LightPath Technologies Inc (LPTH) 2020 Q2 法說會逐字稿

Good afternoon, and welcome to the LightPath Technologies Second Quarter 2020 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.

Please go ahead.

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 would now like to turn the conference over to Jim Gaynor, LightPath's President and Chief Executive Officer.

Thank you, and good afternoon.

Welcome to LightPath Technologies' Fiscal 2020 Second 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 some key areas.

We'll then conduct a Q&A session.

We're very pleased with our fiscal 2020 second quarter results.

Our performance reflects a rebound from the last several quarters, during which time we implemented several transitional strategies.

At the end of last quarter's call, I remarked at that time that we had made significant progress on the major steps taken to restructure our business last year.

And in the first quarter, our true performance was masked by 2 issues: a customer-requested shipment delay and yield on our new BD6 products.

Both of these areas have been addressed, which now enables more visibility into the progress as reported with our 2Q results.

I further noted last quarter that our outlook would be favorably impacted by a few factors.

These were: One, our IR business growth will increase with the addition of our new family of lens assemblies using our proprietary BD6 material system; two, our precision molded optics business will benefit from demand relating to the 5G network buildout; three, that we have rightsized our operating expenses, reduced debt and invested to improve and expand our production capacity; and four, that we have sufficient cash to execute our growth strategies.

All of these factors contributed to our record quarterly revenues, record bookings and record backlog.

For full transparency, our record quarterly revenue of $9.6 million included about $500,000 of orders that had been delayed from the previous periods.

But excluding this amount from our 2Q results, we still reached a record level of revenue for any quarter.

A record bookings of $15.4 million in 2Q includes the renewal of our largest annual contract.

The record 12-month backlog of $19.1 million at 12/31/19, will likely come down a bit in subsequent quarters as we work through and deliver orders against that large contract.

Overall, however, our steady progress on sales and marketing, global branding and product development can be seen in our backlog, which has significantly increased.

With a backlog at $19.1 million at December 31, 2019, we grew that from $18.1 million at December 31, 2018, and $12.3 million at December 31, 2017.

So in 2 years, we've increased our backlog by over 25% annually.

The progress revealed in the second quarter goes beyond contracts and revenues.

We have also been focused on improving our profitability and overall financial condition.

In terms of profitability, we saw a significant gross margin improvement in comparison to the first quarter of fiscal 2020 as the issues that were negatively impacting our gross margin were largely mitigated in the second quarter, including the resolution of our BD6 annealing yields, which really hurt us in the first quarter.

Our gross margins also continue to benefit from the reduction in overhead expenses associated with the relocation of our New York facility.

Don will further address our gross margins and tariffs in his remarks.

Our gross margin improvement strategies, coupled with continued management of operating expenses, resulted in an EBITDA margin of 21% of revenues in the second quarter, which demonstrates the improved leverage in our business when compared to 11% in the prior year and a negative EBITDA margin in the first quarter of this year.

On an annualized basis, our target near-term EBITDA margin is in the 15% to 20% range.

We have proven that our investment in production capacity enables us to deliver quarterly revenues between $9 million and $10 million.

Yet, our total production capacity enables the capability to produce far more than this, positioning the company for growth.

Unit volumes sold were up 35% as compared to the first quarter of fiscal 2020 and 23% as compared to the second quarter of the prior fiscal year.

Growth in precision molded optics, or PMO products, continues to be driven by 5G demand.

The average selling price for our PMO product group is lower in comparison to prior periods driven by the volume increase in lower price point products.

Moreover, we did not experience price erosion for any product group in the quarter -- in the second quarter, with the change in average selling prices solely reflecting revenue mix, which shifts from quarter-to-quarter, depending on the products we are manufacturing.

We also continue to see significant growth in the BD6-based IR products, where we experienced a 215% increase in units sold quarter-over-quarter.

BD6-based products now represent just over 10% of our total revenue and approximately 20% of our infrared revenue and continue to experience strong demand.

