Transcript
Greetings and thank you for standing by and welcome to the CVD Equipment Corporation's First Quarter Fiscal 2023 Earnings Call. As a reminder, this conference is being recorded. We will begin with some prepared remarks followed by a question-and-answer session. Presenting on the call today will be Emmanuel Lakios, President and CEO and Member of the CVD Board of Directors; and Richard Catalano, Vice President and Chief Financial Officer. We have posted our earnings press release and call replay information to the Investor Relations section of our website at www.cvdequipment.com. Before I begin, I'd like to remind you that many of the comments made on today's call contain forward-looking statements including those related to future financial performance, market growth, total available market, demand for our products and general business conditions, and outlook. These forward-looking statements are based on certain assumptions, expectations, and projections that are subject to a number of risks and uncertainties described in our press release and in our filings with the SEC, including, but not limited to, the Risk Factors section of the company's 10-K for the year ended December 31st, 2022. Actual results may differ materially from those described during this call. In addition, all forward-looking statements are made as of today and we undertake no obligation to update any forward-looking statements based on new circumstances or revised expectations. Now, I would like to turn the call over to Emmanuel Lakios.
Paul, thank you and good afternoon everyone. Thank you all for joining us today to discuss our Q1 2023 financial results and other important company developments and pertinent information related to our business. Your thoughts are important to us and we look forward to your questions in our Q&A session. We are pleased to report strong revenue growth for the first quarter of 2023, an increase of 87% over our first quarter of 2022 and a 20% increase over our fourth quarter 2022. During the first quarter 2023, we recognized a net loss of $40,000 or $0.01 per basic and diluted share. This compares to a net loss of $1 million or $0.15 per basic and diluted share for the same period 2022. We have in the past noted that we expect fluctuations in revenue due to the fluctuations in the timing of orders. Orders for the first quarter of 2023 were $2.9 million, this was lower than anticipated orders for the quarter. This resulted in a decrease in our backlog from $17.8 million at December 31st, 2022, to $12 million at March 31st, 2023. The decrease in orders may have a negative impact on our revenues over the next couple of quarters. We continue to be cautiously optimistic as our served markets recover, develop, and grow, we will be able to obtain an increased order level. As there is a history of market cyclicality, our strategy is to serve a few growing markets. We have narrowed our market focus to three areas: the first being high-growth power electronics market, our emerging battery materials market, and our legacy aerospace and defense market. In the power electronics market, we previously announced receiving an order for a total of 30 PBT 150 systems. These orders were received in 2021 and 2022 from a customer who uses our system to grow silicon carbide crystals that are subsequently processed into 150-millimeter silicon carbide wafers. We recognized $2.5 million of revenue during the first quarter of 2023 related to these orders and expect to ship the remaining 10 of 30 units before the end of the second quarter. We also expanded our marketing efforts during the first quarter with the hire of a dedicated sales manager and broadening our general marketing efforts, including attendance in key silicon carbide-related shows and conferences. The success of our efforts is dependent on the performance of our equipment in the field, overall market conditions, our customers' ability to qualify their end product as well as the capital markets. A recent development in our battery material market occurred in early May and we are excited to have received a repeat order from 1D Battery Solutions for our PowderCoat-1100 system and components for approximately $1.8 million. This system will be used by 1D battery solutions to add nanoscale silicon to carbon powder for use in the anode section of the battery. This addition of silicon enhances the performance of the battery and the application is in line with our focus on markets that electrify everything. Related to aerospace and defense, we are a leading manufacturer of a chemical vapor infiltration systems and also tow coating systems to manufacture ceramic matrix composite materials also referred to as CMC for use in gas turbine engine components. CMCs can withstand extreme temperatures and are one-third the weight of nickel-based super alloys. This allows jet engines to run hotter, thereby consuming less fuel and emitting less pollutants. As previously announced, during the fourth quarter of 2022, we received the production CIV tool to manufacture CMCs for aerospace gas turbine engines for approximately $3.7 million. Our customers now include two of leading manufacturers of gas turbine engines. This order contributed to approximately $300,000 of revenue during the first quarter of 2023. We continue to engage with our aerospace customers on their technology and production capacity requirements for both the short and long-term. CVD Equipment Corporation's objective remains to be a profitable growth company through a focus on products that serve growth markets, specifically hot power electronics, EV battery materials, and aerospace and defense specialty materials. We remain committed to stay the course of our strategy to achieve consistent long-term profitability, growth, and return on investment. I would like to turn the call over to our CFO, Rich Catalano, who will provide you an overview of our first quarter results.
