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Edited Transcript of LPTH earnings conference call or presentation 7-Feb-19 9:30pm GMT

Q2 2019 LightPath Technologies Inc Earnings Call

Orlando Feb 11, 2019 (Thomson StreetEvents) -- Edited Transcript of LightPath Technologies Inc earnings conference call or presentation Thursday, February 7, 2019 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Donald O'Connor Retreage

LightPath Technologies, Inc. - CFO

* J. James Gaynor

LightPath Technologies, Inc. - CEO, President & Director

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Conference Call Participants

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* Gene Inger

The Inger Letter - Research Analyst

* Gregory Thomas Gibas

Northland Capital Markets, Research Division - Analyst

* Marc Wiesenberger

B. Riley FBR, Inc., Research Division - Associate

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Presentation

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Operator [1]

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Good day, and welcome to the LightPath Technologies Fiscal 2019 Second Quarter Financial Results Conference Call and webcast. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Mr. Donald Retreage, Chief Financial Officer. Please go ahead.

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Donald O'Connor Retreage, LightPath Technologies, Inc. - CFO [2]

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Good afternoon. Before we get started, I would like to remind you that during the course of this conference call, the company will be making a number of forward-looking statements that are based on current expectations and involve various risks and uncertainties that are discussed in the periodic SEC filings. Although the company believes that the assumptions underlying these statements are reasonable, any of them can prove to be inaccurate, and there can be no assurance that the results will be realized.

In addition, reference may be made to certain non-generally accepted accounting principles, or non-GAAP measures, for which you should refer to the appropriate disclaimers and reconciliations in the company's SEC filings and press releases. Following management's discussion, there will be a formal Q&A session open to participants on the call.

I would now like to turn the conference over to Jim Gaynor, LightPath's President and Chief Executive Officer. Jim, please go ahead.

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J. James Gaynor, LightPath Technologies, Inc. - CEO, President & Director [3]

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Thank you and good afternoon. Welcome to LightPath Technologies Fiscal 2019 Second Quarter Financial Results Conference Call.

Our financial results press release was issued after the market closed today and posted to our corporate website. Following my remarks, our CFO, Donald Retreage, will further review our financial results and provide more perspective on some key areas.

We will then conduct a Q&A session. And now onto my remarks.

In fiscal second quarter continues the ascent we began to experience in the first quarter. We're very pleased with the progress made year-to-date for putting LightPath on a path for sustainable improvements in long-term revenue performance, profitability and cash flow.

Among our key performance indicators in the second quarter, bookings in the second quarter of fiscal 2019 increased to $14 million, setting a new quarterly record for the company. Also setting a record for the second quarter in a row was our 12-month backlog, which stood at approximately $18.1 million at December 31, 2018.

Revenue and gross profit growth in the second quarter were relatively subdued as compared to our order flow due to the timing of certain contract fulfillment and our ongoing transition out of New York, which is adding some cost and production inefficiencies.

It is important to consider these factors when reviewing our performance, progress and growth prospects.

The operational and financial performance areas we are most focused on are: our presence in the markets in which we operate; revenue growth and margins, profit and cash flow.

We attribute our progress in the second quarter and the first half of the year to our focus on end markets and customers.

You may recall on last quarter earnings update when we announced that as of the start of fiscal 2019, we had organized our business with the goals of improving our time to market, maximizing sales opportunities and reducing redundant costs.

With our bookings, you are seeing the beginning of the fruits of our labor.

Our business was consolidated from 5 product groups into 3: infrared, or IR, optical products; precision molded, or PMO products, which now includes both the low-volume and high-volume precision molded optics; and specialty products, which now includes non-recurring engineering, or NRE, projects.

For sales and marketing purposes, our major markets include: catalog and distributors, which really isn't a market but it is a key sector for us; commercial; defense; industrial; medical; and telecommunications and networking.

This focus has driven our investments in product development and manufacturing. Our mission is to offer our customers the best value possible and to be their first choice for high value infrared and visible optics.

