LightPath Technologies Inc (LPTH) 2018 Q2 法說會逐字稿

Good afternoon, and welcome to the LightPath Technologies Second Quarter 2017 Financial Results Conference Call.

(Operator Instructions) Please also note, today's event is being recorded.

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

Please go ahead.

Thank you, and good afternoon.

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

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

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

Following management's discussions, 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 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'll also make 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 now 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 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 a more in-depth review of our financials.

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

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

The headline numbers are strong and we showed improvement in several areas sequentially from the first quarter of fiscal 2018.

However, LightPath management views the second quarter results as mixed.

With our overall long-term objectives remaining constant in delivering global diversified growth and solid cash flow generation, here are some of the highlights of the second quarter, which reflect our overall positive but mixed results for this past quarter.

Compared to the fiscal 2018 first quarter, our second quarter precision molded optics, or PMO, business increased 3% and our infrared business increased 12%.

Total revenue for the second quarter of fiscal 2018 increased to $8.4 million, up 42% as compared to the $5.9 million for the second quarter of fiscal 2017, and 10% from the $7.6 million in the first quarter of fiscal 2018.

Total operating costs and expenses as a percent of revenue was 36% in the second quarter of fiscal 2018, an improvement from the 41% for the first quarter of fiscal 2018, reflecting the continued leverage of our overhead as we increase our volume.

Adjusted net income for the second quarter of fiscal 2018, which excludes the noncash income or expense related to the change in the fair value of the company's June 2012 warrant liability, was $666,000 as compared to $851,000 for the second quarter of fiscal 2017 and $169,000 in the first quarter of fiscal 2018.

The good news here is that the warrants have all expired or been exercised now so we're done with them.

Adjusted EBITDA, which also excludes the noncash income or expense related to the change in the fair value of the warrant liability, was $1.5 million in the second quarter of fiscal 2018, an increase of 9% as compared with $1.4 million in the second quarter of fiscal 2017, and up 21% from the $1.2 million in the first quarter of fiscal 2018.

The company's 12-month backlog was $12.3 million at December 31, 2017, an increase of 43% from $8.6 million at September 30, 2017, and up 32% from $9.3 million at June 30, 2017.

This is a great improvement and in line with what we had been forecasting and supports the capital investment that we have been making.

We have invested approximately $1.9 million in the first half of fiscal 2018 in global growth initiatives and product development, and we ended the quarter with a strong cash balance of $7.7 million.

Also of significance and to our benefit, subsequent to the end of the fiscal 2018 second quarter, debt was reduced by $3.3 million or 32% through a debt restructuring and minimal use of cash on hand.

I'll elaborate on this in a few minutes.

As noted, we made considerable investments in our platform for growth.

Despite softness in certain sectors including the telecom and datacom space, which has slowed our growth during the past few quarters, there are signs of substantial market expansion as demand and technological creativity continues to evolve in the favor of products that we make.

To take advantage of this, we have made investments to remain at the forefront of this technological evolution, added staff to position us with adequate sales, engineering and customer support and increased our production capacity.

Through these recent investments, our consolidated production capacity increased by approximately 60% depending on product mix to support planned growth in infrared and specialty products, including light distance and ranging, or LIDAR applications, and the 5G network conversion.

This means that with minimal staffing adjustments, we can continue our significant growth.

We are better positioned than ever to advance up the value [change] from a component supplier to a provider of assemblies.

As such, there remains significant operating leverage in our model.

What gets us excited and validates our strategic imperative and the investments being made in our growth platform is going to industry events such as the annual CES show in Las Vegas last month.

In the automotive section alone, there were jaw-dropping displays of autonomous vehicles, driver-assist automotive electronics and safety features.

Every single one of these applications requires sensory equipment, require infrared or visible light optical technologies that we now make, and likely we'll make better than anyone else in the world.

We've only begun to scratch the surface globally.

On other fronts, we see recent telecom and datacom weakness nearing an end as 5G network upgrades are being implemented by carriers domestically and globally.

