Precision Optics Corporation Inc (POCI) 2023 Q1 法說會逐字稿

Good afternoon, and welcome to Precision Optics' reports first quarter fiscal year 2023 financial results conference call. All participants will be in listen-only mode. (Operator Instructions)

After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) Please also note this event is being recorded. I would now like to turn the conference over to Robert Blum with Lytham Partners. Please go ahead.

All right. Thank you very much and thank you all for joining us today to discuss Precision Optics' first quarter fiscal year 2023 financial results, for the period ended September 30, 2022.

With us on the call, representing the company today are Dr. Joe Forkey, Precision Optics' Chief Executive Officer; and Dan Habhegger, the company's Chief Financial Officer. At the conclusion of today's prepared remarks, we will open the call for a question-and-answer session.

Today's conference call is also being webcast with replay capabilities available through the webcast as well as through the dial-in instructions. The details of both were included in today's press release.

Before we begin with prepared remarks, we submit for the record the following statement. Statements made by the management team of Precision Optics during the course of this conference call may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended. And such forward-looking statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements describe future expectations, plans, results, or strategies, and are generally preceded by words such as may, future, plan or planned, will or should, expected, anticipates, draft, eventually or projected. Listeners are cautioned that such statements are subject to a multitude of risks and uncertainties that could cause future circumstances, events, or results could differ materially from those projected in the forward-looking statements, including the risks that actual results may differ materially from those projected in the forward-looking statements as a result of various factors and other risks identified in our filings with the Securities and Exchange Commission.

All forward-looking statements contained during this conference call speak only as of the date in which they were made and are based on management's assumptions and estimates as of such date. The company does not undertake any obligation to publicly update any forward-looking statements whether as a result of the receipt of new information, the occurrence of future events, or otherwise.

With that said, let me turn the call over to Dr. Joe Forkey, Chief Executive Officer, Precision Optics. Joe, please proceed.

Thank you, Robert, and thank you all for joining our call today to discuss our first quarter fiscal year 2023 financial results. I'm extremely pleased with the results of the first quarter, which reflect record revenue of $5.1 million, up 118% year-over-year, increasing gross margin, and positive adjusted EBITDA.

As we have discussed for a few quarters now, the key driver of this revenue growth is the transition of a number of programs from our development pipeline into production, including most recently a new release for otoscopy application, which came to us through the Lighthouse acquisition and another for a large defense/aerospace project. Both of these leverage our company's unique optical capabilities.

The other key driver of our recent revenue increases is the recovery, and in some cases, acceleration of demand for many of our customers' products that were negatively impacted by the pandemic. Combining new product launches with this recovery has resulted in significant revenue growth that we expect will continue through this fiscal year and beyond.

Our business strategy of engaging with customers at the very early stages of the product development cycle by leveraging our cutting-edge technological capabilities to enable their product requirements is clearly working well. The acquisition of Lighthouse Imaging a year ago, further enhanced the breadth and depth of our technical offering, making us the provider of choice for our customers' product development requirements and long-term production.

This approach, which has the ability to provide us with ongoing manufacturing revenue for many years once a product has transitioned from development into production, provides enhanced predictability to our operations and outlook.

While we have made strong progress, moving programs from our development pipeline into production, we have also been equally successful in replenishing our pipeline with new opportunities. With the positive market response to the combination of Lighthouse Imaging and Precision Optics, the number of opportunities coming to us for new development projects is greater than ever.

With the increase in revenue levels, we are also beginning to see increases in our gross margin as we have long anticipated. Excluding the recently acquired Lighthouse operations, gross margins during the quarter were 42%. Due to the ramp in a number of our production programs, we are beginning to see the effects of higher manufacturing utilization and overall increases in efficiency and gross margins.

We expect that as we continue to integrate Lighthouse more fully into our operations and as more of the Lighthouse development programs transitioned to production, we will gain efficiencies within the Lighthouse production operation and achieve overall corporate margins above our goal of 40%.

As we mentioned in the last earnings call, our key goal for fiscal 2023 is to achieve bottom-line profitability and growth. The increases in both revenue and gross margin, combined with close management of operating expenses helped us achieve adjusted EBITDA of $110,000 in the first quarter, which represents a positive first step in our goal to improve bottom-line performance throughout the fiscal year and beyond.

