Greetings, and welcome to the Frequency Electronics, Inc. second quarter fiscal 2026 Earnings Release Conference Call. As a reminder, this conference is being recorded. I will now turn the conference over to your host, Thomas McClelland, President and Chief Executive Officer. Sir, the floor is yours. Good afternoon. And thank you for joining Frequency Electronics, Inc. second quarter fiscal year 2026 earnings call.

With me today is our Chief Financial Officer, Steven Bernstein. On our first quarter fiscal 2026 earnings call in September, I discussed two near-term factors that produced a quarter with lower revenue than recent trend levels suggested. The first factor was that strong execution in fiscal 2025 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 2026, essentially pulling forward some revenue. The second factor was customer-driven delays on a few key programs that pushed revenue recognition out of the fiscal first quarter. Despite those issues, I noted on that call that six weeks into the second quarter, we saw that those delays were behind us, making significant progress towards a bigger book of business. I'm pleased to report on today's call that our second quarter performance was very strong across a number of key metrics, as we resumed our revenue uptrend and have numerous proof points to support our belief that this will be a strong multiyear growth period for the company. Steven will provide more financial details later in the call, but I want to take a few moments to highlight several important data points and trends. For this quarter, we reported revenue of $17.1 million, up 24% sequentially. This was the third highest quarter of revenue in the past decade, with only two higher in that period having occurred in the third and fourth quarters of last fiscal year. In short, though our business does not proceed in a perfectly linear fashion, we have established a new higher baseline on which we expect to build in the years ahead. To illustrate that point, our quarter-end backlog was $82 million, the highest in company history and up 17% since…

Thank you, Tom, and good afternoon. For the three months ended October 31, 2025, consolidated revenue was $17.1 million compared to $15.8 million for the same period of the prior fiscal year. The components of revenue are as follows. Revenue from commercial and US government satellite programs was approximately $4.6 million or 27% compared to $9.4 million or 59% 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 Frequency Electronics, Inc. New York segment. Revenue from non-space US government and Department of Defense customers, which are recorded in both the Frequency Electronics, Inc. New York and Frequency Electronics, Inc. ZIFER segments, were $11.9 million compared to $5.8 million in the same period of the prior fiscal year and accounted for approximately 69% of consolidated revenue compared to 37% for the prior fiscal year. Other commercial and industrial revenue were approximately $560,000 compared to approximately $591,000 in the prior fiscal year. Revenue for the three months ending October 31, 2025, was higher than revenue in the prior fiscal period due to an increase in non-space Department of Defense products in the Frequency Electronics, Inc. ZIPER segment. This increase was in both shipment-based products as well as products accounted for under the percentage of completion method. For the three months ending October 31, 2025, both gross margin and gross margin rate decreased compared to the same period of the prior fiscal year. The decrease in gross margin and gross margin rate were attributable to a change in the mix of high-margin production satellite programs in the prior year periods versus lower-margin programs with significant nonrecurring engineering efforts during the three and six months ending October 31, 2025. We demonstrated meaningful operating leverage…

Thanks, Steve. We are now ready for any questions.

Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we pull for questions. Once again, please press 1 if you have a question or a comment. The first question comes from George Marema with Pareto Ventures. Please proceed.

Thank you. Good afternoon, Tom. I have a couple of questions. So I saw the other day, congratulations. You guys won on the first tranche of the Golden Dome Awards. I was wondering if you could provide any color on the frequency kind of component and system and quantities opportunity in that program.

Yeah. I don't think I can provide a whole lot of details. You know, Golden Dome is one of those things that is sort of in the process of being defined as we speak. And it's a little hard to precisely define exactly what is encompassed by that. I think, suffice it to say, we just in general terms, we anticipate participating in several different aspects of what will ultimately become Golden Dome. So in particular, you know, there are ground-based missiles. And as we've discussed previously, we're already very involved in both Patriot and THAAD programs. But, of course, one of the big things that is being pursued in Golden Dome is a space-based approach to missiles and defense. And there are various aspects of that. And we anticipate, although that's not something that we're under contract for at this point in time, we do believe that we will be involved in that in a very significant way in the near future. Yeah. I think that's about as much as I can say at this point.

Okay. And could you comment on your Colorado operations? Like, what kind of activities are going on there today?

