Funko Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
December 12, 2023

There are 11 speakers on the call.

Operator

Greetings, and welcome to the Frequency Electronics Q2 Fiscal 24 Earnings Release Conference Call. At this time, all participants are in a listen only 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 in the company's periodic report filings with the Securities and Exchange Commission.

Operator

By making these forward looking statements, the company undertakes and no obligation to update these statements, 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.

Speaker 1

Thank you, and good afternoon, everyone. From a financial point of view, as was the case last quarter, we have encouraging numbers to report And I continue to be confident that we're on a sustainable path of growth and profitability. We have a lot of exciting new business And are confident in our ability to execute profitably going forward. As everyone should be aware, we publicly announced 3 relatively large contracts, one right after the other during the month of November. These contracts were a long time in the making.

Speaker 1

And originally, we anticipated getting under contract much sooner. However, in the end, this occurred after the close Of Q2. Because these contracts have been anticipated for some time, we've been able to prepare ahead of time And our ability to execute these programs successfully. In addition, we anticipate additional smaller contracts to be coming online over the next few weeksmonths, and we will make public announcements as appropriate. All in all, we're experiencing significant growth and have good reason to believe that this trend will continue going forward.

Speaker 1

Let me briefly highlight the financial results before Steve fills you in on the details. Revenue, gross margin and operating income are all up compared to Q2 of last fiscal year And holding steady compared to Q1 of this year. The backlog is holding steady at around $50,000,000 at the end of Q2 So in summary, I believe our efforts have put us on a sustainable positive trajectory of growth In our core business, the company remains committed to achieving sustained profitability and cash generation Going forward, at this point, I'd like to turn things over to Steve Bernstein, our CFO,

Speaker 2

For the 6 months ended October 31, 2023, consolidated revenue was $25,900,000 Compared to $17,200,000 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 $9,500,000 or 37 percent compared to $7,800,000 or 46 percent 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.

Speaker 2

Revenues from non space U. S. Government and DoD customers, which are recorded in both the FEINew York and FEAR ZEIFER segments, We're $15,800,000 compared to $8,000,000 in the same period of the prior fiscal year and accounted for approximately 58 Percent of consolidated revenue compared to 47% for the prior fiscal year. Other commercial industrial revenue was $1,400,000 The 6 months ending October 31, 2023 and 2022. The significant increase in revenue for the period compared to the same Period in the previous fiscal year was related to contract awards, resolution of technical problems from the previous fiscal year and improvements made by management.

Speaker 2

For the 6 months ended October 31, 'twenty three, gross margin and gross margin rate increased as compared to the Same period of fiscal year 2023, the gross margin dollar increased as a direct result of increase in revenue. The gross margin rate increased significantly due to the fact that many of the technical challenges faced in the prior fiscal year have been resolved And as a result, the related programs are now moving forward and running more efficiently. Previous Programs that sustain lower margins due to technical issues are near completion or have completed. For the 6 months ending October 31, 23 2022, SG and A expenses were approximately 19% 23%, respectively, October 31, 23, as compared to the 6 months ending October 31, 22. The increase in SG and A expense for the 6 months Ending October 31, 23 as compared to the prior year period was largely due to an increase in professional fees, Payroll and associated costs.

Speaker 2

R and D expense for the 6 months ending October 31, 20 3 decreased to $1,300,000 from $1,700,000 for the 6 months period ending October 31, 'twenty two, A decrease of $400,000 and were approximately 5% 10%, respectively, of consolidated revenue. R and D decrease for the 6 months ending October 31, 'twenty three was primarily due to a shift of employees between production and development Depending upon availability, scheduling and necessity, the company plans to continue to invest in R and D in the future to keep its products at the state of the art. For the 6 months ending October 31, 23, the company recorded operating income of $3,000,000 Compared to an operating loss of $5,400,000 in the prior year, operating income increased due to The combination of increase in revenue, gross margin and the effects of cost cutting measures instituted by management that began in fiscal year 2023. Other income can be derived from reclaiming of metals, refunds, interest on deferred trust assets or the sale of fixed assets, Interest expenses related to deferred compensation payments made to retired employees. This yields pre tax income of Approximately $2,900,000 compared to a $5,400,000 pretax loss for the prior fiscal year.

