LightPath Technologies Inc (LPTH) 2021 Q3 法說會逐字稿

Good afternoon, and welcome to the LightPath Technologies Fiscal 2021 Third Quarter Financial Results Conference Call. (Operator Instructions) Please also note today's event is being recorded. I will now pass the call off to Don Retreage, Chief Financial Officer of LightPath Technologies.

Good afternoon. Before we get started, I would like to remind you that during the course of this conference call, the company will be making a number of forward-looking statements that are based on current expectations and involve various risks and uncertainties, including the impact of COVID-19 pandemic that are discussed in its periodic SEC filings. Although the company believes that the assumptions underlying these statements are reasonable, any of them can prove to be inaccurate, and there can be no assurance that the results will be realized.

In addition, references may be made to certain non-generally accepted accounting principles or non-GAAP measures, for which you should refer to the appropriate disclaimers and reconciliations in the company's SEC filings and press releases. Following management discussion, there will be a formal question-and-answer session open to participants on the call.

I would now like to turn the conference over to Sam Rubin, LightPath's President and Chief Executive Officer. Sam, please go ahead.

Thank you, and good afternoon. Welcome to LightPath Technologies Fiscal 2021 Third Quarter Financial Results Conference Call. Our financial results press release was issued after the market closed today and posted to our corporate website. Following my remarks, our CFO, Don Retreage, will further review our financial results and provide more perspective on key areas. We will then conduct a Q&A session.

For those of you who have been following closely the company, you know that the past 9 months or more have been marked by changes designed to position LightPath for growth. I'm very pleased to report that our long-term growth plans are beginning to yield their intended results as seen in the strong results for the quarter, including the highest level of quarterly revenue in our history. This marks the second consecutive quarter in which we set a new record for quarterly revenues, and we continue to deliver double-digit growth rates on annual terms.

In the 9 months since the beginning of our fiscal year, we won over 50 new business contracts including 16 from new design wins. This supports both our new strategic direction of being a partner for solutions as well as our goal to diversify our customer base and reduce our customer concentration.

With reflection, I was appointed CEO of LightPath a little more than a year ago. At the onset, my initial focus was to assess the company's strengths, weaknesses, opportunities and leadership capabilities, as they relate to our strategy forward. Once I completed their initial assessment, we began implementing our new strategy with an orientation towards becoming a value -- a valued and trusted photonics partner in the form of providing engineered solutions, which goes well beyond serving as a component manufacturer.

As a reminder, our strategy is based on the fact that photonics as a technology is being adopted into more and more applications and integrated into more and more products, such that there is a growing number of companies that use photonics and therefore, need a partner that can support them through extensive knowledge and experience with the technology, making the adoption of photonics technology easier for them. This is a powerful growth mechanism and is reflected in the strong revenue growth we reported today as well as in our fast-growing number of design wins and prototype development work for our customers.

During this time, our focus was not only in growing the top line. From the beginning of the fiscal year through the end of the third quarter, our financial and operational focus resulted in our cash increasing by 10% even as we reduced our debt by 8% and funded capital expenditure at nearly 80% more than prior year.

Those investments have been focused on ways to better serve larger multinational customers and satisfy higher volume production demand, which is part of our solutions orientation. Along the same lines, our investment in R&D has grown this year by 24% as we invest in developing unique technologies and capabilities, which in turn translates to technological differentiators that allow us to provide our customers with solutions that enable them to better use photonics technologies in their applications.

This last part brings the essence of our strategy. And with it, we are pursuing an increasing number of sizable opportunities in diversified vertical markets, where our engineering expertise, volume production capabilities and proprietary technology are competitive advantages.

The growth we're seeing in sales is fueling the company and further driving the need for additional changes and improvement. This has led to the next step of our long-term growth plan, which requires strengthening and expanding our leadership team. With our recently announced changes in management, the focus is turning towards operations, efficiencies and overall performance, similar to the efforts that led our initial growth in this fiscal year, which took a couple of quarters to be realized. Our shareholders should expect a period of adjustment with the new leadership team until we begin to more fully experience the intended results of operational optimization.

Our objective has been to secure the right talent for the company, who have the skill and experience to drive forward our long-term goal and implement our strategy to be the preferred partner to our customers on all things photonics. This included several changes to our leadership ranks and filling out the depth and of our broader middle and senior areas of management.

