LightPath Technologies Inc (LPTH) 2014 Q1 法說會逐字稿

Hello, and welcome to the LightPath Technologies Inc. fiscal first quarter 2014 financial results conference call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference call over to Dorothy Cipolla. Ms. Cipolla, please go ahead.

Thank you, and good afternoon. Welcome to LightPath Technologies's fiscal 2014 fiscal first-quarter financial results conference call. Our call today will be hosted by Mr. Jim Gaynor, President and CEO. Following management's discussion, there will be a formal Q&A session open to participants on the call.

Before we get started, I'd like to remind you that during the course of this conference call, we will be making a number of forward-looking statements that are based on our current expectations and involve various risks and uncertainties that are discussed in our periodic SEC filings. Although we believe that the assumptions underlying the statements are reasonable, any of them can prove to be inaccurate, and there can be no assurance that the results will be realized.

With that out of the way, it's now my pleasure to introduce Jim Gaynor, President and CEO of LightPath. The floor is now yours.

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

I will open with an overview of operational result highlights and then turn the call over to Dorothy for more in depth review of our financials. After some closing remarks, we will open the call to your questions.

Our fiscal 2014 first quarter is marked by increased core product sales, improved margin, a jump of nearly 80% in cash flow generation, and an increase in backlog to $4.4 million. Importantly, we believe we have only begun to scratch the surface of the opportunities available to us, given our proprietary technology, our low-cost manufacturing, the leverage in our business, and our demand creation model.

Although our sales could be somewhat lumpy, we continue to experience robust demand for and interest in our two primary business lines -- precision-molded optics and infrared products. The first quarter is representative of the improvements we have made and continue to make in our business.

The Company's operating results for the first quarter of 2014 as reported under Generally Accepted Accounting Principles, GAAP, include the effect of quarterly mark-to-market adjustments related to warrants that were issued in connection with our private placement in June of 2012. We believe a more important comparison of ongoing operations exclude the effects of the non-cash expenses associated with such warrants and is more helpful for investors to better understand the financial results of our ongoing business operations.

We believe this non-GAAP measure reveals the strength of our first-quarter results, better represents how our product business is performing, and represents an inflection point for the Company to build on as we go forward. Adjusting our operating results to look at our underlying ongoing performance by removing the contributions of the DARPA project and warrant liability effects, we see a strong and improving business.

Revenue grew 6% year-over-year for the fiscal first quarter. This growth comes primarily from sales of our molded aspheric optics and has not yet appreciably benefited from our new line of infrared products. I'll discuss our growth outlook in a moment.

Other areas of progress in the quarter include measures to improve profitability. Gross margin has further improved, with an increase of 31% from the level achieved for all of fiscal 2012 to our most recently completed quarter. The gross margin in the first quarter of fiscal 2014 was 47%, a substantial improvement from 36% for all of fiscal 2012 and 44% for fiscal 2013.

We are managing the Company for long-term, sustainable growth, so we really like these trends. The combination of higher top-line performance and improved profitability has led to an increase in cash flow generation. As compared with average cash generated by operations of approximately $101,000 per quarter in fiscal 2012 and approximately $140,000 per quarter in fiscal 2013, we delivered cash flow from operations of approximately $251,000 in the first quarter of fiscal 2014.

Precision-molded optics unit volume has continued to grow, averaging 408,000 lenses per quarter in fiscal 2012; 550,000 lenses per quarter in fiscal 2013; and 530,000 lenses in Q1 of fiscal 2014. These results further demonstrate the powerful trends we've been able to sustain.

However, the improvements have been partially offset by the lower prices associated with our shift to high-volume applications, albeit at very good margins, which is part of our demand creation model. As the high-volume, lower-priced business segment becomes a larger percentage of our overall business, the average selling prices are lower -- approximately 13% on average -- which impacts the rate of revenue growth. But it is more important that we are effectively creating new market opportunities for our products and enabling our customers to develop new products.

Given our progress on these fronts and amid an outlook for exciting sales growth, which contrasted with our capacity constraints in the first quarter of fiscal 2012, we took the opportunity to further invest in the expansion of our global sales and marketing efforts; increase production capacity; and broaden both of our product lines. These investments were in part made possible by our improved cash flow and reflected the accelerating market demand for our molded aspheric lenses and the outlook for our new infrared products.

Last month we began to build 12 new molding stations at our China operations. This investment will result in an increase in capacity and production capability of over 45%. These machines are expected to be brought online in two phases. The first, by the end of December; and the next, no later than the end of March.

But we were also required to increase our overhead expenses, which were higher in the quarter as compared to the first fiscal quarter last year by approximately $176,000, or 15%. One-half of this increase was due to a reclassification of several members of the R&D staff being charged to the cost of goods sold while working on the DARPA project last year, and an increase in fees and sales tax on capital purchase for investments increasing our capacity to support current and anticipated growth.

