Q4 2010 Prophotonix Ltd Earnings Conference Call
Mar 15, 2011 PM UTC
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PPIX.L - ProPhotonix Ltd
Q4 2010 Prophotonix Ltd Earnings Conference Call
Mar 15, 2011 / 02:30PM GMT
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Corporate Participants
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* Chris Lane
Cubitt Consulting
* Tim Losik
ProPhotonix - CFO
* Mark Blodgett
ProPhotonix - CEO
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Conference Call Participants
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* Ronald Urvater
Capital Partners - Analyst
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Presentation
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Operator [1]
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Ladies and gentlemen, welcome to the ProPhotonix final results conference call on Tuesday, 15 of March, 2011. During today's recorded presentation all participants will be in a listen-only mode. After the presentation there will be an opportunity to ask questions. (Operator instructions) We will now hand the conference to Mr. Chris Lane. Please go ahead, sir.
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Chris Lane, Cubitt Consulting [2]
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Great, good afternoon, everyone and thanks for joining us. With us today from management are Chairman and Chief Executive, Mark Blodgett and Chief Operating Officer and Chief Financial Officer, Tim Losik. Management will today provide a brief overview of the results for their fourth quarter and full year, discuss the Company's outlook, and then open the call up to your questions.
We'd just like to begin by reminding you that comments made during today's call may contain forward-looking statements. All statements of and statements of historical fact, including without limitations those with respect to ProPhotonix's goals, plans and strategies are forward-looking statements. Although the Company believes that the expectations reflected in its forward-looking statements are reasonable, they can give no assurance that such expectations or any of its forward-looking statements will prove to be correct. Certain factors and uncertainties identified in today's accompanying press release could cause actual results to differ materially from those described in the forward-looking statements. Forward-looking statements represent management's current expectations and are inherently uncertain. Thus, actual results may differ materially. ProPhotonix undertakes no duty to update any of the forward-looking statements discussed in today's call. So, with that, I will now turn the call over to Mark Blodgett. Mark?
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Mark Blodgett, ProPhotonix - CEO [3]
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Thanks, Chris. For those of you in the UK, good afternoon. For those in the states, good morning. Thank you for joining us. Before Tim reviews both the fourth quarter and full year results for 2010, let me make several general observations about 2010. 2010 was a transformational year for ProPhotonix Limited. We have launched new product families for both lasers and LEDs, expanded into new markets, made significant investments in our LED business, floated on the London Stock Exchange AIM market, and amended the Company's term debt on favorable terms. All of which contributed to our improved financial performance, with revenue up quarter-on-quarter, robust margins and break even EBITDA performance at the end of the period.
As we noted last year at this time, management stated that it was focused on growing and improving the profitability of the UK laser and Irish LED businesses. I'm happy to tell you that our actions and investments, as well as the recovering economy, have produced significantly improved results. Both the LED and laser business achieved significant growth during 2010.
In our LED business we invested in semi-automated production equipment in our Cork, Ireland operation. As a result of this significant investment. Our LED operations have a three fold increase in production capacity, as of the end of the fourth quarter. We have made significant inroads in both the medical market which grew at a rate of 91% year-on-year as well as the solar equipment market. We also launched a new line of LED lights for the light line scan market, which includes spin film, aluminum, steel and textile inspection, where the customer requires high performance, compact, and energy efficient lighting systems. In our laser division, we launched the InViso laser product line for the machine vision market and are expecting this product line to help fuel our growth for 2011 and beyond.
Finally, during Q4, we also began distributing laser diodes from two leading diode manufacturers in Korea and Taiwan, which complement our diode offerings from Opnext, Sanyo and Sony. With the further expansion and growth of both our Irish and UK operations we made the decision to float on the London Stock Exchange AIM, which was completed in late December. We sold approximately 3.8 million shares of common stock to raise $1.2 million, and our primary debt holder converted an additional $1.3 million of debt to common stock at the placing price, an issuance of an additional 4 million shares of common stock. Listing an issuance cost totaled approximately $1 million. In addition, to the placing proceeds and debt conversion, the Company significantly amended the payment obligations of its remaining debt. Tim will provide more comments in the moment on that.