In doing so, we believe we'll be able to increase our share of the growing markets in which we operate. This involves a commitment to customer satisfaction, which includes our alignment with their needs, our ability to build the right products in high volume for today and in the future and our ability to deliver products and service, our customers -- to our customers globally.

The recent streamlining of major markets and product groups has provided us with enhanced visibility into demand. We are responding accordingly with investments in our manufacturing capacity and product development.

Capital expenditures, including equipment purchased through capital lease arrangements, were significant at $1.6 million in the first half of the year, although down from the $2.2 million in the first half of the last fiscal year.

Investments are being made to add capacity for infrared products in conjunction with the transition out of our New York facility into our other facilities.

This transition is expected to be completed by June 30, 2019, at which time we expect to begin to realize a significant reduction of our operating costs.

Year-to-date, we have spent nearly $1 million on new product development, an increase of nearly 25% from the same period in the prior year. New product development costs were approximately $519,000 in the second quarter of fiscal 2019, an increase of 26% from the second quarter of last year, primarily due to additional engineering employees to support the development work.

We anticipate that these expenses will remain at current levels for the remainder of fiscal 2019.

I'd now like to talk about some of our progress in key areas that impacted our second quarter results, particularly in terms of revenue growth.

In the industrial sector, we announced our largest annual contract ever, which came as a renewal from our largest customer overall. We have now renewed this contract for the second year in a row and at a greater dollar value than the prior renewal. In fact, we have also added on additional contracts for other products from the customer as we have proven to be an important partner with leading optical technologies.

In the telecom sector, our revenue growth in the second quarter was led by 5G product sales. In the second quarter of fiscal 2019, the revenue for telecom sales were up 79% over the same quarter of last year and 52% from the first quarter of this year.

Telecom bookings of $1.2 million in the second quarter were up 53% from last year's second quarter.

Prior to fiscal 2019, telecom revenues for LightPath had been weak for about 5 quarters. During that time, we noted that our NRE projects involved the design of many new products for 5G.

At that time, production quantities were not yet a reality. In the second quarter, we started seeing some production orders, which means our sample products are now part of the larger equipment and assemblies and that these finished products are being deployed in quantity into the field for actual network upgrade.

Network upgrades typically involve multiyear periods of capital investment, as our customers roll out the upgrades in stages.

We believe, are now entering into the first meaningful phase and that rollout of these build-outs could last for several years.

For 5G, our customers and their end-users are some of the world's leading network operators, public and private cloud technology companies and data center developers.

We provide a critical passive component used as part of the optical data network assemblies. Our products are built into equipment used at the data center for the last mile into metro buildings -- build-outs and edge computing and for long-haul transport.

The build-out for 5G requires incrementally more processing power, which can only be achieved with data transfer through optical networks. 5G will enable the next generation transmission capabilities for voice and Internet of Things, which includes downloading movies in seconds, AR and VR immersive experiences and connectivity at all levels for mission-critical functions, including mobile data and health care and autonomous computing applications.

Of course, with the higher bookings comes higher revenues and with our margin enhancing initiatives in place we anticipate improved cash flows.

For this part of the discussion, I'll pass the call to our CFO, Donald Retreage, who will provide commentary with his prepared remarks.

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Donald O'Connor Retreage, LightPath Technologies, Inc. - CFO [4]

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Thank you, Jim. First I would like to mention that much of the information we are discussing during this call is also included in the press release issued earlier today and in our quarterly report on Form 10-Q filed with the SEC. I encourage you to visit our website at www.lightpath.com, specifically the section titled Investor Relations.

Now onto my remarks pertaining to the second quarter and first half of fiscal 2019. Revenue for the second quarter of fiscal 2019 was $8.5 million, 2% higher than the prior-year period and flat with the first quarter.

For the first half year, revenues were $17.1 million, an increase of approximately $1.2 million or 7% as compared to the same period of the prior fiscal year.

For our geographic revenue mix, we had 38% from North America, 24% from Asia, and 30% from Europe, 8% from the rest of the world.

