LightPath Technologies Inc (LPTH) 2020 Q3 法說會逐字稿

Good afternoon, and welcome to the LightPath Technologies, Third Quarter 2020 Financial Results Conference Call (Operator Instructions) Please note, this event is being recorded. I will note pass the call off to Don Retreage, Chief Financial Officer of Lighthouse 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 that are discussed in the 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 discussions, there will be a formal Q&A session open to participants on the call. I now would like to turn the conference over to Sam Rubin, LightPath's President and Chief Executive Officer. Go ahead, Sam.

Thank you and good afternoon. Welcome to LightPath Technologies fiscal 2020 third quarter financial results conference call. Our financial results press release was issued after market closed today and posted to our corporate website. Following my remarks, our CFO, Donald Retreage will further review our financial results and provide more perspective on key areas. We will then conduct a Q&A session. Now, onto my remarks.

I'm pleased to be able to conduct my first conference call with Lighthouse at a time when our quarterly financial results showed consistent improvement in many areas, as compared to prior year periods and for most performance measurements as compared to second quarter of this fiscal year.

All things considered, we find the results to be satisfactory given the global economic conditions and the challenges some of our customers, employees, and suppliers have been facing as a result of the COVID-19 pandemic.

In line with previous updates regarding our operation during this time, as a designated essential supplier to the medical industry, all our manufacturing facilities in China, Latvia, and the U.S. remain open and production has been ongoing without any interruptions.

Our global workforce has risen to the occasion to deliver financial results while continuing to support our customers, new and recurring alike, and while keeping our workplaces, their communities, and their families safe.

And while we deal with the current impact of the crisis on our daily lives, corporations, government entities, and educational community alike are developing strategies surrounding this new norm in connection with life during and after COVID-19, and what might be required to support that going forward.

In terms of LightPath's products, this pertains specifically to our infrared lenses used in temperature reading, heat imaging and sensing technologies.

During the third quarter, we announced an award totaling more than $1.7 million fulfillment imaging lens assembling used in medical and sensing infrared applications, many of which are being utilized to combat the spread of COVID-19. This was just one important award we announced during the quarter. The more important question is how big this market opportunity may be.

Much attention and work has been put recently into developing safety protocols so that businesses and institutions may reopen and operate safely. According to report, Amazon, for one large enterprise, as an example, has commenced the use of thermal cameras in its warehouses to speed up screening workers with fever who could be infected with coronavirus.

Such thermal cameras would use infrared lenses to measure how much heat people emit relative to their surroundings. Those devices are more efficient in requiring less time than conventional thermometers and do not require physical proximity to take a measurement.

While Amazon warehouses in the U.S. have stayed open during the pandemic, in France, it was example, it was reported that the company had temporarily closed 6 of its fulfillment facilities due to risk from coronavirus.

Thermal cameras with temperature management initially garnered attention in Asia after the SARS epidemic in 2003 when they were used in airports. Beyond critical venues, hospitals, and typical first responders, other facilities are interested in installing remote thermal sensing devices, including mainstream businesses. Other examples of companies exploring the use of thermal camera technology include Tyson's Food Corporation and Intel Corporation. Hotels may also join this fray, perhaps led by Wynn Resorts, which announced it will be screening for temperature using non-invasive thermal cameras at all its hotel's entrances.

LightPath stands ready and is actively planning for this potential growth driver. This additional planning is needed since demand for a number of our key product lines has risen and intensified. As a result, consolidated revenue for the third quarter of fiscal 2020 was $8.7 million, an increase of more than 10% as compared to third quarter of fiscal 2019.

Growth was driven by demand to our new line of BD6 lenses going into medical markets and similar sensing applications, as well as precision-molded lenses for 5G and other telecom related applications. This strength more than offsets the decline in sales for academic institutes that are temporarily closed, and to other sectors experiencing weaknesses, such as consumer goods market, all of which are impacted by the restrictions imposed due to COVID-19.

We have had a small number of customers hold or cancel shipments due to COVID-19. This represents less than 5% of the revenue for the third fiscal quarter. About half of those are temporary plant closures due to local stay-at-home orders in their respective areas. We expect that once their facilities reopen and they can receive shipments, they will take deliveries of those orders completely on hold.

