and Electronic Warfare. How is that coming along?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

I think you're referring to the AOEW program?

--------------------------------------------------------------------------------

Unidentified Participant, [60]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Stanton David Sloane, Frequency Electronics, Inc. - President, CEO & Director [61]

--------------------------------------------------------------------------------

From a technical point of view, that's progressing pretty well. Initial units have been delivered and the customers evaluating.

--------------------------------------------------------------------------------

Unidentified Participant, [62]

--------------------------------------------------------------------------------

All right. On the 2 recent contracts, the small $4.5 million, $3 million, does that lead to bigger contracts?

--------------------------------------------------------------------------------

Stanton David Sloane, Frequency Electronics, Inc. - President, CEO & Director [63]

--------------------------------------------------------------------------------

$1 million here, $1 million there, they add up to larger numbers. The -- yes, I mean, obviously, we would hope that those would lead to other things. Those -- that -- the 1 contract that I talked about today, the $4.2 million, that program has -- that's for initial satellites. The program -- if the government approves the whole program, there's more satellites to follow. So that one has some nice potential for us.

--------------------------------------------------------------------------------

Unidentified Participant, [64]

--------------------------------------------------------------------------------

And did you hire any salespeople?

--------------------------------------------------------------------------------

Stanton David Sloane, Frequency Electronics, Inc. - President, CEO & Director [65]

--------------------------------------------------------------------------------

Since -- it depends on what time frame, but we have added salespeople, particularly in Elcom and additional sales and marketing resources here in New York also.

--------------------------------------------------------------------------------

Unidentified Participant, [66]

--------------------------------------------------------------------------------

So how many -- in the last 6 months, how many salespeople?

--------------------------------------------------------------------------------

Stanton David Sloane, Frequency Electronics, Inc. - President, CEO & Director [67]

--------------------------------------------------------------------------------

Well, at Elcom, it's 1, but remember that, that's a relatively smaller business. But we're augmenting the employee folks that are associated with sales and marketing with outside consulting support.

--------------------------------------------------------------------------------

Unidentified Participant, [68]

--------------------------------------------------------------------------------

So you didn't hire them directly or indirectly, you have some people?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Well, both. Indirectly, we're bringing consultants in. We don't have presence, for example, in certain places where we have key customers, given the size of the company. We can't afford to have 100 salespeople. So we do some sales -- we have sales reps, and we have representation in certain markets. And when we do that typically through third parties.

--------------------------------------------------------------------------------

Unidentified Participant, [70]

--------------------------------------------------------------------------------

So they are not W2 employees are just consultants that get paid on commission, I assume.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Some of them are commissioned, some of them are hourly, and it depends on what they're doing.

--------------------------------------------------------------------------------

Unidentified Participant, [72]

--------------------------------------------------------------------------------

All right. I'll just make a comment. The top 3 people last year took $1.4 million in salary roughly, and we're losing money. We have to move forward. We have to start making money. I think we haven't made any money in a year.

--------------------------------------------------------------------------------

Stanton David Sloane, Frequency Electronics, Inc. - President, CEO & Director [73]

--------------------------------------------------------------------------------

Yes. We agree.

--------------------------------------------------------------------------------

Unidentified Participant, [74]

--------------------------------------------------------------------------------

In the past year, it's just a lot. We just lost $5 million this quarter. I am here 20 years in this company. I want to see some results finally.

--------------------------------------------------------------------------------

Stanton David Sloane, Frequency Electronics, Inc. - President, CEO & Director [75]

--------------------------------------------------------------------------------

Yes. You and me both.

--------------------------------------------------------------------------------

Operator [76]

--------------------------------------------------------------------------------

We'll go next to private investor, [Michael Cooper].

--------------------------------------------------------------------------------

Unidentified Participant, [77]

--------------------------------------------------------------------------------

I just want to talk about some of your development projects, and get a little bit more clarity on what is being developed here that is going to open up new markets for the company or expand your existing markets? And you have made a couple of comments on a digital rubidium atomic clock that I think is taking resources to develop. Can you give us some sense of what is a digital rubidium atomic clock? What are the market opportunities? Is this a software development? Is this something where you will sell encrypted keys to customers? I have no idea what it is. It sounds intriguing, but I'm not sure what it is. So maybe you could talk about that a little bit? And...

