Amplitech Group - Q2 2023

Transcript

Operator (participant)

Good day, ladies and gentlemen, and welcome to AmpliTech Group's quarterly investor update call, where the company will discuss its second quarter 2023 financial results. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will be given at that time. As a reminder, today's conference is being recorded. I would now like to turn the call over to AmpliTech's Director of IR, Shan Sawant.

Shan Sawant (Director of Investor Relations)

Thanks, everyone, for joining today's call to review the progress of AmpliTech's growth initiatives and to answer investor questions. On the call today are AmpliTech's Founder and CEO, Fawad Maqbool, the company's COO, Jorge Flores, and the company's CFO, Louisa Sanfratello. Following initial management comments, we will open the call to investor questions. An archived replay of today's call will be posted to the IR section of AmpliTech's corporate website. This call is taking place on Tuesday, August 15th, 2023. Remarks that follow and answers to questions, including statements that the company believes to be forward-looking within the means of the Private Securities Litigation Reform Act of 1995. These forward-looking statements generally include words such as anticipate, believe, expect, or words of similar importance. Likewise, statements that describe future plans, objectives, or goals are also forward-looking.

These forward-looking statements are subject to various risks that could cause actual results to be materially different than expected. Such risks include, among others, matters that the company has described in its press releases and in its filings with the SEC. Except as described in these filings, the company disclaims any obligation to update forward-looking statements which are made as of today's date. With that, let me turn the call over to our CEO, Fawad Maqbool.

Fawad Maqbool (CEO)

Good afternoon, ladies and gentlemen. Thank you for joining our Q2 2023 review call today. Today, we'll reflect on our performance in the second quarter of 2023 and discuss the company's growth outlook and market opportunities. The second quarter, we reported a revenue of $4.1 million and a gross profit of $1.9 million, translating to an increase and record gross profit margin of 47%, despite facing inflationary pressures. Sales from our core low-noise amplifier business grew by 23%. Our semiconductor distribution sales saw a dip primarily due to the softening of international demand, which is evident in the broader semiconductor sector as well. We expect this sector to rebound nicely and are already seeing strengthening signs in the semi industrial world. Our Q2 loss stood at about $508,000.

This can be attributed to our ongoing investments in research and development for new products, including new 5G wireless infrastructure products, MMIC designs. Our R&D initiatives totaled over nearly $700K for this quarter and $1.2 million for the six months ended June 30th, 2023. We're confident that the investments we've been making in the new products will generate higher returns and profitability for the company when they are introduced to the market in 2024. They are designed to be not only cutting edge, but also light touch labor. Light touch labor means less labor intensive, which is the source of most of our expenses in the products made here in the USA. It was supported by our new automated quoting and other capabilities of the new multifunction CRM system that we implemented. Financially, our position remains robust.

As of June thirtieth, our cash and liquid marketable securities totaled $9.3 million, in addition to $2.5 million in receivables. Working capital stood at $16.7 million at quarter end. We're confident that these balances will provide us with the capital necessary to support our current strategic growth initiatives. The surge in LNA sales and demand underscores the market's recognition of our products' value and the strong competitive advantage with clear differentiators that position us for continued growth. Most of the growth in this quarter was from our SatCom clients, who utilized our super low-noise amplifiers, enabling their systems to achieve unmatched performance levels. AmpliTech's offerings enhance overall SatCom systems, including satellites, earth stations, gateways, transponders. This ensures signals traveling farther, connections are more dependable, and systems run more efficiently.

Considering signal performance and bandwidth, the effective isotropic radiated power, which is EIRP, gauges the signal strength that a satellite can transmit to Earth. For a steady connection, if an amplifier introduces excessive noise, the EIRP required escalates. For instance, direct-to-home services might necessitate EIRPs between 50-55 dBW. That's a measure of power on watts for transparent reception. Most importantly, if you minimize system noise, the satellite will use less energy and provide a broader coverage area. This is a key parameter for satellites since size and weight are critical for cost and reliability in every system, especially all the new LEOs and MEOs that are being launched for the Internet in the sky. In terms of reliability, the junction temperature of a device, like an amplifier, is pivotal.