Much of our focus over the past year has been on the integration of Lighthouse Imaging. Going forward, we are looking at strategic investments to continue our future growth.

I have already discussed our goal this fiscal year of demonstrating greater bottom-line profitability. To support that effort, we expect to make targeted investments to update our organizational structure and corporate-wide operating systems to drive greater integration between all three of our locations in Maine, Massachusetts, and Texas, with an expectation of greater efficiencies and profitability.

The medical device space continues to grow at an estimated compound annual growth rate of 5% to 10% per year, with the growth rate of the single-use segment 2 to 3 times higher at 15% to 20% per year. As we have discussed before, the investments we have made to get our first single use program through the development process has positioned us well to compete in this fast-growing market segment.

With additional investments targeted at augmenting our existing capabilities with new technologies, particularly proprietary design and production techniques that help reduce costs for high-volume production, we believe we will continue to attract new opportunities in this phase.

We also continue to pursue applications for our technology in the defense and aerospace markets. The first program that came from our dedicated targeting of this market over the last couple of years is driving most of our recent growth with an expected $3 million per year run rate. We intend to continue to expand our sales and marketing efforts in this direction with the expectation of adding additional projects similar to those we have already engaged.

And finally, given the success of the Ross Optical acquisition three years ago and the more recent Lighthouse Imaging acquisition one year ago, we believe it is likely that there are additional opportunities for strategic transactions to further enhance our capabilities through partnerships, mergers, or acquisitions.

With a successful first quarter, a burgeoning production portfolio, a large pipeline that continues to move projects through the development process, and strategic plans to support long-term opportunities, I believe we are in a great position to continue the acceleration of growth through this fiscal year and into the future.

With all of this positive momentum, we continue to believe the time is right to uplist our stock to the NASDAQ Stock Exchange. As we have discussed on recent calls, one of the requirements for listing on NASDAQ is to have a share price above $3. In order to satisfy that requirement, we implemented a 1-for-3 reverse split on November 2.

I am pleased to report that subsequent to the reverse split, we received the letter from NASDAQ indicating we are now approved for listing. Assuming all goes smoothly, we will issue a formal press release tomorrow, confirming that trading of our stock on NASDAQ will begin on Wednesday of this week, November 16.

The new ticker symbol for Precision Optics will be POCI once NASDAQ trading commences. While different systems can vary, everything should seamlessly transition to the new ticker symbol on the first day of trade.

We recognize that the process to uplist to NASDAQ has taken longer than we expected, and I wanted to thank all of you for your patience and support during this process. It is our belief that with the progress we have made operationally and our positive outlook for the future, a listing on NASDAQ will enhance the visibility of the company to a larger group of investors.

We are certainly excited about this significant step forward.

Let me now provide some added details on our production programs and pipeline.

For the first quarter, production revenue was $3.4 million compared to $1.8 million in the first quarter of fiscal 2022, which represents an increase of 87%. Lighthouse contributed $262,000 of the first quarter production revenue, which implies a 72% year-over-year growth in organic production revenue.

Sequentially, overall production revenue was up 12%. The key drivers here were: the increase in production orders for our spinal product for a major long-time customer, which we announced in March; our new defense/aerospace production contract, which we announced in February; the transition to production of Lighthouse's next-generation otoscope device, which we announced in May; and a nice pickup in our older lead defense/aerospace product, which came back following a delay during the pandemic.

Let me comment briefly now on each of these four programs. We have talked on recent calls about the large new defense/aerospace order that is now in full production. In February we announced initial production orders for this program and have received subsequent follow-on orders.

During the first quarter of fiscal 2023, we delivered approximately $850,000 to this customer. This was an increase of $450,000 compared to the previous quarter and was in line with our anticipated roughly $3 million per year run rate. We are pleased with the development of this program to date and expect future production to continue at a comparable level.

Our ongoing defense/aerospace program that we have been working on for many years also contributed to revenue increases in the first quarter. You may recall that this program was delayed due to the pandemic but is now back underway.

