Frequency Electronics, Inc. Stock

Greetings, and welcome to the Frequency Electronics First Quarter Fiscal 2027 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, Paul. Good afternoon, and thank you for joining Frequency Electronics First Quarter Fiscal Year 2027 Earnings Call. With me today is our Chief Financial Officer, Steve Bernstein.

I'm very pleased to report first quarter revenue of $23.5 million, an all-time record for FEI, up 70% year-over-year and up 52% sequentially. As we told you on our fourth quarter 2026 earnings call in July, we expected to return to growth starting in the current fiscal 2027, and this first quarter is a strong proof point of that. Further, this performance gives us increasing confidence in our ability to meet or exceed the $150 million or more in annual revenue that we guided to by fiscal 2029, which ends April 30, 2029. I'll have more to say about that target shortly.

Steve will provide additional financial commentary later in the call, but I'd like to highlight a few items. On our July call, we established 3-year minimum margin targets of 50% for gross margin and 30% for operating margin, again, by fiscal 2029. In the fiscal first quarter we're reporting today, we generated gross margin of 45.8% and operating margin of 22%, substantial improvements and solid progress on our path towards our minimum targets.

As I've mentioned numerous times over the past few years, we do not expect our progress to be perfectly linear on a quarterly basis, whether in revenue or profitability. But the trends we see in revenue, backlog and pipeline as well as the internal improvements we've made that we discussed last quarter and the operating leverage we should generate with increasing revenue position us well to meet or exceed those minimum targets.

As for backlog, it grew to a new record of $129 million, up approximately 82% year-over-year and 16% sequentially. This continued increase in backlog gives further support to our ability to add meaningful growth to FEI in the years to come.

As we've discussed before, we expect continued growth in our core space and defense markets while also seeing additional growth coming from new markets such as space defense, proliferated satellites, quantum sensing, space exploration and alternative position, navigation and timing. Today, I'd like to provide some additional color on several of these markets, all of which build upon our core timing and frequency generation capabilities.

So I'm sure you're all familiar with GPS satellites, part of the traditional space business we have sold into. On April 21 of this year, the final GPS III satellite was launched, which included FEI's newly developed Digital Rubidium Atomic Frequency Standard, or DRAFS, atomic clock. This enhanced DRAFS clock is currently operational on the GPS satellite, is on order for use on other global navigation satellite systems and is targeted at future GPS satellites, including the upcoming GPS IIIF, or follow-on, launches. This advanced atomic clock is an example of the company's important capabilities, not just to provide the precision time and frequency devices that we've been delivering for the last 65 years, but also our capability to deliver state-of-the-art products with capabilities fueling future technological innovations.

You've no doubt seen the news flow over the past several months about the critical need for missile replenishment with government plans to significantly expand production by 2030. And we've spoken with you before about our content that goes into missile batteries for programs such as Patriot and THAAD. We expect to generate revenue from those programs in 2027 and for years beyond that coming from existing orders, more orders to come and additional orders to meet the needs of allied countries.

In addition to this missile battery-related work, we're also now bidding on additional missile programs with components that go directly onto the missiles themselves. In some cases, we're being asked to bid on these -- on missile programs in order to potentially displace incumbents.

There is a secured communication program for the military that we're producing that is a good example of both the higher rate production programs we have spoken about and the push by our customers to deliver more sooner. In this case, we're working on a production contract for over 1,000 systems. In addition, the customer on this program is now asking us to increase monthly production by more than 50% while also promising additional follow-on orders. In other words, we're expanding the total size of an already high-rate production program.

For another example of our ability to use internally developed technology for expanded use cases, we're currently exploring potential uses of our mercury ion atomic clock for naval applications. Strategic submarines are a potential use case for advanced atomic clocks because they need to be underwater for months at a time and their timing cannot be updated from GPS satellites while they're underwater. So they'll need a different technology for certain use cases that require very highly accurate timing and our advanced mercury ion clocks may be the solution. We believe this is also a good example of our ability to participate in long-term programs for higher-priced systems and to do so with external funding.

In quantum sensing, we're making rapid progress in the development of advanced sensors for magnetic navigation in GPS-denied environments. We just recently delivered a sensor and associated electronics to the Army Research Laboratory for additional testing. Development is ongoing at FEI to make smaller, more capable magnetic sensing systems for alt-PNT applications.

Finally, I'd like to discuss the capital raise that we completed right at the end of the first quarter and how that may impact our long-term guidance. We've told you previously that we have sufficient capital in place to meet the minimum $150 million revenue target by fiscal 2029. Numerous customers, however, are asking us to do more for them and to do it more quickly.

To meet this customer-driven business expansion, we decided to pursue a secondary offering of our common stock in July, which raised approximately $73 million and also brought several excellent long-term oriented new institutional investors into our shareholder base. Approximately $14 million of the total came in after the quarter ended as the greenshoe was exercised.

We remain debt-free with a very strong cash position, and we anticipate being a free cash flow generative on an annual basis going forward. We would like to thank Morgan Stanley, our lead bankers on the transaction, and Craig-Hallum, who served as book-running managers, for their hard work on this successful transaction.

The capital we raised will allow us to pursue capacity expansion to help meet these additional customer requests, which may have the effect of our both reaching the $150 million minimum target sooner and making that target a substantially larger number by fiscal 2029. We also expect that some of our customers will pay for capacity expansion in certain cases.

We expect this additional revenue growth that derives from capacity expansion to be organic, and it is likely that if we were to make any acquisitions, they would be small tuck-ins to add to our vertical manufacturing capabilities. In other words, we do not intend to buy revenue, frankly, because we don't need to, given the strength of our backlog, pipeline, order book and prospects. There's an exceptional amount of growth and value creation to be gained by focusing on what is in front of us without getting distracted by a larger acquisition. We should be able to super-serve our customers with this extra capital, resulting in additional profitable growth that should benefit our shareholders as well.

With that, I'll turn it over to Steve for some financial commentary, and I look forward to taking your questions in the Q&A portion of the call. Steve?

Thank you, Tom, and good afternoon. As Tom highlighted, it's a great start to our fiscal '27 and a strong start to achieving our 3-year targets. For the 3 months ended July 31, '26, revenue from commercial and U.S. government communication satellite programs was $11.8 million and accounted for approximately 50% of consolidated revenue compared to $6.5 million and approximately 47% of consolidated revenue during the same period in the prior fiscal year.

Revenue is recognized primarily over time under the percentage of completion method. Revenue from the satellite market are recorded in the FEI-New York segment. Revenue from non-space U.S. government Department of Defense customers, which are recorded in both the FEI-New York and FEI-Zyfer segments were $11.1 million and accounted for approximately 47% of consolidated revenue for the 3 months ended July 31, '26, compared to $6.9 million and approximately 50% of consolidated revenue during the same period in the prior fiscal year. Other commercial and industrial revenue for the 3 months ended July 31, '26 and '25 accounted for approximately 3% of consolidated revenue and were $605,000 and $439,000, respectively.

The revenue for the 3 months ending July 31, '26 was significantly higher in both segments and in consolidation by approximately 70% or $9.6 million over the same quarter of the prior fiscal year. Revenue from commercial and U.S. government communication satellite programs increased $5.2 million and over 80% and revenue from non-space U.S. government Department of Defense customers increased $4.2 million and over 61% over the same period in the prior fiscal year.

For the 3 months ended July 31, '26, both gross margin and gross margin rate increased compared to the same period in the prior fiscal year. The increase in gross margin is attributable to the $9.6 million increase in revenue compared to the same period in the prior fiscal year. The 9% improvement in gross margin rate is attributable to higher production levels driving efficiencies in labor, overhead allocation, product mix and also partially due to efficiencies recognized as programs mature.

For the 3 months ended July 31, '26 and '25, selling, general and administrative expenses were approximately 18% and 26%, respectively, of consolidated revenues, a decrease of approximately 8%. However, the actual expenditures increased by $0.5 million. The increase in SG&A expenses during the 3 months ending July 31, '26 related mostly to compensation expenses. SG&A as a percentage of revenue decreased 8% over the same period in the prior fiscal year, demonstrating positive operating leverage given the higher revenue base and because the prior year included strategic headcount additions and process optimizations that were implemented to support growth in fiscal '27 and beyond, which caused SG&A as a percentage of revenue to be higher in fiscal '26.

Research and development expenditures represent investments intended to keep the company's products at the leading edge of time and frequency technology and enhance future competitiveness. Fluctuations in R&D expenditures will occur in some periods due to current operational needs supporting ongoing programs. The company plans to continue to invest in R&D in the future to keep its products at the state-of-the-art.

For the 3 months ending July 31, '26, operating income was $5.2 million or 22% of revenue and increased significantly compared to the prior fiscal year period's $364,000 operating income due to the higher revenue, gross margin and operational efficiencies as described above. The majority of the approximately $0.1 million of investment income for the 3 months ended July 31, '26 was from interest income and unrealized gains on assets held in the Frequency Electronics deferred compensation trust. This yields a pretax income of approximately $5.2 million for the 3 months ending July 31, '26, compared to approximately $557,000 pretax income for the 3 months ending July 31, '25.

Consolidated net income for the 3 months ending July 31, '26 was approximately $4.2 million or $0.41 per share compared to $634,000 or $0.07 per share for the same period in the prior fiscal year.

Our fully-funding backlog at the end of July was approximately $129 million, a new company high compared to approximately $111 million for the previous fiscal year ending April 30, '26 and compared to approximately $71 million in the year ago period.

The company's balance sheet continues to reflect a strong working capital position of approximately $90 million and a current ratio of approximately 5.3:1, helped by the company's stock offering, which increased further following the exercise of the greenshoe after the quarter ended. Additionally, the company is debt-free. The company believes that its liquidity is adequate to meet its operating and investing needs for the next 12 months and the foreseeable future.

I'll turn the call back to Tom, and we look forward to your questions.

Thanks, Steve. We're now ready to take questions.

[Operator Instructions] The first question today will be from Jeff Van Rhee from Craig-Hallum.

Congrats across the board. It just looks like a fantastic quarter here. Maybe a few for me. The -- Tom, maybe touch on TURbO. I know obviously, interesting form factor, a lot of useful applications. Can you just give us a little update in terms of what you're seeing there, in particular, from the new bookings side, strength of bookings, any quantification of where revenue is going, maybe insights into the use cases, just how it's being deployed? Just sort of a broader update on TURbO would be great.

Yes. Yes. Sure, Jeff. We're just starting to -- beginning to deliver production-grade TURbO units at this point in time, relatively small quantities still, but we anticipate things will be picking up in the near future. We -- currently, the applications are all aircraft applications, manned aircraft applications, although we have discussions with some companies regarding drone applications, which is one of the areas that we're most excited about. We are also starting some initial efforts in terms of updating the development of the TURbO units for use in space, primarily that involves radiation hardening of those devices.