In respect to the impact of the situation on our operations and performance, we're pleased to report that we have not had any employee impacted and that we continue to take all precautions to ensure that our employees remain safe and that our business operations continue.

We also continue to evaluate the situation with our supply chain and to look for ways to mitigate any risks we can foresee. While we are able to continue operations with non-manufacturing staff working from home, this arrangement may ultimately have an impact on delaying some long-term projects and some research and development initiatives.

Moreover, there has been no material or negative sustainable impact to our business to report, but we recognize the situation is fluid and we must remain vigilant with the preparation of contingency plans.

LightPath has entered this COVID crisis in a position of strength that has enabled us to effectively approach the present challenges and opportunities. We completed the transition out of our New York facility by consolidation of our facilities, which removed a lot of additional cost and nonrecurring expenses that were incurred in prior year.

Ongoing cost reduction and expense management initiatives, along with a favorable revenue mix, led to a gross margin as a percentage of revenue coming in at 46%, 700 basis points higher than last year, and above our low to mid-40% target range.

Among our higher margin product are those sold into telecommunication markets. On the 5G front, this has been a growth driver for LightPath for approximately the 4 previous quarters, after we earlier developed prototypes and product samples on an NRE basis. In effect, one can look at the NRE basis as -- NRE projects as us being paid to develop new lenses that then go into 5G network installations. And now, we have a library of products customers can choose from.

We have reported increased production for this application in fiscal 2019 and in 2020 to date. More specifically, production volumes for 5G related lenses increased 175% in third quarter 2020 versus the prior year period and are up 195% year to date. Our lenses have primarily been used for 5G network infrastructure. The 5G network is designed to connect virtually everyone and everything together in an IoT ecosystem. This includes, for example, machines, objects, and devices connected onto the 5G network that delivers higher multi-gigabit per second data speeds, also low latency, and increased availability by a smaller but significantly closer together network access points.

More access points mean more network equipment installation, which in turn means more sales of our precision molded lenses. Precision and quality to ensure the highest service level standards is paramount, so a trusted and experienced partner, like LightPath, enables our customers to deliver on their promises.

In China alone, where we have been selling our lenses to equipment suppliers, carriers are expected to deploy approximately 500,000 5G base stations in 2020 with approximately 200,000 installed through March 2020 according to research.

In the U.S., Verizon announced in March that it is increasing its capital [exponential] guidance range to approximately $18 billion in 2020 to accelerate its transition to 5G and help support the economy during this period of COVID-19 induced disruption.

Looking at the current stress to its networks, and new norms post COVID-19, where millions of additional people may continue to work from home, Verizon has been analyzing usage patterns and is addressing anticipated changes in demand now and in the future.

The coronavirus has given rise to remote workers and has advanced requirements for bandwidth and more robust [optical] technologies into the U.S. and globally. Again, this appears to be a trend benefiting telecom equipment OEMs and in turn, LightPath, as a source for high volume, high quality lenses for optical networks.

Strong demand and order execution led to our 12-month backlog at March 31, 2020, setting another record at $20 million with forward visibility bolstered by our backlog beyond the next 12 months. This is a result of successful execution of our strategy for developing customer relationships with proprietary products and entering into long-term supply agreements, primarily in our new, growing infrared business.

Based on our order book, which may vary depending on how the economy plays out and our backlog levels, we may need even more incremental production capacity. Capital expenditure for fiscal 2020 are on track but subject to an increase if new order volume continues at the current pace.

As a key focus area, we continue to invest in and optimize our [IL] glass production, coating, and molding capacity to meet the increase in demand for both our BD6-based infrared products and telecommunication product lines. Both of those product areas are expected to continue to grow as the year progresses.

For full disclosure and transparency, there is a lot of work remaining to be done to fully capture and execute on the near and long-term market opportunities. And I would like to caution that amid COVID-19, we may be subject to unforeseen circumstances, which may be out of our control, including changes in demand, additional expenses for health and sanitary purposes, and the closure of either our suppliers, customers, or even one of our facilities.

