Earnings Call Transcript - AMPG Q2 2023

Operator, Operator

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. 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 IR

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 15, 2023. Remarks that follow and answers to questions, including statements that 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 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. Thanks 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. In the second quarter, we reported a revenue of $4.1 million and a gross profit of $1.9 million translating to an increased and record gross profit margin of 47% despite facing inflationary pressures. Sales from our core low noise amplifier business grew by 23%. However, 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 strength in excellence in the semi industrial role. 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 and MMIC designs. Our R&D initiatives total nearly $700,000 for this quarter and $1.2 million for the six months ended June 30, 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 less labor intensive, which is the source of most of our expenses in the products made here in the U.S.A. This is 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 30, 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 L&A sales and demand underscores the market's recognition of our product 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 products, utilizing our super low noise amplifiers, which enable their systems to achieve unmatched performance levels. AmpliTech's offerings enhance overall SATCOM systems, including satellites, earth stations, gateways, and transponders. This ensures signals travel further and connections are more dependable as systems run more efficiently. Considering signal performance and bandwidth, the effective isotropic radiated power, which is EIRP, gauges a signal strength that a satellite can transmit to earth. For a steady connection, if an amplifier introduces excessive noise, the EIRP requirement increases. For instance, direct-to-home services might necessitate EIRP between 50 to 55 dBW. That's a measure of power and voltage for transparent reception. Therefore, 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 and size and weight are critical for cost and reliability in every system, especially with 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 Labs indicated that for every centigrade rise in operating temperature, the life expectancy of a standard electronic component can 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 failure means longer connectivity and improved signal performance over time. Our low noise amplifiers are the lowest power disciplining 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 note, and we're excited to share that our ongoing R&D projects, centered around 5G ORAN massive MIMO, are progressing very well and are on track with our expectations. Through the utilization of massive MIMO, coupled with beam-forming technology, we are enabling precise and efficient solutions for true 5G category B base station radios. These are the units that go on top of the tower. This breakthrough approach is addressing existing performance limitations, facilitating support for a larger user base within each cell while enhancing the overall end-user experience in densely populated urban areas. Our cutting-edge 5G ORAN radios are also set to showcase our proprietary low-noise amplifier 5G MMIC chips. The massive MIMOs require arrays, and these are best done in a MMIC form. Therefore, our new technology for MMICs is very important to these 5G radio developments in 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 gigabit per second speed capability, which is 100 times that we have currently. Consequently, 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 AG TGSS 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 ORAN compliant 5G radios. The robust investments we've made in these technological endeavors are paving the way for the introduction of novel product solutions. We believe that these solutions are poised to elevate the company to new heights when they're introduced to the market, which we expect in 2024. We have a lot of interest from current MNOs and customers already, and we anticipate a portion of these to convert into sales in the coming quarters as we continue our efforts to add the NGK product line to our spectrum division. This is the 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 Electronics' 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 our stakeholders. Our CRM now indicates over $85 million of 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, Operator

Our first question will come from Jack Vander Aarde with Maxim Group.

Jack Vander Aarde, Analyst

Okay. Great. I appreciate the update and great to hear about the solid pipeline and record gross margins. It's great to see. Fawad, I want to start by touching on the core L&A business because those had a strong revenue quarter for you. It was up 23% year-over-year, it sounds like. So just what's the driver behind your core L&A strength? And is this sustainable?

Fawad Maqbool, CEO

Well, there's a need or more of a demand for cloud-based systems right now, and they are actually ground stations that many companies like Viastat and CPI and all the big guys are also supplying to Amazon and Google; they're all creating their own cloud systems. So when they do these cloud systems, they have to communicate from the satellite ground station to the satellites. So that requires the lowest noise figure amplifiers because range is very critical in all these satellite communications as lots of data is going through this. So the demand has increased in that way. We are 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 that we've never had before. So all of these things lead to growth and will continue to lead to growth in this business.

Jack Vander Aarde, Analyst

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

Fawad Maqbool, CEO

Exactly a bit of both. We actually have gotten more RFQs, especially because 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 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. So 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 products. So that's one reason why we're getting increased ARPU activity. 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 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, or the number of radios that they need for their base stations. The services, MMICs that they're going to need thousands of MMICs in their application when they get contracts from defense, government, or private second-tier suppliers. It trickles down to us, and the value is there because that's going to increase our sales. So we're going to convert and start to convert all these leads, which we didn't have before. We started to implement this, as we mentioned a couple of quarters ago.

Jack Vander Aarde, Analyst

Fantastic. Just for context, there is over $80 million of potential pipeline, which is four times larger than your total revenue last year. This signifies a considerable increase. In terms of estimates and near-term expectations, I'm aware that conversion rates are being evaluated. However, looking at the near term, how do you anticipate the third and fourth quarters of this year compared to the first half, based on your projections?

Fawad Maqbool, CEO

It looks like it's going to be consistent that we're still going to be around $4 million to $5 million per quarter. That's what it looks like right now. But 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 would be booked, but the conversion to revenues will really start in '24 and our numbers indicate at least 136% growth from the previous year. So 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 are a result of customers being very interested. So it's not just a number, and you'll see that when they start converting. That's when you're really going to see that. But '24 is really an important year for us, and it's going to be the year where all of our best-laid plans are going to come to fruition.

Jack Vander Aarde, Analyst

That's great. You mentioned a number, and while I don't want to hold you to it, it seems you're quite confident that whatever the revenue is in 2023, you're anticipating it to more than double next year with over 100% growth. Is that a reasonable assessment?

Fawad Maqbool, CEO

That's a fair assessment.

