AmpliTech Group, Inc. Q3 FY2022 Earnings Call

Good day, ladies and gentlemen, and welcome to AmpliTech Group’s 2022 Investor Update Call. 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 call is being recorded. I'd now like to turn the conference call over to AmpliTech’s Director of Corporate Communications, Shan Sawant. Please go ahead.

Thank you and thanks everyone for joining today's call. Today we will review the third quarter and the progress of AmpliTech’s Growth Initiatives and answer investor questions. On the call today, our AmpliTech’s Founder and CEO, Fawad Maqbool; the Company COO, Jorge Flores; and the Company CFO, Louisa Sanfratello. Following initial management comments, we are going to open the call to investor questions. An archived replay of today's call will be posted to the news section of AmpliTech’s corporate website. Q3 earnings press release will also be found there. This call is taking place on Monday, November 14, 2022. Remarks that follow and answers to questions include statements the Company believes to be forward-looking within the meaning 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 obligations 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.

Thank you, Shan. Good day everyone. We appreciate your joining us on today's third quarter investor update call. I want to use this time to review some key financial and operational milestones from Q3 '22, speak on current market conditions and the overall communication space, and also provide an update on our two newer ventures MMICs and TGSS. Let's begin with some key highlights of the third quarter. Revenue increased 415% to $5.4 million, compared to $1.1 million in Q3 '21. Q3 '22. Gross profit grew to $2.7 million, an over 7-fold increase from the Q3 '21 gross profit of $314,000. The gross profit margin expanded 193 basis points to 49% compared to 29.7% in the same period last year. Q3 '22 net income reached $577,000 compared to a Q3 '21 net loss of $593,000. That's a positive swing of approximately $1.2 million. As of September 30, 2022, our cash and equivalents totaled $13.1 million and working capital was $20.2 million, giving us ample capital to fund all of our strategic growth initiatives. Now operationally, AmpliTech had a successful showing at the annual AOC Electronic Defense Show, achieving positive customer engagement and setting a company record for the number of meetings with new and existing customers. These included many military applications, as we know there was a large effort by the government to update much of the existing obsolete communications infrastructure. We expect this to create demand for our new technology. MMIC chips are now available to our customers for the first time for sampling and small quantities for production. We have had interests from government and commercial organizations for these MMICs and designs are expected to lead to production next year. Finally, TGSS, AmpliTech’s fully managed 5G system integrator company, is now operational. Revenue contribution from this division is expected to begin by Q3, 2023 or earlier. I'll get into more detail on that later on. Now I'd like to add some color to broader market conditions and speak to our revenue guidance for the year. AmpliTech product demand remains strong, as shown by the increased revenue guidance we just issued in our earnings press release. As I mentioned in the third quarter, we reported record quarterly revenue of $5.4 million. Effectively, quintupling our Q3 2021 revenue of $1.1 million, this growth was primarily driven by strong demand for our LNA products and semiconductor packages. It's important to note, as per our previous quarter guidance, that despite rising industry material costs, we reported $577,000 of net income, compared to a net loss of $593,000 in Q3 '21. How do we do this? We optimized our manufacturing process and focused attention on higher margin products to raise our gross profit margins from 29.7% as mentioned in Q3 ‘21 to 49% in Q3 ‘22. Again, that's an improvement of 193 basis points. We continue to see strong unwavering demand for our products and our increasing revenue guidance for the full year of 2022 to a minimum of $18 million. A $1 million increase from our guidance last quarter, representing a 239% increase over fiscal year 2021 revenues. AmpliTech is also well capitalized for executing our strategic growth initiatives with solid cash reserves of $13 million and healthy working capital of $20 million, low cash burn and profitable operations, we have no need to raise additional cash at this time. Now, I would like to speak about the communications infrastructure space today and the opportunities that we see ahead for AmpliTech. As of today, we still find that the communications industry infrastructure is not at the level it needs to be to power next-generation technologies. And I've mentioned this in the past on previous PR investor calls. In fact, Ookla’s latest 5G network speed test report shows 57 to 116 megabits per second downstream speeds and eight to 11 megabits per second upstream speeds, from the three major carriers; that just means speed to everyone here on your cell phones, laptops, and devices. These are numbers from this quarter, so you can see recently even from these numbers that we're still not at what we should be; it's far from the 1-2 GB/S speeds that denote true 5G, including the 2-5 GB/S speeds required by AR/VR technologies from companies like the Metaverse. We see this disconnect as a massive opportunity aligned with our strategic goals. As we build out our product suite, our goal is to improve overall infrastructure performance and bring it much closer to enabling true 5G. We're happy to report that our AGMDC design center is now sampling LNA and PA MMIC power amplifiers in chip form to customers. This has been met with great enthusiasm. We now have an assortment of low noise amplifiers, filters, attenuators, and other components available in chip form or MMIC, and we expect to add more new products by the end of 2022. We are progressing on schedule for the launch of this product line, and we reiterate our goal to provide MMIC chips on a COTS or Commercial off-the-shelf basis by Q2, 2023. We are also continuing the development of our TGSS division, which will offer innovative true 5G O-RAN radios as well as the planning and optimization services required to complete all new 5G installations globally. For those of you that don't understand O-RAN and what it means, let me give you an analogy. If people travel overseas or to another country, they need to have to use their appliances and an adapter; something that converts 110 volts to 220 or 220 to 110; without this conversion, they cannot use their appliance. So using this analogy, O-RAN is something that you need to have 5G in place, and to adapt for 5G, you'll need this adapter to connect to the older technology. So in essence, without this adapter, you cannot get to 5G. So AmpliTech is enabling this adapter to work and thus provide the 5G that's necessary and convert all existing infrastructure to 5G so the old can be converted into the new relatively easily. I hope that makes you understand how important the O-RAN technology is; and who would now buy an adapter? I think we all need to buy that. The amplifiers are essential to the 5G communications system. They're responsible for ensuring the quality of the signal and carrying the data across to an end user. AmpliTech amplifiers feature extremely low noise across a range of frequencies, diffuse minimal data loss, and ultimately provide a clear signal that can travel great distances at greater speeds. We believe that by implementing these components into a full 5G open radio unit, which we are building in the next-generation open RAN architecture, we expect to create a compelling product for our customers. They should play an essential role in allowing networks to move closer to achieving true 5G performance. In closing, I'd like to congratulate AmpliTech’s team for their hard work and execution that's evident in our record third quarter results. We are thrilled to continue to solve the challenges ahead of us by building the communications infrastructure of tomorrow, today. Now I'll open the call up for Q&A. Specific questions, we'd be happy to answer.

