LightPath Technologies Inc (LPTH) 2010 Q3 法說會逐字稿

Greetings, and welcome to the LightPath Technologies third-quarter earnings call. 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, Dorothy Cipolla for LightPath Technologies. Thank you, Ms. Cipolla. You may begin.

Thank you and good afternoon. I would like to thank everyone for joining us today for LightPath Technologies' fiscal 2010 third-quarter financial results conference call.

Mr. Jim Gaynor, CEO of LightPath Technologies, will be your host on the call. If anyone participating on the call this afternoon does not have a copy of the earnings release, please contact our office at 407-382-4003, and we will be happy to get you a copy.

Before we begin the call, I'm going to review the Company's Safe Harbor statement. Statements in this conference call that are not descriptions of historical facts are forward-looking statements relating to future events and as such, all forward-looking statements are made pursuant to the Securities Litigation Reform Act of 1995.

These forward-looking statements are subject to risks and uncertainties and actual results may differ materially. When used in this call, the words anticipate, could, enable, estimate, intend, expect, believe, potential, will, should, project and similar expressions as they relate to LightPath Technologies, are such forward-looking statements. Investors are cautioned that all forward-looking statements involve risks and uncertainties, which may cause actual results to differ from those anticipated by LightPath Technologies at this time. In addition, other risks are more fully described in LightPath Technologies' public filings with the US Securities and Exchange Commission, which can be reviewed at SEC.gov.

At this time, I would like to turn the floor over to Mr. Jim Gaynor, CEO of LightPath Technologies.

Thank you, Dorothy, and thank all of you for joining us today for our fiscal 2010 third-quarter results conference call.

LightPath has just completed its fifth consecutive quarter of improving financial results with the closing of our third quarter of 2010. Through this period, which, as you all know, has been a very difficult period for all business, LightPath has been able to grow its quarterly revenue by 61%, increased its gross margin from 25% to 47%, and improve its EBITDA 182% from a negative $483,000 to a positive $397,000 and improve its net income from a loss of $756,000 to a gain of $12,000, an improvement of 101%.

During this period, we have also been cleaning up the balance sheet and have recognized some nonrecurring items, which have had both a net negative or a net positive effect, depending on each given quarter.

We have included in our press release for the third quarter of fiscal 2010 a chart that details the effect of these nonrecurring items on each of the last five quarters, comparing as-reported numbers to the numbers excluding these items. These numbers demonstrate to the continuous improvement of our fundamentals and the strong potential of the Company as we continue to grow our business.

The third quarter of our fiscal year 2010 has continued the improvement with revenue at $2.66 million, up 19% over the second quarter of fiscal 2010; gross margin improving 4 percentage points to 47% over the second quarter of fiscal 2010; and our backlog holding steady at $3.9 million, and shippable within the next 12 months, on higher revenue.

Quote activity for the quarter was strong, up 10% over the previous quarter. Production and unit shipment rates have continued to increase, up 82% over the previous year.

I'm extremely pleased that as a result of these factors and continued control of our G&A expenses, we are reporting a positive net income for the second quarter in a row.

We have a large number of new lenses in development that we anticipate will allow LightPath to continue its growth. These lenses are being developed to allow us to address new applications in the consumer market, continue our cost reduction efforts, and, at the request of specific customers, we are designing lenses for their applications.

As we continue to grow our top line and increase our unit volume, we anticipate continued margin improvement and profitability resulting from better fixed cost absorption and utilization, and our previously announced direct cost improvements.

We have identified markets that offer substantial growth opportunity. These markets are industrial laser tools with product applications such as laser levels, rangefinders, barcode scanners and gun sites; telecom data-com with product applications that support expanded infrastructure, which is being required to support the mobile Internet demands; and other consumer-driven applications, such as micro-projectors and Blu-ray type applications.

We also, on a slightly longer-term basis, are working on developing lenses for infrared products. These include thermal imaging for use in vehicles, both auto and maritime, security cameras, fire-fighting and electrical maintenance applications. Infrared applications also have many defense-related applications, including thermal rifle sites, weapon targeting systems and infrared countermeasures.

We believe that over the next three to five years, the markets such as discussed here will grow to over $1.5 billion of business for aspheric lenses. We have and we will continue to introduce products designed for these markets. We have organized our sales channels to address these markets, and we are implementing our strategic plan to penetrate these markets.

These improvements, along with a continued aggressive cash management, have positioned LightPath to become cash positive and reach its profitability goals.

