Optex Systems Holdings, Inc Q2 FY2025 earnings call

• Cash balance increased: Ended March 30, 2025, with $3.5 million in cash, up from $1 million in September 2024, driven by higher revenue, EBITDA, and reduced inventory.
• Revenue growth: Year-over-year, revenue increased 22.2% for six months and 25.9% for three months. Gross profit also saw significant increases.
• Segment performance: Both Optex Richardson and Applied Optics Center saw improved gross margins. Periscope production levels increased by 50% over 2024 levels.
• Legacy orders: About 7% of Optex's backlog and 5% of overall backlog from legacy periscope contracts prior to COVID, fully reserved with $226,000 set aside.
• Tariffs: No material impact expected as products are primarily military, sourced domestically, and duty-free.
• Product descriptions: Applied Optics Center uses thin film coatings for laser protection, etc. Optex division uses laser filters in periscopes and other optical sub-assemblies, including commercial products like Speedtracker and Reacher.

For the three-month period ending March 30, 2025, revenue increased 25.9% to $10.7 million. The Optex Richardson segment saw a 101.6% increase in periscope revenue, going from $2.7 million in 2024 to $5.4 million in 2025, and laser filters in the Applied Optics Center increased 21.4% from $2.4 million in 2024 to $3 million in 2025. For the six-month period, revenue was up 22.2% to $18.9 million. The Optex Richardson segment contributed $2 million to the increase, with periscopes up $3.7 million offset by a decrease in other product lines of $1.7 million. The Applied Optics Center saw a $1.4 million increase, primarily from laser filters. Gross margin for the three-month period was 31.3% (compared to 30% prior year), with Applied Optics Center at 36.1% and Optex Richardson at 26.1% (vs. 21.7% prior year). For the six-month period, gross margin was 29% (vs. 27.4% prior year), with Optex Richardson at 20.3% (vs. 19.3% prior year) and Applied Optics Center at 35.9% (vs. 33.5% prior year). EBITDA for the three-month period was $2.4 million (vs. $1.6 million prior year) and for the six-month period was $3.6 million (vs. $2.4 million prior year).

• Expect additional higher levels of periscopes through Q3, Q4 as indicated on backlog forecast.
• The $5.7 million award for laser filters to the Applied Optics Center received within 10 days of the period end, and awards booked are expected to be affirmed for the current year.
• Legacy reserves expected to flow through by end of 2025 or first quarter of 2026 at latest.

• Legacy orders: About 7% of Optex's backlog and 5% of overall backlog from legacy periscope contracts prior to COVID, with $226,000 reserved.
• International diversification: Potential issues with ITAR-controlled items for selling into Europe, including paperwork and customer/supplier issues.
• Tariff uncertainties: Although no material impact expected currently, future changes could pose risks if tariffs affect imported components (though most products are domestically sourced).

Q: Specifically on the Speedtracker acquisition, but more generally on your approach to acquisitions in general. Where do acquisitions fall into that scheme?

A: We're conservative with acquisitions. Had previous acquisitions like Miller-Holdsworth Inc. and Applied Optics Center. Speedtracker was a product line acquisition for the commercial side. Will look at acquisitions that align with core competencies and if recommended by customers, but are cautious of high valuation multiples.

Q: Specifically on the commercial and Speedtracker, you’ve made some initial forays into the commercial area. What are the prospects there and is it worth the time?

A: Speedtracker acquisition was to enter the commercial side. It was a learning curve with website cleanup, internal process corrections, and distributor alignment. Now launched Reacher product. Proof will be in the pudding over the next year, but pursuing commercial sales is opportunistic.