LightPath Technologies' CEO Discusses F2Q 2014 Results - Earnings Call Transcript

Jan.30.14 | About: LightPath Technologies, (LPTH)

LightPath Technologies, Inc. (NASDAQ:LPTH)

F2Q 2014 Earnings Call

January 30, 2014 4:30 p.m. ET

Executives

Dorothy Cipolla - Chief Financial Officer, Corporate Vice President

Jim Gaynor - President and Chief Executive Officer

Analysts

Robert Ainbinder - Newport Coast Securities

Operator

Good afternoon everyone and welcome to the LightPath Technologies Fiscal 2014 second quarter financial results conference call. All participants will be in listen-only mode. (Operator Instructions) Please note today's event is being recorded. I would now like to turn the conference call over to Ms. Dorothy Cipolla, Chief Financial Officer. Ma'am, you may begin

Dorothy Cipolla

Thank you and good afternoon. Welcome to the LightPath Technologies fiscal 2014 second quarter financial results conference call. Our call today will be hosted by Mr. Jim Gaynor, President and CEO.

Following management's discussion, there will be a formal Q&A session open to participants on the call. Before we get started, I'd like to remind you that during the course of this conference call, we will be making a number of forward-looking statements that are based on our current expectations and involve various risks and uncertainties that are discussed in our periodic SEC filings. Although we believe 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.

With that out of the way, it's now my pleasure to introduce Jim Gaynor, President and CEO of LightPath.

Jim Gaynor

Thank you, Dorothy, and welcome to everyone who has joined us on the call today. We appreciate your ongoing interest in LightPath. I will open with an overview of the operational results, highlights and recently developments, and then will turn the call over to Dorothy for a more in-depth review of our financials. After some closing remarks, we will open the call to your questions.

Our progress in the second quarter of fiscal 2014 clearly reflects the investments we have made to become a global optical technology powerhouse. Through our proprietary technology and manufacturing processes, we have lowered the cost of production and in turn this has led to win market adoption which has contributed to the growth in our unit volume production. Essentially, this is what we have referred to in the past as demand creation.

We continue to invest in lowering our manufacturing costs and enhancing our growth prospects. On today's call I will talk more about each of these elements of our business which are the lowering of our cost basis and enhancing our growth. First I will address our growth.

The success of our efforts is undeniable as unit production volumes have reached their highest levels in the company's history. New orders received in the second quarter of fiscal 2014 were $3.2 million. This strong order performance increased our 12-month backlog as of December 31, 2013 to $5.16 million, an increase of 24% as compared to the June 30, 2013 backlog.

In our second quarter last year, we did have a major customer in the digital projection market that was developing a new product. And due to some complex technical issues unrelated to the optics. The decided to cancel the project, creating a large short-term gap in our revenue. If we adjust the revenue for this issue from last year, it reveals that our remaining business has grown 17% year-over-year. When you consider the additional effects of the DARPA program that was completed last year, our revenue from underlying business grew at a rate of 25%. Even so, our second quarter results did not meet our internal forecast but we were pleased that we are able to replace these programs with new business and expanding market.

In the second quarter of this year we had also had a higher than planned increase in our SG&A expense due to higher than normal stock compensation. This was a non-recurring event caused by the vesting of restricted stock units due to the death of one of our board members. Taking this additional expense into account, our adjusted EBITDA would have increased to $134,000.

We continued to experience strong demand in our two primary business lines, precision molded optics and infrared products. Sales volumes of precision molded optics were 590,000 lenses in the second quarter of fiscal 2014, a significant increase as compared with earlier periods. In fiscal 2012, for example, our sales volume averaged 408,000 lenses per quarter and in fiscal 2013 our sales volume averaged 550,000 lenses per quarter.

We have demonstrated our ability to create a strong business development pipeline with demand for our aspheric lenses emanating both from our North American and Asian sales regions. LightPath has created a solid platform to continue growing our high volume business for precision molded optics which greatly benefit from end-market diversification. These markets include laser tools, telecommunications and wireless broadband infrastructure, consumer electronics, digital projectors, industrial equipment and medical instruments. This diversity enables us to withstand the vertical industry cycles while positioning us to benefit from growth opportunities in other markets.

