Martin Bloch - President and CEO Alan Miller – Treasurer and CFO.

Marcel Herbst - Herbst Capital Management Sam Rebotsky - SER Asset Management.

Greetings and welcome to the Frequency Electronics Second Quarter Fiscal Year 2016 Earnings Release Conference Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

Any statements made by the company during the conference call regarding the future constitute forward-looking statements pursuant to the Safe Harbor provisions of the Private Securities Litigation 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, Martin Bloch, President and Chief Executive Officer of Frequency Electronics. Thank you, Mr. Bloch. You may begin..

Welcome everybody. I just finished talking with General Joe Franklin. He is in Washington and he sends his best regards. This conference call will be handled by me, Martin Bloch and Alan Miller our CFO.

And without any further ado, Alan why don’t you take over?.

Thank you, Martin, and good afternoon everyone. For the second quarter of our fiscal 2016, Frequency recorded revenues of $16 million as compared to $19.2 million in the year ago quarter. Satellite revenues again represent approximately 60% of consolidated revenues, similar to the last two fiscal years.

But due to delays in new contract awards most of which are sole sourced to Frequency satellite payload revenues are lower by about $5.5 million for the first six months of fiscal 2016 compared to the prior year. In the U.S.

government DoD non-space market revenues increased year-over-year and accounted for nearly 30% of consolidated revenues in the quarter. This increase in revenues is reflected primarily in the FEI-Zyfer segment where we provide solutions for secure communications on GPS dependent systems.

The increase in this market area partially offsets the decrease in network and other commercial product sales which declined to 15% of consolidated revenues. These lower sales are a result of less third party contract manufacturing revenue from FEI-Asia and a nearly $1 million decrease in sales at Gillam-FEI.

Based on the present anticipated schedule of satellite payload program awards we expect to see an upturn with significant additional bookings in the next few months and for the end of our fiscal year in April.

However, as a result of lower revenues already recorded so far this year, we anticipate fiscal 2016 revenues will not reach the record high levels achieved in fiscal 2015. Gross margin was $5.2 million compared to $6.7 million last year, yielding a gross margin rate of 33% in fiscal 2016 compared to 35% last year.

Lower sales yield lower margins and do not fully absorb all overhead costs. In recognition of the lower level of sales we have taken some steps to reduce costs in order to maintain profitability. SG&A expenses were $3.2 million or 20% of revenues as compared to last year's $3.5 million or 18% of revenues.

This level of SG&A expense is very much in line with our targets and we expect them to remain in line going forward. Internal R&D spending in the second quarter of fiscal 2016 was $1.9 million or 12% of revenues compared to last year's $1.4 million or 7% of revenues.

Second quarter IR&D spending reflects an acceleration of development in certain products for the satellite market and to improve manufacturing efficiency.

For fiscal year 2016 as a whole we expect IR&D spending to be higher than the prior year as we bring these new products to market the total expenditures are expected to remain at less than 10% of revenues.

With $1.5 million in lower gross margin and higher IR&D costs we've recorded a nominal $48,000 operating profit in the second quarter compared to $1.8 million last year.

Other income, which generally consists of investment income, offset by interest and other expenses, netted to an income number of $63,000 in fiscal 2016, as compared to $153,000 in the same quarter last year. This year's pre-tax income of $111,000 in the second quarter of fiscal 2016 compared to $1.9 million in the year ago period.

The provision for income taxes is $180,000 which exceeds our pre-tax income. This high rate is due to the inability to receive any current tax benefit from losses recorded at our foreign subsidiaries. In addition if and when Congress reinstates the R&D tax credit for calendar 2015 we would expect our tax rate to go down.

Net loss for the second quarter of fiscal 2016 were $69,000 or $0.01 per share compared to net income of $1.3 million or $0.15 per diluted share for the second quarter of fiscal 2015. For the first six months of fiscal 2016 we used cash from operations in the amount of $2.9 million.

This is primarily the result of the timing of billings and collections of receivables. Following the end of our second quarter we collected over $9 million of receivables which contributed significantly to our cash flow for the year. Our backlog at the end of October 2015 was $23 million compared to $27 million at the end of the first quarter.