We will now begin the question-and-answer session. Our first question today will come from Eric Beder with SCC Research. Please go ahead.

Good afternoon. Congratulations on an impressive quarter. Could you discuss Spectrum? You're approaching the anniversary of acquiring it. What are the long-term opportunities you see there, and what is your outlook on the growth rate and potential for increased profitability at Spectrum?

Well, we see continued growth. I mean, we have seen continued growth because of the demand, that's existing and it's in alignment with all the requirements for 5G and all the requirements for the chips right now as it is. But as these technologies evolve, there will still be a continuing demand and we plan on infusing it with our own MMICs as well. So we will actually increase that revenue by scaling it up and joining the production of our MMICs into the stocking capability of Spectrum. Therefore, they'll have a value add now. They'll be able to sell not only the semiconductor packages themselves, but they'll also be able to sell the MMICs in the packages to the same existing customer base. And that will be an increase in revenue for both companies, for both divisions.

Wait, could you I know you recently signed an agreement with Meta. Could you talk a little bit about that and where you think that will eventually go in terms of opportunities?

Well, we didn't sign any agreements with Meta. We did join the Telecom Infra Project, which they have. So we joined them as a participant in providing technology for all this evolving infrastructure.

Okay. And last question on Quantum computing, obviously it's a big piece, it's growing. You have the right LNAs for that. What about that in terms of going forward in terms of both returns and in terms of revenue for that?

Sure. So we do definitely see an increase in the requirements for quantum computing. As I mentioned before, it's like a hockey stick and we're at the curve of that hockey stick and we've also sent in several demo units to customers, and right now they're in qualification. We believe we will have a high success rate. So it is really a pivotal year. Actually, next year will be a pivotal year because all the demonstrations that have been done this year, we provided hardware to these large users and when they see the comparative results of our products compared to what is out there, then we see a very, very large increase in revenue next year, due to this. I can't give you any numbers on that, but the total market is obviously in the hundreds of millions.