We continue to be engaged with most of the major OEM optical network equipment suppliers around the world.

We expect a recovery of the telecommunication industry to increase our revenues.

The majority of our second quarter 2018 top line growth, however, reflects our drive towards diversification into the infrared side of our business, where we made a transformational acquisition of ISP Optics Corporation in December 2016.

Infrared product represented $4.3 million in the second quarter of fiscal 2018 revenues, primarily attributable to ISP, which was up nearly fourfold from the prior year when ISP was only included for a 10-day period following the acquisition.

During the fiscal 2018 second quarter, we celebrated the 1-year anniversary of the ISP acquisition.

Significant progress has been made in the past year for our ISP subsidiary including taking steps necessary to bring it closer to LightPath model of leveraging proprietary technologies, including driving production costs down in excess of price reductions and increasing production volumes and capabilities in order to drive sales growth, as new market opportunities are accessed with our lower price points.

This process was executed as part of the first transition of the company following my appointment as CEO in 2008.

At that time, LightPath was producing about 200,000 optical lenses per year at an average cost between $7 and $10 per lens.

We essentially had this single product group and addressed a limited number of vertical end markets.

Today, for our optical lens production alone, which does not include the entire infrared side of our house, we are producing just under 3 million lenses annually with a significantly lower average cost.

In turn, we have opened up many new market applications and have been exposed to customers around the world and now have a profitable company.

And now we have added a tremendous complementary business with our infrared capabilities.

Further to our infrared business, we announced that our ISP subsidiary was awarded a $5 million contract after winning a competitive bidding process.

This was an existing customer who'd put the contract out for bid, where we believe we had to compete against companies whose sole value proposition was based on price.

Our ability to competitively price and our technological superiority secured the contract win.

We acquired ISP to broaden our product and customer base, which in turn would bolster our bookings and revenues.

This large infrared award in the second quarter provides evidence of our ability to increase bookings.

An unanticipated but welcome benefit is that LightPath is booking more annuity contracts, which we believe will reduce backlog volatility.

One of our goals is to have more assured current quarter bookings that will drive our revenues each quarter.

To that end, we have recently booked over $7 million of orders with 9 different customers that are longer-term orders.

The company's 12-month backlog at the end of fiscal 2018 second quarter increased to $12.3 million, up 43% from the previous quarter.

We see tremendous opportunity ahead.

Consistent with the first quarter and in light of our anticipated order flow as well as market demand, we continue to invest in global growth initiatives, including capacity expansion and increase spending on research and product development.

We invested approximately $500,000 in new equipment in the second quarter.

Capital expenditures for the first half of fiscal 2018 was $1.9 million, more than double as compared with the first half of the prior year.

Earlier, I mentioned the company's consolidated production capacity increase, but research and development has also been a priority as we increased spending by 54%, for the same quarter as of last year.

We now have 43 engineers worldwide out of a total workforce of nearly 325.

Our team is focused on the burgeoning opportunities ranging from LIDAR to autonomous vehicles to wearable and recreational electronics to 5G networking, all of which require light-based or infrared capabilities.

Channel checks from around the world confirm that we are in the early stages of a secular trend for sensory technologies.

From optical to infrared products, LightPath has taken the necessary steps to achieve exponential growth with best-in-class products in manufacturing and customer support around the world.

During the second quarter, we remained vigilant in maintaining our financial health.

Cash at the end of the second quarter was $7.7 million, only marginally lower than the $8.1 million at the start of the fiscal year.

As I mentioned earlier, subsequent to the end of the second quarter, our debt was reduced by $3.3 million or 32% through a debt restructuring and minimal use of our strong cash position.

This restructuring eliminated $5.7 million in principal debt plus amortized interest to date from the sellers note associated with the acquisition of ISP in exchange for 967,208 shares of the company's common stock and approximately $3.5 million in cash.

The cash used for the elimination of the sellers note included approximately $600,000 from cash on hand and $2.9 million secured from an increase in refinancing of the company's credit facilities.