Speaker 2

For the 6 months ending October 31, 23, the company recorded a tax provision of $13,000 compared to $2,000 for the same period of the prior fiscal year. Consolidated net income for the 6 month ending October 31, 23, was $2,800,000 or $0.30 per share compared to a $5,400,000 loss or $0.58 per share In the previous fiscal year, our fully funded backlog at the end of October 23 was approximately $50,000,000 Compared to 56 for the previous fiscal year ending April 30, 23. The company's balance sheet continues to reflect A strong working capital position of approximately $25,000,000 at October 31, 'twenty three and a current ratio of approximately 2:one. 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 for your questions soon.

Operator

And the first question today is coming from Brett Reiss from Janney. Brett, your line is live.

Speaker 3

Tom, the StarLink satellite Program that SpaceX has that so many of the militaries are using in the conflicts that are going on. Is the satellite size of those satellites the size where mode. Our atomic clocks and our frequency generators, are these Potential sales opportunities?

Speaker 1

Well, I can tell you that Starlink in particular, we none of our products are on the Starlink satellites at this point in time, Presence on the StarLink satellites going forward. However, there are several other Similar kind of satellite systems that are in various stages of development and launch, and We have been talking to several of these programs, And we do anticipate at some point in the future that we will definitely be involved in these programs. So one of the important things, StarLink is very much a communication system, Where we think that we have a better opportunity is in similar systems That are developing a navigation segment on those systems. Affinity for us. And this is a pretty big thing at this point in time.

Speaker 1

People are very concerned about the vulnerability Of GPS and the ability to so one thing is to actually take out GPS satellites. The other is to jam the signals from those satellites or to spoof them. And it's much more difficult To jam the signals that come from low earth orbit satellites because the signals are a much higher level. And so a lot of people, a lot of programs are looking at adding a navigation Payload and capability to those systems, and we have big The potential opportunity in those and we're looking at those very, very carefully.

Speaker 3

These Organizations that are looking to develop these similar systems, Do you know who they are and you already have your foot in the door? Or is it someone that your sales

Speaker 1

No. We know who they are, and we do already have our Put in the door in a significant number of these.

Speaker 3

Great.

Speaker 1

Okay. Thank you, Fred. Thank you.

Speaker 4

Right.

Operator

Thank you. The next question is coming from Chris Vatowski. Chris is a Private Investor. Chris, your line is live.

Speaker 5

Hello. Congratulations on great results.

Speaker 1

Thank you.

Speaker 5

I want to ask first, did margins go down Slightly sequentially, because you discussed margin on 6 months basis. But on quarterly basis, it seems like you It's a question. You had slightly larger revenues last quarter. You said barring one time items, your net Your operating income was a little bit over $1,000,000 and now it was a little bit under $1,000,000

Speaker 1

Yes. That's certainly correct. But I think The point I would emphasize, we always anticipate that quarter to quarter, we're going to see some fluctuations In things as we reported last quarter, there were some one time events that had a positive impact on those numbers. And those one time events aren't there this quarter. So I think the way I strictly speaking, the margin went down a little bit, But I think I would I think realistically, I would characterize it as pretty much holding steady.

Speaker 5

Okay. And generally speaking, does your business allow for leverage kind of continuing raising margins as your revenues increase? Would the government economies kind of like look at that and take That's into account when the price contracts?

Speaker 4

Yes.

Speaker 1

We for our government customer, of course, They scrutinize things pretty carefully, and we're subject to audit of all our numbers We feel pretty strongly that our gross margin is Going to continue an upward trend. Of course, that's not going to go on indefinitely, But we're targeting gross margin of around 50%, And we think that we can get there within the next 6 months to a year.

Speaker 5

That is great to hear. And you backlogs were Kind of a hair down sequentially again, but you still anticipate to be clear, you still anticipate backlogs mode. Shooting up again as you win more deals, is that correct?

Speaker 1

That's definitely correct. Same I would characterize that the same way. It's true, literally speaking, the numbers have gone down A little bit over the last quarter, but they're really pretty much holding steady. And given The new business that we booked in the month of November and additionally what we anticipate over the next couple of months,

Speaker 5

Okay. That's good to hear. And of the deals you announced, one of them wasn't a U. S. Government customer.

