LightPath Technologies Inc (LPTH) 2018 Q1 法說會逐字稿

Good day, and welcome to the LightPath Technologies, Inc.

First Quarter Financial Results Conference Call.

(Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Dorothy Cipolla, CFO.

Please go ahead.

Thank you, and good afternoon.

Welcome to LightPath Technologies Fiscal 2018 First Quarter Financial Results Conference Call.

Our financial results press release was issued after the market closed today, and posted on our corporate website.

Today's conference call will be hosted by Mr. Jim Gaynor, President and Chief Executive Officer.

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 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 these statements are reasonable, any of them can prove to be inaccurate and there can be no assurance that the results will be realized.

In addition, we will also be making a reference to certain non-Generally Accepted Accounting Principles, or non-GAAP measures, for which you should refer to the appropriate disclaimers and reconciliations in our SEC filings and press releases.

With that out of the way, it's my pleasure to introduce Mr. Jim Gaynor, President and CEO of LightPath.

Thank you, Dorothy, and welcome to everyone who's joined us on the call today.

We appreciate your continued interest in LightPath.

I will open with an overview of operational results, highlights, and recent developments, and then we'll turn the call over to Dorothy for more in-depth review of our financials.

Following that, we'll open the call to your questions.

Now, onto my remarks and perspectives on our fiscal 2018 first quarter.

LightPath continued to make progress with the implementation strategies to deliver global diversified growth and solid cash flow generation.

Here are some of the highlights of the first quarter as compared with the year-earlier period, unless otherwise noted.

Revenue increased 51% to $7.6 million from $5.0 million, thanks in large part to the addition of ISP.

Total costs and expenses as a percentage of our revenue continued to decline, improving to 41% as compared to 49%.

Net income increased 56% to $218,000 from $140,000.

Adjusted net income, which excludes the non-cash income or expense related to the change in fair value of our warrant liability, was $169,000 as compared to $97,000.

Adjusted EBITDA which also excludes the warrant liability, was $1.2 million, up 99% from $619,000.

The 12-month backlog was approximately $8.6 million as of September 30, 2017, as we continue to ship against our contract that will renew later this year.

We've made significant investments in our global growth initiatives and product development, with capital expenditures in the quarter of $1.4 million.

Cash flow provided by operations increased by 80% to $1.7 million, as compared to approximately $922,000.

And our strong cash balance at September 30, 2017, was $8.1 million.

In continuation from last year, we delivered significant growth in key performance metrics including revenue, profitability, and cash flow.

These results reflect the importance of our diversification initiatives implemented over the past few years, particularly in that consolidated revenues increased amid declining sales in certain vertical markets which are traditionally some of our fastest-growing areas.

Sales of infrared products, one of our two key product groups, increased by $3.1 million or 579%, compared to last year, primarily due to the acquisition of ISP Optics Corporation in December of 2016.

We believe the acquisition of ISP is a transformative event for the company, given its contributions to our consolidated financial results which was evident in the first quarter.

Longer-term, ISP bolsters our technology roadmap and market share expansion strategies.

We view infrared as a key product group because of the associated long-term attributes of addressing faster-growing and larger markets.

For our key product groups consisting of precision molded optics and other revenue lines, we experienced lower sales, primarily reflecting prior inventory build in China and the United States by specific customers in the telecommunications and data communications industry.

We are in the third quarter of this inventory correction, which historically takes three to four quarters to complete.

Our customers are foreasting recovery in the telecommunications and data communications industry during the second half of our fiscal 2018, as China begins investing to upgrade its wireless networks to 5G.

We also see a shift from 100G to 200G speeds that is being driven by increases in video content, Internet of Things, cloud computing and mobile broadband demands.

Further, in 2019 and beyond, the shift is expected to continue to higher speeds supported by 400G networks.

Our non-recurring engineering, or NRE revenue, increased 95% to approximately [$260,000].

Included in NRE during the quarter were projects relating to new designs for a major customer for the 5G buildout in China.

So, we are very excited by the growth potential this represents.

NRE, while recorded as revenue, is essentially paid research which, when combined with our R&D expenses, further strengthens our intellectual property.

As part of our investments in global growth initiatives, R&D spending increased by 37% year-over-year but remained consistent with the fourth quarter of fiscal 2017, when we determined that our cash flow could support this level of commitment.

This level of spending, which is about 5% of revenue, is within our target range and where we believe is necessary to advance our technological leadership.

Some of the focal areas of our product development efforts include advanced driver assistance systems, or ADAS, light distance and ranging, or LIDAR sensing, and spectrographic and fiber delivery technologies.

