LightPath Technologies Inc (LPTH) 2010 Q4 法說會逐字稿

Greetings and welcome to the LightPath Technologies fourth 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, Mr. Dorothy Cipolla, Chief Financial Officer for LightPath. Thank you. You may begin.

Thank you and good afternoon. I would like to thank everyone for joining us today for LightPath Technologies fiscal 2010 fourth quarter and year end financial results conference call. If anyone participating on the call this afternoon does not have a copy of the earnings release, you can find a copy on our website at lightpath.com. Or if you're unable to access the materials online, you may call our office at 407-382-4003 and request a copy.

Before we begin the call I am going to review our 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, estimates, intend, expect, belief, potential, will, should, project, and similar expressions as they relate to LightPath Technologies are such forward-looking statements. Investors are cautioned that had 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 our public filings with the US Securities & Exchange Commission which can be reviewed at SEC.gov.

It is now my pleasure to turn the call over to your host, Jim Gaynor, our Chief Executive Officer.

Thank you, Dorothy. Good afternoon, everyone. I would also like to thank everyone for joining us today for LightPath's fiscal fourth quarter and year end financial results conference call. As such, I am pleased to report LightPath has concluded its fourth consecutive quarter of top and bottom line growth. In the fourth fiscal quarter ended June 30th our revenues grew 75% to $2.8 million and our gross margins increased four points sequentially and 18 points year-over-year to 51%. All of this while our costs remained relatively flat. Unit volumes produced have grown substantially, up 292% in the fourth quarter of 2010 compared to the year ago period. Another good measure of our performance remains earnings before income taxes and depreciation and amortization, or abbreviated as EBITDA. Our EBITDA has improved from a negative $21,000 in the fourth quarter of fiscal 2009 to a positive $488,000 in the fourth quarter of fiscal 2010, a gain of over $500,000.

As we continue to increase our unit volume and achieve higher fixed cost utilization, a greater percentage of our total revenues will drop to the bottom line, delivering gross margin, EBITDA, and net income improvements going forward. We achieved a turnaround to profitability in the second fiscal quarter that ended December 31, 2009, and I am pleased to say we continue our positive earnings trend. For the fourth fiscal quarter of 2010 net income rose to $92,000 or $0.01 per diluted share, representing an increase of $80,000 over the third fiscal quarter of 2010. While the US fiber optics market showed signs of an economic rebound in 2010, Asia represents the strongest growth potential for our business in fiscal 2011. Our shipment of orders from our Shanghai facility have nearly doubled over the past two fiscal quarters compared to the first six-month period of this year. Billions of dollars are now being invested by the Chinese government to build out high-speed internet infrastructure with a focus on wireless networking, mobility solutions and cloud computing. Our telecom and datacom products have been developed with these specific applications in mind. In addition, we are targeting the industrial laser tools market with applications for laser levels, range finders, barcode scanners and gun sites.

We are also making progress on bringing to market lenses for a number of infrared products. Commercial thermal imaging products are used in digital security cameras, emerging fire fighting and electrical maintenance applications, and infrared applications also have many defense related applications including thermal rifle sites, weapon targeting systems, and infrared counter measures. LightPath has also developed radiation hardened aspheres that are currently being used for satellite communication in both the military and commercial markets. We believe that over the next three to five years our total addressable market combined is over $1.5 billion for aspheric lenses. We have the research and development, scalable, low cost, high volume production capacity, and the global sales channels to ensure that we fully capitalize on these markets going forward.

I would now like to turn the call back over to Ms. Dorothy Cipolla, our CFO, to discuss the financial results for fiscal 2010 fourth quarter and the year ended June 30, 2010.

Thank you, Jim. At first we'll want to talk about the results for the quarter which ended June 30th. Revenue for the fourth quarter totaled $2.8 million compared to $1.6 million for the same period last year, an increase of 75%. The increase from last year was primarily attributable to higher sales volumes of precision molded optics, Gradiums and isolators. 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. Our current cost structure has allowed us to sell products at lower prices while improving gross margins. Growth in sales going forward is expected to be derived primarily from the precision molded optics product line, particularly our low cost lenses being sold in Asia. Our gross margin percentage in the fourth quarter compared to last year increased to 51% from 33%. Total manufacturing costs of $1.4 million was approximately $324,000 higher in the fourth quarter compared to last year. This is due to costs to support higher sales volumes.