Speaker 5

Is that still a military deal or is that a civilian deal?

Speaker 1

It's not a military deal, let me put it that way.

Speaker 5

Do you expect you can enter the civilian markets In any

Speaker 1

way? I'm sorry. Can you say that again?

Speaker 5

Do you expect to go into civilian markets Significantly?

Speaker 1

Definitely. It of Of course, in the satellite business, the U. S. Government has historically been the biggest player. But there's always been there's a lot of activity and more and more Coming from other arenas and the $9,000,000 contract that we talked about in our November press release

Speaker 5

Okay. That's it for me. Congratulations again.

Speaker 1

Okay. Thank you. Thank you.

Operator

Thank you. The next question is coming from Tim Hasara from Senate Capital. Tim, your line is live.

Speaker 4

Yes, thank you. Tom, I just want to confirm, you said 50% gross margins in the next 6 months to a year. Is

Speaker 6

that correct?

Speaker 1

Yes. That's our goal.

Speaker 4

Right. And I would assume that the 3 new contracts that you announced in November would be Much higher gross margin than to help the mix there. Would that be correct?

Speaker 1

In general, that's correct. Yes.

Speaker 4

And with respect to those three contracts, I would assume that you'll book those as a percent of completion through the term, I guess, all 3 of them are Approximately 2 years.

Speaker 1

Yes. The one of them is actually closer to 3 years, but and one of them is 18 months, But they will all be percentage completion.

Speaker 7

And with respect to

Speaker 4

the booking those on a quarterly basis, well, Can you give us any kind of estimate or guidance? Will it be somewhat linear for the amount of the contract or more Front loaded, back loaded or any kind of color would help kind of model that?

Speaker 1

Yes. I think it's pretty hard to model, I would say that this the best approximation would be a linear approximation, Probably a little bit more upfront, but approximately linear over the course of the program.

Operator

Thank you. The next question is coming from Frank Wieczynski and Frank is a Private Investor. Frank, your line is live.

Speaker 6

Hi. Mode. And your backlog given the new orders in November, your current backlog must be close Sitting on about $100,000,000 And in that light, your inventories, which are high, Do you have enough people to put out these contracts efficiently?

Speaker 1

Okay. So a couple of things to highlight there. First of all, the current backlog is not at 100 1,000,000. You have to keep in mind that when we get under contract on these programs, We don't get authorized to spend the full amount of the contract. So the backlog is going to go up and it's going to go up significantly That's kind of an important thing to understand.

Speaker 1

I think that I'd like to address inventory a little bit. I think you're actually right on the money with that one. I think we're really coming out of the pandemic and this period where we all experienced The supply chain problems and as part of that, it was pretty important To inventory provided a good buffer to all of the supply chain kind of problems. And we're really kind of coming out of that and we're at the point where we really want to be much more aggressive in Keeping the inventory down and approaching it And managing that inventory very carefully, but you're right, we do have a very significant inventory. And as we start these programs, Especially where we're on really quite historically quite tight schedules to deliver things, that's a benefit.

Speaker 1

Now your other part of the question regarding engineers, I think this what I tried to point out in my opening Statements is that we've actually been working on these three programs for quite some time. And in fact, it's been fairly frustrating that we didn't get turned on, get under contract on these jobs sooner than we did. But the benefit of that, the positive thing about that is that we've really been preparing for these programs Over the last 6 to 9 months and we have cautiously been increasing our workforce And hiring engineers, so we're really in, I think, a very, very good position in that regard. And I'm very, very optimistic about our ability to execute these effectively right from the start.

Speaker 6

Good. I'm a little curious on how you figure the backlog. You got contract awards, Say the first one for $25,000,000 So you don't take all that $25,000,000 even though it's been awarded, you don't take it in the backlog?

Speaker 2

No. We only take fully funded backlog. So in that example, let's just say a $25,000,000 contract, they give you $5,000,000 upfront And then they progressively funded accordingly, we would only put $5,000,000 in backlog.