As noted in the press release potential bookings of orders for approximately $35 million have been delayed on most of these programs Frequency is the sole-source provider. As we noted earlier, we expect significant contract awards to occur in the second half of our fiscal 2016 and a positive book-to-bill during the remainder of the fiscal year.

At this point I'll turn the call over to Martin and look forward to your questions later..

Thank you, Alan. I believe that Alan gave a very clear picture of where Frequency is.

The good news is we haven’t lost any contracts, they just moved to the right and our pipeline is healthy and is based on add-on to existing contracts and which we expect will be formalized before the end of April 2016 and also very healthy line of new proposals that we have outstanding. In general, especially the satellite business is very lumpy.

You know when we were getting 500 to $1 million per satellite the lumps were smaller. Now our contracts are between 6 and the largest one like for Iridium is $30 million so it is a lot lumpier and they don’t happen on a continuous basis.

But looking from now and the future I see a continuous increase in satellite opportunity and our product line is very healthy.

We utilize this period of delays to great benefit because there is a continuous demand to take a look at our product line and see what we can do to improve manufacturability, to reduce size, to reduce power and most of all to make it more affordable.

And another great pressure that is especially applicable to the satellite industry is the cycle time is getting shortened and is considerably from 30 to 50 months to approximately 12 to 24 months.

That requires a very careful examination on FEI on being able to improve the manufacturability, improve standardization of products so not each building block is a new design and a new engineering effort, and have available considerable amount of long-lead part so we can respond to those demands [on this item] [ph].

We have used our time very effectively and we will continue to achieve the main goals that our customer wants and this is size, smaller size, less power on this because they want to put a lot more channels per satellite and of course affordability because their commercial communication satellites are being pressured to put more channels and to make it more affordable.

We have spent 50 years being the best custom builder in the world. We build one of each kind to some 800 satellites and have become classified as a national treasure.

But right now it is very appropriate to take all the technology and in addition to this custom building ability which is great for technology and money we have put a significant effort in pursuing programs that have more production capabilities using the old yardstick is build it by the mile and sell it by the inch.

And we're doing that effort specifically for secure communication and other secure programs where GPS denial or jamming is a criteria because there is a great need and becoming greater everyday to secure our communication and other critical services. And also in the satellite to try to standardize as much of the building blocks as possible.

So for each custom satellite we have to do a minimum of delta engineering. So, I am very confident in the future of Frequency and where we are going and I think I've talked long enough. I'd like to open to answers and questions..

[Operator Instructions].

Operator, could you be kind enough to ask them to address the question either to Martin Bloch or Alan Miller?.

Participants at this time if you have a question, please direct that question directly to Martin Bloch..

Or Alan Miller..

Or Alan Miller at this time. Our first question comes from the line of Marcel Herbst of Herbst Capital Management. Please proceed with your question..

Martin and Alan, thanks for taking my question. Actually all my questions are for Martin. And the first one is regarding your need to find a partner.

Can you give us a sense with how many potential partners you are currently in active discussions with and what the likely timeline is for reaching as decision?.

Well, that's kind of a difficult question to answer. All I can tell you is that we have discussions with many people on different aspects and some on either partnering, acquisition or merger, but I'm not at liberty to quantify that number..

All right, would you say this is something we should look out for over the next 12 months or is it more a shorter term kind of stage?.

Well, that's again a very hard question on this because we'll have to evaluate each saturation as it comes. Our plan is to proceed and become healthy and grow on our own and at the same time look for every opportunity to pursue a merger or an acquisition..

Okay, and you have approached all six of the major satellite manufacturers which your new Ku, Ka-bands product line, can you tell us if all of them are still considering it and at what stage the decision making is?.

Well, the first what has to happen on the satellites is for the programs to be decided. They are all in limbo, undecided. There are about 10 satellite programs that now are in the bidding and we don’t know who the winner is going to be.

So that's the first step and the programs are going to be shaking out some as early as Monday and others are within the next six months. And yes, we are still involved with five out of the six, I don’t remember six, are undecided. The big ones are basically four U.S.

and well I guess, yes, there are two foreigners because we are dealing with two foreign companies, so six is the right number. I was just mentally adding the people that we're dealing with..

Okay, and is your first large project still on hold to the situation with the Import Export Bank?.

