This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk02: Good afternoon and welcome to the LightPath Technologies Fiscal 2021 First Quarter Financial Results Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal the conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone. And to withdraw your question, please press star then two. Please note, today's event is being recorded. I will now pass the call off to Don Retriege, Chief Financial Officer, Lightpath Technologies.
spk06: Thank you. 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 risk and uncertainties, including the impact of COVID-19 pandemic 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 therefore, there can be no assurance that the results would be realized. In addition, references may be made to certain non-journally 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's discussion, there will be a formal Q&A session open to participants on the call. I would now like to turn the conference call over to Sam Rubin, LightSpath's President and Chief Executive Officer. Please go ahead.
spk05: Thank you, and good afternoon. Welcome to Lighthouse Technologies' fiscal 2021 first quarter financial results conference call. Our financial results press release was issued after the market closed today and posted to our corporate website. Following my remarks, our CFO, Donald Routridge, 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. Strong sales performance in the first quarter of fiscal 2021 reflects our continued trajectory of growth and performance improvements, as well as initial impact of the strategic review we presented when addressing our year-end financial results. Our growth and strong performance can be seen both sequentially compared to the fourth quarter of fiscal 2020, as well as compared to the first quarter of last fiscal year, a quarter in which we suffered from significant operational challenges that impacted results in that quarter. Despite the coronavirus pandemic, which has disrupted supply chains and caused an economic upheaval, as an essential manufacturer, we have been able to deliver strong results and have positioned the company for more profitable and long-term growth. Against the backdrop, of the pandemic and other socio-economical issues, there have been many challenges. I would like to commend our global staff for their resilience, commitment, and continued effort to support our customers while adhering to health and safety protocols to protect our coworkers and their families. Sales of all major product groups increased in the first quarter of 2021 on prior year period. Most notable has been the demand for our PMO lenses for the 5G infrastructure build-out and from our vertically integrated manufacturing platform for optics and optical assemblies made with our own BD6 material. We shipped approximately 1.3 million lenses in the first quarter, another record for the company, which is an increase of 105% from 600,000 lenses in the first quarter of last year, and 9% increase from 1.2 million lenses in the previous quarter. To meet the increasing demand for optics, we have been adding capacity through investments in equipment and process improvements in different areas. Demand-based capacity constraints began to be revealed in the third quarter and continued in the fourth and first quarter, which is why we had front-loaded investments in our manufacturing for this year. Capital expenditure in first quarter 2021 were 1.2 million, nearly four times the amount spent entire year period, and more than 25 percent greater than in the fourth quarter. It is important to note, however, that reporting on capital expenditure is based on dates of invoices, and often there is a delay between the timing of decision and order, and the actual expenditure is booked. The additional investment in machinery and related operating personnel typically take several months until achieving full-scale output, where we see more meaningful margin contributions. As such, some of the growth in capacity and some of the expeditions are still related to investments initiated in fiscal 2020. For the time being, Although we have added a production capacity in the fiscal year to date, we remain constrained on certain product lines amid the growth in both revenue and total backlog. And we intend to continue to invest in areas we believe we can get suitable returns. Both revenue and total backlog increased 26% as of September 30th, 2020, as compared to the same time last year. While our capital expenditures in recent quarters have been focused on capacity increase, as we roll out our new strategic direction and as we continue to evaluate opportunities for improvements in the organization, we are likely to identify areas for investments that will yield improvements to our operations and hence to our margins, as well as allow us to attract new business that will help shape our future and yield higher returns. As we are still experiencing growth in demand for our core products, such as molded optics, as well as a desire to address the future direction and operational improvements, we might choose to invest at a somewhat higher rate than we had in previous years. This is also aligned to the improvement in our capital management, and hence the growth in our cash position, which we have focused on and will continue to focus on. I would like to now pivot and provide an update on our new strategic direction and company transformation. In this call and in subsequent quarterly calls, I plan to provide updates on activities we are taking and outcomes of to align the organization to our new direction and execute on this strategic direction. As mentioned on our previous call and in our latest 10K, we have identified that while we have served our customers well as a component company, the world around us is changing, and photonics as a technology is being integrated into more