LightPath Technologies, Inc. (LPTH) Q3 2020 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the LightPath Technologies Third Quarter 2020 Financial Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please also note today’s event is being recorded. I will now pass the call off to Donald Retreage, Chief Financial Officer of LigthPath Technologies.

Good afternoon. Before we get started, I would like to remind you that during the course of this conference call, the company will be making a number of forward-looking statements that are based on current expectations and involve various risks and uncertainties that are discussed in the periodic SEC filings. Although, the company believes 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, 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 reconciliations in the company's SEC filings and press releases. Following management discussions, there will be a formal Q&A session open to participants on the call. I would now like to turn the conference over to Sam Rubin, LightPath's President and Chief Executive Officer. Go ahead, Sam.

Thank you and good afternoon. Welcome to LightPath Technologies fiscal 2020 third quarter financial results conference call. Our financial results press release was issued after market close today and posted to our corporate websites. Following my remarks, our CFO, Donald Retreage will further review our financial results and provide more perspective on key areas. We will then conduct a Q&A session. Now onto my remarks. I'm pleased to be able to conduct my first conference call with LightPath at the time when our quarterly financial results showed consistent improvement in many areas, as compared to prior year period and for most performance measurement as compared to second quarter of this fiscal year. All things considered, we find the results to be satisfactory, given the global economic conditions and the challenges some of our customers, employees and suppliers have been facing as a result of the COVID-19 pandemic. In line with previous updates regarding our operations during this time, as a designated essential supplier of the medical industry, all our manufacturing facilities in China, Latvia, and the U.S. remain open and production has been ongoing without any interruptions. Our global workforce has risen to the occasion to deliver solid financial, results while continuing to support customers new and recurring alike, and while keeping our workplaces, their communities and their families safe. And while we deal with current impact of the crisis on our daily lives, corporations, government entities and educational community alike are developing strategies surrounding this new norms in connection with life during and after COVID-19 and what might be required to support us going forward. In terms of LightPath products, this pertains specifically our infrared lenses used in temperature reading, heat imaging and sensing technologies. During the third quarter, we announced an awards totaling more than $1.7 million for thermal imaging lens assemblies used in medical and sensing infrared applications, many of which being utilized to combat the spread of COVID-19. This was just one important award we announced during the quarter. The more important question is how big this market opportunity maybe. Much attention and work has been put recently into developing safety protocols so that businesses and institutions may reopen and operate safely. According to reports, Amazon for one large enterprise, as an example, has commenced to use thermal cameras in its warehouses to speed up screenings, workers with fever, who could be infected with coronavirus. Such thermal cameras would use infrared lenses to measure how much heat people emit relative to their surroundings. Those devices are more efficient in requiring less time than conventional thermometers and do not require physical proximity to take a measurement. While Amazon warehouses in the U.S. have stayed open during the pandemic dependence, in France, for example, it was reported as a company had temporarily closed six of its procurement facilities due to risk from coronavirus. Thermal cameras for temperature measurement initially garnered attention in Asia after the SARS epidemic in 2003 when they were used in airports. Beyond critical venues, hospitals and difficult first responders, other facilities are interested in installing remote thermal sensing devices, including mainstream businesses. Other examples of companies exploring the use of thermal camera technology, include Tyson's Food Corporation and Intel Corporation. Hotels may also join this fray, perhaps led by Wynn Resorts, which announced it will be screening for temperature using non-invasive thermal cameras at all its hotel’s entrances. LightPath stands ready and is actively planning for this potential growth driver. This additional planning is needed since demand for a number of our key products lines has risen and intensified. As a result, consolidated of revenue for the third quarter of fiscal 2020 was $8.7 million, an increase of more than 10% as compared to third quarter of fiscal 2019. Growth was driven by demand our new line of BD6 infrared lenses going into medical market and similar sensing applications, as well as precision molded lenses for 5G and other telecom related applications. This trend more than offset the decline in sales to academic institutes that are temporarily closed and to other sectors experiencing weaknesses, such as consumer goods market, all of which are impacted by the restrictions imposed due to COVID-19. We have had a small number of customers hold or canceled shipments due to COVID-19. This represents less than 5% of the revenue for the third fiscal quarter. About half of those are temporary plant closures due to local stay-at-home orders in their respective areas. We expect that once the facilities reopen and they can receive shipments, they will take deliveries of those orders currently unfold. In respect to the impact of the situation on our operations and performance, we're pleased to report that we have not had any employee impacted and thus, we continue to take all precautions to ensure that our employees remain safe, that our