LightPath Technologies, Inc. (LPTH) Q3 2013 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the LightPath Technologies Fiscal Third Quarter Earnings 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 note this event is being recorded. I now would like to turn the conference over to Ms. Dorothy Cipolla, Corporate Vice President and Chief Financial Officer. Please go ahead.

Thank you, and good afternoon. Welcome to the LightPath Technologies, Inc., third quarter fiscal 2013 financial results conference call. Our call today will be hosted by Mr. Jim Gaynor, President and CEO. Following management’s discussion, there will be a formal Q&A session open to participants on the call. Before we get started, I’m going to review the Safe Harbor statements. Today’s conference call may contain certain 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. All statements, other than statements of historical fact, included in today’s presentation are forward-looking statements including statements regarding the company’s business strategy plans, objectives, and statements of non-historical information. Although the company believes the expectations reflected in these forward-looking statements are reasonable, they do involve assumptions, risks, and uncertainties and these expectations may prove to be incorrect. You should not place any undue reliance on these forward-looking statements, which speak only as of today, May 2, 2013. All forward-looking statements attributable to the company or persons acting on its behalf are expressly qualified in their entirety by these factors. Other than as required by securities law, the company does not assume any duty to update these forward-looking statements. With that out of the way, it’s now my pleasure to introduce Jim Gaynor, President and CEO of LightPath.

Thank you Dorothy and welcome to everyone, who has joined us on the call today, and we appreciate your ongoing interest in LightPath. I’ll open with an overview of the third quarter operational results, and then turn the call over to Dorothy for a more in-depth review of our financials. After some closing remarks, we’ll open the call to your questions. We were very pleased with the results we achieved this quarter with bookings over $3 million, raising the 12 months order backlog to over $5 million, 14% higher than that last year at this time. Shipments of $2.85 million and gross margin of 47%, 15 percentage point improvement in gross margin as compared to the third quarter of fiscal 2012 was a result of cost reductions from our glass conversion program, lower costs, yield improvement and direct labor productivity improvement. We also benefited from improved overhead absorption as we continue to increase our manufacturing volume. These continued improvements resulted in a positive operating income for the quarter of $56,000, which bring the operating income for the year-to-date number to slightly above breakeven. Our revenue growth continues to be driven by the telecommunications sector, specifically the need for expanded infrastructure to support mobile Internet demand; our industrial tool business, which benefited from an improving Chinese market, demand for fiber laser delivery systems; and our entry into the digital projection market Our goal is to accelerate our top line growth and we are rigorously pursuing opportunities to further expand our current accounts and develop new ones. We believe the themes of mobile internet growth, recovery of the Chinese industrial tool market and new production applications bode well for our long-term growth. Even though overall markets are still weak and somewhat choppy, we have been able to grow our business 51% from 2009 through 2012. Our product offerings, which serve a diverse group of end-markets, have found growth opportunities for our core business in precision molded optics. We are also building a presence in the infrared market. We will continue to work hard to ensure that we are positioned to capitalize on the many opportunities we see ahead for our products and technology. I will now turn the call back over to Dorothy for the financial review.

Thank you, Jim. I will now review our fiscal third quarter 2013, which ended March 31, followed by the discussion of our nine-month year-to-date financial. Revenue for the third quarter increased approximately 3% to $2.85 million, compared to $2.78 million for the third quarter last year. The increase over last year was attributable to increases in sales of custom optics and increase in our industrial tool products and an increase in our Gradium product lines. Growth in sales for the next several quarters is expected to be derived primarily from the precision molded optics product line, driven by the telecommunication sectors, specifically the need for expanded infrastructure to support mobile Internet demand. Our industrial tool business which benefited from an proving Chinese market demand, fibre laser delivery systems and our entry into the digital projection market. Infrared products now be designed and introduced to the market are expected to accelerate the company’s growth more meaningfully beginning in the fourth quarter of fiscal 2013 and continuing in fiscal 2014. As Jim indicated, gross margin percentage in the third quarter was 47%, the highest expense in fourth quarter of 2010. Results were compared sequentially with 43% in fiscal second quarter 2013 and is up 32% a year ago. Total manufacturing cost of $1.52 million, decreased approximately $373,000 from a year ago period and were down sequentially by $128,000 from $1.65 million in the fiscal second quarter 2013, and down from $1.7 million in the first quarter. This reflects our continued success implementing cost reduction to our manufacturing overhead. Direct cost, which include material labor and services were 23% in the third quarter flat from 23% of revenue in the second quarter 2013 but down from 24% of revenue last year. This reflects increased leverage and higher productivity. During the third quarter, total…