In these uncertain times, it remains our intent to remain agile, continue to develop our approach to the markets we serve, follow our product roadmap, improve our processes, manage expenses, and leverage our strong financial condition for growth. Again, we are working from a tradition of increasing strength, such that we have been investing in the business while continuing to reduce our debt, and even adding, albeit moderately, our cash as our key balance sheet measures have improved in stride.

With our expanding product portfolio, addressing several different markets, a globally diversified sales distribution platform, manufacturing in 3 countries around the world, and solid financial condition, LightPath is well positioned to provide high quality, competitively priced optical components.

We look forward to building upon the success achieved thus far in fiscal 2020 while remaining grounded in the realities that face all businesses amid the present environment.

And now, I'll pass the call over to our CFO, Donald Retreage, to provide some additional information and aspects of our first quarter financial results.

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

Now, onto my remarks pertaining to the third quarter of fiscal 2020. Sam's remarks covered a lot of our financial performance so I will specifically be discussing key performance areas. Revenue for the third quarter of fiscal 2020 was approximately $8.7 million, an increase of approximately $803,000, or 10% as compared to the same period of the prior fiscal year. IR product revenue was $4.3 million or 50% of the total, up 12% from $3.8 million or 49% of the total in the prior year period.

Visible precision molded outfits, or PMO product revenues were $3.9 million or 44% of the total, up 15% from $3.5 million or 42% of the total in fiscal third quarter '19. The balance of our revenues in their respective periods were from specialty products and nonrecurring engineering projects, which vary greatly from quarter-to-quarter but are substantially smaller contributions to our consolidated revenue.

With respect to our margin profile, generally speaking, PMO products is smaller and almost entirely molded. So we have faster turnaround times, higher volume applications, and more automated processing. Due to these attributes, we historically have had margins averaging in a 40% to 50% range. The IR product group represents a larger and faster growing market opportunity with gross margins lower than PMO. IR margins have historically been in the 20% to 30% range with our new molded IR lens, which use our proprietary internally developed BD6 material are on the top side, if not able to go higher with efficiencies.

BD6 products that are not molded may be in the middle of the range and diamond-turned germanium-based products are at the low end of the range due to generally higher material costs and less automated manufacturing.

As part of our gross margin improvement strategies, we have been aggressively working at marketing new products and for new customers using our line of innovative BD6 lenses, while attempting to convert the existent possible germanium customer to BD6 customers.

Molding technologies and processes are a competitive differentiator for LightPath, which provides in certain circumstances, benefits to customers beyond the high gross margin contribution that we may enjoy. Gross margin in the third quarter of fiscal 2020 was $4 million, an increase of 29% as compared to approximately $3.1 million in the same quarter of the prior fiscal year.

Total cost of sales was $4.7 million for the third quarter of 2020, down from $4.8 million in the prior year. The lower total cost of sales is meaningful when you consider that the sales increased 10%. Gross margin as a percentage of revenue was 46% for the third quarter of 2020 as compared to 39% in the third quarter of 2019 and 41% in the second quarter 2020.

The increase in gross margin in dollar and as a percentage of revenue is primarily driven by an increase in sales and the elimination of elevated costs, including labor, manufacturing, and efficiencies, and increased overhead expenses associated with the relocation of our New York facility in the prior year period.

The increase in gross margin as a percentage of the third quarter 2020 versus second quarter primarily reflects the revenue mix and other favorable variances. It's worth noting is that the yield issue related to our BD6 products which negatively impacted our first quarter 2020 margin was mitigated in the second quarter 2020 and we have seen consistent quality in yield during the third quarter.

With BD6 yield issue behind us, we have been improving our factory utilization and increasing our volume production of lenses to the extent possible in meeting customer demand. Demand in aggregate has been strong. Although there are pockets of weakness that emerge as followed by COVID-19. Sam addressed some of these stronger areas of our business.

Demand for the commercial and industrial markets is lagging, particularly as supply chains issue prevent the OEM customers from following through on their fulfillment. We view this weakened demand is potentially short-term in nature while we enjoy strong demand from secular or long-term market applications.

Overall, as indicative or our higher revenue, our production volumes are growing. In the third quarter 2020, we produced 904,000 total lenses, up 41% from 642,000 lenses in the third quarter 2019, and an increase of 4.2% from 868,000 lenses made in the second quarter 2020. Unit volumes sold were up 29% as compared to the first quarter of fiscal 2020.

