LightPath Technologies Inc (LPTH) 2008 Q2 法說會逐字稿

Greetings, and welcome to the LightPath Technologies Incorporated second quarter fiscal year 2008 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. Jim Gaynor. Thank you, Mr. Gaynor, you may begin.

Thank you. Good afternoon, and thank you for joining our conference call to discuss LightPath Technologies financial and business results for the second quarter of 2008, which ended on December 31, 2007. In the conference call today with me are our Chief Financial Officer, Dorothy Cipolla; our Chairman, Bob Ripp; and our corporate VP of marketing and sales, Mr. Jim Magos. Dorothy will now open with our Safe Harbor statement.

Good afternoon. First I want to mention that this call is being webcast to the home page in the 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 our 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 provisions of the Private Securities Litigation Reform Act of 1995, including statements about LightPath's perspective 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 a new development or otherwise.

Okay. With the Safe Harbor statements read into the records I want to remind listeners that in addition to call participants, 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. From there click on e-mail IR contact that. That directs your e-mail to the following e-mail account inv_rel@LightPath.com. E-mail sent to any other address will not be responded to.

Now I'd like to continue covering the financial information. As noted in our press release, our second quarter revenue was recorded at $2.02 million, a 47% decrease compared to $3.79 million of revenue for the second quarter of last fiscal year. Net loss for the second quarter was $1.66 million or $0.31 per share compared to a loss of $0.34 million or $0.08 per share in the same period a year ago. Comparing six months of fiscal '08 to fiscal '07, our revenue decreased by 47% from $8.18 million of fiscal '07 to $4.33 million in fiscal 2008. The decrease from the first quarter of last year was primarily attributable to lower sales volumes of (inaudible) and optic products and isolators.

Our sales to customers in the telecommunications industry decreased by $1.5 million compared to the quarter ended December 31, 2006. This is due to a softness in these markets and we expect lower communications sales to continue throughout fiscal 2008. Our gross margin percentage in the second quarter of fiscal 2008 compared to the same period last year was lower at 0% versus 32%. This decline in gross margins was due to some one-time charges associated with inventory standard costs and prep, which Jim Gaynor will address later in the call.

Our gross margin percentage for fiscal 2008 compared to fiscal 2007 declined from 28% to 6% for the six months. The primary reason for these reduced gross margins was attributable to revenues which were not adequate to absorb fixed costs. Also the $524,000 standard costs revaluation and [scrap] charges lowered margins offsetting improvements in direct labor made by increasing production in the Company's Shanghai manufacturing facility. The Shanghai facility contributed more than 83% of the production of [molded] optics in the second quarter of fiscal 2008.

We continue to work diligently at expense controls throughout the business. In the second quarter we renegotiated our operating lease in Orlando and reduced our space in half. As we continue to balance the needs of Shanghai and Orlando operations, our plans for this year include selectively adding personnel, particularly to expand our sales force in China.

We are continuing to invest in equipment and facilities for our China operations, which management believes will exceed both cost reductions and growth opportunities. For the six months ended December 31, 2007 net cash used was $2.8 million. Cash was used for operations as a result of the low revenue levels and investment in future growth. $240,000 was for long lead-time capital equipment for the joint venture, $18,000 for legal fees for setting up the joint venture, and severance expenses of $114,000 for work force reductions implemented in the first and second quarters.

Now I'll turn the conference back over to Jim Gaynor.

Thank you, Dorothy. In an effort to try to explain these things I'd like to go through a number of points. First, LightPath is in a period of transition and we have completed three very difficult quarters as we position the Company to be in line with these rapidly-changing markets. In Q1 and Q2 of 2008 we had several one-time costs that, in combination with reduced revenue levels are masking the improvements we have implemented. Let me take a few minutes to explain these.

First, the revenue decline is mainly attributable to weakness in telecommunications market and a slowdown of defense orders. Telecom was only 20% of revenue in Q2 '08 compared to 51% of revenue in fiscal Q2 '07. We are addressing the revenue issue as can be seen when you start to look at our disclosure backlog. Our disclosure backlog has grown 46%. It's up from $1.8 million to $2.7 million from the June, 2007 through December of 2007 and all of that growth is in non-telecom business.