Thank you, Dorothy. I would like to take a moment to review some of the key accomplishments of the company beyond what the LightPath team has accomplished in this current quarter. As I mentioned earlier, over the last three plus years, we’ve grown the business by 51%. We have lowered our manufacturing cost significantly, we’ve added new markets, we’ve eliminated our debt, we’ve invested in innovative technology for future with infrared molding, we’ve added many new products such as our short wavelength green and blue lenses and infrared lenses. And we brought the company to a profitable position. As a result of these and other achievements, we have found a diverse group of end markets for our core business and positioned the company for continued growth in the future. I want to be a little more specific about the potential for this growth and why we’re excited about the future. With the use of 51% over the last three years, we’ve been growing between 12% and 17% per year on average with weak market conditions. Secondly, our financials continue to improve and we see no reason for that to change going forward with the programs we have underway. And third, we positioned the company well with multiple opportunities across the first markets. With industrial tools we have put the products into new products such as two-dimensional scanners, gun sights, tool guides, fiber laser delivery systems, et cetera. In telecommunications, we’ve qualified over eight new lenders for optical networks being built to support demand driven by mobile Internet application. And from infrared optics point of view, we brought to market a molding process that is repeatable, volume producing, lower cost alternative for infrared optics. So you can rest assure that the team at LightPath is committed to continue our efforts to make LightPath a successful enterprise and capitalize on the opportunities the company has before. I’ll now open the call to any questions.

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions) Our first question will come from [Michael Diet], a private investor. Please go ahead, sir.

Hi, Jim and Dorothy. Great to hear the report. And, hello?

Yeah, hi. We’re here.

Great, great, great. Well, following up on historic questions I’ve had, first, I’m curious about Europe and I guess there is a show coming up in Munich and I wondered what the prospects are particularly in the IAR and maybe digital projection areas.

We are going to that show, we will be there and we do that show jointly with our master distributor in Europe, AMS Technologies. So we do that with them. That’s generally a pretty good technology show. And we usually get a quite a bit out of that. To follow-up on the laser projection, we are continuing to supply products to few customers, we’ve gone into the space and identified about eight or ten players who build the kind of equipment. They’ve used a similar technology that matches our products. And we are actively quoting them and I think we’ve actually booked some orders with one or two of those guys that happened to be in China. So I think we see great things for that and that’s a growing opportunity for us in one other things that where we see the ability to continue to expand our base business with new applications and into a slightly different market space for us. On the infrared side, Mike, we are continuing to make good progress. We have (inaudible) position where we’ve got product into five or six major players where they are going through a qualification process and we expect some significant business to develop out of that over the next three to five months. These are guys like Flair, like L-3, like General Dynamics and those kinds of people where our products is being used in their devices and those will very from thermal imaging type devices to fire fighting safety equipment, to thermal weapon sights. I think that it could be substantial volume coming from that kind of thing, once those products go to production.

Some of us saw the infrared with the Boston Marathon work, is that the kind of application that you are about the flair thing that they said they used?

Absolutely, yeah, the thermal imaging device its not one that we currently I mean that's a little bit bigger camera than we participate in, but yeah that's the same technology and it's nice to get some publicity on – albeit not the right kind of event to have that happened.

Exactly. You’ve mentioned the GRADIUM partner and taking a little time to get going, but I think. Dorothy said some of the sales were coming from that, is that solidifying a little bit better?

We were still working with our business there, working through some technical challenges, but I think we'll get those all. But we did see an uptick in the business in the last quarter, but really have much to do with that, I just put there are some strength in that marketplace, and we were able to capitalize on it. So we’re in good position there, this is a business – it’s not a huge market, but it has extremely good margins far us and so it’s a nice cash generator for us.

Great. At the Annual Meeting you mentioned really wanting to look out for some national salespeople, I wonder how that recruitment been going?

Well, we're very actively doing that particularly in the infrared space, we've been interviewing and I believe one of the things and we did, we just had the Defense and Security show actually just going on this week and we really expect to find some good leads out of that to pursue. So I think we will find some good candidates for that in the infrared side. On the other side of the business, we are building up the infrastructure here in Orlando. We are putting in more insight sales people that would deal with the smaller business, the small and medium size customers and then free up our outside regional sales people to handle major accounts and do more cost cutting for new business and new applications. So we are in the midst of making those changes and that will continue, but that’s something that I think will get solidified in the next several months.

