Frequency Electronics, Inc. Aktie

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.

Greetings, and welcome to the Frequency Electronics Fiscal Year-End 2025 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, everyone. The fiscal fourth quarter we just reported was the highest revenue quarter for the company in the past 25 years, and I'd like to provide some additional context on that. We've demonstrated strong growth over the past several years, and we believe the growth potential for our company is expanding even further for reasons I'll get into shortly.

While we do not provide guidance, given the lumpiness of contract awards, I would be remiss if I did not mention that this recently ended quarter benefited from strong execution that allowed the company to produce revenue on certain programs in fiscal year '25 that we originally expected to produce over a more extended period of time in fiscal year '25, '26 and beyond. In other words, while the trend here is very much an upward one, I do not think it's prudent to expect every quarter in the near term to look exactly like this from a top line perspective. Though in the medium term, it is directionally where we're headed.

It's important to keep in mind that the allocations for space and defense-related programs from the recently passed legislation in Congress are very positive for the direction the company is going. But as the bill just passed last week, additional revenue from those contract awards will flow in over the coming quarters and years as our customers now submit bids for increased available funds.

Critically, as we position the company to take advantage of all the opportunities we've discussed before and others I'll discuss in a moment, we're also expanding our customer base beyond the traditional prime contractors. We maintain excellent relationships with the traditional primes and are working on numerous projects with them and anticipate meaningful growth with them going forward. But we've also already been actively submitting bids alongside next-generation defense companies, which are increasingly getting attention in this administration. We believe this positions FEI extremely well to benefit from industry trends we see playing out over the next 5 to 10-plus years.

Some of the opportunities that will further accelerate our growth are Golden Dome, we're already involved in several key missile programs and anticipate additional opportunities both for terrestrial and space applications.

APNT, which is Alternate (sic) [ Assured ] Position, Navigation and Timing. The vulnerability of GPS is well documented at this point as stories of jamming and spoofing, especially in the Mid East and Eastern Europe corroborate. FEI's quantum magnetometer development representing an unjammable approach to navigation is part of a particularly relevant solution. Our small but very high-performance rubidium atomic clock, which we've dubbed TURBO, for timing units rubidium oscillator, is a key ingredient in other proposed alternate navigation approaches.

Another important item is GPS enhancements such as resilient GPS, augmenting GPS satellites with a large number of lower-cost satellites. Quantum sensing, FEI is well positioned to succeed in the growing quantum sensor market based on our expertise in atomic clocks. We're currently developing solid-state diamond-based quantum magnetic sensor devices in collaboration with MIT Lincoln Labs. Similarly, we're collaborating with scientists at NIST to develop Rydberg sensors, allowing for extremely compact microwave antennas.

Last year, FEI sponsored a Quantum Summit in New York City to bring together scientists to discuss progress in quantum sensors. I'd like to announce that FEI will host a Quantum Summit again this year in October, in particular, on October 29 and 30.

All in all, I'm happy with our performance, vigilance regarding the changes in Washington and very enthusiastic about our future. Steve?

Thank you, Tom, and good afternoon. For the fiscal year ended April 30, 2025, consolidated revenue was $69.8 million compared to $55.3 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 $40.9 million or 59% compared to $23.2 million or 42% 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.

Revenues from non-space U.S. government and DOD customers, which are recorded in both the FEI-New York and FEI-Zyfer segments were $26.5 million compared to $29 million in the same period of the prior fiscal year and accounted for approximately 38% of consolidated revenue compared to 52% for the prior fiscal year.

Other commercial and industrial revenue was $2.4 million and $3.1 million for the fiscal year ended April 30, '25 and '24, respectively. The company is encouraged by significant revenue growth compared to the prior fiscal year. The majority of the increase in revenue for fiscal year '25 as compared to fiscal year '24 was a result of increase in sales in the U.S. government DoD satellite market.

For the fiscal year ending April 30, 2025, the gross profit and gross profit percentage increased as a result of several factors. The increase in gross profit dollars was directly related to the significant increase in revenue over the prior fiscal year period as well as the increase in gross margin. The majority of the increase in the gross profit percentage as compared to the prior fiscal year was in the FEI-New York segment and was attributable to the company's performance on several traditional space programs at higher margin and ahead of schedule. In addition, the company has new programs that are progressing well, and the company anticipates they will generate additional revenue and profits.