Among the growth opportunities that we are capitalizing on, we have been experiencing high demand in China. New orders from China sales increased 108% in the second quarter of fiscal 2014 as compared to last year's quarterly average. And we anticipate this growth to continue during the balance of the fiscal year. Recent customer wins have resulted in a 70% increase in our laser tool business, a 50% increase in our telecom business, and an 83% increase in new digital projector business comparing the first half of fiscal 2014 compared to the first half of fiscal 2013.

Reflecting the growth that we have been experiencing and the anticipated continuation of this trajectory, we were required to increase our production capacity. This was a fortuitous development as it plays into our ongoing efforts to lower our cost basis. So now we will address the manufacturing and cost basis reduction efforts. During the fiscal second quarter we announced the second high volume manufacturing facility in China to the formation of a new wholly owned subsidiary, LightPath Optical Instrumentation Zhenjiang Company.

LightPath currently occupies a 22,000 square feet facility in Orland Florida, a 17,000 square feet facility in Shanghai, China, and the new facility will occupy 26,000 square feet. This new investment in our future will effectively triple our combined global lens production capacity. We estimate our manufacturing cost could be up to 40% lower at this new facility once we are at full production levels.

We remain confident in our growth prospects going forward with demand for our precision molded optics and increasing interest in our infrared product line. I will now turn the call over to our CFO, Dorothy Cipolla, to provide additional detail on the second quarter and half-year results.

Dorothy Cipolla

Thank you, Jim. First, I would like to mention that much of the information we are discussing during this call will also be included in the press release and in 10-Q, which we will be issuing later today. I encourage you to visit our website at lightpath.com and specifically through the Investor Relations section and see presentations made at recent investor and shareholder presentations.

I will now review financial performance and operational details from our 2014 second quarter, which ended on December 31, 2013. Revenue for the second quarter totaled $2.09 million which is basically flat as compared to the second quarter of last year. Revenue in the second quarter of last year included $154,000 for a large purchase order from a customer in connection with the DARPA low cost thermal imaging manufacturing program. Excluding DARPA contributions, our revenue increased 5% year-over-year, primarily reflecting growing unit demand for precision molded lenses for the telecommunications market.

Growth in sales for the next several quarters is expected to be derived primarily from the precision molded lens line, driven by the telecommunications sector's need for expanded infrastructure to support mobile internet demand, the industrial tool sector and demand for the fiber laser delivery systems and as we enter the consumer electronics market. Infrared products now being designed and introduced are expected to accelerate the company's growth more meaningfully beginning in the fourth quarter of fiscal 2014 and throughout fiscal 2015.

Our gross margin percentage for the second quarter was 43%, the same as in the second quarter of last year. Total manufacturing costs of $1.67 million increased approximately $17,000 in the second quarter as compared to the same period last year. The increase in manufacturing cost was compared to last year as a result of higher unit production volume and wages, partially offset by a decrease of $100,000 in direct costs associated with the DARPA related purchase order in the prior year.

Selling, general and administrative or SG&A expenses were $1.15 million for the second quarter, an increase of approximately 13% from last year. A higher SG&A in the current quarter is attributable to an increase of $96,000 in stock compensation expense, an increase of $20,000 in higher travel expenses for sales trips and visits to our facility in China, and an increase of $19,000 in sales commission. The majority of the larger than normal stock compensation expenses is due to a payout to the estate of Mr. Silverman, for member of our board of directors.

Total operating loss for the second quarter was approximately $186,000 as compared to a loss of $25,000 for last year. During the second quarter we received $261,000 in gross proceeds from the exercise of warrants. 303,806 previously issued warrants were exercised and converted into common shares in connection with exercises. The exercised price was $0.87 per share of common stock.

I will now review financial performance and operational details for the first six months of fiscal 2014. Revenue for the first half totaled approximately $5.72 million compared to approximately $5.81 million in the last year. Revenue for the first half of last year included $407,000 for a large purchase order in connection with the DARPA project. This was offset by an increase in sales of our other products. Therefore, excluding the onetime in nature DARPA revenue, our first half 2014 revenues increased by nearly 6% from the same period of last year.

Our gross margin percentage for the first half was 45%, up from 42% last year. Total manufacturing cost of $3.16 million decreased by approximately $206,000 in the first half as compared to last year but last year's prior amount included $257,000 in direct costs associated with the DARPA related purchase order. And we also had lower coding costs for molded optics.