I would now like to turn the call over to Ms. Dorothy Cipolla, CFO, to discuss our financial results for fiscal 2010 third quarter and fiscal year to date in detail. Dorothy?

Thank you, Jim. First, I'm going to talk about the results for the fiscal third quarter, which ended March 31.

Revenue for the quarter was $2.7 million compared to $1.7 million for the same period last year, an increase of 61%. This increase was primarily attributable to higher sales volumes of precision-molded optics, GRADIUM and isolator product lines.

Our precision-molded optics sales units were significantly higher as a result of our increased production capability and our pursuit of high-volume, low-cost lens business. We expect our growth in sales going forward to be from the precision molded optics product line, particularly our low-cost lenses being sold in Asia.

Our gross margin percentage for the quarter compared to the same period last year increased to 47% from 25%. Total manufacturing costs of $1.4 million was $167,000 higher than last year. The important point is that these costs were on $1 million more of revenue.

Unit shipment volume in precision molded optics was up 82% in the quarter compared to last year. This resulted in better absorption of overhead costs, which resulted in improved fixed cost utilization, which lowers our unit cost.

Our direct costs, which include material, labor and services, increased to 25% of revenue in the quarter as compared to 21% for the same period last year. This was due to the product mix changes, which included increased sales of isolators, which have a higher material cost.

Our improved gross margins are the result of our cost reduction program, better production yield, and efficiencies and improved overhead absorption with the increased volume.

Total costs and expenses were comparable to last year at $1 million. Included in total costs and expenses for the quarter were $817,000 in selling, general and administrative expenses in both periods. Operating income for the quarter improved to $203,000 compared to a loss of $597,000 for the same period last year.

Net interest expense was approximately $191,000 in the quarter as compared to $159,000 for last year. The debentures we issued in August 2008 accounted for most of this interest expense. The interest also includes amortization of debt issuance costs and debt discounts.

This quarter, expense includes a $54,000 write-off of debt issue costs and prepaid interest in debt discount for debentures converted into common stock during the quarter.

Net income for the quarter was $12,000 or $0.00 per share per basic and diluted share compared with a net loss of $756,000 or $0.11 per basic and diluted share for last year. This represents a $768,000 decrease in net loss compared to last year.

Weighted average shares outstanding increased to $8.2 million in the quarter compared to $6.7 million for last year, and this was primarily due to the issuance of common stock and our private placement in the first quarter of this year.

Now I'd like to talk about the year-to-date results which are for the nine months ended March 31.

Revenue year to date totaled $6.4 million compared to $5.9 million for the same period last year, an increase of 9%. The increase from last year was primarily attributable to higher sales volumes for precision-molded optics and GRADIUM products, offset by lower sales for isolators and collimators.

Our precision-molded optics sales units were significantly higher but our average selling price was lower. This is the result of our pursuit of high-volume, low-cost lenses.

Our gross margin percentage year to date compared to the same period last year increased to 45% from 26%. Our total manufacturing cost of $3.6 million was $821,000 lower year to date compared to the same period last year. This was due to lower production costs. Unit shipment volume in precision-molded optics is up 137% year to date compared to the same period last year. This means better absorption of overhead costs, which improved fixed cost utilization and lowers our unit cost.

Direct costs, which include material, labor, and services remained at 23% for both this year and last year. Our gross margin improved as a result of the cost reduction programs we'd previously implemented and better production yields and efficiencies.

Year-to-date total costs and expenses decreased $864,000 to $3 million compared to $3.9 million for last year. Total costs and expenses included $2.3 million in SG&A expenses, which decreased $833,000 or 26% from $3.2 million last year.

This decrease in SG&A included a reduction in salaries and benefits of $263,000 from reduced headcount and salary reductions.

We also had the following decreased expenses. $98,000 in rental costs, $54,000 in accounting fees, $29,000 for insurance, $30,000 in stock compensation expense and $33,000 in travel expenses.

We did have some expense increase. Investor relations expenses of $195,000 and higher legal expenses for payments in connection with recent litigation.

But offsetting this year to date we received two one-time payments totaling $556,000, one from our previous D&O insurance carrier and the second for the sale of the balance of our insurance claim against this carrier.

Net interest expense was approximately $533,000 year to date compared to $1.2 million for last year. The debentures we issued in August 2008 accounted for most of this interest expense. This interest also includes amortization of debt discounts -- debt issuance costs and debt discount. Last year, 25% of the debentures were converted into common stock and $425,000 of debt discount and debt issue costs were written off to interest expense.