Got it. That's helpful. And then maybe just a couple of quick on the numbers front, Steve. The percent of the backlog that's 12 months? And then also, if you could, just any color around funded. I know you only report in total backlog, the portion that's funded. I'm wondering how the ratio of funded to total has changed maybe compared to, say, a-year-ago quarter?

Well, I'll answer the first question. Well, the reported backlog is fully funded. So that is fully funded. We don't report the non-funded part, the options or things. Tom has explained numerous times, like we get a contract just for like $10 million, maybe 10% or 20% of it is funded. So only $1 million or $2 million would go into backlog. We don't report that other $8 million or $9 million until it becomes funded.

Yes. No, understood. What I'm asking is you've got visibility to what the rest of that backlog is, but you're only reporting funding. I'm asking the ratio of what's visible to total and how it's changed? And then the second part of the question is what portion is the next 12 months?

Well, I think it's multiple times of it going -- the unfunded portion of it. And as for the 12 months, it's about 60-some-odd percent, 65% approximately.

Okay. Tom, the -- you referenced again on this call and you talked about it last call as well. I mean, obviously, the order book is full and you've got to figure out how to allocate and which orders to take. But one of the responses has been to ramp production. Just talk a little bit about where you are in that volume production ramp, that build-out. Are you hitting your throughput goals? It's a challenge to keep up this level of growth. Curious how you're doing on that volume production shift.

Yes. It's a really good question, Jeff. I think that's certainly one of our biggest challenges at this point. We are ramping -- successfully ramping up our production on a number of fronts at this point. But we -- there are some challenges and limits to what we are able to achieve in that regard. And I think one of the management challenges is being able to thread the needle appropriately so that we -- of course, we never like to turn down additional business. On the other hand, it's very important for us to deliver what we say we're going to deliver and to do it on time.

So in some cases, we are not signing up to some of the more ridiculously optimistic schedules that some of our customers are asking for because it's -- we don't feel that it's possible. And I think it's important for us to stand firm on that kind of a thing. But yes, it's -- we're walking a tight rope in this regard at this point. Let's just put it that way.

Yes. Understood. And then maybe two other quick, if I could. On the proliferated LEO opportunity, I mean, I think you commented last quarter, 90% win rates in the space. And in particular, we've seen some real interesting, call it, green shoots in terms of proliferated LEO and the ability to win. Just curious, any updates there last 90 days, things that have influenced your conviction, what you're seeing in the pipeline there? Observations on P-LEO opportunity would be great.

Yes. Yes. I think the opportunities are really good. I think that a big arena for us is the classified satellites, which -- the architecture is very aggressively moving to the proliferated satellite model. It is still in the early stages of that transition, but we're kind of at the point where we're moving from demonstrating capabilities to initial production on those programs. We're getting involved in more programs every day at this point. So that's really pretty exciting.

And -- but I think there's a tremendous amount more to come in the future. We hear a lot of talk about data centers in space, but that hasn't materialized quite yet. I know there's talk about that happening in 2027, but I think that's probably a little bit overly optimistic. But the proliferated satellite is -- that concept is definitely happening, and we are in the thick of it and very excited about that.

Sort of a variant of that, we are, of course, actively involved in some of the lunar missions that get a lot of press at this point in time. And in some ways, it's similar to the proliferated satellites. In some ways, it's different. We're not really talking about hundreds or thousands of devices heading toward the moon. But I think a lot of the approach is similar to the proliferated satellites where we're looking for a lot smaller, cheaper, faster production of things. And so I think that's important involvement for us because it helps to get our feet wet in this smaller, cheaper, faster arena.

Very helpful. Last one, maybe on gross margin. Tom, I know you pay a lot of attention to which contracts you take and which you don't. And there are a lot of variables that can affect your gross margins, whether they're follow-on orders versus new and a variety of other things. Just as you look at the order book and what is to come over the next few quarters, any notable call-outs in terms of, you put up a great gross margin print here this quarter, quite a bit ahead of us, things that would drive it higher or lower? I know you're not going to call a specific quarter, but as you look out over the next 2 or 3, anything to call out about what's in that pipe and going to turn into revenue and whether those are, in particular, upward or downward pressure on gross margin?

Yes. I don't see any particular either upward or downward pressure on things at this point in time. I guess what I'd say is it's really part of our strategy at this point, and we've talked about it before, there's so much growth in our basic markets that we're -- it puts us in a really strong position. We can be a little bit picky.

So I think for us, the strategy is to be disciplined to make sure that we bid things such that we can be very profitable and maintain our high margins. And of course, part of that strategy is being willing to lose some things if the competition is extreme and the margins that we would necessarily need to accept in order to get those programs are a little bit lower.

So we're in a really good position, and we are staying disciplined. And yes, and I think we've talked about it previously, the proliferated satellites, especially in the early stages are ones where we are willing to accept somewhat lower margins in order to get involved in those programs. But at this point, we -- there's not a major move in that direction in the sense of having to accept lower margins. We are seeing activity in the proliferated satellites, but we haven't really seen a lot of pressure on our margins. So I think it's pretty optimistic on the margin front. But yes, I will say that we shouldn't interpret that as a straight line upward necessarily as we go.

Yes. Got it. Congrats and understood. And obviously, years of decision-making, good decision-making getting you guys to this point. So congrats to the whole team.

The next question will be from Jon Siegmann from Stifel.

Congratulations on the momentum in the business. So the company has had a long history of relationships with the larger traditional companies. You've made reference in earlier calls about bidding with some of these new companies. Clearly, some success sounds like percolating on the space side. Can you talk a little bit about any penetration and success you've had with the new defense tech companies?

A very good question. Yes, I think it's true that at this point in time, most of our success in this arena is in the space environment. We have -- I have to be very careful about talking about specific programs, but we've had conversations with a number of the newer space companies on a variety of different programs, Intuitive Machines, Astranis and a number of others.

In the defense arena, we don't have a whole lot of success in this area yet, although we are certainly pursuing things with a number of different companies. Of course, Anduril, in particular, is one that we've had communications with. Yes, let me just leave it at that.

That's great. And then, maybe just on the traditional side, the Patriot and THAAD production increases. Understand you're more on the battery side versus the interceptor side, but is there any way to frame how much increases that could be for your business if we're tripling production rates for those programs?

Yes. It's very significant. Obviously, you don't build new batteries every time you shoot off a couple of missiles. But I think we -- the bottom line is we're seeing a tremendous amount of business for both THAAD and Patriot. And I think to put that into context, I think there's a lot of activity in Ukraine talking about additional missile batteries and things. And I think that the more missiles are shot off, it tends to mean that batteries are needed in additional locations, and this translates into more business for us in these applications. So yes, it -- for whatever reason, I think the bottom line is it's a thriving business for us at this point.

[Operator Instructions] The next question will be from Steve Levenson from Big Rock Research.

I've enjoyed watching your progress over the last few years, and I'm curious about a few things. You talked about using some of your new capital to expand manufacturing. And I imagine a lot of your work is sort of manual bench work, and I'm wondering if there's an opportunity to enhance margins by using some automation, or is that impractical for the sort of assemblies you make?

Well, it's a very good question. It's certainly not out of the question. In fact, we are looking at that very carefully, especially in quartz crystal manufacturing is an important part of what we do and the quantities that are required. I guess I should emphasize that all the -- this is part of our vertical integration. We do all of the manufacturing of quartz resonators starting from raw quartz crystal material.

And so the production there is certainly one of the challenges that we face at this point in time. And we are looking at putting in place additional equipment that has higher throughput capabilities. We tend to think of our production facility as sort of a boutique facility because in general, the quantities that we work with are relatively small for space applications and so forth and so on. And relative to quartz crystal manufacturing for consumer watches and things of that sort, our production will remain relatively small going forward, but it is nonetheless increasing. And so we are looking at putting in place equipment that can increase the throughput.

In addition to that, though, there's a lot of equipment that is needed just in general, most of the products that go into space need to be tested in a space-like environment, so-called thermal vacuum, vacuum environment where we can modify the temperature to be similar to what units experience in space. And so obviously, that's an environment which is normally not encountered on earth, and there's a lot of special test equipment in order to be able to test in those kind of environments. So that's another thing that we're looking at adding additional capacity for. And of course, there's a lot of other things that we're looking at, at this point in time. Those are just kind of a couple of straightforward examples.

Great. That's helpful. My other question would be in terms of proliferated satellite constellations. Is there an application for the quantum sensor to gather data for the World Magnetic Model? Is that something that can be done using that device from space? Or is that more a terrestrial item?

Well, it definitely is something that meaningful measurements can be made from space. And I know there is definitely some talk and some ideas for doing just that. I think that in terms of overall quantities, I think that would remain relatively small, but it is definitely something that we're interested in pursuing.

The next question will be coming from [ Michael Eisner, ] and Michael is a private investor.

Great job. One quick question or two. In space, is there a specific area you see the most revenue coming from or opportunity?

Well, I think -- no, the simple answer is I think we are seeing increasing revenue from just a variety of different directions, and that's really what's so exciting and unique about this time relative certainly to a decade or 2 decades ago. It's just -- I think we've commented on it recently, whereas a decade ago, there were something like 100 launches in a year. I think in the last year, the United States had something like -- launched something like 3,700 objects into space. So 100 objects launched into space, objects being satellites and things like that, and now 3,700. So tremendous growth any way you look at it.

The traditional satellite activity is booming. We have a lot of work going on right now. But the new proliferated satellite stuff is also very active, and we have a lot of programs that we're getting involved in. And as we demonstrate success on those programs, we see more and more coming in the front door. So pretty exciting.

I like the answer. What's the book-to-bill at this time?

Steve, you got those kind of numbers?

The book-to-bill is about 1.76:1 for the quarter.

1.76:1. All right. Excellent.

And the next question will be from Robert Smith from the Center of Performance Investing.

Congratulations on the ramp. It's superb to see. My first question is, can you give me the current R&D figure? And how do you see R&D as a percent of revenue going forward, considering the large targets that you have for growth?

So a good question. I think a couple of qualitative statements first. I think -- and we've talked about this in the past, but one of the overall strategies for the company is to try to get as much external funding for R&D as possible. I think this is really important in the kind of products that we specialize in because the primary customer for our products is really the U.S. government. And when the U.S. government funds research, it's always because they're funding applications that they're interested in. And of course, that's what we want to focus our research and development on what our customers are interested in as opposed to stuff that might be intellectually interesting, but not necessarily -- doesn't necessarily lead to profitable products down the road.

