LightPath Technologies Inc (LPTH) 2007 Q4 法說會逐字稿

Greetings and welcome to the LightPath Technologies Incorporated fourth quarter, fiscal year 2007 results. At this time all participants are in a listen-only mode. A brief Question and Answer Session will follow the formal presentation. (Operator Instructions). As a reminder this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Bob Ripp, chairman of LightPath Technologies. Thank you, you may begin.

Thank you. Good afternoon, everybody. We'll talk about our fourth quarter, full year, I want to come back and talk a little about our strategic summary, before we open it up to questions. I have with me on this call, members of the management team, Jim Gaynor our Interim CEO and Global Operations Manager, James Magos, VP of Sales, Joe Wu, from China as our county General Manager of China, and of course Dorothy Cipolla as our Chief Financial Officer. I will have Dorothy go through the safe harbor and brief run through on the financials, and I will turn it over to Jim for some explanations about the financials, and we'll take it back to me, and back to you the audience.

Good afternoon. First I want to mention this call is being webcast through the home page and Investor Relations section of the company's corporate website, at LightPath.com. A recording of the call will be posted on our website by tomorrow, as has been our usual practice. Please note this conference call is the property of LightPath Technologies, and any taping or other commercial reproduction is prohibited, without prior written consent.

It is necessary for listeners to be informed, that the following discussions including the Q&A, will contain forward-looking statements made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. Including statements about LightPath's prospective market opportunities, future business plans, and possible future financial performance. These forward-looking statements necessarily involve risks and uncertainties. LightPath's actual results may vary materially, from any such statements made. Additional information concerning factors that could cause actual results to differ from forward-looking statements, can be found in LightPath's periodic filings with the SEC.

The forward-looking statements and associated risks covered during this conference call are based on current expectations as of today. LightPath assumes no obligation to update, or revise them, whether as a result of new developments or otherwise.

Okay, with the Safe Harbor Statement read into the record, I want to remind listeners that in addition to call participants, the questions for this call can be submitted via our Investor Relations e-mail box. It can be accessed on our home web page, from the Investor Relations button on the left menu. From there, click on e-mail IR contact, that directs your e-mail to the following mail account, INV_REL@LightPath.com. E-mails sent to any other address, will not be seen, or responded to.

Now I would like to continue covering the financial information. As noted in our 10-K which will be filed today, our fourth quarter revenue was reported as $2.28 million, a 33% decrease compared to $3.41 million of revenue for the fourth quarter of last fiscal year. Net loss for the fourth quarter was $1.30 million or $0.29 per share, compared to a loss of $0.83 million or $0.18 per share in the same period a year ago. Comparing fiscal 2007 to fiscal 2006, our revenue increased by 10% from $12.17 million in fiscal 2006, to $13.35 million in fiscal 2007. In the second half of fiscal 2007, order activity from customers in the communications and defense market segments slowed significantly, compared to the first half of 2007. This is due to a softness in these markets, and we expect the communications slowdown to continue, in the first half of fiscal 2008.

Our gross margin percentage in the fourth quarter of fiscal 2007 compared to the same period last year was lower at 2%, versus 13%. This decline in gross margin was due to some extraordinary operational issues, associated with the transfer of manufacturing processes to our China facility, and delays in product delivery which Jim Gaynor will address later in this call. Our gross margin percentage for fiscal 2007 compared to fiscal 2006, improved from 17% to 23%.

The primary reason for these improved gross margins is the increased production at the company's Shanghai manufacturing facility. The Shanghai facility contributed more than 75% of the production of molded optics in the fourth quarter of fiscal 2007. The company is continuing to invest in equipment and facilities for that site, which management believes will continue to achieve both cost reduction, and new growth opportunities. We continue to work diligently at expense control throughout the business. As we continue to balance the needs of Shanghai and Orlando operations, our plans for this year include selectively adding personnel, particularly in new product development and expanding sales in China.