We received the latest follow-on order in November of last year for $875,000, and we are working to fill this order now. Based on discussions with this customer, we expect follow-on orders to increase in size and to be timed, so that deliveries continue without a break from order to order.

On the medical device side, we reported in March that we received production orders totaling approximately $2.5 million for a spinal surgery product that we have been delivering to a large medical device customer for over 10 years. We delivered nearly $500,000 in product to them in each of the third and fourth quarters of fiscal 2022. And in the first quarter of fiscal 2023, we delivered more than $350,000 worth of products.

As I said last quarter, this is a great example of the value to our company of medical device product once they transfer it to production. With very little ongoing investment, this product has continued to contribute to production revenue and now more than 10 years out from initial production volumes have grown substantially.

Because of regulatory requirements and an aversion to risk associated with changing suppliers, these types of products tend to stay with us once they transition to production, often contributing to ongoing revenue for many years. This is one of the reasons we are so excited about the prospect of transitioning a number of development programs to production in fiscal 2023.

Finally, and as we talked about last quarter, the first program from our Lighthouse acquisition to transition to production occurred during the fourth quarter of fiscal 2022. This product is a highly complex optical and electronic assembly used for imaging in the ENT space, and we are currently delivering against a $600,000 initial production order.

Because this product is still in the market launch phase, our customers' delivery requests some -- vary somewhat from month to month. But all indications are that the current order will run through the next six months or so and that follow-on orders are likely. Production of this product represents the first successful transfer of a Lighthouse pipeline product since the acquisition and is a great indicator of the likely success of other pipeline programs nearing production.

Overall, we continue to see a nice recovery of other mature products that were delayed due to the pandemic. In particular, our otoscopy and cardiac devices continued to experience improved market pull through, which we believe will lead to an increase in production for both programs as we move through fiscal 2023.

As I have said in the last couple of earnings calls, our product development pipeline in the volume and size of new opportunities, especially as a combined company, continues to be as large as it has ever been. We continue to see a very positive response from the markets to the combination of Lighthouse and Precision Optics. So we are able to replenish our development pipeline as soon as programs transition production.

In the first quarter of fiscal 2023, our engineering revenue was $1.6 million for the quarter, an increase of 235% compared to the first quarter of the previous fiscal year, and down only slightly from the previous fiscal quarter. Lighthouse contributed $1.1 million of this engineering revenue. We have now integrated the two engineering teams and are finding the combined resource to be much more scalable.

We continue to believe there are several programs in our product development pipeline that have the ability to transition to production in fiscal 2023, including the single-use ophthalmic product we talked about on earlier calls as well as programs that support multiple orthopedic products, general robotic surgery, urology, ophthalmic diagnostics, and E&C applications.

Let me talk a bit now about some of the financial highlights. I've already mentioned revenue a few times, but to reiterate, revenue for the first quarter of $5.1 million represents a new record for quarterly revenue. The growth was due to a combination of organic revenue growth, which came in at 61%, combined with new contributions from Lighthouse. On a pro forma basis, the total year-over-year revenue increase was 34%.

Our gross margin was 34% for the first quarter compared to 30% in the previous quarter. As I already mentioned, excluding Lighthouse, first-quarter margin would have been 42%. This represents significant growth in the gross margin of organic revenue compared to gross margin in Q1 of the first quarter of the previous year of 27%. As expected, this has been driven in large part by more complete absorption of manufacturing resources.

As we continued to see revenue growth, particularly that driven by transfer of programs from the Lighthouse development pipeline into production, we expect overall corporate margins to continue to grow. While we may see some fluctuations from quarter to quarter, the overall expectation is that margins will continue to improve.

Operating expenses in the first quarter were $1.7 million compared to approximately $1.2 million in the previous year's first quarter and down sequentially by a little more than $100,000 compared to the fourth quarter of fiscal 2022. On a cash basis, excluding depreciation and amortization as well as stock-based compensation, operating expenses were approximately $1.6 million compared to approximately $1.0 million in the first quarter of last year.