Financially, I want to emphasize the Company has now achieved four straight quarters of sequential growth, had a fourth quarter increase of 56% in sales, and a total year increase in sales of 45%, with our LED business leading the way with an 86% year-over-year sales growth. In addition, the Company improved its quarterly gross margin rates from 36% in 2009 to 39% in 2010, based on US GAAP. For the full year, the Company improved its gross margin rates from 30% in 2009 to 38% in 2010. With that, I would like to turn the call over to Tim, who will talk you through the financials. Tim?
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Tim Losik, ProPhotonix - CFO [4]
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Thank you, Mark. I will provide a brief summary as follows. All amounts will be reflective of current continuing operations unless otherwise stated.
Net sales for the fourth quarter ended December 31, 2010, were $4.1 million, an increase of 56% compared to $2.7 million year-over-year. Full year 2010 net sales were $15.2 million, a 45% increase versus 2009.
Sales by geography for the fourth quarter were 61% Europe, 28% North America, and for the rest of the world, 11%. Sales by market sector were industrial 78%, medical 16%, and Homeland Security and defense 6%. Bookings for the fourth quarter 2010 were $3.6 million, and backlog at the end of the quarter was $5.8 million. Fourth quarter bookings grew 12% over the third quarter.
Gross profit was $1.6 million for the fourth quarter 2010, a 70% increase compared to the fourth quarter 2009. The increase from the prior year was substantially due to higher volumes, a more favorable product mix, and productivity improvement initiatives. Gross profit for the year was $5.8 million, an 84% increase compared to 2009. As Mark noted earlier, fourth quarter 2010 gross margin was 38.7%, compared to 35.6% in the comparable year ago quarter. The increase, again, was due to volume increases and a more favorable product mix. Gross margin for 2010 was 38%, up from 30% in 2009.
Operating expenses totaled $2.3 million for the fourth quarter 2010. Included in this amount was an intangible asset impairment charge of $0.2 million and a debt amendment fee. Net of these costs, expenses were $2 million, and compares to $1.5 million in the fourth quarter 2009, which was net of an impairment charge of $4.4 million in that quarter. The increase in operating expenses is primarily attributed to an increase in sales expense associated with the increase in revenue.
The 2010 impairment charge is a non cash expense and is a result of our annual asset -- assessment of intangible assets. Operating expenses for 2010 were $8.6 million, which also includes the impairment charge, the debt amendment charge, a facility lease termination charge, and AIM related expenses. Excluding these costs, the operating expenses increased 8%, to $7.5 million, and compares to $6.9 million in 2009 net of $4.4 million impairment charge in that year. Overall, operating expenses net of unusual charges continued to decline as a percentage of total revenue.
The operating loss in the fourth quarter 2010 was $0.7 million, but excluding the impairment and debt amendment charges was $0.4 million, compared to a net loss of $0.6 million in Q4 2009. Net income for the fourth quarter 2010 was $0.2 million, which includes a net gain on the sale of discontinued operations of $0.6 million, plus the impairment charge of $200,000 mentioned earlier. The net loss for 2010 of $2.6 million includes net gains on the sale of discontinued operations of $500,000, the impairment charge of $200,000, and the facility termination charge, and the debt, and AIM related fees. In comparison, the 2009 net loss was $1.2 million, and includes the net gains on the sale of discontinued operations of $4.2 million, and the impairment charge of $4.4 million.
Adjusted EBITDA loss for the quarter was $47,000, excluding the debt restructuring fee, as compared to a loss of $214,000 for the fourth quarter 2009. Adjusted EBITDA loss for 2010 for the year was $300,000, after excluding the AIM and lease termination related charges. This compares to an EBITDA loss of $2 million in 2009.
Turning to the balance sheet, our cash and cash equivalents balance as of December 31, 2010, was $1.8 million. The current ratio has improved. At the end of 2009, the ratio was 1.09 to one. And at the end of 2010, it was 1.28 to one.
Our debt position has improved from approximately $7.6 million balance at the end of 2009 to $4.6 million at the end of December, 2010. As Mark mentioned, we significantly restructured our existing term debt in the fourth quarter. In addition to the debt to equity conversion, we amended a balloon payment due in November, 2010, of $1.6 million, such that it is now termed out over a two year period. We also amended two obligations with maturities occurring in 2011, amounting to $2.7 million. These obligations have been amended for repayment over a five year period ending June, 2015.