Speaker 6

I understand. But I mean, it's not like the rest So that $25,000,000 is contingent on anything other than you delivering the first $5,000,000 I suppose, right?

Speaker 2

It's not I can't do anything, but it's just funding, and we only report funded backlog.

Speaker 1

So the and just to follow-up on that, And that particular example, that's a $25,000,000 program, which has that completion in 18 months. So I think one of the important ways to look at that is that backlog has to surface Within the next 18 months and obviously most of it a lot sooner than that. So our initial turn on was just for a few $1,000,000 but that has to in order for the customer To get that product in 18 months, they're going to have to turn us on for a lot more money

Speaker 6

Great. I understand. In that same vein, The atomic clock order, which I guess has a potential contract options of 70,000,000 Depending upon the effectiveness of the navigation system performance on a demonstration satellite, when is Is that demonstration satellite going up and when do you just when do you expect to receive confirmation that the product has been effective?

Speaker 1

So I think that is currently scheduled for 2027. So we would anticipate that potentially even well before that, But certainly at that point in time, we would anticipate mode. That would get determined. Let's just put it that way. Okay.

Speaker 1

This is a new customer For us and I think one of the important things is for That customer to gain confidence in working with FEI. And so we're doing everything we can To position ourselves to so that those options get realized.

Speaker 6

It's fully you don't expect any engineering difficulties like you've had in past programs on this program, I hope.

Speaker 1

No, we do not. In fact, that's one of the things. This is there's Very little new development on this. It's basically building hardware. It's Production job and there's every reason I believe that we should be very, very successful on this one.

Speaker 6

Okay. One final one for me. Investors look at FEI pretty much as a satellite program company. But the ZEIFER and the non satellite business seems to be going quite well. Are there big orders associated with that Business or is it more continuing orders or is it smaller orders, but the numbers are quite impressive, how that's going?

Speaker 1

Yes. They actually had been very successful over the past couple of quarters And getting new work, completely new stuff. And of course, there are also continuing Orders on their existing products. So They went through a rough patch about a year ago. I remember.

Speaker 1

Things were moved around the country, But they've surprised us all actually in their ability to turn things around And things are really just looking really good at ZYPHR at this point in time.

Speaker 6

And is the are the margins at ZEIFER similar to the satellite or is there any difference in the margin structure of those two operations?

Speaker 1

Yes. I think

Speaker 8

there

Speaker 1

the numbers aren't that different When you look at them, but I think the details of how you get there are definitely not quite the same.

Operator

Thank you. The next question is coming from George Marama from Pareto Ventures. George, your line is live.

Speaker 4

Hi. Thanks for taking my call. I had a question about your SG and A, R and D expenses. As revenues increase and if you get near your Gross margin well, let me ask you differently. If you get towards your gross margin goals, what would net margins approximately look like?

Speaker 1

Steve, I'll let you take that one.

Speaker 2

So SG and A on a dollar value number It's going to run fairly consistent. I mean, again, if we grow substantially, yes, there'll be some more costs in there. But percent wise, as you see, It went down. Forgetting the percentage, the dollars even as a formula of income is down. So we expect it to stay at that current level where it is now unless things substantially grow.

Speaker 4

Okay. And so you don't expect the net margin to expand as a percentage of sales?

Speaker 2

Gross margin or SG and A?

Speaker 4

No, net margin. Well, let's say your gross margin does hit 50%, what would you anticipate a net margin Operating margin.

Speaker 2

I would have to look at it, but it will go up. And again, I think like I said,

Speaker 4

So the SG and A right now is about 2.5 a quarter. You don't expect that to increase too much?

Speaker 2

No, I do not.

Speaker 4

Okay. All right. And also, After you've won a couple of these big jobs here recently, what does the opportunity outlook Will the next couple of years look like the opportunity set?

Speaker 1

Hi, Glenn. Yes. I think the opportunities are look really Great. You might imagine that we got been working on These 3 jobs for some time and we finally got them and that's it. But the reality is that We're just actually overwhelmed with opportunities at this point in time.

Speaker 1

Space is booming, and I don't see that turning around anytime soon.

