Giga-tronics' (GIGA) CEO John Regazzi on Q1 2017 Results - Earnings Call Transcript

Giga-tronics Incorporated (NASDAQ:GIGA)

Q2 2016 Earnings Conference Call

August 8, 2016 16:30 ET

Executives

John Regazzi - CEO

Steve Lance - CFO

Analysts

Daniel Gardner - Emerging Growth Equities

Operator

Welcome to the Giga-tronics First Quarter Earnings Conference Call. My name is Eric and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.

I'll now turn the call over to Steve Lance. Please go ahead, sir.

Steve Lance

Thank you, Eric. First, I'd like to read our Safe Harbor Statement. This conference call contains forward-looking statements concerning operating performance, future orders, long-term growth and shipments. Actual results may differ significantly due to risks and uncertainties such as delays with manufacturing and orders of new products, receipt or timing of future orders, cancellations or deferrals of existing orders, the company's potential need of additional financing, the ability to be traded on NASDAQ, the volatility in the market price of our common stock and general market conditions.

For further discussions, see Giga-tronics' most recent Annual Report on Form 10-K for the fiscal year ended March 26, 2016, Part I, under the heading Risk Factors, and Part II, under the heading Management's Discussion and Analysis of Financial Conditions and Results of Operations.

I will now discuss our financial results for the first quarter of fiscal 2017. Net sales for the quarter of fiscal 2017 were $3.4 million, compared to $4.4 million for the first quarter of fiscal 2016. The decrease was primarily due to the winding down of a $6.5 million non-recurring engineering order to develop a variant of our radar filter for the F-16. The F-16 filter moved into production in July under an associated $10-million, multiyear order, which is expected to ship through fiscal 2020.

Operating loss for the first quarter was $910,000, compared to $473,000 in the first quarter of fiscal 2016. The increase in operating loss was to the decrease in sales, fixed factory overhead being absorbed by fewer product shipment, and production variances associated with early advanced signal generator units.

As announced in June, if the first quarter, we completed the sale of our Switch product line to Astronics. Astronics paid $850,000 after June closing for the intellectual property and agreed to purchase approximately $0.5 million of related inventory during the second quarter. After netting related expenses, the transaction resulted in a gain of $802,000 in the first quarter. More details regarding the transaction will be found in our Form 10-Q we are filing later this week.

Net loss for the first quarter was $102,000, compared to $629,000 for the first quarter 2016. The decrease in net loss was primarily due to the $802,000 gain associated with the sale of the Switch product line to Astronics.

The company ended the first quarter with $1.8 million in cash and $1.4 million in working capital, with -- and $3 million in shareholders' equity. But with the sale of the Switch product line to Astronics and the sale of our legacy product to Spanawave in December 2015, Giga-tronics is now primarily focused on the electric warfare market with the newly developed advanced signal generator, which we believe has significant growth and margin potential, and the Microsource YIG radar filter business, which also has growth potential along with more predictable cash flow due to long-term contracts associated with the jet fighters.

As a result, we have been able to reduce our employee headcount by approximately 20%, from 71 in November 2015 to 55 on July 31, 2016.

I will now turn over the call to John Regazzi, our Chief Executive Officer. John?

John Regazzi

Thank you, Steve. Good afternoon and thank you for joining our quarterly earnings conference call. As Steve just mentioned, Giga-tronics has now completed its transformation from a general purpose test equipment supplier to a company now focused on two very specific segments within the electronic warfare test market. As a reminder, I will review the two segments in some detail, and add the current status of each business.

The first segment is defined by the radar filter business that we conduct through our Microsource subsidiary. The prior generation of fighter jets, F-15, F-16, F-18, are all receiving upgraded radars to extend their useful life. When installed on the older planes, the new radars cause interference with other electronic systems onboard because those new radars are so much more powerful than the ones they replace. The Microsource Radar Filter solves this interference problem. With more than 3,000 F-16 jets still operational worldwide, the opportunity could exceed $100 million over the next three to five years, including the planned F-15 upgrades. Microsource is the sole source supplier for these filters and Microsource works closely with the two major U.S. prime contractors responsible for upgrading the jets.

In May of this year, we received a $4.5 million order for the F-15 filter variant, which is a 50% increase over the $3 million order we received last year associated with this program. Microsource net sales, however, were still low in the first quarter of fiscal 2017 because we did not have the production line at full capacity until June. The company expects revenue during this fiscal year from its Microsource business unit to return to levels achieved in fiscal 2015. We plan to continue shipments of the $4.5 million order throughout the year.

In July, we received a $1.9 million order for nonrecurring engineering from Boeing, which we will begin executing in fiscal 2017. This order is for addressing a part obsolescence issue on the F-15 program. The order demonstrates the customer's commitment to the program and it is a good indication that we will receive additional annual production contracts in the future.

