Transcript
Hello. My name is David, and I'll be your conference operator today. At this time, I'd like to welcome you to Optical Cable Corporation's Third Quarter of Fiscal Year 2025 Earnings Conference Call. Please note that today's call will be recorded. Your host today will be Mr. Dean Sterrett. Mr. Sterrett, you may begin your conference.
Good afternoon, and thank you for joining us for Optical Cable Corporation's Third Quarter of Fiscal 2025 Conference Call. By this time, everyone should have a copy of the earnings press release issued earlier today. You can also visit www.occfiber.com for a copy. On the call with us today are Neil Wilkin, President and Chief Executive Officer of OCC; and Tracy Smith, Senior Vice President and Chief Financial Officer. Before we begin, I would like to remind everyone that this call may contain forward-looking statements that involve risks and uncertainties. The actual future results of Optical Cable Corporation may differ materially due to a number of factors and risks, including, but not limited to, those factors referenced in the forward-looking statements section of this morning's press release. The cautionary statements apply to the contents of the Internet webcast on occfiber.com as well as today's call. With that, I'll turn the call over to Neil Wilkin. Neil, please begin.
Thank you, Dean, and good afternoon, everyone. I will begin the call today with a few opening remarks. Tracy will then review the third quarter results for the 3-month and 9-month periods ended July 31, 2025, and some additional detail. After Tracy's remarks, we will answer as many of your questions as we can. As is our normal practice, we will only take questions from analysts and institutional investors during the Q&A session. However, we also offer other shareholders the opportunity to submit questions in advance of our earnings call. Instructions regarding such submissions are included in our press release announcing the date and time of our call. OCC had a strong third quarter as we delivered significant net sales growth and gross profit expansion during both the third quarter and the first 9 months of this fiscal year. Net sales increased 22.8% during the third quarter of fiscal 2025 compared to the same period last fiscal year and increased 12.8% during the 9 months ended July 31, 2025, compared to the same period last year. These results reflect the OCC team's ability to capture additional opportunities as demand for our products increased in many of our markets. We also continue to see the benefits of OCC's significant operating leverage during the third quarter as our 22.8% year-over-year increase in net sales drove gross profit growth of 61.2%. I'm pleased to report that the OCC team is executing well against our long-term growth strategy. As previously announced, OCC and Lightera entered into a strategic collaboration agreement in early July to expand product offerings and solutions to the enterprise sector, the data center sector as well as expanded presence in certain other sectors. As part of this strategic collaboration, OCC and Lightera have combined portions of the product portfolios of both companies to deliver additional integrated cabling and connectivity solution offerings which will include certain Lightera products being offered and sold by OCC. In connection with this strategic collaboration, Lightera made an investment in OCC with Lightera holding 7.24% of the company's outstanding common shares. We anticipate our strategic collaboration with Lightera will provide growth opportunities for OCC. As we look ahead to the end of this fiscal year and into 2026, we remain focused on disciplined execution and capitalizing on growth opportunities to drive shareholder value. And with that, I'll turn the call over to Tracy, who will review in additional detail our third quarter of fiscal year 2025 financial results.
Thank you, Neil. Consolidated net sales for the third quarter of fiscal 2025 increased 22.8% to $19.9 million compared to net sales of $16.2 million for the same period last year, resulting from increases in net sales in both our enterprise and specialty markets. Sequentially, net sales increased 13.5% during the third quarter of fiscal year 2025 compared to net sales of $17.5 million for the second quarter of fiscal 2025. Consolidated net sales for the first 9 months of fiscal 2025 increased 12.8% to $53.2 million compared to net sales of $47.2 million for the first 9 months of fiscal 2024 with sales increases in both our enterprise and specialty markets. At the end of our third fiscal quarter of 2025, our sales order backlog and forward load was $7.1 million compared to $7.2 million as of April 30, 2025, $6.6 million as of January 31, 2025, and $5.7 million as of October 31, 2024. Turning to gross profit. Our gross profit increased 61.2% or $2.4 million to $6.3 million in the third quarter of fiscal 2025 compared to $3.9 million for the same period last year. Gross profit margin or gross profit as a percentage of net sales increased to 31.7% in the third quarter of fiscal 2025, up from 24.2% in the third quarter of fiscal 2024 and 30.4% for the second quarter of fiscal year 2025. Gross profit increased 39.5% to $16.3 million in the first 9 months of fiscal 2025 compared to $11.7 million in the first 9 months of fiscal 2024. Gross profit margin increased to 30.6% in the first 9 months of fiscal 2025 compared to 24.7% in the 9 months of fiscal 2024. Gross profit margin for the third quarter and first 9 months of fiscal 2025 was positively impacted by production efficiencies created by higher volumes and the resulting positive impact of our operating leverage. Additionally, our gross profit margin percentages are heavily dependent upon product mix on a quarterly basis and may vary based on changes in product mix. SG&A expenses increased to $5.7 million or 9.5% in the third quarter of fiscal year 2025 compared to $5.2 million for the same period last year. SG&A expenses as a percentage of net sales were 28.8% in the third quarter of fiscal 2025 compared to 32.3% in the prior year period. SG&A expenses increased to $16.9 million or 8.2% during the first 9 months of fiscal year 2025 compared to $15.7 million for the same period last year. SG&A expenses as a percentage of net sales were 31.8% in the third quarter of fiscal 2025 compared to 33.2% in the prior year period. The increase in SG&A expenses during the third quarter and first 9 months of fiscal year 2025 compared to the same periods last year was primarily the result of increases in employee and contracted sales personnel-related costs and shipping costs, including employee and contracted sales personnel-related costs for compensation costs and sales incentives. OCC recorded net income of $302,000 or $0.04 per basic and diluted share for the third quarter of fiscal 2025 compared to a net loss of $1.6 million or $0.20 per basic and diluted share for the third quarter of fiscal 2024. OCC recorded a net loss of $1.5 million or $0.19 per basic and diluted share for the first 9 months of fiscal year 2025 compared to $4.6 million or $0.59 per share for the first 9 months of fiscal year 2024. With that, I'll turn the call back over to you, Neil.