Exceeding this amplifier temperature can result in malfunction....A study conducted by NASA's Jet Propulsion Laboratory indicates that for every 10 degrees rise in operating temperature, the life expectancy of a standard electronic component may plummet by 50%. Our amplifiers facilitate the transmission of identical signals at much cooler temperatures, leading to longer system lifetime and a higher mean time between failures. This is also a very key parameter that differentiates us from our competitors. Less failures means longer connectivity and improved signal performance over a period of time. Our low-noise amplifiers are the lowest power dissipating on the market and can help the system be safer, more energy efficient, and subsequently more cost efficient. Considering all these points as a whole, this illustrates the value proposition that we bring to our many Fortune 500 customers, differentiating ourselves from our competitors.

As I mentioned earlier, we have continued to invest for future growth. This is very important to, to note. We're excited to share that our ongoing R&D projects, centered around 5G O-RAN Massive MIMO Radio units, among others, are progressing very well and are on track with our expectations. Through the utilization of Massive MIMO, coupled with beamforming technology, we are enabling a precise and efficient solution for true 5G Category B base station radios. These are the units that go on top of the towers. This breakthrough approach is addressing existing performance limitations, facilitating support for a larger user base within each cell and enhancing the overall end-user experience in densely populated areas. These are city, urban areas. Our cutting-edge 5G O-RAN radios are also set to showcase our proprietary low-noise amplifier, 5G MMIC chips. MMIC meaning Monolithic Microwave Integrated Circuit. The Massive MIMOs require arrays.

Arrays require tiny, small amplifiers, and these are best done in a MMIC form. Therefore, our new technology for MMICs is very important to these 5G radio development and all sorts of antenna developments. This technology, characterized by an exceptional low noise figure, provides a strong competitive advantage as it will enable an increased coverage range while providing near 1 Gb per second speed capabilities. That's 100 times what we have currently. As a result, this innovation reduces the requisite number of radios in a true 5G network, leading to an opportunity to enhance the return on investment for every deployment site. This is very important for MNOs and private 5G networks. We anticipate the receipt of initial prototype units by our AGTGTSS division in the fourth quarter of this year.

As such, we are currently in discussions with mobile network operators, MNOs, and many private corporations that are seeking the advantages provided by our new 5G O-RAN compliant Cat B radios. The robust investments we have made in these new technological endeavors are paving the way for the introduction of novel product solutions. This is a key, key, key note. We are making this R&D investment for a particular reason. It's to separate us from what exists now and to bring the future of the fifth 5G, 5G technology now, which does not exist. We believe that these solutions are poised to elevate the company to new heights when they're introduced and available to the market, which we expect in 2024. We have a lot of interest from current MNOs and customers already. We're in discussions.

As we move through the third quarter and as a result of our newly implemented CRM and AI engines, we're addressing a surge in requests for quotes for our low-noise amplifiers and 5G networks. We anticipate a portion of these to convert into sales in the coming quarters. We're also continuing our efforts to add NGK's product line to our Spectrum division. This is a deal we made last year to add very special microwave packages to our Spectrum division, which we expect to complete by the end of our fiscal year, 2023. We also expect NGK Electronic Devices RF microwave packages to start contributing to our top line sales number early in 2024. As we roll out our new leading-edge products next year, we believe that 2024 will be a transformative and pivotal year for AmpliTech and its stakeholders.

Our CRM now indicates over $85 million in potential opportunities. In closing, we're proud that our products enhance our clients' entire systems, as our commitment remains unwavering to aid our clients in shaping the future of communications. Thank you. We'll now open the call for questions.