Net loss year to date was $653,000 or $0.08 per basic and diluted share compared with a net loss of $3.5 million or $0.58 per basic and diluted share for last year. This represents a $2.9 million decrease in net loss.

Weighted average shares outstanding increased to $7.9 million this year compared to $6 million last year. This was due to the issuance of common stock and our private placement in the first quarter of this year.

Now I want to talk about a few areas on the balance sheet. Our cash balance was $543,000 at quarter end. Our total current assets and total assets at quarter end were $4.2 million and $6.9 million compared to $3.3 million and $5.8 million, respectively, at June 30, 2009.

Our current liabilities and total liabilities at quarter end were $1.8 million and $4 million compared to $2 million and $4.1 million, respectively, compared to June 30, 2009, the end of our previous fiscal year.

Our current ratio at quarter end improved to 2.31 to 1 compared to 1.59 to 1 at our previous year end. Total stockholders' equity at quarter end totaled $2.9 million compared to $1.7 million at last year previous year end.

As of March 31, 2010, our backlog of orders scheduled to ship in the next 12 months was $3.9 million compared to $2.3 million as of June 30, 2009.

In April, we issued 507,730 shares at $2.20 per share in a private placement, raising $1.17 million. Our goals were to raise a limited amount of cash to minimize dilution to our current shareholders, but to also raise enough money to expand our molding capacity in Shanghai to meet forecasted demand.

Our cash balance as of May 3 was $1.5 million. I would now like to turn the call back over to Jim for closing comments.

Thank you, Dorothy. Our results for the third fiscal quarter of 2010 are a result of the dedication, hard work and effort by the team at LightPath to control costs, mitigate expenses and bring the right new products to our defined markets.

We're seeing the effect of increased unit volumes in precision-molded optics, and these volumes are improving the absorption of our fixed costs and reducing cash usage and operations.

With our current operating efficiencies and low cost structure, our focus will continue to be on revenue growth. Our efforts to penetrate high-volume, lower-cost commercial markets in Asia show tremendous promise for this fiscal year, and we are excited by the acceptance of the new lenses we have recently introduced.

Going forward, we will continue to focus on these market opportunities and on implementing new distribution channels to expand our presence in the Asian precision optic lens market.

This concludes my formal comments. And at this time, I would like to open the call for questions. So, Christine, if you could please start the Q&A portion of the call?

(Operator Instructions). [Robert Ainbinder], Garden State Securities.

Congratulations, Jim, Dorothy. I want to congratulate you for all the hard work and getting the Company to this point. It's nice to see the Company truly turning the corner, showing an operating cash flow of $203,000 from where we were just a year and a half ago is pretty darn good.

So, my question is, with regard to some of the distribution agreements that you signed last quarter, could you comment on where those distribution agreements stand at this point? If they've started to bear any fruit with regard to bringing in any new customers? And if so, would we be hearing something about them publicly?

I guess it's kind of a mixed bag depending on which part of the world you work in, Bob. The agreements that we entered into and set up as a master distributor in Europe with AMS Technologies have worked extremely well. We've cleaned up a number of smaller distributors that we had and replaced them with the offices that AMS had. And we've seen about a 50% increase in business in that geographic region as a result of that change. So they're just doing an outstanding job for us and we're very excited about that.

We then signed a different distributor, WPG, in the Americas and southern Asia. That effort is not producing as much fruit as quickly as we would like. Although I think it has given us much better coverage in the Americas. I've been a little disappointed with what they've been able to do in Asia. And we have not yet signed an agreement with them for the main target that we had in Asia, which was China.

And they -- it's been an issue where they are trying to line up a number of photonics type operations and kind of make a big splash in the market in the photonics area all at once. We have told them that we are not going to wait anymore and we are actually actively looking for some other distributors to put on in that market because we just can't keep waiting for these guys.

So it's been kind of a mixed bag, but obviously, in Europe and covering that part of the world has worked very well for us, and we're very pleased with that. So, I think it's the business has increased, and we're going to take care of Asia here in the next month or so.

Okay. So that would lead me to my next question, which is obviously, the ability was there for you to raise substantially more capital than you did in that last round of financing. And we all appreciate obviously keeping the dilution down. But, you anticipate with that capital being able to increase your manufacturing capabilities to I believe you said double. With that, you must be seeing something other than what's represented in your backlog going forward to warrant that doubling of your capacity. Is that correct?

Well, we have been increasing our production rates all along, as we indicated. And we see a significant growth in these markets that we're already penetrating. In the industrial laser tool market, that market has continued to be very strong for us. We continue to take share in that market, and we continue to get new applications through our own direct sales force efforts in Asia as well as in the Americas.