Thank you, Tracy. At this point, we would typically take live questions from analysts and institutional investors. However, we have received several questions in advance of today's call that we think will interest most participants. Therefore, we will start with those questions and then address any remaining live questions from analysts and institutional investors. Dean, would you please begin reading the questions we've received in advance, and we will respond to them?
Absolutely. First question, can you comment on what you're seeing in your traditional markets and how it has evolved through the year?
Yes. We are generally seeing strength in our targeted markets this year, and that's been the case with others in the industry as well. We believe we're benefiting from our strong market position, and that's been reflected in our top line results this year, including in the third quarter of 2025.
Can you comment as to what you're seeing in terms of AI impact? It seems like there should be a significant opportunity for you.
Well, as folks know, and I believe it's fairly clear that AI is growing, or some would even say exploding, because of all the demand. And this is positively impacting our industry generally. The impact is seen in the growth of hyperscale data centers in particular. Currently, OCC's products are more suited for what we would call Tier 2 and Tier 3 data centers. However, we do believe we will see a positive impact from AI and data center growth. However, we also believe the biggest growth will be seen by those companies targeting hyperscale data centers.
Yes, apologies. CommScope recently sold the vertical that is competing with you on Amphenol. Do you expect any impact from that?
As our listeners may expect, we are following these developments, but at this time, we do not believe this will have an impact on OCC.
Next question. The backlog is down versus Q2, but Q4 is usually the strongest quarter. Does this decline in backlog mean that the seasonality is not expected to be what we'd normally expect from Q4?
I would describe the decrease in backlog and forward load of approximately $100,000 as more of a leveling off rather than a decrease, certainly not a significant decrease. And possibly more related to timing of shipments and order entry than indicative of demand. At the end of Q3, our backlog and forward load was still higher than the backlog and forward load at the end of both fiscal 2024 and the first quarter of fiscal 2025, which is basically where you see the seasonality impact.
Thanks, Tracy. How much indicative backlog decline is a result of potentially weaker demand?
Well, as I mentioned in my response to the previous question, this was a very minimal decline. We don't believe it is an indicator of weaker demand at this point. As Neil said, we're generally seeing strength in our target markets and believe demand is holding strong.
Appreciate that. Next question is, why was the gross margin 31.5% with higher sales levels in the quarter considering in Q4 last year, it was 33.5% with lower sales growth?
As we've mentioned in our previous filings, our gross profit margin varies depending on product mix in addition to volumes. We believe this was a result of product mix when comparing the two quarters.
Next question. Do you think you will need to increase capacity if you have plans to materially invest in extra capacity?
We believe we have the capacity to capture the exciting growth opportunities out there. We're currently filling some open positions in our manufacturing operations, given anticipated demand, particularly in Roanoke. And it does take some time for our production employees to get fully up to speed. But other than filling open requisitions to meet anticipated demand, we don't have any needs or plans to significantly invest in extra capacity at this time.
Next question. Is the current OpEx level sustainable? Or should we expect any material expenses moving forward?
As we've described in the past, we believe our operating leverage has a significant positive impact on our results as revenues increase. We also believe that our operating expenses should be generally sustainable at current and even higher sales levels.
Next question. Could you elaborate on the structure of OCC's Lightera cooperation? Will OCC be manufacturing Lightera branded products? And will OCC hold any Lightera equipment inventory?
Thanks, Dean. I will answer the number of questions that we've received regarding Lightera. I will say, as we get started and going through these questions that there's a lot of details about our collaboration that we're not prepared to share and that I think is consistent with the way we've typically operated. With respect to the question at hand here, we have previously disclosed the purpose of strategic collaboration that OCC has entered into with Lightera was to expand product offerings and solutions, especially for the data center and enterprise sectors. We believe that both OCC and Lightera will benefit from opportunities generated by the ability to expand fiber optic and copper cabling and connectivity solutions in the enterprise sector, the data center sector as well as an expanded presence in certain other sectors. As you all know, Lightera has made an investment in OCC, and we believe this reflects their confidence in OCC and resulted in Lightera holding a 7.24% interest in OCC. We have on file the stock purchase agreement related to this investment by Lightera, and that was filed with the SEC in a Form 8-K shortly after the announcement on July 7.
