Advanced Photonix CEO Speaks About His Company

| About: Advanced Photonix, (API)

On March 5, The Wall Street Transcript interviewed Richard Kurtz, Chairman and CEO of Advanced Photonix, Inc. (NYSEMKT:API). Key excerpts follow:

TWST: We would like to begin with a brief historical sketch of Advanced Photonix and a picture of the things you are doing right now.

Mr. Kurtz:
Advanced Photonix is an optoelectronic semiconductor components and subsystems manufacturer focused on the telecommunication, military, medical, industrial, non-destructive testing and homeland security markets. The company has three product platforms - high-speed optical receivers, optoelectronic solutions and terahertz systems and subsystems. All three of these product platforms leverage our core competencies including Indium Phosphide (InP), Gallium Arsenide (GaAs) and Silicon (Si) optoelectronic semiconductor design and material growth, microwave application engineering, and hybrid semiconductor circuit manufacturing. Our hybrid manufacturing includes high-speed semiconductor fabrication, integrated circuit assembly, fiber optic attachment and high-speed test in both standard and custom packages.

Our corporate strategy over the mid-term, which we define as the next two to three years, is to accelerate profitable revenue growth with existing and new products in the markets we serve. We intend to do this by providing state of the art optoelectronic solutions to our customers that will enable the company to maintain good gross margins in high growth markets. Each of our product platforms contributes to the overall strategy differently since each has a different product maturity and market growth stage and thus has different strategies necessary to meet our goals. Our high-speed optical receiver products [HSOR] are used in the telecommunications industry for 40 gigabit per second (Gbps) and 10 Gbps applications using proprietary PIN and APD photodetector designs. These products have the highest performance of any detectors in the market today and are available in industry standard and custom package configurations.

We are currently experiencing significant growth in this market as the buildout of the next generation wireline and wireless telecommunication fiber optic infrastructure accelerates to accommodate the delivery of HDTV, full motion video, computer to computer file sharing and Voice over Internet Protocol-based networks. Our challenge is to increase our application engineering for new product development and dramatically increase our high speed hybrid semiconductor circuit manufacturing capacity in our Picometrix facility in Ann Arbor, Michigan, while continuing to improve efficiency. We have increased capacity more than 300% during the past 12 months and anticipate similar capacity increases over the foreseeable future.

We expect to continue to experience high double-digit revenue growth for our products selling to the telecommunications market over the next 12 to 18 months. This will drive much of the near-term growth. Our Optosolutions solution products serve a variety of global original equipment manufacturing markets. API supports the customer from an initial concept from design of the semiconductor, hybridization and supporting electronics, packaging and signal conditioning for processing into prototypes through full-scale production, validation and test at our California and Wisconsin facilities. Markets for this product offering are typically referred to as high-reliability markets, like military, medical and some industrial applications.

Our focus here is growing profits with the consolidation of facilities from recent acquisitions, including the consolidation of two of our existing clean rooms into one that will be located in our Ann Arbor, Michigan, facility. This consolidation will create value through building strong manufacturing, product development and business development teams. The newest technology is our terahertz (THz) product platform, or our T-Ray? product offerings. Terahertz is the last unexplored frontier of the electromagnetic spectrum. As a result, these products are in the product development, market development and market adoption stage. Given the evolving nature of THz products it is difficult to predict the revenue stream coming from in the near term. THz can be used to provide two-dimensional and three-dimensional imaging through optically opaque materials (in essence, see-into packages). In addition, it can provide spectrographic and/or chemical composition information in order to differentiate materials. THz imaging has high spatial resolution, similar to that of the human eye, is capable of high-speed processing and is not harmful to humans.

Our T-Ray sensor product line is targeted at non-destructive testing, including baggage or cargo scanning and on-line quality-controlled markets. We will be introducing our fourth-generation terahertz system in March of this year. This new system will revolutionize how terahertz systems are used. Our goal is to deliver on the promise of this new technology and be the dominant supplier of terahertz's non-destructive testing systems for pharmaceutical, chemical, consumer products and homeland security markets.

TWST: As you grow the company, which will be more important - M&A activity or organic growth?

Mr. Kurtz: We have completed four acquisitions in the past three years and have grown our revenue from $7 million to over $24 million and increased our stock price from $1 to slightly over $2. In addition, during that time we improved gross margins from 30% to 47% and have established technical leadership in two of our three product platforms. I think we have demonstrated the ability to put companies together and build shareholder value. We are now focused on consolidating what we have done and concentrating on developing our significant internal growth opportunities. But, at the same time, we want to keep our eyes open for strategic acquisition opportunities that would be synergistic with our growth strategy. Each product platform has different growth characteristics and thus different opportunities for growth through acquisition. In Optosolutions, there may be further consolidation similar to our prior strategy. High-speed optical receivers may require more of a complementary optoelectronic technology, and terahertz may require targeting distribution channel acquisition or the other alternative of strategic partnering for certain applications.

TWST: What might be some year-by-year milestones for investors to look for?

Mr. Kurtz: One of the things that is very difficult for an investor looking at API is figuring out what kind of company we are. How do you classify us? We are an optoelectronic semiconductor components and subsystem manufacturer with three product platforms that are sold into five markets. The fastest growing platform is high-speed optical receivers for the telecommunications market. In that regard, we are a telecommunications optical component supplier with good gross margins. We are also a military, industrial and medical device optoelectronic semiconductor manufacturer with our Optosolutions platform with good gross margins. We are also developing breakthrough optoelectronic semiconductor technology with terahertz and are just emerging from the product development stage and transitioning to the application development phase that will eventually lead to the market adoption and rapid revenue growth stage. Once investors understand that we are a leading edge optoelectronic semiconductor components and subsystem manufacturer that is poised with near-term and long-term high growth opportunities and markets with a product platform that limits the downside, the picture becomes clearer and investor confusion is eliminated. I like to think of us as having the best of all three.

We are a stable business with the Optosolutions product platform that gives us a strong base development, a fast-growing telecommunication component supplier and a company that has an emerging breakthrough technology with terahertz. Right now, our Optosolutions product platform is the largest revenue contributor, but the high-speed optical receivers are the fastest growing product platform and will soon take over the Optosolutions platform. Terahertz has the opportunity to be a breakthrough technology that can be used in several large markets within non-destructive testing, homeland security and defense. It is entering the high reliability application and market development phase, which will take some time to blossom.

So look for milestones in our T-Ray product platform like new product introductions, application design wins and strategic announcements. When you look at the financial indicators or metrics for our business, investor should look at the gross margin and revenue growth. Gross margin is a meaningful measure for any company. It tells the story of how successful your business model can be in the long run. Revenue growth in our growth markets is the other measure of how well we are meeting our strategic plan. It is an important factor in growing our stock price and being able to realize cost savings that come with economies of scale. We focus on annual revenue growth as opposed to quarterly fluctuations that happen due to scale.