Frequency Electronics, Inc. (FEIM) Q2 2026 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
The earnings call highlights strong financial health with a 17% increase in backlog and a strong current ratio. Despite a decrease in EPS and lower margins due to program delays, the company expects margin normalization and revenue recovery. The strategic focus on quantum technology and potential in military and space applications is promising. Analysts' concerns were addressed, and the Colorado operations are anticipated to contribute positively soon. Overall, positive financial metrics, strategic growth plans, and optimistic guidance suggest a positive stock price movement.
Key Financial Performance
Revenue $17.1 million for the 3 months ended October 31, 2025, compared to $15.8 million for the same period of the prior fiscal year, representing an increase of 8.2%. The increase was due to higher revenue from non-space Department of Defense products in the FEI-Zyfer segment.
Revenue from commercial and U.S. government satellite programs $4.6 million or 27% of total revenue, compared to $9.4 million or 59% in the same period of the prior fiscal year. This represents a significant decrease due to a change in the mix of high-margin production satellite programs.
Revenue from non-space U.S. government and Department of Defense customers $11.9 million or 69% of total revenue, compared to $5.8 million or 37% in the same period of the prior fiscal year, representing a significant increase due to higher shipment-based products and products accounted for under the percentage of completion method.
Other commercial and industrial revenues Approximately $560,000 compared to approximately $591,000 in the prior fiscal year, showing a slight decrease.
Gross margin and gross margin rate Both decreased compared to the same period of the prior fiscal year. The decrease was due to a change in the mix of high-margin production satellite programs versus lower-margin programs with significant nonrecurring engineering efforts.
Selling and General Administrative (SG&A) expenses Approximately 21% of consolidated revenues for both the current and prior fiscal year periods. The increase in SG&A expense was due to fluctuations in various expense accounts.
Research and Development (R&D) expenses Decreased to approximately $1.2 million (7% of consolidated revenue) from $1.6 million (10% of consolidated revenue) in the prior fiscal year, a decrease of approximately $400,000. The decrease was attributed to current operational needs supporting ongoing programs.
Operating income Approximately $1.7 million for the 3 months ending October 31, 2025, compared to approximately $2.6 million in the prior fiscal year, representing a decrease due to lower gross margin and increased SG&A expenses.
Pretax income Approximately $1.8 million for the 3 months ending October 31, 2025, compared to approximately $2.7 million for the same period of the prior fiscal year, showing a decrease.
Tax benefit/provision A tax benefit of $31,000 for the 3 months ending October 31, 2025, compared to a tax provision of $139,000 for the same period of the prior fiscal year.
Net income Approximately $1.8 million or $0.18 per share for the 3 months ending October 31, 2025, compared to approximately $2.7 million or $0.28 per share for the same period of the prior fiscal year, showing a decrease.
Fully funded backlog Approximately $82 million at the end of October 2025, compared to approximately $70 million at the end of April 2025, representing an increase of 17%.
Working capital Approximately $31 million as of October 31, 2025, with a current ratio of approximately 2.6:1, indicating a strong financial position.
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Operating Highlights
Quantum sensing and ALT-PNT programs: The company is optimistic about growth in quantum sensing, proliferated satellites, and Alternative Position, Navigation, and Timing (ALT-PNT) programs. These new markets are expected to be additive to the already strong core business.
Space technology: The company’s technology is onboard the U.S. Space Force’s NTS-3 experimental navigation satellite, highlighting its strategic relevance in advancing next-generation PNT architectures.
Defense and space markets: The company is experiencing significant growth in defense and space markets, with increasing participation in modernization initiatives such as missile defense and drone procurement. The Pentagon plans to procure 200,000 drones by 2027, showcasing the scale of modernization.
Revenue growth: Revenue for the quarter was $17.1 million, up 24% sequentially, marking the third highest quarter of revenue in the past decade.
Backlog growth: The company’s backlog reached $82 million, the highest in its history, up 17% since fiscal year-end. The backlog is expected to exceed $100 million in the near future.
Profitability and margins: Gross margin and operating income decreased compared to the prior year due to a shift in program mix, but the company remains committed to improving profitability.