So that's the first thing is to try to get external funding for as much research and development as possible. But talking about the internal R&D, I think that, like a lot of things, you have to understand that there will be fluctuations. And so I don't want to make statements that we'll be held to on a quarter-by-quarter basis. But I think that we anticipate the internal R&D funding to stay under 10% of revenue at this point in time. I think that we will see in an absolute sense, some additional R&D expenditures over the next couple of years as our revenue grows. I hope that gives at least a bit of an answer to your question.

It does. And my second question is, would you at all consider the initiation of a small cash dividend to attract any number of institutions that won't buy the security without a cash payment?

Well, we have done so in the recent past, and I think we certainly will consider that going forward. I'm not making any promises at this point. But yes, definitely something that's on the table.

And there were no other questions at this time. I would now like to hand the call back to Thomas McClelland for closing remarks.

Thank you. Thanks for taking the time to listen and participate in today's earnings call, and we look forward to providing further updates in the coming months. Thanks.

Thank you. This does conclude today's conference. You may disconnect your lines at this time, and have a wonderful day. Thank you for your participation.

Greetings, and welcome to the Frequency Electronics Year-End 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.

Good afternoon, everybody, and thanks for joining Frequency Electronics Fourth Quarter Fiscal Year 2026 Earnings Call. With me today is our Chief Financial Officer, Steve Bernstein. We have a lot to cover today, but I want to start with a very clear statement. After a year of digestion, we're returning to growth now. This quarter, which ends in 2 weeks, will be the beginning of a multiyear ascent to a much bigger Frequency Electronics.

On this call, we'll provide additional color on our end markets, talk about our new margin targets and discuss the decisions we made during the year to better position the company to take advantage of the enormous growth opportunities in front of us. But first, I want to share why we feel so confident in this pending upturn in our business. We've described over the past year how fiscal 2026 was a year of digestion for frequency after we pulled forward some revenue into the prior fiscal year. Despite that, our backlog continued to build throughout the year.

Two quarters ago, we told you that we believed it was reasonable that we could see a backlog north of $100 million in the not-too-distant future. Today, I'm pleased to report a record funded backlog of $111 million as of the end of our fiscal year. This backlog gives us a lot of visibility into coming revenue and so does several other key data points. We don't usually discuss our book-to-bill ratio, but it was nearly 3x in the fourth quarter. Book-to-bill like revenue can proceed for us in a nonlinear fashion, but a number this high is a strong indication of the kind of demand we're seeing.

Further, fiscal 2026 was the single biggest year of bookings in company history. Recall that the backlog we report is our funded backlog and the total contract value of signed deals is multiples of our funded backlog. We had some very significant contract wins during 2026, especially in the fourth quarter, and those wins will contribute to revenue in fiscal 2027. We believe we can see multiple new quarterly revenue records established for frequency in the quarters ahead.

We expect to announce a number of additional meaningful contracts in fiscal 2027. Looking ahead over the next 2 years, there are some very exciting opportunities that we're bidding on, including a number of sole-source opportunities on proliferated satellite programs, each of which is bigger than anything we've previously won. Our traditional satellite business also holds promise, and we're bidding on several large geostationary orbit programs.

We're also embedded in multiple classified satellite programs. And as they see growth, so will we. On the defense side, we've discussed previously the replenishment opportunities for missile systems like Patriot and FAD for which we provide content in the missile batteries. These bookings are hitting now. Over the next few years, that same technology will be part of programs in both Golden Dome and Shield.

We'll win that Golden dome and Shield business because we're embedded in those missile programs. Ours is a multi-domain business with opportunities in space, air, land and sea. We're pursuing additional timing applications in naval programs and bidding on important quantum sensor programs today. We're still growing our traditional business while also expanding into new markets.

For instance, we continue to produce atomic clocks for GPS satellites while also developing solutions for congested environments in which GPS is denied. On previous calls, we've described a much larger total addressable markets we're going after, all of which are predicated on our existing competitive strengths. These larger TAMs include proliferated satellites, quantum sensing, space defense and space exploration and alternative PNT. These are multibillion-dollar markets we're selling into with high projected growth rates.

Critically, we have already won business in all of these areas, and we anticipate winning much more business in all of these markets. It's worth emphasizing that the contracts we're winning today are a combination of these new markets we're selling into as well as new and follow-on orders from our traditional markets. We anticipate announcing more wins in both new and traditional markets as the year goes on.

Just in the past few months, we won very important contracts in high-growth new markets, and I'd like to spend a few minutes discussing 2 of these. First, we won a contract for approximately $7 million for compact, highly precise atomic clocks to support position navigation and timing for a lunar space mission. We anticipate winning additional awards of greater magnitude to support similar programs in the future and to expand beyond the lunar environment into deep space missions.

This win is an excellent example of FEI's ability to leverage our long-standing market leadership in space-qualified atomic clocks to service exciting new and potentially very large markets. Second, we won a contract in the burgeoning area of space defense, the next major frontier of our country's defense. Space defense involves countering space-based threats, and this award leveraged the company's expertise in terrestrial secured communications in a new domain space and opens up significant new opportunities for FEI.

Also, the space defense win included not just hardware, but also internally developed software, which expands the solution set we can provide. There's an increasing need amongst our U.S. government customers for space-qualified hardware that can provide secure communications from satellites to ground stations and via satellite crosslinks, and FEI is uniquely positioned to provide such solutions given our heritage in both space systems and terrestrial secured communication systems.

Space is more important than ever, and we're very encouraged to see generational levels of investment going into our end markets and increased government funding in all of our markets. The environment is robust and so is our win rate, which validates the significant capital investments we've made over the past several years. We are meeting the customer where they are and more importantly, where they're going. We're the best at what we do. And for many of our customers and products, there is simply no substitute.

All of these factors combined gave us the confidence to establish a 3-year revenue target of at least $150 million which we announced on April 30 at the end of our fiscal year. This level is a minimum target and represents 34% compound annual growth from fiscal '26 forward. Frequency has not historically provided guidance because our business can be nonlinear on a quarterly or even annual basis, but we feel increasingly confident in our ability to project our growth on a multiyear basis because of the continuing expansion of our backlog and order book as well as the significantly larger end markets that we're selling into, all of which are based on technology that leverages our long-standing market leadership in space and defense applications.

We expect that additional revenue to drive substantial incremental profitability. And today, we're announcing for the first time 3-year margin targets for Frequency. In fiscal '27, we'll begin demonstrating a multiyear path to higher margins. We are today establishing a minimum gross margin target of 50% and a minimum operating margin target of 30% by fiscal 2029. In addition, our depreciation and amortization expenses have historically been in the low to mid-single range as a percentage of revenue, and we anticipate that trend to continue. The path to these higher margins is largely in our control and is a direct result of the significant business shift we're undertaking.

On the gross margin side, we anticipate seeing meaningful improvement from 2 significant levers. The first is the much higher revenue base we're targeting, as we've previously discussed and which is well supported by our backlog, order book, industry trends and government funding. In addition, due to customer demand, we're moving from a bespoke manufacturer of exquisite products with more episodic production schedules to a high-rate production company, making many more units of similar products on a more consistent basis.

This higher rate production will be more predictable, allow for better overhead absorption and feature less nonrecurring engineering as a percentage of total business, all of which should drive gross margins to at least 50%. We also anticipate seeing gross margin benefit from some pricing initiatives.

In addition, we believe we will demonstrate very strong operating leverage in the business, such that as revenue increases sharply, we should gain meaningful efficiencies on our research and development and selling and administrative expenses. Based on the gross margin target outlined above and those operating expense efficiencies in R&D and SG&A, we believe we'll then be able to generate minimum operating margins of 30%, with depreciation and amortization in the low to mid-single range as a percentage of revenue.

We invested significantly in the business during fiscal 2026 in order to better prepare the company for the strong growth ahead. The majority of this investment was focused on hiring engineering talent in advance of the large ramp-up in production and revenue that we're expecting. This had near-term dampening effects on gross margin as engineering costs flow through the manufacturing overhead portion of our cost of goods sold, raising this expense before the revenue is generated. A second meaningful investment was a business process improvement investment, which should allow us to improve turnaround time.

This investment also flowed through overhead and had a similar dampening impact on gross margins. But with the orders and demand coming in, we think it is prudent long-term decision to be ready for that business and to super serve our customers who increasingly want more work done more quickly. We believe this should meaningfully benefit our shareholders as well as we increasingly provide higher levels of mission-critical products that perform to the highest standards in the harshest environments and will do so with high incremental margins.

The investments we made in our new Colorado facility and team are already opening opportunities in quantum sensing and very low-noise microwave resources. This is just one example of the many ways we expect our fiscal 2026 investments to pay off in spades. With these investments now made, we do not need to make additional meaningful investments in order to achieve our 3-year revenue target. We simply need to execute. It's also worth noting that these investments were made entirely with cash on hand generated from operations.

Further, we've increased our internal focus on our largest and most profitable market opportunities and deemphasized or discontinued products with lower growth potential and lower margin profiles that have historically been part of our business. Specifically, we chose to restructure our Elcom manufacturing business in New Jersey in the fourth quarter because it simply did not have the growth or margin potential of our core space and defense markets nor those of the much larger addressable markets we're starting to sell into.

Though we sacrificed some near-term revenue in the fourth quarter through this restructuring, we believe it's the right long-term decision to better align our capital and talent towards their highest and best use and potential returns. Quite simply, we're playing for much larger stakes. The Elcom restructuring included a $3.8 million inventory write-down, a noncash charge which flowed through cost of goods sold and further depressed gross margins for this reported period, but which is not reflective of ongoing business trends. Additional severance costs flowed through selling and administrative expenses. Further, the restructuring yielded over $9 million in future tax benefits, which will benefit the company going forward as we turn to profitable growth this year.

Lastly, we had several nonrecurring charges that flowed through operating expenses this quarter. the majority of which was a noncash charge for an accrual related to a onetime change in employee sick/paid time-off policies. Most of this charge flowed through cost of goods sold, impacting gross margins and the balance flowed through selling and administrative. Steve will provide further detail on the impact of these charges.

As a result of all of these charges this quarter, our as-reported results do not appropriately reflect the core strength of our underlying business, which will pave the path towards the much higher revenue and margin levels we described earlier. We decided to take the pain now so that we can focus on our highest return opportunities going forward.

In short, this quarter and year were preparation for the improvements we're about to see, including in the current quarter. We've historically been conservative in our accounting presentation and today's reporting of charges does not reflect any intended change in that regard. We'll not become a company with constant adjustments that seek to flatter financials rather than inform investors.

In this case, however, we thought it was cleanest to clear the decks now as we head into fiscal 2027, the beginning of a multiyear acceleration phase, which should allow FEI to demonstrate both strong growth and operating leverage in the years to come. We know that there will be no substitute for demonstrating these results, and we look forward to doing so starting this year. And now I'll turn the call over to Steve to provide a few more financial details, and I look forward to taking your questions during the Q&A following Steve's remarks. Steve?

