Q1 2024 Syntec Optics Holdings Earnings Call
Drake: Good afternoon and welcome to Syntec Optics Holding Things' fourth quarter 2023, full year 2023, and first quarter 2024 earnings call. My name is Drake, and I'll be your operator for today's call. As a reminder, this conference call is being recorded. At this time, all participants are in a listen-only mode. I'll now turn the call over to Casey Nelson, Chief Financial Officer of Santec Optics. Please go
Casey Nelson: Thank you, operator, and welcome everyone to Sintec Optics' first earnings call as a public company. On the call with me today is Al Gabor, Chairman and Chief Executive Officer of Santec Optics. We will be presenting the company's financial and operational results for the fourth quarter and full year of 2023 and first quarter of 2024. A few quick reminders before we start.
Casey Nelson: First, today's call is being webcast, which can be accessed along with our press release in the Investor section of our company website, which can be found at www.santecoptics.com. Second, during this call, we may be making forward-looking statements based on current expectations, which could differ from our actual results materially. Santec Optics assumes no obligation to update these statements. Finally, we will reference some non-GAAP financial measures. Reconciliations to the nearest corresponding GAAP measure can be found in today's release and on our website. With that, I'll turn the call over to Al.
Al Gabor: Thank you, Casey. And thank you to everyone joining us today for Syntec Optics' first earnings call. For those of you who are new to our story, I will begin by taking a few minutes to provide some information about Syntec and what it does. Syntec is an opportunity for investment in light. 11% of the global economy is now light-enabled, and we believe that this is a trend that will continue and create more opportunities for Syntec Optics.
Al Gabor: SNTEC is a leading provider of mission-critical optics to scientific and technical instruments and defense and aerospace OEMs. Of the nearly 10 end markets, with a marketplace of size of nearly $2 trillion for SBIE reports, Syntec Optics has a presence in three of them and will add one additional end market in 2023. Syntec has blue-chip customers in biomedical, defense, and consumer from the past, with recurring sales from them, including examples such as disposable optics and system optics for diagnostic testing provided over a decade, night vision optics and scopes in production for over four years, and laser scanners in production for over a decade.
Al Gabor: Space Optics was added and is in full production now. New biomedical mirrors. Micro Lens Arrays for Telecom entered production ramp in Q1 of 2024. Other production ramps will follow as the year progresses for new products. Before discussing our organic and inorganic growth opportunities and some of our other operational highlights, I will turn the call over to Casey to provide a review of our financial and operational results.
Casey Nelson: I will now review our fourth quarter and full year results for fiscal 2023 and first quarter 2024 results, beginning with the fourth quarter. All figures are GAAP unless otherwise noted. Sintec Optics generated $8.3 million in net sales in the fourth quarter of 2023, which is an increase of approximately 17% compared to the fourth quarter of 2022. We saw a significant mixed shift towards communications compared to the same quarter a year ago, with our communications and market accounting for 41% of revenue in the period, compared to 0% of revenue in the fourth quarter of 2022. The growth in our communications business is largely the result of increased demand from customers needing optics that are used in low Earth orbit satellite systems.
Casey Nelson: We expect this trend to continue and believe communication product revenue will continue to be a significant driver of our growth throughout 2024. Our defense revenue represented approximately 12% of sales in the quarter, compared to 29% of sales in the same quarter a year ago, as entry into communications added more diversification of end markets. The year-over-year muted change in our defense business was driven by revenue mix. However, we expect overall demand for defense equipment to increase given macroeconomic factors such as global conflict in Eastern Europe and the Middle East.
Casey Nelson: As we fine-tune our volume production process for recent global product launches, we expect our revenue in this end market to increase in the latter half of 2024. Our biomedical revenue increase represented approximately 23% of sales in the quarter, compared to 46% of sales in the same quarter a year ago, again driven by additional diversification through entry into communications. The year-over-year decline in our biomedical business was driven by product mix. However, expectations are that our biomedical business will increase as demand for biomedical mirrors and digitization enabling and optics applications continue to increase in the latter half of 2024.
Casey Nelson: Our consumer representative, revenue represented approximately 24% of sales in the quarter compared to 26% of sales in the same quarter a year ago. The year-over-year decline in our consumer business was again driven by product mix. We anticipate a muted increase in demand given higher interest rates and persistent inflation.
Casey Nelson: While we have seen recent signs of stability in the segment, we expect growth in this market to remain more muted, at least through the second half of 2024. Syntec's gross profit in the fourth quarter of 2023 was approximately $2.0 million, and remained approximately flat in dollars as compared to the fourth quarter of 2022. The stability in gross profit was driven primarily by our revenue mix and stable cost of goods sold compared to the prior year period.