Moving onto talk about cash flow, the company is continuing to invest in equipment and facilities for its Shanghai location, which management believes will achieve cost reductions and growth opportunities. For the quarter ended June 30, 2007, net cash used was $0.59 million. For fiscal year ended June 30, 2007, net cash used was $2.47 million of which $0.83 million was used for capital equipment purchases. These capital equipment investments were made to improve production efficiencies, resulting in an increase in our gross margins to 23% for the 12 months ended June 30, 2007, from 17% in the same period in the prior fiscal year.

Our fiscal year end cash, and cash equivalents were at $1.29 million. This compares to fiscal 2006 year end cash and cash equivalents of $3.76 million, in March of 2006 we raised $3.6 million through a private placement. Now I will turn the conference back over to James Gaynor.

Thank you, Dorothy. Q4, we experienced some extraordinary and isolated operation issues, which negatively impact our gross margin by $341,000 or about 15 percentage points. The cash usage of $547,000 included this $341,000 of one-time charges, plus some capital investment spending of $129,000 for continued cost reduction and expansion purposes.

Excluding these expenses of cash usage, in Q4 '07, the cash usage in Q4 '07 is very similar to the cash that we spent in Q4 of '06. The $341,000 dollars of spending, relates to the transfer of manufacturing processes and equipment to China, and to bring our material system into compliance with RoHS standards. RoHS is a regulation on hazardous substances, that has been implemented by the European Union and other Japanese and foreign companies, which requires-- it is a restriction or a ban actually, on the usage of some hazardous materials such as lead.

This has been in effect, and we're operating under an exemption, so we're required to make this kind of conversion. We are issuing a press release later today which will have some more details, on these one-time charges. The $341,000 represents an execution issue as we implemented our cost reduction, and transition to high-volume strategy. Why do we find ourselves in this position? Our strategy requires us to position the company, to be able to participate in lower cost, and higher volume opportunities. The cost drivers include our labor costs, our glass costs, and our tooling costs.

Labor is being addressed by our move into our China operations, and at this point, as Dorothy mentioned, we are seeing the improved labor costs, as we have a significant portion of our volume transferred there. Implementing lower glass cost systems requires us to change our press technology. We have just completed the upgrade to new computerized atmospheric pressing stations, and with the conversion of these stations, we're now able to convert to the RoHS compliant glass.

Our previous business model used quick-turn soft tooling design, for small quantity runs. As we move to higher volume opportunities, this tooling will no longer be cost effective. By converting to a ceramic based tooling technology, we can increase the number of lenses per tool set, by an order of magnitude, which would significantly reduce our tooling costs. The ceramic based tooling is a proven technology in the industry, and the issue for us, is one of implementation, which we expect to complete over the next nine months. The additional benefit of going to a ceramic-based tooling, is it allows to us press at higher temperatures. There are-- and that opens up opportunities, to use other lower-cost glass materials that exist in the industry.

Given these things, we are confident that our strategy is correct, and to achieve success, it is simply a matter of execution. In the fourth quarter we experienced some execution issues, which have been, and are continuing to be addressed. I am happy to say at this point, our efforts thus far have shown very positive results in yield improvements, and the reduced delinquent orders by at least 40%.

In addition, the manufacturing engineering team as Dorothy mentioned, has transferred more than 75% of our molding production to our Shanghai location, and 85% of our preform manufacturing process. This will continue to afford us additional cost reduction opportunities and will increase our production capacity. We are continuing to leverage our Shanghai facility with a transfer-- the anticipated plan transfer of our isolated product line over the next few months.

However, I want to mention that we will continue to see some effects over the next two quarters, until we implement all of these tooling, glass, and labor initiatives are complete. The problems we are facing are known, we have the technology and knowledge to implement the improvements, and again it is a matter of execution. With that, I would like to turn it back over to Bob Ripp.

Thank you, Jim. Before we get to the question part of this call, I want to take a few moments to discuss the evolution of the LightPath business model, and its implication on the company's financial goals.