LightPath's product development pipeline is robust.

We've talked about the high demand for our new BD6 IR product lines.

On other products, we are viewed as being critical components to our OEM customers.

And this brings me to a touch point relating to the coronavirus outbreak.

This crisis, which has grown in size and significance, has not impacted us initially.

But more recently, travel advisories, quarantines and other governmental restrictions have resulted in some of our staff, not being able to report to work.

You may recall, in China, we have manufacturing facilities in Zhenjiang, which is in the Jiangsu province of China and located about 500 miles northeast of Wuhan, the epicenter of the crisis.

We also have administrative functions and sales personnel located in Shanghai, which is about 550 miles east of Wuhan and about 200 miles southwest of Zhenjiang.

According to the research from the John Hopkins Center for Systems Science and Engineering, as of February 4, of the 20,704 confirmed cases of the virus, only 308 cases were reported and 0 deaths in the entire Jiangsu province, while 219 cases and 1 death were reported in the Shanghai region.

Our nearly 50,000 square foot facility in Zhenjiang provides a significant amount of our molded product production.

This facility has been running at about 50% capacity for the past 2 weeks, which followed a period of 4 days that it was closed for the Chinese New Year.

Chinese government extended the holiday shutdown and has required all companies to remain closed through February 9. We appealed to government authorities, and were allowed to open and operate at a reduced level as we're a critical supplier of components for medical products and to medical equipment OEMs that are supplying medical equipment like x-ray and blood analyzers to hospitals and other medical facilities combating the virus in China.

At least 1 of our large medical device OEM customers in China has written the Chinese government to request that LightPath remain open, given the critical components we provide to the medical device supply chain.

At this time of need, we're pleased that LightPath's innovative and globally respected technologies can play an important role in dealing with the coronavirus health care crisis.

Of course, the safety and health of our employees is our priority while we closely monitor the situation and take every action we can to protect our employees.

We're proud of our technological platform and our IP position, which continues to grow.

We made some investments in patents during the second quarter of fiscal 2020 as part of our strategy to lever technology as a differentiator.

We recently received 1 patent approval and have several others in process.

Approximately $300,000 in cash was used during the first half of fiscal 2020, including spending on manufacturing capacity and IP.

Our cash flow from operations has remained positive, while we continue to make strategic capital investments and pay down debt.

Total debt, including financial leases, was reduced by 7% in the first half of fiscal 2020, following an 11% reduction during fiscal 2019.

Our fiscal 2020 second quarter results reflect our ability to create demand for differentiated products in our key targeted markets of infrared and visible optical components.

We have demonstrated operating leverage, which has been aimed through top line growth and disciplined cost management.

It has taken us time to get here, but we are now in a stronger position, both financially and operationally, and more optimized to deliver value for our shareholders.

Now I'll pass the call to our CFO, Don Retreage, to provide more detail on some other critical areas of our second quarter 2020 financial results.

Thank you, Jim.

First, I'd like to mention that much of the information we're discussing during the call is also included in a press release issued earlier today and our 10-Q filed with the SEC.

I encourage you to visit our website at lightpath.com and specifically the section titled Investor Relations.

Now onto my remarks pertaining to the second quarter of fiscal 2020.

Jim's remarks covered a lot of our financial performance so I will be specifically discussing key performance areas.

Gross margin in the second quarter of fiscal 2020 was approximately $3.9 million, an increase of 11% as compared to the approximately $3.5 million in same quarter of fiscal year -- of the prior fiscal year and 63% higher than the $2.4 million in the first quarter of 2020.

Gross margin as a percentage of revenue was 41% in the second quarter of fiscal 2020, consistent with the second quarter of fiscal 2019, but increased from the first quarter 2020 when gross margin as a percentage of revenue was 32%.

The improvement in gross margin was due to increased volumes, yield improvement and mitigation of the impact of the tariff increases.

The yield issue relating to our BD6 products, which we experienced in the first quarter of 2020, was substantially mitigated during the second quarter.

