Q1 2022 LightPath Technologies Inc Earnings Call
[music].
Good afternoon, everyone and welcome to the Lightpath technologies fiscal 2022 first quarter financial results Conference call.
Please note. This event is being recorded at.
At this time I would like to turn the conference call over to Al Miranda Chief Financial Officer at Lightpath Technologies. Please go ahead.
Thank you and good afternoon, everyone before we get started I would like to remind you that during the course of the conference call. The company will be making a number of forward looking statements that are based on current expectations.
Various risks and uncertainties, including the impact of COVID-19 pandemic that are discussing.
And its periodic SEC filings, although the company believes that the assumptions underlying these statements are reasonable any of them can be proven to be inaccurate and there can be no assurances that the results would be realized. In addition references may be made to certain non generally accepted accounting principles or non-GAAP measures.
For which you should refer to the appropriate disclaimers and.
And reconciliations in the company's SEC filings and press releases.
Following managements discussion there will be a formal question and answer session open to participants on the call.
Now I'd like to turn the conference over to Sam Rubin bypass President and Chief Executive Officer.
Thank you al good afternoon, everyone and welcome to Lightpath technologies fiscal 2022 first quarter financial results Conference call.
Our financial results press release was issued after the market closed today and posted to our corporate website.
Before I begin my remarks by our new followers and shareholders I would like to begin with a short recap of the last 18 months.
In late 2019, the board of directors have decided that it's time to refresh and revitalize the company and began to search for a new CEO.
As such I joined as CEO in March 2020, following a career in building and growing companies.
Industry in the U S, China and Israel.
I had come to light up after 15 years at four labs, where we grew the company opened thats periods of time from $30 million to 500 million bullets in sales.
Through a combination of organic growth and acquisitions.
Shortly after I joined shortly after I joined late pulse I recruited Mark Levine another industry veteran as the position of Vice President of global sales and marketing.
Mark's focused on aligning and building our global sales team was the major contribute to the 17% year over year growth, we experienced in the first three quarters of fiscal 2021.
Also during the first few quarters of fiscal 'twenty, one we focus on organizational alignment and development of that when your strategy, which I will discuss in more detail shortly.
It was during those efforts that we discovered irregularity in our China operation, which after a close look at turns out to be illegal activities by management of that subsidiary Misappropriating company money and resulting customer orders.
Third party entities owned by intent.
Thus effectively helping themselves to the company money.
Activities that we now know have been ongoing for a very long period of time.
Following this following the discoveries we have immediately discontinued the work of those individuals and began rebuilding the new management team in China.
Around the same time in the spring of 2021, we have also recruited two of our key members needed to round our van.
Our senior management team.
Amendment accomplished executives with Peter Greece from hyper growth companies in the optical and electronic.
We added a new CFO al May Wonder, who was previously the president and CFO of Genoptix USA.
<unk> VP operations, Vito <unk>, who joined us from a senior operations position in Jabil, where he managed operations of over $400 million.
Okay.
We're pleased to senior executives on board, we have now turned our focus to recovering from the episode in China and focusing on delivering on our new strategic direction, one that takes us from being a component manufacturer to a solutions provider, which will be the preferred partner for industries and customers looking.
To integrate into their products.
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With this overview I believe the balance of our comments today, we will provide you with greater perspective on our progress and opportunities.
Expanding our capabilities by building on our core capabilities and creating new differentiating technologies.
Such that allow us to both deliver better systems and to be known as a partner to go to for the most advanced optical technology.
One such exciting capability, which we announced a couple of weeks ago is the ability to use our molding technology for high volume production of three form optics.
We form optics as the name implies our optical components that have significantly less constraints and shapes and dimensions and can therefore expand the range of what Ken Peter designs.
Also drastically reducing the size and weight of an optical system.
For Illustrative example, lend.
Lens is an optical element that can focus late in the prison as an element that can combine beam of light beams of light a free form optical element could theoretically be one element to the performance both functions of focusing light and combining light and one element.
