Agora, Inc.
Q2 2015 Earnings Call Transcript

Published: 11 Nov 2014

[Operator:]

Good day, everyone, and welcome to the Advanced Photonix 2015 Second Quarter Earnings Conference Call. Today's conference is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Mr. Jeff Anderson, Advanced Photonix CFO. Please go ahead, sir.

[Jeffrey Anderson:]

Thank you. Before we get started, I want to remind listeners that this conference call will contain forward-looking statements, which involve known and unknown risks and uncertainties about the company's business and the economy and other factors that may cause actual results to differ materially from our expected achievements and anticipated results, including unforeseen technological obstacles, which may prevent or slow the development and/or manufacture of new products; problems with the integration of acquired companies and technology; and possible inability to achieve expected synergies; and limited or slower-than-anticipated customer acceptance of new products, which have been and are being developed by the company. Please see our press release of today and our periodic reports filed with the Securities and Exchange Commission for a fuller statement of such risk factors. Given these uncertainties, listeners are cautioned not to place undue reliance on any forward-looking statement contained in this conference call. The forward-looking information given during the conference call represents management's expectations and beliefs as at the date hereof. The continued availability of this conference on the Internet or through other media does not mean the company is reaffirming or confirming its continued validity. Except as may otherwise required by law, the company expressly disclaims any obligation to update or alter any of the forward-looking statements made herein as a result of any event occurrence after the date hereof. This conference call also contains a presentation of non-GAAP financial measures, as defined in the SEC's Regulation G. Reconciliations of the non-GAAP financial measures to the GAAP -- the company's GAAP-based financial statements are included in the company's second quarter earnings press released today and are available on our website at www.advancedphotonix.com. On today's call, I will briefly review a few financial highlights from our second quarter 2015 fiscal year. And then I'll turn the call over to Rob Risser, COO, for an update on business activities. We'll pass the call on to Richard Kurtz, CEO, for closing remarks. Our revenues for the second quarter ended September 26, 2014 were $7.8 million, an increase of 3% or $253,000 from revenues of $7.5 million for the quarter ended September 27, 2013. On a year-to-date basis, our revenues were $15.5 million, an increase of $838,000 or 6% from revenues of $14.6 million for the 6 months ended September 27, 2013. Sequentially, revenues increased 2% or $126,000 from the quarter ended June 27, 2014. We experienced revenue increases in 2 of 4 markets for the quarter and 6 months ending September 26, 2014, compared to the prior year period. The Test and Measurement market revenue was approximately $4.7 million and $9.1 million in the second quarter and first half of the fiscal 2015, similar to the related prior year periods. Improvements in Comtest revenues have been offset by lower Terahertz system and contract revenues. Sequentially, revenue increased approximately 4% or $175,000 from the first quarter of fiscal 2015, on the strength of Opto and Comtest product sales, offset by lower Terahertz system sales. Looking forward, we see the Comtest revenues slowing in the second half, which is causing us to revise our overall growth for the year. Telecommunication revenues in the second quarter and first half of fiscal 2015 were $2 million and $4.4 million, respectively, an increase of 16% and 49%, respectively, from the prior year periods. The higher revenue was primarily attributable or is primarily due to the resolution of supply constraints in our 100 gigabyte line side products. And timing of orders and revenue on 40G line side products. Telecommunications revenue on a consecutive quarterly basis decreased 20% or $478,000 from the first quarter of fiscal 2015. During the quarter, North American and European carriers decreased their capital spending to fund near-term merger and acquisition activity. This pause in the Telecommunication market is leading us to revisit our total year growth forecast. Military/Aerospace market revenues in second quarter and first half of fiscal 2015 were $832,000 and $1.5 million, respectively, an increase of 17% from the