Oh, sure. So we talked about that a little bit last quarter. I think the starting point for that is that we saw an opportunity to hire several senior scientists from NIST in Boulder, Colorado, as they were part of this federal effort to reduce the ranks there really pretty significantly. So we were successful in that. We've hired several people now. Of course, they weren't interested in moving to Long Island, but if we were willing to set up shop in Colorado, they were interested in joining us. So that's what we did. The focus primarily of the facility that we have started there in Boulder, Colorado, is technology. But we have some key efforts that are really going on there also in some very low phase noise oscillator technology that was actually started by work at NIST in Boulder. But the primary focus there is quantum technology. So we have magnetometer development that's going on there in Colorado. And we have established some cooperative research and development arrangements or CRADAs with several different research groups at NIST. And so some of that is in Rydberg sensors, which is a type of quantum sensor. And we also have some efforts in low phase noise oscillators, etcetera. So we're pretty excited about the Colorado setup. We have a really talented group of people working there. And, of course, we anticipate that, just in case you weren't aware, this is the Boulder, Colorado area. It is a focus of precision time and frequency technology with the NIST there, but also the University of Colorado. There's a tremendous amount of research there, and we hope to be able to attract talent from that area in the years to come. So yeah, that's pretty much the story at this point.

Okay. Thank you, Tom. I'll get back in queue. The next question is from Chris Pokosky, a private investor. Chris, please proceed.

Hello. Good afternoon, and congratulations on resuming growth.

Thank you.

So you talked about how because this past quarter, you had more work in non-space related military applications where your work was apparently required more investigation and more R&D. The margins were lower. It seems logical that as you continue doing that work, less investigation will be required, then you kind of climb into higher margins. Am I thinking of that correctly?

Well, I would say things just a little bit differently. I think in the last quarter, the results were less than we might have expected otherwise, primarily because we had some significant delays in programs. I think that a lot of the things you're referring to, the non-space defense activity that we're involved in, is really pretty high-margin programs. And, you know, we expect those to be quite profitable. As always, we have a mix of things. When we do new development, and we are involved in some new development programs, in particular in some advanced missile technology, we do anticipate somewhat lower margins. But yeah, anyway, I think that is what I would say.

Alright. So some of the reason for the lower margins was because of interruptions of funding. You get to put work down and then start it over again. Is that what you're saying?

Well, that's correct. I think that it's not so much that that resulted in lower margins, but it resulted in delays in revenue. Revenue that we anticipated during that quarter, we weren't able to realize because we were put on hold on programs and weren't allowed to do any more work.

I see. Now that the shutdown is over, are those programs restarting? Have they restarted all?

Yeah. A lot of that, interestingly, wasn't really due to the shutdown. The programs were ongoing, but it was more about, we had actually brought up issues with some of the requirements that were levied on Frequency Electronics, Inc. It was really because of that that we were put on hold on several programs. And that was necessary for our customers to figure out what they really wanted in terms of performance requirements. What I will say about the government shutdown is that primarily that affected us because there are new programs that we anticipated getting started that would have started actually by now, which we're still waiting for. And so I think the primary thing was that some of the contracting activities that we thought would have taken place earlier haven't happened yet.

So if it wasn't for the shutdown, you would have even higher backlog.

That's correct. That's absolutely correct. Now, go ahead. You know, I should point out in that regard, and I tried to in the opening remarks, I tried to point this out. You know, when we get awarded a new contract, we'll announce, assuming it's a significant contract, we'll announce the full amount of the contract, but we won't add that full contract amount to our funded backlog. We only add the funded portion of the contract. So if we get a $10 million contract and we get funded for a million dollars initially, we would add a million dollars to backlog. Although, when we make a press release, we'll announce that we got a $10 million contract. Those numbers are all hypothetical. Let me just point out.

Okay. So this back and forth on requirements, is that progressing? Have you resolved most of that by now?

We have resolved most of that at this point in time. There is always a potential for more kind of issues in that regard in the future. But I think in the particular cases, referring to here, those issues have been resolved.

Alright. And have new contracts started, new funding started to appear after the shutdown? Or are they still trying to figure it out? Trying to catch up?

Well, we've had a few small things since the shutdown, but we are anticipating some much more significant stuff which hasn't arrived yet.

Alright. And I guess the major question I was trying to get to in a roundabout way is, you know, are we, as these requirements have been cleared up and as hopefully those new missile systems, you're kind of getting into stride after the new learnings, can we see normalization of margins near term?

Yes. I think so.

Okay. This is very good to hear. Alright. Congratulations again, and thanks for taking my call.

The next question is from Jeff Van Rhee with Craig Hallum. Please proceed.

Great. Thanks for taking the questions. Several for me, guys. Congrats, first of all. But Tom, if you talk to this size or relative size of the initial awards versus the scope of the potential follow-on awards. You called it out in your opening transcript as abnormal. I know you won't give us an actual hard number, but can you at least give us a ratio? Does the initial order, the initial order is a dollar, and mean the subsequent order is usually $2? Are we talking now initial orders a dollar and follow-on orders are four? I mean, what's the scope of the increase that you're speaking to?