The remainder of the increase was for continued investment in our infrared business. These investments in our future, which led to a modest loss in the quarter, are a necessary trade-off such that we may be positioned to capitalize on numerous market expansion opportunities that we believe will lead to meaningful returns on investments going forward.

New orders received in the first fiscal quarter of 2014 recovered from last quarter's softness to $3.5 million. But a debooking of 300,000 from one of our digital projector customers, who canceled the order due to technical issues unrelated to the optics, brought net bookings to $3.2 million. This strong order performance increased our 12-month backlog as of September 30, 2013, to $4.42 million, an increase of 7% as compared to June 30, 2013.

In our fourth quarter of fiscal 2013, we outlined major market drivers for our business which primarily revolve around optical network expansion to support increasing bandwidth demand. We continue to see this growth in our business, particularly in China and other Asia-Pacific markets. New orders from China sales increased 33% in our first quarter 2014 from last year's quarterly average, and we anticipate this to continue to grow during the balance of this fiscal year.

We remain confident in our growth prospects going forward, with burgeoning demand for our precision-molded optics and increasing market interest in our infrared product line. End product markets driving the increased demand for aspheric lenses include laser tools, telecommunications, digital projectors, industrial equipment, medical instruments, and increasing use of green laser diodes. We are working on securing a number of orders over the next 3 to 4 quarters that will require the additional capacity being brought online. To give you a sense of the market applications, in China we are working with three different commercial digital projector manufacturers, which, combined, have the potential to generate lens volumes from 700,000 to 1.2 million units per year starting in 2014 and reaching full potential in 2015.

In North America, another interesting program is a lens we have developed for a customer that makes laser diode assemblies used in various fiber laser delivery systems. Currently, we are shipping over 50,000 lenses per month, with a continued growth anticipated.

I will now provide an overview of our infrared product line and our growth expectations. Similar to our molded aspheric product line, infrared products leverage our proprietary manufacturing technology. We are now in the process of replicating the demand creation models of our precision-molded optics to generate growth in the infrared market. This technology has been limited to visible and near-infrared wavelengths due to the crystalline structure of most infrared optical materials.

The advances we've made in chalcogenide materials have enabled compression molding for mid- and long-wavelength infrared optics in a process similar to visible molded optic lenses. LightPath's molded infrared optical technology enables high-performance, cost-effective infrared aspheric lenses that do not rely on traditional diamond turning or lengthy polishing methods. Some of the infrared opportunities reside in thermal imaging assemblies, security installations, thermography, and a myriad of defense and industrial applications.

We have recently had our lenses designed into firefighting camera qualification units, which have passed testing under the NFPA 1801 certification. We anticipate that we will soon see production orders for these products. We also have had our lens assemblies chosen for a second firefighting camera application by another large camera manufacturer, who is now in pilot production.

We hope this discussion has been helpful in sharing with you our view of the market expansion and growth outlook for LightPath technology. I will now turn the call over to our CFO, Dorothy Cipolla, to provide additional detail on our first-quarter results.

Thank you, Jim. First, I'd like to mention that much of the information we're discussing during this call is also included in the press release and the Form 10-Q, which we issued earlier today. I encourage you to visit our website at lightpath.com, and specifically, the section entitled Investor Information, where we've included the presentations that we've made at recent investor conferences.

I'll now review financial performance and operational details from our 2014 first quarter, which ended September 30, 2013. Revenue for the 2014 first quarter totaled approximately $2.81 million compared to approximately $2.89 million for the first quarter last year, a decrease of 3%. The decrease from the first quarter of last year was attributable to revenue in the prior period of $253,000 for a large purchase order from a customer in connection with the Defense Advanced Research Projects Agency's, or DARPA, low-cost thermal imaging manufacturing program. And this was partially offset by an increase in sales for the Company's precision-molded lenses for the telecommunications market.

Looking at our precision-molded optics business, revenue increased 6% compared to the first quarter of last year. This demonstrates that our strategy to increase production volume and manage our cost inputs has been successfully implemented. More specifically, we expanded our precision-molded optics through improving our costs in procurement, leveraging purchasing volumes, bringing antireflective coating in-house, improving our tool life, improving the productivity in our Shanghai factory, and broadening the customer base through expanded distribution in direct sales in Asia.

Growth in sales for the next several quarters is expected to be derived primarily from the precision molded lens line, driven by the telecommunications sector's need for expanded infrastructure to support mobile Internet demand.

The industrial tool sector, which is benefiting from an improving Chinese market, demand for fiber laser delivery systems, and entry into the digital projection market. Infrared products, now being designed and introduced, are expected to accelerate the Company's growth more meaningfully during the balance of fiscal 2014.

