LightPath Technologies Inc (LPTH) 2012 Q4 法說會逐字稿

Good afternoon and welcome to the LightPath Technologies fiscal fourth-quarter earnings conference call. All participants will be in listen-only mode. (Operator Instructions). After today's presentation there will be an opportunity to ask questions. (Operator Instructions).

Please note, this event is being recorded. I would now like to turn the conference over to Peter Seltzberg with Hayden IR. Please go ahead.

Thank you, and good afternoon, everyone. Welcome again to the LightPath Technologies fourth fiscal quarter 2012 financial results conference call.

Our call today will be hosted by Mr. Jim Gaynor, President and Chief Executive Officer; and Dorothy Cipolla, Chief Financial Officer. Following management's discussion, there will be a formal Q&A session open to participants on the call.

Before we get started today I am going to review the Safe Harbor statement. Today's conference call may contain certain forward-looking statements within the meaning of Section 27a of the Securities Act of 1933 as amended and Section 21e of the Securities Exchange Act of 1934 as amended.

All statements other than statements of historical fact included in today's presentation are forward-looking statements, including statements regarding the Company's business strategy, plans, objectives, and statements of non-historical information. Although the Company believes the expectations reflected in these forward-looking statements are reasonable, they do involve assumptions, risks, and uncertainties, and these expectations may prove to be incorrect.

You should not put any undue reliance on these forward-looking statements, which speak only as of today, August 30, 2012. All forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by these factors other than that as required by securities law. The Company does not assume any duty to update these forward-looking statements.

With that out of the way, it's now my pleasure to introduce Jim Gaynor, President and Chief Executive Officer of LightPath. Jim, the floor is now yours. Congratulations on the good quarter.

Thank you, Peter. And welcome, everyone who has joined us on the call today. We appreciate your ongoing interest in LightPath.

I'll open with an overview of the quarterly and full-year operational results and then turn the call over to Dorothy for a more in-depth review of our financials. After the conclusion of the financials, we will open the call to your questions.

Our financial metrics continue to trend favorably in our fiscal fourth quarter, with increased bookings, backlog, gross margins, cash flow, and EBITDA. These favorable metrics are being driven by demand for our custom optics and also our products that are designed for the telecom market.

As I said in our last call, 2012 has been an important and transformational year for LightPath. We are building the foundation to capitalize on the operating leverage we delivered in our fiscal year, and with our quality, performance, and attractive price points, we see a sustainable business model to capture diverse opportunities going forward.

We grew our business by 11% for the fiscal fourth quarter and by 13% for our fiscal 2012 year from the respective year-ago periods. This is a positive accomplishment in an economic environment that is still very difficult and uncertain.

Orders for the fourth quarter were $3.2 million, which did not include any part of the Raytheon purchase order we spoke about on our last call. At that time, we reported on our fiscal third quarter of 2012 call that $1.1 million or about 25% of the $3.9 million in orders was from the Raytheon purchase order.

The fourth-quarter bookings of $3.2 million demonstrates that current orders came from a more diverse mix of market opportunities and a broader customer base. Bookings, excluding the Raytheon vision systems purchase order, have averaged $3 million over the last six quarters, now demonstrating the continued growth of our base business.

As a result of this trend of bookings above $3 million per quarter, our 12-month shippable backlog has increased 26% or $1.02 million from June 30, 2011. Our 12-month shippable backlog for the year now stands at $4.89 million.

We are also having success winning larger and longer-term orders as a result of our improved manufacturing capacity and market diversity, as demonstrated by two pieces of new business we won during this quarter, one in industrial tools and the second in medical instruments, each over $300,000. In addition, our quote activity has been increasing recently, so we are cautiously optimistic and enthusiastic about our business going into fiscal 2013, particularly in the second half.

Our industrial tool business, whose customers are primarily located in China, has been picking up recently, so this too is a reason to be encouraged but cautious. There are a lot of mixed signals at the macroeconomic level, but we are finding that the increased diversity of our product mix is allowing us to maintain our revenue levels, even with lagging growth in the overall global economy.