Fortunately as a matter of fact we had a call today and they said that they are making great progress and they feel that that's going to be behind in the next couple of days that they need two more Board members to sign off, but it is a done deal..

So, that’s excellent..

So, I don’t know the exact mechanism, but our customer said that, that they consider it a done deal, that the Export Bank will be reinitiated..

Okay, good..

That’s good news..

That’s very good news.

Now, my last question, can you give us an update on the France project and strategically where you are going with on that subsidiary?.

On the France electrical opportunity, we are waiting for, are you talking about the commercial of Gillam, or are you talking our pursuit of the Leo satellites?.

The commercial of Gillam with the M2M of both….

Well, the France Electric is buying more smaller quantity units. They have not gone out for any of that large production scale. Gillam I think got an order for another 140 of those RTUs and then they are moving much slower then they initially projected. So, there is a large opportunity, but no timeline that we can define..

Okay, great. Thank you so much..

Thank you..

Our next question comes from the line of Sam Rebotsky of SER Asset Management. Please proceed..

Hello Sam..

Hi, good afternoon Martin and Alan..

Sam, did you like your candle - your hanukkah candles?.

Definitely, definitely, but not yet for tonight..

Okay..

Tell me the $35 million of major satellite programs, is that dependant on the export, import, how much of that $35 million is export, import?.

About five..

Five, okay and we said, yes?.

$5 million, maybe $8 million on this and that, or most of it is totally from the programs that are [just laid] [ph] in paperwork..

And how much in addition is the export, import that’s not in the 35?.

I have to take a look at the proposals, probably another two or three proposals in there and again each one between $5 million and $10 million chunks..

Okay, that’s good. Now do we - as far as the January where we say based on present scheduling of satellite payload programs that we anticipate this recent trend will not continue beyond our current third quarter ending next month, January 2016.

Do we expect to do better than $16 million in sales for the January 2016 or do we expect some of this new business to go in so we can make a profit in the quarter ending January?.

Well, obviously we don’t always predict, so we don’t really know where we’re going to be at the end of January. So it always going to depend on the actual time of contract awards, but we can’t be predicted at this point with respect to that..

So, when we get the order how long does it take to get it together before we ship it?.

Well, we ship it there takes anywhere from 12 to 30 months depending on the complexity on the program, but that has really very little to do because we get milestone payments and milestone progress on revenue. So, the basic idea from the time we get an order until we do the first billing is typically what 90 days..

To be even faster….

Yes, in some cases it is even faster and decide and so, the idea, the most important thing is to get the actual contract and then the billing is done fairly quickly..

And the firm contracts of $23 million to $35 million is not included in the $23milion?.

That’s correct..

So, do we know when the $35 million will firm or is it going to be after April or before or are we going to ship any or whether we, what’s our best thoughts?.

Our best thought is the way we – if we look at the bubble right now as we expect all of them to be from before April 30 of 2016 and obviously some of them will be built in this year..

Okay, okay and of the $23 million do we know how much we expect to ship of that before the end of April?.

90%....

No, usually we get a 12 month look and it’s really around 70% of that number, so the percentage of that will be shipped before or revenue recognized before the end of April..

Okay. Okay. All right.

Now, do we prefer to be acquired or do we prefer to make an acquisition, what is the – how do we look at this?.

We look at each opportunity individually and will appraise it on what’s best value for our stockholders, our employees and the country in that order..

Okay, yes. Martin, the problem is that they get a greater value for Frequency, I think a lot of the companies look at the backlog and what is actually shipped and I guess the sooner you get to be able to get a bigger number to be shipped, the value of Frequency will go up.

So hopefully, you could sort of firm this up and get a bigger backlog and start making some decent profits and then the merger/acquisition will take care of itself..

No question about it and that’s one criteria, but I want to add to you another criteria. We have many enabling technologies that could be of great value to some of our companies. So they’re both, I agree with you that having backlog and having profit is an important incentive, but let’s not forget the key technology that we are unique in the world..

Yes I agree with you, Martin 100% and I know there is a lot of value here and as I continue to repeat of the $100 million valuation of Frequency with a insignificant book value, a number of years ago let’s get to the better value sooner than later..

Amen..

Okay, amen..