Our gross margin percentage in the 2014 first quarter was 47%, up from 41% in the first quarter of last year. Total manufacturing cost of $1.49 million decreased by approximately $223,000 in the 2014 first quarter compared to the same period last year due to a decrease of $166,000 in direct sales costs associated with the DARPA-related purchase order and lower coating cost for our molded optics.

During the first quarter of fiscal 2014, the Company received $1.3 million in gross proceeds from the exercise of warrants. 832,336 previously issued warrants were exercised and converted into common shares in connection with these exercises. The exercise prices range from $0.87 to $1.89 per share of common stock.

Cash and cash equivalents totaled approximately $2.88 million as of September 30, an increase from $1.57 million at June 30. The increased cash balance lead to an improvement in the Company's current ratio as of September 30, which was 4.06 to 1 as compared to 3.75 to 1 as of June 30.

Total stockholders' equity as of September 30 was approximately $6.99 million compared to $5.49 million as of June 30. And as of September 30, the Company's 12-month backlog was $4.42 million compared to $4.14 million at June 30, 2013. This was also a sequential improvement of approximately 7%.

With this review of our financial highlights concluded, I will now turn the call back to Jim.

Thank you, Dorothy. Our focus is to accelerate our top-line growth while effectively managing our cost structure. We are rigorously pursuing opportunities to further expand our current accounts and develop new ones. We believe the themes I outlined earlier will provide continued growth.

In addition, we continue to see future opportunity for our infrared products. These opportunities are broad-based across several of our larger market segments and not limited to any specific industry, market, or geographic location. We believe the Company is well positioned to capitalize on many opportunities we see ahead, and that our investment story is really taking shape.

To this end, we look forward to presenting at the sixth annual LD Micro Conference, to be held in Los Angeles in December. If you would like to attend this event or meet with us, please contact our Investor Relations representative, Jordan Darrow, at 631--367--1866.

I will now open the call to any questions.

(Operator Instructions) Stephen Donovan, Private Investor.

I tried to call in on the number that you post on your announcement, and it didn't work. And I had to call the international number to get through to you, and so I missed most of your presentation.

I'm sorry about that. It was a good one.

Yes. So what I have to do is read all the material and digest it. But just one question -- when will the growth begin?

Well, I think the growth is beginning. We just recently announced an expansion of our capacity by adding these 12 new press lines in China. We didn't do that because we just wanted to build some more machines; we have a defined use for those things.

So I think we're seeing some very robust growth in the visible side of the business associated with the telecom markets; and also, what we call our industrial tool markets, which are our high-volume, lower-cost products that go into the industrial tools -- you know, laser levels, and barcode scanners, and things like that, where we see a lot of growth taking off again which had been dormant for a while. So we see really nice opportunities there.

I mentioned in the report -- I don't know whether you heard this part or not. We're working with three different digital projector manufacturers in China, and the volumes that they are forecasting a very large -- from 700,000 up to 1.2 million lenses to us beginning in 2014, and I think reaching full potential in 2015. I don't know if you follow that market it all, but IMAX is investing very heavily in China and Asia, developing a number of their big theaters. And these guys that we're dealing with -- a couple of them, anyway -- are building digital projectors for those guys. So that's where some of this business is coming from.

Thanks very much. I'll read the material. And thanks for all your good work.

Jason Duncan, Devon Capital.

I'm a little new to the story, but I wanted to see -- how do you describe the current competitive landscape for your products vis-a-vis your ability to manufacture them, price them, and distribute them?

I think LightPath has been in the molded aspheric optics business for many years, and what we really are bringing to market is a low-cost manufacturing method for aspheric lenses. And what we've been able to do -- by setting up our operations in Asia, we've been able to really even substantially reduce our costs.

And so we can be price competitive with spherical solutions and offering a higher-performance lens in an asphere. And that's one of the reasons that we are winning a number of these -- this type of business in this industrial tool segment, which is growing quite rapidly.

We have also been -- historically, LightPath has been very well connected into the telecom business. And with the growth in the mobile internet and the bandwidth demands that that's creating, which is stimulating these service providers to expand their optical networks, that is also creating a very large market for us. So we're selling to the equipment manufacturers, the guys -- JDSUs and the Huaweis, the Finisars, M-Cores, those type of people. So we see a very robust market in that area, and we believe that will continue for quite some time, given this mobile internet phenomenon that's occurring.

So I think from that standpoint, on the visible side we have a very large market opportunity in front of us. If you look at all the metrics on the mobile internet stuff, there are just phenomenal things going on. I think they say, you know, everybody has got more than one. They're predicting 1.4 mobile devices for every man, woman, and child on the planet by 2016. The Internet is growing, and the video content on Internet is growing. And all of this stuff requires more and more bandwidth, which requires larger networks and more capacity to be put in place. And we can play in that market segment and that theme.