Many of these products are being designed for higher margin applications within the automotive, electronics, healthcare and defense sectors.

Automotive electronics has many potential opportunities for LightPath and could play a very important role in our growth.

Many of our existing products and our technologies in development for both visible light and infrared light can be applied to automotive electronics.

More specific to the automotive sector, is the electric vehicle.

There is no doubt electric vehicles will arrive, and likely sooner than we anticipate when you read the latest stories from the media.

The question for us, is how much more content can we pack into each vehicle?

These vehicles include automobiles for personal transportation, trucks for long-haul delivery of products, and forklift and other automated factory applications.

Car makers are in a race to be the first in autonomous cars.

To get there, they will need technologies that enable cars to see the road and to have other technological innovations and laser scanning sensors, cameras, and night vision.

As previously discussed, we are working with a partner on an optical system assembly based on our proprietary fiber delivery technology for position mapping that can be used in autonomous industrial vehicles, where accuracy and calibration are of paramount concern.

All of these areas apply to LightPath, so we have been busy building our brand globally.

To this end, other planned spending increases that you saw in the first quarter included the higher sales and marketing expenses.

These are costs incurred now, but intended to deliver forward revenue generation as we bring our expanded product portfolio to market.

As we anticipate bringing more new products to the market and higher volumes for existing product lines, we have increased our capital allocation from last year.

Capital expenditures for fiscal 2018 are expected to be higher in fiscal 2018 than in previous years.

The majority of this spending is front-loaded, including approximately $1.4 million that we spent in the first quarter, primarily for new machines, a substantial increase in our manufacturing capacity, and process improvement investments.

This was up from under $400,000 in the same period in fiscal 2017.

We recently completed the addition of a 13,000 square foot addition of manufacturing and production space to our facility in China, including clean room areas for advanced technologies.

This space increase, combined with the equipment increase, positions the company for growth we anticipate as our R&D efforts move into production and the telecom business recovers.

While increasing our spending in anticipation of growth in forward periods, we remain vigilant in maintaining discipline within our current operations.

Our strong performance absorbed the lower-than-expected gross margins resulting primarily from one-time production yield shortfalls, which have now been resolved, and price concessions due to competitive pressure.

We expect our gross margins to benefit in subsequent periods from the correction of these shortfalls and our success in obtaining increased volumes in return for the lower pricing.

Collectively, our fiscal 2018 first quarter gross profit increased substantially year-over-year, although our gross margin as a percentage of revenue declined as a result of the non-systemic yield issue.

We remain solidly on track for our fiscal 2018 goal of growing responsibly through the diversification of our business lines and effectively managing our cost and performance measures.

I will now turn the call over to our CFO, Dorothy Cipolla, to provide additional detail on our financial results for the first quarter of fiscal 2018.

Thank you, Jim.

First, I'd like to mention that much of the information we are discussing in this call is also included in the press release issued earlier today and in our quarterly report on Form 10-Q.

I encourage you to visit our website at LightPath.com and specifically the section titled, Investor Relations.

Now, on to the results for the fiscal 2018 first quarter.

Revenue for the first quarter was $7.6 million, an increase of approximately $2.6 million, or 51%, as compared to $5 million in the prior year.

The growth is attributable to an increase of $3.1 million, or 579%, in revenues generated by infrared products, primarily attributable to ISP and higher NRE project sales which increased by $126,000, or 95%.

These increases were partially offset by a $391,000 decrease in sales of low-volume precision molded optic lenses, primarily attributable to fewer sales to the telecommunications and data communications sectors, and a $39,000 decrease in high-volume precision molded optic lenses primarily attributable to fewer sales of position-sensor applications in industrial tools.

Specialty products revenue, which is project-based business and has cycles, decreased by $234,000, primarily due to the timing of orders in the defense and medical sectors.

Moving to our geographic revenue mix, 40% was from the United States; 34% was from Asia; 23% was from Europe; and 3% from rest-of-world.

Our overall geographic mix remains fairly consistent, with 60% international sales for the first quarter this year compared to 62% for the first quarter last year.

Now, for our vertical markets sales review.

In the first quarter, we had 23% of sales from distribution and catalogs; 8% from telecom and wireless; 4% from medical; 38% from industrial; 16% from instrumentation; and 11% from government and defense sectors.

Notable shifts in vertical market orientation included increased sales to the industrial sector for infrared products sold through ISP, more than doubling our sales to this market quarter-over-quarter, and a decrease in sales to telecom and wireless customers which decreased from 17% of sales to 8% of sales quarter-over-quarter.