We also have seen some awakening in the telecom markets with the infrastructure buildout, both in the emerging countries as well as the expansion of infrastructure that's becoming necessary in more developed areas, which is being driven by the mobile Internet increase; it's being driven by smart phones and cloud computing; and those kinds of things are creating a need for more and more data to be transmitted at a higher speed. Which is -- optics and fiber-optic type connections is the only way to do it, so that creates a need for more infrastructure.

And that's a major application for us. And we recently introduced a series of environmentally compliant lenses to put into that market, and they have been accepted.

So, that's what's fueling the growth, those types of high-volume applications. We see more of it coming, and we raised that capital specifically for the purpose to expand our capacity in China so that we could keep up with the production volumes that we see coming down the road.

Very good. Okay. Could you give us a little more color as to what is happening in the telecom market? You said you are seeing an uptick there. I know that has been quite a drag on LightPath's revenue for a number of years. And to hear that we are seeing an uptick in that market is -- that's obviously an exciting area for us. Can you give us a little more color there?

Well, as I said, Bob, it's a -- telecom is -- we're trying to view it as an incremental opportunity. I don't want to get too tied to it like we were in the past so that when it goes away that we are down in the dumpsters again, and we're not going to let that happen.

But, as an incremental opportunity and it's being driven primarily I think by the bandwidth requirements that these smartphones are requiring and the desire of people to have a mobile device that accesses the Internet as well as more than just a telephone. So this 3G rollout, the 4G stuff, all of those things is demanding more bandwidth, and that means they have to put in more infrastructure.

In Asia and those kinds of countries, it's new infrastructure. It's infrastructure that hasn't existed. I've been told in China there are 700 million subscribers to cell phones. A very large percentage of that is the upper end stuff, that's these smart phones. They have a middle class now that is larger than the entire population of the United States that has cash and spends money on these types of things. So it's driving the market at a very rapid pace. And that is driving the need for more infrastructure in this telecom business.

India is another example of similar proportions.

So is this an area where you think you will see an uptick in collimator and isolator?

Well, I think, certainly, we've seen some uptick in the isolator business that's kind of a drag-along as we do these lenses for these -- the big thing is these laser diodes that have got to get the light off the laser onto the fiber and then off the fiber into whatever other application they're putting it into. And that creates the need for our product, the optics that we make. So that's really what's driving it.

So, obviously at this point, being at this -- you can say real turning point where you are profitable, you're running 47% margins, that's pretty damn good. With any uptick in revenue in this area, we could basically see that fall directly to the bottom line, correct?

Absolutely. I think what you've seen in this last quarter is, we've basically at a $2.7 million revenue level, shown basically a small profit and a breakeven situation. So, any volume increase from this point on just makes the cash flow and the operating income increase. So it's going to be -- should drop right through to the bottom line.

We will continue to operate as efficiently as we have been and continue to improve that, just like we've done. I mean we've done all this hard work to get this cost structure in place, and now it's a matter of execution and increasing the volume so that we start building up the reserves.

Great. I appreciate your time. Thank you very much. Look forward to next quarter.

(Operator Instructions). [Stephen Donovan], a Private Investor.

Well, I really am pleased with these results, and I'm glad you drew our attention to the EBITDA and the powerful progression over the past five quarters, from a very negative $483,000 to a positive $361,000. Indeed, that shows how dramatically the fundamentals are improving.

What I want to ask you is to elaborate on the market that you are projecting to penetrate, the laser tools, telecom consumer products infrared, you said it was $1.5 billion. Is that global?

Well, I think that is an estimate -- the $1.5 billion is an estimate of what the total aspheric lens device demand would be associated with the markets that we have identified and that we are targeting. Now, those markets are industrial laser tools, telecom, there's micro projector-type applications and other type of consumer applications that are shorter wavelength type Blu-ray type things. And then the data communications, those types things. So, from our perspective, that is a huge potential.

Now, that's all aspherics. So part of that is plastic and part of it is glass. But it is a huge market opportunity in which we are participating, and it gives us plenty of room to grow in the near-term.

Is it a coherent market? Or is it very fragmented?

Well I guess in my view it's a little bit fragmented, but it is -- we are addressing it. We've tried to segment it down where we are addressing these specific applications. And so we're very focused in what we are going after. There's plenty of volume there for us.

I think we want to continue to grow that quarterly revenue to the point where we are generating significant profit while we work to develop some longer-term developments.