Unit shipment volume in precision molded optics was up 292% in the fourth fiscal compared to last year. This resulted in better absorption of overhead costs which results in improved fixed cost utilization which lowers our unit costs. Direct costs, which include material, labor and services, increased to 26% of revenue in the fourth quarter as compared to 23% of revenue last year due to a product mix change. Gross margins improved as a result of the cost reduction programs we've implemented, better production yields and efficiencies and improved overhead absorption with the increased volume. During the fourth total cost and expenses increased $465,000 to $1.2 million compared to $690,000 for last year. Expenses last year were $370,000 lower due to nonrecurring events resulting in reductions to G&A expense. Receipt of $183,000 from our D&O insurance carrier as a refund of legal expenses and receipt of $186,000 in excess cost reimbursement from the Chinese government related to the move of our manufacturing facility in Shanghai attributed to these one-time events. Included in total costs and expenses for the fourth quarter were $937,000 in selling, general and administrative expenses. As a result, total operating income for the fourth quarter improved to $282,000 compared to a loss of $159,000 for last year.

Interest expense was approximately $193,000 in the fourth quarter as compared to $163,000 last year. The convertible debentures issued in August of 2008 accounted for approximately $193,000 of interest during the quarter. This includes periodic interest at 8% amortization and amortization of the related debt issuance cost and debt discounts and write-offs of debt issuance costs, prepaid interest, and debt discounts for debentures which were converted into shares of common stock during the quarter. Net income for the fourth quarter was $92,000 or $0.01 per basic and diluted common share. Compared with a net loss of $318,000 or $0.05 per basic and diluted share for last year. This represents a $410,000 decrease in net loss compared to last year. Weighted average basic shares outstanding increased to 8.9 million in the fourth quarter compared to 6.7 million last year primarily due to the issuance of common stock shares related to the private placement and the earlier this year.

Now I would like to talk about the results for the year which ended June 30, 2010. Revenue for the fiscal year totaled $9.3 million compared to $7.5 million for last year, an increase of 24%. The increase from last year was primarily attributable to higher sales volumes for precision molded optics and Gradium, 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 the high volume low cost lens business. Our current cost structure has allowed us to sell product at lower prices while improving gross margins. Growth in sales going forward is expected to be derived primarily from the precision molded optics product line, particularly our low cost lenses being sold in Asia.

Our gross margin percentage for the fiscal year compared to last year increased to 47% from 27%. Total manufacturing costs of $4.9 million was $500,000 lower in fiscal 2010 compared to last year. This was due to lower production costs. Unit shipment volume in precision molded optics was up 85% in this year compared to last year. This resulted in better absorption of overhead costs which resulted in improved fixed cost utilization which lowers our unit costs. Direct costs, which include material, labor and services, were 24% of revenue in this year as compared to 23% last year. Gross margins improved as a result of the cost reduction programs we implemented with the better yields and efficiencies.

During fiscal 2010 total costs and expenses decreased $400,000 to $4.2 million compared to $4.6 million for last year. Included in total costs and expenses for this year were $3.3 million in selling, general and administrative expenses which decreased $400,000 or 10% from $3.6 million last year. We had a reduction of $255,000 due to lower salaries and benefits, a $29,000 reduction of board compensation, a $25,000 decrease in stock compensation expense for stock options and restricted stock units, and decreased legal costs of $262,000. We had higher investor relations expenses of $267,000. During last year there were two one-time events resulting in reductions to G&A which was the receipt of $183,000 from our D&O insurance carrier as a refund of legal expenses and the receipt of the $186,000 from the Chinese government related to the move of our facility in Shanghai. Net interest expense was approximately $723,000 this year as compared to $1.3 million for last year. Approximately $5,600 of the interest expense for this year is attributable to our equipment term loans and our capital equipment lease.

The convertible debenture issued in August of 2008 accounted for approximately $722,000 and $1.3 million of interest expense this year and last year, respectively. This represents periodic interest of 8% and amortization and writeoff of related debt issuance costs, debt discounts, and the value of shares and warrants issued as an incentive to participate in the convertible debenture placement and to induce the conversion of the debentures to shares of common stock. In December of 2008 25% of the debentures were converted into shares of common stock and $300,000 of debt discounts and $121,000 of debt issuance costs were written off to interest expense. We also had $262,000 of debentures converted into common stock during this fiscal year. Net loss for fiscal 2010 was $560,000 or $0.07 per basic and diluted share compared with a net loss of $3.8 million or $0.62 per basic and diluted share for last year. This represents a $3.3 million decrease in net loss compared to last year. Weighted average shares outstanding increased to 8.1 million this year compared to 6.2 million last year primarily due to the issuance of shares of common stock related to the private placements this year.

