LIGHTPATH TECHNOLOGIES INC Q2 FY2025 earnings call

• Acquisition of G5 Infrared is a transformative event, complementing LightPath's products and aligning with its strategic transition to a solutions and subsystem provider.
• LightPath's previous strategy involved transitioning from a pure play optical components manufacturer to a solutions provider, with acquisitions like Visimid Technologies adding capabilities. The acquisition of Visimid led to large development contracts with Lockheed Martin.
• Impact of China's germanium export restrictions: More than three-quarters of a million dollars of revenue from the previous quarter couldn't ship due to shipment halts from China, but efforts are underway to transition to alternative materials and build manufacturing capacity.
• CFO Al Miranda reviewed financial results, noting revenue increase, gross profit decrease, operating expenses increase, net loss, and EBITDA loss. The acquisition of G5 had preliminary unaudited revenue of $15 million in 2024, and combined revenue expected to be $55 million in 12 months following the acquisition.

Revenue for the second quarter of fiscal 2025 increased 1.5% to $7.4 million. Infrared components sales were $3.1 million (42% of revenue), visible components were $2.8 million (37%), assemblies and modules were $0.9 million (12%), and engineering services were $0.7 million (9%). Gross profit decreased 11% to $1.9 million (26% of total revenues).

• Combined revenue of the company is expected to exceed $55 million in the 12 months following the acquisition of G5.
• The earnout for G5 includes projections of revenue between $21 million to $27 million in the first year, compared to $15 million in 2024.

• China's germanium export restrictions impacting shipments of materials, including non-germanium related ones, leading to temporary revenue timing issues.
• Supply chain issues with some Chinese companies stopping shipments of optics altogether.
• Concerns about tariffs, though efforts are made to pass them through to customers transparently.

Q: Hey guys. Thanks for taking my questions. Just want to start on the gross margin in December. You noted some kind of manufacturing yield issues. Just curious if those have been fully resolved?

A: Our yield issues in this quarter were not particularly bad. They were minor. The problem was exasperated by the fact that we usually have more material, but when we have yield issues and not a fast and quick source to some of the materials coming out of China, it sort of delays our ability to deliver.

Q: Just curious, the customer overlap between the two companies and relatedly the cross-selling opportunities you guys are envisioning. And if there are cross-selling opportunities, are those sort of baked into the growth expectations reflected in the earnouts?

A: There's definitely some great opportunities there. For optics, G5's optical coating services naturally service many of our customers. For cameras, there are opportunities to cross-sell uncooled and cooled cameras together. Those are not baked into the numbers.

Q:I couldn't help but notice your comment on the when you were talking about G5 a little bit about you said you mentioned something about to be awarded several large programs and that you should be moving into LRIP. I'm just trying to understand that language because -- normally I guess you wouldn't say about to be awarded unless you had the business pretty secure or is it can you just give us a color on that?

A: One of them is a matter of dates, literally. It's in very final negotiations. For example, the naval program for prototypes could be several million, and we expect to order any day now.

Q:Hi, guys, and congrats on the acquisition. I couldn't help but notice your comment on the when you were talking about G5 a little bit about you said you mentioned something about to be awarded several large programs and that you should be moving into LRIP. I'm just trying to understand that language because -- normally I guess you wouldn't say about to be awarded unless you had the business pretty secure or is it can you just give us a color on that?

A: One of them is a matter of dates, literally. It's in very final negotiations. For example, the naval program for prototypes could be several million, and we expect to order any day now.

Q:Just finally, just in terms of those shipments that pushed out being in this quarter and just in general, are we seeing that coming through? And how do you give any comments on the current quarter, how it's shaping up?

A: We shipped most of that already in the first 6 weeks of this quarter. The concern is the supply chain not speeding up out of China. The rest of the business, like assemblies, is ramping well. The Lockheed Martin project is going very well on track.

Q:Hi. Good afternoon guys. Thanks for taking my questions and congrats on the transaction. I guess, first thing guys, hopefully I didn't miss it, but could you give us just a little bit of background on how the deal came together? Were they actively out looking for a suitor or was this more, I guess, organic in the way it came about?

A: G5 is a company we've had an ongoing relationship with for nearly 30 years. We did a preemptive strike as we felt they might start shopping around. We've always been on the lookout for acquisitions that are culture fit and strategic fit.

Q:Great. I appreciate that, Sam and Al. That was helpful. And then second one, just a quick modeling question. Is there any seasonality in their business that we should be thinking about as we model the out quarters here?

A: Yes, there is seasonality. Typically, their third quarter is light on revenue, and Q1 and Q2 are heavy. I need to confirm the exact mix next week.

Q:Great. Thanks so much. With the $55 million revenue target, it implies significant growth from G5 from the $15 million. I joined late, so hopefully I'm not repeating, I just joined when Glenn was asking questions. Have the few programs that you expect to drive this growth with G5, are those awarded? Have you started shipping against these contracts or subcontracts? And at what point do you expect these shipments to meaningfully ramp in order to achieve this growth?

A: One program, Border Patrol, received the first order last month and has started shipping. The naval shipments are expected to get purchase orders any day now. The earnout for G五年 is designed around them hitting revenues between $21 million to $27 million in the first year.

Q:Well, hi, Sam and Al, thanks for taking my questions and congratulations on someone. Looks like a really nice deal. Let me ask a quick high-level question following, Sam, your comments in your prepared remarks about G5. You said they had a really big pipeline. Can you quantify or characterize that in any way by itself or relative to the pipeline that LightPath has itself?

A: Programs of record like Border Patrol and Naval are expected to be $5 million to $20 million a year in potential during production. These are military/defense related and have long rollout and spare parts/repairs revenue streams.

Q:Well, hi, Sam and Al, thanks for taking my questions and congratulations on someone. Looks like a really nice deal. Let me ask a quick high-level question following, Sam, your comments in your prepared remarks about G5. You said they had a really big pipeline. Can you quantify or characterize that in any way by itself or relative to the pipeline that LightPath has itself?

A: Programs of record like Border Patrol and Naval are expected to be $5 million to $20 million a year in potential during production. These are military/defense related and have long rollout and spare parts/repairs revenue streams.

Q:You mentioned a number of applications for the products from G5 here and all of them sound interesting border control, obviously a key thing for in our current U. S. administration. Data centers obviously resonate with everybody tracking AI, but one that's really stood out to me I'm really interested in is in drones or I think you see UAS or some acronym I don't really understand. Maybe you can talk about what's going on there. It sounds like a particularly useful and extremely important near-term application for the defense community. Maybe you can talk about what's going on there and how big of the pipeline are you expecting from that?

A: The Naval program is a large one for detecting drones passively. It's a major application where infrared cameras are used to detect drones without active measures. The pipeline for such programs is significant, with potential for substantial revenue in the defense community.