In our last call we indicated that we were implementing measures to improve our manufacturing efficiency and decrease overhead by about $400,000. This was done to improve gross margin in the upcoming quarters and was expected as soon as the fiscal fourth quarter. In fact, we did see significant gross margin improvement to 40%. We achieved that from a sequential gross margin of 32% in the third quarter and expect the 40% range is sustainable in upcoming quarters.

We also indicated that with the leverage we were building into our operating model, we could begin to deliver profitability with revenues above $3 million quarterly, which we accomplished. In addition, this operating leverage allowed us to report EBITDA of $485,000, up 72% from the year-ago period, and also delivered positive cash flow of $309,000 before changes in equity.

We have assembled a very capable team and are now demonstrating and achieving momentum in the ongoing strategic shift of our business. That business includes our core business in molded optics and the enormous opportunity to grow our business rapidly with new products in the infrared sector. The number of units of precision molded optics sold in the fourth quarter increased by 13%, due to the Company's increased production capability and the pursuit of the low-cost, high-volume lens business.

Growth in sales going forward is expected to be derived primarily from LightPath's precision molded optics product line, particularly its low-cost lenses sold in Asia in the Company's infrared and collimator product lines. We expect the infrared growth will potentially take several more quarters, probably into the second half of fiscal 2013, but we are confident we are on the right track, and that this direction will generate the kind of meaningful, transformational financial results we expect, which in turn will benefit LightPath shareholders.

As we have already discussed on previous calls, we are partnering with Raytheon to develop low-cost manufacturing processes for infrared optics, which supports their $13.4 million Defense Advanced Research Project Agency contract. As an update on this partnership, we finalized the optical and optomechanical design with them during the fiscal fourth quarter.

We started the process of building the first set of prototypes using our current process of molding infrared optics. These prototypes will provide the baseline cost model and production estimates for the program.

We have also started investigating different infrared glass compositions and process improvements to increase our yield and find the lowest-cost, highest-yield combination of glass and mold tooling. To achieve this we have hired a materials engineer with experience in chalcogenide glass to direct our development efforts.

Finally, we have placed orders for specific manufacturing and testing equipment that will enable us to achieve the program goals of lowering the cost of molding infrared optics. This equipment, once received and installed, will enhance our scientific capabilities to monitor, track, and test the material and yield improvements in our process.

Over the next 3 months to 12 months, this program will result in new technologies and processes that will significantly increase manufacturing yields and reduce costs. We are also exploring different chalcogenide materials that will also reduce costs and provide overall cost reduction in infrared optics.

These results will significantly lower the overall production costs for our molded infrared lenses. Our ability to commercialize and capitalize on this technology and its completion has the potential of doubling our revenue over the next three years with sales in infrared products.

Separately, during April we announced the addition of two new molded infrared aspheric imaging assemblies that can support a variety of applications in long-wave infrared thermal imaging used for homeland security, industrial inspection, preventive maintenance, security, and surveillance and driver vision enhancement systems in automobiles. We showcased these new technologies at the Defense, Security, and Sensing Conference in Baltimore, Maryland, at the end of April.

These new products were well received and have generated several OEM opportunities that should generate business over the next 12 months. We estimate these markets have a combined current value at the systems level of over $2.5 billion.

I will now turn the call to over to our CFO, Dorothy Cipolla.

Thank you, Jim. I will first talk about our fiscal fourth quarter, which ended on June 30, 2012. Revenue for the fourth quarter increased approximately 11% to $3.1 million compared to approximately $2.78 million for the fourth quarter of last year. The increase from last year was attributable to increases from the Company's telecom products and custom optics.

As Jim indicated, gross margin percentage in the fourth quarter was 40%, flat when compared to 40% last year, but up sequentially from 32% gross margin in the third quarter. Total manufacturing costs of $1.88 million increased by approximately $209,000 in the fourth quarter compared to last year, but were down sequentially from $1.9 million in the third quarter. This reflects the successful implementation of cost reduction to our manufacturing overhead, as Jim mentioned in this call and on our last call.

Direct costs, which include material, labor, and services, were 22% of revenue in the fourth quarter, down from 30% of revenue last year. This reflects increased leverage and higher productivity. It also reflects a sequential reduction from 24% in the third quarter. During the fourth quarter, total costs and expenses were flat at $1.1 million when compared to a year ago, and down sequentially from $1.3 million in the fiscal third quarter.