Thank you, Tom, and good afternoon. As we have discussed, 2026 was a year of revenue digestion for us, and this quarter made for a particularly difficult comparison as the prior year's fourth quarter was the highest revenue quarter in 25 years for the company. That said, we are confident that we are returning to growth in the current fiscal first quarter and for fiscal '27 in general. In fact, we can start setting multiple new quarterly revenue records in the coming quarters. For the 3 months ended April 30, 2026, consolidated revenue was $15.4 million compared to $19.9 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 $7.7 million or 50% compared to $12 million or 60% in the same period of the prior fiscal year. Revenue on satellite payload contracts are recognized primarily under the percentage of completion method and are recorded only in the FEI-New York segment.

Revenue from non-space U.S. government and Department of Defense customers, which are recorded in both the FEI-New York and FEI-Zyfer segments were $6.8 million compared to $7 million in the same period of the prior fiscal year and accounted for approximately 44% of consolidated revenue compared to 35% for the prior fiscal year. Other commercial and industrial revenues were approximately $908,000 compared to approximately $890,000 in the prior fiscal year.

For the fiscal year ended April 30, 2026, revenue decreased by approximately $6.6 million or 9% compared to the prior fiscal year. Fiscal 2026 was a year of digestion from a revenue standpoint as the company pulled forward some revenue into last year fiscal 2025. Satellite program revenues for the government end use were 31% and 53% of total revenues for the fiscal year '26 and '25, respectively. Satellite program revenue for commercial end use were 6% of total revenues for both fiscal years '26 and '25.

Revenue from non-space U.S. government and DoD customers increased by approximately $11.5 million or 43.2% in fiscal '26 compared to fiscal year '25. These revenues accounted for approximately 60% and 38% of consolidated revenues for the fiscal years 2026 and 2025, respectively. Other commercial and industrial sales accounted for approximately 3% of consolidated revenue for both fiscal years '26 and '25 Sales in the other commercial and industrial sales were $2.1 million and $2.4 million for the fiscal years ended April 30, '26 and the fiscal year ending April 30, 2025, respectively.

For the 3 months ending April 30, '26 and the fiscal year ending April 30, '26, the gross profit and gross profit percentage decreased as a result of several pre-revenue investments and nonrecurring factors, as Tom mentioned. Similarly, there were several nonrecurring items that impacted operating expenses, specifically selling and administrative expenses causing operating profit and operating margins to decrease. We have provided tables in the press release so that investors can better understand the impact of these items and see what our margins would have been without these growth-oriented investments in advance of revenue and without these nonrecurring charges.

Adjusted for the charges and investments, our gross margin and operating margins would have been approximately 36% and 1%, respectively, for the quarter and approximately 41% and 11%, respectively, for the fiscal year. These are levels we anticipate growing meaningfully in the years to come, as Tom stated earlier, starting in the current fiscal year. Lastly, the company made significant cash investments during fiscal '26, but expect to return to normal cash generation in fiscal '27 beginning in our current fiscal quarter. We encourage you to read our upcoming 10-K for further details. John, we can open the line now for Q&A.

[Operator Instructions] The first question comes from Brian Kinstlinger with Alliance Global Partners.

We've heard a lot about space and satellites. However, GPS jamming and time jamming in the battlefield has become a major problem. Can you talk about how both the war with Iran as well as the Ukraine-Russia war are impacting demand for frequencies, precision timing clocks, if at all?

Well, yes, sure. Happy to respond to that. Of course, I think those war environments are impacting our products and our markets in several different ways. I mean one of the things that we have talked about previously is the fact that GPS, which is important for a lot of military applications is frequently jammed in those areas and also spoofed. In other words, there are in place of the normal GPS signals, there are artificial signals, which indicate that untrue location information.

So those things going on have made it very clear to everybody that for defense applications in particular, but even for a lot of commercial applications, GPS cannot be relied on for position navigation and timing applications. So that's just expanded tremendously our accessible market. Of course, when we provide more precise atomic clocks, this allows better timing in all of these applications even during those periods when GPS or other navigation systems are not available.

The other thing, of course, there are a lot of applications that are being envisioned at this point, which will provide that same kind of information that's provided from the satellite navigation systems, but in other ways. And of course, since ultimately, those navigation systems rely on precision timing, our products are very important there.

And the other application, which we are in the early stages of is as an alternate means of navigation, magnetic navigation in which by measuring the magnetic field in one's location and with an accurate map of the magnetic field on the surface of the earth, one can navigate without depending on any external signals from navigation satellites or anything else.

And this, of course, is very important in these battlefield kind of situations that are being experienced in the Middle East at this point in time. So maybe I'll leave it at that. These are just a few of the important things that are coming out of the war situation in the Middle East. I think the -- maybe the other big thing that we should talk about is, of course, a lot of missiles have been expanded there. And so of course, there's a huge replacement activity for those missiles although in most cases, we don't have hardware on the missiles themselves, we do have a lot of hardware in the missile batteries. And there's -- we are seeing a tremendous uptick in those markets also.

Great. That's super helpful. I have one follow-up. You gave long-term gross margin targets. But as it relates to the $111 million backlog, how much of that is expected to convert to revenue in the current fiscal year? And what is the average gross margin in that backlog?

Yes, I have to be a little bit careful about providing specific numbers on that. So let me just say that I think what we typically see is that we are -- the programs that we work on typically take place over a period of 1 to 3 years. So we expect that backlog to be worked off over the next 3 years completely. And we do expect the gross margins to increase significantly over the course of this fiscal year.

When you say over 1 to 3 years, that's the funded backlog, not the total backlog? So the funded backlog of $111 million is over 1 to 3 years, yes?

That's actually primarily the total backlog. We reported the funded backlog.

So the funded presumably should be on the shorter end of that 1 to 3 years, I would assume. Is that accurate? Or should I not think that way necessarily?

That's reasonable.

Next question comes from Jeff Van Rhee with Craig-Hallum.

A lot to love about that forward model and congrats on the backlog growth. Obviously, you're right in front of some very large demand drivers. Tom, if you look at the bookings you're putting to the tape now and what's in the pipeline, you called out a bunch of drivers, and it's a blessing of Rich as you've got so many things working here. Can you just help us prioritize, though, what are the biggest needle movers right now in terms of the surge we've seen thus far in the backlog growth? And based on pipeline, what's going to drive backlog growth next 6 to 12 months, if they're different?

Well, it -- I mean, you actually hit the nail on the head. There's -- one of the reasons that we're so optimistic Jeff, is that there are so many different arenas that we're acting in that all look really are just growing tremendously at this point. But that being said, I think actually, over this last fiscal year, non-space played a big role in the revenue that we did generate. But I think in the coming year, space is going to be forefront.

We're really excited about the activity related to the lunar activity, the movement toward repopulating the moon, so to speak. I think there are a number of very large space programs that we're working on at this point. And I think an important thing that I'd like to talk about in most cases in the space arena, where we really have very little competition. We've looked at it. And over the last couple of years in space, we've had a 90% win rate on the contracts that we have bid on. So we're in a really strong position there. Space is booming.

So I think that's the one that I'd emphasize, but we do have to keep in mind that we've had a tremendous amount of activity in non-space defense-related things also.

Yes. Yes, that's great. Steven, just one for you. You commented on the quarter, and you said you're going to have several new record revenue quarters in the coming quarters, that's pretty vague. That could be years, that could be this year. Were you specifically trying to say over the next 4 quarters, the next fiscal year, we should see several all-time record quarters? I just want to be clear what you're trying to say there.

Yes. I believe in fiscal '27, we should have.

Okay. All right. That's helpful. And then, Tom, on the -- from the manufacturing front, I mean, first of all, fantastic to see the trajectory to 50% gross margins based on mix and a number of other things that you're working through. One of the underpinnings there, obviously, is scale, and you talked about moving from bespoke manufacturing to process-driven manufacturing. Those are different mindsets, skill sets, facility setups, equipment. It sounds like you've been working on that a lot during this fiscal year. I think you've referenced that. But just talk about where you think you are now in terms of readiness to go into that, I would say, different mindset and different way of operating.

Yes. I think we are very much -- I think the last couple of quarters of fiscal '26, we were in a transition period. And I think we are really ready for this at this point in time. I think it's something that we've been working on very hard. And I think we have a very clear road map on what we need to do over the next 3 years. I think we have a lot of work at this point in time. We're very focused on executing. But I think we have the basic items in place in order to be able to achieve what we've talked about. And interestingly, we are going to do that without any significant facility expansion.

We're going to do that within our current facilities. Internal to those facilities, of course, there's already been significant expansion taking place. And as I mentioned earlier, of course, we've been adding significantly to the labor force. So I think that although as you say, there is some transition to more of a production kind of environment, we should keep in mind that we're not going from making 1 or 2 to making hundreds of thousands. We are still in the satellite business. And so although it's more continuous production and at a significantly higher rate, we're not talking about manufacturing cell phones or anything like that.

Yes. Got it. And maybe one more, and I'll let somebody else jump in. Just a housekeeping. On the Elcom exit, the -- you referenced some lost revenue in Q4. Certainly, it sounds like it's going to be some headwind to fiscal '27. Can you quantify what the revenue impact was in the quarter and what you expect it to be for the coming fiscal -- for fiscal '27?

Yes. Steve, do you want to...

Well, I think the revenue forgone was about $1 million roughly for Q4.

Okay. And in terms of additional rundown of a revenue stream that you're walking away from in FY '27, just what is -- how do we think about the rest of the headwind from exiting Elcom?

We think we'll make it up multiples with what we have, and it will improve our performance, not hinder our performance in any way.

Okay. All right. I'll come back to that one. I appreciate it. Congrats. I mean it just really seems like you've got the business rightsized here and ready to pounce on some great opportunities coming through the doors and love that target model.

The next question is from Michael Eisner. He is a private investor.

Nice backlog. So Elcom is closed right now completely.

Well, we have some ongoing activities there. We have some commitments that we have to honor going forward. But the plan is to completely shut down those activities over the course of this year.

We will take a year to close completely?

Well, it's not 100% determined. We have some commitments that we had made prior to the decision to shut down Elcom that we have to honor some open quotes, et cetera. So yes, we have to play that by year to some extent. But roughly over the next fiscal year, we should wind down all of that activity.

But it shouldn't be too bad on the cost.

Yes. That's correct.

So besides Elcom, most of the write-downs are done?

Yes.

All right. I'm just trying to get an idea of the big picture with the margins. How many employees did we end up at year-end?

Year-end, we have about 250 employees.

All right. That's why the expenses went up. So hypothetically, if you're growing at 34% CAGR how many more employees are you going to need in 1 year?