We identified the root cause of the yield issue early in the second quarter and have implemented corrective action.

We continue to make process improvements that we believe will further improve our BD6 yields and margins going forward.

Total cost of sales was approximately $5.7 million for the second quarter of fiscal 2020 compared to $5.2 million in the first quarter of 2020.

While revenues of $9.6 million in the second quarter of 2020 increased 26% from $7.6 million in the first quarter of 2020, cost of sales increased only 10%.

The year-over-year comparison is not as favorable since the revenue mix in the second quarter of 2020 had a higher concentration of lower-margin IR products.

Our first quarter gross margin was also impacted by the tariff increases resulting from the U.S. and China trade negotiations, the majority of which went into effect in June 2019.

As we anticipated, the net impact of the tariff increases were significantly reduced beginning in the second quarter as the mitigation actions we took in effect for the full -- took effect for the full quarter.

To offset the tariff increase, we begin adding a surcharge to certain customer invoices, which is included as an offset to the cost of goods sold and is not included in the revenues.

The surcharge may be removed in the future once a corresponding trade settlement is reached that reduces the tariff to the previous lower levels or eliminates the tariff entirely.

As a result of our tariff mitigation efforts, the net increase in tariff expenses quarter-over-quarter was negligible.

Our estimate from our last quarter conference call was that our gross margin as a percentage of sales was negatively impacted by approximately 2 percentage points as a result of the tariff increase in first quarter of 2020 when compared to the first quarter of 2019.

With the BD6 yield issue almost entirely behind us, we have been able to improve our factory utilization.

We continue to manage this process, particularly since we have substantially added more production capacity on the plant floor over the past 12 months.

We can handle a lot more production which should lead to more efficiencies to improve gross profits and gross margins.

Again, the margins can fluctuate depending on the product mix of our revenues.

We continue to benefit from the significant improvements in operating costs following the relocation of our New York facility and implementation of other cost-saving measures.

As previously discussed, we had a few vacant positions in sales and other areas.

So expenses will increase somewhat as those positions are filled.

With our backlog and sales pipeline as well as manufacturing efficiency improvements, we're looking to improve our operating margin even after the vacant positions are filled.

So our IR capabilities on overall production capacity are growing steadily, while our overhead has significantly declined following our transition out of New York.

This facility relocation and other cost savings eliminated about $800,000 in operating expenses in the first half of fiscal 2020.

During the first half of the year, total operating costs and expenses were approximately $5.9 million, a decrease of $793,000 or 12% as compared to $6.7 million in the same period for the prior fiscal year.

During the second quarter of fiscal 2020, total operating costs and expenses were approximately $2.9 million, a decrease of $475,000 or 14% as compared to $3.3 million in the same period of the prior fiscal year.

In terms of operating categories, both SG&A and R&D were lowered in second quarter 2020 as compared with 2019 second quarter.

SG&A was lower in the second quarter 2020 as compared with the first quarter 2020, but R&D was a bit higher due to aforementioned improvement programs activities.

Going forward, we expect a slight increase in our second quarter -- overall second quarter 2020 in SG&A and R&D as we add some planned positions in the sales and engineering area, as mentioned before.

Similar to the first quarter of this year, the second quarter's overall performance was highlighted by fiscal discipline following the completion of planned spending last year, enabling significant production increases and the strengthening of our balance sheet.

Capital investment in fiscal 2019 to increase our vertically integrated regional production capacity enabled us to reduce capital expenditures this year.

Capital expenditures, including equipment financed through leases, were $1.2 million for the first half of fiscal 2020, down from $1.6 million in the first half of fiscal 2019.

Meanwhile, net cash provided by operations were $938,000 in the first half of the year as compared with net cash used in the operations of $398,000 in the prior year period.

Subsequently, from the first quarter, cash flow from operations increased by about 9%.

Due to capital investments and the reduction of debt in the quarter, our cash balance at December 31, 2019, was $4.3 million as compared to $4.6 million at June 30, 2019.