Thank you, Manny, and good afternoon. Our revenue for the first quarter of 2023 was $8.7 million compared to $4.7 million for the same period in 2022, marking an increase of $4 million or 87%. This revenue growth was mainly driven by our PBT 150 product line, which contributed $2.5 million this quarter compared to last year. Additionally, our SDC segment performed well with a revenue increase of $80,000 over the first quarter of 2022, reflecting a 59% rise. Our revenue for the first quarter of 2023 was also 20% higher than the $7.2 million recorded in the fourth quarter of 2022, due to stronger sales from both our CVD equipment and SDC segments. We reported an operating loss of $187,000 for the first quarter of 2023, which is an improvement of $783,000 compared to the loss in the first quarter of 2022, and slightly lower than the $221,000 loss from the fourth quarter. This improvement was largely due to the increased revenue of $4 million, which resulted in a gross profit increase of $1.7 million, although this was partially offset by a rise in operating expenses of about $900,000. Our gross profit margin percentage was 28.0% in the current quarter, compared to 16.5% in the first quarter of last year and 27.7% in the fourth quarter. The enhancement in gross profit was mainly a result of leveraging fixed costs on higher sales and an improved product mix, which helped offset certain increases in material costs and compensation. The rise in operating expenses year-over-year and from the fourth quarter stemmed from higher employee-related costs to support our business growth, along with increased selling expenses and professional fees. After accounting for non-operating other income, primarily interest income, our net loss for the first quarter was $40,000, or $0.01 per share, both basic and diluted. This is an improvement from a net loss of $1 million, or $0.15 loss per share in the first quarter of 2022. In the fourth quarter of 2022, we reported a net income of $1.5 million, or $0.23 earnings per share basic and diluted, which included the recognition of $1.5 million in other income from an employee retention credit following an eligibility analysis for certain quarters in fiscal 2021. Regarding our backlog, as of March 31, 2023, it stood at $12 million, down from $17.8 million on December 31, 2022, reflecting a decrease of $5.8 million as our revenue of $8.7 million surpassed our bookings of $2.9 million. Our backlog contains $10.1 million associated with performance obligations on ongoing contracts and about $1.9 million from other customer orders, such as spare parts. Our cash and cash equivalents as of March 31, 2023, totaled $11 million, a decline from $14.4 million on December 31, 2022. This $3.4 million drop was driven by an increase in contract assets of $1.5 million and a decrease in contract liabilities of $2.8 million as we incurred costs for ongoing contracts. Additionally, during the quarter, inventories slightly increased by about $300,000, and accrued expenses decreased by roughly $500,000, mainly due to the payment of year-end bonuses. These changes were partially offset by a $1.4 million reduction in accounts receivable. Our working capital at March 31, 2023, was $15.7 million, compared to $15.5 million at December 31, 2022. Looking ahead, we cannot predict how current economic and geopolitical uncertainties will affect our financial position or future operations and cash flows. Our return to consistent profitability depends on receiving new equipment orders, managing supply chain disruptions and inflationary pressures, and controlling capital expenditures and operating expenses. Additionally, our revenues and orders have historically varied based on changes in order rates and other factors affecting the timing of revenue recognition. Therefore, customer orders and revenue can fluctuate from quarter to quarter. Considering these elements, we believe our cash and cash equivalents, along with projected cash flow from operations, will be adequate to meet our working capital and capital expenditure needs over the next 12 months. We will continue evaluating our operations and will take necessary measures to sustain our operating cash to support working capital needs. I'll now hand it back to Manny.
Rich, thank you for your presentation. In summary, the first quarter results for 2023 reflect our efforts to continue to focus on everything we do and those who we serve. Our focus remains on our customers, our employees, our shareholders, of course, and the pursuit of growth and return to consistent profitability. We look forward to continuing to build on our success in the year ahead and will continue to be cautiously optimistic. Your comments and questions are important to us. With the close of the canned presentation, I would like to open up the floor to your questions.