All right guys, well, congratulations again on a great quarter and good luck for Q4.

And our next question will come from Jack Vander Aarde with Maxim Group. Please go ahead.

Okay, great. Hey everyone, great results. Congratulations on a strong quarter. Thank you for answering my questions. Fawad, I don’t have too many more right now, but it’s clear that there was a strong sales result in the third quarter. It’s also encouraging to see you raise the revenue guidance for the year. Just to clarify, in terms of seasonality, while the overall opportunity is still developing, do you anticipate that the fourth quarter will be a bit slower than the third quarter?

Yes, in general, it usually is slower due to the holidays. We really have two big holidays, and you lose two weeks or so from that. And not just that, there are a lot of people that take vacations at this time, even customers. So even though we would normally pick up orders or they're in line, they wouldn't be placed until next year. Also, because a lot of people hold back on their budgets, they wait until next year and then they put the budget in place because they run out of funds for this year. So usually it is always a little bit lower.

I understand. That makes sense. You've mentioned before that you have been successful and seeing strong demand at recent trade show events. Are you currently receiving customer orders following these trade shows? I'm curious about the timing of these orders. Are you seeing an increase in orders compared to usual? Are you in talks with these customers? Can you provide an update based on the trade shows?

Yes, actually we are. We have, as mentioned before, we implemented the CRM tool that we are using now. And it's really generated a lot of inquiries and a large funnel for inquiries, which will be converted a large percentage of that. I don't know. Jorge, what percentage are we looking at forecast somehow?

Well, right now, our CRM model will have a source of doing at least converting 25% of the opportunities that are in the funnel. And just to add to the success that we're getting at the trade shows, we're generating a lot of requests for information that we didn't have before, which eventually, as you're aware, will turn into RFQs and then solidly purchase orders from different new people.

Okay, that's helpful. And then, I just want to get your thoughts on the backlog because when you acquired Spectrum at the beginning, or earlier, I guess like a year ago now you had quite a sizable backlog from that acquisition. Do you, when you look at, I don't want to get ahead of my skis here, but when you're looking at 2023, obviously you're expecting a huge demand influx here. Do you, but obviously you need customer orders to generate sales. So what's your level of confidence and outlook visibility into customer orders coming in that could set you up for growth in 2023?

Well, I can tell you that we have at least five very large customers that we are discussing these products in quantum computing and 5G applications. We're very close to receiving orders. I can't say anything right now, but in general, the only limitations right now for us getting purchase orders are just logistics and the current economic conditions that we've been experiencing. There's a lot involved in that causes these delays. But again, my estimate is as early as Q4 we could see some of the results of all these efforts as early as Q4, and it could be, not in revenue, but in bookings.

Okay, great. Great. So it sounds like we could see a bit of a domino effect possibly as we get closer to year-end; you could start to see some evidence of more of these orders coming in. And I guess we'll kind of get an update from you probably around February or March of next year at that time when you report the fourth quarter. So that's great to hear. Also, I'm happy to see, great job on the bottom line too. Great to see you put up over just over $5 million of revenue and yet you put up a GAAP net profit. So that's great as well. Do you, I imagine you expect you guys have a high degree of operating leverage in this business; I imagine that there's no reason to not expect that to continue; I expect as revenue scales, I imagine you'll be more profitable?

Yes, yes. Our goal is to shift our focus, as I mentioned before, from the original mode that we were providing the LNAs to just regular commercial markets here and there to smaller customers. Our goal is to provide very special LNAs, which differentiate us from other competitors. We really don't have competitors that can provide the same kind of amplifiers and low noise amplifiers that can actually fit into and enable these communications technologies as well as we can. So we feel that it's only a matter of time before all of those get put in place. And the government itself, from that show in, specifically that show is for military applications. So we are going after all the military applications because there's a whole revamping of military communications infrastructure and companies like Space Force and Navy and Air Force, they're all revamping their communications hardware. So we've made inroads in contacting all these companies and are now getting exposure for both our connector modules as well as our MMIC chips, so we can access the entire spectrum of applications. So that's just one thing that we're doing. But specifically, we are focusing on the larger margin applications. Every one of these things that we mentioned is a larger margin and not just the regular general amplifier requirements like we used to do before. So we've really transformed the company into a different type of company. And, in many ways, we've done consolidation. We've brought the specialty microwave from two buildings into one building. We've effectively lowered our overhead so that you have more of a profit margin. That's also a big plus for us because by buying specialty, I mean Spectrum, we have actually gone into a resale operation that averages out to a lower overhead from manufacturing. And we are staying away from full-scale manufacturing. That's also helping. We've also implemented an ERP system, which lowers our overhead and actually increases our throughput. So we're doing a lot of things to actually increase our gross margins and, in turn, our profits.