Our vertical market sales review for the second quarter. Sales to catalogs and distributors were 17% of revenue, defense was 17%, industrial was 29%, and commercial was 16% of revenue, with medical 6% and telecom 15% of revenue.

Second quarter 2019 bookings of $14 million were up 17% as compared to $12 million in the second quarter 2018 and 60% compared to the first quarter of 2019.

Similar to last year, the significant increase in bookings for the second quarter from the preceding quarter is largely due to annual contract renewal that Jim talked about. However, even excluding these contract renewals from their respective periods, bookings would have been up 16% quarter-over-quarter.

Including all bookings, first half 2019 bookings increased 20% over the prior period. Given the emerging growth and nature of business in a highly fragmented market, we place greater value on longer-term trends.

To this end, on a trailing 12-month basis, booking increased an impressive 30% from the prior period.

Our 12-month backlog was a record $18.1 million at the ending of the second quarter, up 30% from $14 million at the ending of the prior quarter and up 41% from $12.8 million at the ending of the last fiscal year.

From a year earlier, backlog increased 47% from $12.3 million.

In addition, reflecting our strategy to enter into long-term supply agreements over short-term contracts, we have an undisclosed backlog that goes out from months 13 to 36, which together with our 12-month backlog provide us with enhanced visibility to manage the business and invest according to future manufacturing capacity needs.

As we mentioned last quarter, our efforts continue to improve our profitability. At the center of our operating streamline is our intent to elevate our gross margin to substantially higher levels. The area in which we are driving improvements in gross margin as well as overall profitability includes cost of materials, labor, manufacturing processes, capital investments and factory utilization. It is important for investors to understand where we believe our gross margins should be.

Before our transformational thrust into infrared business, our gross margin had gone from 36% in fiscal 2012 to 54% in fiscal 2016.

This was achieved through the implementation of strategies that are substantially similar to the 5 areas I just mentioned. We have been working on these strategies for our IR business for the last 6 months.

Today, our PMO gross margin are still at those heightened levels, depending on our product mix.

With the PMO business, during the fiscal 2018 and in the beginning of fiscal 2019 being impacted by lower volumes from the higher-margin telecommunication sector, our gross margins for all PMO revenues in these periods were a bit lower.

IR margins were expected to be lower than PMO with a substantial increase in the price of primary material used to make them brought these margins even lower. Thus our first course of action was to address the raw material for our IR products. Near the end of fiscal 2018, we announced comprehensive production capabilities and global availability for a new line of infrared lenses made of chalcogenide compound versus a traditional germanium-based lens.

We developed this new compound and grew it internally to produce Black Diamond glass, which has been trademarked as BD6.

BD6 offers a lower-cost alternative to germanium, which we expect will benefit the cost structure of some of our current infrared products and allow us to expand our product offerings in response to the market's increased requirement for low-cost infrared optics application.

Our consolidated corporate gross profit margin profile is also expected to benefit from the resurgence of telecom, PMO revenues and associated 5G purchases. Telecom lenses typically are more complex and therefore, lead to higher prices and margins.

In addition, we anticipate savings from the transition of -- out of our New York facilities in our other facilities. The ongoing relocation of our New York operation, which was acquired with ISP, to our other facilities in Orlando, Florida and Riga, Latvia, is another key step in margin improvement. At the present time, we are incurring redundant costs for overhead and personnel, have invested in upgrades to the equipment and have seen a temporary decline in efficiency, given the obvious productivity level challenges that arise when processes are being relocated.

We expect duplicated personnel to be removed by the ending of June 2019, along with complete exit from the New York facility, and then we will see a more normalized lower cost basis in that, we have moved the operations to Orlando and Riga.

Moving onto additional capital investments and balance sheet matters. Cash and equivalents totaled approximately $4.6 million at December 31, 2018, down from $5.5 million at September 30 and $6.5 million at the start of the fiscal year. From the beginning of our fiscal year, the use of cash primarily reflects equipment purchases for expanded production capacity and vertical integration at our 3 global facility. Integration component will help us streamline our manufacturing process, thus avoiding delays on expense associated with the involvement of multiple sites as we have been doing to date for our IR products.