Thank you. We will now begin the question-and-answer session. Our first question is from Brett Rice with Jamie Montgomery Scott. Please go ahead with your question.
Hi Manny, hi Richard. How are you guys doing?
We're doing well Brett. And yourself?
Good, good, everything is good. The orders in the first quarter being less than anticipated, why is that? Is it macroeconomic?
Sure. I mentioned earlier that we did not lose any orders to competitors. In our three markets, each has its unique circumstances. In the silicon carbide market for our PBT product line, we are currently waiting for customer qualifications to proceed with expansion, as well as awaiting an order from a second potential customer. This involves capital raising as well. So, it's a matter of both capital markets and the qualification process, which can take time, often spanning quarters. On the aerospace side, there have been some delays in orders due to a capital procurement process. We remain engaged with our two existing customers, one of which is a legacy customer and the other being a more recent order we closed in December. We continue discussions regarding their capital needs as manufacturers in the aerospace sector, such as Boeing and Airbus, begin ramping up production. There has been some positive news on that front. Regarding the battery side of the business, we had hoped to close an order in Q1, but that was delayed until Q2 in May. We are pleased to have received that order, and we believe our partnership is on solid ground. We did announce a customer for the battery material, which is aligned with their acknowledgment of our capabilities.
Great. Great. Now, the margins of the PBT 150, the PowderCoat-1100 and the CVI system, which have the best margins?
Yes. They have similar margins, particularly for the higher volume tools where we can achieve some economies of scale. Consequently, you can expect a slight to several margin points increase with the PBT tool. We believe we will continue to secure additional volume, surpassing our current levels. Ultimately, this is all dependent on the volume in relation to the absorption of our overhead and factory costs.
Right. Now, on the PBT 150, additional orders, will they come from the existing customer that has ordered 30 of them and whose appetite might be satiated? Or is it going to come from a new list of customers on that particular system?
Okay. I'll address both points. Clearly, our tool's performance indicates that as our initial customer requires more tools, we expect to be their chosen supplier. I can’t think of any reason that wouldn’t occur. Additionally, with the launch of our marketing initiatives in the first quarter, we have already connected with a few new customers. In the previous call, John inquired about my objectives for the year, which was to secure two more accounts, and that goal remains unchanged.
Thank you for your response. Can you tell us a little bit about the background of the new dedicated sales manager?
Yes. He comes from an LED background. So, he is very familiar with selling into very large accounts. He previously had worked with one of the top three LED manufacturers heading up a portion of their sales efforts. I have a prior history with the sales manager as well and have all the faith in him.
Great. Great. Thank you very much as always for taking my questions.
Thank you, Brett.
Thanks Brett.
Thank you. Our next question is from Krish Sankar with Cowen and Company. Please proceed with your question.
Hi, this is Robert Mertens on for Krish. Thanks for taking my questions. Just real quick on the backlog. Thanks for providing the Fire color. So, is it fair to say the majority of the difference is probably due to timing and pushouts and might be expected to be recovered in later quarters and not as much as the pullback in general demand? And then I had a quick follow-up.
Yes, I believe the orders have indeed been pushed out. It's primarily a timing issue. As I mentioned earlier, there are no orders that I am aware of that we lost that we expect to close in the first quarter, and we are actively working to finalize those. In fact, we have already closed two deals this quarter that total approximately $2.3 million to $2.4 million. So, for me, this situation is more about timing than specific numbers.
Okay, got it. Thanks. That's helpful. And then just could you provide a little more color on what you're seeing in the silicon carbide market? And what the major growth opportunities are outside of, of course, growing earn customer account? Is there a focus on expanding the customer list or are there additional opportunities within the supply chain, whether it's on the wafer or equipment side of the silicon carbide market?
Yes, we have two main questions. It's beneficial to have a solid presentation. First, are we planning to expand our customer base? Yes, we intend to reach out to other US manufacturers and then European manufacturers of wafers and devices, including flash and equipment. We have a strategy for each of these categories, with our main focus being the United States and Europe, as we are not prioritizing Asia at this time. We believe there is sufficient business for us. So far, we have contacted at least seven potential clients and have engaged in discussions with three additional ones beyond the one account we currently have installed. We are in the selling process now. Regarding how to expand after securing an account, we previously announced that we are developing a silicon carbide epi system for 2014, and we are still following that path and timeline.