business operations continue. We also continue to evaluate the situation with our supply chain and to look for ways to mitigate any risks we can foresee. While we are able to continue operations with non-manufacturing staff working from home, this arrangement may ultimately have an impact on delaying some long-term projects and some research and development initiatives. Moreover, there has been no material or negative sustainable impact on our business to report, but we recognize the situation is fluid and we must remain vigilant with the preparation of contingency plans. LightPath has entered this COVID crisis in a position of strength that has enabled us to effectively approach the present challenges and opportunities. We completed the transition out of our New York facility by consolidation of our facilities, which removed a lot of additional costs and non-recurring expenses were incurred in prior year. Ongoing cost reduction and expense management initiatives along with a favorable revenue mix, led to a gross margin as a percentage of revenue coming in at 46%, 700 basis points higher than last year and above our low to mid 40% target range. Among our higher margin products are those sold into telecommunication markets, on the 5G front this has been a growth driver for LightPath for approximately the four previous quarters, after we earlier developed prototypes and product samples on an NRE basis. In effect, one can look at the NRE basis of -- the NRE projects as us being paid to develop new lenses that then go into 5G network installation. And now we have a library of products that customers can choose from. We have reported increased production for this application in fiscal 2019 and in 2020 to date. Most specifically production volumes for 5G related lenses increased 175% in third quarter 2020 versus the prior year period, and are up 195% year-to-date. Our will lenses have primarily been used for 5G network infrastructure. The 5G network is designed to connect virtually everyone and everything together in an IoT ecosystem. This includes, for example, machines, objects, and devices connected onto the 5G network that delivers higher multi gigabit per second, big data speeds, also low latency and increased availability by a smaller, but significantly closer together network access point. More access points mean more network equipment installation, which in terms means more sales of our precision molded lenses. Precision and quality to ensure the highest service level standards is paramount. So, we trusted and experienced partner like LightPath enables our customers to deliver on their promises. In China alone where we have been selling our lenses to equipment suppliers, carriers are expected to deploy approximately 500, 000 5G base stations in 2020, with approximately 200,000 installed through March 2020 according to research. In the U.S. Verizon announced in March that it is increasing its capital venture guidance range to approximately $18 billion in 2020 to accelerate its transition to 5G and help support the economy during this period of COVID-19 induced disruption. Looking at the current stress to its networks and new norms post COVID-19 where millions of additional people may continue to work from home, Verizon has been analyzing usage patterns and there's interesting anticipated changes in demand now and in the future. The coronavirus has given rise to remote workers and has advanced requirements for bandwidth, more robust optical technologies in the U.S. and globally. Again, this appears to be a trend benefiting telecom equipment OEMs and in terms of LightPath as a source for high volume, high quality lenses for optical network. Strong demand and order execution led to our 12-month backlog at March 31, 2020 setting another record, $20 million with forward visibility bolstered by our backlog beyond the next 12 months. This is a result of successful execution of our strategy for developing customer relationships, with proprietary products and entering into long-term supply agreements, primarily in our new growing infrared business. Based on our order book, which may vary depending on how the economy plays out and our background levels, we may need even more incremental production capacity. Capital expenditure for fiscal 2020 are on track, but subject to an increase if new order volume continues at the current pace. As a key focus area, we continue to invest in and optimize our IR glass production, coating and molding capacity to meet the increasing demand for both our BD6 based infrared products and telecommunication products. Both of these products areas are expected to continue to grow as the year progresses. A full disclosure on transparency. There is a lot of work remained to be done to fully capture and execute the near and long-term market opportunities. And I would like to caution that amid COVID-19 we may be subject to unforeseen circumstances which maybe out of our control, including changes in demand, additional expenses for health and sanitary purposes and closure of either our suppliers, customers or even one of our facilities. In these uncertain times, it remains our intent to remain agile, continue to develop our approach to the markets we serve, follow-up products roadmap, improve our processes, manage expenses and leverage our strong financial condition for growth. Again, we are working from a position of increasing strength such that we have been investing in the business while continuing to reduce our debt and even adding albeit, moderately our cash that would keep balance sheet measures have improved in stride. With our expanding products portfolio, addressing several different markets, a globally diversified sales distribution platform, manufacturing in three countries around the world and solid financial condition, LightPath is well-positioned to provide high-quality, competitively priced optical components. We look forward to building upon the success achieved thus far in fiscal 2020, while remaining grounded in the realities that face all businesses, amid the present environment. And now, I'll pass the call over to our CFO, Donald Retreage, to provide some additional information and aspects of our first quarter financial results.

