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Edited Transcript of GIGA earnings conference call or presentation 30-May-19 8:30pm GMT

Q4 2019 Giga-tronics Inc Earnings Call

SAN RAMON Jun 14, 2019 (Thomson StreetEvents) -- Edited Transcript of Giga-tronics Inc earnings conference call or presentation Thursday, May 30, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John R. Regazzi

Giga-tronics Incorporated - CEO & Director

* Lutz P. Henckels

Giga-tronics Incorporated - CFO, Principal Financial Officer, Executive VP & Director

* Traci Keiko Mitchell

Giga-tronics Incorporated - Corporate Controller & Principal Accounting Officer

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Conference Call Participants

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* Gregory J. Berlacher

Emerging Growth Equities, Ltd. - President, CEO, CCO & Principal Executive Officer

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Presentation

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Operator [1]

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Welcome to the Giga-tronics Fourth Quarter and Fiscal Year 2019 Conference Call. My name is Vanessa, and I will be operator for today. (Operator Instructions) Please note that this conference is being recorded. And I will now turn the call over to Traci Mitchell, Corporate Controller.

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Traci Keiko Mitchell, Giga-tronics Incorporated - Corporate Controller & Principal Accounting Officer [2]

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Hi, everyone, and thanks for joining our quarterly and fiscal year earnings conference call. I'm Traci Mitchell, and I'm joined today by John Regazzi, our CEO; Lutz Henckels, our Chief Financial Officer and Executive VP.

Before we begin, I need to remind everybody that this conference call contains forward-looking statements concerning operating performance, future orders, long-term growth and shipments. Actual results may differ significantly due to risks and uncertainties, such as delays with manufacturing and orders for our ASGA, receipt or timing of future orders, cancellations or deferrals of existing orders, the company's potential need of additional financing, the ability to be traded on NASDAQ, uncertainty as to the company's ability to continue, the volatility in the market price of our common stock, results of pending or threatened litigation and general market conditions. For further discussion, see our most recent annual report on Form 10-K for the fiscal year ended March 31, 2018, Part I, under the heading Risk Factors; and Part II, under the heading Management's Discussion and Analysis of Financial Condition and Results of Operations.

With those reminders in place, I will now pass the call on to John.

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John R. Regazzi, Giga-tronics Incorporated - CEO & Director [3]

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Thank you, Traci. Good afternoon, and thank you for joining our fiscal 2019 fourth quarter and year-ender earnings conference call. I'm pleased to report that the company completed its 2019 fiscal year with a substantial improvement in year-end results as compared to the prior fiscal year. To achieve this result, Giga-tronics management has devoted attention over the past few years to key performance areas of the business and implemented a number of changes, including moving to a smaller facility, hiring personnel with EW experience and refocusing the organization towards selling solutions. These changes have helped increase revenue, reduced operating expenses and improved our overall gross margin percentages, culminating in positive operating and net income for the fourth quarter of the company's 2019 fiscal year. This is a significant achievement for the company.

I would also like to acknowledge the successful effort undertaken over the same time period by our finance team to maintain the company's liquidity, which has preserved the opportunity to realize the revenue growth and improve gross margins we believe the RADAR and EW market offers compared to the company's legacy test and measurement business. Developing and selling solutions has been a key component of our turnaround, and we will continue along this path going forward.

As an example, we are experiencing a good start to the new fiscal year, which began April 1, 2019, with the shipment of the fifth multi-ship RADAR signal generator to our U.S. Navy customer located at China Lake, California. The management team is fully committed to continuous improvement in the company's operating performance and to maintaining profitability every quarter. I look forward to the Advanced Signal Generation and Analysis platform becoming a larger part of our future revenue growth and profitability during the 2020 fiscal year.

I'll now turn the call over to Dr. Lutz Henckels to go over the numbers in more detail, and then we'll open the call for questions. Lutz?

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Lutz P. Henckels, Giga-tronics Incorporated - CFO, Principal Financial Officer, Executive VP & Director [4]

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Thank you, John. Welcome to our fourth quarter FY '19 conference call. In our earnings release of today, we stated substantially improved operating results. I want to make 2 points to substantiate this statement.

First, looking at the quarterly results, we generated a $230,000 operating profit in Q4 FY '19 ending March 30, 2019. The last time the company achieved an operating profit was in calendar 2014. In fact, since the end of calendar 2014 through the end of calendar 2018, the company generated an average operating loss of $609,000 per quarter. This is roughly $10 million when you add it all up. So finally, we are profitable, and we expect to be profitable going forward until we put this loss history behind us.