Selling, general, and administrative expenses were $860,000 for the fourth quarter of fiscal 2012 compared to $842,004 last year. Total operating income for the fourth quarter was approximately $111,000 compared to income of $22,000 last year.

Interest expense was $22,000 in the fourth quarter as compared to $23,000 last year, and this represents interest on the convertible debentures at 8% interest per annum, and amortization of debt -- discount and debt costs.

Net income for the fourth quarter was $196,000 or $0.02 per basic and diluted common share compared with net income of $429 or $0.00 per basic and diluted common share last year. Our weighted average basic shares outstanding increased to 10.385 million in the fourth quarter compared to 9.714 million last year. This increase is primarily due to the issuance of shares of common stock related to the payment of interest on the debentures, and shares issued in our employee stock purchase plan, and shares issued with the exercise of incentive stock options.

Now I'll review the year-to-date financials for the 12 months which ended June 30. Revenue increased 13% to approximately $11.28 million compared to approximately $10 million for last year. This increase was primarily attributable to higher sales volumes from the Raytheon DARPA purchase order, vision molded lenses for telecom, laser tool markets, and custom optics. The number of units of precision molded optics, as Jim indicated, increased 13% due to increased production capability in light of this low-cost, high-volume lens business.

Gross margin percentage for the fiscal year decreased to 36% compared to 39% last year. Total manufacturing cost of $7.25 million were approximately $1.17 million higher for the period compared to last year.

This increase resulted from increased direct costs of $576,000 for material, labor, and outside services on the increased revenues; an increase of $171,000 in labor costs for our collimator and infrared products as we ramp up the development of these new products; and an increase of $293,000 in tooling costs. Direct costs, which include material, labor, and services, were 25% of revenue for the year compared to 27% of revenue for last year.

During fiscal 2012 total costs and expenses increased $180,000 to approximately $4.96 million compared to approximately $4.78 million for last year. As a result, total operating loss for fiscal 2012 increased to a loss of approximately $924,000 compared to a loss of $857,000 last year.

Interest expense was approximately $92,000 compared to $738,000 for last year, which reflects interest on the convertible debentures at 8% per year, and the amortization of debt discount and debt costs. Last year loss on extinguishment of debt of $132,000 resulted when the debentures were extended three years.

Net loss for the first 12 months was approximately $865,000 or $0.09 per basic and diluted share compared with a net loss of approximately $1.6 million or $0.17 per basic and diluted share last year. Weighted average basic shares outstanding increased to [9.8] million this year compared to 9.534 million last year. This is primarily due to the same reasons mentioned earlier.

Cash on hand at June 30 was $2.4 million as compared to $929,000 on June 30 last year. Total current assets were approximately $6.25 million, and total assets were $8.27 million at June 30 compared to approximately $4.61 million of current assets and $7.12 million of total assets, respectively, at June 30, 2011.

At June 30, 2012, total current liabilities were $1.74 million; total liabilities were approximately $4.27 million. This compared to approximately $1.53 million for total current liabilities, $3.09 million for total liabilities respectively at June 30, 2011.

The current ratio this year is 3.59 to 1.00, which compares to 3.01 to 1.00 as of June 30, last year. Total stockholders' equity at June 30, 2012, totaled approximately $4 million compared to $4.04 million at June 30, 2011.

With this financial review concluded, I will turn the call back to Jim.

Thank you, Dorothy. In fiscal 2012 our management team and Board members set a strategy for the future focused on establishing innovative manufacturing processes and new products for industries with large growth potential.

We've made great strides in implementing this comprehensive strategy, which has set the stage for expanding revenues and profitability in 2013. Management expects the back-half fiscal year growth will partially come from the infrared products coming online.

In June we raised almost $2 million in a private placement. Net proceeds are intended to provide working capital to support the continued growth of our business, with the primary uses of the funds anticipated to be for expansion of our infrared molding capacity and enhancement of our glass preparation processes and test and measurement capability. The funding will also support new product development and the acquisition of new equipment.