In 2004 after consolidating the locations of Albuquerque and the California operation into Orlando, the financial profile for LightPath was $8.3 million of sales, of which about 90% was telecom, a gross margin of 25% which is a peak, and expenses of $6.2 million of SG&A, for an adjusted operational loss of a 50% margin, and a capacity of 200,000 lenses. On the horizon was the specter of price declines in the telecom sector. The company could not, at that time, compete in high volumes because it lacked automated presses and a tooling capability, to mold lenses at a competitive cost. The LightPath model as Jim mentioned, was a custom manufacturing of Aspheres, quick turn around, and capable of modest volumes, per part number.

Therefore LightPath pushed to diversify its technology into defense industrial markets, and later infrared imaging applications. In essence, LightPath would be a high markup supplier, for value-added Aspheres. LightPath at the same time increased its capacity to 400,000 lenses in Orlando by 2006. While sales for the new markets-- these new non-telecom markets would have higher gross margins than the telecom sales, the top line growth would be only okay, on "only okay", because the new application growth would be masked by the declining telecom sales, but bottom line profits and cash flow, would be better than okay, due to the profit margin improvements for the new applications that we would be introducing.

Two parts of that strategy have worked. We have seen a successful growth of new applications with gross margins of 35%. However, the telecom market sales end margins, were ravaged by severe ASP declines. During '05 and '06 LightPath evaluated to offshore direct labor operations. In April of 2006, we established Shanghai as a way to reduce the manufacturing labor and benefit costs, which comprise almost one third of our lens price. With our presence in China, we were presented with many opportunities to produce glass Asphere, in a range of high-volume applications. LightPath operated in a laser, non-imaging space of about 13 million lenses per year, about two-thirds of that was communications based, so we were currently operating in about a 4 million lens per year, kind of activity.

Infrared laser imaging is a 17 million lens opportunity, and with the recent trend towards molded IR glass, which has lower material costs, reduced cycle times, and lower capital costs, to the then current diamond-turned one at a time approach, makes the LightPath technology very attractive. Cell phone requirements of 740 million lenses, and cameras of 150 million lenses per year, are increasingly demanding glass Aspheres, as the size of lenses decrease, and the demand for resolution, exceeds 3 megapixels. LightPath decided it would embrace a business model, that would allow it to be a high-volume, low cost producer of Aspheres.

However, the Company would have to convert to different manufacturing processes, as Jim Gaynor has described, but LightPath believes, it will help not only our current non-telecom product set to achieve higher gross margins, but it would also allow the company to compete in large volume telecom opportunities, and be positioned, to be a major supplier to customers in China, for laser and imaging product applications. It would be a business model with better than okay volumes, and gross margins in the high volume business that would be attractive.

In 2007 we expanded capacity to 1.1 million lenses, and that will more than double in capacity over the next twelve months. We will keep about 10% of that capacity in Orlando, for defense applications and low volume for partner products for other industry segments.

We have, for the better part of 2007, been implementing operational changes that Jim Gaynor spoke about. We believe that the strategic learning that we have gained, will enable LightPath to achieve gross margin objectives of about 35%, by reductions in our labor and materials materials content. The near term sense of urgency, is to bake into the manufacturing processes, the kinds of cost reduction efforts that Jim has talked about. We are confident that we can produce low cost lenses at high volume, we will bid aggressively on the sales side, so that our competitive prices will also be profitable.

In conclusion, our strategy is clear. The LightPath team is both committed and energized. Our key is execution. We know what we have to do, and now we need to go do it. Now I want to turn this back to Jim for a moment before we take your questions, to have him just talk a little about anecdotally, some of the more recent successes that we've seen.

Thanks, Bob. As Bob has mentioned, we have a three-pronged approach to improving our gross margin. The first part of that is to maximize the use of our China operation for low cost labor. The second part of that, is to implement lower-cost glass in our materials systems, and to do that we need the third piece, which is the approved and upgraded atmosphere pressing and ceramic tooling together. So we've embarked on that strategy, and we've had some success with it, and we've also had some issues with it, as has been evidenced in some of our financial performance of recent quarter.

The echo glass that I think has been referred to before, which is the RoHS compliant glass, we originally wanted to implement a year ago, and we had some problems with that in our current press stations configuration. What that forced us to do, was to look at our press stations, and decide how we could change those, so that this glass, these lower cost glass would be useable to us. The bad news is delayed us implementing a lower-cost material system, for over a year. The good news is, we have now a better, more flexible press to go forward, and we have recently completed the conversion of all our machinery in Shanghai, and Orlando, to have this capability.