Gross margin in the first quarter was $2.2 million, an increase of 16% as compared to $2.8 million in the prior year period.

Gross margin as a percentage of revenue was 43% for the first quarter prepared to 57% last year.

The change in gross margin as a percentage of revenue is primarily attributable to the inclusion of revenues generated by ISP and the associated cost of sales, as well as lower yield for certain precision molded optic lenses, resulting from technical issues that have been rectified.

In addition, we offered a pricing discount in connection with a large (technical difficulty) exchange for increased orders from the customer.

Total cost of sales was approximately $4.3 million for the first quarter, an increase of approximately $2.1 million as compared to the same period last year.

The increase in total cost of sales is entirely due to the increase in volume of sales, primarily because of the acquisition of ISP.

First quarter total operating costs and expenses were approximately $3.1 million, an increase of approximately $665,000 compared to last year, but slightly lower than $3.2 million in the fourth quarter.

The higher operating costs and expenses from the prior year period was primarily due to an increase in the expenses of $562,000 related to the acquisition and (technical difficulty) ISP which includes the amortization of intangibles, wages, professional fees and travel expenses, and $103,000 increase in R&D expenses.

In the first quarter, we recognized non-cash income of approximately $48,000 related to the change in the fair value of warrants which were issued in connection with our June 2012 private placement.

In the first quarter of last year, we recognized non-cash income of approximately $44,000 related to the change in the fair value of these warrants.

The applicable accounting rules for the warrant liability require the recognition of either non-cash expense or non-cash income, which has a significant correlation to the change in the market value of our Class A common stock for the period being reported and the assumptions on when the warrants will be exercised.

The likelihood of exercise increases as the expiration date of the warrant approaches.

The warrants have a 5-year life, and will expire next month.

The fair value is remeasured each quarterly period until the warrants are exercised or expire.

Our respective tax rate for the first quarter was 21%.

In the first quarter, we recorded income tax expense of approximately $58,000, which is a decrease of $207,000 compared to the first quarter last year.

This decrease is primarily attributable to the jurisdictional mix of income and losses, as well as some prior period adjustments recorded in the first quarter last year.

We have net operating losses, or NOL carry-forward, benefits of $84 million in the United States.

The NOL does not apply to taxable income from foreign subsidiaries.

Income taxes are attributable to our Chinese subsidiaries and to a lesser extent, income taxes attributable to ISP's wholly-owned subsidiary, ISP Optics Latvia.

We accrue income taxes in China and Latvia, which have statutory income rates of 25% and 15% respectively.

Moving on to net income, for the first quarter we reported net income of $218,000 or $0.01 per basic and diluted common share, which includes the non-cash income of approximately $48,000 which had no impact on the basic and diluted common share, for the change in the fair value of the warrant liability.

This compares to net income of approximately $140,000 or $0.01 per basic and diluted common share, which included non-cash income of approximately $44,000, which also had no impact on the basic and diluted common share, for the change in the fair value of the warrant liability for the same period last year.

Net income for the first quarter was affected by increases in amortization of intangibles, SG&A expenses, interest expense, and R&D as compared to the prior year period.

All of the amortization intangibles and a portion of the increase in SG&A expenses during the first quarter, were related to the acquisition of ISP.

Adjusted net income, which is adjusted for the effect of the non-cash change in the fair value of the warrant liability, increased to approximately $169,000 in the first quarter as compared to $97,000 in the first quarter last year.

Weighted average basic and diluted common shares outstanding increased to 24.2 million and 26.2 million respectively in the first quarter, which was up from 15.6 million and 17.2 million respectively in the first quarter last year.

The increase was primarily due to the 8 million shares of Class A common stock issued in connection with the acquisition of ISP.

Adjusted EBITDA, which eliminates the non-cash income or expense related to the change in the fair value of the warrant liability, was approximately $1.2 million in the first quarter, an increase of 99% as compared with approximately $619,000 for the first quarter last year.

The adjusted EBITDA margins in the first quarter increased to 16%, up from 12% in the first quarter last year.

Now, I'll discuss some balance sheet items and cash flows.

Cash and cash equivalents totaled approximately $8.1 million as of September 30, 2017, which was flat with the beginning of the year, despite the substantial capital investments made in the quarter to increase our manufacturing capacity.

Cash flow provided by operations was approximately $1.7 million for the first quarter compared with $922,000 last year.

During the first quarter, we expended approximately $1.4 million for capital equipment, as compared to $387,000 last year.

The current ratio as of September 30 was 3.2 to 1 compared to 3.4 to 1 for the prior year end.

Total stockholders' equity as of September 30 was approximately $30.2 million, a 2% increase compared to approximately $29.7 million as of June 30, 2017.