SG&A expenses were $2.23 million for the first half, an increase of approximately 13% from last year. This increase was due to an increase of $100,000 in stock compensation expense, an increase of $112,000 in wages, an increase of $50,000 in higher taxes received, and an increase of $26,000 in commissions and an increase of $20,000 for outside services for lens design.

Total operating loss for the first half was approximately $248,000 as compared to a loss for $51,000 for last year. Moving on to the balance sheet. During the first half of fiscal 2014, the company received $1.5 million in net proceeds from the exercise of warrants. $1.1 million previously issued warrants were exercised and converted into common shares in connection with these exercises. The exercised prices ranged from $0.87 to $1.89 per share of common stock.

Cash and cash equivalents totaled approximately $2 million as of December 31, an increase of $1.57 million at June 30. The increased cash balance led to an improvement in the company's current ratio as of December 31 which was 4.06:1 as compared to 3.75:1 at June 30. Total stockholders' equity as of December 31 was approximately $7.21 million compared to $5.43 million as of June 30, 2013.

Also, as of December 31, the company's 12 months backlog was $5.16 million which compares to $4.14 million as of June 30, 2013. This was an improvement of approximately 26%. With this review of our financial highlights concluded, I will turn the call back to Jim.

Jim Gaynor

Thank you, Dorothy. Our focus is to accelerate our top line growth while effectively managing our cost structure. We are vigorously pursuing opportunities to further expand or current accounts and develop new ones. We believe the themes I outlined earlier will provide continued growth. In addition, we continue to see future opportunity for our infrared products. These opportunities are broad-based across several of our larger market segments and not limited to any specific industry, market, or geographic location. We believe the company is well positioned to capitalize on many opportunities we see ahead and that our investment story is really taking shape.

I will now open the call to any questions.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from John Noble [ph] from Taglic Brothers [ph]. Please go ahead with your question.

Unidentified Analyst

I am just trying to make sure I had the facts correct. I think, Jim, you said without the DARPA program in the second quarter the growth was 25% but then I heard Dorothy say it was 5%. So I just want to make sure I am crystal clear on that without DARPA.

Jim Gaynor

Okay. John, there was two elements that we were adjusting the prior year's revenue from. One was the cancellation of this product where in the second quarter last year we had experienced close to -- over $400,000 worth of business associated with this digital projector project which the company cancelled. So that business at that rate went away. And so if you took that out, the remaining grew about 17%. Then the other comparison was the DARPA program which was also completed last year, is not in the numbers this year, and so we had to replace that business as well, so that’s another 5%. So that kind of gets us or thereabouts, and that gets you to the 25%. So a combine of those two events.

Unidentified Analyst

Okay. So it was a combine. I thought I heard DARPA for maybe [indiscernible]. And speaking of DARPA, the last quarter, I just wanted to get an idea of, did their margins contributed to an increase or decrease in your overall margins. Could you have that information on the DARPA margins for the last year or last quarter?

Jim Gaynor

The DARPA margins were not -- I mean that was a recognition of revenue against cost to the project. So those margins were rather low associated with that. I think in the, probably 34% range. So they were actually with a lot [ph] of that tends to be a boost to the margins on the other business. So I think what you are seeing is basically there is some fluctuation of a percent or two in the margins on a quarter-to-quarter basis, which is result of mix changes in the products that were shipped during those quarters predominantly.

Unidentified Analyst

Okay. I just wanted to make sure because you know it's a large increase in your margins from this quarter versus last quarter. Just to factor out the DARPA but they still were about 1% to 2% increase in margin, if you factor our DARPA?

Jim Gaynor

Yes.

Unidentified Analyst

Okay. And to get an idea of the capacity with the new plant in China. I was wondering if you had for fiscal '13, how many lenses you actually produced, and now with the new plant in China, what is your capacity?

Jim Gaynor

Well, I mean that’s going to be a growing capacity, John, so we are sitting here right now, we have been building additional lines that are targeted to go into that facility when it opens. So our capacity right now is in the plus 4 million range. And then as we continue to build that up, that capacity will continue to move. So we intend by the time we are done, we will have probably 2.5 to 3 times our capacity today. But that’s a future projection, not necessarily in place today.

Unidentified Analyst

You said 4 million capacity right now, 4 million lenses.

Jim Gaynor

Right.