and more industries and applications. This leads to a change in the typical customer profile with an opportunity to create and capture more value if we focus on solving the customer's optical problems and needs rather than being a supplier of components. This is made possible not only because of the changes unrolling in our market, but also because of Lightpath's unique positioning as an innovative optics company with strong capabilities in both design and manufacturing of optics. To deliver on this, there are some activities and changes we are implementing. First, the sales process. Along the lines of what I had just discussed, and for the purpose of context, in the component business, we engage with the customers once they have a complete optical system design, such that the customers engage with us at the point in which they need to procure the component. In the solutions-oriented business, which we are moving towards, the process is different. We would ideally engage with the customers at an earlier stage, so that we are part of the design process. In other words, instead of receiving an optical design from the customer and fabricating the individual components for them, we are going to design the optical systems for the customer's systems and produce the entire optical assembly. To achieve this, we are implementing some changes in our sales process and structure. Although we will continue to work with and pursue business through our traditional processes that have been successful to date. We have created a new role of business development whose responsibility is to engage with customers early on and begin our interaction at the system specification stage. We have also established an internal rapid response team that is able to work with customers on their needs and turn around designs, or solutions quickly. Lastly, our sales team is switching from a product-based focus to an account-based focus, thus making the customers' need the center of attention as opposed to product or technology. Secondly, to be able to offer unique capabilities to our customers, and to be able to design and deliver great solutions. Our product development is now focusing on adding products and capabilities that will allow us to enhance the performance of the customer's system. One such recent example is the addition of a new high-index moldable glass to our product offering. Such a glass allows achieving higher numerical aperture, which in turn translates to better light collection efficiencies or tighter optical focus, all of which are in very important specs in optical system design. Third, as we focus on solutions that naturally mean focusing on higher value contracts with longer durations, as seen in the nearly $2.7 million contract we announced last February, which we will soon commence delivery against, Often, those contracts are multi-year contracts. In the past, we had disclosed at the end of each quarter our backlog for the forward 12-month period. This view did not include any longer-term supply agreements that extended beyond a one-year period, and that we expect now to see more of. As such, and to be able to provide a more complete picture of the outcome of those efforts, We will now be reporting our complete backlog and not the 12-month backlog we previously reported. It is our belief that this will allow investors to have a better picture of our progress with the new strategic direction. Additionally, as expected, we are also engaging into more solution-based opportunities with customers that have a higher unit value and longer-term engagement. Though we are early Early on in this new strategic path, we currently have in our pipeline a number of early-stage opportunities. Each has the potential of being a multi-year engagement with over $1 million of annual spend for each of them, which we see as a positive sign for the potential of this strategy. Finally, I would like to address the recent global developments related to COVID-19. While we have been lucky enough to not be significantly impacted by the situation, as I mentioned in previous calls, the dynamic nature of the situation leads to changing conditions and significant uncertainty. In the previous quote-unquote wave, we have seen some customers prefer taking delivery of products, whether due to change in demand or due to physical closure of their facilities. In this time around, we have not yet experienced such situations. However, we are seeing signs from some of our customers in Europe of potential reductions or order postponements pertaining to some demand during the time of this wave, which may impact future quarters. At the same time, sales to academic customers, which were significantly impacted in the previous wave, are now not showing the same pattern. Additionally, as we did six months ago, our teams are evaluating potential impact to our supply chains and will be adjusting our inventory levels for raw materials to ensure business continuity in our manufacturing. The results today The results announced today reflect continued sales growth, improving manufacturing efficiencies, and ongoing management of expenses. Our disciplined cash management has allowed us to hold a consistent cash balance at the end of the quarter from beginning of fiscal year at $5.4 million, despite the substantial increase in capital expenditures, while further reducing our total debt. Don will review our cash flow and investments in greater detail during his remarks. We are very pleased with the progress made in the first quarter of fiscal 2021 and are upbeat about future results and implementation of our strategy based on our strengths and our core capabilities to address the largest and fastest growing trends in our industry for visible and infrared solutions. Now, I will pass the call over to our CFO, Donald Retriege, to provide more details on our first quarter of fiscal 2021. Thank you, Sam.
