FEIM - NASDAQ

Greetings, and welcome to the Frequency Electronics First Quarter Fiscal 2026 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, Thomas McClelland, President and Chief Executive Officer.

Thank you. Good afternoon, and thanks for joining the Frequency Electronics First Quarter Fiscal Year 2026 Earnings Call. With me today is our Chief Financial Officer, Steve Bernstein. On our fourth quarter fiscal 2025 earnings call in July, I told you that particularly strong execution allowed the company to produce revenue on certain programs in fiscal 2025 that we had originally expected to produce over a more extended period of time in fiscal 2025, '26 and beyond. So while we do not provide guidance given the inherently lumpy nature of contract awards and customer-driven activity, we did want to point out in July that the previous quarter, the highest revenue quarter in 25 years, should not be viewed as the near-term new normal. We anticipated instead that the fiscal first quarter of 2026 would look more like the first 2 quarters in fiscal 2025. This would have been the case, but for customer-driven delays on a few key programs that pushed revenue recognition out of the fiscal first quarter. Recall that the allocations for space and defense-related programs that were enacted by Congress were first finalized in early July with only a few weeks left in the quarter, which created some late quarter customer scrambling. Critically, this revenue will still be earned in the coming quarters and predominantly in this current fiscal year. These are neither cancellations nor contract reductions. In fact, we expect at least one of these programs to be meaningfully increased in total contract value. Now that we're 6 weeks into this second fiscal quarter, I can clearly state that the issues we saw in the first quarter related to customer-led delays are now behind us, and we're making significant progress towards a bigger book of business. When we have a quarter like this first one with lower revenue than recent trend levels, while we're still investing in growth for the future, we can see temporarily lower levels of profitability. But make no mistake, this is not your grandfather's FEI. We have fundamentally transformed this business over the past few years to be a larger, more profitable, more cash-generative company that invests in the future and rewards shareholders for years to come. One indication of our future success is that our funded backlog remains at historically high levels, but we're also actively bidding on new programs and anticipate meaningful new business in the near term. Some of the programs we're bidding on are larger than the typical contract wins we've previously reported. Furthermore, these programs have significant follow-on potential over the next decade and beyond. Both space and non-space defense activity point to continued healthy growth in our core markets, both for our legacy products and our next-generation technology. Notable programs we're involved in include Golden Dome, Patriot missile system, B-2 bomber, and Terminal High Altitude Area Defense system, or THAAD, as well as other multi-domain defense systems. To support these markets as well as our new initiatives in quantum sensing, the company recently opened an engineering facility in Boulder, Colorado and hired senior scientists formerly with the National Institute of Standards Technology, Time and Frequency Division. These physicists and others who are expected to join FEI at the Boulder facility in the near future will support ongoing company programs and new technology efforts. We anticipate that the Boulder facility will contribute positively to the bottom line by the third quarter of this fiscal year. In addition, as noted previously, we're pursuing external government funding for research and development with significant activity underway, particularly in the area of quantum sensing, which is a large emerging market for us. Building on the enthusiastic response and strong encouragement from last year, our company will host its second annual Quantum Sensing Summit in New York City this October. This scientific conference will convene leaders from government, academia, industry and other laboratories to explore emerging technologies, discuss strategies for realizing their full potential and reinforce our nation's leadership in this critical field as well as FEI's expanding strategic role in advancing this technology. We're excited about the enthusiasm, which has developed around this event. Additional details related to this event are available on the Frequency Electronics website. We have always been a quantum physics organization. Quantum is at the heart of atomic clocks that we have designed and produced for many years. This area of our business is robust and taking on more meaning in the position, navigation and timing, high reliability security complex, and our solutions are critical elements of mission assurance and surveillance. What has changed over the past year or so is that our customers need quantum solutions, particularly in sensing that are real and timely in order to deal with an increasingly tech-focused and conflicted global defense landscape. We are in a prime position to deliver solutions given our technology expertise in defense, space and quantum. Our opportunity set is not only the best we've seen, but we believe is also the best in our industry, and our relevancy is critical to the mission of the defense of our country and allied partners. Although this quarter showed a temporary decline in revenue and earnings, our strong fundamentals remain unchanged. We continue to generate profitability in our core technologies and are actively investing in innovation to drive long-term growth. With a debt-free balance sheet and the unwavering commitment of our talented workforce, we're confident in the company's continued strength and bright outlook. Our leadership in position, navigation and timing has never been more paramount in the industry. Traditional customers as well as emerging leaders are engaging with FEI, recognizing our unparalleled and growing technical leadership, coupled with manufacturing expertise. We have also now proven our ability to execute complex contracts with greater speed and precision than industry norms. In recent years, we have returned cash to shareholders via 2 significant special dividends while still investing in the business for future growth. Today, the company announced a $20 million authorization for the repurchase of shares, and we remain committed to both investing for the future and finding ways to return cash to shareholders. Please see today's 8-K for further information. Before I turn the call over to Steve to discuss our financials in greater depth, I want to highlight an issue making global headlines that goes to the heart of our mission, the growing battle to protect time. As the Financial Times recently reported, the ultra-precise clocks that power GPS and other satellite systems are increasingly at risk. From war time jamming and spoofing to accidental outages and even potential attacks on satellites themselves. This isn't just about navigation. Time is the invisible utility that keeps the world running. Financial markets, power grids, telecom networks and emergency services all depend on precise secure timing. Even a small disruption can ripple through critical infrastructure with serious consequences. In one recent case, suspected Russian GPS interference forced the European Commission President's plane to abandon satellite guidance and land in Bulgaria reportedly using paper maps. That's why governments worldwide are accelerating investments in resilient timing. The U.S. has unveiled its most advanced atomic clock. The U.K. and France have pledged to strengthen infrastructure together. Sweden is upgrading national timing systems to secure 5G communications. For FEI, this is powerful validation. Our technologies in alternative PNT and quantum enhanced timing are designed precisely to close these vulnerabilities. We're not just a supplier, we're a strategic partner helping ensure that our nation and our allies can rely on resilient, secure and sovereign sources of time. In summary, we remain highly confident in our continued upward but not necessarily linear trajectory and our increasing strategic importance in the industry. We look forward to demonstrating this in the quarters and years to come. I'll now turn the call over to Steve, and I look forward to taking your questions in a little bit later in the call.