Unidentified Analyst

That’s not including the new plant. In other words you still have to build that out so currently you are at 4 million capacity?

Jim Gaynor

Correct.

Unidentified Analyst

Okay. So we are looking to double or even triple that with this....?

Jim Gaynor

We should. We will have the capability. What I mean is we will have the space in the facilities to continue to build additional press lines to build that capacity up as the business ramps. Okay.

Unidentified Analyst

Okay. And now just to get an idea of where you are with your current capacity say of 4 million lenses. What was the lens count for fiscal '13 you did, approximately?

Jim Gaynor

It was close to 3 million lenses.

Unidentified Analyst

Okay. So 3 million in fiscal '13. So you still have a little cushion with the existing plants right now?

Jim Gaynor

Yes, but the run rate that we are seeing going forward with the orders that we are doing is starting to push that close to our capacity limit.

Unidentified Analyst

Okay. And speaking of the plan in the Shanghai, I was looking through, I think it was in the 10-K, the lease expires April 2014.

Jim Gaynor

That lease has been extended for two years.

Unidentified Analyst

Okay. So we are looking at April 2016, it already was extended.

Jim Gaynor

I am sorry.

Unidentified Analyst

I mean it's extended now to 2016.

Jim Gaynor

Correct.

Unidentified Analyst

Okay. I just wanted to make sure. And I saw a report, I was reading an industry report about projected growth in uncooled thermal cameras, specifically the commercial end of that. And I just wanted to get a feel for, if you are already producing lenses for this market, the uncooled thermal camera business. And if so, what are plans for growing this business?

Jim Gaynor

I mean our plans are substantial. We are at the point where we have been sampling and building prototypes and we have some production going in the quantum cascade laser type applications in the infrared space. We have recently gotten a qualification in a firefighting camera with a major defense contractor. He is going into the commercial side of the business with his firefighting camera. So that thing is qualified to the national fire protection standards. So that’s kind of like a, as I understand, a FDA qualification, so you are design them and the changes are not now allowed without a requalification. So as that business builds for them, that business will build for us. So there has been significant effort going forward. You know as I said, we believe this to be a game changing event as we go into the market place with our molding technology. And we believe we will be able to compete at a significant price discount to the current costs that are in the market place today. So I believe this to be a significant growth driver of our business. It's come a little slower than we had planned but it is definitely coming.

And I think the things in the marketplace are indicating that these types of applications are growing in acceptance and maybe, now you just saw some consumer type efforts come out with the [indiscernible] announcement where they put a thermal imaging camera on a cell phone. And I think they are charging $349 for it. Well, that’s a consumer type application and once those things are in the marketplace, there will an infinite number of developed apps to go with that and drive that kind of business. So it's getting to be a pretty exciting marketplace and molding is certainly going to have its place and we believe we have positioned our company to be able to take advantage of that going forward. So it's pretty hard to predict how much that’s going to be, when. But we believe it's going to be substantial and we believe we will start to see some of the benefits of that in our fiscal fourth quarter of 2014 and throughout 2015.

Unidentified Analyst

Okay. That was my next question actually. I think it was Dorothy who said that starting fiscal Q4 of '14 that the IR products should really contribute to your growth. That’s what I wanted to find out. If you are looking really at this, and I stress, that it's an uncooled thermal camera business that you are looking at?

Jim Gaynor

Yes. I mean that seems to be the types of applications that fit with the types of products that we are interest in. Mostly because of their price points and the cost structures that are involved, and the type of lenses that those things would demand.

Unidentified Analyst

Okay. Just one final question in regards to this topic. I think if I look back at fiscal '13, approximately 3% of your revenues were from infrared lenses. So if you are looking to really start growing this in the fourth quarter, if I could ask you if there is any early estimates of what you think this could contribute to the total revenue, the IR business, going into 2015.

Jim Gaynor

Well, John, we try not to give that kind of forward guidance. I think that it will be difficult given the nature of the business and how we are able to break into it. But I will just leave it at the fact that we think it will be a substantial contributor.

Operator

And our next question comes from John Fabum [ph] from Coast Capital Associates [ph]. Please go ahead with your question.