Easy to see this way what will impact this can have on optical system.
Reform optics had been a promising technology for a long time, one can find demonstration of how free form optics.
Pumps for development of free form optics, as well as optical assembly based on three form optics for customers in.
And lidar in this.
Overall, we are currently working on three major development projects in the <unk>.
And Lidar space that include Mlps and hundreds of thousands of dollars to develop those customers smaller and lighter optical solutions for their next generation products.
While each one of those customers has the potential of having annual sales anywhere from 1 million to $10 million a year.
It's important to remember that the actual material <unk> of such contracts depends not only on our success with the technology, but also with the customers' product success.
Most of those customers by new fields that are just beginning to develop into commercial market.
In addition to commercializing this very exciting technology and very cutting edge. Our team has also been developing other differentiating technologies.
Some of them in the materials side of the business expanding our glass manufacturing capabilities into more areas.
All of those development and for that we expect to announce in coming months are important differentiators that bring more customers to us for our optical system business and allow us to design and deliver better optical solutions.
What is available elsewhere.
All of which translates to better margins larger orders and longer term relationship with customers in comparison to what we have experienced in our historical components business.
Needless to say that we're wherever possible we apply for patents to protect our technology and IP in the last 12 months, we have applied for three new patents on those new technologies.
Now from the macro of strategy I will switch to the micro Av operations.
As you all know the previous quarter was incredibly challenging as it was when we incurred the majority of the hedges related to the changes we needed to do in China.
Although we have taken steps to minimize the business impact from the termination of the management employees over there and transition to the new management personnel.
We experienced some short term adverse impact on domestic sales and operating expenses in China in the fourth quarter and somewhat also in the first quarter of this fiscal year.
Okay.
Thank you said and wait for everyone that much of the information. We're discussing the earnest cost is also included in our press release issued earlier today and will be included in the 10-Q I encourage you to visit our website at Lightpath Dot com.
So Sam just covered the highlights of our strategy New management team the market opportunities and how we are progressing.
I will discuss some of the primary financial performance metrics and provide additional color on them to better assist investors and analyzing the company.
As a short reminder.
In queue for 21, we had in significantly impacted by the transition of business conditions in China.
And some of the financial impact was also developing.
As we indicated it would last quarter as Sam just said.
Revenue for the first quarter of fiscal 2022 was nine $1 million, that's down 4% from the same period of the prior fiscal year, but up almost 10% from the fourth quarter of fiscal 2021.
Sales of infrared products.
Christ, 54% of the companies consolidated revenue in the first quarter of fiscal 2022.
As compared to 50% of consolidated revenue in the same period of the prior fiscal year.
Visible precision optics TMO product sales represented 42% of consolidated revenues in the first quarter of fiscal 2022.
As compared to 45% in the same period of the prior fiscal year.
Specialty products continue to be a small component of the company's business.
Presenting 4% of the consolidated revenues in the first quarter of fiscal 2022 as compared to 5% in the same period of the prior fiscal year.
IR revenue represents the largest component of our sales rep.
Revenue generated by our products was approximately $4.9 million in the first quarter of fiscal 2022.
An increase of approximately 163000 or.
Or 3% compared to $4.7 million in the same period of the prior year.
The more automated machined process.
I R. Historically was more manually produced but with the growth in our molding technology is applied to IR products.
Being made from our proprietary beauty six material.
The margins will increase from both the advantages of the material and the automated molding process. So we expect to see margins continue to improve regarding IR.
Specialty product margins.
Very based on the project.
Our consolidated gross margin as a percentage of revenue was 35% for the first quarter of fiscal 2022.
Compared to 40% for the same period of the prior fiscal year and 25% in the fourth quarter of fiscal 2021.
Consulting expenses associated associated with the events in China.
As you recall in our Sam just said during the fourth quarter of fiscal 2021, the company terminated several employees, which Chinese subsidiaries.