Capital investments were modestly higher in the second quarter of fiscal 2020 than in the previous quarter due to timing of completion of certain projects that were initiated at the end of the fiscal 2019 and in response to the growth and end-market acceptance for our products.

We continued to invest in our IR glass production, coating and molding capacity to meet the increasing demand for both telecommunication products and BD6-based infrared products.

Both of these products areas are expected to continue to grow as the year progresses.

During the second quarter, as part of our cash management, we declared an intercompany dividend of approximately $2 million to our U.S. operations from all divisions in China as this was determined to be the most cost-efficient way to rebalance our cash positions around the globe.

In doing so, we incurred additional Chinese tax expense of $200,000 in the quarter, of which $100,000 was paid during the quarter.

Our consolidated corporate income tax in the U.S. is shielded by our net operating loss carry-forward benefits of approximately $74 million at December 31, 2019.

But we do have to pay income tax to the countries of certain foreign subsidiaries.

With our operational strategies delivering these intended results for growth and margin expansion, we look forward to telling our story to prospective investors.

We will be participating in the Sidoti Conference in New York on March 26 and hope to see you there.

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

(Operator Instructions) Today's first question will come from Marc Wiesenberger of B. Riley FBR.

Can you talk about the increase in the BD6 lenses?

And is the increase coming from new customers, new applications or existing customers that are really seeing the benefits and are substituting materials?

I think the answer to that question is, yes.

All 3 parts, Marc.

The -- I mean the -- we're seeing increased volume on some of the products that we had developed to customers, and they're repeating those orders and increasing them.

A lot of this material is going into new projects as we develop those lens designs.

I think -- so I think it's all of those things are contributing to that growth.

And we are substituting and we're working on, and I think we'll see the substitution of the product into -- for some germanium products increase, although we haven't seen a tremendous amount of that to date.

But there are -- some of our customers are working on that type of substitution.

I think you put out a release recently talking about the diamond-like coating.

Talk about how that's going to impact the application and potential maybe acceleration of the substituting of the BD6 lenses?

I mean, in our opinion, the chalcogenide glass, which is our BD6 -- our name, our BD6 is our name for that is actually, in many ways, technically superior to the germanium in that it has a wider thermal operating temperature range.

It's lighter in weight.

The 1 knock on the product was that it's softer and it didn't have good wear characteristics if it was used for a front element in an assembly.

So with the diamond-like carbon coatings, now we can put a wear surface on that, and correct that deficiency.

So then, I think, overall it's a better material choice and not to mention the fact that it is somewhat less expensive.

I think you rolled out -- I'm sorry.

Go for it.

I was just going to say, I think those are the reasons that we expect it to continue to grow and why that DLC capability is so important.

Kind of following on that point, I think you called out that the BD6 is making up about 10% of total revenue and about 20% of the IR revenue.

What's kind of your expectations going forward as to how much of the business that could grow into?

Well, I mean, I think in general the infrared business is probably going to be 60% or greater of our total revenue.

I think we'll kind of settle into that 60-40 split between the visible and the infrared-type business.

And as we go through the next couple of years, I think the chalcogenide material will be probably the majority of that, although I think germanium will still have its place.

But with the molding capability we have, we can provide those types of products in large volumes as the sensor market and the surveillance market, which are emerging applications for this material, continue to grow.

And then with our diamond-turning capability, we can make the larger lenses, and BD6 is turnable as well as moldable.

So that we can do the full range of lens fabrication with it.

So I would imagine that the chalcogenide for us will be probably the majority of the material over time.

Great.

What percentage of -- you talked about a big uptick in 5G.

How much of the business was that this quarter?

We saw the PMO business grow about -- I think it was -- the revenue actually was down a little bit, but the unit volumes were up about 20%.

And I think that's mainly being driven by the telecom sector at this point.

There's still general weakness in the industrial and commercial areas, particularly in Asia.