During and following the end of our fiscal third quarter, we announced a series of management appointments with corresponding onetime expenses for the associated changeover as we put our new team in place. The normalized amount of operating expenses is expected to be reached through the course of the next few quarters as we eliminate temporary redundancies and other onetime costs. This conference call provides a good opportunity to summarize LightPath's recently expanded management and leadership team.

Earlier this week, we announced 2 significant changes. First is the retirement of our long-time Chairman, Bob Ripp, who has held the position since 1999. Bob has served the shareholders and the company very well for a long period of time, navigating the company through periods of economic and market changes. He was instrumental in bringing me to LightPath, and I'd like to personally thank him for the opportunity and assure him that we will very much continue to follow the strategic direction that has been shared on this call today. The Board anticipates appointing a new Chairman to replace Bob in coming weeks.

The second major appointment announced this week was for Peter Greif to the position of Vice President Operations. This position has been vacated about a year ago, and we finally found the right person for the job. Peter comes to us from New York Stock Exchange listed Jabil, 1 of the largest manufacturing solutions providers based in Florida with a market cap of over $8 billion and more than 260,000 employees worldwide across 100 locations in 30 countries.

Al Miranda, who is also sitting in today's call was appointed to the position of Vice President, Finance effective April 19 as part of our CFO succession plan. We are grateful for the contributions of Donald Retreage, our outgoing CFO, who announced his retirement that will take place following the closing out of this quarter. I'd like to personally thank Don, who I have worked with closely for the past year. He has been an important contributor to the company's transitional period during the expansion into the infrared market and in building out our global manufacturing operations.

As Don's successor, Al previously was President of the North American subsidiary of publicly traded $1.5 billion market cap Jenoptik. For Germany-based Jenoptik, Al led the North American subsidiary to top and bottom line double-digit growth. Jenoptik is known globally for specializing in photonics-based technology across several markets.

In our operation in China, Joseph Huang was appointed General Manager, replacing Hui Yue. Joseph has more than 30 years' experience in OEM manufacturing, working in various international markets with a focus on China, including 10 years with Samsung and IBM.

This change in management in our China group, which included dismissing the previous General Manager as well as the Sales Manager and the Engineering Manager was instigated as a result of certain code of conduct infractions by the previous leadership of our China operation. This includes an attempt to set up a competing business to LightPath as well as an attempt to misappropriate part of our intellectual property.

While we're confident that the swift corrective actions we have taken have resolved the issue and any related findings to date, this also resulted in some related additional onetime expenses to be incurred in our fiscal third and fourth quarter. Additionally, we expect some limited impact to our domestic sales in China for the next 2 quarters, while we stabilize our domestic sales operation in China.

Finally, in another Board level move, we were joined by Eric Creviston, who is President of the mobile group product in NASDAQ-listed Qorvo, a $22 billion technology company, which develops and commercializes worldwide semiconductor products and software for advanced wireless and wired technology. For our solutions-oriented products and business development road map, Eric is an exceptional addition to our Board.

The series of management and leadership changes reflect the opportunities presented to LightPath to accelerate its global growth and prominence. Furthermore, the appointment as well as the results this quarter are in line with what our focus has been, which essentially is a departure from the way of old and in support of our new vision. These operational changes may take a few quarters to impact along with additional ebb and flow during the changed management period before becoming material and substantial.

One area of operational improvement lends to our gross margin performance. You'll note that our gross margin as a percentage of revenue is down by a meaningful amount in the third quarter and to a lesser extent, for the first 9 months of the fiscal year. This has to do with the lifespan of new design wins.

Going into larger production -- into larger production runs and our yields in 2 specific parts of the process, which I discussed on last quarter's call. Our team has continued to focus on developing both unique technologies and processes and products, particularly as they scale from prototype to mass production. Our R&D spending has been higher in part to develop new products that gets us to the design win stage.

Therefore, we have equally important work to do in scaling new products into volume production, where a number of technical challenges are typically encountered related to the fabrication of the components as well as some of their value-add activities such as coatings and assemblies. While we have not yet completely resolved those issues -- those yield issues, results are very encouraging. And I'm confident that we are on track to have them resolved in coming weeks.