Now I would like to talk about a few areas on the balance sheet. Cash and cash equivalents totaled $1.5 million at June 30, 2010. Total current assets and total assets at year end were $4.8 million and $7.5 million compared to $3.3 million and $5.8 million, respectively, for last year. Total current liabilities and total liabilities at June 30, 2010, were $1.1 million and $3.3 million compared to $2 million and $4.1 million, respectively, for last year. As a result, the current ratio as of June 30, 2010, improved to 4.27 to 1 compared to 1.59 to 1 as of last year end. Total stockholders equity at June 30, 2010, totaled $4.2 million compared to $1.7 million at June 30, 2009. As of June 30, 2010, our backlog and orders scheduled to ship in the next 12 months was $2.9 million compared to $2.3 million as of last year end.

I would now like to turn the call back over to Jim for closing comments.

Thank you, Dorothy. Overall, given the current uncertain market conditions, our outlook over the short-term remains cautious but optimistic. We just returned from our exhibit at China's international opto-electronic expo where we showcased our expanded catalog of aspheric laser tool lenses and new lenses for blue laser collimating lenses, and our products were extremely well received by our target market of Asian OEM suppliers. As a result of our participation, we anticipate a rise in quote activity throughout fiscal 2011. What the past year has demonstrated is our ability to increase revenues, gross margins and EBITDA and control our costs despite the economic forces. Given the opportunities we see for LightPath and the low cost commercial and infrared markets in Asia, we remain very optimistic for our business over the long-term. We expect our year-over-year fundamentals to show continued improvement and as always we appreciate your support and are very excited about the prospects to increase shareholder value over the near and long term.

This concludes my comments at this time, and I would like to open the call for questions. Operator, if you would please start the Q&A portion of the call.

Thank you. (Operator Instructions). Our first question is from Robert Ainbinder with Garden State Securities. Please go ahead.

Hello. Good afternoon, Jim and Dorothy. First, let me congratulate you both on a great quarter, and a fantastic turnaround at LightPath. This is very, very encouraging to see, and we all look forward to continued progress as we go forward.

With that, if I can ask you to give us a little more color with regard to some of the new products that you announced back in June, and what type of market you see for those lenses, and if we're starting to gain any traction with those lenses in China.

Okay, well, we've announced a number of new lenses. And actually, Bob, we're working at a rate where we're introducing almost a new lens per week, as we find different opportunities in the marketplace. But in particular, we have released two families of lenses that I am real excited about. One is these RoHS compliant lenses that are targeted to telecom type applications, which is something that LightPath has done for many years, but we never had lenses that met these environmental restrictions before. And now we do, and that allows us to reparticipate in that market going forward. And we have a number of those in qualifications at two or three major OEM equipment makers for the telecom market. So we're excited about that.

The next family is the blue collimating lenses that we just recently released. And those I am excited about because they have really good application, and they have been really well received in the marketplace, particularly for biomedical instrumentation type applications. So those are the kinds of things that we're trying to do.

What we're trying to do with our strategy there is to introduce a group of lenses that we think have good application to a targeted market. And even if that particular lens that we put out there isn't exactly what the customer wants, we're able then, it puts us in the space, and these guys come to us, and then we're able to tweak a lens design to fit their particular application. And that strategy is working very well for us. So we're real pleased with that.

The business in Asia, I think, has tremendous potential. We have spent quite a bit of effort and time getting LightPath established in the Chinese market, and I think we have accomplished that. And we have built a very good reputation there, and we're starting to see the traction occur with direct sales out of our Shanghai facility directly into the Chinese market. And that's the one segment of our sales that we have seen increase quite substantially over the last six months.

We're seeing almost a 300% increase. That's some big numbers there. Do you expect to see continued growth in that area in China?

The unit volume growth we expect to see continue. And actually right now, we're running probably about 48% of our capacity on a unit volume basis, and we're already in the middle of expanding that capacity because we expect that much more volume to be coming in the near term.

Fantastic. Okay. That's great. This is an exciting time for LightPath, I got to say, especially with, I noticed in one of your comments on one of the recent announcements, you stated that you're seeing a resurgence in telecom. And I remember, I have been following LightPath and been around LightPath quite a long time, and I remember back in the late '90s, this is an area of great excitement for the Company as the United States was rolling out its fiber optic infrastructure. And with China now in the process of doing the same thing, you see the market potential there.

Is that what we're seeing with a resurgence of telecom? Are we seeing the opportunity for us as China begins to roll out their fiber optic infrastructure?

That's a piece of it, certainly. And it is a big piece. I think we do see that, but we also see it in other parts of the world as well. India is doing a similar thing.

And I think the other thing that is driving the market, not just in these emerging and developing countries, but also in the developed countries is the mobile Internet phenomena that's occurring, and all of these applications for iPhones and droid phones, and all of this kind of stuff is creating a demand for bandwidth much like we saw when video and things started going across the Internet. And the telcos have to add infrastructure to keep up with the demand.