So, yeah. A little bit of clarification. So, typically, when we get a new contract, I think, typically, we are funded initially for 10% of the total contract. But another point of clarification. So we get a contract award for a certain amount of money. There are often additional options. So if it's a satellite program, we'll be funded for three satellites, with options for additional satellites, perhaps options to provide products for satellites four, five, and six. But the initial contract is just for the initial three satellites. And so that's a, you know, let's say, $10 million. We get initially funded for $1 million, 10% of that contract. There may be another $10 million later for options for the follow-on three satellites. So hopefully, that clarifies that to some extent.

Okay. I'll leave that there. And the incremental backlog, I mean, still all else the same, you know, very nice sequential bump. Is there anything to call out or commonality in terms of the contract types that drove the sequential increase in backlog, namely the use cases?

I think we can talk about that a little bit. I think we are seeing a big uptick in backlog for non-space defense products. I think that's a very significant portion of that. I think the other thing I would say is that we anticipate a very significant uptick in the very near future on the space end of things. So what I would say is over the last quarter, the big thing has been non-space defense. And over the next couple of quarters, I anticipate that it's likely to reverse, and we'll see that in space.

Got it. That's helpful. And then Steve, on the margin question, with respect to gross margins, if we think about it over the next couple of quarters, what do you fundamentally see as drivers that are going to push it up or push it down or likely kind of leave it where it is based on what you see in your backlog and likely to be able to take revenue on over the next few years, not by asking for a number, but really just asking directionally what you think the forces are that are at play.

I think, all in all, it'll stay flat to going up a drop. But I think, you know, it'll take time to go back to where you saw it, you know, in the prior year.

Okay. And then, Tom, on Turbo, I think, I don't know, last quarter probably wasn't the first time, but I know you've talked a few times about some initial expectation that in the fiscal year, Turbo could be a couple of million. And then in the out year, it had the potential for $20 million. Based on what you're seeing in the pipeline and discussions with customers, do you feel like those numbers are increasingly conservative? Comfortable, maybe a bit more of a stretch than you thought? How do you feel about those numbers?

I think those numbers are pretty much right on. You know, we are seeing a lot of enthusiasm and activity in our Turbo product. And I think, yes, we see the near term in a few million dollars, and I think that definitely the earlier estimate that we made, the $20 million kind of number, is very, very realistic.

Yep. Yep. And then maybe last for me, obviously, you're feeling very good. You gave some swags at what the pipeline looks like and where it could lead backlog. And if the backlog does surge and you've got to deliver on these contracts, what does that mean for your cost structure? How do you feel about the headcount? How do you feel about facilities available production capacity? You know, does it take meaningful hiring? Does it take meaningful CapEx? Just talk about the ability to address the growth without meaningful incremental spend.

Yeah. Good question. I think we certainly, that's something that we're actively looking at. It's very, very important. I think, on the one hand, we want to avoid getting out ahead of our skis and taking on too many people. On the other hand, I think at this point in time, we are in a cautious hiring mode in anticipation of the business that we think we're going to be getting in the near future. I think facility-wise, we are in good shape. I think we're capable of handling the business that we anticipate at this point and even a little bit more, given our current facilities. And, of course, we've added a little bit more capability in Colorado, although that isn't anticipated to be a primary manufacturing area. So I think we're in pretty good shape, but it's something that is always a bit of a challenge to try to be prepared but not too prepared.

Yeah. For sure. Yeah. I mean, given the backlog and the other commentary, I mean, just a lot of forward momentum here, so congratulations. Last time then just Tom, you talked on an answer to a prior question, I think, about the revenue that had pushed out whereby you'd done the right thing for the customer and they and it took a little delay and then you caught some revenue. Just to be clear, has all that revenue come back, or are we still going to pick some more of that delayed revenue up in the forward quarter? Just kind of curious where we are with that.

A significant portion has come back, and we're going to be picking up more in the next quarter.

Next quarter. Got it. Okay. I'll leave it there. Thanks. Next question is from Michael Eisner, a private investor. Michael, please proceed.

Hey, great job on the backlog. Was any of that new contracts or was that just the release of funding?

It's a little bit of both, but I think more the release of funding than the new contracts.

And, Colorado, do you think that's going to be profitable in the third quarter?

Yes, actually. I do. That's not going to be a huge contribution, but it's going to be a positive contribution as opposed to a negative one.

Because the people you hired took away from rent earnings but now will come back in the third quarter.

Yeah. They are actively contributing to externally funded R&D programs at this point in time. And, so, you know, that is a positive contribution.

Alright. And the backlog, most of that backlog all has legs on it to keep on going forward. Am I correct?

Yes. You are.

Alright. Thank you very much. Great job.

Okay, Michael. Thanks.

Next question is from Brett Rice with Janney Montgomery Scott. Please proceed.

Hi, Tom. Hi, Steve.

Hi.