During the third quarter of fiscal 2020, total operating expenses were approximately $2.9 million, a decrease of 135,000 or 10% as compared to $3.1 million in the same period of the prior fiscal year. SG&A costs decreased by 7%. Third quarter 2020 reflects the elimination of $103,000 of nonrecurring expenses from last year, which are related to the relocation of the New York facility as well as our reduced personnel and overhead costs from synergies.

New product development costs decreased by $93,000 or 18% due to the shifting of personal to the newly created product management function, which is included in the SG&A. It should also be noted that expense in the third quarter 2019 were reduced by gains on disposal of equipment of approximately $136,000, which is masking some of the savings when compared to total expenses for third quarter 2020.

Capital investment in fiscal 2019 to increase our vertically integrated regional production capacity have enabled us to reduce capital expenditures so far this year. Capital expenditures including equipment finance through leases were $1.5 million for the first 9 months of fiscal 2020, down from $2.1 million in fiscal 2019.

As we are (inaudible) production capacity in certain lens, a nice challenge, we may need to moderately add more CapEx for new machines with corresponding increase in personnel.

Meanwhile, net cash provided by operation was $1.9 million for the first 9 months of the year and about half of that coming in at third quarter alone. This compares with net cash provided by operations of only $26,000 in the first 9 months of the prior year.

Improving cash flow from operation gave us the continued confidence to invest in our facilities. Total debt, including financial leases, were reduced by nearly $737,000 or 11% in the first 9 months of fiscal 2020 from June 2019. Our cash balance at March 31, 2020 was $4.4 million compared to $4.3 million at December 31, 2019.

And finally, our consolidated corporate income tax in the U.S. is [shield] by our net operating loss forward benefits of approximately $73 million at March 31, 2020. But we do have to pay income tax to the countries of certain firm subsidiaries. With the higher revenues from margin and management of expenses, net income for the third quarter of fiscal 2020 was $816,000 compared to the net loss of $352,000 for the first quarter of fiscal 2019, which was negatively impacted by elevated costs, including labor costs, manufacturing inefficiencies, and increased overhead expenses associated with the relocation of the New York facility.

We are operating far more efficiently and profitably, having completed the transition, improved our production yields, and increased revenue. With this review of our financial highlights and recent developments concluded, I will turn over to the operator so that we may begin with our question-and-answer session.

(Operator Instructions) Today's first question comes from Marc Wiesenberger with B. Riley.

Sam, congratulations on your new role. I was wondering if you could maybe talk about some of the order trends that you're seeing in the beginning of April and May relative to the orders you guys were seeing in February and March.

Sure. Thank you first of all. We're seeing definitely a continued growth in the 5G. I think that is a long-term plan that has been created and executed in different areas, primarily in China that they're clear about the plan, and have communicated publicly how much investment is going to go into that, and therefore the trend on the orders there really follow what has been communicated publicly from the majority of (inaudible).

On the infrared, we see what is still a strong demand in requests for us to increase capacity and deliver more lenses to go into the contactless temperature measurement. At the same time, we're starting to see more potential players looking into developing temperature measurement devices and acquiring, if at still small quantities, devices, and lenses to incorporate into their designs.

It is still difficult to know how much of this temperature measurement growth that we're seeing is sustainable and for how long. It could be growing much more as we described earlier, if really many locations started rolling out temperature measurement devices in their facilities and it happens to be that our customers are the ones that would be providing those temperature measurement devices.

It also could be, at the same time, that we're looking at a spike of 6 months and in 6 months, everyone will have enough measurement devices. Something might change regarding the virus, who knows. And when the characteristics of that market will change from our point of view.

Understood. So maybe if you could boil that down to kind of how should we think about maybe growth in your fiscal fourth quarter as well as maybe what your longer-term expectations for growth of the business? And maybe some of the respective verticals.

Marc, this is Donald. We expect our growth trend to continue. The question that we ask -- let's address fourth quarter first. Because it's liquid, as Sam mentioned, and hopefully we do not have any more close. We expect this trend on the third quarter to continue in general as far as the growth is concerned, which is showing overall between a 5% to 7%. Again, that's extended to the first and second quarter in 2021, all again, how all of this is going to pan out.

