Frequency Electronics Inc (FEIM) Q1 2025 Earnings Report

Revenue: $15.077 million for the quarter, up 21.5% YoY and -3.2% QoQ. Gross profit: $6.698 million, gross margin 44.4% (YoY margin up ~?), QoQ margin stable. Operating income: $2.365 million, operating margin 15.7% (YoY and QoQ comparison: +14.8% margin YoY). Net income: $2.43 million, net margin 16.1% (YoY +19.0%, QoQ -7.4%). EPS: $0.25, diluted $0.25 (YoY +13.6%, QoQ -10.7%). Backlog: funded backlog approximately $70 million at 2024 year-end/backlog as of July 31, 2024; prior-year funded backlog around $78 million. Cash flow: operating cash flow -$1.52 million; free cash flow -$1.847 million; cash balance $17.418 million; net debt position effectively cash-positive (~$10.43 million net cash). Balance sheet: total assets $84.264 million; total liabilities $51.062 million; total stockholders’ equity $33.202 million; current ratio 1.531; quick ratio 0.902; cash ratio 0.419. Growth/valuation metrics: price-to-book ~3.91x; price-to-earnings ~13.35x; enterprise value multiple ~46x (contextual, small-cap microcap with niche end-markets). These figures indicate solid liquidity and a robust margin backbone, albeit at a small-cap, government-facing business that can exhibit lumpiness in revenue and backlog realization.

- Strategy and market positioning: FEI is expanding beyond its legacy, high-margin timing and synchronization products into high-addressable-growth areas, notably proliferated satellite programs and quantum sensors. Management underscored that proliferated satellites and quantum sensors represent large, addressable markets and that FEI has begun to win initial contracts in these newer domains. - Margin execution and mix: CFO highlighted that the Q1 gross margin was the highest in 24 years, driven by stronger revenue mix and efficiency gains, with several smaller, higher-margin jobs contributing to the improvement. The company expects continued margin strength only if core programs remain efficient and if newer programs do not erode margins; management cautioned against assuming a sustained 44%+ margin for all programs. - R&D and SG&A dynamics: R&D rose to about $1.5 million in the quarter (vs. $0.506 million a year ago), partly reflecting customer-funded development and partially FEI-funded activities. Management guided annual R&D at roughly $3–$4 million, with the caveat that quarterly spend will be variable. SG&A ran at ~19% of revenue, with payroll as a primary driver; management expects SG&A to stay relatively steady on a percent-of-revenue basis. - Backlog and visibility: Fully funded backlog stood near $70 million at July 2024 vs. $78 million year-end, signaling robust but cyclical visibility tied to government award cycles. Unfunded backlog remains a qualitative risk area acknowledged by management; FEI does not publish a separate unfunded backlog figure due to its potential volatility. - Growth initiatives and risk: Management described a strategic push into low-cost, proliferated satellites and quantum sensors with external funding support. They also noted collaboration with government and labs for Rydberg sensors and magnetometer-based navigation aids in GPS-denied environments, highlighting the potential for meaningful long-term addressable markets if these technologies scale. - Operational capacity and headcount: The primary capacity constraint identified is talent acquisition; plant and equipment capacity is deemed adequate to support growth in the near term. - Governance and corporate development: The CEO reported not currently serving on FEI’s board, addressing governance questions observed in investor discussions. - Near-term outlook and guidance: The management comment that “revenue, profits and margins should continue to increase going forward” implies an optimistic view of the trajectory, contingent on successful execution in the new programs and stable funding. Quotes emphasizing backlog replenishment and strategic growth were highlighted in the call. (Quotes drawn from the Q1 FY2025 earnings call transcripts.)

FEIM presents a cautiously optimistic investment thesis anchored in a robust liquidity position, a historically high gross margin, and a multi-year growth trajectory driven by strategic pivots into proliferated satellite programs and quantum sensing. The QQ1 2025 results show a strong top-line performance (revenue up 22% YoY to $15.1 million) and a margin expansion to 44.4%, with net income of $2.43 million and EPS of $0.25. The funded backlog of ~$70 million provides meaningful visibility, though the company notes that government funding timing can introduce quarterly variability in orders. Management’s commentary is constructive: the company is not only executing well on its core timing business but also investing in high-potential growth areas and pursuing external funding for quantum sensors, which could unlock sizable long-run addressable markets. The CFO’s emphasis on a planned annual R&D run-rate of about $3–$4 million, with quarterly fluctuations, supports ongoing product modernization while keeping cash usage manageable given FEIM’s cash-rich balance sheet and debt-free status. Key investment considerations include: (1) upside optionality from proliferated satellites and quantum sensing programs that could become material revenue streams if funded and scaled, (2) margin resilience in FEIM’s core business, but with awareness that some newer programs may not realize the same margin profile as legacy work, and (3) execution risk associated with managing growth, workforce expansion, and supplier/partner coordination in a government-driven ecosystem. On a relative basis, FEIM’s near-term gross margins (~44%) compare favorably to several peers in related niches (peers in the provided dataset show a wide margin dispersion, e.g., KVHI at ~33.5%, with others exhibiting lower or negative margins), suggesting FEIM currently benefits from a favorable mix and efficient production on its core programs. Valuation considerations: FEIM trades at ~13x trailing EPS with a price-to-book around 3.9x, reflecting a small-cap, niche supplier with favorable gross margins and optionality in quantum-sensing and proliferated-satellite markets. The stock’s risk-reward is tied to the speed and scale of adoption of the new growth platforms and to government funding stability. Investors should monitor: (i) progress and funding stability of quantum-sensor initiatives and Rydberg-sensor programs, (ii) the rate of funded backlog realization and the timing of new awards, (iii) the company’s ability to attract and retain qualified engineering and manufacturing talent, and (iv) the trajectory of core program profitability as FEI continues to optimize margins in both legacy and new businesses. Overall rating: Neutral to cautiously positive. If FEIM sustains its margin discipline while accelerating funded backlog conversion in proliferated satellites and realizes meaningful revenue from quantum sensors over the next 6–12 quarters, the stock could re-rate higher on improved earnings visibility and a more diversified growth profile. However, the near-term path remains subject to government award timing and the execution risk inherent in commercializing emerging, capital-intensive sensor technologies.