These developments further strengthen our balance sheet and improve our cash flow with the improvement in earnings given the reduced debt servicing, and eliminates the overhang of a balloon payment.

And by the way, the lower interest rate will improve earnings per share, offsetting any dilution from the issued stock.

The fiscal 2018 second quarter represents a pivotal period in which we marked strengthened -- markedly strengthened our global presence from a product development and capacity standpoint while bolstering our financial position subsequent to the end of the period.

Along with all warrant conversions and elimination of warrant liability exposure, which distorted our quarterly financial performance, we are energized to embark on our mission to develop top-line growth and enjoy the benefits from the leverage in our operating model.

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

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 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.

Within our 10-Q, we provide information pertaining to the new Tax Cuts and Jobs Act, which I will summarize now as it has been a topical subject in earnings reporting this season.

As you know in December of 2017, the U.S. government enacted new tax regulations.

Among other things that will have specific implications to LightPath, the 2017 Act changes U.S. corporate tax rates, generally reduces a company's ability to utilize accumulated net operating losses and requires the calculation of a one-time transition tax on certain foreign earnings and profits, or E&P, that had not been previously repatriated.

In addition, the 2017 Act impacts a company's estimates of its deferred tax assets and liabilities.

Pursuant to U.S. GAAP, changes in tax rates and tax laws are accounted for in the period of an accent, and the resulting effects are recorded as discrete components of the income tax provisions related to continuing operations in the same period.

We're currently in the early stages of evaluating the impact of the 2017 Act on our financial statements.

Based on our initial assessment to date, we expect the one-time transition tax on certain foreign E&P to have a minimal impact on us, as we anticipate that we'll be able to utilize our existing net operating losses, which were $84 million at December 31, 2017.

And this will substantially offset any taxes payable on foreign E&P.

Additionally, we expect significant adjustments to -- for our growth deferred tax assets and liabilities.

However, we also expect to record a corresponding offset to our estimated full valuation allowance against our net deferred tax assets, which would result in minimal net effects to our provision for income taxes.

Now onto the results for the fiscal 2018 second quarter.

Revenue for the second quarter was $8.4 million, an increase of approximately $2.5 million or 42%, as compared to $5.9 million in the prior year period, and up 10% from $7.6 million in the first quarter of this year.

The growth was attributable to an increase of $3.4 million or 378% in revenues generated by infrared products, primarily attributable to ISP.

This increase was partially offset by a $745,000 decrease in sales of high-volume precision molded optical lenses and a $200,000 decrease in sales of low-volume precision molded optical lenses.

The reduced PMO sales was largely due to softness in the telecommunications and data communications sectors.

Moving to our geographic revenue mix.

45% was from the U.S.; 26% was from Asia; 27% was from Europe; and 11% was from rest of the world.

Our overall geographic mix remains fairly consistent with approximately 55% international sales for the second quarter.

This compares to 60% for the first quarter of this year and also compares to 64% in the second quarter of last year.

Now for our vertical markets sales review.

In the second quarter, we had 18% of sales from distribution and catalog; 8% from telecom and wireless; 6% from medical; 39% from industrial; 4% from instrumentation; and 14% 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 second quarter was $3.5 million, an increase of 7% as compared to $3.3 million in the prior year.

Gross margin as a percentage of revenue was 42% for the second quarter compared to 56% for the second quarter last year.

The change in gross margin as a percentage of revenue is primarily attributable to the inclusion of revenues generated by ISP and their associated cost of sales.

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

The increased orders are reflected in the significant jump in our backlog from the end of the first quarter to the end of the second quarter, which I will address further in my comments.

Total cost of sales was approximately $4.8 million for the second quarter, an increase of approximately $2.3 million as compared to the same period last year.

The increase in total cost of sales is primarily due to the increase in volume of sales, which is mostly driven by the acquisition of ISP.

Second quarter total operating costs and expenses were approximately $3 million, an increase of approximately $1.1 million compared to last year, but slightly lower than $3.1 million in the first quarter of this year and $3.2 million in the fourth quarter of last year.