On the sales side, we see demand growing based on a number of new opportunities in our sales funnel, both from existing customers and new customers alike. Yet, we are only just beginning as we report another record performance for quarterly revenues, which turned to double-digit growth that marks another goal we set for the company this year and further improvements to our balance sheet. I am confident that our strengthened management team will lead us through our next phase of growth.

This anticipated growth is on organic basis, while in addition, we intend to pursue selected acquisition to bolster our product lines and manufacturing capabilities. Our superior products, innovation capabilities and deep customer relationships enable us to extend our leadership position. We are leveraging our competitive advantages to deliver stable return on investment and ultimately, returns for our shareholders. I'm energized by the outlook for our business and believe we are making considerable progress in our growth strategies.

Now I pass over to our CFO, Donald Retreage, to provide more detail on recent financial performance.

Thank you, Sam. First, I would like to mention that much of the information we're discussing during this call is also included in a press release issued earlier today and in our 10-Q filed with the SEC. I encourage you to visit our website at lightpath.com, specifically the section titled Investor Relations.

Onto my remarks pertaining to the fiscal 2021 third quarter and 9 months ended March 31, 2021. Sam's remark covered the highlights of the changes that came in form of the strategies designed to position LightPath for growth. I will be specifically discussing some of the key financial performance areas.

Revenue for the third quarter of fiscal 2021 was $10.7 million, up 8% sequentially from $9.9 million in the second quarter of 2021 and an increase of 23% as compared to $8.7 million in the second quarter of 2020. Revenue for the first 9 months of fiscal 2021 was $30.1 million, an increase of $4.2 million or 17% as compared to $25.9 million in the same period of prior fiscal year.

Infrared products revenue was $6.5 million in the third quarter of fiscal 2021 or 60% of the total revenue. This is up from $4.4 million or 50% of the total in the third quarter of fiscal 2020. IR revenues grew sequentially from second quarter 2021 by 35%. Visible precision molded optics, or PMO, products revenue in the third quarter of fiscal 2021 was $3.9 million or 36% of the total, up from $3.8 million or 44% of the total in the third quarter fiscal 2020. PMO products revenues were drawn sequentially -- were down sequentially from the second quarter of this year by approximately $800,000 due primarily to a reduction in spending on a large telecom customer's long-term supply agreement following accelerated purchases during the first half of the year.

The balance of our revenue for the third quarter was $334,000 from specialty products. Specialty products are nonrecurring engineering projects, which vary greatly from quarter-to-quarter but were substantially smaller -- but are substantially smaller contributors to the consolidated revenue. Revenue from this group in the prior year was $561,000.

Moving on to gross margins. Generally speaking, PMO products are smaller and almost entirely molded. So we have faster turnaround time, higher volume applications and more automated processing. These products are also generally lower in price as compared to infrared lenses. We historically have a margin averaging in the 40s to 50 range for PMO lenses, which have been about 10 to 20 points higher than the margin on our infrared lenses.

After 2 primary revenue reporting groups, PMO is the smaller group with a higher margin. So on a consolidated basis, our gross margin will skew more towards IR products, which comprised a greater percentage of revenue in the quarter.

Infrared product group represents a larger and faster growing market opportunity. Infrared margins have historically been in the 20s to 30% range. The average selling price can vary based on the product and market, so we do not believe that this is a meaningful performance metric. Instead, we encourage investors to focus on our revenue and gross margin as a percentage of the revenue over the long term, not necessarily on a quarterly basis.

Perhaps the most important factor to our gross margin this year has been the number of new product launches coming online. Sam discussed the traction we're experiencing in the market with the increased number of design wins as well as the factors that negatively impact margins in the early months of the new design going into volume production. Many of our product lines coming into production volumes in the second and third quarter of this year are from our BD6 molded infrared lens family of products. These will come in on higher end of the margin range once we reap the benefits of volume and efficiencies.

Gross margin as a percentage of revenue was 38% for the first 9 months of fiscal 2021 compared to 40% for the same period of prior fiscal year. The gross margin in third quarter 2021 was brought down by the 36% margin in the third quarter, which included the primary influence of revenue mix skewed towards infrared products and near-term negative impact of the many new designs still in their early stages.