Our goal is to become a leading global supplier of optical systems for applications in the infrared market. The global market for infrared systems in both commercial and defense-related applications has experienced double-digit growth during the past 10 years.

LightPath is in a position now to leverage its manufacturing technology and optical expertise developed over the last 20 years into a specific set of significant growth applications and industries, and we are well positioned to have a strong market presence in these markets.

The intent of our growth strategy is to be the supplier of choice who brings true scalability to the infrared optics market. This recent capital infusion will help us achieve this goal and validates our strategic direction, and should ultimately benefit shareholders with an increasing valuation in the marketplace.

Subsequent to the end of the fiscal year, per recent announcements, there is one item that I would also like to mention and provide some details for our shareholders. We announced expansion initiatives that are now underway at our Orlando facility. We applied for and have been given approval from the state of Florida and the local orange county governments to receive significant amount of tax incentives and incentive money to help us expand, as they recognize we are doing some exciting things with our business.

We plan to add several engineering and production positions in our infrared group, which we believe will keep us growing and innovating well into the future. All of our infrared development continues to be done at our Orlando facility, and as we are ITAR certified, makes us eligible for US government and allies military business in this exciting new growth area.

Fiscal 2012 was indeed a pivotal and transformational year for LightPath. We did what we said we'd do, namely in that we stabilized our business, delivering improved revenues, margins, EBITDA, cash flow, and as promised, regained profitability in the fourth quarter. We expect that going forward, we can sustain this profitability based on $3 million-plus in quarterly revenues and continuing to pay close attention to cost management.

We continue to invest and optical technology and to leverage our 20 years of experience, which will bolster our position in the emerging, highly exciting market for infrared. We delivered solid profitability even as we made these investments.

The stage is now set for accelerated growth, and we expect the momentum will increase starting in the second half of fiscal 2013 and continuing through 2014, when we have commercialized infrared products that emerge from our partnership with Raytheon. We've said that we can double our revenue within two to three years, and we believe that we are well positioned to make this happen.

I want to thank our employees, Board of Directors, customers, and shareholders for their continued support and interest in LightPath. We look forward to an exciting and productive 2013. We will now open the call to any questions.

(Operator Instructions). Bhakti Pavani, C.K. Cooper & Co.

Congratulations on the great quarter.

Thank you.

My first question is about -- you mentioned on the infrared that you have finalized the prototypes of the -- for the infrared lenses with Raytheon. I was just curious to know, when to you expect the first orders coming in or if you could share some additional information on that, that would be very helpful.

Okay, well, you need to understand that the work we're doing for Raytheon is basically to develop a low-cost manufacturing process for infrared optics. These lenses that we're doing are really developmental, experimental type products to gauge that process and to develop that process with them.

So there isn't a lot of specific unit volume associated with this. However, I know that Raytheon has plans to be a leader in this field. So we anticipate that going forward, there will be significant business coming from them.

That is what you believe, that second half would be the time when [sales] will really start kicking in?

Well, I think not only from them, but from other customers as well that we're working with, that we'll start to see some growth in the infrared space starting in the second half of 2013, and more materially, I think in our fiscal 2014.

Okay. Also, I think in this quarter you had a big purchase order from Raytheon. The press release said that was primarily the reason for the increase. Could you share some of the details on the purchase order?

Well, those -- that order was basically a development contract, so that was like engineering work that they're paying for.

Okay.

So it's kind of like nonrecurring engineering-type funds, but it is related to this specific work, and it's being taken as revenue on a percent of completion across the program. So that will continue for a while, and then there also is the other business in the infrared space that is continuing with other customers.

Okay. Now with that European market, there has been so many news around the markets that the market is slowing down. How do you see growth in that area? What kind of visibility do you have from the demand perspective for the Company's products? If you could share some light on that.

Well, I think the European market is very weak, and we have seen that primarily through some reduced business activity through our catalog and distributors that are impacted, as well. However, we have been working with several OEMs on several projects, and that's where we see some continued activity.

We expect that to continue. But our business has been weak there, but it has been picked up by some custom optics type work in North America, as well as some increased activity in the telecom space.