Thank you, Tom. Good afternoon. For the 3 months ending July 31, 2025, consolidated revenue was $13.8 million compared to $15.1 million for the same period of the prior fiscal year. The components of revenue are as follows: revenue from commercial and U.S. government satellite programs was approximately $6.5 million or 47% compared to $8.3 million or 55% in the same period of the prior fiscal year. 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 non-space U.S. government and DOD customers, which are recorded both in the FEI-New York and FEI-

Thanks, Steve. I think we're now prepared to take questions.

[Operator Instructions] And the first question today is coming from George Marema from Pareto Ventures.

Thanks, Tom. Back in the beginning of the year, this last winter, you kind of outlined some of your various clock technologies, including the rubidium vapor clock, the mercury ion clock, of course, quantum sensing and NV Diamond magnetometer and you kind of gave some time lines on that. I just wonder if I can get an update on sort of the progress on these, the productization of these things and sort of like an updated time line on when these might be convert to actual product.

Okay. Well, keep in mind that we have atomic clocks that are available off the shelf at this time. And in fact, we're actively producing. In particular, we have a satellite grade state-of-the-art GPS atomic clock for GNSS satellite systems that we're actively producing. But to address some of the more advanced things that we are working on, in particular, as you stated, we're working on mercury ion, atomic clock. And we are actually beginning to produce prototypes at this point in time in collaboration with the Jet Propulsion Laboratory. And we anticipate that this will be ready for low-rate production in another year or so. We're also, as you stated, working on various magnetometer technologies. This is primarily to support a very important field at this point in time, which is alternate navigation sources that are completely independent of GPS and related satellite navigation systems. We have externally supported programs to develop this technology, in particular, NV Diamond magnetometer technology. And we anticipate by the middle of next calendar year to have prototypes available to support testing done by some of the -- our potential customers. And roughly a year after that, we're anticipating that we'll have a next generation higher performance devices available. Let me leave it at that.

Okay. And I had one more question, which is kind of a 2-part question about quantum sensing. The first one is just sort of a general update on where we are on the space application. But -- and I know you guys focus on space applications, but I was wondering, there seems to be some emerging research on how quantum sensing can also be used in other areas like quantum computing, for example. Has there been any thought, discussion or interest in applying your technology to anything outside of space?

Yes. So quantum computing doesn't necessarily exclude space. So the space, it's not like those are opposites, space and quantum computing. But certainly, we also don't need to do quantum computing in space. I think that at this point in time, we are not investing directly in quantum computing. But a lot of the technologies that we're working on potentially have applications in quantum computing. And I think our approach is that quantum computing is a very tricky kind of business. I think everybody realizes it's not ready for prime time right now and an awful lot of people working on it. And instead, we're focusing on some aspects of quantum sensing that it's very clear that we can make a contribution very quickly in the near future. At the same time, I think we are aware of what's going on in quantum computing, and we're trying to put together a workforce that's part of the reason for our investment in the Colorado facility so that we put together an engineering team with the kind of expertise that can potentially contribute to quantum computing in the future.

Okay. Thank you, Tom, for your outstanding leadership. I appreciate it.

Thanks.

[Operator Instructions] And there were no other questions from the lines at this time. I will now hand the call back to Thomas McClelland for closing remarks.

Okay. Well, I would like to thank everybody for taking the time to listen and to participate in today's earnings call. We look forward to providing further updates in the coming months. Thank you.