For capital expenditures, we spent approximately $510,000 in the second quarter and $1.2 million in the first half of 2019, with an additional $412,000 in equipment purchased through a capital lease arrangement.

In addition, in the first half of fiscal 2019, we reduced total debt by $474,000, or 6% from the beginning of the fiscal year. And our accounts receivable increased nearly $850,000 or 16% as our accounts payable remain flat just over $2 million.

With the higher level of bookings and anticipated revenues, we modestly increased the amount of inventory being carried. Inventories increased to $6.7 million at the end of second quarter, up 5% from the beginning of the first year (sic) [first quarter], which compares favorably since our backlog from these periods increased by 41%.

In summary, we believe we have grown our markets presence and demand creation, taken significant steps to improve our margin profile and effectively manage our balance sheet. This is a strong way to enter into the second half of fiscal 2019.

With this review of our financial highlights concluded, I will turn back to the operator so we can begin with our question-and-answer sessions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Matt Koranda of Roth Capital.

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Unidentified Analyst, [2]

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This is [Mike] on for Matt. And so first question, I was just wondering, can you talk a little bit about the margin improvement? I know some is probably due to a higher mix of PMO, but how much of the improvement was in PMO versus infrared?

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J. James Gaynor, LightPath Technologies, Inc. - CEO, President & Director [3]

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Well, I think it was a combination of both things. We did have a favorable mix with the increase in the telecom shipments during the quarter on the PMO side. But we also got some slight improvements in the infrared mix of product that we were shipping. So I think it was kind of a combination of both things.

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Unidentified Analyst, [4]

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Okay, great. And then regarding the lower revenue sort of due to the timing of the large infrared contract, will that difference be recognized in the second half of fiscal '19?

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J. James Gaynor, LightPath Technologies, Inc. - CEO, President & Director [5]

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Well, I think we will see a slow improvement in the overall levels of revenue as we move into the back half of the year. I think we're not tremendously off our plan, as you guys had forecasted, but that was your forecast, not ours. So but I think, Mike, the thing -- the key on here is even though the revenue was flat with the first quarter, was a substantial improvement in the fundamentals, in the margin and EBITDA numbers.

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Unidentified Analyst, [6]

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Okay, great. That's helpful. And then just last one here. If tariffs were to go up that 25% level in March, how does that impact your margins in the back half of the year, do you think?

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J. James Gaynor, LightPath Technologies, Inc. - CEO, President & Director [7]

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Well, I think if they go to that level, we'll definitely see some impact. That means tariffs would be moving from about -- on lenses, about 15% to 25%. So that's a 10% increase in those taxes. So it's something that we hope doesn't happen. If it does look like it's going to happen, we'll try and take some mitigation steps where we limit some of the things that we're shipping through the U.S., if we have to do that. But we could see some impact, yes.

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Operator [8]

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Your next question comes from Marc Wiesenberger of B. Riley FBR.

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Marc Wiesenberger, B. Riley FBR, Inc., Research Division - Associate [9]

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Last quarter, I think you noted some elevated prices in the PMO segment. Were you able to see that the continuation to this quarter? And if you could talk about the kind of prices you're achieving in the market.

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J. James Gaynor, LightPath Technologies, Inc. - CEO, President & Director [10]

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Do you have the average price increase -- or price for the quarter compared to last quarter? Just one second, Marc. So yes, they did -- the average selling price did go up about, on the PMOs about $3 or $4, I think on the average. Yes, so we did see some higher prices, which I guess is -- I can -- I attribute mostly to mix. There isn't anything other going on that -- we just had a very favorable mix in that quarter. I think you could continue to see that, particularly as we expect with the telecom lenses, as we said, they're more complex so they have a little higher ASP in that category than some of the industrial -- overall industrial stuff. So I think that's what's driving that, yes.

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Marc Wiesenberger, B. Riley FBR, Inc., Research Division - Associate [11]

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Got it. I think within NRE as well as PMO, it looked like industrial seems to be weakening in both segments. Is there anything that's kind of a larger going on that you can read into going forward? Or was that -- and with the lower industrial NRE, should we expect potentially lower levels going forward, because that kind of foreshadows future demand?