comparable prior year second quarter and a 16% decrease over the priory year first half. The second quarter improved over the first quarter by 29% or $188,000. And Optosolutions military missile program has now begun to ran back up in the current year, explaining these revenue changes. Given Terahertz contract awards for the F-35 program expected to be awarded and contribute to revenue in our fiscal third quarter in addition to the fulfillment on existing missile orders, we would expect substantial growth in this market for the year, with the growth coming later than expected, though this has caused us to update our growth forecast for the year. Medical market revenues in the second quarter and first half of fiscal 2015 were $342,000 and $443,000, respectively, a $106,000 and $341,000 decrease from the prior year periods. These reductions in revenue are mainly due to the timing of shipments related to one customer. Gross profit for the second quarter of fiscal 2015 was $2.6 million compared to $2.8 million for the second quarter of fiscal 2014, a decrease of $165,000 on a revenue improvement of $253,000. Year-to-date fiscal 2015 gross profit was $5.5 million or 36% of sales, down from $5.7 million or 39% of sales in the first half of fiscal 2014. The lower gross profit dollars have been driven by the growing mix of 100-gigabyte HSOR product sales at competitively price levels and a decline in Terahertz revenue. Gross profit percentage was 34% for the second quarter of fiscal 2015 compared to 37% in the second quarter of fiscal 2014. And 38% in the first quarter of fiscal 2015. The fiscal 2015 second quarter gross margin rate declined year-over-year, given the growing mix of 100 gigabyte HSOR product sales at competitively priced levels. Sequentially, the lower mix of Terahertz revenues and the absence of a buildup in WIP and finished goods as enjoyed in the first quarter explain its rate decline. Total operating expenses for the quarter and first half of fiscal 2015 were $2.9 million and $6 million, respectively, a decrease of $439,000 and $832,000 over the comparable fiscal 2014 periods, due to cost-reduction efforts to lower our breakeven point and reduced intangible amortization. Total operating expenses for the second quarter of fiscal 2015 decreased by $164,000, when compared to the first quarter of fiscal 2015, given a reduction in G&A and legal spend. The non-cash expense in the stock options and restricted stock grants, included in operating expenses was $16,000 and $37,000 for the 3- and 6-month periods ended September 26, 2014 compared to $41,000 and $70,000 for the 3- and 6-month periods ended September 27, 2013. And stock awards have been limited over the past year. Interest expense in the second quarter and the first half of fiscal 2015 was $129,000 and $310,000, respectively. This decrease of $36,000 and $15,000 in expense relative to prior year periods is due to the decrease in total debt, as equity proceeds of $2.9 million were primarily used to reduce the debt with SVB[ph] June of this year. The adjustment of fair value of the warrant liability cause income of $46,000 in the current quarter and $991,000 for the first half of fiscal 2015, and are driven primarily by the change in the stock price and a reduction in the remaining contractual term. This is in contrast to $107,000 of income in the second quarter of fiscal 2014 and expense of 89,000 for the first half of fiscal 2014. We realized a net loss for the second quarter of fiscal 2015 of $368,000 or $0.01 per share as compared to a net loss of $578,000 or $0.02 per share in the second quarter of fiscal 2014. The reduction in the net loss of $210,000. Year-to-date, we realized the net loss of $636,000 in fiscal 2015 relative to a net loss of $1.5 million in fiscal 2014. This decrease in the net loss for the second quarter and first half fiscal 2015 is primarily attributable to reduced operating expenses. On a non-GAAP basis, our loss for the quarter was $152,000, and for the 6 months of fiscal year 2015 was $155,000, both of which rounded to $0.00 per share and was in line with first call estimates. We generated positive adjusted EBITDA computed consistent with our bank covenants of $74,000 in the quarter and $342,000 for the first 6 months of fiscal 2015, as our cost reduction efforts over the last year have lowered to breakeven point. We've proactively worked with our lenders to adjust our covenants going forward, to accommodate the revenue pause we have seen in the telecommunication market, as detailed in our debt footnote in our 10-Q. I would now like to turn the call over to our COO, Rob Risser.