Finally, a few balance sheet metrics, the day sales outstanding for 2010, or at the end of 2010, were 44 days. The days payable outstanding were 72 days, and inventory turns are 5.37 or 68 days. During the course of the year, headcount increased from 70 to 95 people as we added direct labor personnel and to -- to support increased production, as well as strengthening our engineering and sales and marketing teams.
In summary, the Company continues to make financial progress evidenced by strong revenue growth, improving gross profit, optimization of operating expenses, and continued progression toward profitability. Now, I'd like to turn the call back over to Mark for his concluding remarks.
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Mark Blodgett, ProPhotonix - CEO [5]
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Thanks, Tim. My concluding remarks will focus on how we are embedding our technology and products into state-of-the-art applications serving fast growing markets. Broadly speaking we serve three markets, industrial, Homeland Security and defense, and medical. In addition, we have set our sights on serving the general illumination market with our LED technology.
As most of you know, we have two primary product lines, first at our Stansted UK facility we distribute laser diodes for Opnext, Sony and Sanyo. As well as manufacture diode-based laser modules. Our low power, high precision lasers are used in a wide variety of industrial applications including food inspection and sorting, wheel shaft alignment and production facilities, lumber inspection and sawmill optimization systems, tire production alignment systems, oil and water sensors for offshore production facilities, to name just a few examples. Current medical applications for our lasers include laser therapy in the dermatology field, and patient alignment systems for one of the world's leading manufacturers of imaging equipment.
Over the last 15 months, we have made considerable investment developing a new line of high performance lasers called InViso, this product was specifically designed to address the automated inspection market, more frequently referred to as the machine vision market. This market represents a significant growth opportunity for the Company, which is currently estimated at approximately $50 million, and we believe the design of our lasers offers prospective customers competitive advantages versus what is currently available on the market. New applications include wafer inspection for the solar panel industry, and rail inspection in China, to name just a few.
On the LED front, 2010 was a record in terms of both sales growth and profitability. Customer demand exceeded capacity and we were forced to add production chips until we were able to install new production equipment late in the fourth quarter, which increased production capacity three fold, as I already mentioned. In Cork, Ireland we are manufacturing compact, industry leading, extremely bright LED light sources based on our proprietary chip-on-board LED technology and the visible UV and infrared light spectrums.
Our knowledge in the areas of LED chip performance, thermal management, packaging, and optics have created significant demand for LED systems in a wide variety of applications. Industrial market inspection applications include silicon ingots for a leader in solar inspection equipment, thin film production for a Fortune 100 company, and flat panel glass inspection systems for a market leader. We are currently supplying infrared LED lights, which are an integral part of optical character recognition systems for license plate reading systems, which are currently used in London's control zone traffic market, as well as other markets. Starting last year our customer began selling similar systems in the United States. Such systems have significant growth potential in the general Homeland Security market. Given the compact nature of our LED systems, we are currently supplying devices to Europe's leading manufacturer of eye tracking sensors, which is a new and growing market.
On the medical front, we are currently manufacturing LED products used to erase images on portable x-ray machines and for 3D dental imaging for a leading US industrial materials company. We believe long-term that medical and biomedical application for LED-based devices represents one of the Company's best and most profitable growth opportunities. Sales to the medical market increased 91% year-on-year, from 14% of total sales in 2009 to 19% in 2010, which contributed to our strong 45% increase in overall sales growth.
Longer term, we see significant growth opportunities for our LED technology in the general illumination market. The general illumination market is in the midst of a major transition. LED lighting currently represents less than 3% of the $100 billion lighting market and is expected to increase significantly over the next decade, due to both energy efficiency and long life.
Since we are experienced at manufacturing high performance LED light engines, which means very compact, high brightness light sources for the industrial inspection and medical markets, we are well positioned to commercialize this technology to certain segments of the general illumination market. This may ultimately include end user products, as well as joint ventures with established lighting providers that can incorporate our chip-on-board LED components into their products. Given our overall understanding of LED and laser module technology, as well as the markets we currently serve, we will focus on expanding our product offering to grow our business into existing markets, as well as new markets that we have recently targeted.
From a financial perspective, given our four consecutive quarters of sequential growth, and improved profitability, the Company is well positioned to build on last year's performance. The balance sheet is stronger and debt amortization has dramatically been reduced, which bodes well for the future. In 2011, we expect to increase our investments in R&D, as well as strengthen both our product management and sales capabilities.