Speaker 4

Okay. A lot more. You mentioned you may have some small wins here in the coming weekmonth. Are there any big ones in the pipeline? Or they're all you want them already?

Speaker 1

No, there are definitely some other big things in the pipeline, but the big Things don't happen overnight. Some of the there's kind of a constant Barrage of smaller things coming in, the big ones, I think We look for some things to materialize in 6 to 9 months perhaps.

Speaker 4

Okay. And if I may ask one last one, since you were there for many years there, I know you're new as The CEO, but you have some history with the company. Can you kind of maybe compare and contrast or describe maybe qualitatively The difference between today and back around 2018, there was a similar, I'd say, setup in terms of Huge opportunities, a lot of wins, but it just didn't really materialize. What kind of happened then and What's to prevent it from everything to kind of falling apart again now?

Speaker 1

Yes. A very good question. And of course, there are no guarantees in life, but I think we are doing some Thanks differently. I think that if we look historically, we've had a lot of difficulty With what we refer to as NRE programs, non recurring engineering or a lot of new development activity, Later on into production, we've been able to do those very profitably, but we have been challenged With the development and I think one thing that I've made a real effort to do differently We're bidding these things differently. And I think to some extent, My experience here over many years, I have been involved in an awful lot of these development programs, And I know the pitfalls and the difficulties.

Speaker 1

And I think we are pushing back really hard and We're making sure that we bid these in a way that we feel confident that we can be profitable. That's one of the elements. I think then the rest is just kind of the devil's in the details. I think if we look at the specific programs that have just come online in November, I think these have a smaller nonrecurring engineering component to them. There are much more production and those historically we have been very effective on.

Speaker 1

So we're confident in that regard. And I think the rest of it is just I think one of the problems starting in 2018 is that the top Management really didn't understand the programs very well. And so

Speaker 2

we really

Speaker 1

didn't We just kind of ended up behind the 8 ball from the start in some cases. And I think I'm actively involved in these programs and I'm committed to making sure that So that's my take on things. It's a really good question. But we'll just have to see how things go

Speaker 4

If I may slip in one real one last quick one here on I know you guys don't give guidance. Do you guys as a company have good visibility quarter to quarter on what revenues and costs look like or you don't have much visibility? We have pretty good visibility. Have you considered giving quarterly guidance a quarter ahead?

Speaker 1

Steve?

Speaker 2

As of now, we don't guide going forward. Maybe we will continue in the future, but not for now.

Operator

Thank you. The next question is coming from Michael Eisner. Michael is Private Investor, Michael, your line is live.

Speaker 9

Hi. How many employees do you have at this time?

Speaker 1

We have just about 200 employees that including all three sites at this

Speaker 9

That's full time?

Speaker 1

Yes.

Speaker 9

And some you have some part time also, right?

Speaker 1

We have some part time. We work with some consultants, and we have some contracts with some outside Engineering Contractors.

Speaker 9

All right. I see you hired more people. The 3 contracts, the first two, the technology is already proven On the first two, the $25,000,000 and the $19,000,000

Speaker 1

Yes.

Speaker 9

That's great. Now can these companies, whoever you're dealing with, can they give you more business on these two contracts?

Speaker 7

All

Speaker 9

right. Just the first part, like for example, the 25,000,000 That will be done in roughly 2 years or so. That could go through another $20,000,000 say.

Speaker 1

Well, it I want to make sure I don't mislead. It's in that particular case, It's not like there are contract options going forward, but that is a major Satellite supplier, and we had many, many contracts with that particular Company over the years, and we will have many more going forward. In fact, we do currently have other contracts With that company, and I have every reason to believe That if we are successful on that particular program that will lead to Are there satellite programs for us going forward?

Speaker 9

Well, it should work because you're using technology

Speaker 1

One of the things we pointed out in the press release is that this is a $25,000,000 program, but from beginning to end, this 15 month time period. And in a way, this is The ultimate customer is U. S. Government. And this is sort of a test To see if we and, of course, our customer can deliver In this shortened period of time, typically a program like this would take Roughly 3 years to do the same thing.

Speaker 1

We're trying to do it in half that time. And so we're we see this as a big challenge, but it's one that we are pretty confident that we can do. And I think if we're successful, I think there's going to be a lot more business behind it.