Thank you, Sam. Also I would like to mention that much of the information we're discussing during this call is also included in the press release issued earlier today in our 10-Q filed with the SEC. I encourage you to visit our websites at lightpath.com and specifically the section titled Investor Relations. Now, onto my remarks pertaining to the third quarter of fiscal 2020. Sam's remarks covered a lot of our financial performance, so I will specifically discussing key performance areas. Revenue for the third quarter of fiscal 2020 was approximately $8.7 million, an increase of approximately $803,000 or 10% as compared to the same period of the prior fiscal year. IR product revenue was $4.3 million or 50% of the total, up 12% from $3.8 million or 49% of the total in the prior year period. Visible precision molded optics, or PMO, product revenues were $3.9 million or 44% of the total, up 15% from $3.5 million or 42% of total in fiscal third quarter 2019. The balance of our revenues in the respective periods were from specialty products and non-recurring engineering projects, which vary greatly from quarter-to-quarter, but are substantially smaller contributions to our consolidated revenue. With respect to our margin profile, generally speaking, PMO products are small and almost entirely molded, so we have faster turnaround times, higher volume applications, and more automated processing. Due to these attributes, we historically have had margins averaging in a 40% to 50% range, 50% range. The IR product group represents a larger and faster growing market opportunity with gross margins lower than PMO. IR margins have historically been in the 20% to 30% range, with our new molded IR lens, which use our proprietary entirely developed BD6 material are on the top side if not able to go higher with efficiencies. BD6 products that are not molded maybe in the middle of the range and diamond turned germanium based products are at the low end of the range due to generally higher material costs and less automated manufacturing. As part of our gross margin improvement strategies, we have been aggressively working as marketing new products and for our new customers using our line of innovative BD6 lenses, while attempting to convert the existence possible germanium customers to BD6 customers. Molding technologies and processes are a competitive differentiator for LightPath, which provides in certain circumstances benefits to customers beyond the high gross margin contribution that we may enjoy. Gross margin in the third quarter of fiscal 2020 was $4 million as increased -- an increase of 29% as compared to approximately $3.1 million in the same quarter the prior year -- for our fiscal year. Total cost of sales was $4.7 million for the third quarter 2020, down from $4.8 million in the prior year. The lower total cost of sales is meaningful when you consider that the sales increase 10%, gross margin as a percentage of revenue was 46% for the third quarter of 2020 as compared to 39% in the third quarter of 2019, and 41% in the second quarter of 2020. The increase in gross margin in dollar and as a percentage of revenue is primarily driven by an increase in sales on the elimination of elevated costs, including labor, manufacturing and efficiencies and increase overhead expenses associated with the relocation of our New York facility in a prior year period. The increase in gross margin as a percentage of third quarter 2020 versus second quarter primarily reflects the revenue mix and other favorable variances. Worth noting is that yield issue related to our BD6 products which negatively impacted our first quarter 2020 margin was mitigated in the second quarter of 2020, and we have seen consistent quality in yield during the third quarter. With BD6 yield issue was behind us, we have been improving our factory utilization and increasing our volume production of lenses to the extent possible in meeting customer demand. Demand in aggregate has been strong. Although, there are pockets of weakness that emerge as followed by COVID-19, Sam addressed some of these stronger areas of our business. Demand for the commercial and industrial markets is lagging, particularly as supply chain issue prevent the OEM customers from following through on their fulfillment. We view this weakened demand is potentially short-term in nature, while we enjoy strong demand from secular or long-term market applications. Overall as is indicative of our higher revenue, our production volumes are growing. In the third quarter of 2020 we produced 904 total lenses, up 41% from 642 lenses in the third quarter of 2019, an increase of 4.2% from 868,000 lenses made in the second quarter of 2020. Unit volumes sold were up 29% as compared to the first quarter of fiscal 2020. During the third quarter of fiscal 2020, total operating expenses were approximately $2.9 million, a decrease of 135,000 or 10% as compared to $3.1 million in the same period of the prior fiscal year. SG&A costs decreased by 7%. Third quarter in 2020 reflects the elimination of $103,000 non-recurring expenses from last year, which are related to relocation of the New York facility, as well as other reduced personnel and overhead costs from synergies. New product development costs decreased by $93,000 or 18% due to the shifting in personnel to the newly created product management function, which is included in the SG&A. It should also be noted that expense in the third quarter of 2019 were reduced by gains on disposal of equipment of approximately $136,000, which is masking some of the savings when compared to the total expenses in the third quarter of 2020. Capital investment in 2019 -- in fiscal 2019 to increase our vertically integrated regional production capacity, so enable us to reduce capital expenditures so far this year. Capital expenditures, including equipment financial releases were $1.5 million for the first nine months of fiscal 2020, down from $2.1 million in the fiscal 2019. As we're much strength in production capacity in certain lanes, a nice challenge, we may need to moderately add more CapEx for new machines with corresponding increase in personnel. Meanwhile, net cash provided by operation was $1.9 million for the first nine months of the year and about half of that coming in the third quarter alone. This compares with net cash provided by operations of only $26,000 in the first nine months of the prior year. Improving cash flow from operation gave us the continued confidence to invest in all facilities. Total debt including financial leases were reduced by nearly $737,000 or 11% in the first nine months of fiscal 2020 from June, 2019. Our cash balance at March 31, 2020 was $4.4 million compared to $4.3 million of December 31, 2019. And finally, our consolidated corporate income tax in the U S is shielded by our net operating loss story forward benefits of approximately $73 million at March 31, 2020. But we do have to pay income tax to the countries of certain firm subsidiaries. With the higher revenues from margin and management of expenses, net income for the third quarter of fiscal 2020 was $816,000 compared to the net loss of $352,000 for the third quarter of fiscal 2019, which was negatively impacted by elevated costs, including labor costs, manufacturing inefficiencies, and increased overhead expenses associated with the relocation of the New York facility. We are operating far more efficiently unprofitably, having completed the transition, improve of production use and increased revenue. With this review of our financial highlights on recent developments concluded, I will turn over to the operator, so we may begin with our question-and-answer session.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Today's first question comes from Marc Wiesenberger with B. Riley. Please go ahead.

