Syntec Optics - Q2 2024

Executive Summary

• Q2 2024 showed a sequential rebound with net sales of $7.01M (+12% q/q), a return to positive adjusted EBITDA ($1.32M) and EPS ($0.01), though revenue remained below the prior-year quarter ($7.69M) due to lower custom tooling and NRE, partially offset by stronger product sales (+20% y/y to ~$7.0M).
• Management guided Q3 2024 revenue to $9.5–$11.0M, indicated gross margin should hold or slightly improve, and forecast positive net income for 2H 2024; G&A to rise modestly to support ramped engineering, quality, and pilot production.
• Order momentum spans space optics (LEO satellites), defense microdisplays (freeform prism subsystem), and AI-driven data center optics (initial order expected to more than double to ~$3.2M annually within a year) — positioning optical content as the near-term growth catalyst.
• Liquidity at quarter-end included an unused $3.7M revolver and $4.8M equipment line; cash was $0.83M. Sequential margin expansion was driven by reduced accounting and production-related expenses as new product ramps scale.

What Went Well and What Went Wrong

What Went Well

• Product revenue mix improved: product sales rose ~20% y/y to ~$7.0M while total net sales were $7.01M; the shift from development to production improved mix and profitability dynamics.
• Profitability inflected: adjusted EBITDA rose to $1.32M from -$0.67M in Q1; EPS improved to $0.01 from -$0.03 in Q1, reflecting cost controls and volume leverage on ramping programs.
• Commercial traction in new end markets: “entered the high-growth data center market driven by the deployment of Artificial Intelligence, with the first product order forecasted to more than double to $3.2 million annually within a year,” and secured follow-on space and defense optics orders.

What Went Wrong

• Year-over-year revenue decline: net sales fell 8.9% y/y to $7.01M as custom tooling (-$0.8M) and non-recurring engineering (-$1.1M) weakened versus Q2 2023, despite stronger product sales.
• Lower y/y adjusted EBITDA vs Q2 2023 ($1.32M vs $1.78M) as gross profit dipped ~$0.2M and G&A rose to enable launches; indicates scaling costs ahead of revenue ramp.
• Working capital/cash: cash decreased to $0.83M (from $2.16M at 12/31/23), though liquidity supported by unused revolver/equipment lines; operating cash flow was -$1.98M for 1H 2024 as inventories rose to support ramps.

Transcript

Operator (participant)

Good afternoon, and welcome to Syntec Optics Holdings, Inc.'s second quarter earnings call. My name is Drake, and I'll be your operator for today's call. As a reminder, this conference call is being recorded. At this time, all participants are in a listen-only mode. I'll now turn the call over to Dane Rudy, Syntec Optics' Chief Financial Officer. Please go ahead.

Dane Rudy (CFO)

Thank you, operator, and welcome everyone to Syntec Optics' second quarter earnings call. Al Kapoor, Chairman and Chief Executive Officer of Syntec Optics, will join me today for a call to discuss the company's financial and operational results for the second quarter of 2024. Here's a few quick reminders before we start. First, today's call is being webcast, and our press release can be accessed along with it on the investor section of the company's website, www.syntecoptics.com.

Second, we'll make forward-looking statements based on current expectations during this call. Actual results may differ due to factors noted in today's release and in our periodic SEC filings. Finally, we will reference some Non-GAAP financial measures. Reconciliations to the nearest corresponding GAAP measure are included in today's release and on our website. With that, I will turn the call over to Al.

Al Kapoor (Chairman and CEO)

Thank you, Dane, and thank you to everyone joining us today for Syntec Optics earnings call. For those of you who are newer to our story, I will begin by taking a few minutes to give you some information about Syntec's strategy and how we're executing it. Syntec Optics' strategy is to lead the large, yet often what we think an overlooked market for light-enabled products by offering a diverse product portfolio tailored to blue-chip customers' needs.

This approach leverages our operations strengths and is built on solid foundation that is financially sound. To achieve this, we are focusing on the following: One, we will grow by having a large target as addressable market, which is the rapidly expanding segment of the global economy, driven by light-enabled technologies. This is not small. It is 11% of the total global GDP per SPIE 2022 report.

Two, within this large target, we will add acyclical end markets by focusing on recession-resistant markets, including communications, defense, biomedical, and consumer sectors. Three, we will leverage existing strengths in such end markets by utilizing our existing customer base, market presence, and operational capability to support all new product launches, capitalizing on our unique abilities across horizontal diverse technologies.

Four, employee retention will complement our leverage of strengths. We aim to maintain what we currently have, one in five employees with over 10 years in service, continuing our commitment to being the best place to work for in our community. Five, we will continue to build relationships with blue-chip customers and expand our business with industry leaders across all end markets, including new products in space optics and biomedical optics. Our ability to be strong supply chain partners makes us a safe and dependable choice for their high-precision products.

Next, we will also continue to develop products around core capabilities, enhancing our competitive advantage by building 20 years of innovation, manufacturing expertise, trade secrets, and patents, and this way, we will continue to generate stakeholder value. We are executing this Syntec strategy by continuing to be a leading provider of mission-critical optics and products to advanced technology partners in defense, biomedical, and communications equipment.

Our operations span the development of advanced manufacturing processes, the design and assembly of mission-critical products, the integration of these products and other innovative ancillary components into subassemblies for subsystems, and marketing and selling these subsystems into a diverse set of markets, including biomedical, disposable, biomedical, defense, consumer, and communications end markets.