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J. James Gaynor, LightPath Technologies, Inc. - CEO, President & Director [12]

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Well, I think on the industrial side, a lot of that comes from demand in Asia, and in particular China, that market has stayed weak. I think the good news is, for us, given the customer base that we have, they tend to be the higher end guys, a lot of them associated. So we're not dealing as much with the smaller companies over there, so we're able to push through it. We have seen some improvement from some of those guys, but that overall sector is weak, has been weak. I don't think it's a deteriorating any further, but it is weak. It remains that way.

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Marc Wiesenberger, B. Riley FBR, Inc., Research Division - Associate [13]

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Understood. You had talked about higher wages. Is that across the entire workforce? Or is that just primarily with your -- the more skilled labor?

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J. James Gaynor, LightPath Technologies, Inc. - CEO, President & Director [14]

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I think those higher wages come into play because we added some technical resources in the engineering people. So not so much that wages went up a tremendous amount other than we added some technical people to support the higher level of product development that we're involved with right now.

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Marc Wiesenberger, B. Riley FBR, Inc., Research Division - Associate [15]

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Sure. And just kind of last question, were you -- do you see any interesting trends or things that might have surprised you with regards to kind of new orders or applications for some of the lenses? I know in the news lately, there's been a lot of talk about Volvo working with one of your neighbors, Luminar about -- for some LIDAR stuff. And there's been unmanned vehicles getting a lot of -- the drones getting a lot of press. Anything specific you're seeing there in terms of trends, new trends?

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J. James Gaynor, LightPath Technologies, Inc. - CEO, President & Director [16]

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Well, I think, I guess the new thing is a lot of the work that we did in 2018 on new designs, particularly in the telecom sector are moving into production. We look -- it looks to us like that will continue and maybe even accelerate. There's a number of lenses that we're being told that we did do some designs -- we had like 11 or so designs in particular that I'm thinking about, there were 3 of them that went into production in this past quarter. There's another 9 -- 8 or 9 that are going into production going forward. So I expect to see that trend continue to be very strong in that sector. The other part of it is, we're having very good success on the infrared side of the business, particularly with these rifle scopes and range finder type applications. And so we're selling -- we sold some designs, and now we've been ramping up that production. So those are starting to flow through the revenue stream as well. So we continue to see the bookings -- the strong bookings and it tends to be in those areas. We've also seen some increase in the medical sector, those -- some of those lenses, optics for those things have increased as well. So all of those things, I think, are driving our business and we believe the second half will be stronger as a result of that.

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Operator [17]

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The next question comes from Greg Gibas of Northland Securities.

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Gregory Thomas Gibas, Northland Capital Markets, Research Division - Analyst [18]

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I'm on for Tim Savageaux. Just a few from me, and I apologize if I missed this from earlier as I jumped on a little bit late. But can you provide some additional color on the revenue and order growth within telecom? And then second, could you give an update on trends that you are seeing in China?

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J. James Gaynor, LightPath Technologies, Inc. - CEO, President & Director [19]

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Well, I think the telecom growth has been driven by, I think the well-known factors. I mean the deployment or beginning deployment of 5G networks, upgrades, we're still seeing some data center, although it's not as strong as it was. But I think -- we did a very large number of new lens designs throughout 2018 associated for telecom products and in particular, 5G applications. And those are starting to move into production across the board. So some of our major customers include Lumentum, Oclaro, NeoPhotonics, I guess we'll continue to call it Lumentum and Oclaro, although they've joined together. NeoPhotonics, those type of guys as well as Huawei, all of those guys' business is very strong and continues to step-up as a result of that. So we see good strength there, I think that's going to continue. On the infrared side, as I just said, these rifle scopes, range finder type applications, we've gone through -- there are some popular focal lengths out there, and we've been methodically providing those as a substitution for other material type products like germanium lenses and that is gaining acceptance in the marketplace. And so we're selling those lens assemblies very nicely now. And now that we have 3 or 4 of them in production and several more coming behind, I expect that trend to continue as well. So I think that's what's going to drive the near-term growth.