[Robin F. Risser:]

Thank you, Jeff. Good afternoon, everyone, and thank you for joining us on the call today. We continue to make progress in our second quarter toward our goals that we believe will drive shareholder value

[Richard D. Kurtz:]

Thank you, Rob, and good afternoon, everyone, and thank you for joining us on the call today. Sequentially, the second quarter was lower than expected due to the combination of a slowdown in telecommunication revenue and the continuing push out of the F-35 contract activity. While the year-to-date comparison shows a 49% increase year-over-year, our major customers for 100-gig transmission products are seeing a pause by domestic service providers in capital expenditures. This is simply a temporary situation and we expect to see a return in ordering later in our fiscal year. The positive offset to this has been the rolling Aeroplane missile or ramp program contract. This 1.5 -- excuse me, $1.6 billion contract announced in September, will grow our military revenues for the remaining balance of the year. On the Terahertz side, we've expanded our value-added network or VAR distribution channel with the addition of Seltek Ltd. As with our other VARs, Seltek is focused on providing process control, engaging systems for continuous manufacturing processes. This privately held company is located in Turkey, but had systems installed around the world. We've completed the VAR training and shift there first system in October. We continue to work to expand our VAR network are in -- and in discussions with several new potential VAR partners. We're also in the process of launching a new Terahertz product designated as the single-point gauge, or SPG, targeted at the offline inspection for fitness measurements. While, we cannot disclose the near-term market opportunity due to Department of Defense instructions, we will have more news about the SPG product and the industrial market opportunities in future earnings calls. On our high-speed Optic receiver product development roadmap, we started to sample our new 10-gig, APD receiver optical subsystems or ROSA product to potential customers. We've also completed our first production run of chip-only, APD 2.5-gig product for the Fiber-to-the-Home. This product will start evaluation, qualification testing and customer sampling in our third quarter. We're expecting to see revenues from these products next fiscal year. The recent pause in telecommunications and contract revenues has caused us to revaluate our growth projections for the year. We're now positioning ourselves for flat growth year-over-year. We do not believe that the combination -- we do believe that the combination of new products in the pipeline today, the release of the F-35 contract and the return to normalize capital expenditures by service providers, will happen in our fourth quarter and lead to a resumption of growth. We've already seen the positive effects of our cost cutting in investments and products and market is creating positive EBITDA from last year's actions. We will continue to look for further cost-cutting actions to minimize any impact of revenue shortfalls on our cash flow. On behalf of our team, we appreciate your continued support. I would now like to open up the call for your questions.

[Operator:]

[Operator Instructions] Our first question is from Randy Knudson, our Private Investor.

[Randy Knudson:]

Let me just ask a few questions, if I could. I guess, my first question relates to the lack of any news at all, since our last conference call, I don't believe there was a single press release. And I'm just wondering, why we never -- the investment community never heard about the ECOC in France. We knew there was some presentation going on somewhere over in Europe, we never knew that you had a booth there and I'm just wondering why that information wasn't released?

[Jeffrey Anderson:]

Well, Randy, we did several press releases in the last -- during the quarter. We talked about the $1.6 million contract, we talked about Seltek. And then, in the call in the first quarter, we mentioned that we would be going to ECOC, I believe.

[Randy Knudson:]

I know you mentioned you were going somewhere, but I never heard that. But anyway, going forward in time, it just seems like the adoption of Terahertz is going remarkably slow, we never hear about any VAR selling products, are your VAR is actually selling products?

[Richard D. Kurtz:]

Well, we did disclose that last quarter that we did have several installations going on. Okay? So we haven't talking about it, now obviously, that we have confidentiality agreements with a lot of customers, and they don't like us to use their names and things like that. But the adoption is slower than we would expect. We would agree with that, Randy. But again, you're talking about replacing a -- taking a new technology and replacing an existing technology, doesn't perform as well, but has been around for over 60 years. So again, the adoption is going to be slower than anybody would like, because everybody wants to prove that their technology can measure what it says they can measure and perform reliably.

