Exchange: NASDAQ | Sector: Technology | Industry: Communication Equipment
Q3 2025
Published: Mar 17, 2025
Earnings Highlights
Revenue of $18.93M up 38% year-over-year
EPS of $1.60 increased by 11% from previous year
Gross margin of 43.8%
Net income of 15.41M
"The magnetometer is a device to measure the magnetic field. And that is getting a lot of interest at this point in time because it can be used in GPSâdenied environments to perform navigation... Another major use of magnetometers is in soâcalled Magnetic Anomaly Detection, or MAD. And one of the main purposes for this is detection of submarines. The other quantum sensor that we're interested in is soâcalled Rydberg sensor... the size of the antenna is completely decoupled from the wavelength. And so, we can use a small cell, maybe one centimeter cube to detect the signals." - Thomas McClelland
Frequency Electronics Inc (FEIM) QQ3 2025 Results: Strong TopâLine Momentum, Backlog Conversion, and Quantum Sensing Aspirations in Technology & Defense Markets
Executive Summary
Frequency Electronics (FEIM) delivered a robust QQ3 2025 quarter with revenue of $18.9 million, marking the highest quarterly revenue for FEI in a decade, supported by an historically high backlog of approximately $73 million. Gross margin remained strong at 43.8%, and operating income stood at $3.47 million, contributing to a nineâmonth revenue run rate of $49.8 million and an improving profitability trajectory, aided by a significant space program milestone and mix shifts toward higherâmargin, government and space related work. Notably, net income for the quarter was $15.4 million, aided by a discrete tax benefit related to the utilization of net operating losses; the nineâmonth period ended January 31, 2025 shows a consolidated net income of $20.5 million. FEIM is also advancing its strategic agenda in quantum sensing and proliferated satellite initiatives, including magnetometer and Rydberg sensor developments, though no standalone product has yet been commercialized and revenue in calendar 2025 from these programs is not yet assured. The company remains debtâfree with a healthy current ratio (~2.2x) and a cautious stance on Washington policy timing, expecting some programs to be pushed or reprioritized, but maintaining conviction in a longerâterm growth runway tied to larger addressable markets. Management emphasized a disciplined investment approach, ongoing R&D, and a workforce that is highly engaged in meeting ambitious milestones.
Net Income: $15.405 million; net margin 81.39% (0.8139) for Q3, largely driven by a discrete tax benefit.
Financial Highlights
Revenue and profitability snapshot:
- Revenue (quarter): $18.927 million; YoY change +38.01%, QoQ change +19.64% (per reported metrics).
- Gross Profit: $8.285 million; gross margin 43.77% (0.4377).
- Operating Income: $3.469 million; operating margin 18.33% (0.1833).
- EBITDA: $3.607 million; EBITDA margin ~19.06% (0.1906).
- Net Income: $15.405 million; net margin 81.39% (0.8139) for Q3, largely driven by a discrete tax benefit.
- Earnings per Share (EPS): $1.60 (diluted) on 9.632 million weighted average shares.
Nine months ended Jan 31, 2025 highlights:
- Consolidated revenue: $49.8 million vs. $39.7 million prior year period.
- Net income (nine months): $20.5 million or $2.18 per share (prior year: $3.0 million or $0.32 per share).
- Fully funded backlog: approximately $73 million (vs. $78 million prior year end).
- SG&A: approximately 19% of revenue in both nineâmonth periods.
- R&D: $4.5 million in the nine months ended Jan 31, 2025 (about 9% of revenue) vs. $2.3 million (6%) prior year; higher spend driven by modernization initiatives and quantum exploration.
- Cash flow: Net cash provided by operating activities negative at $(3.63) million; free cash flow negative $(3.95) million; cash balance end of period $6.87 million; company is debtâfree with a current ratio ~2.2x.
Backlog and revenue quality:
- Revenue growth largely reflects a large space program milestone and backlog conversion; management indicated ongoing expectation of additional units and successor programs contributing in the near term. The quarter was characterized by a favorable mix toward U.S. government satellite programs and highâmargin nonâspace DoD/legacy work. Management noted that quarterly results can be variable due to government program timing, but the longerâterm trajectory remains positive given exposure to proliferated satellites and quantum sensing opportunities.