spk06: First, I would like to mention that much of the information we're discussing during this call is also included in a press release issued earlier today and in our 10Q file with the SEC. I encourage you to visit our website at lightpass.com and specifically, the section titled Investor Relations. Now on to my remarks pertaining to the fiscal 2021 first quarter ended September 30th, 2020. Sam's remark covered a lot of our financial performance, so I will be specifically discussing some other key performance areas. Revenue for the first quarter of fiscal 2021 was approximately $9.5 million. up from $7.6 million in the first quarter of fiscal 20, and $9.1 million in the fourth quarter of fiscal 20. This marks the highest level of the first quarter revenue in the company's history. IR product revenue was $4.7 million in the first quarter of fiscal 21, or 50% of the total revenue, up from $4 million, or 52% in the first quarter of fiscal 20. Visible precision molded optics or PMO products revenue in first quarter fiscal 21 was 4.3 million or 45% of the total, up from 3.2 million or 42% of the total in the first quarter of fiscal 2020. The balance of our revenues for the first quarter was 491,000 from specialty products and non-recurring engineering projects which vary greatly from quarter to quarter, but are substantially smaller contributors to the consolidated revenue. Revenues from this group in the prior year period was $408,000, so we realized a 20% improvement. With respect to our margin profile, generally speaking, PMO products are smaller and almost entirely molded, so we have faster turnaround time, higher volume applications, and more automated processing. These products also are generally lower in price. We historically have a margin averaging in the 40s to 50% range. Of our two primary revenue reporting segments, PMO is the smaller group with the higher margin. The AR product group represents a larger and faster growing market opportunity. IR margins have historically been in the 20% to 30% range. Our molded IR lens, which use our proprietary internally developed BD6 material, will come in on the higher end of the margin range, and we foresee further increases to our margins within this category as volumes grow and efficiencies improve. As part of our gross margin improvement strategies, we have been more aggressively working at marketing new products and targeting new customers using our line of innovative BD6 lenses, while attempting to convert existing customers to the extent possible from using our germanium lenses to our BD6 lenses. As Sam discussed, we have been making enrolls with new and differential products, such as KPSF and 202, which offers a high index rating for the visible to near infrared spectrum that is very hard to achieve at a scale. So this will be a premium product group. For first quarter fiscal 2021, gross margins were 3.9 million, an increase of 61% as compared to approximately 2.4 million in the same quarter of prior fiscal year. Total cost of sales was 5.7 million, for the first quarter of 21, up from 5.2 million in the prior year. So, as the cost of sales were up 10% on a 25% improvement in sales, this is the result from some of our operating and leveraging strength. While impressive, we did benefit from certain operational challenges that impact results in the prior year period. which we estimated at approximately 2.5% increase in cost of sales and a 1.6% decrease in gross margin. Gross margin as a percentage of revenue was 40% for the first quarter fiscal 21 as compared to 32% in the first quarter fiscal 20. On the fourth quarter, we improved by one point. The increase in gross margin from prior year period was primarily driven due to higher revenue and volumes across all product groups. In addition, there were several factors that negatively impact the first quarter of fiscal 2020, such as increase in tariffs, the impact of which have since been mitigated. From the first quarter of last fiscal year and the fourth quarter, We're experiencing benefits from yield, improvements, and efficiency measures, which are all farther magnified as the volume of lenses produced continues to increase. In fiscal 2021, we shipped 1.3 million lenses. Up from the fourth quarter of fiscal 21, we shipped 1.2 million lenses. 905,000 total lenses in third quarter, compared to 643,000 lenses in the first quarter of fiscal 20. During the first quarter of fiscal 2021, total operating expenses were approximately 3.2 million, an increase of about 168,000, or 6%, as compared to the 3 million in the same period of the prior fiscal year. Selling general and administrative costs increased by approximately 4%, as compared to the same period of the prior fiscal year due to personnel-related costs associated with a moderate increase in headcount, particularly in filling positions that have been outstanding, as well as additional outside consulting services for projects related to operational improvements. Research and development related to new product development costs increased by 5%, which was needed to address the demand for advanced optical designs. Partially offsetting these increases were limited travel and marketing expenses from the COVID-19 restrictions, net