Yes, I'm not really in a position to answer that at this point. We -- I don't think we're going to have to add -- we've already added a significant amount in preparation for this. So I don't anticipate a huge additional workforce. But yes, beyond that, I can't say anything specific.

All right. But most of them are -- the 250 at year-end is the big amount.

Yes.

All right -- all right. I'm just trying to get to where we're getting the gross margins and the operating margins from. Are we the only ones that do space defense? Do we have competition in that?

Well, I think space defense covers a lot of things. I think in the portion of that arena that we participate in, we have very little competition.

All right. I think -- are we working with SpaceX or anything -- well you can't comment.

Well, at this point, we don't have any active programs with SpaceX, but we're -- SpaceX and a number of other companies, we're pursuing all sorts of things.

All right. So the new revenue growth should make up for the tailwinds back the loss of the -- how should I word this, should make up for the problems with Elcom?

Yes, absolutely.

The next question is from Chris Vakovski, private investor.

Congratulations on the great orders. Just generally speaking, you talked a lot about communications when you talked about the orders. Can you generally talk -- tell us about technologically-wise, why precision timing is important for communications? And are there any new things in satellite communications that require new higher precision timers?

Well, I think especially for military applications where secure communication is required, then precision timing is important. There are, of course, a number of different means of communication in these arenas. But one of the key things is to only communicate during predefined time intervals. And in order to do that, you need very careful synchronization between the communicating parties. So that's just one very specific example. Yes. So short of going into a long-winded technical discussion, maybe I'll leave it at that.

Okay. I don't mind your long-winded technical discussions, but that's all right. So would you say that your influx of orders is partly due to the higher required security in satellite communication?

I'm not sure I caught all of that. Could you maybe just repeat...

Yes. Would you say that your influx of new orders is at least partially caused by the higher required security in satellite communications?

Yes. Well, definitely. I think that's an important aspect of it. I think -- yes.

And as far as the record quarters go, did you say that the next quarter will be a record quarter or that the next year will have multiple record quarters?

Well, I hesitate to make specific statements about individual quarters. But over the course of fiscal 2027, there will be record quarters.

We have no further questions in the queue. We have reached the end of the question-and-answer session, and I will now turn the call over to management for closing remarks.

Okay. Thank you, 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. And once again, thanks, everybody. All right. Bye.

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

Greetings, and welcome to the Frequency Electronics Third 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.

Good afternoon. and thanks for joining Frequency Electronics Third Quarter Fiscal Year 2026 Earnings Call. With me today is our CFO, Steve Bernstein.

On our second quarter fiscal 2026 earnings call in December, I discussed our vision for how we see the growth in our company developing in the coming years. Specifically, I told you that the exciting growth prospects we have in large and growing end markets, which are larger than our historical addressable markets will come in addition to continuing strength and growth in our ongoing businesses in space and defense. These new markets such as quantum sensing, proliferated satellites and alternative position, navigation and timing programs are built upon our industry-leading capabilities in our core space and defense programs.

I also told you on that December call that we anticipate multiple awards in the coming months, some of which are as large or larger than the biggest ones we have historically announced. Today, we're very pleased to report significant progress on all of these fronts. In a separate press release that came out at the same time as our earnings report after the close of market today, we announced that we were awarded 2 contracts valued at approximately $45 million. One of these contracts is in the domain of FEI's traditional space satellite programs and one is part of the new proliferated satellite paradigm. Customer confidentiality prevents us from discussing these with greater specifics at this time. But there are 2 important points to consider.

First, of course, is that these contracts reflect our ability to continue to win meaningful contracts in our traditional space business, while also winning significant business in our next-generation markets at the same time. In other words, while our business is never perfectly linear, we are definitely not projecting a dislocation in which the traditional business wanes while the new business replaces it. Rather, they'll both grow and pave the way for us to become a substantially larger company.

Second, we're already actively working on additional contracts of similar magnitude in both our traditional and new business lines and anticipate additional awards in this calendar year. On the December call, I also told you that while backlog in any given quarter can fluctuate given newly funded awards and what is converted into revenue in a given quarter, based on what we're seeing coming down the road, we believe it is reasonable that we could see backlog north of $100 million in the not-too-distant future. Our January quarter end backlog was [ approximately $83 million ], a new record for FEI. And of course, this backlog amount was prior to the award of the contracts announced today.

This new business announced today, will start to enter backlog in this current fiscal fourth quarter, which should help us make further progress towards the $100 million mark in the near future. Now that $100 million level, by the way, is not meant to [indiscernible] but the level we're currently building towards.

Adding more awards like the ones we announced today could push us well past that over time. Steve will provide more financial details a little bit later. But I would make a few financial comments here. For the third fiscal quarter, we reported revenue of $16.9 million, essentially the same as the second fiscal quarter. This revenue number is down year-over-year because of the particularly strong execution we exhibited in fiscal 2025, which allowed the company to produce revenue on certain programs in fiscal 2025 that we had originally expected to produce over a much more extended period of time well into fiscal 2026. Essentially pulling forward some revenue, as we've discussed in the previous calls.

Nonetheless, this was still the fourth highest quarter of revenue in the past 10 years, with the only 3 higher quarters having occurred within the past 4 quarters. As we said on the December call, though our business does not proceed in a perfectly [ linear ] fashion, we have established a new hire base, and we anticipate building upon that base now and in the years to come.

Before I turn things over to Steve, I would like to make a few comments on the current state of the world and how it relates to FEI's business. Obviously, most immediately, our country is now at war. As we've discussed on previous calls, we're involved in numerous defense programs, including Golden Dome, Patriot missile system, B-2 Bomber and terminal high-altitude area defense missile system, THAAD system as well as other multi-domain defense systems. Missile systems and interceptors have been in the news quite a bit over the past 2 weeks, and I would like to remind you of remarks we've made previously on our calls.

Our exposure on major missile programs is principally in the missile batteries which are ground-based units used to detect, track and intercept incoming threats, generally by firing missiles at those threats. As the government increases the deployment of these batteries, our business will expand along with that, and we've already seen evidence of that in the current quarter.

Further, the early days of this war as well as the action earlier this year in Venezuela have shown an increased reliance on traditional jet fighters and naval fleets as opposed to next-generation defense technologies. Similar to our discussion earlier on our space positioning in the traditional and emerging markets, we believe this military deployment is a good example of how there remains strong opportunities in our traditional defense business. Even as we are engineering products for next-generation modalities. We expect defense to continue to be a meaningful and growing business for FEI for many years.

Meanwhile, in the Ukraine-Russia war and in the Straits of Hormuz, GPS jamming has become ubiquitous, creating dead zones that threaten civilian aircraft, telecom and financial systems, shipping firms and NATO allies. The need for alternative position, navigation and timing systems Alt-PNT including the use of quantum sensing and magnetometers is paramount, and we expect to be a part of that solution set in the years to come. In fact, in this current fiscal year, we've already won some new business in both magnetometers and other quantum sensing, including business won out of our new Colorado facility. We expect a lot more Alt-PNT business in the years to follow.

Our technology is used in systems and programs that play critical roles in keeping our country and our military safe. We're very proud of this work and it creates an additional sense of mission for our team. I would like to thank our employees, our customers and our shareholders, all of whom we serve by carrying out this important work.

Lastly, we will be participating in 2 investor conferences in the fiscal fourth quarter, and we look forward to meeting with a number of you at the Craig-Hallum New Space Conference on March 25 and the Morgan Stanley Golden Dome and National Security Innovation Summit on June 15.

And now I'll turn the call over to Steve to provide some more financial details, and I look forward to taking your questions during the Q&A following Steve's remarks. Steve?

Thank you, Tom, and good afternoon. For the 3 months ended January 31, 2026, consolidated revenue was $16.9 million compared to $18.9 million for the same period of the prior fiscal year and substantially similar to the second quarter of this fiscal year, as Tom mentioned earlier, and which we have described on the past several calls.

The components of revenue are as follows: revenue from commercial and U.S. government satellite programs was approximately $4.2 million or 25% compared to $11.2 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 reported only in the FEI-New York segment. Revenues from non-space U.S. government and Department of Defense customers, which are recorded in both the FEI-New York and FEI-Zyfer segments were $12.5 million compared to $7.4 million in the same period of the prior fiscal year and accounted for approximately 74% of consolidated revenue compared to 39% for the prior fiscal year. Other commercial and industrial revenues were approximately $180,000 compared to approximately $367,000 in the prior fiscal year.

The revenue for the 3 months ending January 31, '26 were lower than the revenues in the prior period, partly as a result of certain space programs in the FEI-New York segment during the prior fiscal year that were being expedited during the period due to very aggressive schedules. In addition, several new space bookings anticipated for the 3 months ending January 31, '26 are now anticipated in the fourth quarter of fiscal '26.

For the 3 months and 9 months ending January 31, '26, both gross margin and gross margin rate decreased compared to the same period in 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 3 months ending January 31, '26. Going forward, the mix of programs will vary in any given quarter, but in general, we expect our gross margin to move up over time, particularly as we add more business with higher rate of unit production and follow-on business from successful programs.

For the 3 months ending January 31, '26 and '25, selling, general and administrative expenses increased by approximately $213,000 and were approximately 21% of consolidated revenue, up from 18% in the prior year. The increase in SG&A expenses during the 3 months ending January 31, 2026, was due to fluctuations in various expense accounts that make up SG&A.

R&D expense for the 3 months ending January 31, '26 increased to approximately $1.8 million from $1.4 million for the 3 months ending January 31, '25, an increase of approximately $327,000 and were approximately 10% and 8%, respectively, of consolidated revenue. Fluctuation in R&D expenditures will occur in some periods due to current operational needs supporting ongoing programs. The company plans to continue to invest in R&D in the future to keep its products at the state of the art.

In total, operating expenses increased approximately $540,000, but this includes approximately $500,000 of nonrecurring expenses. So we anticipate showing more operating leverage going forward as additional revenue should expand at a much faster rate than expenses.

For the 3 months ended January 31, '26, the company reported operating income of approximately $1.3 million compared to an operating income of approximately $3.5 million in the prior fiscal year. Operating income decreased due to lower revenue, lower gross margin and increased SG&A described earlier.

Other income expense net is derived from various sources, the majority of the approximately $0.2 million of investment income for the 3 months ending January 31, '26 was from interest income and unrealized gain on assets held in the Frequency Electronics deferred compensation trust. This yields a pretax income of approximately $1.4 million for the 3 months ending January 31, '26 compared to an approximately $3.6 million pretax income for the 3 months ended January 31, '25.