[Randy Knudson:]

I noticed on your while [ph] also the conference presentation, and also on my blog, I've posted the name of some of your customers, which was pretty impressive, but that's all been taken down. And so I'm wondering, are there -- did all of those customers requested that you do not release any information about their purchases?

[Richard D. Kurtz:]

No, not all of them. I'll say not 100% of them, but enough to say, you know what lets not cause any more problems with our customers. Because again they are our customers.

[Randy Knudson:]

Well, I understand and we want to continue to make sales with, at the same time, the investment community needs to have some idea about who we are making sales to. I thought it was really significant who we were selling to, but now that information is out there so. If there's any [indiscernible] that you can where we can pull a little information about...

[Richard D. Kurtz:]

Absolutely.

[Randy Knudson:]

I mean, I think that's important to do.

[Richard D. Kurtz:]

Right. We like talking about the applications, because the applications have broader customers than the ones that we've named. So if we talk about building products, we talk about flat roofing material. The number of customers that make that PPO roofing material or EPDM roofing material, are very -- are well-known names in the marketplace. So that's the reason that we like to talk about the applications, because we may not be selling to one particular competitor out there, but we have the opportunity, once we get the application out there and them knowing about the application, then they can knock on our door too.

[Robin F. Risser:]

Randy, this is Rob. To add to that, VARs, each VAR is at kind of a different stage. Some VARs are -- had become much more self-sufficient and are selling products on their own, or at least selling the customer on that. Some are still in the process of getting up to speed enough, where they can move to their own self-sufficient sales, rather than having us directly involved and pulling through the early sales through the VAR. So there are different stages, but they are all making steady progress on this.

[Randy Knudson:]

And one of the questions that I asked you at the last conference call, and I think you agreed is none of the VARs websites, even mention the word Terahertz. If you search for Terahertz or look at their partners, Advanced Photonix is not listed, or at least, they weren't the last time I checked, which is fairly reasonably. And I was wondering is there anything we can do to address that issue?

[Richard D. Kurtz:]

It's an internal customer VAR issue for us. When you're dealing with a very large corporation like Thermo Fisher scientific there is a number of things that they have to go through on their end, to get it approved to be listed on their website. Lot of the VARs really don't like advertising the fact that they're not vertically integrated in some aspects, so they're really reluctant to announce who their partners are out there some times. And so you do have to go to a lot of hoops to get over those little bumps in the road.

[Randy Knudson:]

I know couple of -- probably, 18 months ago, we had signed -- we sold, I believe with T-Ray 5000 over in China for airport inspection, as I recollected airport baggage inspection.

[Robin F. Risser:]

Yes, that was -- it was sold to a university and the university had a partner, who was in that space. So it wasn't directly to the L-3's or the ASME people in China will say, so it was through the intermediate, but the intermediate was giving funding to the university to buy the equipments so they can do some development work with it.

[Randy Knudson:]

And do we project or anticipate anything at all coming from that or is it just a onetime sale there?

[Richard D. Kurtz:]

No, not really. I mean if it comes back, they will be looking at different aspect, probably, but the university is handling that development, we don't have any type of agreement with the University and we don't get any feedback from that university, because it's in China. Unlike, but some of the universities here in the United States.

[Randy Knudson:]

Got you. Speaking about new Terahertz products, your single-point gauge, or the SPG, when should we believe that will be marketable or is it marketable today, and you're just waiting on signing contracts?

[Richard D. Kurtz:]

No. I think what we are waiting on today is that we delivered a prototype, we'll call it, but the next step for us is to get it UL-approved, so it could be deployed in the factory. And as a result, we're looking at, I'll say next calendar year, definitely to do the launch and everything. We got some pictures and some videos and things like that of how it can used, but we're really waiting for it to be UL-approved and commercialized.

[Randy Knudson:]

And any developments at all within QTel and use of the safety check, is that still waiting for the -- waiting to be put on the qualified provider's list?