of pandemic-related increased cleaning and safety expenses. Our consolidated corporate income tax in the U.S. is shielded by our net operating loss carry forward benefits of approximately $74 million at September 30, 2020. But we have to pay income tax to the countries of certain foreign subsidiaries. Income tax expense for the first quarter of fiscal 2021 was $435,000, as compared to $148,000 in the same period of the prior fiscal year. Taxes in both periods are primarily related to income generated by one of the company's Chinese subsidiaries. First quarter 2021 income tax also include Chinese withholding taxes of $300,000 associated with the intercomponent dividend declared to repatriate cash from China into the U.S. Only $100,000 of this tax has been paid as of September 30, 2020, with the remainder accrued. It should also be noted that while intercompany dividends are subject to withholding tax, the total income tax on the earnings of this subsidiary was still lower than it would have been using the normal income tax rate since this subsidiary currently qualifies for a lower Chinese income tax rate. Net foreign currency transaction losses due to changes in the value of the Chinese yuan and the euro against the U.S. dollar was $98,000 in the first quarter of fiscal 21, with no impact on the earnings per share, compared to net foreign currency transaction losses of 497,000 in the first quarter of fiscal 2020, for a reduction of two cents to the earnings per share. Net income for the fiscal 21 was 97,000, which was breakeven on a per share basis. compared to a net loss of $1.4 million or $0.05 per share for the first quarter of fiscal 2020. For the second consecutive sequential quarter, we had higher revenues, stronger margins, and controlled management of expenses. Income tax expense from the repatriation of cash from China resulted in a meaningful, non-recurring impact on earnings in the first quarter of fiscal 2021. This was not experienced earlier. For better comparability, we look at the EBITDA to provide important insight into our performance and progress. EBITDA of 1.4 million set a company record for the first quarter and compares to a loss of $236,000 in the same period of fiscal 2020. In addition to the operational progress that drove the improvement in EBITDA for the first quarter, there was also a favorable difference approximately $400,000 in foreign currency transaction losses. Moving to the balance sheet and cash flow related items, capital expenditures was $1.2 million in the first quarter of fiscal 21, up from $257,000 in the prior year period. Given that we have been running at near capacity, we intend to continue to invest and project capital expenditures for the year to be in the vicinity of $2.5 million for the year. Meanwhile, net cash provided by operation was $662,000 for the first quarter of fiscal 21, up from $450,000 in the prior year period. Total debt, including finance leases, was $5.7 million, which was reduced approximately by $308,000 in the first quarter of fiscal 21 from $6 million at the beginning of the fiscal year. This represents a 5% reduction since June 30th, 2020, and it's nearly half the amount of the debt reduction from all of last fiscal year. Our cash balance at September 30th was $5.4 million, consistent with the June 30th, 2020 balance, even though we reduced debt and made significant investment to increase our production capacity to deliver future revenue growth and increase cash flow. Finally, onto our backlog. As Sam mentioned, in accordance with our new strategic directives, we have taken a refreshed view of our key performance indicators for backlog. We have modified our disclosure from providing a 12-month order outlook to one that emphasizes our focus on long-term customer orders, such that we now provide total backlog for all firm orders. As of September 30, 2020, LightPath's total backlog was 20.9 million, an increase of 26% from 16.6 million as of September 30, 2019. It should be noted that it is natural for our backlog to fluctuate during the year as a result of the timing of such bookings of large orders and annual renewals. With this review of our financial highlights and recent developments concluded, I will now turn the call over to the operator so that we may begin with our question and answer session.
spk02: Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touchdown phone. If you are using a speakerphone, we ask that you please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Today's first question comes from Brian Kinslinger with Alliance Global Partners. Please go ahead.
spk03: Hi, good evening. Great results. can you talk about can you talk about i think last quarter you gave a manufacturing capacity number can you talk about where you are today and with the investments you're talking about for the rest of the year where will that be say mid 2021 or or at the end of 2021 you know what's your goal to get to our goal for the entire year as i mentioned is 2.5 as a firm number however
spk06: We will adjust accordingly based on the continuous flexibility of where logistically we need to adjust, number one, to choose for COVID-19, and number two, how we can better collaborate with our manufacturing processes.