Casey Nelson: Costs of goods sold in the fourth quarter of 2023 were $6.3 million, compared to $5.1 million in 2022. The increase was driven by incremental material and labor costs associated with increased production and the ramp-up of newly launched products.
Casey Nelson: General administrative expenses in the fourth quarter of 2023 were $1.9 million, compared to $2.4 million in 2022. The decrease was driven by disciplined control of E&A expenses, primarily due to cost containment for personnel and professional fees. Income in the fourth quarter was $1.0 million, or $0.03 a share, compared to a loss of $0.2 million in the fourth quarter of 2022. Adjusted EBITDA was $1.3 million in the fourth quarter compared to $2.3 million in the same quarter a year ago. For a reconciliation of net income to adjusted EBITDA, please refer to our earnings press release.
Casey Nelson: Turning now to our full year 2023 results, Syntec generated approximately $29.4 million in record net sales in 2023, an increase of 5.7% year-over-year compared to 27.8 million in 2022. From an end-market perspective, our communications segment grew by more than 100% year-over-year and represented approximately 18% of total sales compared to roughly 0% of sales in 2022. Communication segment growth was driven primarily by demand for space-based satellite optics that leverages our expertise in metal-based optics. Our ability to meet nano-level design requirements at scale is needed to meet satellite launch strategies to provide laser-based space communications to customers almost anywhere on the Earth.
Casey Nelson: Communication revenue represented approximately $5.0 million of 2023 net sales, up from $0 in 2022. Our communication revenue increased year-over-year, mainly as a result of macroeconomic demand for space-based communications by end customers. From a defense perspective, our sales of $7.5 million increased 1% year-over-year compared to $7.4 million in 2022. However, defense revenue remained relatively flat as our product mix shifted to increases in communication and offsetting decreases in consumer and biomedical end markets.
Casey Nelson: Biomedical revenue of $9.6 million decreased 18% as a percentage year-over-year compared to $11.5 million in 2022 as we experienced more normalized demand after the COVID-19 period. Consumer revenue of 7.0 million decreased 28% as a percentage year-over-year compared to $9.0 million in 2022, as we experienced reduced demand giving increased interest rates and persistent inflation, the macro environment for the consumer sector. Our 2023 gross profit increased 29.3% to $7.9 million, as compared to $6.1 million in 2022.
Casey Nelson: The increase in gross profit was primarily due to a change in revenue mix that included a larger percentage of higher-margin product sales and engineering service revenue, together with a relative reduction in some key components within our cost of goods sold. Cost of goods sold for 2023 was $21.5 million, compared to $21.7 million in 2022. The decrease was driven by disciplined control of labor costs.
Casey Nelson: In 2023, general administrative expenses were $6.4 million, compared to $6.7 million in 2023. The decrease was driven by disciplined control of G&A expenses, primarily due to cost containment for personnel and professional fees. Our net income for 2023 was approximately $2 million, or $0.06 per share, compared to a net loss of $0.4 million, or $0.01 per share, for 2022. Adjusted EBITDA, excluding other non-recurring items, was $5.3 million in 2023, compared to $4.5 million in 2022.
Casey Nelson: The company ended the year with 2.2 million in cash and 8.9 million in debt. Sintec Optics retains financial flexibility with access to an unused 4.4 million effective line of credit and a 5 million equipment line of credit.
Casey Nelson: Turning now to our first quarter 2024 results, Syntec generated approximately $6.3 million in net sales in 2024, a decrease of $8.9 million year-over-year compared to $6.9 million in 2023. In the first quarter of 2024, net sales were $6.3 million, decreasing from $6.9 million compared to the first quarter of 2023. This decrease was primarily due to a delay in receiving nearly 2.3 million orders spread across the biomedical... Consumer and Defense End Markets, offset by an increase of $1.7 million, and then Communication as a Market, year-over-year, 2023.
Casey Nelson: First quarter 2024 adjusted EBITDA was negative 0.7 million compared to 1.0 million in the first quarter of 2023. Contributing factors included 2024 trade show expenses, 2023 year-end audit expenses, and development costs of new products. The company ended the first quarter of 2024 with $1.7 million in cash and $8.8 million in debt. Syntec Optics retains financial flexibility with access to an unused $4.6 million line of credit and $4.8 million equipment line of credit.