On the infrared side, what we are bringing to market is a lower-cost infrared optic by using molding. And so we believe what we have here is an enabling technology for the further commercialization of thermal imaging type devices. And so there's a lot of activity in the marketplace to make low-cost thermal imaging devices, and we can participate in that.

And as the cost of the sensors in these devices comes down -- the technology shifted when they came out with uncooled microbarometers and focal plane arrays. That lowered the most expensive component in these devices. And then the optics are another area that has never been cost reduced. Traditional manufacturing methods -- they'll use high-end CNC-type operations, single-point diamond turning, to make aspheric lenses. It's a more expensive process, using a more expensive material.

Once you get more than 1,000 pieces of a demand for a particular product, molding becomes very effective. And we believe we can offer a lower-cost solution by as much as 30% to 40%. So that's how we're going to bring that to market in the areas that we can play.

That's great. Thank you for that explanation. Did you also say -- I know you said that you would be expanding capacity and, obviously, growing the production facility in China. Did you happen to say what type of volumes that current capacity can support, and if there will be additional investment necessary in the near future?

Whether there is additional investment in the near future depends on how quickly we can generate volume, which there is quite a bit of demand creation going on. We just did announce that we're adding 12 new mold pressing lines to our China facilities. And so we are doing that expansion.

Now, our capital cost for that type of expansion is very low. We build our own machines. Our molding machines are of a unique design, and the cost of capital there is about 10% of what the commercial molding equipment is on the marketplace today. So it's extremely low-cost and flexible equipment that we use in our process.

So the cost of capital to expand is relatively low. And we're able to do that quite quickly. So I think we have an advantage there from that standpoint. And no, I didn't give you any unit volume capacities. And I try to keep that as more proprietary technology.

Okay. Understood. My last question is about the gross margin. Obviously they're trending toward -- I'll know if you had record levels, but certainly very good levels. Is there a steady-state gross margin or a target margin that you plan to reach, or expect to reach, or hope to reach?

Yes. Yes, and I think our margins -- you know, we continue to cost-reduce our process on a continuous basis. The latest thing that we have done that has had a good impact on that has been the bringing in-house of our antireflective coatings that we did in the last nine months or so. And that has significantly reduced our cost of putting the antireflective coating on the lenses.

So we continue to find things like that to continue to reduce our costs. But what we did over the last -- from, I would say, 2007 through about 2009 or 2010, we made significant investment in the cost structure of our process and products. We started our China operations in 2005. We got them very effective starting in 2007.

We changed our tooling material from a nickel Inconel-type base material to a carbide, which gave us longer tool life, but also allowed us to mold our product at higher temperatures. And that allowed us to bring in much lower-cost raw material in the glass.

Those three major changes made an order of magnitude change in our cost structure, which allowed us to get into these higher-volume, lower-cost markets. By order of magnitude change -- it used to cost us somewhere from $7 to $10 to build a lens, depending on the type; and today we build many of those lenses under $1.00 in cost.

So now, with that, and the continued leverage of increased volume, so we get better absorption of our overhead costs, we're continuing to drive those margins up. So I think there's still a little room for improvement in the margins, but we're approaching a level that's pretty decent for us. In the upper 40%, low 50% type range is where I think that we'll probably achieve a steady-state.

(Operator Instructions) Cecil Mahalo, Private Investor.

I'm sorry; I joined the call late, and I did not hear whether you made any elaborations on the projections that you had for revenues going forward. I was looking for you to discuss with the investors on this call your statement in late September about the financial guidance for revenue growth in excess of 15% this fiscal year. Can you update us on where that stands right now?

I think, Ves, you're asking if we're going to give some guidance, which we typically don't do. We're still a pretty small operation, and so when we get a little -- smaller changes make big swings in some of our forecasts, etc. However, as I've said, we have this growth -- we're on this growth curve, with these opportunities coming in these different markets, both in the visible and infrared side.

And as you know, we've announced a capacity increase and adding different lines. And we said with that capacity increase -- I think it was about a 45% increase in our unit volume capacity. We didn't do that without a reason, and we didn't do it to have those machines sit idle. So I'll let you figure it out from there. We're going to grow.

So no significant updates on what we heard at the end of September, your expectations of --?

The predictions that I did then, I still stand by, yes.

(Operator Instructions) There are no more questions at the present time. Do you have any closing comments?

Yes, thank you. I'd like to thank everybody for joining us today. and I particularly want to congratulate our employees for the hard work that resulted in our first profitable year in fiscal 2013 and has created the foundation for an even more prosperous and exciting future. So, again, I thank everybody for joining the call, and we'll talk to you next time.

Thank you. That concludes today's teleconference. Thank you for participating. You may now disconnect your lines. Have a nice day.