Unidentified Analyst

Jim and Dorothy, congratulations on doing a nice job of increasing your unit volume production, while you continue to invest smartly in handling in the areas where you think you are going to have some growing demand for your products and really launching that infrared business. I wanted to follow up if I could on that last series of questions the prior person had on the consumer electronics market. Maybe you can help me understand, you are focused on a -- I guess we came with Flear Systems [ph] and their new product. But where do you see your products fitting into the consumer electronics market?

Jim Gaynor

Well, I think there is a couple of ways, we have traditionally been suppliers to OEMs, a component supplier to laser-base type applications. So as those things expand in the consumer markets, we will see that growing. One area that we are particularly excited about is in the digital projection which maybe driven by consumer demand but is a device that would go into like movie theatres and things of that nature. So that digital projector is using a laser light source for those kinds of things. I think you would see some substantial growth in that marketplace.

I think our industrial tool business has a segment in it that has evolved in things like handsaw guides and laser levels and that kind of stuff, that are sold through places like and Lowe's and Home Depot and those kinds of store. As well as some high end stuff that’s more industrial in nature. So we have a substantial business going into those kinds of assembly. So I think it's that kind of stuff and as these laser type application expand into those types of products then that’s where we see that consumer type interface.

Unidentified Analyst

Sure. Those are pretty big opportunities. How are you making progress in each of those areas because it sounds like you have got the great products that fit in at the right time for many of these applications?

Jim Gaynor

I guess as I said, as that market grows, that we are doing the things to continue to lower our cost so that we can participate in those things, which is always a driver. We are putting the capacity in place to ensure that we can keep up with that kind of demand which we see those type of consumer applications would require that kind of volume. So I think we are doing those kinds of things. We believe both on the visible side that’s probably a $250 million market for our types of products. That’s a lot of lenses for us. So I think as those applications expand then we are going to enjoy that marketplace.

Unidentified Analyst

Just one last question here on your infrared products. Just to help me understand and maybe for other folks here on the call. Your infrared products, how do they differ from your traditional aspheric lenses?

Jim Gaynor

Substantially, the process of manufacturing them is similar. I mean it's basically using a different material system that transmits in the non-visible spectrum as opposed to the visible spectrum. But from a product point of view, other than the differences caused by the materials which we are using, it's very similar. So it's an easy add-on for us but a different type of marketplace.

Operator

(Operator Instructions) And our next question comes from [indiscernible] from Newport Coast Securities [ph]. Please go ahead with your question.

Unidentified Analyst

Let me just start by making a couple of quick suggestions on conducting these conference calls. First of all, for the long suffering shareholders of this company that have been in this stuff for, some of them for 20 years, they are not seeing much return. I would hope that the company respects them in a way that, actually -- especially to respect by releasing its earnings in a formal press release one hour before the conduction of any conference calls. That means probably you should be holding your call at 5 p.m. and release your results at 4:01 p.m. so that people can see what's going on at the company, calculate the margins and be able to ask questions and not having to take notes during the call. So that’s my number one suggestion.

Number two suggestion is, to limit the questions to maybe one or two, maybe two with a follow-up, and then get back in the line to ask another question later on. Because everybody has questions and appointments and we need to get this call moving rather than spending with one person all 15 minutes on the call. So with these suggestions out of the way I want to ask the following, couple of quick questions. First of all, when is LightPath going to stop comparing its quarterly results to quarters including DARPA revenues and onetime items i.e. every quarter we are hearing about internal revenue growth but happened last year, we had the DARPA revenue contract, we had the Department of Defense, and therefore the revenues are flat. So what was the last quarter in which there were DARPA revenues, in other words when do we start seeing just clean commercial revenues, apples-to-apples going forward.

Dorothy Cipolla

We effectively recognized 99% of the DARPA project through Q4 of 2013. So in fiscal 2014, you have not seen any DARPA revenue.

Unidentified Analyst

Okay. Very well. So in the September press release if I remember correctly, under safe harbor provisions Jim expressed hope for LightPath revenues growing 15% in this fiscal year. We are two quarters in and as far as I can see, revenues are flat. Now I don’t think that Jim made any provisions for DARPA revenues and non-DARPA revenues in that press release so I was thinking we are comparing dollars to dollars. With two quarters out of the fiscal year and only two quarter remaining, where does that guidance stand? And again, this is safe harbor, you are free in this country to make projections on your revenue growth. In the first two quarters I see no revenue growth, we are left with two quarters. Are we going to hit 15% revenue growth for the year or not?