Strategic partnerships: The company maintains strong relationships with major prime contractors and next-generation defense companies, often serving as a sole source provider.
Expansion in new technologies: The company is focusing on quantum sensing, magnetometers, and proliferated satellites as future growth areas, building on its industry-leading capabilities.
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Risk or Challenges
Revenue Variability: The company experienced revenue variability due to customer-driven delays on key programs and the pulling forward of revenue from fiscal 2026 into fiscal 2025. This could lead to uneven revenue recognition in future quarters.
Gross Margin Decline: Gross margin and gross margin rate decreased compared to the prior fiscal year due to a shift in the mix of high-margin production satellite programs to lower-margin programs with significant nonrecurring engineering efforts.
R&D Expenditure Fluctuations: R&D expenses decreased by $400,000 compared to the prior fiscal year, which could impact the company's ability to maintain state-of-the-art products if not managed carefully.
Operating Income Decline: Operating income decreased from $2.6 million to $1.7 million year-over-year, driven by lower gross margins and increased SG&A expenses.
Dependence on Defense and Space Markets: The company is heavily reliant on defense and space markets, which are subject to government budget allocations and policy changes, potentially impacting future revenue streams.
Nonlinear Growth Trajectory: The company acknowledges that its growth trajectory is not linear, which could lead to periods of financial instability or investor uncertainty.
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Guidance & Outlook
Revenue Growth: The company expects to build upon a new higher revenue baseline in the years ahead, supported by a strong multiyear growth period.
Backlog Growth: The company anticipates backlog to exceed $100 million in the near future, driven by strong existing business and new contracts.
Market Expansion: The company expects to participate meaningfully in expanding sectors such as quantum sensing, proliferated satellites, and Alternative Position, Navigation, and Timing (ALT-PNT) programs.
Defense and Space Business: The company envisions sharp growth in its defense business for many years, supported by increasing defense spending and modernization initiatives. It also sees a long runway of growth in the space business.
Future Awards: The company anticipates multiple awards in the coming months, some as large or larger than historical awards.
Technological Advancements: The company plans to continue investing in R&D to maintain state-of-the-art products and expects to play a significant role in next-generation defense and space technologies.
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Shareholder Return Plan
The selected topic was not discussed during the call.
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Key Q&A
Q:Can you provide details about the Golden Dome program, including the frequency component, system content, and quantities?
A:The Golden Dome program is still being defined, making it difficult to provide precise details. The company anticipates participating in various aspects, including ground-based missiles (Patriot and THAAD programs) and potentially space-based missile defense in the near future.
Q:What activities are currently happening in your Colorado operations?
A:The Colorado operations focus on quantum technology, including magnetometer development and low-phase noise oscillator technology. The facility has established Cooperative Research and Development Agreements (CRADA) with NIST and is leveraging talent from the Boulder area, which is a hub for precision time and frequency technology.
Q:Are lower margins in the last quarter due to more R&D and investigations in non-space-related military applications?
A:The lower margins were primarily due to significant delays in programs rather than R&D investigations. Non-space defense activities are high-margin programs, but delays in funding and program requirements caused revenue delays.
Q:Have the delayed programs restarted after the government shutdown?
A:Yes, most delayed programs have restarted, but some new programs anticipated to start earlier are still pending due to contracting delays.
Q:Can we expect normalization of margins in the near term?
A:Yes, normalization of margins is expected as program requirements are resolved and new missile systems progress.
Q:What is the size of initial awards compared to potential follow-on awards?
A:Typically, initial funding is about 10% of the total contract value. Follow-on awards can include options for additional satellites or products, significantly increasing the total contract value.
Q:What drove the sequential increase in backlog?
A:The increase was primarily driven by non-space defense products. A significant uptick in space-related backlog is anticipated in the near future.
Q:What are the expected trends in gross margins over the next few quarters?
A:Gross margins are expected to remain flat or slightly increase, but it will take time to return to prior year levels.
Q:What is the revenue potential for the Turbo product in the near and long term?