Great. And I also saw that Orlando, the university was doing something on open photonics I think that was the word open sourcing, does that have any bearing on your business?

Not directly. We do participate in the university, but in that particular program we are not.

Great. Thanks very much.

All right. Thank you, Michael.

And our next question will come from Bhakti Pavani of C.K. Cooper & Company. Please go ahead. Bhakti Pavani – C.K. Cooper & Company: Hi, Jim. Hi, Dorothy.

Hi, Bhakti, how are you? Bhakti Pavani – C.K. Cooper & Company: Congratulations on the operationally profitable quarter.

Thank you. Bhakti Pavani – C.K. Cooper & Company: Taking a look at the top line, the top line still seems to be lowest for the fiscal ‘13. What is your strategy to grow the top line and also on the last conference call, you had mentioned that you have changed your sales strategy which you just mentioned that you are hiring more production people. Is that helping in improving the sales or has that helped in improving the pipeline, can you just comment on that please?

I think the intention for the sales organization change is to help that, I think it's little early on to let say whether it's work as we have forecasted, but we still believe that’s the right thing to do. So I think time will tell on that, but that's the direction we are going. In terms of your sales volumes, the things that I outlined in the opening remarks or in the strategy that we see, we see opportunities in the laser projection area, and we see some recovery in the industrial tool markets in Asia, and China you hear good and bad things gone on there, but for our markets they seem to be more positive to negative, and we were seeing increasing business there. And then as we continue to push into the infrared space, we really expect that to be a bigger driver of the sales going forward. So with that strategy we continue to leverage the base business with PMO visible side of the business, and then develop the infrared business to support the growth is the direction that we’re trying to go. Bhakti Pavani – C.K. Cooper & Company: All right. Also that you mentioned about China coupled with there is news that China manufacturing is going to slowing down does that have any impact or bearing on LightPath business?

It can, I think what we're seeing is may be contrary with some of the news reports you hear is, we’re seeing some recovery in the market that we do and some of that comes from two of these scanners is a relatively new product is coming to market is big in China the 2D versus the one-dimensional scanners required a higher quality optic, which means that they are much more interested in use of an aspheric solution, and they are little higher price. So that’s a very good thing, because that’s an up and coming deal for an application for us. In terms of they are still doing some constructions starts to pickup a little bit in China that drives a lot of the tool, industrial tool type applications. And then the other driver is coming from fiber laser delivery systems, which use these laser diode assemblies, and that is also a big driver. Now in addition to that we’ve got some pretty good business in the laser diode type application in the U.S. with the gun sights there is a lot of strength there, which I guess people are buying a lot of guns as a result of the potential regulations they fear might be coming, so that system seems to be blooming right now. And then the – again the fiber laser delivery systems we had some very major customers that take a lot of product. And we have one major customer that we are delivering about 45,000 lenses a month today, who is opening three new plants to expand his capacity in fiber laser delivery systems and then these laser diodes assemblies that he built for us. And those plants are scheduled to open in this summer. And so we could see almost a doubling of that business from that single customer going forward. So we believe that to becoming as well. So with a lot of potential growth, from those types of things and as we continue to lower our cost, as we’ve outlined, then that sort of keeps the margins improving and also gives us a little more price flexibility, so we may be able to drive even some more volume. Bhakti Pavani – C.K. Cooper & Company: Well it sounds good, the question on infrared, you mentioned that you have about 5 million to 6 million customers that are undergoing the qualification process, how – what is the timeline, once the product gets qualified, what is the timeline of receiving the order, how soon can we achieve some momentum in the infrared or expect some already there?

Well that’s – I wish I knew the definitive answer to that Bhakti we really expect to see some progress there in the next 3 months to 5 months. Bhakti Pavani – C.K. Cooper & Company: All right. On March 28 the company announced the debenture conversion and now the debt gone, what kind of capital investment are you currently focusing if you could share some color?

I mean I don’t think we are changing our capital investment in the strategy as a result of that, we continue to invest predominantly to support the infrared development and can bring our cost reduction programs such as the AR coding facility that we just recently put in, so we will continue to do those things and we will probably also be upgrading our tooling equipment as well. Bhakti Pavani – C.K. Cooper & Company: All right and my last question on the margins? How much is there any more room of the gross margins to go upward?

I think obviously as we continue to work on the cost side there is a little bit more margin but I think the kind of margins that we’re seeing currently are pretty representative of where we thought we could be in the upper 40s, it’s probably a pretty good place for us to be given the nature of the market and the kind of price points that we can achieve. Bhakti Pavani – C.K. Cooper & Company: All right. And my last question for the fourth quarter, can we expect the revenues to be reaching the $3 million mark or it’s still early to comment?