After determining that they had engaged in malfeasance and conduct adverse to the interests of the company.
Company's Chinese subsidiaries are involved in certain ongoing legal proceedings with the terminated employees.
Somewhat recruited from any further discussions on that particular topic.
Slightly higher SG&A also was incurred as a result of our additional head count.
As Sam mentioned some of the people that we've hired.
The costs associated with operational improvement and to support our new strategic plan.
Based on Sam's comments it appears that our investments are going to deliver terrific returns.
And we really needed to make those workforce additions as well as move forward to our capital investments to provide for additional production capacity and capabilities in the future.
Cash invested was $1 2 million.
Cash provided by financing activities was 51000 and the effects of exchange rates on cash was a negative 32000.
Therefore, the change in cash was negative $2 8 million from the end of the prior fiscal year to the end of the first quarter of fiscal 2022.
Within that timeframe receivables increased by $1 3 million payables and accruals were reduced by 800000.
Inventories remained consistent at $8 7 million.
Our backlog.
As of September 32021 was $19 3 million down from $21 3 million at June 32021, which primarily reflects the reduction of certain telecom business and a normal deliveries against annual contracts.
Including our largest that is up for renewal in about a month.
This is partially offset by increases order for other product lines.
As we've noted is natural for our backlog to fluctuate during the year because of the timing of bookings.
<unk> orders and annual renewals.
Our single largest contract last year that is up for renewal would be valued at about 30% of our backlog at 930 <unk> 'twenty one.
With this review of our financial highlights and recent developments concluded I will now turn the call over to the operator. So we begin the question and answer session.
Ladies and gentlemen at this time, we'll begin the question and answer session.
Ask a question you May press Star and then one.
You are using speaker firm, we do ask that you. Please pick up your handset before pressing the key.
So let's draw your question you May press Star two.
Once again that is star and then one to ask a question we'll pause.
Momentarily to assemble the roster.
Because they need to get market traction with that product. We do have a couple of customers that are using it for more.
Looking into using free form for more conventional products and that we will start seeing larger volumes sooner.
Great and then how do you think about the addressable market. That's the first question.
And then is this made him the same production line.
Existing lines, you know on the PMO or infrared side or is this incremental on production to your capacity.
Yeah, that's a great point, so as you might know part of the uniqueness of light path is that we have developed our own production equipment and molding and we have a few different versions of molding machines that we developed here and we built in house.
This allowed us to make very slight modifications to existing molding machines to be able to use them for free form of it.
So capacity wise for the most part this is going to use equipment that we have already for CMO.
The second half of the question.
It was on the.
What's the addressable market and Jonathan I guess since you say, it's the same it's the same line the same equipment.
A year ago, maybe two years ago, you had capacity issues does this mean you need more capacity now.
So we actually have capacity is that something issue at this point. So a lot of that capacity was then theme.
Being constrained by telecom and by the urgent need for lenses for temperature contactless temperature measurement both of them.
We're down significantly so the capacity is there.
In terms of addressable market I've looked at it.
It's a component that as I mentioned performance a function of a few different components together. So typically the unit price is going to be one is going to be higher than our regular PMO, meaning these are going to be probably in the 10 to $30 $40 a piece.
And then if you look at something like an application of a lidar.
And every lidar ahead is going to need one.
Customers using those platforms. If you look at the AR glasses, then typically the projection in an ideal scenario is for both eyes that there would be two of notes.
What is the possible market of Lidar and.
I'm sorry.
Beyond the <unk> at this point.
Okay last one and then I'll get back in the queue I wanted to touch on margins again.
Cost perspective.
That's the part that we feel more comfortable managing and if we get the right mix will get there certainly in this fiscal.
Let me just make sure I understand and then I'll.
See the line and what.
What you are saying is from a yield and and production standpoint, you can get a 40% you're going to have some quarters you are going to be below based on mix. Some quarters, you may be at or above depending on new products coming out, but everything is in place to get to 40% depending on mix now.