As an example of the type of the growth that we're experiencing, as we announced on January 10, 2008, securing a multi-year or agreement with a Chinese tool manufacturer to supply a minimum of $1 million of custom aspheric lenses. In addition to that we are experiencing significant quote activity on our new product lines, collimators and black diamond IR lenses, which I am confident will convert to orders in the very near term.

Also during the first half of fiscal 2008 gross margin was negatively impacted by some one-time expenses. The combination of the rapid decline in revenue and our successful cost reduction created an inventory issue. We needed to adjust our standard cost to reflect the cost improvements, and in so doing we had to recognize the impact to our inventory valuation. A combination of obsolete and excess parts, which is about 29% of the adjustment and revaluation of costs, which was 71% of the adjustment, resulted in the $524,000 inventory adjustment, which is reflected in the gross margin. Reported gross margin was 6% for that period, but adjusted for this one-time percent -- or one-time charge it would be 18%.

Now let me explain a little bit about what is happening to our costs. Clearly the reduction in our telecommunications business revenue had an effect on gross margins due to the under absorption of fixed costs. The lower revenue means less gross margin. Now to try and explain the significance of the revenue change, if we look at the $1.8 million reduction in revenue in Q2 '08 compared to Q2 '07, and we apply the 27% of direct costs that we had in Q2 '08, we would have contributed another approximately $1.3 million of gross profit. So that's a very significant impact of the revenue decline.

Again, Q2 2008 direct costs were 27% compared to Q2 2007 when they were 33%. This significant six percentage points reduction in direct costs gives me confidence that going forward LightPath is now able to compete in high-volume, low-cost commercial and consumer markets. These markets are where LightPath will generate the volume it needs to cover its necessary fixed costs and we are now positioned to do so.

LightPath is in the design cycle phase with many customers and programs in these new markets around the world, including high-volume custom aspheric lenses, IR Black Diamond thermal imaging lenses and collimators for fiber lasers.

In addition, we have addressed our SG&A costs. During first half of fiscal 2008 we have reduced personnel and overhead costs. We have reduced 44 people from the organization and reduced our Orlando facility lease cost by 50%. The impact of these savings will be realized in Q3, 2008 and beyond. Now there was a cost to make these changes and this cost was taken in the first half of fiscal 2008. We experienced some nonrecurring charges totaling $476,000 for severance, executive search fees, related expenses, legal fees for the joint venture contract preparation, and we also incurred a $150,000 one-time lease termination fee. LightPath is continuing to implement its business strategy to diversify its served markets and position the Company to participate in lower-cost, high-volume opportunities.

Our direct operating costs are decreasing to support our low-cost products. We have reached agreement with our Chinese partner, KDGM Optical Glass Company, to open a joint venture business focused on high-volume, low-cost products. We have expanded our Chinese -- our Shanghai manufacturing capacity, and as Dorothy mentioned, we produce over 83% of our second quarter lenses in that factory. We are implementing RoHs-compliant glass. RoHs is the European standard that restricts the use of certain hazardous materials, such as lead and mercury, and we're qualifying lower-cost glass materials.

As a result of these management actions, we are seeing positive results in yield improvement, production rates and cost reductions. We are continuing to position the Company to participate in higher-volume market opportunities.

Now I'll turn the conference over to Bob Ripp, our Chairman.

Thank you, Jim. I'd just like to say that this last quarter was not only disappointing, but given the fact that we also took about $600,000 of one-time charges in the quarter -- $374,000 for inventory valuation, $150,000 for a lease termination so that we can get out of about 20,000 square feet here in Orlando with savings to come in the future, and another about $77,000 for the executive search fee that we had in place -- complicates the understanding of the results that took place.

My sense of where we are, with all the actions that Jim and the team have about been taking, they have not yet seen themselves reflected in the actuals. They will show up in the ensuing quarters -- the third and the fourth quarter. As I look at all the work that -- internally that we've done, I do see improvements in both our reductions in infrastructure cost, our continuing reductions in our direct manufacturing costs, which makes us more competitive in terms of how we can price our products so that we can go up the volume curve and get some elasticity on those volumes.

The best way I can communicate to you in terms of how it is that we're better positioned going forward, for those of you who have been following the Company, we used to talk about maybe a $4,5 million to a $5 million a quarter as a break-even revenue. I think based on the infrastructure reductions that we've taken and where we are with our lower direct cost that number is probably in the $3.5 million to $3.8 million per quarter range.