Nearly half of the increase in operating cost and expenses as compared with the prior year period was due to the acquisition of ISP, including the amortization of intangibles.

Overall, changes in second quarter fiscal 2018 operating costs and expenses were primarily due to a $380,000 increase in wages, a $140,000 increase in IT services and consulting, a $130,000 increase in travel expenses and $73,000 increase in professional fees, which were partially offset by a $125,000 decrease in expenses related to the acquisition of ISP, which we incurred during the second quarter of last year.

In the second quarter, we recognized noncash expense of approximately $243,000 related to the change in the fair value of warrants which were issued in connection with our June 2012 private placement.

In the second quarter of last year, we recognized noncash income of approximately $247,000 related to the change in the fair value of these warrants.

The applicable accounting rules for the warrant liability require the recognition of either noncash expense or noncash income, which had 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 would be exercised.

The likelihood of exercise increased as the expiration date of the warrant approached.

The warrants had a 5-year life that expired on December 11, 2017.

The fair value was remeasured each reporting period until the warrants were exercised or expired.

There were no outstanding warrants and no remaining warrant liability as of December 31, 2017, and as such, we will no longer be subject to noncash expense or income in connection with the warrants.

During the second quarter, the company recorded an income tax benefit of approximately $194,000 compared to income tax expense of approximately $241,000 for the second quarter last year.

The decrease in tax expense and the effective income tax rate were primarily attributable to the mix of taxable income and losses generated in the company's various tax jurisdictions.

During the second quarter, the statutory rate applicable to LightPath's Zhenjiang facility was lowered from 25% to 15% in accordance with an incentive program for technology companies.

The lower rate applied to the 2017 tax year begin in January 1, 2017.

Accordingly, the company recorded a tax benefit during the second quarter of fiscal 2018 related to this retroactive rate change.

These changes are outside of the anticipated impact of the U.S. tax reform, as I discussed earlier in my remarks.

Moving on to net income in the second quarter.

We reported net income of $423,000 or $0.02 per basic and diluted common share, which includes the noncash expense of approximately $243,000 or an impact of $0.01 per basic and diluted share from the warrant liability and $194,000 or just under $0.01 per basic and diluted share from the overseas income tax benefit adjustment.

This compares with net income of approximately $1.1 million or $0.07 per basic and $0.06 per diluted common share, which includes noncash income of approximately $240,000 or $0.01 per basic and diluted common share for the change in the fair value of the warrant liability for last year.

Net income for the second quarter was also affected by increases as compared to the prior year period in the following: Amortization of intangibles, SG&A expenses, interest expense, new product development costs.

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

Adjusted net income, which is adjusted for the effects of the noncash change and the fair value of the warrant liability, was $666,000 in the second quarter as compared to $851,000 in the second quarter last year.

Weighted average basic and diluted common shares outstanding increased to 24.5 million and 26.4 million, respectively, in the second quarter, which is up from 16.5 million and 17.9 million, respectively, last year.

The increase was primarily due to 8 million shares of Class A common stock issued in connection with the acquisition of ISP as well as shares of Class A common stock issued under the 2014 Employee Stock Purchase Plan and shares of Class A common stock issued as a result of the exercise of stock options and warrants.

EBITDA for the second quarter was $1.2 million compared to $1.6 million in the second quarter of last year.

The difference in EBITDA between periods was principally caused by a $490,000 claim related to the fair value of the June 2012 warrant liability, which went from noncash income in last year to noncash expense in the second quarter this year.

The second quarter results were also impacted by increased SG&A expenses associated with the acquisition of ISP, partially offset by increased revenues in gross margins.

Adjusted EBITDA, which eliminates the noncash income or expense related to warrant liabilities, was $1.5 million in the second quarter, an increase of 9% as compared to $1.4 million last year.

Now we will discuss some balance sheet items and cash flow.