The roughly $0.5 million year-over-year increase is largely due to the acquisition of Lighthouse and the incorporation of their operations, coupled with increased travel, trade shows, commissions, and other general sales and marketing expenses that have increased with the end of the pandemic and with increasing revenues

Over the past year, we have discussed the strategic investments we have made in operating expenses as part of the acquisition and overall growth strategy of the company. For example, we have grown our sales and marketing team in infrastructure to take advantage of increased market opportunities. We have invested in more resources to support a corporate-wide accounting system, and we have incurred costs required to support the uplisting to NASDAQ. These and other expenses have contributed to an increase in overall corporate operating expenses over the past year.

While we will continue to invest judiciously to support our strategic growth plans, we expect that operating expenses will grow more slowly than revenue and gross margin, thereby helping to support our goal of increasing bottom-line profit.

All told, net loss improved significantly from the previous year with a net loss of just $74,000 in Q1 of fiscal 2023 compared to a net loss of $577,000 in the same quarter last year. Adjusted EBITDA, which excludes stock-based compensation, interest expense, depreciation, amortization, and any acquisition expenses was positive $110,000 for Q1 compared to a loss of $197,000 for Q1 of the last fiscal year.

As we look to the second quarter of fiscal 2023, we expect that run rate of overall revenue to be steady or slightly higher compared to Q1 and increasing as we progress through the year. While our growth is never linear, we still expect solid revenue growth in the range of 20% for this fiscal year overall. And as we drive improvement in gross margins and hold the line in operating expenses, we believe we will see incremental dollar's fall to the bottom line.

This is an extremely exciting time for Precision Optics. Operationally, we are achieving record quarterly revenue with the growth coming both organically and through the acquisition of Lighthouse Imaging. With more programs slated to transition to production as well as the continuation of programs recovering from the pandemic, we expect this topline growth to continue.

Gross margins are rising as we achieve improved utilization of manufacturing resources, both because of the increase in overall business and due to the success of efforts to improve efficiencies across the board. And by limiting the increase in operating expenses, we expect the growth in our business to translate into increases in profitability throughout this fiscal year and beyond.

From a corporate standpoint, we are excited to be only days away from a move of our stock to the NASDAQ Stock Exchange. Given our company's positive operating results and our strategic plans for ongoing growth into the future, this is an ideal time for the enhanced visibility that comes from the uplisting to NASDAQ.

All in all, I am very pleased with our fiscal 2023 first-quarter results, and I look forward to ongoing progress throughout the year.

One note before I take questions, I will be visiting New York City this Thursday to meet with people in person, and I'll be available for virtual meetings on Friday. If anyone on the call is interested in meeting on either date, please contact Robert Blum of Lytham Partners or me directly.

And now I'd be happy to take any questions.

Thank you. We will now begin our question-and-answer session. (Operator Instructions) At this time we will pause momentarily to assemble our roster. (Operator Instructions)

Rick Teller, Private Investor.

Yeah. Hi, Joe, a good quarter there, definitely. You talked mainly about production, but I just wanted to get a sense of where you are in the engineering side of things in terms of your capacity to take on new business because you're talking about there's a lot of interest?

But if several medical outfits came to you and said, we'd like you to start as soon as possible on this new project we're working on -- could you do it? Would some of them have to wait or do you have an excess capacity? How much more could you take on before you'd have to start hiring and training new engineers?

Yeah. Thanks, Rick. That's a great question. So it's a great question and it's -- the answer has a number of different aspects to it.

So the first thing is that we work very hard. And we've been working hard during the integration of Lighthouse to get the data that we need and to be able to monitor the utilization rate of our engineering team. And of course, where we always want to be is at a fairly significant utilization rate because you don't want people sitting around and not working.

On the other hand, as you sort of alluded to, we also want to be sure that we always have some capacity. So if the best medical device program or new defense/aerospace program comes to us that we've ever seen, we want to be able to respond to it. We don't want to have to tell our customer to go away and come back in six months after we hire a bunch of engineers. So there's really a bit of a balancing act there.

What our team does -- they do very well, which is this. For each program that we have, we put together an anticipated timeline for our customer. And that timeline, as you go through development, of course, has to be a little flexible because there are unforeseen things that happen when you're doing development on cutting-edge technological program. And so both our customer and we have to have some level of flexibility.