Thank you. Good afternoon and Sam, congratulations on your new role. I was wondering if you could maybe talk about some of the order trends that you're seeing in the beginning of April and May, relative to the orders you guys are seeing in February and March.

Sure. Thank you first of all. We're seeing definitely a continued growth in the 5G, I think that is a long-term plan that has been created and executed in different areas, primarily in China that they clear about the plan and have communicated publicly how much investment is going to go into that. And therefore, the trend on the orders really follow what has been communicated publicly for the majority of parts. On the infrared, we see what is still a strong demand in requests for us to increase capacity and deliver more lenses to go into the contactless temperature measurement. At the same time, we're seeing -- we're starting to see more potential players looking into developing temperature measurement devices and acquiring -- if it's -- still at small quantities, devices and lenses to incorporate into their designs. It is still difficult to know how much of this temperature measurement growth that we're seeing is sustainable and for how long. It could be growing much more as we described earlier, if really many locations started rolling out temperature measurement devices in their facilities, and it happens to be that our customers are the ones that would be providing those temperature measurement devices. It's also could be, at the same time, we're looking at the spike of six months and then six months everyone will have enough measurement devices, something might change regarding the virus, who knows. And then the characteristics of that market will change from our point of view.

Understood. So, maybe if you could boil that down to kind of how should we think about maybe growth in your fiscal fourth quarter, as well as maybe what are your longer term expectations for growth of the business and maybe some of the respective verticals.

Hi, Marc. This is Donald. We expect our growth trend to continue. The question that we ask, let's address fourth quarter first, because it's liquid, as I mentioned and hopefully we do not have any more close. We expect this trend on the third quarter to continue in general, as far as the growth is concerned, which is showing overall between of 5% to 7%. Again, that's extended to the second -- the first and second quarter in 2021, all -- again, how all this is going to plan out.