Operator (participant)

We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, please pick up the handset before pressing the keys. To withdraw a question, please press star then two. At this time, we will pause just momentarily to assemble our roster. Our 1st question here will come from Jack Vander Aarde with Maxim Group. Please go ahead.

Jack Vander Aarde (Vice President and Senior Research Analyst)

Okay, great. I appreciate the update, great to hear about the, the solid pipeline and record gross margin. It's great to see. Fawad, I, I wanna start by touching on, on the core LNA business, because this had, it had a strong revenue quarter for you. It was up 23% year-over-year, it sounds like. Just what's, what's the driver behind your core LNA strength, and is this sustainable?

Fawad Maqbool (CEO)

Well, there's a need or more of a demand for all these, let's say cloud, cloud-based systems right now. They're actually ground stations that many companies like Viasat and CPI and all the big guys are also supplying to Amazon, Google. They're all creating their own cloud systems. When they do these cloud systems, they have to communicate from the satellite ground station to the satellites. That requires the most lowest noise figure amplifiers, because range is very critical in all these satellite communications, because lots of data is going through this. The demand has increased in that way. All these companies, they're looking for the best solution possible, and we have the best solution in these LNA, core LNA products. That has increased.

We're also picking up a lot of the business from competitors who have failed and do not have that performance. We see an increase there. We will continue to see an increase also due to our new CRM system, which is really seeking out potential customers, potential new customers that we've never had before. All of these things lead to growth and will continue to lead to growth in this business.

Jack Vander Aarde (Vice President and Senior Research Analyst)

Okay, great. Great color there, Fawad. You know, next thing, most importantly, I, I really want to dig into the pipeline a bit more. You know, last quarter was around $66 million, it sounded like, and now you just provided an update. Sounds like it's grown, it's over $80 million. Maybe just a couple questions. I'll, I'll kind of go one by one. Just what's changed since last quarter that's contributing to that pipeline growth? Are, are you seeing more RFPs coming from prior trade shows? Are these larger customer orders than you previously thought? What's really been the difference there that's driving that increase since last time we spoke?

Fawad Maqbool (CEO)

It's actually a bit of both. We actually have gotten more RFQs, just because of the. We're turning over a lot more leads from our CRM system. It's finding the key people that are responsible for the technical development of their systems. The satellite operators, they have all the engineers that we need to connect to, and they see the performance of our amplifiers, so they see the need right there. Part of it is just having a very good AI system, CRM system, that finds the right people to connect to that really need our product. That's one very good reason why we're getting increased RFQ activity, and then closing some of those deals is the next part of it.

All of those deals have to start getting closed, and that's why we think that next year is going to be very pivotal for us. It takes time to build this kind of a base. It takes time to digest the $80 million. It's growing because every person gives us an actual discussion on what their needs are going to be. It's either the number of satellites, the number of radio stations, the number of tow- radios that they need for their base stations, you know, services, all, and MMICs that they're going to need, thousands of MMICs in their application. When they get contracts from defense, government or defense or private, you know, high second-tier suppliers, it trickles down to us, and the value is there because of the, that's going to increase our sales.

We're gonna convert and start to convert all these leads, which we didn't have before. We started to implement this, as we mentioned, you know, a couple quarters ago.

Jack Vander Aarde (Vice President and Senior Research Analyst)

Fantastic. Yeah, just, I mean, just for a relative context, I mean, over $80 million of, of potential pipeline is, you know, that's, that's four times larger than your revenue last year altogether. I mean, it, it's a significant increase for sure. Maybe just, just given for estimate's sake and just near-term expectations, I know that conversion rates are gonna, you know, you're gonna figure that out. Just in the near term, how, how does the third and fourth quarter of this year kind of look relative to the, the first half of this year, based on where you, where you see things playing out?