Now as Jim said, we're coming out of this quarter at about $2 million of revenue, but yet if you look at the backlog, it's up substantially and it's up all in the nontelecom business area. So I view the second quarter as the trough and now the question is how quickly do we build that revenue base back up? We don't have to get it back up to that old plateau to get it to be breakeven because of the cost and expense reductions that we've taken, But now the question is how quickly can we energize the lower cost that we have, translate that into more competitive pricing so that we can get the volumes.

For those of you who may have been on the call in September, I was asked the question, with the cost reductions that LightPath was making with regard to ceramic tooling, glass, coating and lens pressing costs, when did you think we were going to be able to do that, and I said I wasn't ready to ship dollars to go get volumes. I do think we are now very well positioned and have begun to quote at the new lower costs that we are now experiencing, and so while we have not been able to have the benefit of those lower-cost quotes in the second quarter of this fiscal year, that's the activity now that Jim Magos and his team are working on to energize both the backlog and the revenue growth going forward.

So I'll end it right there and now take questions from the group to both Jim and myself and Dorothy.

Thank you. (OPERATOR INSTRUCTIONS) Our first question comes from the line of [Robert Embiner] with Montfield Financial. Please go ahead with your question.

First that's [Robert Ainbinder]. Good afternoon, Bob, Jim, Dorothy. I'd like to congratulate you on a lot of very hard work. It's obvious what you've been trying to accomplish is showing up in what you're trying to do here and my question, Bob, would first be to you, because you addressed some of the call that we had back in September. Would you say that then this quarter is the kitchen sink corner -- quarter where you feel like all of these one-time charges and related costs with making the transition to the manufacturing facility in China have taken place?

My answer is yes. I'd like to just leave it with one caveat. As we said in our press release, we did a piece of work based on an inventory charge that we took in the first quarter. We reported on another inventory revaluation this quarter, both of which were noncash. We had a consultant in yesterday. While we are not required -- I should say this differently -- while we don't have to get certification from our auditors with regard to Sarbanes-Oxley, management does have to start doing some attestation. We've asked this individual to help us go through our inventory processes to make sure that the way in which we are relieving our standard costs out of inventory will get us back to where we want to get to with respect to not having these particular charges. I'm hopeful, but I won't say confident that there won't be another inventory charge, but if it is, Bob, it will be a noncash charge.

Okay. Very good.

I do think all the other restructuring work with regard to having to get ourselves positioned in China is behind us.

Okay. That would lead me to my next question to Jim. With respect to the facility in China, obviously we see most of the manufacturing now being done there, 83% as you stated this quarter handled in China. Would you say that the capacity that we currently have can handle -- if it you can give us just some kind of gauge or some kind of color as to what type of capacity that facility can now handle?

Well, I would say that facility is not operating at full capacity at this point in time. It's probably operating around 40% of its planned capacity and we have room to grow there, as we grow this business in the Asian markets and worldwide. I don't think capacity is going to be our issue.

Okay. So if you're running at 40% capacity, is there anything holding you back other than orders to go to 80%, 90% capacity? What's holding you back from doing that, other than taking on orders?

All right. Right now very little. There is nothing holding us back other than growing the business to start utilizing the installed capacity.

Fantastic. Okay, great. That leads me on to the CDGM arrangement. Now that we're in a position to take on substantial volume orders and some of this low-market stuff --excuse me, let me rephrase that -- low-priced, high-volume applications that we're trying to attack, how do you envision this CDGM arrangement playing a role six, nine, 12 months down the road for LightPath?

I guess very positively, Bob. I would view it's a way for us to execute into the high-volume market that gives us several advantages. The first advantage is that we're partnered with a major material supplier and also a major player in the Chinese business market. So we have a lot of advantages having a partnership with that type of company. I think that it's a business arrangement that mitigates the execution risk of getting into that type of business quickly.