We continue to produce more lenses overall. Again, the KPI is best viewed on a longer-term basis since revenue mix and production ramp-ups come into play as they did in the third quarter. Total production for all product lines increased to nearly 3.3 million lenses in the first 9 months, up from 2.4 million lenses in the same period of the prior year.

In the third quarter, where our revenue mix was heavily weighted towards infrared lenses and given the factors discussed, total units declined to 862,000 units this year from 905,000 units last year, a decline of 5% even as our revenues increased 23%.

Moving on to operating expenses. During the third quarter of the fiscal 2021, total operating expenses was approximately $3.7 million, an increase of about $790,000 as compared to $2.9 million in the same period of the prior fiscal year. The increase is primarily due to approximately $194,000 of nonrecurring and legal fees and consulting expenses associated with the hiring of the new employees and termination of certain existing employees within the company's China subsidiary and higher SG&A for a moderate increase in headcount and costs associated with operational improvement and growth strategies that Sam addressed in his comment.

I would note that additional legal fees, consulting expenses and severance expenses associated with these changes at our operations in China will be incurred in the fourth quarter of this year. In April 2021, we entered into a severance agreement with certain of the employees where we agreed to pay an aggregate of $478,000 over the next 6 months, provided that these employees comply with certain terms set forth in the severance agreements. The third and fourth expenses -- the third quarter and fourth quarter expenses as well as the second quarter charges related to a former CEO for about $400,000 combined for nearly $1 million of onetime items for the year.

New product development costs in the third quarter of 2021 increased by approximately $229,000 from the prior year period, which was needed to address the demand for advanced optical designs including our accelerated level of design wins, which are expected to lead to future revenue growth. We added to our engineering headcount and related outside services in order to support demand for custom optical design.

Partially offsetting these expenses and the OpEx was limited travel and marketing expenses from the COVID-19 restriction even as we incurred some pandemic-related costs for cleaning and safety measures. Our consolidated corporate income tax in the U.S. is shield by our net operating loss forward benefits of approximately $74 million on March 31, 2021, but we must pay income tax in the countries of certain foreign subsidiaries.

Third quarter 2021 income tax expense was approximately $308,000 compared to approximately $203,000 for the same period of the prior year, primarily related to the income tax from the company's operation in China. Income tax for the third quarter also included Chinese withholding taxes of $100,000 associated with intercompany dividends declared by the company's Chinese subsidiary payable to the parent company in the U.S.

Net loss for the third quarter 2021 was $223,000 or $0.01 per share compared to a net income of $816,000 or $0.03 per share in the prior year. Net loss for the first 9 months of fiscal 2021 was approximately $272,000 or $0.01 basic and diluted loss per share compared to net income of $210,000 or $0.01 basic and diluted earnings per share for the first 9 months of fiscal 2020.

For EBITDA, a non-GAAP measure, which we believe provides important insight into our performance and progress, we had a positive EBITDA of approximately $1 million in the third quarter of 2021 as compared to $1.9 million for the third quarter 2020. This decrease was primarily due to the low operating income from lower gross margin and increased SG&A, which included significant nonrecurring costs and high product development expenses.

Again, looking at our longer-term progress, which is more meaningful, EBITDA for the first 9 months of fiscal 2021 was $3.5 million or approximately $4.1 million, excluding onetime nonrecurring expenses related to the executive changes as compared to $3.7 million for the first 9 months of fiscal 2020. Nine-month EBITDA performance also benefited in the current year from favorable difference of approximately $325,000 in foreign exchange gains and losses.

Moving to the balance sheet and cash flow-related items. Capital expenditure was $0.5 million up in the third quarter -- was $0.5 million in the third quarter and $2.7 million for the first 9 months of fiscal 2021. This is up from $300,000 and $1.5 million in the respective periods of fiscal 2020. We are on track for capital expenditures for the year to come in with a range of around $3 million for the year.

Meanwhile, net cash provided by operations was $3.1 million for the first 9 months of fiscal '21, up 64% from $1.9 million in the prior year period. Total debt, including financial leases, was $5.5 million on March 31, 2021, a reduction of approximately 8% or $482,000 from $6 million at the beginning of the fiscal year. Approximately $200,000 of this reduction came in the third quarter. Our cash balance on March 31, 2021, was $5.9 million, up $600,000 from the end of the second quarter and as compared with $5.4 million at the beginning of the fiscal year.