I think it’s early to comment. Bhakti Pavani – C.K. Cooper & Company: All right. Thank you very much.

Thank you, Bhakti.

Our next question will be from (inaudible) a Private Investor. Please go ahead.

Hello, Dorothy and Jim.

Hey, (inaudible), how are you?

Thanks very much. I’m pleased to see the diverse number of plans in various fields and, of course, you are getting a lot of publicity with the defense security in sensing and way you are giving in-stock and so forth. The part that I would like to pursue a little bit is your entry into digital projection. It seems like last month there isn’t a lot of attention given to digital projection. I happened to be in the car and NPR last Tuesday had a report about a small theater in Ohio that was installing the new digital projection systems. And they said in that report that the sweeping men date from the Hollywood studio was getting everyone to convert to digital. And then locally the The Loft Cinema in Tucson had a fundraiser last weekend. You’ve had the National Association of Broadcasters and their Technology Summit on cinema in Las Vegas and the story goes on and on. I did notice that Sony teamed up with laser light engines out of Salem, New Hampshire, and they’ve got a new cinema projection system. And I’d like to have you tell me a little bit about where does LightPath fit into all of these. I know there are – the engines are designed to replace the Xenon lamps. Are you in that part of it or on the front end, I just need to have some sense of where we are?

I think, what we do is we provide the optics that focus the line to cover made and focus the light come and out of those laser diodes are red, green and blue lasers. So we’re in with Lightbox what they called the Laser Lightbox.

Okay

And that laser Lightbox is replacing the illumination and the projector so we’ll basically replacing the bulbs

Okay.

And using a laser technology we’re also kind of people as you mentioned on the kinds of people little bit sold the product

Okay.

Laser light engines and those of people but it doing those things or the customers that we are dealing with.

So you’re going in and doing the red, green and blue the RGB.

Determine the optics with going to the …

Optic for those

For those diodes.

So it’s going to be more than one piece of glass in there.

Yeah I mean, some of these projectors we have in and excess of 80 lenders in the single projector

Excellent

So what they would is, they will have a number of green diodes and a number of red diodes and number of blue once and to give the illumination, I need the stack those things up and make multiple panels and this 80 type some designs there is up to 80 optics just for that in addition to that in some places we are also providing some of the mirrors and other optics were the projectors well and so we are trying to tie up as much business as we can in these devices the DV the optic supplier of choice for these equipment builders

Now I have red some place of the digital projection is available in about 70,000 can you go into those that are already and add your expertise (inaudible) there and add your expertise

Well, I mean – what I believe should happen here is the supply chain advantages and the advantages from digital technology once going to make this is, what’s making this a growing market, it could be I’ve seen some forecast would say from the system level, this could be a $1 billion market and growing at 30% a year for a while, it’s probably several $100 million market when we get down to the component level for the optics and things that we do, but that’s fine. I mean that’s a nice market application for lens manufacturer like LightPath.

Great, that’s very helpful. And lastly next month, I’ve read there is a projection summit in your neighborhood, is that something that you’re participating in or what’s that all about?

We kind of go visit to see what they are doing, but we’re not really participate to much and that’s more – it’s beyond so these are the guys trying to sell more projectors and cameras.

Okay, thanks very much

Thank you.

Yeah.

(Operator Instructions) The next question will come from Bob Ainbinder of Newport Coastal Securities. Please go ahead. Robert Ainbinder – Newport Coastal Securities: Congratulations Jim and Dorothy, very nice quarter.

Thanks Bob.

Thanks. Robert Ainbinder – Newport Coastal Securities: Absolutely first question relates to the customer, if that’s the customers name that you have in Japan that was very hard with the Tsunami that you thought you had lost, but they had come back and built the plant back and you’re looking forward to kind of bringing them back online, is that contributing factor to the increase in the backlog,

I think it is we’re – they have been booking orders again and those are for basically tunable lasers, used in the data communication and telecommunication networks that’s basically that was flooded with affected Fibernet, who is the contractor for these guys, and it took them quite a while to get back online, but my understanding is they are back on line, and we do see a nice flow of orders beginning to come from them again for that product line which was just ramping up into full production when that diaster occurred. Robert Ainbinder – Newport Coastal Securities: Okay, great so…

Taking a lot longer than we had thought and we expected to go back online, but good news is its back online now. Robert Ainbinder – Newport Coastal Securities: That’s great. Can you comment on where you are with the build out in Orlando and the capacity that you currently have to manufacture infrared?