This difference reflects the addition of net income, and to a lesser extent, issuances of Class A common stock upon the exercise of warrants and issuances related to the 2014 employee stock purchase plan.

As of September 30, our 12-month backlog was $8.6 million.

This backlog is almost evenly split between infrared products and optical products.

With this review of our financial highlights completed, I'll turn the call back to the operator so we may begin with the question-and-answer session.

(Operator Instructions) The first question comes from Matt Koranda with Roth Capital.

Hi guys, this is Brad Noss on for Matt.

I just wanted to, if we could first just start off, I know most of that infrared increase was due to ISP but did you, or can you, break out what ISP contributed for the quarter?

Yes, we can.

ISP revenue in the quarter was about $3.4 million.

Okay, thanks, and then just in regards to the second half recovery that your customers are expecting in telecom, have you seen any orders or contracts, or any buildouts from them that lead you to have more confidence there?

Or is it mostly based on just their forecasts at this point?

I think there's a couple of things.

I mean obviously, they're all forecasting it.

We do have orders from one of the major guys for new products that are aimed at the 5G network upgrades.

So we know that.

And we did our channel checks with four or five of the other telecom guys, and they're all doing the same thing.

We're all getting, now, orders for products that are associated with the upgrade, particularly in China.

In addition to that, the Chinese government has come out and said they are going to invest in that infrastructure for the upgrade from 3G to 5G starting in 2018, and running through 2020.

So, I mean, all of that fits.

I think in addition to that, the drivers of the market, that are driving telecom network expansion in terms of the video content increasing, the Internet of Things, global broadband, all of those things, those drivers haven't gone away.

They're still there, they're still increasing.

So, we believe that it will happen, and we've seen -- we expected, I guess, a slowdown and we forecasted it in our internal forecasts.

We got the direction right, we didn't quite get the intensity or the magnitude of it in Q1 totally correct.

So, I do believe what's going to happen in fiscal '18, which is our second half of -- it's the first half of calendar '18.

We will start to see that sector recover.

Okay.

And then in regards to, you said especially for the Chinese market, but I believe you're experiencing some choppiness in the North American telecom market.

Are there any indications of a recovery there, as well, or is it going to be primarily China in the near term?

I mean, the majority of what we do in that market goes through China, even though some of it comes back here.

So yes, we see the same thing here in North America.

We haven't as much activity, but we see or hear the same stories.

And then, just regarding the yield shortfalls, can you just break out the relative impact of the yield shortfall on margin versus some of the pricing pressure that you referenced in your prepared remarks?

I think the most of the margin impact was due to the yield problem.

We had two major things that went on.

Our tool life was shorter than we normally experience, and that's really related to two things -- one being the complexity of the lenses that we ran in the quarter was a little higher, in other words, what that means for tool life is if we run a lot of prescriptions that have a steeper radius on them, tool life is always a little shorter, and there seemed to be more of that.

The other thing was related to, over the years we've developed and continued to improve the coating that we put on our tools that allow the glass to release from the molds.

And so, we have some very sophisticated targets that are used in the deposition process where we apply that coating.

We had to replace one of the targets.

As of normal course, they get consumed.

When we went to replace it, the replacement target was not available when it should have been from our vendor, and to keep running we had to take a step back and use a previous target that we had available that didn't provide quite the same tool life as this newer formulation did.

So, that impacted us there.

It's a little complicated, but we've taken steps now, the right targets are in place, the right coatings are going on the tools again, and we won't let that situation occur again.

So, we'll take steps that we're not subject to that vendor's capability.

The second one was a little more assiduous in its presentation in that it was involved with the coating yields that we were experiencing.

Normally, when we have a coating failure on the anti-reflective coating, it's a big batch failure and we lose a batch, a whole bunch of lenses at once.

That did not occur.

What did occur was very small yield losses compared to what our normal operating situations are, and it took a while to recognize it.

And then, once we recognized it, it took a while to figure out what was going on.

We determined that we had some instability in the coating chambers, had to do with some overdue maintenance.

It's a relatively new process for us, from that perspective.

We've been running these machines for about four years now.

And so, we learned something there.

That also has been rectified, and so we expect those things to recover.

And if I take the financial impact of those things and adjust the gross margins for them, our gross margins go right back to where we anticipate them to be.

In the core business of LightPath that's in the lower 50s, and consolidated it would be in the upper 40s.

And so, that was the magnitude of it.

The difference was almost 5 or 6 points in gross margin for the quarter.

So realistically, now that the changes have been made to the equipment and everything has been more or less resolved, it sounds within the quarter, would we see more of a relative snap-back in Q2?

