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

Q1 2020 Giga-tronics Inc Earnings Call

SAN RAMON Aug 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Giga-tronics Inc earnings conference call or presentation Thursday, August 8, 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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Presentation

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Operator [1]

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Welcome to the Giga-tronics First Quarter Earnings Conference Call. My name is Cheryl, and I will be your operator for today's call. (Operator Instructions) Please note that this conference call is being recorded.

I will now turn the call over to Traci Mitchell. You may begin.

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

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

Before we begin, I need to remind everyone that this conference call may include forward-looking statements, including statements about future results of operations and margins, future order growth and shipments. Actual results may vary significantly due to risks and uncertainties, such as delays with manufacturing and orders for our products and services, receipt or timing of future orders, cancellations or deferrals of existing orders, the company's capital needs, the trading of our common stock and volatility and the market price of our common stock, results of pending or threatened litigation and general market conditions. For further discussion, see our most current annual report on Form 10-K for the fiscal year ended March 30, 2019, 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 would now like to pass the call on to John Regazzi.

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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 '20 first quarter earnings conference call. I'm pleased to report that the company completed its second consecutive quarter with positive net income. In many ways, Giga-tronics truly has turned around its operating performance. Although we've reduced expenses last year in response to the company's situation at the time, our improved operating performance has permitted us to increase R&D spending in fiscal '20. We've added to the engineering staff at our Dublin, California facility, and we've opened and staffed a new design center in Nashville, New Hampshire. The Dublin engineering effort remains focused on supporting our Microsource RADAR filter business and on designing enhancements to the Advanced Signal Generation and Analysis platform. The Nashville Design Center is developing new solution for the Electronic Warfare segment of the defense market based upon the unique features of our ASGA Test platform.

The platform enhancements and the new EW solutions are intended to create opportunities for us to add additional business from our existing customers and to help us win new customers by convincing them to adopt our platform to solve their test problems. We continue to believe our disruptive EW test platform represents the company's best path to drive revenue growth with high margins and to build greater market share.

I'll now turn the call over to Dr. Lutz Henckels to go over the numbers, 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 first quarter FY '20 conference call. The first quarter results demonstrate significant progress in the turnaround and growth of our business. We've committed to you that we will deliver consistent profitability going forward. And this is the second quarter in a row of net profitability, albeit quite small. Furthermore, we are focused on growing on our RADAR and Electronic Warfare Testing business, and we saw a considerable growth in that segment. However, the revenue results in Q1 were somewhat offset by the lumpiness of the RADAR filter business, which we see from time to time. But it should be clear that the RADAR filter business, which we also call Microsource and which in the earnings release is called Services, is very healthy and is performing very well. There are absolutely no worries here. It's just a matter of timing.

Overall, sales increased by 15%. The company delivered profit for the second quarter in a row and the combined EBITDA, earnings before interest, taxes, depreciation and amortization, for the last 2 quarters was $700,000 on a combined sales of $7 million, which represents a 30% growth year-on-year.

So concluding, clearly, we have turned the company around, and we have started to reinvigorate its growth.

So now let's look at the more detailed results. We start out with sales. Net revenue in the first quarter of FY '20, which ended on June 29, 2019, was $3.498 million. We show 2 components for the revenue, the first components we called goods of $1.938 million, which is for our RADAR Test business. This $1.938 million compares to $207,000 for the same period in the prior fiscal year. So it's a major increase. And the second component is for Services of $1.56 million, which is mostly for our Microsource product line, mainly for the RADAR filters, which are used in the F-15, the F-16 and the F-18 fighter jets. This $1.56 million compares to $2.843 million in the same period in the prior fiscal year. You may say, why such a dramatic decline? And should you or should we be worried about it? Well, let me explain. There are 2 components to the lower revenue. Component #1, we shipped only 2 F-15 filters versus normally 12 filters or 4 filters per month, so 2 filters instead of 12. That impacted the revenue roughly by $800,000. This was due to the transition from an old F-15 contract to a new F-15 contract, which caused the gap because of material flow. This gap is behind us and there's no worry going forward.

The second component relates actually to the ASC 606 accounting. As I have mentioned before, we were required on April 1, 2018, to take revenue on units, which were produced but not shipped. And now when we ship these units, we do not see its revenue. So these 2 components combined across this delta.

Should you worry about this decline in the Microsource RADAR filter revenue? Not at all. We already received $3.7 million of new orders last quarter or at the end of the prior quarter and expect several more orders this quarter and next. The Microsource business is a sole-source business that reliably delivers between $7 million to $9 million in business per year and will do so for the next several years, including this fiscal year. So no worry.

We'll now go to gross margins. Gross margins for the first quarter of FY '20 were 43.7%. Gross margins for the first quarter of fiscal '19 were 42.8%. So there was a small improvement of roughly 1%. The gross margin improvement was really one key factors in turning the company around, and we expect the gross margins to continue to improve this growth of the RADAR test business, which has better gross margin than the RADAR filter business.