Fantastic. Okay.

Bob, here is an interesting statistic that just applies to China. China is the world's largest user of mobile phones. I think they have some 700 million subscribers today. The middle class -- the middle class -- of China is equal to the entire population of the United States, and expected to grow. Those people have a savings rate of something like 35%, so there is this huge market of people with money, that is ready to explode into the consumer business. And obviously smartphones and mobile Internet is a big opportunity there, and I think we have ourselves poised to take advantage of that market.

So while we have this happening for us there in China, which turns out to be just an absolutely great move to move our manufacturing operations there, we also have a market here in the US with some of the military applications, and infrared. Can you give us a little more color in regards to the infrared market, and what we anticipate happening there?

I think that's a longer term growth opportunity for LightPath, over the next several years. We believe that we have an enabling technology associated with infrared type products, which is molding. Infrared type products, lenses and optics are very expensive. They're made out of very expensive materials that have a lot of rare earths in them, so the raw material is expensive. The processing of that material to make an optic has historically been done with single point diamond turning, which are expensive machines, and they take a certain amount of time to make a lens.

Molding, we believe, is a way to reduce the costs of that process, and use less material, make more repeatable lenses, and therefore enhance the commercialization of these types of devices. And we just recently announced that we've engaged with the University of Central Florida and their optics school to do some work that is targeted specifically at improving the material efficiency as we prepare the glass for molding. And we believe we're going to be very successful with that effort, and we're very happy that we're able to engage with the talent that's available from the University of Central Florida to help us do that. And we think that will expedite our process as we develop those techniques, and give us something unique in the marketplace to do that.

So I am real excited from that standpoint, as to the future potential that we have there. Now, having said that, infrared devices is about a $2.5 billion market at the end product, so there is a huge market opportunity there, and if we can get the cost of the optics to be significantly cheaper, but while they're still relatively high-end, there is a tremendous business opportunity for LightPath.

Applications in sensing and thermal imaging, fire fighting safety equipment, electrical maintenance, security cameras on the commercial side. And then on the defense side, there is thermal rifle sights, weapon targeting systems, IR countermeasure type devices that we can all participate in providing optics for those types of devices. So I really think it is the next major leg up for LightPath from a growth point of view.

Fantastic. Once again, I want to congratulate you both, and the whole team at LightPath, fantastic job, and very, very excited about the future, and looking forward to the next conference call. Thank you very much.

Good talking with you, Bob. Thanks.

Thank you. Our next question is from the line of [Michael Diet], a private investor. Please go ahead.

Jim and Dorothy, thanks again for the great report. During past calls, you have mentioned the European sales, and the expansion of territory over there. I just wondered if you have been at all successful in some of those efforts, and might talk a bit about that potential as well?

Okay. I think the European market, since we changed our channel to market by going with a master distributor in AMF Technologies, and taking that approach to that marketplace has been very successful for us. We believe we have doubled the amount of business that we historically have done in Europe through that change in our approach to the market, and it is going very well, Michael. I think we're quite pleased with that, and it continues. And those tend to be higher technology type applications that we get involved with in the European market, and associated more with the higher end of our business, so that's also good that we're increasing that segment for ourselves.

Great. Thank you very much.

Thank you.

(Operator Instructions). And our next question is from the line of Steven Donovan with Donovan Associates. Please go ahead.

Hi, there, Jim and Dorothy.

Hi, Steven, how are you?

I am fantastic. And I am so excited to hear your news. It is really gratifying to watch LightPath unfold in such a wonderful way.

I just have one quick question that Dorothy probably can answer, and that is, on the balance sheet there is the accumulated deficit of $202 million. Is it correct to assume that much of that will be a tax shelter for future earnings, meaning LightPath will not have to pay any corporate tax?

Yes, it is. We have $95 million of tax loss carryforward at our disposal. Some start to expire in 2012, but they go through 2030, so you're correct, that that would be a shelter on future income.

And we're going to do our best to use them all.

Fantastic. That's great. Okay. Thanks, you guys.

(Operator Instructions). We have no further questions in queue at this time. I would like to turn the floor back over to management for any closing comments.

Thank you, operator. I would like to thank our shareholders, and everyone who has participated in today's call. Again, as I usually do, and I sincerely mean it, I would like to thank the team at LightPath for their hard work and dedication, because they're the people that have actually made our success happen.

I look forward to updating you again on our fiscal 2011 first quarter conference call. And if you have further questions, please feel free to contact myself or Dorothy. And with that, I wish you all 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.