--------------------------------------------------------------------------------

Stanton David Sloane, Frequency Electronics, Inc. - President, CEO & Director [78]

--------------------------------------------------------------------------------

Okay. So atomic clock is a very precise clock. It's a clock. It keeps a very good time. Satellites, such as GPS and communication satellites and a variety of other things use are dependent on precise time and that's what the atomic clock provides. The particular technology that we're using here on the clock you're referring to is rubidium clock. That's pretty well-known from a science and physics point of view. The DRAFS clock you're referring to, Digital Rubidium Atomic Frequency Standard, is an evolution of our previous rubidium clocks, and it adds a digital control circuitry. Don't think of this as a software development, however, this is a hardware system that provides time and frequency reference for very high-performance satellite systems. The relevance of the DRAFS program, that's what's being developed for the -- specifically for the GPS IIIF program, and that's what I was referring to earlier that, that's the progress on that program is going very well. That same clock is applicable to other satellites where the requirements for either precision time or frequency are also a requirement. So it's not applicable only for the GPS III program. The -- did that answer your question?

--------------------------------------------------------------------------------

Unidentified Participant, [79]

--------------------------------------------------------------------------------

Yes. So it's still focused on space. In a lot of the reading I'm doing on what atomic clocks can be used for, I'm seeing a lot in the 5G area. I'm seeing reports out, suggesting that timing synchronization is so important in 5G, it requires atomic clocks, I guess, in cell towers and that type of thing, I'm not sure where they would go. But that atomic clock technology is very important for the evolution of 5G and then some of these other -- the airlines and their ability to offer Wi-Fi. There was somebody talking about that, I think on CNBC just a week ago or so, suggesting that airlines can't give away free Wi-Fi right now because the bandwidth would crash their systems or something like that, but I recall Martin talking about Frequency Electronics possibly having a solution for the airline industry, and I know you installed those WAAS systems in the satellites. And I'm wondering, so is there -- is that opportunity getting closer? Or is it moving away? And is -- what I'm reading about the atomic clocks in the 5G networks, is that at all relevant to Frequency Electronics?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

So first of all, let me say the DRAFS clock -- started the conversation is a space-qualified clock, will be space qualifying clock, but the technology of that clock is also applicable to a variety of other things. In fact, if you look at the history of the company, for the last 58 years, we just add up the numbers of clocks that we've delivered is probably more on the ground side than it would be on the space side. They tend to be a little different types of clocks and different requirements and other things, but don't think of that clock is only applicable for space. The types of clocks that we do here are very high performance. The requirements for things like commercial, cellular and 5G are not that level of performance. We're not focused here on producing the sort of that level of performance commercial device. Our principal market here is high performance, high value-added types of clocks.

--------------------------------------------------------------------------------

Unidentified Participant, [81]

--------------------------------------------------------------------------------

Okay. And just one final question. So the platforms in the military I've seen, and I'm talking planes, ships, submarines, I guess, tanks, I've seen numbers around 20,000 platforms out there in the military. Is that a target market for you?

--------------------------------------------------------------------------------

Stanton David Sloane, Frequency Electronics, Inc. - President, CEO & Director [82]

--------------------------------------------------------------------------------

Depends on the particular platform. We do a lot of oscillators for airborne applications. That is sort of a unique environment. Well, I shouldn't say that, anything that moves or has a machinery in it or flies or drives has vibration, and the vibration affects the performance of the oscillators. We do very high-performance oscillators that are immune -- mostly immune to that sort of vibration. They typically go into high-value platforms, things like airplanes, UAVs. So that would be the way to think about it. It's applicable to a lot of platforms. Now in addition to things that moves, we also do a lot of precision clocks and oscillators, for example, for secure communication systems that don't necessarily -- they're not necessarily installed on moving platforms, but they still have very high-performance requirements. They're used to, for example, to mitigate the problems associated with spoofing and jamming on the GPS program. So it's a mix. So when you say platform, don't just think of moving platforms, a lot of platforms that don't move what we would describe as platforms.

--------------------------------------------------------------------------------

Unidentified Participant, [83]

--------------------------------------------------------------------------------

Okay, great. And I hope the gross margin grows at least somewhat next month and then grows next quarter and then grows substantially after that.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

We're working hard to make that happen.

--------------------------------------------------------------------------------

Operator [85]

--------------------------------------------------------------------------------

(Operator Instructions) We'll go next to Robert Smith at the Center for Performance Investments (sic) [Investing].

--------------------------------------------------------------------------------

Robert Smith;Center for Performance Investments;Founder, [86]

--------------------------------------------------------------------------------

I'd like to get a little more color about the landscape of the numbers. So the $500 million that you're bidding on, can you tell me something about this? Is this all-inclusive?