Cash and cash equivalents totaled approximately $7.7 million as of December 31, which was slightly lower than $8.1 million balance as of the previous quarter and also at the beginning of the fiscal year.

This is despite the substantial capital investment that Jim mentioned.

Cash flow provided by operations was $1.6 million for the first half of fiscal '18 compared with $1.5 million for the prior year period.

During the first half of fiscal '18, the company expended approximately $1.9 million for capital equipment, as compared to $873,000 last year.

The current ratio as of December 31, was 3.9 to 1 compared to 3.2 to 1 at September 30, and 3.4 to 1 as for the prior year-end.

Total stockholders' equity as of December 31 was approximately $32.3 million, an increase from $30.2 million at the end of the first quarter, and $29.7 million as of June 30.

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 options and issuances related to the 2014 Employee Stock Purchase Plan.

As of December 31, LightPath's 12-month backlog increased 32% to $12.3 million as compared to $8.6 million at September 30, and $9.3 million at June 30, which reflects the bookings of a large annual contract to be shipped over the next 12 months.

The current backlog is comprised of approximately 60% for infrared product orders and 40% for optical product orders.

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

(Operator Instructions) Our first question comes from Matt Koranda of Roth Capital.

Maybe just a housekeeping one to start, how much PMO infrared revenue was there during the quarter versus diamond turned?

I'm just trying to get a sense for sort of organic infrared growth through your molded optical product versus ISP contribution?

Yes.

The turned infrared was $4 million.

Got it.

$4 million for turned, okay.

And then just in terms of the telecom and market softness, I think sort of well understood there during the quarter, but could you help us out with the outlook?

I know in the prepared remarks I think you mentioned some improvements around 5G deployment, but wanted to get a sense for essentially how long the current softness persists.

When we see that pick up really flowing through the P&L for you guys?

Could it be as soon as the March quarter or are we looking probably more at June/September?

Well, I would say, Matt, it's a really tough question to answer in terms of the timing that that occurs.

I don't -- I mean, I think, we had talked previously that we would see it in the second half of 2018, but it looks like it's still weak and we may not see it at least in our third quarter.

We may start to see some in the fourth, but it looks like it's pushing to the light.

Got it.

Okay.

And I guess last time on the call in November, you guys talked about having decent visibility into the 5G build-out in China.

That's maybe changed a little bit since we last heard from you?

Well, I think we're still seeing the activity for 5G.

The number of lenses or designs are continuing.

I think we'll start to see some of those moving towards production levels in these months, but trying to figure out the intensity of that is pretty difficult at this point.

But the major guys are still moving towards that.

We've seen more announcements from the service providers considering that they're going to implement 5G over the next year or so.

So -- and since we're in the front-end equipment that's required for that, as that starts to take hold, we'll be in the front end of that change.

Got it.

Okay, that's helpful.

And then in the backlog, if I strip out the $5 million order for thermal sights during the quarter, it looks like pretty strong underlying growth in bookings, maybe as much as 40% over last year.

So what -- help us with sort of what's driving the strength in that underlying new order rate.

Well, I think there's strength in the infrared segment of the business and the turned lenses.

That -- we see that business in the industrial sector continuing to strengthen.

We've seen some pops in the medical side and instrumentation.

And -- so I think that's where the major drivers are in that industrial sector.

Okay.

And then some examples would be helpful when you guys mention annuity type contracts and longer-term orders.

Could you help us understand just -- maybe an example in term of end-market solution that you're providing?

And then what is the duration -- like average for those orders?

When you say long term, do you mean a year?

Do you mean further out than a year?

No.

I think most of them are in the 6-month to 12-month frame.

I mean there's a few that are 3-month type orders that we're seeing.

And that's really, Matt, as opposed to the turns business that we have where we book and ship within the same quarter.

So what we're trying to do is get a longer-term view and more visibility and fill the quarter up, or higher percentage of the quarter, that we don't have to turn in the same quarter.

And so we're seeing those kinds of -- that kind of business.