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Operator [20]

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(Operator Instructions) Your next question comes from Gene Inger of IngerLetter.com.

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Gene Inger, The Inger Letter - Research Analyst [21]

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I think you've got your arms around this pretty well this quarter. I think I detect a solid vision as to when that bell curve that I spoke of before goes into favorable territory, which causes me to ask when we can talk about satisfactory net margins rather than just gross margins. Then I have a technical question I'd like to ask.

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J. James Gaynor, LightPath Technologies, Inc. - CEO, President & Director [22]

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I mean I think we talk about that now, Gene, I. Mean we publish operating income along with a gross margin. So it improved quarter-to-quarter, quite substantially, I think. So and we expect that trend to continue.

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Gene Inger, The Inger Letter - Research Analyst [23]

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Right, I just mean positive earnings basically. You've talked about LIDAR, which I would normally inquire about, so I won't. But I will ask a bit about telecom. I heard you reference the word edge, first time I've heard you use the word. I'm familiar with edge. Edge usually refers in the cellular business to either front haul or backhaul, and I'm sure or Devin know what I'm referring to. And my question is whether or not you're involved in that. So beyond the collimators and so on that you've provided for data centers, because there are companies like Ceragon and Huawei who you -- as well as Nokia and Ericsson that they do -- some can even do not just fiber but microwave and backhaul, and I'm wondering whether there's a form of wireless optical backhaul. Does that exist?

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J. James Gaynor, LightPath Technologies, Inc. - CEO, President & Director [24]

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You've taken the technology beyond my scope, Gene. I'm not sure I can give you a decent answer to that question. Our -- the majority of the lenses that -- the products that we're dealing with right now still are mainly associated with the [ITLAs], the doses of the packages that go into those -- that equipment. So I think we have -- there's been some minor inquiries for some collimating type products as well, but that really hasn't -- isn't anything that would move the needle, at least to date.

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Gene Inger, The Inger Letter - Research Analyst [25]

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Well, in your Needham presentation, you talked about new optical designs and actually sort of referred to a backhaul and from cellular access points, not just towers, which is a whole field. And that's why I wondered if there's some new integration going on that's related to 5G and voice.

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J. James Gaynor, LightPath Technologies, Inc. - CEO, President & Director [26]

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Yes. Well, I mean I -- right off the top of my head, I don't know what all the designs are, but if there's something that we can get into there, we certainly will. I mean we do have capability of making collimating and fiber type products, so I don't see that to be a problem.

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Gene Inger, The Inger Letter - Research Analyst [27]

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Okay. Well, I think it's just a question of patience. I think you've got a handle on the presumably non-recurring expenses associated with the relocation. So as long as top line marches forward, it sounds like bottom line will as well.

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J. James Gaynor, LightPath Technologies, Inc. - CEO, President & Director [28]

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Yes, I believe we got ourselves pretty well positioned looking forward. And the bookings growth should be an indication of the strength and the diversity. We tried to give some indication of that across the different market segments, so we're very -- we just...

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Gene Inger, The Inger Letter - Research Analyst [29]

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I think you did that as well and I appreciate it.

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J. James Gaynor, LightPath Technologies, Inc. - CEO, President & Director [30]

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Okay. Thanks, Gene.

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Operator [31]

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We have time from closing remarks from management. Mr. Gaynor, I will pass the call back to you.

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J. James Gaynor, LightPath Technologies, Inc. - CEO, President & Director [32]

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Thank you. In conclusion, we appreciate the support of our shareholders and the dedication of our expanding global team at LightPath. And with our strength and presence around the world, we remain focused on our efforts to drive top line, bottom line and cash flow growth while making improvements in our overall financial condition, as well as providing more value to our growing base of customers. We are very excited about our growth prospects, and will be sharing them at the upcoming Roth Investor Conference in March.

Thanks again for participating on today's conference call, and we look forward to speaking with you next quarter.

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Operator [33]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.