One example of the flexibility of these machines that we have, is in our previous press stations and some of the competitive press stations that are available on the market that we've looked at, they are multiple-head presses, and we have an issue like a tool change, or a repair problem with the machine, you lose the entire station. That's eight heads, or whatever. They all go down at once for the problem associated maybe with one. On our machine if be lose one press head, the other seven, or ten, continue to operate unaffected. That's the kind of the benefit that we've gotten out of some of this issue.

In addition, if we move onto another example, tooling costs as we said in our model, our previous model, liquid tooling was designed to be used for low quantity manufacturing, that had the flexibility to be a very fast turn around to make tools, but it was soft tooling, and it did not last a very long time. As we try to position ourselves, for low-cost higher volume opportunities, this is a totally ineffective cost of tooling, so we have then investigated other methods, and we've decided on the ceramic tooling technology. This kind of tooling will extend our tooling life, by at least an order of magnitude. That is a significant cost factor as we move forward, and will reduce our lens cost significantly.

Additionally, because of the material characteristics of the ceramic tooling, it allows us to use higher temperatures in pressing, if that's necessary. The advantage that that gives us immediately, is it opens up additional material systems of higher temperature glass, which are historically less expensive. As a matter of fact, we are in the process of doing some of that, and we have in addition, as we have investigated this, we have begun having some success shipping product on lower-cost volumes out of our China facility. Those are the kinds of examples of things we've been involved in over the last year.

Thank you, Jim. We'll be quiet now, and then turn this over to the those that are on the line, to ask whatever questions they may have of the executive team.

Thank you, we will now be conducting a Q&A session. (Operator Instructions). One moment please, while we hold for questions. Our first question is from Robert [Embiner] with Montfield Financial. Please go ahead with your question.

Good afternoon, gentlemen.

Hi, Bob.

Congratulations on the progress being made at LightPath. We look forward to continued progress, as we go forward. My first question, Bob, I know it has only been a week since Mr. Brazil's departure. Have we had any progress on identifying a potential candidate, to replace Mr. Brazil as CEO?

I did have-- I have had a number of conversations with the executive search firm, and we have a list of prospects that they think are, very attractive. I have not spoken to any of them, and my plan is to do that, as soon as I return, from my trip to China which is going to be in about two weeks, so they're busily compiling a list of candidates, and that's where we are.

Okay. We do have Mr. Wu on the line with us as well?

Yes.

I would like to know if you can give us a little color as to where we are with the build out, and our manufacturing operations in China, and how much time you think it will be, before we can get completed out there?

Bob, I want to interrupt a moment. I am happy to have Joe answer that question, but our manufacturing is globally managed under Jim Gaynor, so both Jim-- Jim is responsible for making sure we align our manufacturing skills, and resources around the world. Joe plays a key and pivotal role, but based on both his background experience, but as his responsibilities as the General Manager of China, to make sure he is working with Jim to get done what we need to get done. I am happy to have him answer your question, but I want to make sure--

If Mr. Gaynor would prefer to answer the question, that's fine.

They both can as far as I'm concerned.

No problem, Bob. How I would answer that question is as we indicated, right now we have about 75% of molded production is now being done in Shanghai. That's where we got to, in the fourth quarter.

That's a significant improvement improvement. The factory in China is complete. It is not full. It is only maybe less than around 40% of its capacity is being utilized right now, and we're continuing to move equipment in there. We just sent another five press stations over there, which are being installed now. We are going to continue to transfer some other product lines in there, as I mentioned, with the isolator product assembly being, we're in the middle of transferring that at this point. That's kind of where we are.

In addition, we also have about 85% of our preform production in Shanghai operating as well, preforms are the preparation of the glass material before we press it.

Okay. Before I get off of China, maybe Mr. Wu would like to answer what type of market opportunity he sees for LightPath in Asia, and what we're seeing to date, with what we can offer?