Speaker 9

All right. Well, that's good to hear. But at this point, these three contracts, I assume you already started working on them.

Speaker 1

That's correct. Yes.

Speaker 9

So the clock is already ticking You didn't start just today or the day the contract was arrived, came in.

Speaker 1

Yes. We are moving forward very aggressively on all of these.

Speaker 9

And the $9,000,000 one, is that new technology or you had did that work before?

Speaker 1

No, that's not new technology for us. That's Based atomic frequency standard, but that is an existing FTI product It has already gone through qualification testing and so forth and so on. And so That is one that we really do not anticipate any major difficulties in the It's just a straight manufacturer train.

Speaker 9

All right. And who owns the technology for that, you or the customer?

Speaker 1

We own the technology.

Speaker 9

Is that on all 3 contracts?

Speaker 1

Yes.

Speaker 9

So they once you make it for them, they can't take your work to someone else?

Speaker 1

No, no, definitely not.

Speaker 9

All right. So you get the R and D, Which is key. And that one you mentioned it could be $70,000,000 over 6 years. Is that what because they don't want to I'll give you the whole thing at once. They want

Speaker 1

Well, so I have to be careful what I say because we as part of this contract, there's a lot of specific Information that we're not able to divulge, but this is a navigation satellite system. And so the idea is we were the products that we're going to deliver on this contract Are going to go on a demonstration satellite. And if that demonstration satellite is successful, Then there's a very high probability that those options will be exercised. Now the other thing to keep in mind, If you read about a lot of these satellite systems, there's all kind of independent of FTIs Participation in these programs, there's a it's very expensive To launch a satellite system, there are all kind of considerations. And so there are many things Other than just the product that we deliver for the satellite that can cause Problems for the ultimate success of that satellite system.

Speaker 1

Those things are completely out of our control. And so there are a number of other reasons that Our customer could decide down the road not to go forward with this system, things that have nothing to do with FEI. I think we have reasons which I can't go into to believe that, that is unlikely. But nonetheless, we have to recognize that those are possibilities. But I think, of course, The other side of it is that if we're not successful in delivering on time or our products don't work The way anticipated, then obviously, our customer would have the opportunity to try to procure those products from somebody else.

Speaker 1

We think that's highly unlikely and it's hard to imagine that that would be cost effective for our customer. So Setting aside the part of this that is completely out of our control that the system doesn't go forward Because of the financial things or other things that have nothing to do with our products, we set that aside and look at the part that we can control. I think we feel that we're in a really good position, and I think it is very likely that one way or another those options will get exercised.

Speaker 9

Just for example, someone may make a part that attaches to your part and if they can't make it, that would be an example something could go wrong. Hi,

Speaker 1

Pat. Yes, that's the kind of thing that could go wrong. We've I'm not going to speak specifically about this program, but we've seen where other space programs The whole program was put together and the plans were to launch satellites In Russia and then over the last couple of years, all of the things that have gone in the geopolitical Realm, Russian arrangements with the U. S. Are suddenly not very good.

Speaker 1

And so those launch opportunities disappear. And so now the customer Making that system is scrambling to find other kind of launch sources someplace else in the world That delays programs and then when things are delayed, people are investing money and it goes out in time and Things become a lot more challenging. So is that just by way of example of other things that can throw a monkey wrench into These kind of programs. So I probably shouldn't be Sitting here being negative about this kind of thing, but I think those are the kind of things that I could imagine that Would potentially be a problem. If you pay attention to the commercial satellite Programs that people talk about, somebody mentioned STARLINK earlier, and there are many other of these systems.

Speaker 1

There's There are good number of them that never really end up getting launched. So

Speaker 9

Yes, that's always that can always happen. But you're comfortable with these three contracts?

Speaker 1

Yes.

Speaker 9

And the third one, is that the 3 year one? You said 3 years before?

Speaker 1

That's correct. Yes.

Speaker 9

3 year. All right. So all these contracts could go any You could do more work on, but right now you expect a couple of just smaller contracts Over the next couple of months.

Speaker 1

That's correct.