So [laughter].
Walnut not answer you.
[laughter].
[laughter].
New products like free form for example, Sam I mentioned that the the margins are better there in our modeling, we're not making a lot of revenue into our modeling there.
And there are models, that's not really taken into consideration so.
We're talking about.
Somewhat conservative and looking at our current products are current business and thinking all right. We get to 40, how do we get to 40.
What's the cost situation and what's the mix but.
To sort of support your answer without answering you.
Is the yield issue.
Was was it was a bigger was a big factor.
And it hasn't cipher through inventory.
It will continue to improve.
Okay. Thanks for all your answers.
Thank you.
Our next question comes from Scott Buck from HC Wainwright. Please go ahead with your question.
The last quarter woods too much of a hit and what we wanted to and bottom line and we felt like we needed to look in what the bits and typing up and and improve and I feel like we're actually lights on track in terms of what we would have wanted to and tons of the improvement so I'm, hoping that.
We continue along this track and we can go back to looking seriously at terminate.
We do want to make sure that we also deliver on that will come in corporations and not just go and bite of something.
Well of course, they make that kind of thing I appreciate the time guy. Thank you.
Thank you.
And speaking of the segments.
Last last call you acknowledge that it's not just Mars Rover, but low earth orbiting satellites you're involved with.
That's a form of telecom, that's obviously not the telecom that you said customer reduced orders because their business was down first of all with that customer in China or the United States.
The satellite company you mean, so as I mentioned.
While the satellite company is gonna be the United States or Europe I'm sure.
No no no you said that the telecom orders were down from one because one customer had lower bill yes that was in China.
No.
Don.
It has been for quite a few quarters and said Wow.
Huawei is down in China Telecom is down because a lot of people die seriously. They have a lot of people cancel account, that's one way people track their desktop but anyway.
Appreciate the comments, that's very useful and I'm sure other investors.
I appreciate it too thanks gene.
Do you know what you're working on is more is infrared not laser and I'm, assuming there's no radiation involved in either.
That would be detrimental in the medical and in fact, the absence of radiation would make it advisable to go in that direction.
Yeah, we.
It seems like <unk> been since the components I've always cycle business has been passive optical components.
We have no projects such as the one with this major satellite company, where we are designing and building a complete opposite.
Optical transmitter for transmission optically between satellite and that includes laid though and receiver. This is a great example of where we are thinking the company into much more of integrated solutions designing a complete solution utilizing our unique technology and knowhow to design.
Something better than what otherwise would be available.
So it has.
Mark do you want to fly them.
[laughter] he has not but.
If you have a word with him I'm waiting for my Tesla and it's available.
Now so.
And when you do realize synergies.
Yes.
In Assembly in Asia in different places.
<unk> shipments they can pay a design work and everything gets done here in the U S.
But you're going to have on price.
Catalog is 20% defense is six.
Industrial applications are 43.
Medical is seven.
Telecom is seven and then commercial applications for 17.
Okay.
Thank you.
Yes, no problem when it comes to that 20% regarding catalog and distribution.
That could also be the other categories, particularly.
Sellers.
You don't always capture the specific market.
Got it.
Second question related to that was.
Thanks, Tom you had mentioned that you want to like to sort of.
Transition from.
Sort of.
<unk>.
Prior light pads, which was you know.
Mid to low single digits to high double.
Will it come from.
Like because you are in higher growth markets, like Lidar, and <unk> et cetera or.
Would it come from because.
You would transition from making components to sub assemblies and solutions.
So with that higher growth rate.
The breakdown or.
Yes, great Great question.
Yes, I think when we look at everything as rates based on value add where can we add value and where can we bring some uniqueness to customers.
We have very very unique strength when it comes to infrared optics, we make the materials ourselves we have very unique capabilities in the fabrication in the coatings.