For the 3 months ending January 31, '26, the company recorded an income tax benefit of approximately $127,000, which includes a discrete tax benefit of approximately $568,000. The discrete income tax benefit is primarily due to stock compensation windfall deductions. For the 3 months ended January 31, '25, the company recorded an income tax benefit of $11.8 million which included a discrete income tax benefit of $11.9 million. The discrete income tax benefit in the comparable period is primarily due to the release of the valuation allowance.

Consolidated net income for the 3 months ended October 30 -- sorry, January 31, '25 was approximately $1.6 million or $0.16 per share compared to approximately $15.4 million or $1.60 per share for the same period of the previous fiscal year. Our fully funded backlog at the end of January '26 was approximately $83 million, a new all-time high for FEI as compared to approximately $70 million for the previous fiscal year ended April 30, '25. The company's balance sheet continues to reflect a strong working capital position of approximately $32 million at January 31, '26 and a current ratio of approximately 2.6:1.

The amount of cash reported as of the quarter end January 31 should be -- represent a low point going forward, which is a combination of investments made by the company, purchases of stock and collections coming in early in the fiscal fourth quarter that were adjusted in the third quarter. Specifically, we have already collected over $11 million of cash since February 1, 2026, and we expect that to continue building through the quarter. Additionally, the company is debt-free and the company believes that its liquidity is adequate to meet its operating investing needs for the next 12 months in the foreseeable future.

I will turn the call back to Tom, and we look forward to your questions shortly.

Thanks, Steve. We're now ready for questions.

[Operator Instructions] The first question comes from Jeff Van Rhee with Craig Hallam.

A couple for you here, guys. So Tom, the proliferated win. Talk to me about what you're learning out in the marketplace in your ability to win in these proliferated constellation deals? I know this is something you've sort of felt your way through. Looks like you've got some success in our sort of guiding to continued success. Where do you have the right to win? Where do you win? Where do you not have a right to play? Just what have you learned there?

Well, I think when we can provide some technical edge. We're very successful. We're seeing that and that's what the win that we announced today reflects. When there are systems that have minimal technical requirements and all of the emphasis is just on the lowest possible cost then it's a much bigger challenge for us.

Realizing your hands are somewhat tied. Talk to me to the degree you can, on the $45 million, I think you said there's a couple of wins in there. Are these roughly equal in size? I know you said one was proliferated, one wasn't, but just rough proportion of what's in there?

Well, yes, I'm going to dodge that one a little bit, Jeff, but let me just say they are both significant.

Okay. And in terms of the -- coming into funded backlog, I think that the phrasing was they will start to come into backlog. I mean, can you give us some swag at how quickly that's going to play into the backlog?

Yes. Just a reminder that we talk about funded backlog. So it's a question of the funding profile on each of these programs. But the reality is that will be pretty significant in the quarter that we're in currently. I don't think that I can say a whole lot more than that at this point.

Okay. And Steven, on the cost structure, I was just unclear. I think you referenced there were some unusual in there. Obviously, R&D has bumped up considerably over the last few quarters. I'm trying to understand what the steady state OpEx levels are going forward. So just what was in there this quarter that was one time and not...

Well, we -- in the general operating expenses, we still have investments that we're making into. Colorado is the largest piece of that. And once that's done, it should normalize pretty much. That was one of the larger piece of it.

And so when you say normalize, are we going to go up from this level as we go forward into future quarters? Or was there unusual in here and we should step down from here?

Well, again, operating expenses in general, unfortunately, there's always some bump, whether it's 3%, 4%, 5% based on just the normal growth of normal expenses. So I don't see any -- unless something changes, I don't see a large increase, but I don't see a large decrease.

Okay. Maybe last for me. Tom, on -- with respect to TURbO, I know you had given some color commentary in a few prior quarters that you felt it had the potential to go from a couple of million to maybe $20 million in the out year, if things go right. Just your updated thinking on TURbO, based on market reception, pipeline, et cetera?

I think, if anything, we're more optimistic about TURbO. We're beginning to see significant revenue at this time. And every indication is that this is going to grow dramatically over the next -- even over the next couple of quarters and definitely over the next couple of years.

Our next question comes from [ Chris Bokosky ], Private Investor.

And congratulations on the new wins. Could you clarify what exactly is the proliferated satellite? Is that the Starlink type satellite? I'm not asking if it's Starlink or not, just if it's that type of satellite?

Yes, yes. It's actually a pretty good question. I'm not sure I really like that term proliferated satellites, but it is 1 that is being used out there. I think the distinction we're trying to make is between what we call traditional satellite systems where there may be 3 to 5 satellites in a constellation, oftentimes in geosynchronous orbits versus these newer satellite systems that are being envisioned at this point in time. Often but not always in low earth orbit, but consisting of many, many more satellites typically from 300 to in some cases, many thousands and SpaceX is now talking about a constellation of 1 million satellites.

And -- but I think the real distinguishing feature is that the thought process that goes behind these systems, what's become very clear recently is that satellites are vulnerable from our enemies. And this has been demonstrated recently that both the Chinese and the Russians in particular, have the capability to destroy other satellites. And when we have a satellite system that has only a couple of satellites in it, if one of those satellites gets destroyed, it's a huge loss for us, it can represent billions of dollars, in fact.

So the idea is instead of having a couple of satellites worth $1 billion each, to have a system where there are many more satellites, but the individual satellites are much, much less costly. So the simple way I like to look at it is that the system itself may overall cost the same amount of money. But instead of those costs being distributed over a few satellites, 3, 4, 5 satellites, is distributed over 300 or 1,000 satellites. So in order to make that approach work, obviously, the individual satellites have to cost a lot less. So that's what we end up looking at.

We look at individual satellites, the contribution that we make in a product to an individual satellite has to cost a lot less than what we would deliver for one of the traditional satellites. And then, of course, another important feature is that if you're going to launch 300 satellites instead of 3, you need to do it at a much more rapid pace than as necessary for the 3 satellites. So the production rate has to increase dramatically.

So this lower cost and more rapid production makes for a significantly different manufacturing approach than with traditional satellites. But one of the things -- so we are actually investing in order to really get involved in a very significant way in this new kind of satellite business. One of the attractive features is that on an ongoing basis, many of these systems are envisioned to have just a continuous ongoing production of satellites. The idea is that the individual satellites are intended to have a shorter lifetime instead of 15 years for traditional satellites, maybe 3 to 5 years for the newer satellites. And so we get into a production mode, where we are delivering on a scheduled basis, say, the first 300 satellites in a 300-satellite system. But as soon as we're done delivering the 300 satellites, we have to start all over again. Because the first satellites that were launched are nearing the end of life and have to be replaced with new ones.

So it makes for potentially a much more continuous kind of production. And that's something that we think makes for a much more predictable business and it's also in many ways a more attractive business than the traditional satellites where we would have a large scale production activity over a couple of years. And then when we're finished with 3 or 4 satellites we're done perhaps for the next decade until people are talking about potentially replacing those satellites. So anyway, it's probably a more long-winded answer than you wanted, but let me leave it at that.

That was very appreciated. Please feel free to be as long winded as you want. So it seems like there will be some headwinds -- some tailwinds for gross margin. I'm sure having continuous production would really help gross margins, but then having a new satellite program with -- which requires limited cost that might hurt gross margins. So do you have -- do you think you'll be able to keep your gross margins on this new proliferated satellite program? And is there going to be like a learning period where gross margins will be lower?

Yes. So that -- it's a good question. It's something we've talked about on previous calls. I think we do anticipate in the short run, somewhat lower gross margins on the proliferated satellite business as it gets refined in the initial years. But at the same time, and it's really one of the things we're trying to emphasize today is that the traditional satellite business is still alive and well. And that is a business that our gross margins are very strong. So whereas we have to invest to some extent in the proliferated satellites, we have really good gross margins with the traditional satellites. And I also want to emphasize that in the long run, we anticipate very strong margins for the proliferated satellite business as well.

Okay. And you mentioned that in this current quarter, things are going -- this $45 million, some of it is going to the funded backlog. Are you allowed to tell us when actual production would start.

I -- that's something, I think, not prepared to get into. It's a very early stages of these programs and the schedules are being worked out now with our customers.

Next question is from [ Michael Eisner ], private investor.

Congratulations on the 2 contracts and future contracts. Most of my questions are answered. Can you comment on Golden Dome?

I don't think there's a whole lot I can say. From our point of view, Golden Dome is just sort of being defined at this point in time. We have spoken specifically in the past and earlier today, about some of the programs, Patriot Missile and THAAD, which I think are in some ways of thinking considered part of the Golden Dome concept. We are also involved in several other missile programs, which we can't talk about in specific. But we're very, very involved in a number of things that are part of the Golden Dome concept. And of course, the satellites are also a very, very important part of the Golden Dome concept, and we're very involved in that also. But other than that, Michael, I don't think I can really get into any specifics.

Frequency Electronics has been around 60, 70 years and Frequency are a nice name, good name, respected name. But did you ever think of adding to frequency, maybe frequency quantum sensing, for example, or timing, what the company actually does?

Yes, sure. We have thought about it. There have been all sorts of suggestions along the lines that you're suggesting right now and quite a number of other ones also. We -- yes, I don't think I want to say a whole lot more than that. But at the moment, we're sticking with the 65-year-old name that we have.

I just thought because there's so much in Frequency from years ago, there is so much more now. And we keep -- it sounds like on this call, we're getting involved with more stuff in technology, a technology company? That it's a technology company.

The one thing I'll say. We've given some thought to this kind of thing, and I'm not going to say one way or the other what the future will bring. But I think there's -- we've just been talking about it. There's a tremendous amount of business that we're looking at, at this point in time, and we're anticipating very, very significant growth. And I think the important thing to do is concentrate on executing that business effectively. And so that's what we're focusing on. And we feel that's way more important than the name we provide to the company.

[Operator Instructions] We have a follow-up coming from Jeff Van Rhee with Craig-Hallum.

Just a few from me guys. The -- in terms of the script, Steven, I might have missed it. I thought you had said you had some bookings pushouts, and I didn't quite catch it. I think you said Q1 went to Q4. Just recap that for me. And then, Tom, you -- I know you've been talking about $100 million backlog you thought in the relatively near future. It sounded like slightly different verbiage here, so maybe it's not quite as near as you thought it had been. Just connect those 2 dots for me and help me understand what's going on there.

Well, I think that, again, we can't really get into quantitative specifics. But I do think that the $100 million mark is going to be breached relatively quickly. I think just the -- so what we talked about today, the numbers we -- our backlog is up from what it was last quarter slightly. And we just announced today $45 million of new contracts, and that's going to be hitting the backlog, beginning to hit the backlog this quarter and there's more in the input pipeline. So we're very quickly approaching the $100 million mark.

Yes. Understood. And just back to the original question. Steve, did you reference contracts pushing out from Q1 to Q4? And if so, can you expand on that?

No. I said they pushed from Q3 to Q4, and that's why some of the revenue was down a drop because of that. That's all.