Marketing China is very exciting. We see a lot of alternatives, ranging from similar market as we elected for high end applications to lower end and medium priced, to very large market for other applications, like imaging.

That goes back to the cell phone and camera lens demand that's out there on an annual basis, Bob, and quite frankly even as it relates to the-- I think the part of China with your question about operations being built out is when are we going to see the leverage of these cost reductions in terms of volume increases? That's what I read into your question, and I try to anticipate that, Bob, by saying, having had a couple of hiccups in '07, I am reluctant until the team has stabilized the manufacturing processes with regard to this new molding technology, as well as the coating applications, before we start bidding on low-price volumes. I want to make sure we have the low cost in hand.

I am not going to be-- you know me, I am an inpatient person, but I have been burned once before with isolators in this company, where we were "literally shipping dollars" with our volumes, because our variable costs exceeded our revenues for those products, so having been chastised once before in that regard, I am just making sure from a process point of view, we know what we're doing, we can drive the low cost, and then the sales team is being staffed up, and they'll be able to hit the road running, and Jim Magos who is here, and responsible for our Global Sales and Marketing around the world, is very excited about the fact, and I think Jim said it, we have shipped a large piece of volume, to a Chinese customer of a low-priced laser application.

So we can get there. We are seeing some business, and I think it is just the beginning of the successes that we're looking for in China.

Very good. Two other just quick questions. One actually relates to the telecom market. We keep hearing about the decline for LightPath with regard to telecom orders, and we've seen that in backlog over the past year-and-a-half. And from a layman's standpoint, I keep reading and hearing about, buildouts from companies such as Verizon. We're seeing the buildout up here in the Northeast of FIOS, and I am wondering with the billions I see being spent in the telecom market, how it relates to us, and why we don't see any business pick up because of that?

I think you're really talking about two different things. The first thing is what we experienced at LightPath is for the long haul telecom business, which has been the traditional business for us, and that's been down at least 60% in volume, and in addition to that, we've had cost degradation over the last two years, pretty significant. What we've done is, we've started addressing some of the other markets, to eliminate the downturn that we're experiencing there.

If you look at the FIOS and some of the other telecom products that you're talking about, we really don't have the cost structure today, in order to address those markets. We are positioning ourselves, in order to address those markets as we go forward, and I believe that we'll be able to play in some of that arena. As Bob said, we're not wrapping money with the units we ship.

One other thing I would say, Bob, is that in the long haul market, even end-user customers had a huge amount of inventory built up, so even if they're selling some of that out to their end-user customer, they're not coming back to us asking for refills, because they still have a large supply of inventory on hand. My point is, this telecom debacle, will continue for LightPath, until such time as we can get our cost structure back in line, and be more competitive.

Okay. Lastly, just to kind of get a handle on, where and at what point we think the retooling of the press technology, as was stated by Jim Gaynor, should take about nine months, and we should feel the effects of that over the next couple of quarters in the financials. With that being the case, and with the build out should be complete by then in China, and we should be stable to start to take on new business in that region by then, is it fair to say, that in two, three, maybe even four quarters, we can start to see some real improvements on the bottom line?

Yeah. I would answer that question in two ways, Bob. First, I think we'll see this in less than three quarters, is a gross margin improvement, because the cost reductions even on our existing products will take hold, so just what we're shipping in our non-telecom product set, will benefit from the kind of cost reductions and material changes that Jim was talking about, so that should ramp that up. Then the challenge will be, the cycle time it takes, to bid a new order, qualify that order, and then begin to ship it. So I think what we're going to see first and foremost, is gross margin improvements, early on next two quarters, and following that, beginning to pick up in new market opportunities, principally out of China.

Fantastic. Thank you, gentlemen, and obviously I appreciate all the hard work, and I look forward to chatting on the next quarter.

Thank you, Bob.

The next question is from Michael [Diat] with [Diat & Bobhew] please go ahead with your question.

Thank you. I am gratified for a very good report, as well. I just wondered if you could give us a little update, on the defense work you've been doing, that we'd heard about in prior conference calls?