Bob, let me make sure I communicate this. The JV is exclusively designed to go after a specific market, high volume in the cell phones and cameras. It's a huge opportunity. However, that doesn't mean that LightPath in Shanghai will also be doing some of that imaging low-volume stuff. So I'm trying to answer your question with respect to the JV. You asked what's going to happen in three to six to nine to 12 months. The contract calls for us getting up to a million lenses a month by month 12. We've got to go through our licensing process yet. We expect that's all going to get completed, subject to us being able to make the investment. Up and running by no later than July 1. And we do think the first three to six months we're going to be having to put all of our equipment in there, which we will have to make, set up in the joint venture site, populate it with the amount of operators that we will need, and train all of those people. So I really don't see much revenue coming from the first six months of that joint venture.

And then once we've gotten through that breakthrough phase, then we'll start ramping up our volumes as quickly as we can and to the extent that -- we've looked at what that might mean financially for us. The contract does call for a second level of investment if we think that the volume opportunities are there for us and both partners are committed to going after that. So I want to caution you on that one hand with respect to the JV.

However, your question about capacity in Shanghai, as Jim said, we're operating at less than half of where we have the capacity. We're looking to put laser applications in there today on the industrial side. We're looking to put infrared applications in there, some kind of black diamond application, as well as the small volume parts for particular imaging in the consumer marketplace, whether they be cameras or cell phones. And we have the capacity to handle that in the Shanghai facility.

Okay. So just projecting out, for everybody else that may be listening on to the call, are we envisioning here a gradual ramp this next six months within our Shanghai facility, as we then start to bring on the JV facility over the following six months and then just a slow gradual ramp within production of our facility and then obviously a continued ramp within the JV? Is that a fair assumption?

Think of this as two ramps onto a highway. One has an HOV lane and that's the JV. As fast as that sucker can run, the both partners are going to run down that lane. The other lanes are the lanes of Shanghai. The only impediment to that, it's not supply, it's not skill, it's not competency. It's booking and getting the orders.

Jim Magos and his team had a very successful show out at Photonics West, got a lot of leads. At our board meeting today we looked at lots of opportunities beyond the laser nontelecom applications. And a lot that had to do with infrared and what I'll call consumer imaging, which are these laser tools that Jim spoke about that we had that big order that we announced. We are seeing lots of quote activity and the question is how quickly then that we get those quotes back to the book of sales is in the hands of customers and our sales reps.

We have put no limit on that, but my guess is we will see much more growth out of Shanghai for the next six months. And then as we go on to the following six months, what I would call the first six months of '09 -- fiscal '09, we'll be seeing continued high growth in the Shanghai place and then the beginnings of us going down the HOV lane with our CDGM partner.

Okay. Just one last question, then I'll let anybody else want to jump in. Just to get outside of some of the lens business that we're doing -- and that's what we're talking about here, I assume. We're not really talking about anything as far as the collimator business or the isolator business. Are you seeing any type of activity within the Chinese market with regard to those markets and what type of opportunity do you believe exists there for LightPath with regard to those products and those markets?

I think before Jim Magos jumps in on the opportunity, I do want to -- on behalf of the management team here, I'll take the fall on this. The collimator business up until about almost this current quarter was a difficult operation for us. We didn't have the right kind of skill and competency. We were having delivery issues that with that product line and some cost issues. The cost reduction efforts that we put in place are going to help on the cost side.

Jim, since September as the interim CEO and then continuing now as the appointed CEO, has made significant changes inside the collimator business area with respect to enhancing skills and replacing people who weren't getting the job done. So we think we have significantly improved our operational response to collimator demand. And now I'm going to turn it over to Jim Magos to talk about what we see in the form of some additional collimator demand.

The primary focus in the collimator area is in the fiber laser delivery systems. This is a market that is an emerging market. It's quite a few customers around the world, including China, as well as a very big concentration in Europe and we are servicing and designing in in the majority of those companies today. We expect that we actually are seeing orders already in that area and we expect the growth there to be very nice and very level over the next few years.

Yes. As we've looked at our strategy, collimators has a place in terms of dealing with where we think we have a proprietary advantage in providing that particular product set at average selling prices that are quite attractive, and so that's going to be one of our strategic product portfolios as we go forward.

Very good. Thank you very much. Bob, Jim, Dorothy, great work, look forward to the next conference call. Thank you.

Thank you.

Our next question comes from the line of [Steven Donovan], who is a private investor. Please go ahead with your question.

Hello there.

Hi, Steve.