Yes. I think the -- and very specifically, the contracts that we just announced. One of the frustrating things in the satellite business is our wonderful government. They like to get their satellite hardware as quickly as possible, but they're not so fast in executing contracts.

Next question comes from Robert Smith with Center for Performance Investing.

I just wanted to congratulate you, Tom, on your transforming this company and positioning it for future growth. And I'm hopeful that you can continue to execute, and I think you're doing a wonderful job, and kudos to you. Grateful to be aboard.

I appreciate it, and we'll do our best.

Our next question, we have a follow-up actually from [ Chris Bokosky ], a private investor.

I wanted to ask you if you can have -- expound a little bit on the alternative position and navigation. Now obviously, there's GPS jamming all over the place. And how do you help address that and would that lead to your devices being actually deployed in kind of the -- in the terrestrial in the boats and cars and so on.

So okay. The -- for alternative navigation, there are dozens or more things that people are considering. I think it's maybe worth just a little bit of discussion about this. The -- we all have come to depend on GPS, global positioning system over the last couple of -- but the one thing that distinguishes GPS is the G part of it, the global. It's available literally any place on the surface of the earth. And when people talk about alternatives to GPS, sometimes they talk about other satellite navigation systems which are potentially also global in reach. But in general, people like to talk about things that are not satellite systems. The whole idea is that the satellite global positioning system is vulnerable. The satellites can be destroyed or damaged by our enemies in particular, and also the signals can be jammed. And if you just replace one satellite system with another satellite system, you have essentially the same problems with -- that you had with the original system.

So people talk primarily about non-satellite alternatives. And in general, the non-satellite alternatives are not global in reach. And that means that if you're not talking about systems, usually when you talk about alternatives, you're talking about employing multiple approaches to navigation. So one alternate may work in a particular environment, say, an urban environment. And another approach will work over the ocean or in the middle of the desert someplace.

So what -- with all of that preliminary being said, there are a couple of things that we're involved in and think are going to become important over the next couple of years and probably over the next decade. So one of them that we're working on very actively right now is a so-called magnetic navigation. And the idea here is that the magnetic field around the surface of the earth, is not exactly constant. It varies by small amounts and the exact magnetic field and direction is location sensitive.

So if you have a very accurate map of the magnetic field in a region on the surface of the earth then you can -- and you have a means of measuring the magnetic field, then you can compare your measurements to the magnetic map and locate yourself with really quite precision. Probably not at this point in time with the same precision that we get from GPS. But under the right conditions, it can be pretty close to that.

So that's something that we're pursuing. We're pursuing the magnetometer end of this, the sensor for measuring the magnetic field. And of course, that by itself isn't going to allow you to navigate. You also have to have the magnetic maps, which, by the way, is something that we are looking at helping to improve the magnetic -- the existing magnetic maps of the surface of the earth.

Another thing that -- another alternative to GPS that is considered is really a similar kind of concept, but you can imagine using a combination of fixed terminals on the surface of the earth or -- and drones. And those fixed terminals and drones effectively act as a mini GPS system. So the drones are equivalent to the GPS satellites. In a localized area that kind of configuration provides a means of very, very precise localized navigation.

So these are just a couple of things that Frequency Electronics is actually involved in terms of alternative navigation. There are, of course, many other things that people talk about. Various detecting radio frequency signals from radio stations and using that. There's inertial navigation and various other things. So I'll just leave it at that for now.

And would -- are you getting any revenue right now? I guess production revenue will be a couple of years out?

Well, yes, we are because the U.S. government is very interested in developing these technologies and their funding development activities -- and so we're getting revenue from those development funds. But we anticipate over the next decade, instead of development revenue, turning that into product-based development product-based revenue, excuse me.

The next question is from [ Sam Nelson ], private investor.

I was just trying to get a better idea of -- with the new contracts, how that award might ultimately flow through the backlog. I think on previous calls, you described how ultimately the impact might be like 10x the initial value that's realized on the backlog. And -- just to clarify, I was wondering if we could look at these new contract awards in a similar way where the initial realized amount of the contract that's falling in backlog -- could we 10x that or what might the impact ultimately be?

Yes. I think without making specific kind of statements, that 10x approximation, I think, is reasonably valid here. It's -- the contribution to backlog depends on the initial funding on these contracts. And yes, so something along those lines. Again, not providing specific guidance.

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

Okay. Thank you for taking the time to listen and participate in today's earnings call, and we look forward to providing further updates in the coming months. Thank you.

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

Greetings, and welcome to the Frequency Electronics Second Quarter Fiscal 2026 Earnings Release Conference Call. [Operator Instructions] 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 Second Quarter Fiscal Year 2026 Earnings Call. With me today is our Chief Financial Officer, Steve Bernstein.

On our first quarter fiscal 2026 earnings call in September, I discussed 2 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 6 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. Steve 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 to 2 hire 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 upon, 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 our fiscal year-end in April as we continue to book new business that is funded. Many of the contracts we signed have initial funded portions, which are only a fraction of the full of the full contract award with additional funding that comes later in the course of the contract, meaning that the funded backlog we show is conservative relative to our bookings and that existing contracts can continue to contribute to backlog in the years to come. While backlog in any given quarter can fluctuate based on newly funded awards and what is converted into revenue in a given quarter, based on what we are seeing coming down the road. We believe it's reasonable that we could see backlog north of $100 million in the not-too-distant future.

Critically, this growth in backlog that we're describing is coming from our strong existing business. We know that many of you are excited for the growth prospects that we have coming in the future in large and growing end markets such as quantum sensing, proliferated satellites and alternative position, navigation and timing or ALT-PNT programs. We share that optimism and expect to participate meaningfully as these sectors expand.

Critically, while these white space opportunities are much larger than our historical markets, we're not standing around waiting with nothing to show for it in the interim. These new markets will be additive to what is already a strong and growing current business as evidenced by our strong performance this quarter and the growth in funded backlog. We anticipate multiple awards in the coming months, some of which are as large or larger than the biggest ones we have historically announced. This is today's core business, which itself has years of profitable growth potential and upon which the future growth opportunities in quantum sensing, magnetometers and other ALT-PNT, and timing solutions as well as proliferated satellites will be additive. In other words, we can be a substantially larger company in the years to come as we layer new growth opportunities, which are built upon our industry-leading capabilities on top of a strong and growing core business.

It's exciting to work with some of the next-generation defense companies, and they will be part of our growth story, especially in new technologies. At the same time, our long-standing strategic partnerships with the major prime contractors are also very important for our current and future business. and we have advantaged positions with them on many programs because of our technological capabilities. In multiple cases, we are sole source providers, and we're often the partner of multiple primes competing for the same government programs, meaning we can win regardless of whom the government selects as the prime on a given program.

Turning to space. This means a significant and expanding market for us. We've been participating in the space business for decades, and we see a long runway of growth ahead. For example, the U.S. Space Force recently launched Navigation Technology Satellite 3, known as NTS-3, experimental navigation satellite, a major milestone aimed at advancing more resilient next-generation PNT architectures. Our technology is onboard this satellite and underscores the strategic relevance of the solutions that the FEI provides.

We also have a strong and growing defense business that is booming, and which we envision growing sharply for many years to come. On our last call, we highlighted the number of the critical multi-domain defense systems we're involved with. We anticipate much continued growth from these programs as well as new ones. Just last week, the Missile Defense Agency announced it has begun Phase 1 of awarding contracts for the Scalable Homeland Innovative Enterprise Layered Defense program, otherwise known as Shield, which is part of the Golden Dome initiative. We anticipate our technology being part of multiple bid winners programs.

Defense spending continues to increase, particularly in missiles, munitions and other modernization initiatives. As an example of rapidly increasing scale. Last week, the Pentagon announced plans to procure 200,000 drones by 2027. While not all of those require high-end precision timing. This illustrates the magnitude of modernization underway and the breadth of defense and space technology initiatives we will participate in.

As we've shown over the past few quarters, the path there is not likely to be linear on a quarter-to-quarter basis, but the underlying strength in our core business and the growth prospects in our new areas support a consistent multiyear up into the right trajectory from a market share leader with growing strategic importance in its industry. We look forward to continuing to demonstrate this in the quarters and years to come.

Two final notes on scheduling before I turn things over to Steve. Out of respect for our friends in the federal government, who could not attend our previously scheduled quantum sensing conference in October due to the government shutdown. We moved the conference to January 14 to 16 in New York City. We have an excellent agenda that will cover quantum policy, multiple military missions that envision utilizing quantum technology, application research from leading national and academic labs, as well as updates on clock and oscillator applications. We look forward to hosting this event next month, and gathering many of the leading players in the industry, many of whom we're already working with to build out our quantum future. Additional details related to this event are available on our website.

In addition, we look forward to meeting with many of you at the Needham Growth Conference in New York City in January. And now I'll turn the call over to Steve to provide some more financial details, and I look forward to taking your questions during the Q&A session following Steve's remarks. Steve?

Thank you, Tom, and good afternoon. For the 3 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 U.S. 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 payer contracts are recognized primarily under the percentage of completion method and are recorded only in the FEI-New York segment.

Revenue from non-space U.S. government and Department of Defense customers which are recorded in both the FEI-New York and FEI-Zyfer 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 revenues were approximately $560,000 compared to approximately $591,000 in the prior fiscal year. Revenue for the 3 months ending October 31, 2025, was higher than revenue to prior fiscal period due to an increase in non-space Department of Defense products in the FEI-Zyfer segment. This increase was in both shipment-based products as well as products accounted for under the percentage of completion method.

For the 3 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 3 and 6 months ending October 31, 2025. We demonstrated meaningful operating leverage in the business as compared to Q1. Our gross margins will often have some variability depending on the shipments in a given quarter where the amount of new engineering development for as repeat business throughout a period. But we remain committed to ongoing improvements in profitability across our business. We have made excellent strides in this regard in the past few years, and it continues to be an area of emphasis.

For the 3 months ended October 31, '25 and '24, selling and general and administrative expenses were approximately 21% of consolidated revenues, the increase in SG&A expense during the 3 months ending October 31, '25 was due to the fluctuation in the various expense accounts that make up SG&A. R&D expense for the 3 months ending October 31, '25 decreased to approximately $1.2 million from $1.6 million for the 3 months ended October 31, '24, a decrease of approximately $400,000 and were approximately 7% and 10%, respectively, of consolidated revenue.

Fluctuation in R&D expenditures will occur in some periods due to current operational needs supporting ongoing programs. The company plans to continue to invest in R&D in the future to keep its products at the state-of-the-art. For the 3 months ending October 31, '25, the company recorded operating income of approximately $1.7 million compared to operating income of approximately $2.6 million in the prior fiscal year. Operating income decreased due to lower gross margin and increased SG&A as described above.