--------------------------------------------------------------------------------

Stanton David Sloane, Frequency Electronics, Inc. - President, CEO & Director [87]

--------------------------------------------------------------------------------

Yes, that's the sort of a rough number associated with the total number of the outstanding.

--------------------------------------------------------------------------------

Robert Smith;Center for Performance Investments;Founder, [88]

--------------------------------------------------------------------------------

And you said your win number is somewhere between 50% and 70%?

--------------------------------------------------------------------------------

Stanton David Sloane, Frequency Electronics, Inc. - President, CEO & Director [89]

--------------------------------------------------------------------------------

Typically, yes.

--------------------------------------------------------------------------------

Robert Smith;Center for Performance Investments;Founder, [90]

--------------------------------------------------------------------------------

Over what period of time [it] encompass and as far as a number of years?

--------------------------------------------------------------------------------

Stanton David Sloane, Frequency Electronics, Inc. - President, CEO & Director [91]

--------------------------------------------------------------------------------

Yes, we don't know. It's -- programs move around. Sometimes they sometimes programs get canceled. If they cancel a program, we wouldn't treat that as a loss. That's not a loss. It's just somebody decided not to buy anything.

--------------------------------------------------------------------------------

Robert Smith;Center for Performance Investments;Founder, [92]

--------------------------------------------------------------------------------

Well, as I run from 1 year to 5 years, is that something like that.

--------------------------------------------------------------------------------

Stanton David Sloane, Frequency Electronics, Inc. - President, CEO & Director [93]

--------------------------------------------------------------------------------

If you're asking about the program performance, our typical...

--------------------------------------------------------------------------------

Robert Smith;Center for Performance Investments;Founder, [94]

--------------------------------------------------------------------------------

I'm trying to get to an average annual numbers, so to speak, a rational number that translates to your current backlog.

--------------------------------------------------------------------------------

Stanton David Sloane, Frequency Electronics, Inc. - President, CEO & Director [95]

--------------------------------------------------------------------------------

Well, our revenue -- I mean, if -- for argument's sake, if you say revenue is around $50 million, then in order to grow that number, you have to pursue x number -- x dollars worth of new business, and that has to execute over some period of time. In that $500 million, there's a mix of stuff, some of it is contracts that execute over a couple of years. Some of it is opportunities that for production, things that get delivered in 6 to 8 months. So it's a mix.

--------------------------------------------------------------------------------

Robert Smith;Center for Performance Investments;Founder, [96]

--------------------------------------------------------------------------------

Yes. I understand it's a mix, but what would be an average point of that mix as far as time goes?

--------------------------------------------------------------------------------

Stanton David Sloane, Frequency Electronics, Inc. - President, CEO & Director [97]

--------------------------------------------------------------------------------

I'm not sure I understand the question. Asking when that $500 million will be adjudicated?

--------------------------------------------------------------------------------

Robert Smith;Center for Performance Investments;Founder, [98]

--------------------------------------------------------------------------------

Let's say if you won 50% of $500 million, that's $250 million. If it -- if the average point would be 5 years, that would be $50 million. It will be -- if it be 2.5 years, it's a different story than you would you have an opportunity to double your revenue.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. Well, the arithmetic is not far off, but remember that some of these programs, for example, satellite -- high-value satellite program that has options in it, that might be worth, let's say, for argument's sake, $50 million. The initial part of that may be over 2 years, but the options may run over 3 or 4 years.

--------------------------------------------------------------------------------

Robert Smith;Center for Performance Investments;Founder, [100]

--------------------------------------------------------------------------------

Well, what do you suggest to me to try and come up with some kind of a rational number to see what your potential is over the next few years to move that needle as far as your revenue number, which has been kind of static for a long, long time?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Well, if we were to win the reasonable share of those programs and adjust for cancellations and other things that are beyond our control, then we should be growing the business. Your arithmetics are not far off.

--------------------------------------------------------------------------------

Robert Smith;Center for Performance Investments;Founder, [102]

--------------------------------------------------------------------------------

Does the passage of the defense budget have any meaning to you in the moment?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Some of the slippages, I think, are related to the CR, but most of the things that we have underway right now are prior programs. They are not affected by the CR. There's a couple of larger commercial programs, which have nothing to do with the defense budget, but are affected by decisions about, for example, people being able to raise funding to get their constellations launched and things like that.

--------------------------------------------------------------------------------

Robert Smith;Center for Performance Investments;Founder, [104]

--------------------------------------------------------------------------------

Can you tell me anything about the competition in the atomic clock area or alternative?