That's really great color. Well, congrats again. Its all the results tonight and I look forward to watching you guys execute. Thanks guys.

And our next question will come from Edward Gilmore, private investor. Please go ahead.

Right. Congrats on a strong quarter to log in. Thanks for taking my call, just one question for me. You mentioned in the press release that the TGSS is now completed and operational, and I wondered if you could just maybe give some more insight on the eventual revenue impact there. Thanks.

Sure. So the revenue comes from two different places in TGSS. The first part of it is services. Basically, what I mentioned before, you need to take all these existing 3G, 4G, LTE, so-called 5G stuff that's right there, right, with all carriers right now. We need to upgrade all of that and put in the interoperability with the new 5G systems. That interoperability is the O-RAN compliance, which has been standardized so that everyone can use the existing infrastructure and then tack on the 5G. Otherwise, it's not possible. So services TGSS is providing these services that will make O-RAN compliance for all these carriers. And that means any country, anywhere that's using 3G, 4G, and 5G, they will now be able to come up to that standard and be able to receive the new 5G hardware. So the second part of our plan in TGSS is to provide the hardware. So the hardware itself is the radio that uses our amplifiers, which are very low noise. And as well, they have an MMIC form. An MMIC form factor means chips, so they can fit into these radios and hundreds of them can fit in there because they're in chip form. Now, because of that, we would be able to increase the range of these radios and provide a much lower noise figure and higher data rates, which other radios cannot. So it's a new kind of radio and hardware that is designed to fit into these existing systems so that they can be an easy retrofit. So the first part of it is the services to upgrade everything to be able to handle the new hardware for 5G. And the second part of it next year is to provide this hardware that will be retrofitted into millions of sites. But also with the hardware and millions of sites, you're going to have services for all these millions of sites as well. So that's where the revenue will be coming in from both sides.

Got it. Makes sense. And do you, when do you anticipate being able to start accepting orders? On the hardware side?

Hardware side would be sometime mid next year is what our estimate is.

We have received an electronic question asking what steps AmpliTech has taken to improve gross profit margins. Is this improvement the result of operational or manufacturing changes? Can this be sustained in the long term?

Sorry, as I mentioned before, yes, it is both operational and manufacturing. And I'll mention this again. We did the consolidation of the two companies so that we have a lower cost structure. We're also focusing our product offering to the large higher margin products like the quantum computing amplifiers and modules, as well as the 5G infrastructure, which is the hardware that is not a $2,000 amplifier like we normally sell. It's several tens of thousands, right? So we'll multiply that by millions of sites. So that is very important in showing why the revenue will increase. And in manufacturing, we've lowered our overhead, as I mentioned, internally across our different divisions as well as the ERP system that we have in place. So we can effectively manage our production much more effectively and streamline the operations and then match our sales to our production. So we're providing more COTS products as well because of our MMIC products. So the COTS generates a faster turnover of sales as opposed to the custom design product that takes 30, 60, or 90 days to build. So all of that adds up to a more streamlined operation with more throughput.

Thank you. And that concludes the question and answer session. I'd like to turn the call back over to Fawad Maqbool for any closing remarks.

Thank you, Operator. Thank you to everyone who joined today's call to hear about the progress we've made and the plans we have to realize AmpliTech mission of providing the communication systems of tomorrow, today. We look forward to updating you further on our Q4 and year-end earnings in March. Until then, if you have any other questions or would like to schedule a call with management, please contact our communications director whose contact information is listed at the bottom of our press releases. Thank you. Be well and have a good day.

Today's conference call is now concluded. Thank you. You may now disconnect your lines at this time.