Fawad Maqbool (CEO)

Well, it looks like it's going to be consistent, we're gonna still be around $4 million-$5 million per quarter. That's what it looks like right now. We're going to see, obviously, an increase in bookings towards the middle of the fourth quarter or so, because we're working on a lot of deals right now that will be booked. The conversion to revenues will be really starting in 2024, our numbers indicate at least 136% growth from the previous year. That's basically just an estimate, but it's based on our actual requirements with customers that have given their requirements. All these numbers that we have, we have actual numbers that are a result of these customers being very interested.

It's not just a number, and you'll see that when these start converting. That's when you're gonna really see that. 24 is really an important year for us. It's really going to be the year where all of our best laid plans, that we've done so far are going to come to fruition. This is what we've been doing. We've been trying to say that from the beginning. When we've raised money, we never said we're gonna be profitable or great the 1st year or the 2nd year. We had a three-year to five-year plan. We raised the money. We are building the foundation, and we're almost complete now in this year, for end of this year. As we complete that, the most important part of it is that in 2024, you'll see that result.

You'll see the start, everything coming together, and that's going to continue for the next three years.

Jack Vander Aarde (Vice President and Senior Research Analyst)

That's, that's great. You just threw out a number there. I don't want to hold you to a specific number, but it sounds like you're pretty confident. Wherever revenue ends up in 2023, it sounds like you're thinking it's going to more than double next year, over 100% growth?

Fawad Maqbool (CEO)

Exactly.

Jack Vander Aarde (Vice President and Senior Research Analyst)

Is that a fair...? Okay, that's a fair assessment? Okay.

Fawad Maqbool (CEO)

That's a fair assessment. That's,

Jack Vander Aarde (Vice President and Senior Research Analyst)

That's true. Excellent. Just maybe one, one last question. Just help us understand, maybe just what the, the types of... I want to quantify and just kind of get more context of the pipeline, over $80 million in the pipeline. Can you maybe just quantify or parse that out between like, outline what those opportunities are between, you know, 4G power upgrades versus your core LNAs versus Spectrum business? Just help us understand-

Fawad Maqbool (CEO)

Yes.

Jack Vander Aarde (Vice President and Senior Research Analyst)

how we, how we make sense of your pipeline.

Fawad Maqbool (CEO)

Sure. I can, I can touch over these, these numbers. Basically, they're, they're coming from a various different sources. We have our core LNA business, right? Basically, the core of business. About in 2024 or so, we're going to have a lot of revenue coming from LNA business. Some we're going to have semiconductor materials. That's going to go up. The Spectrum is growing because of the NGK business that we're adding to it. That's going to be a very good source. In 2024, we're still going to be about 29% into contribution from Spectrum because we expect that to grow, although it declined this year because of the international demand.

We, we said that, a couple of quarters ago also, that we're going to make up and increase and scale up their business by adding this, the new product line, NGK, which has about 80% of the world's market for packages, for RF microwave packages. That microwave packages feeds right directly into our, our microwave MMIC's. It's working hand in hand. We'll have a 29% of contribution of revenue in 2024 from Spectrum. Our core growth is going to grow as well, but, you know, mostly in 2024, the AGT, AGTGSS division should start showing revenue because there's a need for the customers, the MNOs, some large names, I can't really say them right now, but they need these new radios.

We're in discussions with almost seven or eight different companies that, that need these 5G radios, our radio itself in particular, because of the advantages that it offers. We're in discussions based on sites, the number of sites, the locations. We're conservative right now. We're saying the 1st year or so, in 2024, we'll have about 10 sites that we will be supplying. We'll go to 50 sites the following year and maybe 100 sites in the next year, third year. Each one of those sites-

Jack Vander Aarde (Vice President and Senior Research Analyst)

I'll just, can I jump in right there and just ask you, you know, 10, 10 sites, what, what does that mean? What, what is that kind of opportunity?