--------------------------------------------------------------------------------

Stanton David Sloane, Frequency Electronics, Inc. - President, CEO & Director [105]

--------------------------------------------------------------------------------

What would you like us to tell you?

--------------------------------------------------------------------------------

Robert Smith;Center for Performance Investments;Founder, [106]

--------------------------------------------------------------------------------

Whatever you can tell me.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Well, we're not the only people in the world that build atomic clocks, it depends on the country. And China has -- they make clocks. Nobody makes the clock level of precision that we do.

--------------------------------------------------------------------------------

Robert Smith;Center for Performance Investments;Founder, [108]

--------------------------------------------------------------------------------

Which is targeted to a certain market. So essentially, you have a leg up on any competitive forces that might be around for high-value atomic clocks.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

We think we offer performance advantages on both the space side and the terrestrial side in terms of the clocks, not only the performance, but the reliability. Track record in space is very important, particularly in the space to defense customers. And the best example I'll give you is the clock that's on the Voyager spacecraft. I think Martin actually saw the electronics in that clock that has been out in the space for 50-something for 40, 42 or 43 years, I forget what it is. 1977 it was launched. So when we talk about reputation and trust, those are very -- those are probably equally as important as cost in this business.

--------------------------------------------------------------------------------

Robert Smith;Center for Performance Investments;Founder, [110]

--------------------------------------------------------------------------------

Is there anything around that might replace the atomic clock?

--------------------------------------------------------------------------------

Stanton David Sloane, Frequency Electronics, Inc. - President, CEO & Director [111]

--------------------------------------------------------------------------------

No. Atomic clocks are -- various types of atomics are being developed, but there's nothing that's -- that at least we are aware of that would replace the atomic clock.

--------------------------------------------------------------------------------

Operator [112]

--------------------------------------------------------------------------------

We'll go next to [Richard Jones], private investor.

--------------------------------------------------------------------------------

Unidentified Participant, [113]

--------------------------------------------------------------------------------

You mentioned on the last call and also at the annual meeting that there was an important Air Force contract, I think, in the neighborhood of $35 million, $37 million. That was on hold and that you'd learn more about in the middle of December. What's the status of that program?

--------------------------------------------------------------------------------

Stanton David Sloane, Frequency Electronics, Inc. - President, CEO & Director [114]

--------------------------------------------------------------------------------

No change. The contract is still active. And -- but we -- at the moment, we don't have funding. You're referring to what is called the [POPRC] program, which was Optically Pumped Rubidium Clock, we were developing for Air Force Research Lab.

--------------------------------------------------------------------------------

Unidentified Participant, [115]

--------------------------------------------------------------------------------

When do you think you might get a resolution on that?

--------------------------------------------------------------------------------

Stanton David Sloane, Frequency Electronics, Inc. - President, CEO & Director [116]

--------------------------------------------------------------------------------

So I don't know. If I were that smart, I wouldn't be working here.

--------------------------------------------------------------------------------

Unidentified Participant, [117]

--------------------------------------------------------------------------------

Okay. And the recent news about the military budget included news that the Pentagon was going to create a new section relating to space and to military warfare and space. That sounds like a pretty encouraging thing for your company. I mean pretty exciting thing. How do you look at it?

--------------------------------------------------------------------------------

Stanton David Sloane, Frequency Electronics, Inc. - President, CEO & Director [118]

--------------------------------------------------------------------------------

Yes, I think that's good. I think it's good for the space business overall. How that sorts out politically. We're sort of immune, but I think what's more important to us is the budget trends and the key programs that are either under procurement or in the procurement cycle for satellites.

--------------------------------------------------------------------------------

Operator [119]

--------------------------------------------------------------------------------

And gentlemen, I have no other questions holding. I'll turn the conference back for any additional or closing comments.

--------------------------------------------------------------------------------

Stanton David Sloane, Frequency Electronics, Inc. - President, CEO & Director [120]

--------------------------------------------------------------------------------

Great. Thank you very much. Martin, would you like to make any closing comments?

--------------------------------------------------------------------------------

Martin B. Bloch, Frequency Electronics, Inc. - Director [121]

--------------------------------------------------------------------------------

My voice is back a little. I want to wish everybody a very happy and healthy holiday season. And my thanks and appreciation to all the people at FEI that are working very hard to achieve progress. Thank you. Have a great holiday.

--------------------------------------------------------------------------------

Operator [122]

--------------------------------------------------------------------------------

Ladies and gentlemen, that will conclude today's conference. We thank you for your participation. You may disconnect at this time, and have a great day.