Or, is there still some of the inventory to work through that may drag a little bit through some of Q2?

Well, we certainly expect to see a pretty good improvement in gross margin in Q2.

There could be a little, in the front end of the quarter, there could be a little of that inventory being worked through on the tooling.

But, the good news here is, these are not systemic problems and they've been fixed, and so it's not anything that we expect to repeat.

Okay, perfect, and then just in regards to looking at the backlog, if we look at the backlog being down quarter-over-quarter and assume that the revenues were orders that were delivered during the quarter, I calculate new orders around $6.9 million versus Q4 of $7.2 million.

But, can you just talk about some of the drivers of the order decrease quarter-over-quarter, and just some of the relative mix within the backlog?

Well, I think overall the backlog decrease was associated with shipping off the major contract that we're doing, and that's mostly associated with the ISP business.

So, I think that really accounts for it.

Okay, and next to the backlog, pretty representative of your current revenue so we shouldn't expect much differences in gross margin flowing through there?

Or is there any over-represented product?

No, I don't anticipate the mix being much of a different impact on the gross margin, looking forward from here.

The next question comes from Catharine Trebnick with Doughterty.

Hi, Zack Turcotte on for Catherine.

Just one or two questions, here.

So you talked again about LIDAR as it pertains to the autonomous vehicle race, and it's obviously pretty early innings still in that, but could you see any impact coming from that in fiscal '18, or is that more of a long-term plan there?

I think it's more of a long-term win for us.

The impact that we're seeing currently is in development of products, so there are paid engineering and development costs that we're sharing with the customers that we're working with.

So, we are developing products in partnership with them, they're footing part of the bill.

So, that kind of revenue we'll see, we are seeing, have seen, and we'll continue to see.

And then, the product-type stuff I think is longer term.

So we saw some increases vertically in medical and instrumentation, kind of with the decrease in telecom.

So, aside from the recovering telecom are there any other specific verticals you see a lot of potential in, in the rest of fiscal '18?

Well, I think the fiber delivery systems, which basically revolves around two of our product types, one being the precision molded optic lenses and the other being collimator devices.

There's opportunities there.

And I think the other opportunities are the normal, just new lenses that we design and ship on a continuing basis.

Last thing, I think you talked last quarter as well as this quarter about accelerated sales and marketing.

So, I just want to know, are there any particular initiatives or direct sales, things that you're doing to try to ramp your sales and marketing as you increase the spend there?

I think we're constantly pushing on our internet type product, and presence, I think, is one way we're doing it.

We have been going through some upgrade in terms of, and organization changes within the sales force itself, and we've been doing -- with the consolidation and integration of the two companies, there's been a significant effort put into training of the two product lines, ISP and the core business, LightPath, within the existing sales force.

I think we've gotten through enough of that at this point where those guys have enough knowledge now that they'll start to be even more effective in promoting whichever product they were learning the most from, whether they be LightPath guys learning the ISP, or ISP guys learning the LightPath side of the business.

The next question comes from Gene Inger, with Inger & Company.

Some of the questions I had have already been answered, but let me say this.

First of all, I think it's not only extraordinary how you and (inaudible) turned the company around, totally different it seems than poor LightPath originally was, but your acquisition of ISP -- essentially did that not just carry the company through this past quarter?

In other words, you broke out the revenue growth of ISP, but I don't think you did it quarter-by-quarter, and does this suggest if you're past the problem areas in telecom and inventory cycles domestically, that you would see almost a continued exponential earnings growth?

Well, I think as we said, it was a transformative event for the company.

It does broaden our product knowledge, and it puts us over half of our business looking forward, and currently is in the infrared sector which we've always said is where we think the strategic growth will be.

So, while I see the component lens business and the precision molded optics continuing as a very strong product segment for us, which has been the majority of the business historically, I see that continuing.

I think where we see and expect for the growth to be, is from the infrared side, and ISP certainly made us a full player in that space.

How did ISP do, relative to the preceding quarter, which you already owned the company?

Well, I think if you look at -- we've operated ISP now for two full quarters.

Three full quarters, I'm sorry.

And if you look at, generally they were running at a rate of about $2.8 million to $3 million a quarter, and since we've operated them that revenue's been about $3.6 million to $3.9 million, so almost up 28%.

From a margin point of view, they were operating on the average of about 32% gross margin, and now that's more like 38%.

So, I think we've been very successful with how we've taken that business and started to get it to grow, and contribute on the levels that we would like in that market space.

I'd like to ask you two more quick questions, if I might.