A healthy year everybody. Go ahead.

What else?.

Thank you..

Thank you, Sam..

Our next question comes from the line of Michael Isner [ph] a Private Investor. Please proceed with your question..

Hi Michael..

How are you, sir?.

I’m okay..

All right, one quick question.

The R&D went up to almost $2 million, which is a loss for you guys, where did you put most of that?.

Well it is not - number one is not a lot and it is still basically our plan as always is to be about 10% of revenue and that has been our plan from all and they all went in, in making and taking a look at our product time to optimize it for size, lower power and manufacturability, so we can improve our response time and reduce our manufacturing cost..

All right..

And at the same time we’ve also addressed some very exciting new products for the future. You cannot continuously hang on your old glory. You have to look at the future, what type of products would be of great benefit. So we didn’t let any and anybody stay around idle and whittling their thumbs. We put everybody to good use, you can depend on that..

I don’t know, want to secure communication and I can’t….

That goes, that is part of the product line and that one we have made lot of traction and by the way when we are talking about secure communication it’s also, you should add to it secure programs because GPS denial or jamming is not only - secure communication is one of the key applications, but without going to any secure details, it’s applicable to many, many other systems..

Yes, that I was going to one, now I think you mentioned in the past the small government contract against jamming specifically..

So any application which Secure Communication has won is one of the initially that’s being attacked where GPS is used is where our new product line is trying to fill the gap..

Okay, thank you..

Thank you, Mike..

Our next question comes from the line of George Marema. Please proceed with your question..

Hey good afternoon, Martin. I’ve got a few questions for you, it’s all for you, keeping you busy..

Why me, what you have against Alan?.

I just like to pick on you, Martin..

Okay..

Few things, one is that you guys have secured this or almost secured looks like this $35 million deal finally, does that make it easier now to get number two, three, four because now that you've got the first one broken out?.

One builds on the other, but I want to indicate again, the larger the lumps the larger the contract revenue, the more lumpier they are..

Yes..

Obviously, any time you get a larger sized contract; it enables and demonstrates your ability to do a larger job..

Now is the sluggishness in getting these closed is it - what’s I mean, I know you’re in talks with several of these things, what are the sticking points, is it budgetary concerns, is it multiple issues?.

No, basically a good portion of that is government business and is just the way our governments operate. Efficiency is not our strong point. You know of every problem, but we don’t prevent the problem, after the problem happens we solve it.

So the basic idea any time you have a significant contract it’s just the definition, the paper work until you get everybody to dot the I's and cross the T's and do all their auditing and facts finding it just what I think should take a week, takes many months. But maybe luckily I don’t run the government..

Yes, I hear you.

I wonder if you can recap for me again some of the key, I know you guys have some key technologies, what in your view are Frequency's most important, most significant technologies that are a value to both customers and to a potential acquirer?.

Oh boy, if I put you on the audience, I couldn’t have had a better question, thank you on this. We are the world expert in precision time and low phase noise technology when it comes to quote low g-sensitivity performance that means keeping time and coherent frequencies on the dynamic motions on meaning on moving platforms.

And we have demonstrated the best type of reliability in space on keeping time. As an example, the clock on the Voyager which was designed for a seven-year mission and it’s now ticking away after 36 years and it’s the first man built hardware that left our solar system and also atomic clocks for secure communication in space and navigation.

And we have the longest operating atomic clocks and it is something that was designed for 10 years launched in 1995 and they’re still keeping perfect time. So that’s our world expertise..

Okay.

And could you give me a little more sort of from your viewpoint, I know there is lots of activity and opportunities coming in the next several years for satellite business, where Frequency plays over the next year, one to three-year timeframe say what are you most excited about, what opportunities do you think you guys can captivate them up?.

Well, we are involved heavily with all of the upgrades on the government Secure Communication and other functions which cannot be defined over the telephone. We are also very excited about the opportunities in the Leo Satellite, both for government and for non-government use because their quantity is enormous on this.

Geo satellite has a very large view angle. It is launched at 22,000 miles and it can look over a large area. Leo Satellite this circumvents the earth every 90 minutes. So if you want to have great communication coverage or surveillance coverage or video coverage you need lots of them because they fly over a given area in less than 15 minutes.