Income Statement
Metric
Value
YoY Change
QoQ Change
Revenue
18.93M
38.01%
19.64%
Gross Profit
8.29M
166.91%
8.74%
Operating Income
3.47M
833.40%
32.51%
Net Income
15.41M
11 750.00%
480.44%
EPS
1.60
11 494.20%
471.43%
Key Financial Ratios
currentRatio
2.19
grossProfitMargin
43.8%
operatingProfitMargin
18.3%
netProfitMargin
81.4%
returnOnAssets
17.8%
returnOnEquity
29.7%
debtEquityRatio
0.1
operatingCashFlowPerShare
$-0.38
freeCashFlowPerShare
$-0.41
priceToBookRatio
3.11
priceEarningsRatio
2.62
Net Income vs. Revenue
Expense Breakdown
Management Commentary
Key management themes from the QQ3 2025 earnings call:
- Strategy and growth trajectory: Thomas McClelland emphasized FEI's positioning in proliferated satellite markets and quantum sensing as a pathway to higher revenue and profitability, noting potential faster growth over the medium term as programs come on line. He highlighted ongoing engagement with government space programs and the prospect of revenue from development contracts in the near to medium term.
- Quantum sensing roadmap: In detailing quantum sensing, McClelland described magnetometer and Rydberg sensor initiatives as nearâterm priorities, with potential applications in GPSâdenied navigation and wideâband reception. He explained the advantages of Rydberg sensors in miniaturizing antennas independent of wavelength, a core enabler for compact, highâperformance systems.
- Financial momentum and mix: CFO Steven Bernstein outlined the revenue mix, including satellite program contributions (~58% of nineâmonth revenue) and nonâspace DoD/other customers (~39%), with SG&A ~19% of revenue and R&D around 9% of revenue in the nine months. He also highlighted a substantial discrete tax benefit (net income for the quarter substantially boosted by taxes) and the companyâs status as debtâfree with ample liquidity.
- Backlog and outlook: Bernstein confirmed a fully funded backlog of about $73 million, down modestly from yearâend levels, and a cautious but constructive view on nearâterm execution given Washington policy uncertainties and possible program timing shifts. The CEO reiterated that FEI expects continued revenue and profitability improvement, albeit with variability by quarter.
The magnetometer is a device to measure the magnetic field. And that is getting a lot of interest at this point in time because it can be used in GPSâdenied environments to perform navigation... Another major use of magnetometers is in soâcalled Magnetic Anomaly Detection, or MAD. And one of the main purposes for this is detection of submarines. The other quantum sensor that we're interested in is soâcalled Rydberg sensor... the size of the antenna is completely decoupled from the wavelength. And so, we can use a small cell, maybe one centimeter cube to detect the signals.
â Thomas McClelland
Our fullyâfunded backlog at the end of January 2025 was approximately $73 million compared to approximately $78 million for the previous fiscal year end.
â Steven Bernstein
Forward Guidance
Guidance stance: FEIM did not publish formal numeric forward guidance for QQ4 2025 or fullâyear 2025 in the call materials. Management conveyed a cautious but constructive outlook based on:
- A historically high backlog and recent revenue acceleration driven by a large space program milestone and backlog conversions.
- The development of quantum sensing products (magnetometer and Rydberg sensor) with potential development contracts in the next year or two, which could begin to contribute revenue over the medium term though no definitive product revenue is expected in calendar 2025.
- Ongoing investments in R&D to maintain stateâofâtheâart products and a plan to commercialize select quantum/space sensing capabilities in the coming years.
- Washington policy variability: some programs may be delayed or reallocated; FEIM intends to remain selective and efficient in bidding and program execution.
Assessment: The lack of explicit numeric guidance suggests investors should model scenarios around: (1) continued revenue contribution from a large program and legacy DoD/satellite work, (2) potential, but not guaranteed, revenue from quantum sensing development contracts starting within 12â24 months, and (3) ongoing fluctuations in cash from operating activities as the company manages timing of billings and program milestones. Key indicators to monitor include quarterly backlog progression, timing of billings vs. revenue under 606 accounting, government funding cycles, and progression toward any FEIM product milestones in magnetometer/Rydberg programs.