One regards the discussion you just had about LIDAR.

Does that involve the kind of glass that you started making a few years after some others?

I think it's pronounced -- I can't pronounce it.

C-H-A-L ?

Actually, no.

The stuff that we're doing in the autonomous vehicle and the LIDAR area has more to do with fiber laser delivery sensing, so those are more collimator type products, currently, even though -- and they also involve some precision molded optics as well.

This is Devin Standard.

However the calchogenide glass will come into play with the various types of automotive night vision applications.

So, a variety of sensors will often be packaged together, so that's the infrared, night vision, or thermal night vision capability that many of these cars we'll start to see, and we're seeing more and more of that build out right now.

I saw recently that General Motors made a small acquisition of a sensor company, and then of course there's LIDAR which you guys know well, that is increasing operations in Orlando.

And I'm wondering how this affects the -- do you feel that you can scale to provide cost-effectively as a smaller company, product to these OEMs, even General Motors itself, as things develop?

Well, I guess the short answer to that, is yes.

I mean, our business is relatively easy to scale.

We've been scaling it, and we can continue to do that.

So, as we look at the plans and the demand that we see, and the forecast that we're given from these various companies that are working on these type of components for the autonomous vehicles, we have some visibility to what their expectations are and the ramps that they're looking at.

And Gene, I don't see any problem with us keeping up with that type of scale.

At the annual meeting, I asked about, a question that one of our subscribers had, which was about GreatStar, and I look back at your -- I think maybe now reading it, it was the most important press release of the year.

You did one in April talking out, it's either pronounced Ole, or OLE, a subsidiary of GreatStar.

And it said, you wrote, that your work with them will result in the development of a fiber delivery system, again for production level position mapping, for mission-critical applications, so that means autonomous vehicles and more.

Is this the same kind of -- is that your sole or primary focus as relates to autonomous driving and guidance?

Because I'm not sure I understand, because of China, would you make there, were a coupling system would be used and why this is a major project?

I'm just a little confused.

Well, I think they are one of the companies that we're working with in this space.

There are others, and we are developing jointly with them as we put out in that press release, an optical sub-assembly that goes into a position-sensing device that they're developing.

OLE is a laser measurement development company that was born out of another company that GreatStar acquired in China, that we've done business with in the industrial tool sector for many, many years.

They make survey equipment, and those types of devices, where we've been providing optics to them in the range of 0.75 million to 1 million lenses a year for those type of products.

This company now is a development branch that they were acquired by GreatStar, this is a development branch for them.

So, they're developing a number of products.

This is one of them, and we anticipate that we will be helping them from the optical side of the development work that they get involved in.

Right now, we're focused on this fiber laser delivery system.

In the future, it could involve other infrared type products that are involved in other commercial applications, that are whatever they might be.

But, there are a number of opportunities that we're working with these guys on.

I think it fits.

That's it, I was just trying to isolate whether your primary focus on autonomous sensors and infrared is going through China, or it's going through here, because both countries will have obviously a significant focus on this in the years ahead.

Yes, I mean, it's a worldwide thing and we're working with companies in North America as well, and Europe.

I mean, that's one of the beauties -- what we're trying to do, the optical components that go into these things, that's the beauty of being a component manufacturer.

We're trying to work with as many of these guys as possible, and whoever wins, we hope at least that we've got one or two of those guys in our sights.

Thanks very much.

My general thinking is, the market cap went up to reflect somewhat the ISP contribution to the company, but I'm thinking the market cap is not reflecting the future of these new fields, which obviously are ramping over time.

I think that's an insightful observation, Gene.

The next question comes from Michael Dyett, a private investor.

I just have a couple quick questions.

In terms of the capital expenditure which you said was mainly sort of China-related, that $1.4 million, I wondered if ISP in Europe and Latvia also need something, or are they really pretty set in terms of capital equipment for the near term?

Let me correct that misconception.

If I indicated that, I didn't mean to.

The capital has been spread around the entire company, at that point.

I'll give you one example.

We have doubled the diamond turning capability that we have in Riga in this period of time.

We've also upgraded a lot of the metrology equipment in New York, in Riga, and Orlando, as well as in China.

So, we're spreading it -- the whole idea that we've been trying to do with this capital investment is ensure that we have the correct capacity in the right location so that we're well-positioned for the growth that we anticipate.

So, we've tried to -- most of this, we've been doing a lot of rearranging of equipment and upgrading of equipment associated with that.

In addition to expanding the capacity for our precision molding in China.

That sounds great.

At the annual meeting, you mentioned one of the takeaways, I'm looking at the acquisition was -- maybe the sales consolidation was a little quick, and your remarks today sound a little more positive.