Jim Gaynor

You know [indiscernible], I have told you many times before we don’t give forward guidance. And what I just explained on this call was, would you see the underlying business growing at a rate that is in that 15% to 20% range when you exclude things like cancellation of a major program, not because of what you are doing but because the new product development that the guy was working on didn’t work out. It was major effect and that’s a big bump it takes a little time to recover from. So I think that’s what's driving it. I think the good news here is, we were able to replace that business and keep the revenues on a steady keel, which took a tremendous effort by the team here to make that happen in such a short period of time.

The bad news here is that we had to replace that business. So I think that some of the things that happened is not what I would consider -- they are extraordinary events when things of that nature happen and they create some issues. So I think that’s -- what I am hopeful is that you recognize what's going on with the business in regards when you look at it and what's happening with the underlying business and the growth rate that are there. We see these things coming and in the future I think those kinds of rates will continue.

The other thing that’s going on with our business that isn't as obvious, is that there is a large mix shift going on as the business is growing. We see this tremendous growth coming out of China in the markets in the industrial tools segment, which is a lower point business. And that’s well and good business because the margins are good and that’s business with good margins. We are not giving up margins by taking this lower price point business, but it does create the illusion that the top line is not growing because you are booking a lot more units at lower selling price. So those things are driving the business and it's still very good business.

Unidentified Analyst

Okay. I am sorry, I joined the call a little late, so if the margins are still good what were the operating margins this quarter?

Jim Gaynor

43%.

Unidentified Analyst

Operating margins not gross margins.

Dorothy Cipolla

It is a loss, operating loss.

Unidentified Analyst

I am sorry.

Dorothy Cipolla

It was an operating loss.

Unidentified Analyst

Operating loss, okay. So we don’t have actually operating profit. The margins maybe good, the gross margins, but the operating margins are not good. Also what cash was generated from operations, if any, this quarter?

Dorothy Cipolla

This quarter cash used by operations was $218,000.

Unidentified Analyst

Okay. So we have no operating margins and we have cash used in operations. I would really like to see these numbers hit on the head going forward and then I can be happy about LightPath pursuing 'good margin business'. Now let me just ask you about one last thing and I will follow my own advice of getting off...

Jim Gaynor

Okay, okay. If you don’t want to get back [indiscernible] or you are going to just....

Unidentified Analyst

No, I have one last suggestion. I went through your presentation today and it included the name of two major Chinese companies in the laser space. And so why do I have to see that as a shareholder and as a broker in a 8-K filing on the SEC website but I cannot see a press release. Why are you guys not telling your story? You have good stories to tell, it can be definitely better going forward. But the names of these kinds of marquee clients should be put out in press release. If you are putting them in an 8-K on the SEC website there should be a $500 press release on PR Newswire every couple of months releasing names of these marquee customers going forward. Any comments?

Jim Gaynor

Okay. I will take your advice under -- take your suggestion advisement.

Unidentified Analyst

And what about the suggestion to release the quarterly numbers before you conduct the call?

Jim Gaynor

We normally release our press release prior to the conference call. Today we had a little bit of an issue that delayed it, so I didn’t want to delay the conference call since it has been scheduled. So the press release will be out later today and I apologize for its short delay.

Operator

And our next question comes from Robert Ainbinder from Newport Coast Securities. Please go ahead with your question.

Robert Ainbinder - Newport Coast Securities

Well, my first question with regard to the margins. I didn’t quite hear what happened, I think you said there was a onetime event that happened with regard to some options or something like that...?

Jim Gaynor

That didn’t affect the gross margins. That was an SG&A expense.

Robert Ainbinder - Newport Coast Securities

Okay. All right. So what happened with regard to the gross margin that brought it down and do you expect it to come back up into that 47%, 48% range?

Jim Gaynor

Well, I mean the gross margin fluctuates a few percentage points given the mix of product that ships in any given quarter and I think that’s the only thing that’s going on here, Bob.

Robert Ainbinder - Newport Coast Securities

Okay. All right. And in the 8-K release, I am just looking at the telecom bookings. I know that, you have been saying that telecom looks like it's been pretty strong and I see a dip in the Q2, in your Q2 numbers here. Is that something that -- can you kind of walk me through what happened there?

Jim Gaynor

Not of the top of my head, Bob. Right now I don’t remember what caused that dip. I would have to look at it.