So these are typically six-figure type orders that are moving through the system now that are anywhere from 3 to 12 months in duration.

Got it.

And then in terms of end markets, where those are coming from?

Well, a lot of them are in the infrared sector, firefighting type equipment.

We're seeing more in what we call aiming lenses for binoculars and then there is the mobility side of it where we're seeing orders associated with these sensing technologies.

Okay.

Maybe that's a good transition to a mobility question.

So is there a way to quantify, Jim, like the percent of the major LIDAR hardware providers that you're supplying currently for either on-road or non-on-road applications?

I don't know if I can give you a percent because I really don't know how many of them are out there.

But we're dealing with 6 different companies I think at this point that we feel have pretty good product technology and a pretty good shot at continuing on.

And that's on-road or is that both on road and sort of industrial applications?

It's both.

As I've said several times, I'm more excited about the industrial applications because I think they'll come quicker and they have fewer hurdles to overcome.

But these are involved with both of it.

And there are some in the agricultural side as well, which I kind of lumped previously into the industrial side.

So that kind of stuff.

Got it.

On margins this quarter -- I guess was there any residual weakness from the tooling life or coding chamber issues that you saw during the first quarter?

Or was the low 40% sort of a mix issue only?

I know you did call out, I guess, a pricing discount as well in that large ISP contract.

So help us understand the -- sort of the moving pieces to gross margins this quarter.

And then how do we sort of think about it on a go-forward basis?

Does that -- I guess does that pricing give back spill further into the second half?

Or should we be kind of looking at margins firming up and coming up from this low 40% level?

Well, I think first of all, the issues that we had in the first quarter have been resolved, and I don't think they were the contributors to the margin in the second quarter.

What we saw really driving the margin in the second quarter were 2 things.

There is a price/mix issue with the contract, as we mentioned, where we had to lower some of that price, and we haven't fully recovered the margins that we will.

There are some actions underway to do that.

And then the second part was the weakness in telecom and the impact -- the volume impact there that also impacted margin as we had to take some lower priced business in that sector as well.

So those were really the drivers.

It's really a pricing type issue, which I think as we implement some of the actions that we're taking in terms of cost reductions, in terms of how we're -- where we're producing product and how we're coding it, we'll recover the majority of that margin I think over the next couple of quarters.

Does the margin recovery -- I guess you're alluding to maybe low-cost country production.

Is that the majority of the action you take to sort of combat the pricing give back?

Or are there other items that you could kind of highlight for us?

Well, I think that's the majority of it, but some of this capital that we've spent has been to realign capacities into our lower cost geographies and to take advantage of that.

So we're still in the process of getting the processes qualified and set up.

I think over the next 6 to 8 weeks, we'll start to see the benefit of those changes.

Got it.

Maybe just one more then I'll pass it over.

In terms of CapEx, I think it was about $500,000 for the quarter.

I know it was sort of at an elevated rate for some of the capacity expansion initiatives you guys had in Q1?

Is this sort of the rate to use for the remainder of the year, the $500,000, sort of gets us through for the rest of the year?

Just a little color there would be helpful.

Yes.

I think we're trying to -- based on what telecom is doing and the impact of that revenue, we'll probably throttle back a little bit on the capital investment moving into the next couple of quarters.

So I think it'll probably be slightly less than that unless we have some specific event that we have to take advantage of.

So -- I mean I'm trying to -- we are trying to manage it down until we see the whites of the eyes of the revenue growing at the proper rate.

Our next question comes from Zack Turcotte of Dougherty.

Zack on for Catharine here.

Just a couple of things.

Sort of a follow-up on the telecom, you mentioned that HVPMO and LVPMO are both down year-over-year, I believe it was, primarily attributable to the telecom softness.

I'm just wondering kind of how impactful the telecom weakness is on the PMO business?

So if we see it continue -- I know you just touched on it moving outwards as far as the bounce back, and we see it continue to be soft in Q3.

Should we continue to see PMO trending downwards as well, and ISP still driving the revenue?