Second, when we look at the annual results, the company generated an annual operating loss of $288,000 in fiscal 2019, which ended in March of this year. This compares to the prior year's operating loss of $3.1 million. So we reduced the annual losses in FY '19 by $2.9 million or 92%. So clearly, we have turned the company around, and we have reinvigorated its growth potentials.

Now let me look at the detailed results that we are reporting today. Looking first at sales. Net revenue for the fourth quarter of fiscal '19 ending March 30, 2019, were $3.5 million. We showed 2 components for the revenue in Q4 FY '19. The first revenue component is for goods of $1.7 million, which is for our RADAR test business. This $1.7 million compares to $93,000 for the same period in the prior fiscal year. The second revenue component is for services of $1.8 million. This is mostly for our Microsource product line, namely the filters, which are used in the F-15, the F-16 and the F-18 fighter jets. This $1.8 million compares to $2.25 million for the same period in the prior fiscal year.

Looking at sales for the fiscal year now. Goods were $2.1 million as compared to $2.9 million for the prior fiscal year, and services was $9.9 million as compared to $6.9 million in the prior fiscal year. Basically, the 31% growth in the Microsource business, which we call services, made up for the lack of growth of the RADAR test business. In summary, sales grew to $11.1 million in fiscal '19, which is 14% over fiscal '18, which sales was $9.8 million.

Moving further down the P&L to gross margin percentages. Gross margin for the fourth quarter of fiscal '19 were 42%, and that was the same percentage as in the prior year fiscal '18. Gross margin for the fiscal year as a whole was 42%. This compares with a gross margin for the year 2018 of 28%. This gross margin improvement from 28% to 42% is one key component for the turnaround of the company. We expect the gross margin percentages to continue to improve with the growth of our RADAR test business.

Looking now at profit and loss. Net operating profits for the fourth quarter of fiscal '19 was $230,000. This compares to a net loss of the fourth quarter of fiscal '18 of $420,000. Net operating loss for the fiscal year 2019 was $288,000, which compares to $3.1 million loss for the prior fiscal year. This improvement -- or this reduction in operating losses of 92% has 3 components: 14% growth in sales, improved gross margin from 28% to 42% and lower operating expenses of $859,000.

Moving now to interest expenses. Our interest expenses in the fourth quarter of fiscal '19 was $187,000. This compares to $134,000 for the fourth quarter of the prior fiscal year. There are 3 components to that $187,000 of interest payments: $113,000 was due to PFG interest payment, $35,000 was for Bridge Bank credit line, and $32,000 was due to the 6% interest for the E Series shareholders. By the way, I should note that we expect to pay in common shares the accrued 6% interest to the E Series shareholders in June of this year.

Interest payments for the fiscal year were $713,000, which compares to $461,000 in the prior year. The increase of $252,000 in interest was due to 4 components: $84,000 was due to PFG, $105,000 was due to the 6% interest in the E Series, $33,000 was due to Bridge Bank, and $24,000 was due to interest for the State of California for taxes that we owed in 2011 fiscal year. So that's way back, and that's a onetime event. It should be noted that the third quarter of last fiscal year 2018 had a one-time gain of $324,000 due to the sale of a product line.

On another note, there was a deemed dividend of $557,000 in the fourth quarter of last fiscal year. This was due to the repricing of warrants for certain shareholders who invested in the E Series and have also made a prior investment in the year 2016 at $1.15 per share. They received at that time warrants priced at $1.15. We allowed to reprice these warrants to $0.25 if the shareholder invested in the new E Series, and that is how the deemed dividend resulted.

Combining the operating income now of $230,000 with the interest payments of $187,000 gave us a net income of $43,000 in Q4 of fiscal '19. That's a net income to shareholders. This compared to a net income to -- or net loss, I should say, to shareholders of fiscal fourth quarter '18 of $1 million. So basically, we made an income to shareholders of $43,000 versus a year ago a loss to shareholders of basically $1 million for the reasons that I explained earlier.

I should point out another piece. That's the number of shares. When you make losses, the number of shares are shown as basic shares. That is only common shares are shown at 10.8 million shares. When you make profits, you have to count all shares, including preferred shares, warrants and options, using the treasury method of accounting. This total is 23.3 million shares.