Speaker 9

All right. And I think SpaceX, I think, is launching About half the rockets at this point, right?

Speaker 1

I don't know the exact number, but they're pretty busy, yes.

Speaker 9

Yes, it's not really your concern. You just make the product. And I think that's all I had to ask. It sounds like the backlog is going to grow and your revenue went up this quarter. So that's always been it's been going up for like a year and a half.

Operator

Thank you. The next question is coming from Frank Gasker. Frank is a Private Investor. Frank, your line is live.

Speaker 7

Yes. Thanks for taking my call. Yes, I'm going to see if you could say something about not Present technology, but future technology. In particular, Several, if not quarters years ago, there was mention of an atomic clock, Which could in fact be a game changer. I haven't heard much about that since.

Speaker 7

Could you elaborate on that in any way?

Speaker 1

Yes. So we are Currently working on an advanced atomic clock. In fact, We're going to do a demonstration tomorrow for our Government customer on that one, that's a pulsed optically pumped rubidium standard. Now the demonstration that we're doing tomorrow actually is Not for a space based atomic clock. It's for terrestrial applications, in the space environment also.

Speaker 1

So that's just one thing. I think that the There are some other technologies in terms of even more advanced clocks That we are seeking funding rather for us to develop Those technologies on internal FEI money is probably not feasible. So we are seeking sources of external Funding at this point in time, and we'll see over the next year or 2 whether we can be successful at that. In addition, I think one of the things we think is very important and we are pursuing with internal funding is Smaller lower cost atomic clocks and also quartz based clocks 4 space applications, but with an emphasis on very high performance. So I know I've talked about this previously on these calls, but I think we feel strongly that the trick is to find the Sweet spot for a lot of these satellite programs, the low earth orbit satellite programs, And the sweet spot is finding the right compromise between low cost, Small sized, low power, low cost and high performance.

Speaker 1

I think we've seen many of the satellites and STARLINK is actually an example where the emphasis is on low cost, but the performance capabilities In terms of precision, frequency and time are very, very limited. And so once you add the navigation component to those satellites, much better performance Starts to become necessary, and we think that's where we can make A big contribution and we're working on that.

Speaker 7

Yes. Thank you very much for getting in detail that. I just have one more short aspect of that. The test you said tomorrow, Is that in fact then going to show a significant increase in CLOXX capability?

Speaker 1

Yes. Yes, it is. It we believe that, that technology is capable of even more. We're going to by one measure, we're going to demonstrate roughly an order of magnitude improvement Over what we typically do with our current products, but we think that technology is Capable of even another order of magnitude improvement if things are optimized appropriately. You have to keep in mind on this particular development, there are It's not just do whatever you need to do to get the best performance possible.

Speaker 1

It's Get the best performance possible, but you have to keep the power dissipation below a certain amount, the size below a certain amount, The way below a certain amount and so forth and so on has to work over a wide temperature range. And so that's where we end up Where we are, it's the performance that can be achieved given the constraints that we have to operate in. And so yes, depending on the application, the particular application, This is one particular example, and we do see a very significant performance improvement. But if we remove some of the constraints that we have in this particular application, we can

Speaker 7

Okay. Thank you very much for the

Operator

Thank you. The next question is coming from Richard Johns, and Richard is a Private Investor. Richard, your line is live.

Speaker 10

Thank you. Tom, you were talking earlier about changes in your Bidding processes, I wonder if you'd expand on that a little further. Would you characterize the contracts, The large and small contracts you're winning as fixed price contracts?

Speaker 1

Most of the contracts we're bidding on are fixed price contracts. We do from time to time have mode. In terms of expanding on things beyond that, let me just say, I think that, yes, I have been here for almost 40 years, so I do have a lot of experience on these programs. And I think I have a pretty good understanding of our business And our customers and what the needs are and so forth and so on. So I think part of the trick in this regard Is knowing just how to go about things.

Speaker 1

And I think in some cases, mode. We are if not sole source, we are virtually a sole source Because nobody else can provide nobody else has the technology or the demonstrated capability To deliver the product that's needed. And in those cases, we shouldn't be giving anything away. And I think we've been working very hard to toe that line. In other cases, There's we have to look at potential going forward That maybe there's a new development and it's something that we want to invest in With the idea that we will there'll be a significant business going forward and we can We want to make sure we have the opportunity to participate in that.