A:The Turbo product is expected to generate a few million dollars in the near term and potentially $20 million in the out years, with strong enthusiasm and activity in the pipeline.
Q:How will the company handle growth in terms of cost structure, headcount, and facilities?
A:The company is cautiously hiring in anticipation of future business. Current facilities are sufficient to handle anticipated growth, with additional capability in Colorado for R&D.
Q:Has all delayed revenue been recovered, or will more be picked up in the next quarter?
A:A significant portion of delayed revenue has been recovered, with more expected in the next quarter.
Q:Was the recent backlog increase due to new contracts or release of funding?
A:The increase was more due to the release of funding than new contracts.
Q:Will the Colorado operations be profitable in the third quarter?
A:Yes, the Colorado operations are expected to make a positive contribution in the third quarter.
Q:Do the growth opportunities depend on political party control in the U.S.?
A:Growth opportunities are largely independent of political party control, driven by technological advancements in space and global defense needs.
Q:Will the Turbo product be used in commercial drones or just military applications?
A:Turbo is expected to be used more in military applications in the near term, with potential for commercial use as drone technology becomes more sophisticated.
Q:Will the company participate in space-based data centers?
A:The company anticipates participating in space-based data centers if they become a reality, leveraging its radiation-hardened synchronization and frequency devices.
Q:Does the company have international business with allies?
A:Yes, the company has significant international business with allies, though export controls and local sourcing preferences in Europe present challenges.
Q:Review of Unclear Management Responses
A:Management avoided providing specific details about the Golden Dome program, citing its ongoing definition. They also used hypothetical numbers when discussing contract values and funding, which lacked clarity.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
ALT PNT
Agency Phase
Alternative Position
Bernstein term
City agenda
City detail
Conference New
Defense Agency
Department Defense
FEI New
FEI Zyfer
Navigation
York City
Zyfer segment
account
backlog award
capability
contract backlog
decrease
defense
delay
event
example
factor
generation
industry
modernization
month income
number
one
opportunity
prime
prospect
quantum sensing
shipment
solution
source
technology
week
FEIM Transcript
Frequency Electronics, Inc. (FEIM) Q3 2026 Earnings Call Transcript
Unknown3-11
The earnings call highlights a mixed outlook. Despite a record backlog and optimistic guidance on new programs, financial performance has declined, with reduced net income and pretax income. The Q&A reveals uncertainties, such as unclear timelines and specifics on key wins. While optimistic guidance and backlog growth are positive, the financial downturn and lack of clarity on significant contracts balance the sentiment, leading to a neutral prediction.
Frequency Electronics, Inc. (FEIM) Q2 2026 Earnings Call Transcript
Positive12-11
The earnings call highlights strong financial health with a 17% increase in backlog and a strong current ratio. Despite a decrease in EPS and lower margins due to program delays, the company expects margin normalization and revenue recovery. The strategic focus on quantum technology and potential in military and space applications is promising. Analysts' concerns were addressed, and the Colorado operations are anticipated to contribute positively soon. Overall, positive financial metrics, strategic growth plans, and optimistic guidance suggest a positive stock price movement.
Frequency Electronics, Inc. (FEIM) Q1 2026 Earnings Call Transcript
Unknown9-11
The earnings call reveals significant concerns: decreased revenue, lower R&D spending, and increased SG&A expenses. Despite a slight backlog increase and share repurchase plans, the company's dependence on government contracts and global timing vulnerabilities add risk. The Q&A section highlights unclear responses regarding key technologies, further dampening sentiment. Overall, the negative financial results and uncertainties outweigh the positive aspects, leading to a negative sentiment.
Frequency Electronics, Inc. (FEIM) Q3 2025 Earnings Call Transcript
Positive3-13
The earnings call indicates strong financial performance with significant increases in pre-tax and net income, driven by improved operations and tax benefits. Although backlog decreased slightly, the company's liquidity and current ratio are strong. The Q&A section reveals optimism about future contracts in quantum sensing and government projects, despite some vagueness in management's responses. Overall, the financial health and future prospects suggest a positive sentiment, likely resulting in a stock price increase of 2% to 8% over the next two weeks.
FEIM Report
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