Other income expense net is derived from various sources, the majority of the approximately $0.2 million of investing income for the 3 months ended October 31, '25, was from interest income and unrealized gain on assets held in the frequency electronics deferred account trust. These yields are pretax income of approximately $1.8 million for the 3 months ending October 31, '25, compared to an approximately $2.7 million pretax income for the 3 months ending October 31, '24.

For the 3 months ended October 31, '25, the company recorded a tax benefit of $31,000 compared to a tax provision of $139,000 for the same period of the prior fiscal year. Consolidated net income for the 3 months ending October 30, '25 was approximately $1.8 million or $0.18 per share compared to approximately $2.7 million or $0.28 per share for the same period of the previous fiscal year. Our fully funded backlog at the end of October '25 was approximately $82 million compared to approximately $70 million for the previous fiscal year ended April 30, '25.

The company's balance sheet continues to reflect a strong working capital position of approximately $31 million October 31, '25 and a current ratio of approximately 2.6:1. Additionally, the company is debt free. The company believes that its liquidity is adequate to meet its operating and investing needs for the next 12 months and the foreseeable future.

I will turn the call back to Tom, and we look forward to your questions later.

Thanks, Steve. We're now ready for any questions.

[Operator Instructions] The first question comes from George Marema with Pareto Ventures.

I have 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 the frequency kind of component and system content and quantities opportunity in that program?

Yes. I don't think I can provide a whole lot of details. 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, their ground-based missiles. And as we've discussed previously, we're already very involved in both Patriot and FAD programs. But of course, one of the big things that is being pursued in Golden Dome is 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 anticipate that we will be involved in that in a very significant way in the near future. Yes, 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?

Sure. So we talked about that a little bit last quarter. I think we -- 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 a -- 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 that's there in Colorado. And we have established some cooperative research and development arrangements or creators 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, et cetera. So we're pretty excited about the Colorado set up. We have a really talented group of people working there. And of course, we anticipate that we just in case you weren't aware, this is the Colorado, the Boulder, Colorado area, is a focus of precision, time and frequency technology with 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 yes, that's pretty much the story at this point.

The next question is from [ Chris Bakosky ] with -- I'm sorry, he's a private investor.

Congratulations on resuming growth, so you talked about how -- because this past quarter, you had more work in non-space-related military applications where your products, your work was apparently required more investigation and more R&D, the margins were lower. It seems logical that if you continue doing that work the investigations will -- less investigations will be required than 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 -- well, 1 of the major factors was that 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 we expect those to be quite profitable.

As always, we have a mix of things when we do development, and we are involved in some new development programs, in particular, in some advanced missile technology. We do anticipate some lower margins. But yes, anyway, I think that is what I would say.

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

Well, that's correct. I think that the -- 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. Those -- now that the shutdown is over or those programs restarting have they restarted at all?

Yes. 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. And it was really because of that, that we were put on hold on several programs and it was necessary for our customers to figure out what they really wanted. In terms of performance requirements.

What I will say about the shutdown, 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 hasn't happened yet.

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

That's correct. That's absolutely correct. Now I should point out in that regard, and I tried to in the opening remarks, I tried to point this out. When we get awarded a new contract, we will 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 $1 million initially, we would add $1 million 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's always a potential for more kind of issues in that regard in the future. But I think in particular cases, referring to here, those issues have been resolved.

All right. And have new contracts started new funding started to appear after the shutdown? Or are they still trying to figure -- trying to catch up?

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

All right. And I guess the major question, I was trying to get to in a roundabout way is, 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. All right. Congratulations again.

The next question is from Jeff an Rhee with Craig-Hallum.

Several from me guys. Congrats, first of all. But Tom, if you talk to this, the size or relative size of the initial awards versus the scope of potential follow-on awards. You called it out in your open transcript as abnormal. I know you won't give us an actual part number, but can you at least give us a ratio? Does the initial order is $1 and the subsequent orders usually $2? Are we talking now initial orders of $1 and follow-on orders are at $4? I mean what's the scope of the increase that you're speaking to?

So yes, 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 will be funded for 3 satellites with options for additional satellites, perhaps options to provide products for satellites 4, 5 and 6. So -- but the initial contract is just for the initial 3 satellites. And so that's 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 3 satellites. So that's hopefully clarifies that to some extent.

Okay. I'll leave that there. And the incremental backlog, I mean, still all else the same, 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're seeing a big uptick in backlog for non-space defense, products that 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 is likely to reverse, and we'll see that in space.

Got it. That's helpful. And then, Steve, the -- 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 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 be 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 will stay flat to going up a drop. But I think take time to go back to where you saw it in the prior year.

Okay. And then, Tom, on Turbo. I think last quarter probably wasn't the first time, but I know you 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 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. We are seeing a lot of enthusiasm and activity our Turbo product. And I think, yes, we see the near term 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.

Yes. Yes. And then maybe last for me, the -- 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 does it take meaningful hiring? Does it take meaningful CapEx? Just talk about the ability to address the growth without meaningful incremental spend?

Yes, 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, we -- 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 we -- facility wise, we are in good shape. I think we were 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.

Yes, for sure. Yes. I mean given the backlog and the other commentary, I mean, just a lot of full momentum here, so congratulations. Lastly, and then just, Tom, you talked on -- in answer to a prior question, I think about the revenue that had pushed out, whereby you've done the right thing for the customer and they respected 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.

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

Next question is from [ Michael Eisner ], Private Investor.

Great job on the backlog. Was any of that new contracts? Or was that just the release of from the funding?

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

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

Yes, actually, I do. is 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 hire, took away from our earnings, but now will come back in the third quarter.

Yes. We -- they are actively contributing to externally funded R&D programs at this point in time. And so that is a positive contribution.

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

Yes, you are.

All right. Thank you very much. Great job.

Okay, Michael. Thanks.

Next question is from Brett Reiss with Jenny Montgomery Scott.

Tom, Steve, 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. The -- 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 if there's a change of command in the next election, what -- does all of that disappear. I don't think so.

So there are kind of 2 important things. I think when 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 it's analogous to artificial intelligences. It's not primarily driven 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 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 -- and 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, those are -- that's a question that we have to keep asking ourselves and pay attention to as we go forward.

Right. Your answer is music to thy ears. Have a good holiday.

The next question comes from George Marema with Pareto Ventures.

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 the -- potentially in both commercial and military, but I think in the near term, we would anticipate more in military. I think that we have to keep in mind that -- and I tried to say this in the initial remarks, the huge, huge numbers of drones 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 so-called comatose drones that are going to fly once and be destroyed in the initial mission. It is unlikely that our products are going to be part of those kind of drones. I've seen recent things where their price tags for those drones of a few thousand dollars, and so it's hard to see our products participating in those cases. But 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, et cetera, about putting data centers in space. There seems to be a big push coming up in that. And I was wondering a frequency, 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 how we have to be a little bit careful because I don't think we're going to be seeing data centers and 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 and space become a reality, I think we definitely anticipating being a participant in that.

Up next is William Bremer with Vanquish Capital.

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. We -- of course, the -- 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 we -- most of our products there are export controls involved, and 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 kind 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 they -- there are several things that are going on at this point in time in the defense industry in the U.S. there's strong emphasis using only domestic sources. This helps us in obtaining business with the U.S. Defense Department. At the same time, we see sort of similar thing in Europe, in particular, where there is a strong emphasis on using European suppliers instead of U.S. suppliers. So that's just a couple of thoughts on that topic, hopefully, sort of answers your question.

No, it does. And I apologize, the doorbell and my dog. So -- but happy holidays, everyone, and keep up the good work Tom.

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 a 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.

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-Zyfer segments were $6.9 million compared to $6.3 million in the same period of the prior fiscal year and accounted for approximately 50% of consolidated revenues compared to 42% for the prior fiscal year.

Other commercial and industrial revenues were approximately $439,000 compared to approximately $544,000 in the prior fiscal year. The revenue for the 3 months ending July 31, '25, is lower than expected due largely to several externally imposed program delays, which halted work on the affected programs. Importantly, these delays are not expected to result in overall program revenue reductions and the revenue shortfall from the first quarter of fiscal '26 is expected to be made up in the upcoming quarters, predominantly in this fiscal year.

For the 3 months ending July 31, '25, both gross margin and gross margin rate decreased compared to the same period in the prior fiscal year. The decrease in gross margin was primarily due to the decrease in revenue and the decrease in gross margin rate was attributable to quarterly fluctuations in the mix of business activity between higher-margin programs and lower-margin programs. As we have stated in the past, gross margin on the manufacture of existing products are generally high, whereas gross margin on development efforts and new products are typically lower.

For the 3 months ending July 31, '25 and '24, selling, general and administrative expenses were approximately 26% and 19%, respectively, of consolidated revenue. The increase in SG&A expense during the 3 months ending July 31, '25, was primarily related to onetime expenses related to investments in the future growth of the company, including expansion into Colorado and quantum sensing and an increase in payroll-related expenses. R&D expense for the 3 months ending July 31, 2025, decreased to approximately $1.1 million from $1.5 million for the 3 months ending July 31, a decrease of approximately $400,000 and were approximately 8% and 10%, respectively, of consolidated revenue.

Fluctuation in R&D expenditures will occur in some periods due to current operational needs supporting ongoing programs. The company plans to continue to invest in R&D in the future to keep its products at the state-of-the-art. For the 3 months ended July 31, '25, the company recorded operating income of approximately $364,000 compared to an operating income of approximately $2.4 million in the prior fiscal year. Operating income decreased due to lower revenue and gross margin, as previously mentioned. Other income expense net is derived from various sources. The majority of the approximately $200,000 investment income for the 3 months ending July 31, '25, was from interest income and unrealized gains on assets held in the Frequency Electronics deferred comp trust.

This yields a pretax income of approximately $556,000 for the 3 months ending July 31, '25, compared to an approximately $2.6 million pretax income for the 3 months ending July 31, '24. For the 3 months ending July 31, the company recorded a tax benefit of $77,000 compared to a tax provision of $133,000 for the same period of the prior fiscal year. Consolidated net income for the 3 months ending July 31, '25, was approximately $634,000 or $0.07 per share compared to approximately $2.4 million or $0.25 per share for the same period of the prior fiscal year.

Our fully funded backlog at the end of July 25 was approximately $71 million compared to approximately $70 million for the previous fiscal year ended April 30, '25. The company's balance sheet continues to reflect a strong working capital position of approximately $30 million at July 31, '25, and a current ratio of approximately 2.3:1. Additionally, the company is debt-free. The company believes that its liquidity is adequate to meet its operating and investing needs for the next 12 months and the foreseeable future. I will call -- turn the call back to Tom, and we look for your questions shortly.

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.

Thank you. This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.