Robert Ainbinder - Newport Coast Securities

Okay. I mean you are anticipating a significant ramp back up. So is there some specific orders that you are seeing that come and flow through into the coming...?

Jim Gaynor

I mean we have had a number of -- you know the telecom space is doing very well right now. And not only is it doing well from a perspective of volume, it's doing well from a perspective of technology. Because a lot of the stuff that we are getting in is associated with these high-speed networks, the 400-gig stuff, which is state of the art now. So not only are we moving volume but we are also moving the state of the art products that are coming out in the telecom space. So I think it's a very encouraging sign. We have qualified a lot of lenses into some of these major telecom equipment providers. The market's demand for bandwidth continues to drive the need for expanded optical networks which drives the demand for this equipment and thus our lenses. So I think telecom going forward is going to be looking very positive.

Robert Ainbinder - Newport Coast Securities

Okay. And with regard to the anticipated infrared ramp. Where will that production be taking place? Primarily in China or will that be taking place in Orlando?

Jim Gaynor

You know as we have said in the past, our plan is to initially build that business up in the U.S. in Orlando, because overall it does have a defense component to it that we would like to be able to participate in until such times that the commercial side of it requires additional capacity that would make sense to move it to China, then we could. But for now our plan is to do that initial production in the U.S.

Robert Ainbinder - Newport Coast Securities

Okay. And can you maybe talk a little bit about that DARPA program that was cancelled. Is there any technology that was developed through that program that you might be able to use going forward?

Jim Gaynor

The DARPA program wasn’t cancelled, it was completed.

Robert Ainbinder - Newport Coast Securities

Oh, it was completed. Okay.

Jim Gaynor

This was a program that we participated with a major defense contractor. The program was basically to develop a low cost thermal imaging device with a target base of about $500. The subcontracted the optics for the device to us. We developed those optics and hit the target prices that they were looking for. So it was a very good success. We enjoyed over $1 million of basically development money that ran through the revenue line against the cost of the program. That helped us develop a lot of things that we wanted to do with our infrared technology, primarily around the materials systems and the processes involved in molding that particular material system. So it was a very successful program. It was very fortuitous for us to be able to participate at that level. And that was basically free development money that didn’t have any strings attached to it. And we hope there has been some follow-on programs at a much smaller scale with the same contractor that are continuing that work. In the future as he completes his side of the deal, we would expect to be able to see some significant business coming from that.

Robert Ainbinder - Newport Coast Securities

Okay. That was where my next question was going. I guess, whatever the end product was, is that still under development and is that potentially going to come through to where you might see a significant increase in unit volume from that particular manufacturer.

Jim Gaynor

You know we are waiting for him to finish his design. So what we wants with his packaging, which I think is happening fairly soon, I think that that is then we would expect some business to come from that. But at this point the timing of that is pretty murky. I really couldn’t tell you how quickly that might happen. I think there are other things in the marketplace in the infrared space that we are having success. That’s built upon the technology and the processes that we developed with that money, that are going to come to fruition much sooner. And we are seeing several design wins and things of that nature and we have some very good opportunities going forward that I think will present some volume to us in that product line. As I said, we expect to start to see that in our fiscal fourth quarter this year and through '15.

Robert Ainbinder - Newport Coast Securities

Right, that’s great. Can you talk about the new hire -- well, the recent hire, I don’t want to say the new hire, the recent hire from Newport. How is he so far in working for LightPath and do you see any successes coming from him yet?

Jim Gaynor

I see quite few successes coming. I think it's a big advantage. He is developing the relationships. He is renewing his relationships with LightPath that he had developed through Ophir and Newport. And I think it's very positive thing and a lot of the opportunities and the designs that we are currently doing picked up at a considerable pace. So I think it's a very good situation that will pay off very nicely in the future.

Operator

(Operator Instructions) And everyone, this concludes today's question-and-answer session. I would like to turn the conference call back over to management for any closing remarks.

Jim Gaynor

Okay. Thank you. I would like to thank everybody for joining us today. And I particularly want to congratulate our employees for the hard work that resulted in our continued success which as positioned us for our future growth. So thanks again and we look forward to speaking to you next quarter.

Operator

Ladies and gentlemen that does conclude today's conference call. We thank you for attending. You may now disconnect your telephone lines.

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