Casey Nelson: Our net loss for the first quarter of 2024 was approximately $1.2 million, or $0.03 per share, compared to net income of $0.05 million, or $0.00 per share, for 2023. Before turning the call back over to Al, I would like to take a moment to discuss our expectations for the second quarter of fiscal 2024. Our night vision optics showing increased customer demand continues to challenge us with a ramp-up to scale production to meet the plan for scheduled deliveries.
Casey Nelson: Our team continues to increase its weekly yield rate to align with customers' demand, given macroeconomic tailwinds, such as global conflict and increasing defense spending. However, our space communication optics, on the other hand, continues to provide significant year-over-year growth.
Casey Nelson: As such, second quarter 2024 revenue is expected to be in a range of $6.4 million to $7 million. We expect gross margin to decrease modestly on a sequential basis as production ramp-up is achieved on our new Night Vision Optics. Cost of goods sold and general administrative expenses for the second quarter of 2024 are expected to be in line with recent quarters. Looking at the full year, we expect revenue growth to accelerate as we go through the year, with particular strength in our communications and defense end markets business in the second half of 2024.
Casey Nelson: Looking beyond revenue, we expect gross margin to increase modestly on a year-over-year basis and expect operating expenses to grow, but at a slower rate than revenue. And lastly, we expect to be net income positive in the second half of the year. With that, I'll turn the call back over to Al to provide some additional color on our growth initiative.
Al Gabor: Thank you, Casey. Here's a summary of recent product launches and product ramp activities that we provided with our earnings release. Syntec entered the communications and market with the launch of space optics for lower orbit satellites and record revenues of 5.3 million in the year 2023. It launched three new products in defense in the third and fourth quarters of 2023. Launched one new product in high-precision biomedical optics in Q4 of 2023, launched one product in biomedical disposable optics in Q1 of 2024, launched one product in telecommunications microlens arrays in Q4 of 2023, and created a higher volume production line in Q1 of 2024.
Al Gabor: The calendar year, calendar year 2023 was marked by record-high net sales and growth within new and market communications, while effectively managing the technical challenges of multiple product launches across various lines of capability. Sintec Optics leveraged a robust platform and continued to innovate, offering products for existing markets with existing customers using existing capabilities. Space Optics Reached Higher Production Levels. High-precision biomedical emitters achieve ramp, and low-weight hybrid optics used in night vision goggle systems are finalizing volume production OEM acceptance. Production ramp-up happens after the product comes off a high volume line, meets customer specifications, and is integrated into the end product by the customer for final OEM acceptance.
Al Gabor: Even though some new products meet customer specifications, the OEM and customer may introduce new or additional parameters extending the product ramp time. Our core organic growth strategy also involves inorganic growth with complementary businesses to augment our existing unifying platform. Sintec plans to run a disciplined process to arrive at a target list of companies it would like to acquire.
Al Gabor: Selected companies with a good management team and ownership can apply industry findings to build the next great public company that enables light. Such companies will augment Syntec's existing platform to add more diverse end markets, participate in stable earnings growth, and expand our optics-enabled pipeline. There are tailwinds for most of Syntec's products. Syntec has already highlighted the excitement in the market for ubiquitous global communication that could be provided by space optics, as evidenced by weekly satellite launches. In the defense space, every ounce that can be reduced from a soldier's kit can improve effectiveness in the field.
Al Gabor: As global conflicts increase, the demand for high-performance night vision optics continues to increase. From a magnifier perspective, lower-weight optics make field systems more effective by reducing strain for end-users. Thus, reduction in weight is a macro-level demand across all end markets.
Al Gabor: Thermal-enabled vision provides operators with additional effectiveness as additional wavelengths can be detected through operator optical systems. Anytime additional wavelengths can be leveraged by operators, increased safety and situational awareness are enhanced. From a biomedical perspective, biomedical optics allows physicians to provide more precise care and generally better biomedical outcomes. Finally, if communications continue to move towards photon-based systems from electron-based systems, optical microlens arrays will continue to become increasingly important as a conduit for handling required bandwidth communication protocols and requirements.
Al Gabor: Syntec is confident that our company is well-positioned to deliver positive results. And as a result, we are uniquely situated to provide mission-critical optics to the ever-expanding light-enabled marketplace that enables roughly 11% of the global economy. Syntec Optics is very excited about where it is headed and the progress it has made to date with several product launches. Thank you again for joining us today, and we look forward to speaking with you in the next quarter. With that, I will turn the call over to the operator, who can close the call.
Operator: Ladies and gentlemen, thank you for your participation and interest in Syntec Optics. This concludes today's event. You may disconnect your lines and enjoy the rest of your day.