[Robin F. Risser:]

Yes. That's the struggle. And again, you're dealing with the government, there's no guarantees of business. We gave them the 3 prototypes, they've used them, tested them. And I talked to them as recently as last month, and they don't see any response from TSA. It's been a revolving to what shall we say at the TSA contact place that we deal within QTel. So we really are not counting on that. The fortunate thing is that we did get the benefit of being able to cost reduce the T-Ray 4000 to the T-Gauge 5000 product line. And so that was the benefit that we really got. So now we really can get to that price point, to get the industrial adoption going.

[Randy Knudson:]

And you mentioned that the T-Ray 5000, it's actually the cost has gone down as that by virtue of the new prototype or new development in the T-Ray 5000 or is that just simply you're able to make it less cheaply now?

[Richard D. Kurtz:]

Yes. We're able to drive cost out of it from 2 aspects. Number one, the design change from the 4000 to the 5000 was a big aspect. Secondly, it's just scale. So now we've got a lot more standard components inside of the thing, we'll say, we're able to get the volume price reductions, as the volume of the sales goes up. So we get the benefit of both of those things in reducing the cost.

[Robin F. Risser:]

And in addition, the 5000 is the first one that we've been vertically integrated for all the major components.

[Randy Knudson:]

Yes, I know on the last press release, you talked about a different type of new product that was coming out that you were going to be talking about in the future, I don't know -- I don't recall what the an acronym or the letters for that were, but it was not in the Terahertz field.

[Richard D. Kurtz:]

No. It was something that was coming out of Opto, they were doing their market study on that. Its called the eternal light source, we're trying to find a partner that will help us with that. It's going to be -- we're going to have a demo of it at the Photonics West show, which occurs every February out in California. So we'll probably make an announcement of that, been demonstrated and it's very unique in its ability to replicate sunlight and spectrum specific. So it's able to -- you're able to tune this lighting system, will call it, to various wavelengths, so you can target the UV, you can target the IR, you can target the visible, you can replicate daylight at high noon, cloudy day, on a rainy day, it's got a lot of new capabilities. And we're looking at where we can apply whether be at the forensic market, like you would see on CSI, and the ultraviolet light in the medical arena where they have to shine in body cavities, even to think about applications in museums, where sunlight is actually harmful, but you want to display paintings in natural light. So there's a lot of potential there. We're still looking at the market opportunity. But its a new and exciting development for the Opto Group.

[Randy Knudson:]

And then years passed, we talked, optimistically, about reaching the $100 million year revenue goal, is that still a goal at API?

[Richard D. Kurtz:]

It is a goal for us. I never with a final think. I think Rob will agree with me. He would never have thought that if the adoption of the Terahertz would have been as slow as it's been. And at the same time, the evolution of the high-speed optical receiver product platform changed so quickly. I mean, you can imagine that when we started there, they were talking about 2.5-gig and now they're talking about 200-gig products. The technology keeps changing very, very rapidly and so you always have to make an investment into that future, so you can capture that high-growth, high-volume market out there like we're going with the 2.5-gig and 10-gig APD products.

[Randy Knudson:]

Very good. And then the last question is, is there any movement at all in any of the Board of Directors stepping down and I know we're paying Don Pastor over $100,000 a year. And I, frankly, as a shareholder, don't see any benefit in that. But is there any movement in that direction?

[Richard D. Kurtz:]

There is no comment for me to make on that at all. This is earnings call, I guess, it's all I'll say.

[Operator:]

[Operator Instructions] Showing no further questions. This will conclude our question-and-answer session. I'd like to turn the conference back over to Richard Kurtz for any closing remarks.

[Richard D. Kurtz:]

Well, I don't have anything. [indiscernible] to thank everybody for taking the time to listen to our report today. I appreciate and for our entire team, we appreciate your continued support of our company. We're very focused on growing our revenues, increasing both non-GAAP and EBITDA and translating this into GAAP profits. So have a great week. And thank you, again.

[Operator:]

Thank you, again. That does conclude today's conference call. We appreciate your participation. You may now disconnect.