Jack Vander Aarde, Analyst

Okay. Excellent. And then just maybe one last question. Just help us understand the types of opportunities in the pipeline, which is over $80 million. Can you quantify or outline those opportunities between 4G tower upgrades, your core LNAs, and the spectrum business? Just help us understand how it relates to your pipeline.

Fawad Maqbool, CEO

Sure. I can touch over these numbers. Basically, they're coming from various different sources. Our core L&A business is going to provide a lot of revenue in '24. We're going to have semiconductor materials that are going to increase. 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 '24, we're still going to be about 29% of contribution from spectrum because we expect that to grow, although it declined this year because of international demand. We mentioned a couple of quarters ago that we're going to make up for it and scale up their business by adding this NGK product line, which has about 80% of the world's market for RF microwave packages. This feeds directly into our Microwave MMICs. In 2024, we anticipate around 29% contribution of revenue from spectrum. Our core growth is going to grow as well, but we expect the AGTSS division to show revenue due to customer needs. We're in discussions with about 7 or 8 different companies that need these new 5G radios because of the advantages they offer. We're anticipating around 10 sites in our first year and growing to 50 in the following year.

Jack Vander Aarde, Analyst

Just jump in right there and just ask you, 10 sites. What does that kind of opportunity represent?

Fawad Maqbool, CEO

Sure. So each site would typically have 3 of our radios in there. You'll see all those towers where they have triangular setups. The 3 radios cover 360 degrees. The new radios will go up, and 3 radios for each site could cost about $10,000 each. That's just for the hardware. Along with that site, we also have revenue from installation charges and maintenance fees, adding up to approximately $5 million for 2024 from just the AGTSS 5G category.

Jack Vander Aarde, Analyst

Fantastic. That's helpful color. Yes. And that's helpful. That's very helpful. And just the pace; maybe it's too early to tell, but just the pace or speed at which you can execute or achieve those upgrades? Like, let's say, for 10 sites. What would that take?

Fawad Maqbool, CEO

Each site installation takes roughly 3 to 4 months. But we can handle several sites in parallel. We're building our teams to be able to service that. That's why we're conservative here. Although we may book a lot more than the 10 sites, we may have booked much more because some sites require maybe 1,000 radios. It will take time to cover all those sites. We have also relationships and collaborations we've set up to help us achieve all this. We're not doing all this by ourselves. We have partners who help with hardware, software, and system integration. We're building our force to do all that, but we've also planned it out, and it will start happening next year. We also have projected revenue from new products that have gone into making lots of new products that are actually lower cost per unit and lower labor costs, reducing our labor as we've taken advanced MMICs that no one else has. This translates into more profit every time we lower our costs. Our strategy is to increase our top line, increase our gross margins, and pursue all products with higher gross margins, which will, in turn, give us higher bottom lines.

Jack Vander Aarde, Analyst

Okay. That's great color. And if I can ask just one more question, and then I'll hop back in the queue. Again, it's about the pipeline. I respect that some customers and potential orders in there want to remain confidential. But can you give us a sense of how many total customers? How many individual customers do those represent in the pipeline? Is it a handful? Is it 12? Is it 30? Is it 50? Just to give a sense.

Fawad Maqbool, CEO

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 to begin with. This is not limited to the United States; we're doing global retrofits.

Jack Vander Aarde, Analyst

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

Fawad Maqbool, CEO

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

Operator, Operator

I would like to turn the call over to Shan Sawant. Please go ahead, sir.

Unknown Executive, Unknown Title

Thanks for the question, Jeff Kobylarz from Diamond Bridge Capital. I'll be reading off your questions. Okay. So it's a 2-part here. I'll start with the first one. So Jeff is asking, did NGK contribute at all to revenue? Or when will that distribution agreement result in revenue, and 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, no, we are in full preparation after we inked the deal with them earlier this year. We are doing a lot of feasibility studies for customer modifications on their housings. We are developing marketing campaigns, updating the website, training sales staff, and working closely with NGK, so a lot of items have to be in close coordination with their team. We believe we'll be closing in by the end of 2023. So we expect to release the first purchase orders to NGK by the end of the year and expect deliveries to occur early in 2024. So we believe that we will have meaningful sales to occur in 2024.

Unknown Executive, Unknown Title

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

Jorge Flores, COO

We have had a few companies that have approached us and actually bought some smaller quantities of the MMICs, and they are still doing their own in-process design at their own facilities. We do have visibility into many of their programs and many of their projects, but the qualification and system design takes a long cycle. We are definitely patiently waiting for them to finish their efforts. Once they are ready, we will be ready to fill any orders they need.

Unknown Executive, Unknown Title

This includes base applications?

Jorge Flores, COO

It includes base applications, yes.

Unknown Executive, Unknown Title

Great. And then 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, we do have conversations with many of them. In many cases, too, we know that if they win, we will win as well. Some of them we'll see in the near term, but some of them are pushing out to the right; it's also because of the qualification beta testing they themselves need to do with their products. It's a very dynamic sales funnel that we have, but we do expect to start closing some deals by the end of the year.

Unknown Executive, Unknown Title

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

Jorge Flores, COO

Yes. As we've seen in the semiconductor industry, the market is down at least 11% this year. This has affected our Spectrum division itself. However, we believe the semiconductor industry will bounce nicely by about 18% in 2024. We believe that our Spectrum division will recover some of the lost sales due to the softer demand, and we are also engaged with the NGK opportunity.

Unknown Executive, Unknown Title

Thanks for clarifying on those. So that concludes Q&A I had in my e-mail. Joe will turn it back over to you. Thank you.

Operator, Operator

And 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. And 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, Operator

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