As I indicated, we have I think close to 15 new lenses in various stages of development, and they are really targeted in three areas.

The first area is we're going after some specific consumer type applications that we think we can go get some business in that we don't participate in today. These shorter wavelength type applications like Blue-ray. So we are developing a series of lenses that we know would work in those type of applications. And once we have them, we will release them to the market, and then we will go after that business.

We got another group of lenses that we're developing that are strictly being done. We're trying to take the cost out of the lenses so we are changing the materials and redesigning the lenses so that we can produce lenses that we are currently selling at a lower cost.

And then we have the third group, which is a group of lenses where customers have come to us and asked us to design a custom lens for them, which they are paying the engineering fees for. And then we're developing those lenses for some specific applications and specific customers.

So those things are the near-term things which are going to target these types of markets. In recent months, we came out with a series of telecom lenses where we designed them in RoHS compliant glass, which has allowed us to readdress that market.

Previously, we had a series of lenses for that market that were lead-based glass, which the telecom companies are no longer interested in using from environmental purposes.

So we're now back in that market, and it's a good time because it seems to be opening up again.

Longer term, we are trying -- we're working to develop infrared applications and infrared lenses for a series of applications. And these have to do with thermal imaging, where you know, both for vehicles, whether they be autos or maritime type systems where they are used in GPS and navigation systems; security cameras; firefighting equipment; electrical maintenance equipment; those types of things.

And then there's the defense segment of that business, where thermal weapons sites; rifle sites; weapon targeting systems; and now they're using lasers to come up with an infrared countermeasures type device, which instead of aircraft ejecting [chad] out the back to deflect missiles, now you're going to use lasers to create a hotspot well behind the aircraft as a renewable infrared countermeasures-type device. So there's all kinds of applications like that. Then we believe we have a technology and we'll develop the process around it that will enable mass production of those types of devices.

So I think we have a tremendous growth opportunity and we have the technology. We have the products. We have the capability and the manufacturing capacity to compete in those markets.

Are there any other companies that can address that total market as broadly as you are?

I think we have an advantage, Steve, from the standpoint that molding these lenses gives us a cost advantage and a processing advantage over some of the other companies that we compete with. We certainly have I think an edge in the marketplaces from that type of production process. The fact that we operate in China and we have this very low cost structure allows us to compete with anybody head-to-head. So I think we're in good position.

And in no case are you building for inventory. These are all -- you're creating the design, but you are waiting for the orders to come; you're not building inventory.

No, we're not building inventory. We're pretty much -- we ship it out as quick as we can get it built right now.

Right. Wonderful. Thanks very much.

Robert Ainbinder, Garden State Securities.

I just had one follow-up question regarding the SBIR that you won from the government quite a few years back; could you just give us a little idea, some color, where that stands?

It's essentially complete. We did the work. We got paid for it. And it allowed us to develop where we are with this process to mold IR lenses. So that's been very successful for us. It also demonstrated for us a capability to mold a larger diameter lens, which in the IR space, there is a -- first of all, the good news is as the IR business is progressing and the opportunities are progressing, the lenses that they want are getting smaller.

So, we're going to meet in the middle here basically. Because previously, the sweet spot of this thing and most of -- some of these lenses were beyond our size capability. So, we've learned how to make lenses a little bit bigger and the applications are coming down in size, so there's more applications for smaller lenses, which is another really good thing for our process as we look at this market in the future. So I think we learned a lot.

We got the government to help us fund some of that development work. And the government got some good information from us about what could be done, which is now transmitting into some of these things that they're looking for development-type projects, such as thermal rifle sites, so where you mount a thermal weapon site on an M-16, so it has to be smaller, lighter, etc. And what I like about that is that could be a very good business because it's relatively high volume. It's not one-off. You're going to make 10,000 or 20,000 or 50,000 of these things.

Got it. Okay, so we could end up seeing some business coming from this?

Certainly that's our plan as we go forward. I mean I don't think it's next week's business, but it certainly could be over the next several months or six months or a year type thing.

Got it. Okay. Great. Thank you very much.

There are no further questions in the queue at this time. I would now like to turn the floor back over to management for closing comments.

Thank you, operator. I would like to thank our shareholders and everyone who has participated on today's call. I would like to thank the team at LightPath Technologies for their hard work and dedication, and I look forward to updating you again on our fiscal 2010 fourth-quarter conference call in September.

If you have further questions, please feel free to contact myself or Dorothy Cipolla. Have a great day.

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