Fawad Maqbool (CEO)

Sure. Each site would have three of our radios in there, right? You'll see, as you've seen all those towers where they have the triangular setup, the three radios cover 360 degrees. Where the new radios will go up, three radios for each site, and each radio is approximately about $10,000 or so. That's just the hardware. Then along with that site, you also have revenue from installation charges. We have revenue that we charge for installing the entire site, all the radios. We have revenue, monthly revenue, that comes from maintenance of all these sites. All of these are adding up. Total revenue, you know, basically around $5 million or so in 2024. That's our re- estimate from AG, just the AGTGSS, just 5G.

Jack Vander Aarde (Vice President and Senior Research Analyst)

Fantastic.

Fawad Maqbool (CEO)

Okay.

Jack Vander Aarde (Vice President and Senior Research Analyst)

Okay, that's helpful color. Yep, that's, that's helpful. That's very helpful color. Just the, the pace, maybe it's too early to tell, but just the pace or the speed of which you can execute or achieve those upgrades, like, let's say for 10 sites?

Fawad Maqbool (CEO)

Yeah.

Jack Vander Aarde (Vice President and Senior Research Analyst)

How long would that take?

Fawad Maqbool (CEO)

Each site installation roughly is around three months-four months.

Jack Vander Aarde (Vice President and Senior Research Analyst)

Okay.

Fawad Maqbool (CEO)

We can do several sites in parallel, and we're building our team to be able to service that. That's why we're very conservative here. Although we may book a lot more than, than doing this 10, 10 sites, we may have booked much more than that, because sometimes some sites require maybe 1,000 radios. You know, they want the whole thing. Eventually, it'll take time to cover all those sites. We're building our, our force to do all that. We have also relationships and collaborations that we've set up to help us achieve all this. We're not doing all of this by ourselves. We have partners that do the hardware, the software, the system integrators that actually go up there and put the radios in. It's all a team effort.

It's not that simple, but we have all of that planned out, and that's why it's taken a while to do, but it will happen, all start happening next year. We also have revenue that we've projected from our new products. Our R&D has gone into making lots of new products that are actually lower cost per unit, but lower labor cost. We've reduced the labor because we've taken our MMICs, our very advanced MMICs that no one really has, with the low noise figures that we can use in our amplifiers themselves. That reduces the labor that we put into each one of our amplifiers. That also translates into more profit. Every time we lower our cost, it'll be more profit per product. Our entire goal, our strategy, and these numbers will show that, is to-

... increase our top line, increase our gross margins, and go after all the products that have higher gross margins, which in turn will give us higher bottom line.

Jack Vander Aarde (Vice President and Senior Research Analyst)

Okay, that's great, Colin. If I can ask just one more question, then I'll, I'll hop back in the queue. Again, it's about the pipeline. You know, I, I know obviously, I, I respect that some customers and, and the, you know, potential orders in there want to be kept confidential. Can you just maybe give us a sense of how many total customers or how many, how many individual customers that actually represents in the pipeline? Is it a handful? Is it 12? Is it 30? Is it 50? Just to give a sense.

Jorge Flores (COO)

Well, these are all large customers, so we're not going after consumers right now. They're basically large MNOs and large corporations that want private 5G networks. I would say between 15 and 20, roughly.

Jack Vander Aarde (Vice President and Senior Research Analyst)

Okay.

Jorge Flores (COO)

to begin, to begin with. This is not limited to, United States. We're doing global, global, retrofits.

Jack Vander Aarde (Vice President and Senior Research Analyst)

Got it. That makes a lot of sense. Well, congrats on the, on the strong momentum, and I, and I look forward to watching you guys execute. That's it for me.

Jorge Flores (COO)

Well, I appreciate it. I know everybody's waiting for, you know, the good, fantastic, results, but, hey, we're, we're working as we have said. We're gonna be doing the milestones exactly as we have planned. You know, this year was a little bit of a downturn, but that's, you know, that's expected to be up and down. It's all part of building the bigger company, building and changing the face of this company, so that we can be a much broader-based, solution provider.

Operator (participant)

Again, if you have a question, you may press star, then one to join the queue. While we assemble our roster, I'd like to turn the call over to Shan Sawant. Please go ahead, sir.