And then in the past conference calls you've mentioned to me shifting more to a European sales force team, and I wondered if you could tell me just a little bit more about the sales force marketing, and particularly in Europe?

I'm going to ask Devin to respond to that, since that's his area of expertise.

This is Devin Standard, I'm the Corporate Development fellow, and we're doing a couple of very interesting programs where we're working on top-grading the quality and caliber of the sales force worldwide.

So, we're doing a lot of training of these people, technical training as well as salesmanship training, and that includes our distributor sales forces as well as our in-house sales forces.

And that -- so this means that an in-house sales person in China, in the United States or in Europe will have had the same type of training in both the ISP product line as well as the LightPath product line.

And also, our distributor sales forces will have this sort of training.

So, we are enhancing the skill set of the people, and also identifying better, higher-caliber people, and replacing some of the lesser-caliber people with higher-caliber people.

So, it's better people, more, deeper, and better training.

And that's around the entire planet.

Another quick one, Jim, at the last conference call you said that with the storms in Orlando you weren't quite sure whether there were going to be any cost impacts because of having to be closed down for a certain period, and you didn't mention that.

Does that mean that this really was inconsequential, the storm?

I believe from our perspective it was, yes.

We were very fortunate from the standpoint that we did not suffer any physical damage.

The only problem we had was here in Orlando, we were without power for about 5 days which was painful on a personal as well as a business point of view.

But, in terms of the impact, because we have these capabilities around the world we were able to shift some business and keep the operations going from the other locations, and that was very advantageous to us, and we minimized that impact.

If there was a slow delivery or something that was held up because of it, it's already been rectified.

So, (inaudible), Mike.

The last quick question is, you mentioned 5G.

I wonder if that's got a potential in Europe, and if so, whether you can do anything on that?

Well, I think -- we sell to the equipment providers that sell to the network providers.

These guys are global companies.

So, if wherever that's happening, we're going to participate.

Now, our channel to that is primarily in Asia because that's where most of that equipment is being built, whether it's being done by an Oclaro, or by Huawei, or JS -- I should call them Lumentum now.

It doesn't matter.

That's where they're doing the work.

NeoPhotonics, the headquarters is in California, but their major manufacturing is in Fabrinet, in Thailand.

So, that's where all that business, from our point of view as a component supplier, it really goes through Asia.

But, they spread it all over the world.

The next question comes from [Chris Vokofsky], a private investor.

Hello, I wanted to ask some questions about that capital spending.

It seems both a little scary and a little exciting for investors, to see you increase capital spending at a time where revenue, it seems that you're working below capacity.

Can you talk a little bit more about why you're doing this at this moment, or why you wouldn't wait until you're filling up your capacity to start spending capital spending?

And are you spending for new capabilities that you don't have, or for more of the same capabilities that you do have, and so on?

Well, I think from our perspective, and we've been successful in the past, we were trying to be proactive with the way we're growing our business as opposed to reactive.

And in our business, if you're not ready to supply the product when the customer wants it, you're not going to get the business.

So, we have to be able to do it, so you've got to work from a forward-looking point of view, from that perspective.

Now, I will say that capital was split between increasing capacity for existing-type businesses as well as preparing for what we think are going to be some new products and future-type products that we have not yet released.

So, it's a mix of both, I think, so as we said, we're spending more on R&D.

Our R&D is, there's a certain amount of it that is moving towards production-type business in the very near future.

And so, some of that capital is associated with that.

We've talked a lot about assembly work for more than a couple of quarters now, that that's one of the areas that we want to expand.

So, some of that capital is targeted towards that, which is for new types of business for us.

There are some other product lines that we see opportunity in that we're expanding, and then there is the precision molded optic business which is our core business today, whether that's in the infrared side or on the visible side of our business, and some of that capital is targeted to that.

As well as, upgrading some of the equipment that we've been using for the last 20 years.

So, there was a piece of the capital, that was associated with replacing equipment that had more than reached the end of its life.

All right, and on the small price concession that you did, am I understanding you correctly, that you did a small price concession for high volume and higher volume is still to come in the current quarter too?

Yes, I think if we're going to give up price, I mean it's only fair to expect something in return.

So, when we get into those negotiations, we work very hard to say, okay, we can lower our price, but we need a bigger piece of your business.

And we've been successful with that strategy with our customers, multiple times, here.

And yes, some of it is shorter-term, and some of it has yet to be realized in terms of the volumes that are coming.

So, we'll see that in Q2 and Q3.

As we move forward, we'll see those volumes increase as a result of those pricing things.