In the fiscal year ending April 30, '25 and '24, selling and administrative expenses were 18% of consolidated revenue in both periods. While total SG&A expense increased in fiscal year '25 as compared to the prior fiscal year, SG&A expense remained constant as a percentage of revenue in fiscal year '25. The approximately $2.1 million increase is made up of mainly payroll-related items such as 401(k) expense, stock option expense, bonus accrual. In addition to these expenses, trade show and related costs also increased during the fiscal year '25.

R&D expense for the fiscal year ending April 30, '25 increased to $6.1 million from $3.4 million, an increase of $2.7 million and were approximately 9% and 6%, respectively, of consolidated revenue. The company-funded R&D amount was higher in fiscal year '25 as compared to previous fiscal year, partially because of the previous fiscal year R&D expenditures were lower than planned and some of the expense were subsequently captured in fiscal year '25. The increase in R&D expense also reflects the company's commitment to maintain its technical excellence. The company expects future R&D investment to be in line with or even potentially above historical spending.

For the fiscal year ending April 30, '25, the company recorded operating income of $11.7 million compared to an operating income of $5 million in the prior fiscal year. The increase is mainly attributable to the company's significant increase in revenue and gross margin during fiscal year '25, as noted above from traditional space programs that have been executed ahead of schedule, well within budget and technologically performed well.

The positive effect of cost-cutting measures instituted by management have also contributed to the increase. The change in other income expense from prior fiscal year was relatively minimal. All 3 categories presented were slightly lower in fiscal year '25 compared to prior fiscal year. This yields pretax income of approximately $12.1 million compared to $5.5 million for the prior fiscal year. For the fiscal year ending April 30, '25, the valuation allowance decreased by approximately $13.9 million from the prior fiscal year, primarily due to releasing the majority of the valuation allowance recorded against deferred tax asset. This change in estimate occurred in the third quarter of fiscal '25.

Consolidated net income for the year ending April 30, '25 was $23.7 million or $2.46 per share compared to $5.6 million or $0.59 per share in the previous fiscal year.

Our fully funded backlog at the end of April '25 was approximately $70 million compared to $78 million for the previous fiscal year, April 30, '24. The company's balance sheet continues to reflect strong working capital position of approximately $30 million at April 30, '25, and a current ratio of approximately 2.3:1. Additionally, the company is debt-free.

Cash went down by approximately $13.6 million since prior fiscal year-end. Of this decrease, the dividend paid in Q2 of fiscal '25 accounted for approximately $9.6 million of it. The additional $4 million decrease was related to timing of billing and revenue. Contract liabilities went down $8.2 million since year-end. Contract liabilities are generated as part of 606 accounting when the billings are in excess of revenue taken on specific programs. We expect that cash will fluctuate quarter-to-quarter. However, we expect its trend to be higher over time. 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 shortly.

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

[Operator Instructions]. And the first question today is coming from Brett Reiss from Janney Montgomery Scott . Brett, your line is live.

Great. Nice quarter, great end of the year. Tom, you rattled off a number of growth potential areas, the Golden Dome, the APNT, resilient GPS. Can you walk me through the process as to how you will allocate corporate time and resources to these various growth opportunities?

Well, I'm not quite sure how to answer that question. We're actively pursuing proposals at this time that are involved in all of those areas. And I think we have ongoing discussions with all our prime customers about these topics as we go and what our capabilities are in this arena.

Tom, I apologize. I didn't ask the question in the right way. Of the 5 or 6 areas you mentioned, which one do you think has the greatest potential that might lead to a greater allocation of corporate resources and attention?

Okay. I see. Well, that's a little hard to say also. I think -- at the moment, I think the quantum sensor area looks quite promising. We know that GPS is vulnerable and the magnetometer activity that we're working on certainly looks very promising, and there's a huge addressable market there in terms of providing alternate to GPS navigation, especially, I think, in commercial aircraft. So that's certainly a big one. But I think Golden Dome looks like a big thing also, but it's a little bit ambiguous as to how the funding is going to happen on that one. So we'll just have to see.

All right. Last one for me. Because of these tremendous growth opportunities, R&D spend is going to move up. We've got a strong balance sheet, but do we have enough cash to fund this greater amount of R&D that's needed to take advantage of these opportunities?

At this point in time, we are confident that we have adequate cash in order to fund that. As I stated in the press release, it's really a targeted use of internal funds. I think we're being somewhat cautious and careful about just what we spend our resources on. And I think we're in a pretty good position to do that and to continue doing that going forward. But we'll keep an eye on that and have to evaluate that in the future. There are a lot of external funding things that we see and we're working on obtaining. And I think that supplements our use of internal funds significantly.