We market mission-critical optics through our blue-chip customers, advanced technology integrators, and OEM customers who rely on optoelectronics, light-enabled devices, and intelligence that requires high precision and reliability.

We have a 90,000-sq ft facility, vertically and horizontally integrated, an advanced manufacturing facility in Rochester, New York, where we are headquartered. Syntec wins in the marketplace because our customers appreciate our unique ability to achieve tough specifications at benchmark costs by deploying our patent portfolio, combined with our proprietary manufacturing trade capabilities. Before discussing our growth opportunities and some of our other operational highlights, I will turn back to Dane to review our financial and operating results. Dane?

Dane Rudy (CFO)

Thank you, Al. I will now review our results for the three and six months that ended in the second quarter. All figures are GAAP, unless otherwise noted. At the previous earnings call, we provided guidance for second quarter 2024 revenue to be between $6.4 million and $7 million. I'm excited to report that our revenue came in just above $7 million, as anticipated.

The $7 million in net sales for the three months ending 2024 was an increase of about 12% compared to $6.3 million in Q1 of 2024. Those sales decreased by about 9% year-over-year, compared to $7.7 million in 2023. Sales from products increased 20%. The decrease in net sales compared to the prior year is due to decreases in our customer tooling and non-recurring engineering revenue streams.

Custom tooling revenue decreased by $0.8 million for the three months ending 2024 compared to 2023, and non-recurring engineering revenue decreased by $1.1 million for the three months ending 2024 compared to 2023. For the three months ending June 2024, product revenue was $7.0 million, as compared to $5.8 million in 2023, a 20% increase.

This demonstrated we were able to convert our engineering and tooling efforts to increase production sales. The second quarter of 2024 Adjusted EBITDA was $1.32 million for the three months ending 2024, compared to a negative $0.7 million Adjusted EBITDA in the first quarter of 2024, and $1.8 million in 2023. The increase over the previous quarter was achieved by a reduction in accounting and production-related expenses.

Contributing factors to the year-over-year decrease include a $0.2 million decrease in gross profit and an increase in general and administrative expenses to enable future product launches. The company ended the second quarter of 2024 with an unused $3.7 million line of credit, an unused $4.8 million equipment line of credit, and a pay down of 3.2% principal on other commercial bank lines during the quarter.

Our net income for the three months ending in the second quarter of 2024 was $0.3 million or $0.01 per share, up from a negative $1.2 million or negative $0.03 per share in Q1 of 2024, and compared to $0.6 million or $0.02 per share for Q2 2023.

Before turning the call back over to Al, I would like to discuss our expectations for the third quarter of fiscal 2024. Our recent increases in ongoing sales into the communications, biomedical, and defense industries are expected to accelerate in the third quarter, particularly within the communications end markets, which include space optics and artificial intelligence deployment, driven by data center microlens arrays.

We also anticipate growth in our mission-critical products for integrated optical scopes, driven by military equipment modernization strategy of the U.S. Department of Defense. As such, third quarter 2024 revenue is expected to be in the range of $9.5 million-$11 million. We expect our gross margin to hold level or slightly improve based upon the profitability of products that are ramping up.

General and administrative costs are expected to increase modestly to enable ramped-up engineering, quality, and pilot production to support continued strong growth into the fourth quarter. Looking to the fourth quarter, we anticipate continued strength from communications and biomedical markets, with additional growth coming from defense-based product launches.

Lastly, we expect to be net income positive in the second half of the year, enabling further investment to energize our continued growth. With that, I will turn the call back to Al to provide additional color on our growth initiatives.

Al Kapoor (Chairman and CEO)

Thank you, Dane. Last year, we expanded into space communications that Dane talked about, and continue to grow sales in this sector. This aligns with our strategy to diversify across markets, enhancing recession resilience, alongside with our products in defense, biomedical, and consumer end markets. These four light-enabled end markets Syntec has entered are sized by SPIE, nearly $1.5 trillion in combined total global revenue. Syntec Optics is poised to rapidly expand our market presence in these end markets.

Our products are propelled by tailwinds as we move towards laser-based satellite communications versus radar-based for low latency, biomedical automation, defense equipment modernization, and on-shoring. Mission-critical products use proprietary techniques that provide an economic moat. In addition to our steady, mostly 10-year life cycle products constituting our existing portfolio, our new product launches will enable strong growth into 2025 and 2026.

We aim to grow our new additions to the disposable optics product line to about $10 million in annual revenue within three years. Our space business has already reached a nearly $6 million annual run rate, and our data center business, that's AI-based, is beginning to generate about $3 million annually and will expand significantly into the three-year time horizon. We expect our new biomedical nano-precision optics line to reach a $3 million annual run rate this year.

Additionally, our night vision optics business, currently at a $3 million annual run rate, is projected to grow to $10 million per year within two years. Syntec is a unique provider of high-performance, cost-effective optics for various night vision configurations. These existing product launches have the potential to double our sales organically. Syntec is also actively pursuing acquisitions to strengthen our position in the light-enabled marketplace.

We are excited about our future and the progress we have made so far. With that, I will turn to the call to the operator, who can close it.

Operator (participant)

Ladies and gentlemen, thank you for your participation and interest in Syntec Optics. This concludes today's event. You may disconnect your lines and enjoy the rest of your day.