Okay. So in FY '13 you are expecting about $3 million-plus every quarter. So would that be majorly coming from the Asian markets? And what end markets -- because I could see that industrial and medical market has been picked up. So are these the markets expected to push up that top line?

That's right. We are seeing strength in the telecom market as companies are building out their networks to support the increased bandwidth demands, driven by Internet mobility-type issues. So we're seeing business from several of our telecom customers.

We have one of the major customers that we were ramping up that's involved with tunable lasers and got impacted by the floods in Thailand last year. We're now seeing orders coming back from him as he brings his product lines back online. So we're starting to see some significant business there -- again, related with telecom.

And in the meantime, we have picked up several major accounts at some other major telecom customers as well. So we see pretty good strength from that.

In addition, even though the business climate in China is still weak and difficult, we're starting to see orders again from our industrial tool customers over there. As a matter of fact, we've just recently book some fairly significant pieces of business, as I mentioned, in that market segment, as well.

So we're starting to see some pickup there, and hopefully that will continue. The strength in this trying time has really come from the custom business at this time.

So we put all those things together; we see we've done pretty well. We've landed some major accounts, and those types of things are going to continue to bolster our business, and we truly do expect to be able to maintain revenues at $3 million-plus a quarter.

Sounds great. You also mentioned that in the state of Orlando, you have the state has offered you some kind of tax incentive. Could you share some color on what kind of incentives those are, and what would that mean for the Company?

There are incentives. We're getting ready to make some fairly large investments, from our point of view, in this infrared for equipment. So that gives us some sales tax exemptions on that. So if we invest a few million dollars in infrared equipment, we will be exempt from the sales tax.

There are also incentives around job creation. So as we hire people, technical and production people to support the growth in infrared, we will get other types of incentives for creating those new positions.

So it's not a huge amount of money, but it's not insignificant, either. I think it's a credit that the state and local governments are willing to help companies and encourage them to invest in their business at this point in time.

All right. And you have made some orders for the manufacturing equipment. When do you expect to receive that equipment?

Well, I think it will be over the next three to nine months time period. We've already got some of it, and we're starting to rearrange the factory and do some things to accommodate it. Some of the equipment that we've already gotten in has to do with metrology, as we're developing some of these products, so we can measure them properly in the infrared spectrum. Then there's also some glass preparation equipment that's coming online, as we believe that can be a major cost reduction effort for us.

So it will be -- it's going to be a variety of different kinds of pieces of equipment associated as we build up this manufacturing capability.

So that is the new technology that you were referring to with regards to the infrared, the new equipment and the glass corporation equipment -- was that it? Or is there anything else? Because you mentioned, I think, you're trying to create a new technology. So I was just confused. It is it the equipment-related technology, or are you guys doing something else? Are you guys investing in -- ?

Well, I mean, it's an expansion of our molding technology, bringing in -- this is molding a different material system that requires different coating systems, different types of tooling shapes. All of those kinds of things have to be developed. So it's a process development expansion and a capacity expansion, together.

All that. So how much of the capital expenditure costs you're expecting to incur in FY '13, and this is -- yes, FY '13? What would be the CapEx presumption?

I think about $900,000 in '13, and then it would continue in '14.

Okay. Also, this quarter you were able to significantly cut down on the SG&A costs. So would that be something that should be considered as going forward as the standard rate?

Yes, I think we --

Like in the Q3 you -- I'm sorry?

I'm sorry?

No, I said in the Q3 at was like 10.9% -- no, I'm sorry, 35.4% SG&A costs, and this quarter it is almost 30%. So would that be something that should be taken into consideration going forward?

Yes, I believe that roughly that level of SG&A cost will be maintained. I think you see a couple of things going on here, Bhakti. We have made some adjustments; we cut some costs out; as well as we're getting leverage as we're increasing that volume, and that's also affecting those percentages.

We also, in the third quarter, had $220,000 of expenses for the self-offering that we withdrew.

Right. All right. Okay. Yes, I think that's about it from my side. Thank you very much. And once again, congratulations, guys.

All right. Thank you, Bhakti.

Robert Ainbinder, Meyer Associates.

First, let me congratulate you and the entire team at LightPath for reporting an excellent quarter. Very, very nice.

Thank you.