But telecom is still growing quite rapidly, and we see that increase continuing as far into the future as we can see, which is the next 2 to 3 quarters for sure.

Great.

I think you talked about the large contract and the delivering on that?

Was there any pull-through to account for that based on the delivery timing?

Or that's not going to impact next quarter?

And maybe you could talk about the dynamics of that contract and the volumes?

No, no.

I think that we shipped -- we were somewhere between $800,000 and $1 million delayed last quarter.

Of that delay, we shipped on top of what we normally ship another $0.5 million.

So there's still some of that delay that will fall into this quarter, which I think I pointed out that we would take as part of the second quarter and part of the third quarter to get completely caught up with that.

So it's not -- it's additional type revenue, if you want to think about it from -- if you don't count what we didn't ship in Q1.

But I think it's -- and that contract has renewed and the volumes in that contract are consistent with what we've had in the last 2 to 3 years with that contract.

So it's just going to continue at that level.

Great.

Maybe -- I mean nice jump in the backlog.

Maybe you could talk about the composition of the increase in the backlog?

Yes.

I think it's -- IR is certainly driving the majority of our growth, and that's coming there, I think.

So the precision molded optics -- I mean overall, our unit volume was up about 23%.

And so that's everything weighted together.

As I said, the infrared, the molded volume was up about 215%.

I think the diamond-turned volume was up in the mid-30s, if I remember correctly.

So the mix has stayed fairly consistent, but it's just continuing to grow.

That's nice to hear.

You were overcoming some challenges.

You got a really solid quarter, but then the coronavirus hitting and impacting operations.

What kind of -- how is -- what is that going to take off growth in the next quarter or -- and how do we think about that impacting what you could do in the second -- in the third quarter?

Well, we're still trying to assess what it means in the short term.

The interesting thing here is, while we had a planned shutdown for the Chinese New Year, which we actually in our operation had shortened from what most companies in China do.

And we had planned to start our operations back up around the 28th of January, which is a couple of days earlier than the new year holiday was planned to be.

Then the Chinese government came in and extended that shutdown period to -- through the 9th of February or added another 10-days to the shutdown.

However, we had already started operating, and we were asked to continue to operate by some of our medical customers who also petitioned the government to at least keep us as a critical component supplier.

So we've been running our plants since the 27th of January, at about 50% of its capabilities.

During the height of that -- the beginning of that crisis, we had about 50 people in there working.

We now have over 100 working out of the 130 total employees we have in Zhenjiang.

So we are running at increasing levels through this whole period.

So instead of losing 10 days of production, we're probably going to lose 5 to 6 effective days, which we believe, for the most part, we can make up during the balance of the quarter.

So it's still a dynamic situation.

It changes a little bit every day.

I think -- but in the short term, there could be some slowing.

In the intermediate term, I think it's actually going to end up being an increase in production.

During this period, my GM in China called me up the other day and told me he received several large requests for quotations from some of our major companies that we service, with tremendous increases in volume, which are associated with making thermal analyzers for combating the coronavirus.

So some of that is infrared.

Some of it is visible product.

And it may end up being an increase in our production output as opposed to decreasing it over the long haul.

So I think it's -- that's -- for us, it's kind of the silver lining in this very dark cloud.

But it -- I think we're going to come out of this, all right.

Now what I don't know yet is how much it will impact in the next 6 or 8 weeks that we have in the third quarter.

Right now, I think that's going to be fairly minimal.

Understood.

And just 2 more for me.

I think you guys 8-K-ed recently, you've got an extension from NASDAQ on the potential delisting.

What are your potential strategies on dealing with that?

I think the deadline is sometime in the summer?

Yes.

I mean, we were granted an extension on January 14 to July 11.

As we continue to report improved results, as we did this quarter, I think we should see the stock -- I would hope we'd see the stock price move to more normal levels.

If not, then we'll consider other options to ensure that we maintain the listing.

But that's a decision we don't have to make at least for another month or so.

Understood.

And then the final one.