[Operator Instructions]. The next question is coming from Chris [indiscernible], who's a private investor.

Congratulations on great results. You mentioned in your press release that there might be some short-term uncertainty. Can you elaborate on that?

Well, I'm not sure uncertainty is the right way to refer to it. I think that there will be some variability in the timing of contracts, I think, is really what we're talking about. And we've already seen this. The new administration is intent on making their mark on things. So the timing of a lot of programs that are already in the works are changing. And we just -- we have to deal with that, obviously. So I think it's very clear that overall, the administration is intent on spending even more money on the things that are in our area of expertise, but they're going to not necessarily spend them in the same way that was imagined prior to this administration. So this is the thing we just have to roll with the punches in terms of how the timing of these things plays out.

Okay. And you're absolutely right. You did not use the term uncertainty, you used term variability, which is what I should have said. Okay. So does that include the variability in timing? Does that include stuff that's already in your $70 million backlog?

I'm not quite sure I understand the question.

So the variability issues you mentioned, would those include projects that are already in your $70 million backlog? Or is it...

No. No, not really. We don't anticipate any variability in the backlog. The only thing I would say is that the contracts can be terminated. We don't anticipate that with anything in our backlog at this point in time, but that certainly has happened. So I guess in that sense, there's the potential for variability. But the backlog is pretty solid. I think it's with future work that we have to look at the variability and the timing of when things occur.

All right. So you think there'll be -- with future contracts, there will be some variability in the short term. But in the medium term, you will see certainty -- kind of relative certainty for higher growth. Now what that -- could you just tell me roughly what do you mean by short term, midterm?

I think short term, we're really talking about the next year or so. And medium term, I think we're looking at 2 to 5 years. Long term, beyond the 5-year point.

All right. And I had a question about Quantum. Right now, it seems that we're not yet at the point where commercial quantum systems are coming out, but a lot of money is going into research. Would you say that at this research stage because you already know you probably -- your timers are probably needed for the research stage as well. Would you say this research stage is enough to make kind of like a notable revenue...

Yes. Yes. There's, I think, significant revenue from the research stage. It might better be characterized as development as opposed to research because I think the science is well understood in these areas. It's really developing products based on that science that we're working on. And to the extent that this development is externally funded, it certainly generates revenue and indeed profit. So yes, I hope that answers your question.

Yes. Yes, it definitely does. And would you expect to do have -- I mean, would you expect to get externally funded revenue? Or would your clients be kind of asking you to do some of development on your own income statement as well?

Well, that's a really good question. I think in some cases, the funding agencies don't have enough money to support all of the work that needs to be done. And so we supplement that with internal funding. But I think that's usually a pretty small amount of the total funding that is to be had. So it's a relatively small thing and that I think we account for in our budget for internal R&D funding on an annual basis. That is going up a little bit, but just a little bit in order to support these new technologies and things.

Okay. It's good to hear it a small amount. Well, this is all for me. Good luck again, and congratulations again.

[Operator Instructions]. The next question is coming from Michael [indiscernible]. Michael is a private investor.

You start working on the Leidos and linking labs yet?

Yes. Yes.

I see. Who's paying for that R&D for that?

So we're funded by Leidos at this point in time.

Is that paying for it?

I'm not sure I understand the question. Leidoes -- go ahead.

I was going to say you have to do R&D [indiscernible] was already proven?

Well, the development -- this is development activity, and that is primarily funded by Leidos. Just like the last question, there's a small amount of internal funding that supplements that. But that's primarily...

We get to keep the technology also, right?

Yes.

And is GPS IIIF back in play, I thought was over with a while ago. I heard something about that.

No. No, that's not true. GPS IIIF is indeed very active. And in fact, we're currently delivering products for the GPS IIIF program.

Which launch are we up to now?

Well, I don't think -- so there are -- there's GPS III and there's GPS IIIF. That F, I think, is for follow-on. So the current launches, the last launch that occurred was a GPS III launch. And I believe it was the eighth GPS III satellite, if I'm not mistaken.

I remember that.

Yes. So there are still additional GPS III satellites to launch. I think IX and X in particular. And GPS IIIF starts with #11. So no GPS IIIF satellites have launched yet.

But they will eventually. That $12 million contract that you just announced, was that a continuation from the previous contract?

Yes. That was.

The one from November of 2023.