spk03: 2.5 million was a CapEx number, right? Correct. What about in terms of units? Sorry, I should have stated that more clearly. Where are you today in terms of capacity, the number of units you can manufacture, and where do you hope to get to a year from now?
spk06: A year from now, I mean, all speculation is we'll probably be close to the double. With our capacity unit based on our PMO, and again, on the IR, it's not going to be as much, even though we are increasing.
spk03: Got it. That's helpful. And then in terms of The DLC coating on BDC, as I understand it, it's important for exterior facing IR lenses. Do you know roughly what percentage of IR lens sales maybe that you have or in general are exterior facing lenses that need that DLC coating?
spk05: Yeah, typically a minimum design of an optical system would be two lenses. So in the most basic optical system, one lens would be facing outside and one lens internally, then all internal surfaces are coated with a different coating, a much more standard thin film coating called AR or anti-reflective. In more complex systems, if you're talking about static systems without the dynamic zoom or change, it could be three or four lenses. In much more complex systems, it can be up to seven lenses or eight lenses.
spk03: Great. So, you know, there's competitors, I take it, that are going through the process of selling a similar version of what you're selling, you know, in terms of a generic germanium. Are customers, are they generally as successful as you, or are you taking much more market share given this DLC, I would think, given, you know, How would they handle those exterior facing issues that, you know, the generic has?
spk05: The DLC is definitely an advantage. To my knowledge, in the U.S., there's two other companies that can do DLC on chalcogenides, some material like our BD6, probably another couple outside the U.S., so there's definitely an advantage there. What is really unique in terms of light path and there were advantages, and this comes from the integration ISP and light path is that we're ability to combine the molding molding technology with standard fabrication technology for large lenses typically one can mold lens up to a diameter of one inch about above that is difficult to mold the lens and and get consistent results So above that, usually what one would need to do is to fabricate the lens using other techniques, which are far less cost-effective than molding. What we have developed and patented, and I think we issued a press release on that patent about half a year ago, is a technology that allows us to mold the lens into a near shape, so very, very close to the final lens. and then only touch it, really, with fabrication equipment at the very end just to get the final result to be a perfect optical surface. So it's really combining the best of both worlds. And as far as I know, that is one of our biggest advantages and allows us to offer cost-effective large diameter chalcogenide lenses. Great.
spk03: Two more questions I have. The first is, Within the current situation of where we are with the pandemic, coupled with the US-China tensions, has there been any change to the pace or expected pace of the 5G rollout in China?
spk05: We have not seen any change in that. We monitor it regularly, and we also raise the question every time we hear about any updates from other companies. As far as we know, any changes that other companies have seen are mostly related to other elements of the 5G and not the optical infrastructure. We have not seen any change in the demand. Now, it could be that there is a change in the demand and it hasn't yet reached us, or that it is impacting more of our competitors because there's multiple vendors often providing to the same customer. As of now, we have not seen a change in demand, and we keep receiving orders from 5G-related customers in China on a very regular basis.
spk03: Great. That's helpful. Last question I have, which is related to the 5G rollout in China. During the Chinese New Year, as I think about seasonality, will that be impacted? Will you see lower volumes, or will you be able to replace that demand with other customers?
spk05: Yeah, well, what happens there, and I reflect back on the six years I lived in China and have been through that, is in preparation of the Chinese New Year holiday, typically companies or employees work weekends and companies operate over the weekends and far more than usual in order to build up the inventory and whatever's needed in anticipation of the downtime during Chinese New Year. The Chinese government even mandates that while the holiday formally is only four days, if companies want to give a seven-day holiday, they have to substitute those additional days with days over weekends, and that's how output isn't impacted. So I've lived through that and seen it, and our operations there and other operations, both foreign and domestic, lived by that and have really built a, I think, a very stable flow during that time.
spk03: Great. Thanks for answering my questions.
spk02: And our next question today comes from Gene Inger with the Ingerletter.com. Please go ahead.