We are in a competitive business.

We compete in many cases with a lot of Chinese companies, which have very aggressive pricing.

We're able to do that because in part we are a Chinese company, and so we're able to go head-to-head with those guys, but it does result sometimes in lower prices and the prices have to -- you see the pricing effect before you see the volume effect, in some cases.

But, we're very sticky about okay, if we're going to lower our prices, we want more of your business.

And then Devin's reminding me, that's one of the reasons that we're trying to move up the food chain into the value-added, more value-added work, more assembly-type work.

The next question comes from Shawn Boyd with Next Mark Capital.

The first thing I wanted to hit here, given the (inaudible) from telecom and wireless and the comments about our recovery not hitting until March and June quarters, should we expect December to be fairly flat with September?

You know, I think with telecom it's always hard to predict, Shawn, but as I said, this thing's being driven by some inventories, that got built up ahead of what they were doing, particularly in China and the U.S., and then historically I think we see that that takes -- it usually takes three to four quarters.

We're currently in the third quarter.

This current quarter is the third quarter of that recovery, so we could see another quarter of weaker telecom-type business.

Probably not weaker than we saw in this previous quarter, but it could be at the same level, and then we'll start to see it increase.

We're encouraged from the standpoint that we're seeing a lot of new projects from these telecom guys that as I said, are associated with the upgrade to this 5G network, as well as more network-type work on existing technology just because of ever-increasing demand for more bandwidth and faster speeds.

Got it, and not to split hairs, the September quarter is the third quarter, or the December quarter is the third quarter?

Remember, we're currently operating in our second quarter, our fiscal second quarter, so first quarter, second quarter, calendar of 2018 -- by second quarter of calendar 2018 we expect to see some increase in that volume, which is one-quarter removed from now.

I think I did that right.

[laughter] So, I mean, I get confused when I'm talking between calendar and fiscal sometimes.

No, I'm sorry, I was referring to just your analogy of being in the third quarter of the telecom slowdown -- you know, the third quarter being right here in the December quarter?

Correct.

That is correct.

Very helpful, and then going from December quarter to March, just often times the telecom equipment, especially the optical guys, have to kind of give up price concessions to the carriers.

Do you see that much in your business, or is that not really something to worry too much about?

Well, we don't really worry too much about that.

That's a couple of steps removed from where we are.

I mean, like any other business these guys are always after lower prices, and we've been very successful from the standpoint of being able to maintain our pricing up until recently with these guys.

And you know, it's kind of like, particularly in Asia we've almost been a victim of our own success, as the Chinese economy has been very slow.

We're seeing some pricing from competitors that we hadn't seen for a while, guys like Kyocera who have been busy doing other things.

When that business went away they looked at LightPath and said, these guys are doing really well, so maybe we ought to look at their market, and they came in very aggressively.

So, that's the kind of thing that we're up against right now.

But again, so, we're able to do it, we're able to give price concessions and still maintain good margins, and because of our relationships with these guys we've been able to increase our share of their business as a result.

And then just in terms of the comments about the recovery in the first half of calendar 2018, you're basing that just on your experience in these cycles in the past and how long they've taken, as opposed to any solid orders in hand?

Is that correct?

It's based on that experience, it's based on what we're being told by our direct customers, and it's based on what I think is even more important, the Chinese government saying they're going to start investing starting in that period of time in this upgrade.

And, then the real proof has been the NREs and new lens developments that we've been asked to do by these equipment guys.

So, they are aggressively designing stuff for this 5G upgrade.

So, they all believe it's going to happen, and they're putting their money where their mouth is at this point.

And Jim, kind of the bigger picture here, last quarter I think we talked about 20% organic growth for the full year, fiscal '18.

Given the kind of slow start to the year here, do we need to temper that down at this point, or do you think that you kind of can still make that up in the back half of the fiscal year and still hit that 20% organic growth bogey?

Well, I think the back half of the year is going to be much stronger than the first half, and I've always been saying that our growth projections have been around 20% plus or minus 3% to 5%.

So, I think we can hit within that range of 15% to 20%.

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.

In conclusion, we appreciate the support of our shareholders and the dedication of our global and expanding team at LightPath.

With our strength and presence around the world, we remain focused on our efforts to drive top-line, bottom-line, and cash flow growth.

We're very excited by our growth prospects, and we'll be sharing our story with current followers and prospective shareholders next month at the 10th Annual LD Micro event, investor conference, in Los Angeles.

Thanks again for participating on today's conference call.

We look forward to speaking with you next quarter.

The conference has now concluded.

Thank you for attending today's presentation.

You may now disconnect.