I don't remember exactly. Yes. No, it was not a continuation of those contracts. It was separate.

All right. And you mentioned that -- how far are we into the magnetic navigation so we don't get spoofed and everything jammed up?

Well, we're actively pursuing it. I think our development activity is basically a 2-year program, and we should have prototype demonstrations at the end of that period.

All right. Are we the only one that still vertically -- only company that's vertically integrated to produce all this stuff from beginning to end?

Well, I don't know that I can say we're the only company that's vertically integrated. But I think it is indeed true that we are vertically integrated. And as I've said before, I think we feel strongly that, that's key to our continued success because it allows us to control. We're working in technology areas that are fairly esoteric. And if we rely on other suppliers to provide key ingredients, then we lose control of those key ingredients, and it's hard to get the kind of performance that's required in these areas. So we do feel it's key. I think it is a differentiator. There are not so many companies out there that are vertically integrated in the way that we are, but I'd hesitate to say that we have a monopoly on that.

Is Microchip, can they do it? Really not sure, microchip.

Microchip. I don't think so, no.

The next question is coming from George Marema from Pareto Ventures.

The first one was on gross margin this quarter was a little bit down. Can you sort of outline the reasons why?

I don't think there's anything super significant. I think there's just a general lumpiness from quarter-to-quarter on how things play out. I think we're pretty comfortable with where the gross margin is overall.

As you look out into this current coming fiscal year, for '25, you're on a 43% gross margin for the year and 37% in this last quarter. Would you be sort of targeting the high 30s or more low 40s for this coming year?

Well, I think we're targeting 40% or more. And where we end up, we'll see. I think that's -- we're trying to maintain a very disciplined approach in terms of our margins. And so yes, that's where we're aiming. But we do have to see. The timing of things, et cetera, always comes into play.

Okay. And then on quantum sensing, could you sort of maybe characterize or size up a little bit for this coming fiscal year, what kind of development like revenue opportunity is there? Is it material, like 10% of your business or less or more than that? And then secondly, when would you hope to have product revenue out of this area? How far off?

So I think it's -- at this -- over the next fiscal year, I would anticipate that it's less than [Technical Difficulty] of our overall revenue, number one. And number two, I anticipate that products sort of 5 years out from now. I think that's a reasonable expectation.

Okay. And then are any of the other newer products coming out before then, these other things you mentioned?

Definitely. We have products which are going to be available within the next fiscal year. The compact rubidium standard is going to be available, and yes.

Is that the TURBO you're talking about?

Yes.

That will be out in this fiscal year, you hope, this product?

It will, yes.

What kind of addressable market is that? If you can kind of size that up or characterize it?

Well, it's a growing addressable market, I think probably $1 million to $2 million within the next year or so and growing after that.

And the next question is coming from Brent [indiscernible]. Brent is a Private Investor.

Tom, thank you for your leadership and thanks to all the employees for their hard work, much appreciated. My question is, what do you target for SG&A and R&D for 2026 going forward -- as a percentage of revenue?

I'll let Steve respond to that question.

I believe they'll be very similar to where they are this year. Approximately SG&A, we ran 18% for the last 2 years and R&D somewhere in the 6% to 8% or 9% range.

And do you target taxes? I mean I know you had -- you didn't have any more carryforwards, but you had a few more NOLs left. Do you still see taxes in the 1.5% to 2% range?

Again, depending, I think for next year, we'll use more NOLs. We still have a bunch left, but with the new tax law change and stuff and California is where right now we pay our taxes because they suspended the use of NOLs. I still believe if we have a good year, it's still -- the majority of it will be covered. Some may not based on where it comes and so forth. But it will not be a normal 21% tax year next year either.

Do you still feel it's in the single digits?

Yes.

Okay. Last quarter, you spoke about SDA bids. Were any of those successful? And what kind of investment expense do you see coming from SDA?

So at this point in time, that's a little bit up in the air, actually. The new administration is rethinking the SDA process. We are still looking at tracking layer activity from SDA, but the transport or data layer is currently being reimagined and how that's going to play out is not clear at this point in time.

There's no indication of even maybe a time frame. I know earlier you mentioned short and medium term to be 1 to 5 years or 1 to 2 years. Do you personally think that it's somewhere within the next 9 to 12 months?

Definitely. I think yes. Yes. I think something is going to pop within that time frame, yes.

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. I think I'd like to thank everybody for participating in this call, and have a nice summer. Thank you.

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