Onto our backlog, as of March 31, 2021, LightPath's total backlog was $19.5 million, down from $23.8 million at the ending of the fiscal second quarter and $21.9 million as of June 30, 2020. Our production capacity has grown and enable us to deliver on more higher-value IR contracts. Our backlog at the ending of the third quarter came down from the ending of the second quarter, which was the highest level in the company's history.

It should be noted that it is natural for our backlog to fluctuate during the year because of the timing of each bookings of large orders and annual renewals. Our single largest contract valued at nearly 25% of our total backlog was renewed during second quarter, and we deliver against this contract as the fiscal year progresses.

Finally, on a personal note, I would like to -- as I will be retiring from CFO role, LightPath, tomorrow, I just wanted to say that it's been a pleasure getting to know many of you in the investment community and the banking community and to serve as the CFO for the company's shareholders. LightPath is in very good hand with Sam and the expanding leadership team.

With this review of our financial highlights and recent developments concluded, I will now turn the call over to the operator so that we may begin with our question-and-answer session.

(Operator Instructions) Today's first question comes from Brian Kinstlinger from Alliance Global Partners.

This is Jacob on for Brian. Can you talk about the slowdown in PMO orders related to inventories for 5G rollouts? Can you talk about what's causing this? And do you believe this is temporary and related to global supply chain shortages? Or do you think this will persist?

Yes. First of all, Jacob, thanks for joining us. The slowdown that we're seeing is specific to one geographical area for customers in China itself. And the reasoning for that is 2: first of all, has been a significant overstocking on the behalf of that customer earlier on in 2020; and the second is some slowdown that they are seeing in the rollout of their equipment.

We're pretty confident that this is a temporary thing. In fact, the customer is already discussing with us what will be the time line for their future releases of orders. But right now, this customer typically releases orders on a quarter-by-quarter basis. That is affecting both our backlog number as well as sales for the coming 2 quarters, this customer.

Okay. And are there any industries that you sell to facing inventory shortages, which will result in fewer numbers of lenses in the near term? And if so, which ones?

Yes. We've definitely seen our share of customers mentioning shortage in certain chips or devices that are impacting their supply chain. We've had, on a couple of occasions, customers shuffle around their schedule. I think a couple of quarters ago, we talked about this, that one of our larger customers was moving shipments around and was doing so at a short notice, which impacted our inventory levels back then. But since then, we haven't seen anything to a level of anyone canceling orders, not releasing new orders or delaying significantly our shipments because of any shortage of other components.

And one more and I'll hop back in the queue if I have any more. Can you talk about how far along you are from correcting your 2 yield issues you identified at the year-end conference call, both the coding issue at the end of the process and the problem in the middle of the process? I think you said before that you plan on having this addressed in the next couple of weeks.

Yes. We're definitely very, very close to this. I think the results we're getting are extremely encouraging. They're not yet statistically viable to the point of us saying, definitely, we resolved it. But the engineers are walking around with a smile on their face, so that's really encouraging.

The next question comes from Scott Buck from H.C. Wainwright.

Don, congrats on retirement.

Thank you, Scott.

Of course. My first question on gross margin, is it possible to give us a percentage point impact some of these new product issues had on the quarter? I mean was it 200 basis points, 300 basis points. Is that even something that you could do?

Overall, it's between 1.5% to 2% overall. I mean we normally would have been closer to a 40.

Perfect. That's great. And second one for me on capacity. Could you give a little color around kind of your comfort level with where capacity is today and maybe what that means for CapEx assumptions moving into your next fiscal year?

Yes, definitely. Absolutely, some of the growth we're seeing now is a result of the capacity expansions that we have been doing over the last few quarters and especially in the PMO and the molding area, which affects both -- some of the infrared that is molded infrared and of course, the PMO itself.

I'd say that at this point, capacity-wise, we're not seeing ourselves limited right now in any specific area. Most of our investment at this point is going towards efficiencies, is going towards technological advancements, investing in new technologies that allow us both to capture new business and do existing business better.

Okay. That's very helpful. And last one for me. I'm curious if you could tell us when you became aware of the issue in China and how quickly you were able to act on that.