Jim, you're slated to depart in the summer as well.

I think previously, you've talked about bringing in external search firms.

What's the status on plans -- on succession plans?

Oh, I think the plan remains the same.

I mean, the Search Committee and the Board is continuing to interview candidates, both external and internal, and that's -- no decision has been made yet and when they make one, we'll certainly announce it.

(Operator Instructions) And our next question will come from Michael Dyett, a Private Investor.

Jim and the team, great job, great report.

As you know, in the past, I've asked about some of the International and European sales strategies, and you've talked about some of the distributors.

Maybe you could bring us up-to-date there and particularly in relation to the shift with more IR, does that shift in the distributor support -- and related to that, does things like the Munich Fair still really play an important role in your EU sales efforts?

Well, I think, Michael, the distribution of our revenue by geography kind of remains similar to what it was in this last quarter.

About 24% of the revenue was in Asia, 34% was in Europe and 36% was in North America, the U.S., with the balance being -- then the small balance being in the rest of the world.

So we see all of those geographic areas pretty evenly split.

If you think about that, the -- so all of those areas are important to us.

We still have 14 reps around the world that we use.

We have our master distributor in Germany that we used mainly for Europe.

We're supplementing what they do with our sales team out of our Riga facility.

And we're supplementing what we do in Asia with our sales team out of our Chinese facility.

So that strategy has not changed.

And all of those geographic areas are continuing to be important to us.

We see growth on the infrared side in all of those areas.

The -- Asia is -- that's continuing.

As I said, it's getting a little boost here, it looks like, from this virus situation where the increase in thermal analyzers is short-term need, so that's increasing that.

Europe is -- there's lots of opportunities for infrared there, and we continue to pursue those.

So I think -- I don't think we'll see that change much as in terms of by-product line, all of those geographic regions are important to us.

Related to that, in past calls you've mentioned the shift to more of a product or a technical sales team orientation.

And I wondered if that's been paying off or if there are any changes expected?

I think we're continuing to implement that strategy.

We implemented the product management strategy, and we put in place 2 product managers, which are hard at work doing the market research and developing the market segments that we think are the right ones to go after.

The whole strategy, for example our visible business, as you know, for many years has been driven by the laser diode growth, which grows at 2% to 4% a year.

We think we can grow that business faster than that by looking at particular markets within that segment that are growing faster.

For example, we're looking at laser projectors that is a market that grows at about 24% -- is predicted to grow at 24% compounded annually, medical instruments grows around 8%, Datacom telecom transceiver looks like it's going to grow around 17% compounded annually.

So we believe we can grow faster than the diode market by focusing those efforts into those kinds of markets.

So that kind of strategy is being implemented in all the product lines.

These guys are focused on the precision molded optics in the visible, the infrared imaging-type applications as well.

So we're implementing that and staffing the sales department for that.

Now we're not fully staffed as we make this transition, and that's where some of those open positions we talked about lie.

So I think -- but that is the strategy that we're working, and we believe it is working.

Our whole idea is to get the technical people in front of the customer quicker and shorten that cycle time from what we're trying to define as the requirements for that optic.

And I think that is the right strategy, and I think it's working.

It's good to have it affirmed, and I appreciate the good report and the good results from all your solid work.

Appreciate you taking my questions.

We show no additional questions.

I'd like to turn the conference back over to Mr. Gaynor for any closing remarks.

Thank you.

To conclude our second quarter 2020 conference call, I'd like to leave with this final comment, which was part of our earnings press release.

We have demonstrated operating leverage, which has been gained through top line growth and disciplined cost management.

Taken its time to get here, but we are now in a stronger position, both financially and operationally, and more optimized to deliver value for our shareholders.

Thanks again for participating on today's conference call.

We look forward to speaking with you again next quarter.

And I'd also like to thank all our employees, and particularly our Chinese employees who are working so diligently through a very difficult time.

So thank you.

The conference has now concluded.

Thank you for attending today's presentation.

You may now disconnect.