Hi, Steve.

I am sure you folks are really working hard and I'm beginning to see the light at the end of the tunnel and I'm grateful, but it's been a rocky road. Anyway, my main question is how do you intend to fund these opportunities that you've opened up in Asia? Do you plan a public offering, private offering? Where's the cash going to come from?

Steve, all I can tell you is we've announced that we made this joint venture. We have an investment that we want to make there. How we do that, I'm a little bit constrained based on some SEC regulations about front running, how it is we may be making -- how we might be financing those investments. So I'm really not at Liberty to discuss how it is we can go about that until it is -- we finish some work on whether or not we think we do it through debt equity, sort our way through all of that, but I'm just not at a point of being able to talk about all that. It's not because I don't want to, but just because regulations prohibit me from doing that. But clearly it's an exciting opportunity, obviously, and we are working hard to find our way through somehow finding the resources to make that investment.

And you're obviously optimistic about that?

And confident and optimistic, yes.

I trust with your background that we're in good hands.

Thank you.

That's my only question, folks. Thanks so much.

Thank you, Steve.

(OPERATOR INSTRUCTIONS) Our next question comes from the line of Kent Garlinghouse with M-C Industries. Please go ahead with your question.

Hi, guys. Can you hear me?

Yes. Hi, Kent.

My question, I guess, it may have already been answered indirectly by Bob Ripp, but regarding the joint venture with CDGM, which I believe called for putting in $5 million, I was just wondering where the $5 million was coming from. But, Bob, you may have already said you can't answer that directly, but are the terms such that you need to put it in right away or over time or what can you tell us about that?

No. We did negotiate because we weren't quite sure what our financing strategy would be, but we have 120-day window, so I think even if we had to do this in some awkward way, we have plenty of time to get it done. So we made sure we put a provision that that would not be a show stopper to the JV.

Okay. Thanks. That's it.

But by the way, just so I communicate this, A, I'm an impatient person, and B, the opportunity is so great that I'm not taking 120 days to get this done.

There are no further questions in the queue at this time. We do have another question. Our next question comes from the line of [Michael Diet], who's a private investor. Please go ahead with your question.

Thank you and congratulations again, as Steve and others have to what you're doing. I just had a question about the outstanding legal challenge that you discussed briefly in September because you had said that all the one-time charges were done. I wonder if you could just bring us up to date on that question of -- relative to the last financing?

Right. Where that stands is as follows. They filed a motion, which we had to respond to by, I believe it was December 12th, which we did, and the way these things work, Michael, is that they make a claim. We get to respond, not on the merits of the facts, but whether or not the statutes that they claim that they want to bring this action forward are reasonable. So we file, and we have back on December 12th, our view of their original filing. The judge has looked at that and they have a right now to respond to that, which they are responding to, and that will take place, I believe, sometime by the end of February, and so that's where we stand.

Nobody has been deposed. No other actions or communications have taken place other than the lawyers are going through the issues with the court. The court, after they have put in their response to our submission, will then make a judgment based on all the submissions that are in front of them as to whether or not he needs more facts and therefore, will call for depositions, or he may just rule, and in our case we'd ask for a dismissal in favor of us and so we'll just have to see how that works out.

Great. Thank you and just a quick follow-up question. Maybe I missed it in the press release, but is the JV in Shanghai so there'd be some synergies or is it in another city or metropolitan area?

No. It's going to be located in a city called Chengdu, which is way west in China, and we did it for two reasons. First of all, Shanghai is a more expensive city within China, but our partner also had a facility that was up and running with a clean room. And so as a way to just get positioned more quickly with space the was available, we've chosen to go ahead into his space in Chengdu.

Thank you very much.

You're welcome.

Gentlemen, there are no further questions in the queue at this time. Would you like to make some closing comments?

Yes, I would, thank you. I just would like to reemphasize a couple things. One is obviously we are not satisfied with our performance in the first half of fiscal 2008, but we have significantly reduced our costs. We have addressed our overhead. We've committed with our partner to a joint venture to address the high-volume consumer markets. We have new products and collimators in the IR and the Black Diamond and we are penetrating the Asian market. So I would like to thank you -- with that said, I would like to thank you for your continued interest and support of LightPath and thank you very much for joining our call.

Thank you.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time.