I am going to ask Jim Magos to do this. Let me steel some of his thunder. If anybody is going to get in trouble it ought to be me, and not the Chief Sales Executive. We're doing better. We're just not allowed to talk about it in terms of, until certain contractors tell us it is okay to do that, but having said that, Jim, why don't you embellish on it.

We've received an award from the Naval Air Warfare Center, but we're not allowed to go through any of the information, until such time, as they give us approval. I actually have the order in hand, and the order is entered into our system, but we're not allowed to disclose anything about that, until such time that we have it. Now, I can't direct you what to do, but there is a website that exists out there, that there is information listed on there, if that answers the question.

Okay. Okay. The only follow-up question I would have, is whether the disclosure backlog at the end of the last quarter is improved a little bit, since that time.

You talk about the last quarter, you mean this quarter?

Well, the number I recall was under 2.1 million something, and that didn't sound that great, and I would hope it is looking better.

Jim.

The answer is yes.

Thank you.

Thank you very much.

(Operator Instructions). Next question is from Steven Donovan, Private Investor. Please go ahead with your question.

Greetings, folks.

Hi, Steve.

Can you comment on any new markets that are being considered? I heard the automotive market, specifically collision avoidance systems, was something you were considering?

We're working on quite a few different automotive applications. They range from the, head's up display, which is probably biggest one of the markets in the automotive where they actually have the display right in front of you, to the collision avoidance, and many of the other thermal imaging applications using our infrared products. Those are the key new markets we're doing in the U.S. with the infrared. In the new markets that we're starting to approach in China, they include products such as laser levels, to other laser non-telecom applications, and the most recently we're starting to look at some imaging applications, as we start getting our costs down.

Is the automotive market something you're taking very seriously here, because it seems like it is huge?

The automotive market is very huge. We're looking for a niche in the automotive market, and there is quite a few other markets out there, micro projectors, there's just a very large opportunity that we see in the Aspheric sector that covers quite a few different segments, but the automotive is a very long design in, as you probably know. We're talking about years before you start seeing volume.

We think there is other markets that we can penetrate and get revenues significantly earlier than we will in the automotive industry. In this particular product, we're not selling directly to the major automotive manufacturers. We're selling to an intermediary, who then in fact sells it, or does some value-add,and sells the module to the automotive manufacturers. We are working with some of these companies as we speak.

Can you comment on LightPath's competitive advantage in something like the automotive market?

It is actually two fold. When you start looking at some of these types of applications, there is two pieces. One turns out to always be cost. Our cost advantage in this--

One moment, ladies and gentlemen. The speaker line disconnected.

What happened?

Please wait while we reconnect the line. Mr. Ripp, you're reconnected to the conference.

Thank you. Hi, this is Bob Ripp again. I apologize. We had a technical problem on this end, so please forgive us. Steve, I don't know how far we were responding to your question. Is there something you wanted us to amplify? I just can't figure out where we lost the connection.

I was interested in just hearing a simple statement of LightPath's competitive advantage and something like this automotive-- emerging automotive market for collision control, collision avoidance.

The advantages, Steve, this is James Magos. The advantage is less material content per lens, and we compress the lens as opposed to diamond turn the lens, so you get more consistency unit to unit, and faster cycle time.

And no one else can do that?

There are people that can do that. We believe that we also have a design advantage. We have a very good design set of engineers in this company that can-- is really a leadership in the industry.

Thanks very much. I think you guys are doing a great job.

Thank you, Steve.

(Operator Instructions). Mr. Ripp, I am showing no further questions in queue.

Okay, I would like to thank everybody for taking the time to join the call. We are disappointed with our fourth quarter. We know what's ahead of us in terms of what we need to get done. Even during this transition, Jim Gaynor as the Interim CEO, I am very confident that he and the rest of the team, I have been spending a lot of time with them, since we made the announcements about two weeks ago.

I am very confident, and you should feel comfortable, that the team is prepared to understand the execution issues, and will begin to execute against the set of metrics we put in place, to see our gross margins improve, and off of that begin to see upticks in our volumes. So with that, I would like to say thanks to the team, and thanks to all of you for participating today. Goodbye now.

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