And maybe can you talk about the pricing environment across your products, what you're seeing, and the dynamics at play that might be continuing over the next few quarters.

Well, as you know, we have this mix that traditionally, we go through. Our PMO, precision-molded optics, is holding its own. The prices generally declined. They declined anywhere from 10% to 18% on the average. That has been for the past 3 quarters for several reasons. Even though we may still be enjoying high margins.

Competition is one. Hopefully now, with this, we'll have less competition because a lot of businesses are closing or manufacturing less. But that's, as the volume goes back, traditionally, the ASP goes down a little bit. IR is difficult because as you know, our molded is a little higher than the PMO average pricing but far less than the IR and is volatile in the sense that we do a huge lens of $200 and we do a lens half that size and it could be $50. But we see the trend for the IR stabilizing or at least increasing, getting better as the demand increased.

And just on that point, the elevated PMO clearly helped the gross margin along with some other things. Should we think about these kind of mix and trends continuing over the short-term and the kind of gross margin level as well, remaining kind of at this elevated level?

This third quarter elevated level. It's due to the full capacity, the efficiencies that we have. We're at full capacity, the efficiencies that we have. We're at full capacity at least from our PMO end getting to the rest.

The second part, as you know, the closing of the New York facility did give us some savings. That all being said, I honestly don't expect the 46%, as we saw there, as published out there. But I see us in the low 40s. It's quite possible that we keep everything, again, if no businesses are closed and our orders continue similar to Q3, which we expect, everything being normal.

Just 2 more from me. Can you talk about the supply chain issues that maybe you're running into as a result of COVID-19? And then the final one would be, you had mentioned an increase in demand from new customers. Do you think you'll be able to leverage the relationship to expand sales into other product categories?

Sure. In terms of the first part, the supply chain, there were some short-term impacts that we saw in China at first while different parts of the country were under different situations or conditions, and at which point it took some vendors time to gear back up or get all the employees back in, or resume full operations after the Chinese New Year and the closures they had there.

We have been seeing some similar things with some vendors outside of China. For example, in Mexico, we've had 1 vendor that was required by the government to close down their facility temporarily for a while. We've had vendors here in the U.S. that have had to scale back their operations, scale down operation to even support how many people they can have physically in the building, or just how many people can come and operate.

For the most part, this has not affected us that much. The couple of vendors where we haven't been able to get parts from, we have alternate vendors for. We have a team here that looks regularly at the different risks and how things unfold, and goes out and finds vendors where needed.

The only other affect to the supply chain is the shipments. And this is both because the shipping companies have scaled back the operation and because like us, many other companies want to expedite shipping or want to get stuff faster from place to place. So for the most part, the shipping carrier that we use has some delays. Those delays typically are on the order of adding 1 or 2 days to shipment, with the exception of 1 shipment that took a bit longer. But again, we were able to recover from that pretty quickly.

The second part of your question, sorry, was?

In terms of you mentioned demand from new customers, leveraging that relationship.

It's definitely interesting. For the most part, the IR and the PMO are fairly separate in their customer base in a sense of in a technical perspective those are different wavelengths, typically are used for doing different things. What we're seeing is that the thermal measurement segment is getting attention on many players in the field, players that believe that they can leverage the knowledge they have in infrared imaging or in different aspects of optics to now develop thermal test and measurement devices for measuring contactless temperature.

All of those have some business in optics already. Many of them have significant business in the infrared. So there's definitely a very good potential there to engage with those customers in other parts of their businesses, as things unfold.

(Operator Instructions) We show no further questions. I'd like to turn the conference back to over Mr. Rubin for any final remarks.

Thank you. To conclude our third quarter 2020 conference call, I'd like to leave by reiterating our focus on building upon the success achieved thus far in this year, while remaining grounded in the realities that affect all businesses and in the current and present environment. LightPath is well positioned to address the challenges and opportunities that lie ahead.

I'd also like to thank our employees that continue to work hard and deliver products needed for the fight against COVID-19 and continue to come to work and perform their duties in an exceptional way. Thanks again for participating on today's conference call. We look forward to speaking with you next quarter.

Thank you. This concludes today's conference call. You may now disconnect your lines and have a wonderful day.