Okay, got it. Thank you for all the clarity. Really appreciate it. Thanks for taking my questions.
Pleasure.
Our next question is from John. Please proceed with your question.
Good afternoon.
Hey John.
I'm a little confused about your current customer. They have a large facility, 400,000 square feet, and the units you shipped on order won't even begin to cover that. What's the issue? Why haven't you received a follow-up order, or is there a qualification problem with these units?
John, how are you? I can't really comment on any issues they might be facing or where they stand on their roadmap. I know there are 20 tools installed, and I have 10 systems ready to start in the next couple of weeks. Those will be operational by the beginning or middle of June, and all are being shipped. I have 20 installed, but I can't specify their locations. I believe the announcement you are referring to is related to a facility that has just been closed. We shipped many systems before that facility was shut down. Did I clarify anything for you?
So, what is the hang-up on more units do that cost to the initial customer?
I think it's based on the feeling comfortable that they have wafers. And I can't really say more than that at this point.
Okay. Second question then is on your new targets, when do you expect to gather orders and receive an initial order from your new targets, the other big players in the industry, either European or US?
We have several projects at different stages. One is currently undergoing capital funding, which is contingent on the completion of that funding. Another project is earlier in the process and is assessing our technology. To address your question specifically, I anticipated receiving orders in the first quarter, but those have been postponed. Whether they will materialize in the second quarter or early third quarter depends on their acceptance of our technology, which has demonstrated some proven results. The market conditions, especially in the silicon carbide sector, indicate significant growth and demand. However, the status of the capital market is uncertain, as is their capability to produce wafers with our current account. Therefore, I believe the answer regarding this quarter or the next quarter is that I would be disappointed if we do not manage to secure at least evaluation units.
Okay. Thank you.
Thanks John.
Thank you. Our next question is from Orin Hirschman with AIGH Investment Partners. Please proceed with your question.
Hi. Thank you. Can you go back to that you're working on the additional epi tool for silicon carbide. You have had an experimental tool out there. How has that tool done? And obviously, it's a much bigger TAM and a much bigger ASP. How does your expected secret source in terms of, let's say, temperature control and other things play into that pool? Do they come into play in that pool at all?
Thank you for the question. I don't think you're really asking me how we do it because that would spoil the secret. We shipped our original silicon carbide epi tool back in 2008, and it underwent productization and some improvements in heating technologies. We have shown that we can control temperatures up to 2,000 degrees with remarkably consistent campaigns lasting days or weeks, maintaining a variance of plus or minus 0.5 degrees, which is quite exceptional. Our capacity to manufacture in-house should provide us with a competitive edge in terms of price performance. I can't share specific performance details about the silicon carbide tool in the field because it was primarily an R&D system. However, just like we did with our PBT tool that we shipped in 2011 and successfully productized, achieving outstanding results that I believe are among the best in the market, I expect we will have a very competitive system in this case as well. Wafers are extremely sensitive to cost, and having our internal manufacturing allows us to eliminate intermediaries in the machine shop and other areas. This should enhance our ability to enter the market effectively. We plan to provide more information later this year and into early 2024, with a product release expected in the third quarter.
The product release is projected for the third quarter of the year.
2024.
Okay. I mean do you have someone interested as a lead customer here without naming anybody you can't name?
Are they interested? Everybody is interested in a proper position cost of ownership, silicon carbide tool. Do I have an agreement with the customer? No, I don't have a customer right now, but I have a list of customers that we can have discussions with, but I really need to provide them performance data before I can have an intelligent discussion that will be closer to the end of Q1 to beginning of Q2.
Okay. Hey thanks so much.
How are you? Welcome. Thank you.
Thank you. There are no further questions at this time. I'd like to hand the floor back over to Emmanuel Lakios for any closing comments.
Paul, thank you. We appreciate everybody's attendance today on the call. And I want to extend my gratitude to our shareholders and to also our employees for all of their express support and loyalty. If you have any questions, be encouraged to please reach out to either Rich or myself directly. And this concludes our first quarter call. Thank you.
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.