So you can see that if you need visibility, you need lots of them. So those are very exciting on this.

We are pursuing and talking to the people that are dreaming about this 1000 satellites in space and we don’t know if it’s a reality or if it’s another fantasy because there have been a couple of them I’m trying to launch Internet service to every animal over the world on this. So those are exciting items that we are pursuing.

And we also are pursuing very exciting outside of the satellites our low g-sensitivity technology to improve a timing and communication automobile platforms because it’s a very large, very, very large market this because everything that moves gets affected by motion and as we need better and better accuracy low g-sensitivity is playing a more critical part..

Which of these projects do you think personally is the most tangible and realistic and not some pie in the sky idea thing?.

Well, if you know me better, I don’t like to pursue pie in the sky type of programs and I can say that all our satellites that we are pursuing are real and near future type of opportunities and of course the sole-source of development that we're doing for secure communication and securing other type of electronic systems is very, very exciting and its instantaneous need, it is way overdue as a matter of fact..

Okay and one last thing if I may on the – I think it is anti-spoofing you did some work with the government talking with about being able to foil jamming up GPS and such, is that still out there or?.

Is becoming more and more as a matter of fact it is one of the biggest threats that we are facing that every system that was so cheap to make GPS dependent because you had a clock in the sky that supplied precision time to everything you needed.

All of a sudden low and behold this, the cheapness [ph] is easily jammed and with a little bit more difficulty it is spoofed which is even more dangerous because you don’t know you’re being jammed. So it is a very mushrooming type of environment for the military and it's also affecting many, many commercial applications..

Are there are some near term opportunities to get some contracts?.

You bet your life..

Okay, well thank you Martin, happy holidays..

We have a contract right now by the way..

What’s that?.

We have one very significant contract in the house..

Okay, go get it Martin..

Okay..

Thank you..

Our next question comes from the line of Richard John. He is a Private Investor. Please proceed with your question..

Good afternoon. I’ve got a couple of questions for Martin Bloch..

Thank you – Alan feels very neglected..

Yes, yes.

Well if I knew him better I have a question for him, but anyway I think three months ago you were anticipating a pretty quick ramp up to shipping 12 systems a month to Iridium and I wonder how is that going?.

It’s going very well. I think that a basic problem on Iridium, I don’t know if you read the press is that they had some issues with some other suppliers..

Yes..

And they have also some issues that they are reconfiguring the satellite so they might have to have some minor changes in our systems, but we are doing great on this. We have overcome the engineering problems.

Gillam has built some superb automatic test equipment, so we can test production and it is the first job that we are really demonstrating and large throughput because on that job we have to deliver 162 L bent up down converters and 82 messed [ph] timing systems. We have never had a job of that magnitude timing..

And does the delay that was caused by that other supplier, how does that affect your schedule to get up to 12 per month to Iridium?.

We are right there at this momentum. As a matter of fact we just had a three-day review with Thales Alenia. They were here and I think their basic question is they’re very satisfied with our delivery schedules since they are slipping the launch considerably of this.

I think the issues at this moment is, how to incorporate their new requirements in the design. So, we’re working together to solve their problems..

And did I understand you to say earlier in your commentary that, that your products for the Iridium satellites amount to $30 million per satellite?.

I’m sorry, I, can you say it again?.

I think you mentioned in your commentary earlier you mentioned $30 million and Iridium in the same sentence and so I just wanted to clarify, does that mean that your products are total $30 million to you per Iridium satellite?.

No, no from your mouth and the dossiers [ph] our total contract for Iridium is about $30 million..

Okay, okay I see..

Which we've been working on for five years now, so there is a lot of revenue that has been recognized already..

I see. I see. Okay, well thanks very much..

Okay, thank you..

At this time, we have no further questions in the audio portion of this conference. I would now like to turn the conference back over to Martin Bloch for closing remarks..

Okay.

As usual I want to express my thanks to all our faithful stockholders and to the employees of FEI that are working hard to make to ensure our success and wishing everybody a happy and healthy and prosperous year and we will talk to you and when is the next…?.

In March..

In March if not sooner, be healthy everybody. Thanks for listening to us..

This concludes today’s teleconference. You may disconnect your lines at this time and thank you for your participation..