Well, I mean, I think this quarter versus the future quarters, we're probably in the trench at this point and it should recover from here.

I don't think it will get weaker than we had, but it may be a little longer before it starts to get stronger.

Okay.

And then I think you were touching on LIDAR before, and I'm pretty sure I might have asked this last time as well, just the potential applications in autonomous vehicles and that's really a 2019 kind of objective there mostly, correct?

I think that's probably true given where the state of the developments and how those things will progress.

It takes some time, but yes.

I think that's something we should start to see an increasing business in there in '19 and '20.

And then just kind of a -- from a modeling perspective, for the last few quarters, you had some kind of ramped up sales and marketing to bring more products to market quicker and whatnot.

So I'm just -- it's been pretty flat as far total sales, general and administrative for the last few quarters, should this continue to trend flat or go back to the levels that we saw in '16?

I think it'll stay probably pretty flat.

I don't see it going back to '16 levels, no.

Our next question comes from Gene Inger of Inger Letter.

In any event, guys, the quarter I think looked a little stronger than maybe you're giving it credit for.

I don't know, but of course your guidance previously was that we would see a couple of quarters max until benefits of telecom started to show up in China and so on.

And now you're suggesting that ultimately that will probably be beyond original expectations as more companies have announced 5G.

What I'm curious about is you've made a fair amount of expansions in capacity in apparently New York as well as Latvia, Orlando and China, and I doubt you would do this without expectation of growth.

Obviously, you have the expectation, but you're also hiring.

So I wonder if you can put the 2 together.

And are you being intentionally conservative in expectations?

Or do you think you've expanded prematurely?

Well, I think we see tremendous opportunity in front of us and we're trying to position the company for growth in areas other than telecom.

I mean, telecom is great business when it's here, and we'll be able to support that at whatever level it ramps to, so that's fine.

But as we've said, we're really focused on the infrared side of the business and establishing where we think the strategic growth will be coming in that.

And in that area, the sensing technologies, I mean, those kinds of things are where we are seeing the growth or the anticipated growth.

So I think we're moving more in that direction and the types of investments that we've been making are much more geared to that side of the business than the historical legacy business that we've had in the core business.

Now, having said that, we still are taking some aggressive cost reduction actions, as we always do over the total business, which would work on the visible side of the business as well.

And -- but the size of the expansions, you've had hiring increases, and you also referenced making assemblies as opposed to parts or components, and I wonder if this is another change in the characteristic of the company?

And in other words, you're delivering modules, not just lenses, for example?

Well, that's part of our strategy and the transition that we think is -- it's the right one for the company to make, that in addition to just being supplying components and lenses, that we move up the value chain and do more subassembly and assembly work.

And part of those investments are geared towards that, and what we see happening where we're putting multiple lenses in housings and doing the alignment of those kinds of devices, collimating type devices, et cetera.

So those types of value-added, higher-level assemblies is definitely a direction that we're going to move the company.

Do such products competitively yield decent margins or even better than sending lens assemblies alone?

And/or do you have competitive concerns with other, perhaps larger companies that may be trying to do the same thing?

Well, I mean, our business is always very competitive and we believe that we have the wherewithal and the ability to be very competitive in these types using the various operating platforms that we have combined with the technology that we bring to the party.

The sales force is the same.

The customers that we deal with on the lenses are the same customers that we've dealt with historically.

So what we have is the ability to go into these guys where we may have been involved in 1 or 2 projects and now we can talk to them about 5 or 6 different projects.

So I mean, I think that's where we have an advantage and we can exploit that in the marketplace.

Great.

I appreciate it.

Sounds like you're on track and it sounds like we're waiting for next year perhaps with respect to what, the infrared aspect of the business to grow.

I'm just -- I'm curious because I know your hiring trends have been higher, and I was just wondering whether that suggests that perhaps business is expected to perk up more in the immediate months than simply waiting until '19.

Well, I think, Gene, first of all, I'm a little confused because we haven't been hiring that aggressively.