You are welcome. I won't even make an attempt at the prior caller's name, but she covered pretty much most of the questions I had. But just to clarify in my mind the timing of when you would have the facility that was recently financed in Orlando for infrared -- the timeframe around when you expect that to be complete and really beginning to generate revenue. Is that second-half '13, fiscal '13?

Well, I think -- you know, there's sections, and it's going in in pieces. We already are -- have some production capability, and we are selling infrared product into the marketplace today. So we're expanding that to cover the anticipated growth in that business, as well as expanding the capabilities and addressing cost factors associated as we have developed this process.

So there's a factor where -- the glass preparation, that's where some of the initial investment will be made, and I fully expect that to be in place within the next three to six months. So we'll be taking advantage of that cost structure.

There's some metrology equipment, as we develop and work on different kinds of lenses and assemblies, that's coming online. And then over the course of probably the next year to year and a half, we'll do some blast facility type manufacturing improvements that will go into place and give us some additional capability there -- because one of the things that we're going to work on is recycling this material, which has a lot of rare earth associated with it, so it is expensive. We believe we can recycle a lot of the material and plus reduce our raw material costs. Those things will be coming onto the course of 2013 and into the beginning of 2014.

Fantastic. Okay. So you're expecting this $3 million, a little more than $3 million-plus in revenue as we go forward over the next couple quarters, and then first calendar quarter and second calendar quarter '13, which is your third and fourth quarter, you expect to really start to feel the impact of having that facility in place and start to really see some meaningful contribution from that facility?

Right.

Is that correct?

Bob, we're talking a lot about infrared, which is the future-type stuff, but we're -- at the same point in time, we are continuing to grow that base business. I fully expect that to be able to support $3 million-plus without infrared. So infrared gets loaded on top of that as we bring it online.

Well, that's great, because you just brought me to my next question, which is, when you talk about being able to double the revenue of the Company -- and you're singling out infrared. So are you saying that you expect to be able to double revenue with infrared and at the same time increasing revenue in the core business?

Well, I think -- what I'm saying is the revenues -- yes, I think we'll see significant growth through the back half of '13 and 2014 from the infrared product line. Up through that same period we'll see maintenance and a growth associated with the base product on the visible side of the business as well. Would we're seeing in the market place is we are capturing longer-term and larger orders associated in the industrial tool area, in the medical instruments area, and in the telecom space.

So I think there's significant growth. I really think this telecom, which tends to be a rather cyclical business, given what is driving it, we see that opportunity and growth in that business for at least the next several years, given the magnitude of what is going on in the world with the smartphones and mobile -- and Internet mobility, which is requiring a significant buildout of the bandwidth and the networks that these companies have to have. That creates quite a bit of market for a product area that we have a lot of experience in.

And so anywhere that you are using laser diode-type technology to generate light that goes on and off a fiber for data communications, that's an application for us. There's a lot of demand for that right now. So that's an opportunity in the short term that we're certainly going to try and capitalize.

Just to expand upon that, and of the business a little bit, LightPath of old -- I've been around the Company a long time, as well. In the late 90s there was a big expansion in laying fiber optic cable, and a huge opportunity for LightPath at that time in that space -- are we kind of talking about another rollout of the 4G LTE networks and us participating again in that arena, that similar arena?

Well, it is certainly associated with this 4G LTE networks -- associated with the buildout of this business. In developed countries, and then in the emerging space, in Asia and India, places like that, they're putting in new networks.

That is a tremendous demand. I see that carrying through two to three years, easily, at this point before the cycle -- before the network space gets built out. So I think it's a tremendous opportunity.

I'm not quite sure it's going to be as big as but the isolator thing did when we were involved with that, as they were laying cables across the ocean. It's a very nice opportunity, and we'll generate significant business for it.

Well, if it is remotely close, I'm sure all the investors will be quite happy. I look forward to the next quarter. Thank you very much and look forward to speaking with you again next quarter.

All right. Thanks, Bob.

(Operator Instructions). This concludes our question-and-answer session. I would like to turn the conference back over to Jim Gaynor for any closing remarks.

Thank you, Amy. I'd like to thank everybody today for joining us, and we'll continue to update you on her next call. So thank you very much.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.