So most times the easiest sort of half of lift lease resistance for us to get into making a complete sub assembly or even a system tends to be more in the infrared area, because that's where our advantages are.
It doesn't mean that.
Say lidar and <unk> that the visible that would absolutely not the case, we even have actually one case like that where we are making a complete assembly we're looking into that.
But the vast majority right now is that we're seeing where most of the activity on the more engineered solutions complex is in English from it.
And those oftentimes tend to be aerospace and defense.
Right. So I mean like overall photonics industry forecast.
Now to go with like mid to high single digits. If you would like to grow slightly faster. So that's what I'm thinking of what's coming.
Because you're going to faster growing end markets. So that will come from because you are bringing more subdued.
<unk>.
It will come a bit from eating other people's launch so it is.
In a way converting our customers.
Customers from buying one component format two components from us to buying a complete assembly that we designed.
Okay, great. Thank you.
Thank you.
And our next question is a follow up from Brian singer. Please go ahead with your follow up.
Hey, guys I think we covered a lot of ground, but we really didn't cover the growth drivers for the two businesses in the near term.
The results to me I would have expected the opposite based.
Based on your comments last quarter a.
That sequential improvement.
In in infrared and more flatness in PMO. So first of all I'm curious what drove that.
Other than Lumpiness.
The changes quarter to quarter, but even a bigger picture and more important as I think about both of those segments.
Which are those industries that are going to drive it I've heard defense seven.
7% of revenue, it's not that big.
So what are the industries and how do you go after them to drive better adoption and penetration.
Yeah. So quickly on the part of where our growth comes from people might recall, we mentioned ultimately back in April I think already but definitely.
In the Q4 results.
Our hit the sales in China with because of the relationships with customers lost when we had to let go of the senior management.
They own their relationships and they were funneling sales food these fake shell companies.
There was a hit to us besides a telecom customer of the customers in China that we sort of lost touch with for a short period of time.
We anticipated that coming back and we're seeing that coming back and a lot of that growth that we saw now and I'm sure. We'll continue to see also is from the focus of regaining back the PMO customers.
Sure.
Sort of disconnected our loss for awhile.
In terms of where the growth comes from.
The industry is very I would say it's very.
Diverse and in a very difficult to predict you have.
Situations like automotive.
Automotive thermal camera that we're working on it looks very promising if it will be.
To be successful it will be overnight the multimillion dollar.
Neal it's Tom.
And also be not successful nothing to do with us it could be.
Automotive company the sites too.
Postpone it because the lack of of other components that they have been delivering cards.
So there are multiple industries, where this can come from defense you're right. It's only 7%. The defense is actually a place where we need to work on contracts for a long time before we wind them and once we do it sort of a overnight big hit so we do expect defense to be quite a bit more in the <unk>.
Future because we're winning designs, we're winning contracts and we know it won't come.
Other than that really.
In places, where new industries or new.
Players want to adopt photonics and use it in their product and that is where we work with them closely sometimes for a couple of months, sometimes for half a year or even a year and then it could be it could turn on the switch in dollars.
A $1 million to $5 million order.
Understood so to the degree there's a component shortage component shortage for one of your customers. It's possible, we see slower demand at times, but to the degree we have new product.
New successful products those will create spikes in revenue.
Yes, absolutely I mean, we've had situations where customers mentioned they might need to reschedule because of component shortage thankfully that didn't actually happen and we think that we feel it is getting better at lease two of those customers that work undeveloped it.
But you're right that's always a concern for us like any components and a factor.
Great. Thanks, so much.
Thank you.
And ladies and gentlemen at this time, we will be ending today's question and answer session I would like to turn the floor back over to management for any closing remarks.
Thank you for participating in today's conference call. We look forward to speaking with you again, our upcoming annual meeting of shareholders and the Investor Conference next week.
We hope you can join us Thank you again and goodbye.
Ladies and gentlemen, with that we'll conclude today's conference. We do thank you for attending you may now disconnect your lines.