Typically, we will schedule things in a fairly conservative way. And what that does is it allows us -- when we have the opportunity, we can put some of our existing engineers onto programs that they weren't necessarily assigned to when we were developing the timeline. And that will help to accelerate the timeline, which we're happy to do and our customers generally are happy to do as well.

What that also allows us to do, though it's maintained a high utilization rate, but still have the ability to transfer some of the engineers to a new program if the best program we've ever seen come through the door, and we really want to respond to it. So we do a little bit of that in order to be able to flex up and down in terms of being able to respond to new programs that come in while still satisfying the requirements for our existing customers and working on a high utilization rate.

The other thing that we do is we do have some outside resources that we use in order to flex up and down as well. So if we get completely slammed and we have way too much work, there are some outside resources that we can use on a temporary basis in order to be able to, again, be able to flex up and down.

Having said all of that, we are continuously -- over the past year, we have been hiring engineers. I think we hired three or four technical folks over the last six months or so.

We continue to look for new engineers. We're very selective in who we accept, and the job market is fairly tight now. So I don't see us hiring another 10 engineers and then being overloaded and having to wait for more business to come in. But we are certainly growing in terms of our capabilities and in terms of our bandwidth because ultimately, we want to be able to grow that team so that we can satisfy more customers, we can build our pipeline to a higher level, and that accelerates the rate at which the pipeline programs can come out into production and helps to grow the business at a faster rate.

Okay. That's good. Thanks. Also, one of the -- I'll call it, negative characteristics of the company in the past was every now and then, a given quarter would not be -- would be very negatively profitable, let us say --

Yeah.

-- due to cost overruns. That doesn't seem to have happened lately, but -- so can we relax and say, it just isn't going to happen much anymore, or have you just lucky, or is there something that you've done that will keep that risk under control?

Yeah. So we've -- so the first thing is we, here at the company, will never relax with regard to those kinds of concerns. But at the same time, it's not that we've just gotten lucky. So we have paid a lot of attention to the issues that led to some of those negative results in certain quarters.

I think there are actually two things that have helped us with this. One of them is just the benefits of being a larger company with more customers and more programs going at once because it means that we're less dependent on any one particular program.

And so if there's a little bit of flexibility in terms of the timing of deliverables on one program or another, that doesn't have as big of an impact. There will still be some ups and downs, but it's not on a percentage basis. It's not going to be as large as it has been in the past when we were a smaller company with fewer customers.

The other thing though that we have learned and that we have changed in a pretty significant way is that as we engage with our customers in the development process, we recognize now more so than ever that there are some risks associated with technological development on products that are as advanced as the products that we're working on. And so in the past, we would often we predict what the cost of the program would be in a fixed basis. So we would quote our customers on a fixed basis, we would do it on sort of in stages. But nonetheless, if there are cost overruns, either we had to absorb those ourselves or we would have to go back and negotiate with our customer.

We've converted just about all of our development programs into time-and-material programs. And I think it's fair to say that we've gotten better at even on a time and materials basis on estimating more conservatively and explaining to our customers in a better way what the risks are and what the costs may be. And so this allows us to shift, if you like, some of that risk back onto our customer as opposed to absorbing it entirely ourselves.

Part of the way that we've been able to do this is by implementing a program management structure. And I have to say this is one of the things that Lighthouse brought to us. We were sort of starting to get into a more official program management structure here at POC.

When we acquired Lighthouse, they had a more mature process, and so we adopted that companywide. And so we have a so-called program management office with individuals whose entire job is to manage the program. They're generally very senior and capable technical folks, but also folks who pay a lot of attention to the details of quoting the program, of communicating with the customer on an ongoing basis on identifying issues that may come up so that there can be communication and in negotiation with the customer we need to.

So all of those things combined really have put us in a much better position, so that we think it's much less likely that we'll end up in a situation where we have significant cost overruns like we had in the past.

All right, good. That's good enough. Thank you.

Thank you, Rick.

(Operator Instructions) Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Thank you, operator, and thank you all for joining us on the call today. I look forward to seeing some of you in the next couple of days and to speaking with all of you again on our next call. Thank you. Have a good evening.

And thank you, sir. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.