Yeah I mean the first step that we put in place which is fully in place is what we call pre-form manufacturing, which is where we are preparing with less to be moulded and that was all outsourced and that’s a huge savings for us to be able to do that internally as well as it gives us quite a bit of flexibility and speed to be able to particularly in the developing business to change sizes and react to new opportunities. So that was the first stage so that’s in place. The second stage well is expanding the moulding capacity itself and that capacity installed I think to handle what we believe the forecasted volumes will be through the next year and we are currently building some new equipment to double that capacity. So I think we are on track there. So that’s kind of a state where we are Bob, we are doing some other things from a cost enhancement point of view but those things impact the yields in the process and the material cost and material efficiency. That was very good about that. Robert Ainbinder – Newport Coastal Securities: Okay great job. So we are looking forward to doubling the capacity again that’s great. As far as the coating equipment, is that – did you complete that, is everything in place now with regard to bringing back the coating in house?

The coating facility is up and running in Shanghai, we are successfully coating the first couple of coatings that they learned how to do. So with the project now is shifted more from a installation and capability point of view to qualification point of view the various coatings on the various materials systems we have, so we will spend, so we are going to get kind of a hybrid going on here. We were using the facility for production and we are in production on several of the coatings but also reserving some time in that equipment. We continue to qualify all of our coatings that we do – offer on all the different glass systems and that will be ongoing project over the next year, year and a half. Robert Ainbinder – Newport Coastal Securities: Well great. I look forward to the next quarter. Thank you so much.

Thanks Bob.

The next question will be from [Steven Jonathan], a private Investor. Please go ahead.

Hi Jim and Dorothy.

Hi Steve.

Hi Steve, how are you.

Thanks for you good report, the one thing that I always been hoping for as a big increase or bigger increase in the top line and why are – you have kind of an impact of $3 million a quarter?

Well, that’s a good question. I think we continue to try and drive that number higher all the time. We are at somewhat at the mercy of the market there. I think we – as we have been focused on the cost of the equation pretty heavily, I think we got that under control and we continue to try to drive new opportunities in there. It does take a while in these new applications for the product to get qualified and then move through that cycle to get into production, where it means something to us from a revenue generation point of view, most of our products are, what I call semi-custom, so guys comes with an application, we design something or modify a design, then it’s got to get tested and then his product has to click, and go to production as well, so you go through another type of cycle on his side. So it takes a while.

Yeah.

So we continue to build the [buyer], and as I said we have been growth the business, on average 12% to 15% through a period of very unfavorable market condition. So I don’t think that’s shabby, I know it’s not, we’d all like but we’ll continue to push it forward.

No, it’s not shabby and the profit of that is fully impressive.

Okay.

Did you say something about the, just how – what is the revenue per projector in the projector – digital projector market, those (inaudible) what is the add up to projector?

The average selling price in those things today is probably around $3.5 to $4 a lens. So if you go 60 to 80 times, that’s where we probably need to project. This business we believe could grow to a couple of million dollars a year and we think that that could happen in the next one to one and half years.

Wonderful. And then can you say something about catastrophe, I can hardly pronounce the word. To what extent our LightPath lenders use and may be catastrophe devices based on detection.

That is an application. We do a lot of medical type instruments and that’s one of the areas particularly in the infrared that we see some application where it means that type of technology that can be used for a number of inspection type criterias. The finding element is certainly – some of the lenders that we call QCL lenders, which are Quantum Cascade Lasers are used in that type of sensing technology that’s used and some of the applications are through the TSA for detection of explosives so et cetera to those kind of materials. So that’s an up and coming application and we will – that fits some of the optics that we do.

In the broad array of products manufactured by firm, we are mostly on the (inaudible).

From clear’s point of view, we are doing more phonography which is more in the thermal energy, those type of applications. So I think that tends to be more where clear as apposed to more instrumentation type things that, in fact commodores in that type of technology are applying.

Thanks so much. Talk to you next quarter.

Thank you, Steve.

And ladies and gentlemen showing no additional questions in the queue. This will conclude our question-and-answer session. I would like to turn the call back over to Mr. Gaynor for his closing remarks.

All right. Thank you. I would like to thank everybody for joining us today and I also like to thank the team of LightPath for the hard work and the excellent results that we continue to produce and we will continue to update you on our progress on our next call. So thanks everybody for joining us today.

Ladies and gentlemen, this concludes the conference. Thank you for attending today’s presentation. You may now disconnect.