Hi.

The growth opportunities, which you mentioned, do they continue unabated irrespective of which political party controls Congress and the presidency?

Well, that's actually a good question. I think that the way we look at it at this point, we think that to a large extent, they are independent of politics. You know, that's something that I think about a lot and worry about. We know that we see certain trends now, and the question always is, you know, if there's a change of command in the next election, does all of that disappear? I don't think so. So there are kind of two important things. I think if we look at the space business, there's just a strong growth in space that has nothing to do with politics. It's just a technology thing, I guess, is analogous to artificial intelligence. It's not primarily driven by government needs. Space is just growing in general. And I think that is good for our business. Then the other part of it is if we just look at defense in general, I think that, of course, is obviously dominated by the government. But if we look at the world situation at this point, and, you know, what is happening in China and other places in the world, it's hard to see the defense spending going down dramatically whether we're talking about a Republican administration or a Democratic administration. I think that's the fundamental reason for our optimism in that regard. So that's kind of how I look at these things. But, of course, you know, those are questions that we have to keep asking ourselves and pay attention to as we go forward.

Right. Your answer is music to thine ears. Have a good holiday. Okay?

Thank you.

The next question comes from George Marema with Pareto Ventures. Please proceed.

Thanks for taking some more. I had a question, Tom, on Turbo. In terms of drones, with the anticipated upcoming changes in the FAA regulations to beyond visual line of sight, there seems to be a large commercial opportunity in autonomous drones. Do you see Turbo playing any part in commercial drones or just military applications?

Well, I think potentially in both commercial and military, but I think in the near term, we would anticipate more in military. I think that, you know, we have to keep in mind that, and I tried to say this in the initial remarks, you know, that there are huge numbers of drones that are going to be coming into play whether we're talking about commercial or military applications. And it's really a fraction of those which will employ Turbo or any of our other products. Our products are pretty specialized and relatively expensive. So when the military, for instance, is talking about this so-called kamikaze drone, drones that are going to fly once and be destroyed in the initial mission, it is unlikely that our products are going to be parts of those kinds of drones. I've seen recent things where the price tags for those drones are a few thousand dollars. And so it's hard to see our products participating in those cases. But, you know, in more sophisticated applications, we think that we will be very important. And as the commercial space gets more sophisticated and people are doing more elaborate things with drones, we do anticipate that our Turbo and some other potential products will be a very significant part of that.

Okay. And then in the recent weeks, there's been a lot of talk from folks like Elon Musk, and Google, and Amazon, etcetera, about putting data centers in space. There seems to be a big push coming up in that. And I was wondering if Frequency Electronics, Inc. if you would be playing in that arena at all, and if so, how?

Well, I think quite possibly. I think that synchronization in data centers is an important thing when those are ground-based data centers. That's relatively easy to accomplish because size is not much of a question. But once we get into space, of course, size, weight, and power become very, very important. And so our products, which are more compact, come into play. But also, they come into play because we have radiation-hardened synchronization time and frequency devices which are tailored for use in space. So I think, you know, we have to be a little bit careful because I don't think we're going to be seeing data centers in space in the next couple of years, except on people trying to demonstrate some capabilities. But I think to the extent that those data centers in space become a reality, I think we definitely anticipate being a participant in that.

Okay. Thank you, Tom.

Up next is William Bremer with Vanquish Capital. Please proceed.

Tom, good evening.

Hi, Bill.

Sorry about that, gentlemen. Just curious on the international front. Whether or not we have any business with any of our allies or any international business going forward?

Good question. We actually do. Of course, most of our business is domestic defense and satellite business. But we do have some very significant business overseas with some of our allies. And we are actively pursuing additional things in this arena. There are some challenges in that. So just to highlight some of the things, most of our products there are export controls involved, so we have to get export licenses in order to be able to sell things overseas. So that's an additional challenge, and it takes typically more time to get those kinds of things started. But nonetheless, we do have some active programs as we speak. The other thing is that in particular with Europe, it's a challenge to do business there because there are several things that are going on at this point in time in the defense industry in the US. There's a strong emphasis on using only domestic sources. This helps us in obtaining business with the US Department of Defense. But at the same time, we see sort of a similar thing in Europe in particular where there's a strong emphasis on using European suppliers instead of US suppliers. So that's just a couple of thoughts on that topic. Hopefully, it sort of answers your question.

No. I apologize about the doorbell on my dog. So but happy holidays, everyone, and keep up the good work, Tom. Thank you.

Okay. Thanks. We have no further questions in queue. I'd like to turn the floor back to management for any closing remarks.

Okay. Thanks to everybody for taking the time to listen to and participate in today's earnings call. We look forward to providing further updates in the coming months. And we wish everyone happy and healthy holidays. Thank you.

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.