spk01: Hi, Sam and Don. It's the Ingerletter, not Inger, and we hope you're not Inger investors. But, guys, it was an interesting quarter, interesting phase, comments that have been made. So let's start with China. Sam, you were talking about China. And when I look through the report and listen to what you said, it looks like you had the majority of the increase of that 4% sequential, which is not that impressive. The year over year, it's another world we're in right now, I understand. But it looks like business perked up in China from 5G and contracted with infrared or contracted other than in China. Is that correct, basically?
spk06: No, Gene, to our record and our track that we have right here, for the past one, two, three, four quarters, including this one, telecom increased for us from 12% to 21% of our income. Sequentially, 12 to 19 to 22, and this quarter was down just a little bit because of capacity constraints. It has been increasing ever since as far as telecom is concerned and China is concerned.
spk01: And as far as Europe, I know it's an aside, but just today, the United Kingdom talked about starting to vaccinate probably the Oxford vaccine, everybody in England, starting next month. So if you're envisioning a slowdown in Europe, I guess you're also envisioning that that would pick up and give you sort of a compounded growth from both areas, Europe and China, not just North America, if we get through COVID, which ultimately we must.
spk05: Well, we're not envisioning a slowdown in Europe as much as we are relaying information we've received from customers about possible impact from the stay-at-home orders of closures that they see in Europe. And hopefully everything gets resolved quickly everywhere and we can all go back to normal.
spk01: Well, from the standpoint of investors, I think because I heard somebody, unless I misunderstood, maybe Don half-kiddingly suggested POMO business might double in a year. So I could see, and I referred to for the life path of the stock as a speculative long-term investment with not too much risk. as a growth stock, but what would you say to traders or shorter-term oriented people that really have a three to six month visibility? Because the volume has been low. It ran up at one point in the summer. Is there a short-term reason for a player in the market to be interested in this company or only for long-term growth?
spk06: First, let me clarify, James. The question I understood it was to ask about the units. And based on our run rate, we see we're increasing, I mean, 25, 30% every quarter. So, my answer to that was that the PMO could easily double within a year unit-wise. Remember, these are . It could. Based on our capacity constraint, but the run rate that we're using, that would be that, providing nothing else happens and telecom continues.
spk01: This may all be fine, but I see by the relatively steady growth since the company really turned around more than a year ago, digested the cost of ISP, divesting New York, and so on, and that's all great. But I think the new direction that Sam refers to, I don't know if it involves autonomous driving modules for different companies or devices for companies like SpaceX, or Velodyne or others you might be working with, but I would hope that you're not concentrating on only three or four core customers that make up a big portion of the business, as I think was the case in the past. Could you guys reflect on that for us?
spk05: Absolutely right. We're diversifying both in customers and industries is something we see as important and something that really almost comes naturally from the fact that The optics get integrated into many different technologies and industries. So I don't think we have any specific industry today that accounts for more than 20% of our revenue. That said, to answer your earlier question about timing, I think it's important to note that we're in here for the long game. Investments we're making, decisions we're making, the path we're taking, all because we believe there is tremendous value for us to create in the long term for shareholders. And while we always try to improve everything as quickly as possible as we can, we're not doing this to achieve quarter-to-quarter big banks necessarily, as much as we're focusing on building something stable and strong that can grow further.
spk01: Sam, if I might ask one more question. dot is this a little bit as you're transitioning even further and your business looks promising especially as we get through so that it's infrared uh and and so on does this give you this integration and devices almost like a little uh it's not taiwan semiconductor or a little foxconn where you have a core business but they expand that in doing work for others so you end up perhaps assembling devices? I don't mean to put words in your mouth, I'm just asking. And you're actually bringing in components from other vendors in order to do assembly work, not just design?
spk05: Yeah, that's a very interesting point because very often in our world, the optics are one of the most sensitive parts of assembly, given the sensitivity to dust and such. So it would not be completely unheard of of a customer wanting us to do more than just the optical assembly since people do not want to touch that part of the system too many times. So it could be in the long term, but it wouldn't be out of an attempt to be a contract manufacturer as much as it would be a service to the customer that can just enhance our offering and services in optics.