In the second quarter of this fiscal year, we will also start delivering on the $10 million multiyear F-16 production order received last year, which we expect to continue shipping through fiscal 2020. As of today, our Microsource business unit has $16.4 million of backlog and we expect this to grow substantially as the U.S. and foreign governments around the world place orders for these radar upgrades. We expect to ship $7 million of the $16.4 million between now and at the end of fiscal 2017.

The second area of focus relates to the major investment that we've made over the last four years in the company's new Advanced Signal Generator. This new product has moved Giga-tronics into the threat simulation and target generation market. Threat simulation is the art of generating realistic signals mimicking a potential adversary's radar in order to evaluate the effectiveness of our countermeasures. Target generation is the art of creating realistic radar reflections for testing a radar's overall performance and for testing its resistance to jamming. The Giga-tronics Advanced Signal Generator is being well received at the major prime contractors, the Service branches, and at research institutes around the world that perform these evaluations.

Giga-tronics will continue investment in this platform and it is currently completing the development of a companion receiver to the Advanced Generator. A receiver is another needed component in the complex process of evaluating modern EWU equipment. It will also open the platform to adjacent markets such as surveillance and direction finding.

We've also entered into the second phase of our strategic software licensing arrangement with Lockheed Martin to develop enhancements to the current real-time threat emulation system. In the first quarter of fiscal 2017, we shipped only a limited number of Advanced Generator units, while we continued focusing on its manufacturability. In addition, significant technical progress was made with our companion receiver, culminating with the shipment of the first production unit. We expect to deliver several additional receivers to customers within the quarter.

In June, Giga-tronics received a $3.3 million order from the U.S. Navy based upon its Threat Emulation system, which is a combination of our Advanced Generator hardware and the software licensed to us from Lockheed that we announced last December. We expect to fulfil the order over the second half of the current fiscal year. In July, we received a $542,000 follow-on order from the United States Navy for additional Advanced Signal Generator hardware that we expect to ship over the next few months. As of today, the Advanced Generator product family has $4.2 million of total backlog, and we expect to ship all of it by the end of fiscal 2017.

The focus on these two segments, the radar filters and the electronic warfare evaluation, will drive the company's margins higher and will provide top-line growth as we build market share within the threat simulation and target generation market. The company currently has more than $20 million of total backlog, of which $11.2 million is shippable within this fiscal year.

With that, I'd like to open the call to questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And our first question comes from Daniel Gardner. Daniel, your line is now open.

Daniel Gardner

Hi, John. I'm curious in the -- Lockheed has been quoted in the trade press in recent weeks as suggesting that they already have orders for up to 300 F-16 upgrades. Also the General Carlisle from the Air Combat Command, U.S. Air Force, has been publicly quoted in the trade press as saying that they have budgeted money to upgrade 200 F-15s. I'm wondering what the time lag is between when Boeing and Lockheed get those types of orders and they eventually trickle through to Giga-tronics for the YIG filters.

John Regazzi

Thank you for your question, Dan. I have seen those articles myself. The 300 upgrades, speaking of the F-16, it was about equally split between Taiwan, South Korea, and Singapore. So we have been talking with Lockheed about the timing of this, and they -- it's not easily determined when all of this will take place. We have the order for the 100 planes for Taiwan already in our backlog, so that's what the $10 million is for. The next one that we anticipate will be from South Korea, and that one is currently -- they're bidding which radar they're going to put on the plane.

So they don't know yet whether it will come from Northrup or whether it will come from Raytheon, so that needs to be determined first. So whenever they send these things out for bid, and obviously they're doing it to keep things as competitive as they can, this just drags it out. So I really can't predict when we'll see that. It's likely not to happen in this current fiscal year. I have also been in discussion with Lockheed and I have -- at least the position they're taking right now is that the Singapore order for upgrades will not use a filter, that they -- I've been told that the filter will not solve that particular airplane's issues. So the most we could see is -- from those -- that one -- those three orders would be for 200 jets.

With regard to the 200 airplanes, F-15 upgrades, that has always been in our forecast and we have been working on a multiyear bid with Boeing to price that out for the next three years. Typically, we'll see that order in the springtime. So I'm not sure I'll see it before the end of the calendar year, but hopefully before the end of the fiscal year, we'll see the follow-on order for additional F-15 upgrades. Does that answer your question, Dan?

Daniel Gardner

Sure. And is Giga still the sole source supplier for the YIG filters?

John Regazzi

Yes, for both -- for all aircraft that we're engaged with, yes.

Steve Lance

And Dan, this is Steve. One other thought on the F-16 South Korea: no matter which radar they choose, both radars need our filter.

Daniel Gardner

Great. Thank you very much.

Operator

We have no additional questions at this time.

John Regazzi

Okay. Well, I appreciate everyone's participation on the call, and thank you for your continued interest in Giga-tronics. Good afternoon.

Operator

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

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