As part of that effort, six weeks ago we merged our LED and laser sales forces into one global sales force, which has been organized along geographic rather than product application lines. We believe the strategic shift improves scalability and will allow us to grow faster in important markets such as the US and China. We remain excited about the organic growth opportunities for the Company based on our initial successes in the industrial and medical markets.
In addition, ProPhotonix will continue to evaluate potential acquisition opportunities, which might strengthen the overall product offering of the group. We are heartened by the recent progress we have made on multiple fronts and remain confident in our long-term future.
Lastly, I would like to mention the appointments of two new Non-Executive Directors, which were announced this morning. Both Tim Steel and Vincent Thompson are both entrepreneurial and have deep experience in capital markets and their input and expertise will be invaluable to the Company -- to ProPhotonix as the Company continues to grow and prosper. This concludes our prepared remarks. Operator, please open the call to questions. Thank you.
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Questions and Answers
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Operator [1]
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Thank you, sir. (Operator instructions) We have a question from Ronald Urvater, with Capital Partners. Please go ahead with your question.
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Ronald Urvater, Capital Partners - Analyst [2]
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Yes, thank you, operator. And congratulations, Mark and to the team. A tremendous year of transformation on all fronts. It is very exciting. I just wanted to expand a little bit my understanding, you mentioned just a moment ago, about your sales organization. And I wondered just if you could elaborate, given the variety of markets that you are serving and the growth in front of you, how in fact does the sales process work from an efficiency point of view, in that, there are different markets that you are targeting? So, even from a geographic point of view, does the sales team cover different types of customers? Or do you need specialized sales people per industry segment? I just want to get a better understanding of the efficiency of the sales process, if you could expand on that?
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Mark Blodgett, ProPhotonix - CEO [3]
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Thanks, Ron. That's a good question. In fact, last week we just spent 1 week bringing all of our sales people to 1 location in Ireland, with the goal of cross-training. We essentially had LED sales people and we had Laser sales people in the organization, and we found it became un-scalable, and we made a strategic decision to combine the two. So, we were cross-training, as well as focusing on applications. We have a number of customers, for instance, who buy both Lasers and LED systems for us. And it didn't make sense to have different sales people calling on them.
So, the key thing from our perspective is to make sure that our sales people, many of them, by the way, have engineering backgrounds, are well trained both in terms of the attributes of the products and applications. We are really focused on applications, but we have specialized in certain sectors as you may have detected, for instance, Solar we already mentioned, Medical being a very big push, those types of things.
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Ronald Urvater, Capital Partners - Analyst [4]
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So in fact, as a corollary, then given the existing sales force, is it fair to say that now, as if revenues start to take off, you can really leverage them --the efficiency of the sales function? In other words, you wouldn't have to go out and hire a whole bunch of new sales people just to get the revenues up let's say 100% from here, just to pick a number?
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Mark Blodgett, ProPhotonix - CEO [5]
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Well, in last year's headcount, we actually did add some sales people. And we have probably targeted to one or two more sales people this year. I should also mention, the way we run our business we have product management behind the sales people and we have application engineers that support the sales people. So, we are not asking each sales person. So, we have a very leveraged sales model we think.
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Ronald Urvater, Capital Partners - Analyst [6]
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Okay. Yes, that was the first of my questions. So, it sounds like you are set now to really expand the business on all fronts. And in terms of capital, I presume you have enough short-term working capital to handle any increased inventory requirements and things of that nature?
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Tim Losik, ProPhotonix - CFO [7]
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Ron, this is Tim Losik. Certainly our budgetary process and our budgetary assessment for the 2011 year takes that into consideration. So, your assumption is correct. It certainly is. We have that going forward with regard to the budget and the models that we have right now.
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Ronald Urvater, Capital Partners - Analyst [8]
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Great. Well, congratulations, guys. You did a really terrific job and look forward to continued progress. Thank you.
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Operator [9]
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Thank you. We have no further questions at this time. Please continue with any further points you wish to raise. There are no further questions, please continue.
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Mark Blodgett, ProPhotonix - CEO [10]
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Well, thanks to everyone for taking the time. We appreciate it and we look forward to reporting on our future progress in the quarters and year ahead. Thank you very much.
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Operator [11]
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Ladies and gentlemen, this concludes the ProPhotonix final results conference call. Thanks for participating. You may now disconnect.
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