I mean, we've been trying to surgically hire where we can put in the right type of people in the right positions that enable us to move the company forward.

But the infrared business has been growing substantially.

I think, what do we say, it was 378% if I remember.

Now some of that was due to the acquisition, but we've also increased the level of business that ISP is doing or is that subsidiary was doing compared to what it was doing before we acquired it substantially.

I think we've moved it.

I think when we acquired it the year we were doing around $13 million.

We're on track to do a couple of million more than that easily this year.

So we're already expanding the business.

We expect that to continue and we're hiring as we need and as we prepare the company for this next transition.

Our next question comes from Marc Wiesenberger of B. Riley FBR.

In an effort to lower the cost of production, can you talk about how quickly you can shift amongst the different facilities?

And are you at all limited based on their different certifications?

Does that pose a problem (multiple speakers)?

No.

I think -- I mean, it's pretty easy for us to shift certain types of business between the locations.

There are some specific things and specific locations that are required and depending on the nature of the business.

For example, I mean if we're doing some defense or ITAR type stuff, obviously, we're limited to our U.S. facilities as well as our Riga facility, which happens to be certified in ITAR.

So we have that capability.

If we're turning lenses, we can do that in multiple locations.

We can do that in New York, we can do that in our Latvia facility.

If we're molding lenses, we can do that in multiple locations either in Orlando or in our Chinese facility.

Now, we try to put the manufacturing product in the lowest cost operation that we can fit it, so that's always a consideration when we start to schedule and take this type of business.

We have pretty good flexibility, I think, for the most part.

With regards to the ISP integration, it's been probably about a year now.

Do you see any additional cost rationalizations that you can kind of squeeze out?

Or is everything related to that kind of been worked through the system?

I think for the moment we're still digesting.

I think we have ourselves in pretty good shape, but as I said, we're always looking for opportunity in that area and we'll continue to do that.

But I think for the most part, we're set.

Okay.

And last one, are you seeing any input cost increases?

And specifically maybe you could call out kind of some of the implied costs that you are seeing rise?

Well, I mean, these rare earths are up and down all the time.

So we have seen some increases in cost of germanium and zinc sulfonate type of materials associated with some of the IR products.

We counteract that with -- there's a great majority of them that we can convert into our BD6 material, which we manufacture in-house, and that mitigates that quite a bit.

But we also are trying to make sure that we have the right inventory of those raw materials so that we don't have real short-term fluctuations and we're not held hostage to that.

Our next question is from [Chris Pachaski], a private investor.

Well, most of my questions have been asked, but I want to ask just about the current quarter, the March quarter, since you seem to be saying that telecom is in a trough, that is, it's not going any further down and your revenue is more aimed towards the industrial market.

That gives us hope that we won't see much of a seasonal decline sequentially in March quarter revenues.

I don't believe we'll see a seasonal decline in the March quarter.

We do have one hurdle to overcome that we try to plan around, which is Chinese New Year.

So we do have a week holiday -- a week's holiday.

Not a -- it's a strong holiday, but it lasts for a week where our factory in China is shut down.

So -- and that happens to start this week, on Wednesday.

And so we -- but we have planned around that and so -- but it does have an impact on our production overall for the quarter.

It's something we have to take into consideration.

Other than that, I don't think we have any concerns along that line.

Our next question comes from [John Matlock] of Paradice Investments.

My question is, it seems like you guys are in a position -- doing so well on the balance sheet just across the board that possibly a potential target for a buyout.

Has there been any inquiries to that?

Or is that just something that you guys wouldn't be interested in doing at this point?

Well, I don't think we're particularly interested in being acquired.

That's not part of our strategy.

I haven't had any inquiries.

And that's not something that I can really control.

We try to operate our businesses to make it desirable but other than that, no.

I don't think so.

This concludes our question-and-answer session.

I would like to turn the conference back over to Jim Gaynor for any closing remarks.

All right, 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 Roth Capital Conference in Southern California.

Thanks for participating on today's conference call, and 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 your line.