That's helpful. Thank you. And maybe can you talk about the pricing environment across your products what you're seeing and the dynamics at play that might be continuing over the next few quarters?

Well, as you know, we have this mix that traditionally we go through. Our PMO or precision molded optics, is holding its own. The price is generally declined. They decline anywhere from 10% to 18% on the average. That has been for the past three quarters for several reasons. Even though, we may still be enjoying high margins. Competition is one, and hopefully now with this, we'll have less competition, because a lot of businesses are closing or manufacturing less. But that's -- as the volume goes up, traditionally the ASP goes down a little bit. IR is difficult, because as you know, our molded, it's a little higher than the PMO average pricing, but far less than the IR and is volatile in the sense that we do a huge lens $200 and we do a lens half that size and it could be $50. But we see the trends for IR stabilizing or at least increasing getting better as the demand increase.

Yeah. That's really helpful. And just on that point, the elevated PMO clearly helped the gross margin along with some other things. Should we think about these kinds of mix and trends continuing over the short-term and the kind of gross margin level as well remaining kind of at this elevated level.

First, this third quarter elevated level is due to the full capacity. The efficiencies that we have were at full capacity at least from our PMO end getting to the rest. The second part, as you know, the closing of the New York facility did give us some savings. That all being said, I honestly don't expect a 46% as we saw there, as published out there. But I see us in a low 40s, it's quite possible that we'll keep everything again, if no businesses are closed and our orders continue similar to Q3, which we expect everything be normal.

That's helpful. Just two more from me. Talk about the supply chain issues that maybe you're running into as a result of COVID-19. And then the final one would be, you have mentioned increase in demand for new customers. Do you think you'll be able to leverage the relationship to expand sales into other product categories? Thank you.

Sure. In terms of the first part, the supply chain, there were some short-term impacts that we saw in China at first, while different parts of the country were under different situations or conditions. And at which point it took some vendors time to give backup or get all the employees back in or resume full operations after the Chinese New Year and the closures they had there. We have been seeing some similar things with some vendors outside of China. For example, in Mexico, we've had one vendor that was required by the government, they're closed down their facility early for awhile. We've had -- we've had vendors here in the U.S. that have had to scale back the operation, scale down operation to even support how many people they can have to clean the building or just how many people can come in and operate. For the most part, this has not affected us that much. The couple of vendors where we have been -- hasn't been able to get parts from, we have alternate vendors for. We have a team here that looks regularly at the different risks and how things unfold and goes out and finds vendor where needed -- vendors where needed. The only other effect is the supply chain is the shipment. And this is both because the shipping companies have to scale back the operation and because like us, many other companies want to expedite shipping or want to get faster from place to place. So, for the most part, the shipping carrier, that we use, have some delays. Those delays typically on the order of adding one or two days to shipments, with the exception of one shipment that took a bit longer. But again, we were able to recover from that quickly. The second part of your question, sorry was?

In terms of -- you mentioned demand for new customers leveraging that.

Yeah. It's definitely interesting. For the most of the IR and the PMO are fairly separate in their customer base, in a sense of -- in a technical perspective, those are different wavelengths, typically are used for very different things. What we're seeing is that the thermal measurement segment is getting attention on many players in the field. Players that believe that they can leverage the knowledge they have in infrared imaging going different aspects of optics to now develop thermal tested measurement devices for measuring contactless temperature. All of those have some business in optics already. Many of them have significant business in the infrared. So, there's definitely a very good potential there to engage with those customers in other parts of their businesses as things unfold.

Very helpful. Thank you. And best of luck.

Thank you.

[Operator Instructions] We show no further questions. I'd like to turn the conference back over to Mr. Rubin for any final remarks.

Thank you. To conclude our third quarter 2020 conference call, I'd like to leave by reiterating our focus on building upon success achieved thus far in this year. While remaining grounded is the realities that face all businesses and at the current and present environment, LightPath is well-positioned to address the challenges and opportunities that lie ahead. I'd also like to thank our employees that continue to work hard and deliver products needed for the fight against the COIVD-19 and continue to come to work and perform their duties in an exceptional way. Thanks again for participating on today's conference call. We look forward to speaking with you next quarter.

Thank you. This concludes today's conference call. You may now disconnect your lines, and have a wonderful day.

Thank you.