In summary, we have turned the company around, and we are looking forward to exciting growth and profits. However, I want to make it clear, 1 quarter does not make a fiscal year. It's only a start. We now need to show you that we can grow the business and deliver profitable quarters going forward.

Going to the balance sheet now. It has greatly improved. Shareholder equity increased to $1.8 million as compared to $131,000 a year ago. Our current assets are $5.5 million, and our current liability are $3.9 million. So our current assets are 1.4x greater than our current liabilities. This is a big improvement compared to a year ago where the current assets were $7.4 million and the current liabilities were $7.8 million. So the current assets were lower a year ago than the current liabilities.

Cash has been a key concern in fiscal 2019, and we have addressed this concern in part of having raised the E Series investment totaling $2.5 million. In addition, we booked, as John mentioned, in February 2019, $4 million from NAVAIR. This order consisted of 2 RADAR systems and 1 support contract. We shipped the first system in Q4 FY '19 and received cash from NAVAIR for the shipment during that quarter. This allowed us to paid back debts of $1 million compared to Q4 FY '18: we paid back the Bridge Bank debt of $552,000, we reduced accounts payable by $250,000, and we reduced our current liability by $200,000.

I should also point out that we shipped the second system, as John mentioned, to NAVAIR in April of this year. We also received already the cash for this system. This allowed us to further reduce our debt by an additional $600,000, and we still have approximately $1.5 million cash in the bank at the end of April 2019. So this is a huge turnaround.

Our accountants have recognized this turnaround of our business and have given us a clean opinion. The last time we had a clean opinion was for fiscal year ending March 2015. That is 4 years ago. So as of today, there is no longer a growing concern issue. This is another big milestone.

And with that, I like to conclude, and we are ready for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We do have a question in queue from Greg Berlacher with Emerging Growth.

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Gregory J. Berlacher, Emerging Growth Equities, Ltd. - President, CEO, CCO & Principal Executive Officer [2]

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It's Greg Berlacher. Lutz, can you give us a little bit more on the gross margin side, which you view, as you described, you went from 28% to 42%? It looks to me like the one side of the business is about a 38%, 39% gross margin. The other side could be as high as 50% to 55%. I assume as the revenue flow comes in and the revenue mix comes in that, that gross margin could actually expand. Can you give me a sense for if you believe in what I just said that could be -- actually happen? And then can you give us a thought in terms of next fiscal year, March of 2020? Do you have any indication of kind of the revenue mix of the 2 businesses as they are today?

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Lutz P. Henckels, Giga-tronics Incorporated - CFO, Principal Financial Officer, Executive VP & Director [3]

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Yes, I can give you that update. First of all, on the gross margin percentage, the gross margins for the RADAR test business are substantially better than the gross margin for the filter test -- the filter business. So yes, as the growth of the RADAR test business increases and becomes a larger portion of our sales, then the gross margin percentage should continuously improve.

Regarding the 2020 total mix, okay, we expect that the RADAR test business delivers approximately 50% more in sales than the RADAR filter business. And so you expect that our, what we call, Hydra business or RADAR test, business should be close to like $10 million and $7 million or in that neighborhood.

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Gregory J. Berlacher, Emerging Growth Equities, Ltd. - President, CEO, CCO & Principal Executive Officer [4]

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And Microsource, you expect to remain at that $8 million to $9 million level?

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Lutz P. Henckels, Giga-tronics Incorporated - CFO, Principal Financial Officer, Executive VP & Director [5]

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The answer is not necessarily because of this ASC 606 accounting where we have been hit with $2.7 million in revenue that was recognized on April 1, 2018. So we need to absorb that from a P&L viewpoint, not from a cash viewpoint. From cash viewpoint, you are right but not necessarily from a P&L viewpoint.

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Operator [6]

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(Operator Instructions) And it seems that we have no further questions. I will now turn the call over to Dr. Lutz Henckels for closing remarks.

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Lutz P. Henckels, Giga-tronics Incorporated - CFO, Principal Financial Officer, Executive VP & Director [7]

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Okay. Thank you. Thank you for being part of this call. In summary, fiscal '19 was a turnaround year. This effort is now complete. We are done with losses and expect profitability going forward. We made the necessary changes in the company, and we are ready to go forward. Like I said, 1 quarter doesn't make a fiscal year. We have to show you that we can deliver this fiscal year profitable and growing.

Thank you very much.

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Operator [8]

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And thank you, ladies and gentlemen. This concludes our conference. We thank you for your participation. You may now disconnect.