spk01: Well, I sort of ask this because what you're talking about with design goes beyond even a Foxconn, and you know them from China, because what I sense is you're talking about being almost an integrated manufacturer, which would really elevate the perception of the company if you're doing that, because you're not just talking about design specifically. Let's say, well, we use Apple. They design something, and they give it to Foxconn, or they design an arms chip, and they give it to TFC in Taiwan. But they're the designers. You're talking about doing the design to meet the customer desire. I think it's a really good idea, and it obviously creates residual or annuity-style income, which I'm guessing is what you're shooting for.
spk05: Yeah, that would definitely be a nice outcome. I'd say that also Optics has some – one different, well, it has many, but one very important difference compared to, say, electronics and PCB, and that is the uniqueness of the knowledge and that the transfer from the design to the manufacturing is not as straightforward as sending prints or feeding into an SMT machine the program and just letting it run. And I think that uniqueness and that very particular expertise needed in optics is the reason why our customers entrust us with such parts of their business and why they also believe, and so do we, that we can create a unique value compared to them doing it in-house or giving it to their contract manufacturer to do.
spk01: It's successful. First of all, I like the vision, Sam, and I think If the performance is delivered, I suspect that the market cap of the stock will reflect that eventually. But basically, I'll let you go with a last thought and congratulate you on the work you guys are doing. But the last thought might be a question if you could expand a little bit more on how your linkage comes into some of the new technologies, AI, AR, autonomous driving, even the FACE program, which you're somewhat connected with.
spk05: Sure. I mean, that's something probably I can talk quite a bit and length about and bore everyone. But, you know, photonics is an incredible technology. It's something that's enabling so many places. And 20, 30 years ago, photonics had some applications. Today, the number of applications and uses for photonics have grown exponentially and continue to grow. And that's part of the beauty of what we do. We're enabling other technologies, other industries to make use of this technology by providing this expertise. And I've seen this throughout my career, how this is growing, and I continue to see it. And for me, it's an exciting thing because it's living up to the potential of a life-changing technology.
spk01: Thank you, Sam. I appreciate it. I'll let somebody else ask questions. Thank you, Gene.
spk02: Ladies and gentlemen, as a reminder, if you'd like to ask a question, please press star then 1. Our next question today comes from Jeff Peterson with Red Sparrow Capital. Please go ahead.
spk00: Thanks, guys, for taking my questions. Can you talk about the gross margins of the BD6 molded lenses versus diamond-turned infrared lenses, and what are the differences between the manufacturing processes?
spk01: Go ahead.
spk06: The difference between the DD6 lenses, which is still a new product for us, is that the range could be from 17% to 23% on the gross margin range. That's getting better as our yield comes up and as our material goes up. On the IRDT, it could be a bit higher because they're bigger and the average selling price is also higher.
spk05: Maybe just to add to that, from a technical point of view, in the IRDT, the material is one of the main drivers of the price and is outside of our control. So the material is a naturally occurring material. It's not synthetic and not reproduced. And so the price of it really depends on the availability of the material for mines in Russia and China. And any fluctuations there greatly impact the gross margin. In our molded BD6, really what our technology and our innovation, similar to what PMO was in the earlier years, is something that really scales with volume. So fairly high investment at the beginning if you're only making very low volumes, but really grows to substantially better margins over time when volumes increases. We're early on in the adaptation of molded BD6 into customers' designs. naturally going to happen this way because many of the designs have a long life cycle and you cannot replace existing designs in aerospace and defense. So we work today on designs that will become production maybe two years from now. And so we're not really fully absorbing the costs of the BD6 molding and the production of the BD6 glass until we reach certain volumes. But when we do, there's no reason why the margin in the long term of molded BD6 would not be similar to PMO.
spk00: That's very helpful. Thanks. Who is your largest infrared customer, and can you discuss the various products they buy from you and the size of these contracts or expected renewals?
spk06: Our largest infrared customer is PMO. you'd have to look at our vertical. First of all, for most of our customers in this area, we have NDAs where we cannot disclose their name. But in our verticals, I mean, we, you know, we're covering defense, industrial, medical. And in those areas, I mean, for example, in the defense industry, we've grown with average of our total revenue between 39 and 34 and 39%. You know, industrial area, in the defense, sorry, we're between 4% to 10% of our revenue. I mean, industrial is about 34% to 43%. I mean, those mixture of infrared and the commercial is also a mixture because of the lens, the riflescopes are used both in defense, they're used both in some industrial and qualify also in commercial. Daniel Contric. And we have an annual contract with one of our biggest customers, which is between $5 million to $6 million a year, and that is mostly the telescopic lens that they use for rifles, I mean, hunting, and also some of it, I think, is defense.