We'll now go to the bottom line. In the past, we talked about losses. Now we are talking about profits, albeit still quite small ones. Net profit for the first quarter of fiscal '20 was $15,000. This compares to a net loss of the first quarter of fiscal '19 of $287,000. Given that we have roughly the same operating expenses of $1.4 million year-on-year, the improvement in profits were due to, #1, the increase in sales; and 2, improved gross margin. While the operating expenses were roughly the same from a year ago, they actually most effect that, as John has mentioned, we have added substantial resources to engineering with the establishment of a laboratory and office in New Hampshire. So how did we sort of mask this increase in engineering expenses? The reason why we do not see this increase in R&D expense is the fact that we had received from NAVAIR a large engineering contract to develop several upgrades for the 5 RADAR test systems that they have purchased from us. We took revenue on this contract, on this engineering contract during the quarter and charged the engineering expense to cost of goods sold rather than to R&D. Now having engineered these upgrades now, we expect that NAVAIR will place the orders for it to purchase and install these upgrades. So that's how these R&D expenses showed up in cost of goods sold. We are introducing for the first time an additional covered profit measure, EBITDA. EBITDA is a measure of operational performance and efficiency. And as I mentioned before, it stands for earnings before interest, taxes, depreciation and amortization. EBITDA for the first quarter of fiscal '20 was $304,000, and a year ago, EBITDA for the same period was $133,000. And as said before, we have now 2 quarters in a row of positive EBITDA, $700,000 on $7 million sales, a 30% growth.

Moving to interest expense now. Interest expenses for the first quarter of fiscal '20 were $113,000. This compares with $177,000 for the first quarter of fiscal '19. The major component of the interest expense were 2. One, there was $69,000 interest expense for the loan risk at PFG, as we call it, Partner for Growth, and we are paying off this liability at the rate of $75,000 per month. The second component was $37,000 for the 6% interest of the e-series that we have. It should be noted that we paid in common shares, the accrued e-series 6% interest in July of 2019. Combining the operating income now of $128,000 with the interest and other expense of $113,000, resulting to a net income to shareholders of $15,000 for the first quarter of fiscal '20. This compared to a net loss of $287,000 for the first quarter in fiscal '19 for the reasons that I just explained.

There's one more comment that I want to make and that is, when you make losses, the number of shares that we show of basic shares, which are only common shares, and they were at 10.8 million shares when we made losses. But making profit, we count all shares, including preferred shares, warrants and options using the treasury method of accounting, and this resulted into 23 million shares.

In summary, we have turned the company around. We are looking towards exciting growth and making profits. However, we need to be clear. 2 quarters do not yet make a trend or a fiscal year, it's only a good start. We still have significant challenges in front of us to grow the business and to deliver profitable quarters going forward. Also because we received very large orders from time to time, several million dollars sometimes, the timing of these orders is always a concern and a risk in any one quarterly period. We now go to the balance sheet. Looking at the balance sheet, there's really very little change from the prior quarter, which ended on March 30, 2019. The main change is actually an accounting change of leases on our balance sheet, which resulted into a long-term right of use asset and a long-term lease obligation, and these 2 offset by and large each other. So it's -- you get an asset and you get a liability and they wipe each other out, okay? With our current assets of $5.9 million is 1.35x greater than our current liability of $4.4 million so that's okay. Our cash ended at $1 million at the end of Q1. This is still weak, especially, when you work with large U.S. prime contractors. And so they consider us to be weak, and we are looking at ways to address this matter.

So in summary, we are done with losses and expect a profitable fiscal 2020. We made the needed changes to the company and are expecting growth and profits going forward. We have a disruptive RADAR Electronic Warfare Test solution for this RADAR and Electronic Warfare market. We estimate that our total addressable market is about $300 million. And we basically just scraped the surface of this market with a single-digit penetration. We're increasingly confident that we can grow market share. We're only in one program, a German program with NAVAIR, but we see at least 17 programs out of 61 programs that we can target. And so there's a lot of opportunity for us. With our improved go-to-market strategy and improved sales and marketing team, we are confident that we can grow market share. We have this very ambitious goal to capture 25% market share of the market over time, as I described.

And with that, I'd like to thank you. And I'd like to turn it over for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from [Bill McKeon].

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Unidentified Analyst, [2]

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Congratulations on the progress. I actually have 2 questions for you. One, I was wondering if you could discuss how many of the prime contractors you currently do business with? And also the status or approximate -- your current NOLs?

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

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Okay. They are basically 7 prime contractors. There's BAE, Raytheon, Northrop Grumman, Lockheed Martin and Boeing. We're doing business with all those 5. We have 2 more, General Dynamics and L3/Harris, that became one company. So we don't have those 2 yet. And there is another one called United Technology, but they are combining with Raytheon. So we are in 5 out of 7. And these are very large prime contractors. And so we -- that's -- these are our customer base. Regarding the NOL, we have $23 million of NOL. And so when it comes down to paying taxes, that's one thing that we don't worry about for quite a while.

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Operator [4]

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(Operator Instructions)

And speakers, at this time, I'm showing no further questions in queue.

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

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Okay. Well, thank you very much. And I look forward to reporting another good quarter in 3 months from now. Thank you.

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Operator [6]

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Thank you, ladies and gentlemen. This concludes today's conference. Thank you for your participation. You may now disconnect.