Speaker 1

And So I think the trick is having a good enough understanding of where things are. On the other hand, To invest in a new program, where we end up taking on a lot of risk And there's not much potential. It's a one shot program or whatever. It doesn't really make sense to invest in that. And I can tell you over the last year, I can think of specific cases Where we lost the program, but we kind of did that knowingly.

Speaker 1

We know there was competition And there just wasn't much potential beyond the particular program. And we could have taken those we could have gotten those programs. We know what it would have taken, but we would have lost money, and it just doesn't make any sense to do that. So I don't know if that's a helpful answer. Yes, it is.

Speaker 10

Yes. That's Sounds as if you're going about the process in a very reasonable fashion. I have another question about your income taxes. They were tiny in the recent quarters as compared with the historic tax rate, Do you is that because of loss carry forwards? And when do you expect to get back to What I believe was more like a rate in the mid-20s or around there, when do you think you'll go back To that kind of tax rate?

Speaker 2

We do it is because of NOLs. The tax we're paying now was mandatory state tax And things of that nature. I can't predict exactly when the NOLs will run out, but I can Tell you as you see the performance in the last couple of years, we have a bunch of NOLs going forward that we will be using for a while.

Speaker 10

Okay,

Operator

Thank you. And we did have a question coming from Geoffrey Cohen from Mulholland Capital Management. Geoffrey, your line is live.

Speaker 8

Yes, good afternoon. I appreciate all the color as other callers have reflected. Just real quick, You talked about a target gross margin about 50%. What sort of quarterly revenue run rate would that contemplate?

Speaker 2

We don't we're not fully Ready to guide how revenue will grow long term. We believe it will grow. And from there, we'll see the efficiency we get from the growth and the

Speaker 8

margin? Yes. No, I appreciate that. But I mean, if 50% gross margin is your target, you must have some sort of underlying assumption in terms of what sort of revenues You'd need to get there. So that's my question.

Speaker 1

Well, I Or maybe you should

Speaker 8

change that.

Speaker 1

Well, I'll put things differently because I don't think it's that target is not really based On a particular revenue goal, I think that target is based it's really a question How we're bidding new business. And that's the target For new business is a gross margin of 50%. And I just I talked about the particular contract that we lost, and that's because When we bid it at 50%, we didn't get it. And that made sense in that particular case. Now there are going to be some cases where we're going to bid at a lower gross margin Because there's good reason to do that.

Speaker 1

But in general, we're really targeting 50% And that's kind of a baseline approach to things. And it's really not That is not based on the particular revenue assumptions.

Speaker 8

Okay. But just so I'm clear, you're not talking about your 6 to 12 month goal being you're Not necessarily getting 50% gross margin on your contracts, you're talking about being able to show that in our quarterly report, correct?

Speaker 1

I'm not quite sure I understand the distinction there.

Speaker 8

Well, I think there's a distinction between bidding a project at a 50% gross margin and actually bringing that Down to your financial results.

Speaker 1

Okay. That's certainly true.

Speaker 8

And so when you put out that target, you're talking about the latter, correct? I mean Yes. Yes. Okay. Can you quantify your bidding activity at all, the amount of outstanding bids or the sales funnel or in some way quantify

Speaker 1

I don't think I'm prepared to do that In a very meaningful fashion, qualitatively very qualitatively, I think The pipeline is pretty full at this point in time. We have Tremendous amount of bidding activity going on, but I Yes. I'm not really in a position to put total dollar amount on things at this time.

Speaker 8

Okay. And Steve, I was just curious, you said you have a lot of NOLs. Can you what would they be on a cumulative basis roughly?

Speaker 2

I don't have the exact number, but I'll say it's approximately $20,000,000 give or take.

Speaker 8

Okay.

Operator

And that's All of the questions that we had, I would now like to hand the call back to Tom McLellan for his closing remarks.

Speaker 1

Okay. Thank you. And I'd like to wish everybody happy and healthy holidays. And that's it.

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Earnings Conference Call
Funko Q2 2024
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