Competitive Position
Company
Gross Margin
Operating Margin
Return on Equity
P/E Ratio
FEIM Focus
43.77%
18.30%
29.70%
2.62%
OCC
24.20%
-8.25%
-7.65%
-3.42%
KVHI
32.00%
-6.87%
-0.84%
-19.57%
KN
44.10%
13.10%
0.06%
799.63%
CMTL
26.30%
1.54%
0.49%
4.85%
Gross Profit Margin
Operating Profit Margin
Return on Equity
P/E Ratio Comparison
Investment Outlook
Base case: FEIM sustains a revenue trajectory supported by a strong backlog and execution of the larger space program, with incremental revenue from quantum sensing development contracts beginning to contribute in the medium term. Margin resiliency should improve as the mix remains weighted toward highâmargin government/space programs, but nearâterm cash flow remains sensitive to working capital movements and timing of billings. Valuation appears reasonable relative to some peers given FEIMâs growth optionality in quantum sensing and proliferated satellites, though the stock could trade with higher volatility given the reliance on government programs and the lack of immediate product revenue from FEIMâs quantum roadmap. Bulls argue FEIM could capture larger share of the SDA pipeline and related programs, while bears caution on the pace of quantum tech commercialization and Washington policy uncertainty. Investors should monitor backlog progression, development contract awards, R&D milestones, and cash conversion metrics, particularly operating cash flow and the timing of capitalized investments.
Key Investment Factors
Growth Potential
High upside from proliferated satellite programs (Space Development Agency work) and advancing quantum sensing platforms (magnetometer, Rydberg sensor). Management emphasized backlog strength and potential to convert development contracts into revenue over the next 12â24 months, with the mediumâterm growth path supported by higherâmargin government/space programs and a shift toward higher value add products.
Profitability Risk
Concentration in government/DoD and satellite programs exposes FEIM to policy and funding risk in Washington, including potential program delays or reallocations. Quantum sensing initiatives are at an early development stage with uncertain commercialization timing. Competitive pressure from established players (e.g., Microchip CSAC) in highâreliability, spaceâgrade timing devices remains a factor. Cash flow generation is still volatile (negative OCF in the latest quarter) and the company is investing in R&D and expansion, which may pressure nearâterm liquidity metrics.
Financial Position
Solid liquidity with debtâfree status and a current ratio of ~2.2x. Cash at end of period approx. $6.87 million; net debt is negative (~$0.52 million), indicating a modest net cash position. Fully funded backlog ~ $73 million provides revenue visibility, though some portion may be subject to timing shifts. The nineâmonth period shows meaningful gross margin expansion and improved operating income driven by program milestones and efficiency gains, but free cash flow remains negative in the reported quarter due to working capital dynamics (notably changes in contract liabilities and timing of billings) and a sizable Q2 dividend.
SWOT Analysis
Strengths
High gross margin, demonstrated by Q3 gross margin of ~43.8%
Historically high backlog (â$73M fully funded) with visibility into nearâterm revenue
Debtâfree balance sheet with solid liquidity (cash ~$6.87M, current ratio ~2.2x)
Strategic positioning in highâreliability timing devices for space and defense, including proliferated satellites
Management commentary on engaged workforce and improving operational efficiency
Weaknesses
Nearâterm free cash flow negative due to working capital dynamics and oneâtime dividend impact
Reliance on government and defense budgets; exposure to political/regulatory timing in Washington
No nearâterm standalone FEIM product revenues from quantum sensing; revenue from quantum efforts is developmentâstage
Opportunities
Proliferated satellite programs (SDA and related programs) as a growth vector
Quantum sensing platforms (magnetometer, Rydberg sensor) with potential multiâyear development contracts
Potential collaboration with national labs and teaming opportunities to accelerate product readiness
Expansion into commercial space and highâreliability markets requiring high stability timing hardware
Threats
Program timing risk and potential delays in Washington funding decisions
Competitive pressures from players like Microchip CSAC in the space/defense sensor space
Technological risk and execution risk in transitioning from development programs to commercial revenue
Macro volatility and policy shifts could affect DoD and space program allocations
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