spk05: And that comes up for renewal in the current quarter.
spk06: Yes, that's every November, December.
spk00: Okay, thanks. That is all my questions at this time. Hey, thank you.
spk02: And our next question today comes from Brian Paragamian, a private investor. Please go ahead.
spk04: Hi, guys. I appreciate you taking my call.
spk00: Absolutely.
spk04: I have a question with regards to with you being an essential business and being able to have operations up and running and China, you know, basically saying, giving you the go-ahead to run your operations. Considering you're running at full capacity and basically 24-7, I'm a little perplexed with that as to how earnings weren't better than what they were. You know, I understand the 26% year-over-year. Gene touched on the 4% sequentials. It's perplexing how earnings aren't better, revenues aren't better when you've expanded operations. So I guess my question is, had you not expanded operations and you weren't running at full capacity as you are, would we be looking at a significant loss or a loss, at least we could say, in earnings?
spk05: No, I don't think we'd be looking at the loss. I think we have a... stable, consistent operation now, and we've done quite a bit in the last half a year to achieve that. I think what you're seeing is two different things. I break it out into two different things. One is we have in our molded optics, in our PMO, we have really what I'd call two very different price ranges. And one is the telecom, which is the lowest price range and single dollars, but fairly good margins. And the other is the medical and others, which are higher unit price and a different type of margins to them. When we added capacity, we added it because at that time we had large telecom orders, which again are the lower unit price. And so it is not as visible in the dollar amount of revenue, but you can see it very clearly in the number of units we produced. and a very nice consistent growth in that. This is not to say that it would remain forever like this. Our product mix changes, and there were orders from different industry change, and we also navigate that knowing what capacity we have and what orders we want when. It's very possible and expected that some of that capacity that we added at some point down the road, and again, telecom, usually a rollout like this 5G lasts for three, four years. So at some point down the road, some of the capacity that we added is going to switch over to products with higher average sale prices. And we'll see the impact on the revenue. On the bottom line, I think this quarter specifically, we had a few expenses. One of them is the $300,000 tax to China for the dividend, which really impacted our earnings per share. Otherwise, we would have expected our earnings per share without that expense and a couple of other one-time expenses that are important for us for the long run, but really we don't expect them to occur every quarter. Then we expect our results, our bottom line results, to continue to be as strong as we've had in the last couple of quarters.
spk04: Okay, so without those couple of expenses you referenced, you would have seen saddle cent per share in earnings? Yep. Two, three, probably. Okay. What would you say to investors from the standpoint of the lack of insider buying? Because I know you guys have this vision, and we saw, as Gene had mentioned, a run-up in the summer in the stock, and it basically pulled back some 50% to 60% in price. And I know you had a recent insider purchase of I forget what it was, 3,000 or 4,000 shares. But what would you say to investors to the point where there's very little insider buying? And I know there is some options based on incentive options based on the price of the stock, but nothing gives investors more confidence than seeing true meaningful insider buying as opposed to a token several thousand shares.
spk05: I cannot speak for others. I can speak for myself that I buy as possible and when possible, depending obviously on our blackout and different personal cash flows. But I would also remind that our fiscal year ends on June 30th. And from that period until fairly recently, we were in a very extended long blackout period. in which we obviously could not trade anything, as much as we would have loved to, because we all felt the share price was very low and a very good buy. Okay.
spk02: That's all the questions we have. We will now pass the call back to management for closing remarks.
spk05: Thank you for participating on today's conference call. We look forward to speaking with you next quarter. Until then, we encourage our shareholders to join us as we conduct our virtual annual meeting on November 12th. We also will be participating in the Diamond Equity Research virtual conference on December 1st and the 23rd annual Needham conference in January. We hope you join us to continue to follow our progress. Thank you again and goodbye.
spk02: Thank you. This concludes today's conference call. You may now disconnect your lines and have a wonderful day.
Disclaimer