Yes. We became aware of it at the beginning of March, and I'd say, within 4 weeks of when the suspicion came up, we already completely handled it and dismissed those employees.

The next question comes from Dave Kang from B. Riley FBR.

First question is regarding on backlog between IR and PMO. Just wondering what the mix looks like. Is that kind of comparable to your revenue mix?

Well, because in the third quarter, we increased sales by 60% in the IR, we reduced almost proportionately with our backlog. So we're a little more lower in the IR as of date, but we have a lot more things in the pipeline with IR.

But in -- IR is a place where we tend to get more longer-term contracts compared to PMO.

Sure. Regarding -- on gross margin, just wondering how we should think about gross margin for the rest of this calendar year. I mean did I hear you correctly that you expect IR to grow faster than PMO so that then won't gross margin be trending down because IR has -- carries lower gross margin?

Yes. In one way, as Sam said, though, the turnaround period is longer. So you're not going to see the effect of higher margins on the IR next quarter. Also, I mean, just remember the mix. If you do 50% of our total revenue in PMO at 50% gross margin and 20% to 30% of IR, which is 50% of the revenue, the average won't come out. It'll come out in the 30s, in the high 30s. So as time goes for a cycle, the IR will sell more higher ASP and increase the margin, but it won't be 20% from quarter-to-quarter.

(Operator Instructions) The next question comes from Gene Inger from ingerletter.com.

Sam, congrats and Don, congratulations on a good quarter in revenue with some problems continuing as you make what seems to be a grand transition.

Thank you.

Thank you, Gene, and it's good to hear your voice. Welcome back with the living.

Yes. Thank you. I went through -- I'm ill, but glad to be alive. In any event and to anyone who doesn't know, believe me, COVID is no joke and it is a horrible disease. But in any event, it looks like you're talking about shrinking gross margins but not by virtue of net margins and not by virtue of price cuts, which used to be what would happen to meet competition. Is that correct?

Yes. We're not -- I'd say we're not seeing a significant price pressure that leads to cutting gross margin. As always, we have a product mix that can be very different. We can have, in PMO and in others, some lenses that are much higher margins than others as that mix shifts around sometimes. But I don't think there's anything that is leading our gross margin on a long-term view decline in gross margins or anything like that. We're definitely facing our current yield issues, which we talked at length about last quarter and still exists to some degree. But other than that, there's no downward trend.

That's great. In your comments -- a lot of the financial questions have been asked. In your comments, you mentioned acquisitions are in the tack. And I wonder whether you could give us some ideas of where you would consider those to be fruitful or whether you rather not because, as you've mentioned before, you have the new direction, but you don't necessarily want competitors to be totally aware of what you're planning.

Yes. Yes, absolutely. I'd say that it would not come as a surprise given that we're investing in technology and capabilities here that some of the acquisition opportunities that we're seeking are similar in nature, meaning companies that could bring along additional capabilities or technologies that would supplement ours and that would allow us to go to accelerate our path down to new strategic direction. We're not likely going to look at this point of acquisitions that solely bring overcapacity, for example, ones that we're not that interested in.

When I look at the staff changes, I see the background of both Albert and Peter and have welcomed them to LightPath. And I -- what I see is also not only optics but an industrial engineering background. And I'm wondering if the personnel changes relate to the new direction. They probably do. Maybe then I should assume that, but I'm just curious if you can expand on that at all.

Yes, yes. I mean as you mentioned, we definitely look for people that fit our needs, and in this case, I think, we're lucky to have landed 2 exceptionally talented people that bring with them experience and skill sets that fit really well the direction we want to go. And it would be -- would come as no surprise to people that as we want to grow more vertically and as we want to create more value, we're looking in our leadership team to people that have done similar things, have been part of similar things before.

We show no additional questions. I'd like to turn the conference back over to management for any closing remarks.

Thank you for participating on today's conference call. Before we leave, I would like again extend my thank you and best wishes to our departing Chairman, Bob Ripp. We look forward speaking with you the next quarter for our year-end results.

As we have typically done, we intend to issue preliminary fourth quarter results in August with the full results coming out in September. Until then, our next public engagement would be at the Needham Virtual Technology and Media Conference on May 18. We hope our institutional investor followers will join us at the conference and that all of you continue to follow our progress. Thank you again, and goodbye.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.