Shan Sawant (Director of Investor Relations)

Hey, thanks for the question, Jeff Kobylarz from Diamond Bridge Capital. I'll be reading off your questions. Okay, it's a two-parter here. I'll start with the first one. Jeff is asking: Did NGK contribute at all to revenue, or when, or when will that distribution agreement result in revenue? What is the materiality of that distribution agreement? Jorge, maybe you might be the best to answer this one.

Jorge Flores (COO)

Okay. Yes, up to this point, though, you know, we are in full preparation after we inked the deal with them earlier this year. We are doing a lot of feasibility studies for custom modifications on their housings. Also, you know, developing marketing campaigns. We are doing website updates, sales staff training, and this is also working directly with NGK. You know, a lot of items have to be in close coordination with their team as well. All of these preparations we believe we're going to be closing in by the end of 2023. We are definitely going to be able to release these 1st purchase orders to NGK by the end of the year, and we expect deliveries to occur early in 2024.

Definitely, we believe that we will have meaningful NGK sales to occur in 2024.

Shan Sawant (Director of Investor Relations)

Okay. Thanks, Jorge Flores. Following up on these questions, I also see company mentioned in the past that prospective customers were beta testing MMICs. What were the results of those tests?

Jorge Flores (COO)

Well, we have had, you know, a few companies that have approached us, you know, and actually bought, you know, like some smaller quantities of the MMICs. They are still, you know, doing their own in process design at their own factories as well. We do have visibility into many of their programs, many of their projects. You know, though, that, you know, the qualification and system design that takes, takes a long cycle. We are definitely patiently waiting for them to finish their efforts. You know, once they win, we will be designing, and then we will be ready to fill any orders that they need.

Fawad Maqbool (CEO)

This includes space, space applications.

Jorge Flores (COO)

Includes the space applications, yes.

Shan Sawant (Director of Investor Relations)

Great. We can move on to this one on the pipeline. The sales opportunity of $66 million, of course, this has changed since then. When will these contracts be awarded to the winning bidder?

Jorge Flores (COO)

Well, what was mentioned in Shan, you know, we, we do have conversations with a lot of them, and in many cases, you know, we know that if they win, we will win as well. Some of them, you know, we'll see in the near term, but some of them, though, you know, are pushing out to the right, it's, it's also because of the qualification beta testing that they themselves need to do with their own products. It's very dynamic, though. You know, it's a very dynamic sales funnel that we have, but we, we do believe, and we do expect us to be able to start closing some deals by the end of the year.

Shan Sawant (Director of Investor Relations)

Thanks, Jorge, and we have one last question here. Given the weaker market for semis, the Spectrum division, should investors expect sales to decline year-over-year for the second half as well?

Jorge Flores (COO)

Yeah. So far, though, Shan, as, as you've seen in the semiconductor industry, the market is down at least 11% this year. This definitely has affected our Spectrum division sales. However, though, you know, look at the industry economists, so they do believe that this semiconductor industry is going to be bouncing nicely by about 18% in 2024. We, we do believe that our Spectrum division is, is going to be able to recover some of the lost sales due to softer demand, and we are also, you know, scaling them up with the NGK opportunity.

Shan Sawant (Director of Investor Relations)

Thanks for clarifying on those. That, that concludes the Q&A I, I had in my email. Joe, I'll turn it back over to you.

Operator (participant)

Thank you. That will also conclude the live Q&A portion for today's call. I will now turn the call back over to Fawad Maqbool for any closing remarks.

Fawad Maqbool (CEO)

Thank you. Thanks to everyone who joined today's call to hear about the progress we've made and the plans we have to further our company's mission of providing the communication systems of tomorrow, today. We look forward to updating you further on our Q3 financial results call in mid-November. Until then, please contact us directly should you have any questions or wish to schedule a call with management. Our investor relations team can be reached at the contact information listed at the bottom of our press release. Thank you and be well.

Operator (participant)

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