The next question on this topic. How will Lightera add value to OCC? How will Lightera help you to increase sales?
We've mentioned before that one of the advantages of partnering with a company like Lightera is their position as a global leader in optical fiber and connectivity solutions. Our long-standing relationship with Lightera and its predecessor OFS Fitel has been successful for decades. This collaboration enhances our product offerings and solutions, particularly for data centers and enterprise sectors, and we are confident that OCC will gain from this partnership. We believe that our customers and shareholders will both benefit from this relationship.
Next question. It seems like OCC has already started to benefit from Lightera sales and marketing efforts. Is Lightera going to spend sales and marketing resources to generate business for the partnership going forward?
Lightera did exhibit at the BICSI trade show last month. And at the invitation of Lightera, OCC did provide some personnel at the Lightera booth at BICSI. As part of this new collaboration, we expect Lightera and OCC will be working together in various different ways. However, we are not commenting on our specific sales and marketing strategies, which is consistent with OCC's past practice.
Thanks, Neil. Next question. Is the goal with Lightera collaboration still to target Tier 2 data centers? Or does this open the door to hyperscalers and larger data centers?
OCC continues to focus on the products we offer, which tend to be more suitable for what we would call Tier 2 and Tier 3 data centers. That does not rule out the possibility of us seeing benefits from the growth that's happening in the hyperscale market, but our core products and solutions are fairly focused on Tier 2 and Tier 3.
The next investor question. Can you give us an impression of the opportunity here, maybe a typical ticket size for Tier 2 or Tier 3 data centers given the combined offerings?
The opportunities in Tier 2 and Tier 3 data centers really vary in size. They can range from new builds to relocations, additions, and alterations. As you know, we do not provide forecasts of expected sales opportunities, so that's about all we can share on that topic.
Next question is, did Lightera want to buy more of the equity than the 7.24% interest?
Well, we're not going to comment or get into the details of our negotiations with Lightera, and that shouldn't be a surprise. We do think very highly of Lightera and the Lightera team, and we believe their investment in OCC reflects their confidence in our business and the work we will do together. We're very excited to be working with Lightera and look forward to that continuing to develop over time.
We received a number of questions with respect to specific sales or financial outlook with respect to the strategic collaboration with Lightera. Can you speak to that?
Again, consistent with OCC's past practice, we are not going to give specific guidance or projections. What we will say is that we are confident that our strategic collaboration with Lightera and the resulting Lightera-OCC integrated solutions will enable us to provide an offering that will expand our market opportunities, accelerate OCC's sales growth, and will create value for OCC and its shareholders.
We have no other questions that were provided in advance of the call today at this time. Neil?
Okay. Thank you, Dean. So now as we usually do, if any analysts or institutional investors have any remaining questions, we are happy to answer them. David, if you could please indicate the instructions for our participants to call in the questions they may have, I would appreciate it. Again, we are only taking live questions from analysts and institutional investors.
And we'll take our first question from Discovery.
Congratulations on a wonderful quarter. My first question is that you saw meaningful growth in the U.S. market this quarter. And in the past quarters, the U.S. was not growing that fast. So I was wondering if you can give us a little bit of color about which verticals caused this strong acceleration and which products; it would be great.
I appreciate the question. One reason for our growth is the successful efforts of our sales and business development teams, along with the overall industry recovering from a downturn experienced in most of fiscal year 2024 and prior. We are also benefiting from our strong position in the marketplace. While we usually don't provide specifics on which markets and products are performing well, we can share that we've seen growth in both our enterprise and specialty markets, as well as growth domestically and internationally. Currently, we are experiencing a broad growth scenario and strength in the market.
I've been following your company for a long time and have read all the press releases, noting the various tones. In the latest press release, you mentioned positive prospects for this year and beyond, which is a new perspective. It appears that you are feeling more confident about the upcoming fiscal year, which comes as a surprise. Can you elaborate on what is driving this optimism and provide more details about why you feel this way?
We have been optimistic because the industry has experienced around five quarters of decline and pressure. We have maintained our position and were not as adversely affected as other companies in our sector. Additionally, we are now benefiting from the industry's recovery. We believe that the ongoing activity in data centers will be advantageous for us, even though we are currently not providing more hyperscale-related products. We are also witnessing strength in our other markets. We engage in a significant amount of specialty work, and we see that strength across the board. This is why we remain optimistic. We're excited about our new partnership with Lightera. We have collaborated with them for years and recognize the quality of their company and team. We believe our long-standing relationship is evolving to a new level with their investment and our collaborative efforts in specific markets and products, which gives us more reason to be optimistic. We still experience seasonality in our annual cycle, with the first and second quarters often being a bit softer. Furthermore, there is considerable uncertainty in the market across various fronts. Observing the financial movements, you can see that. Therefore, while we cannot predict exactly what will happen, we are currently very optimistic about our direction.
That's very helpful. And for my last question, I won't difficult. So it's a little bit more macro oriented. So as we can assume interest rates are probably going down soon. So I was wondering, does the fact that interest rates are going down maybe affect some of your clients, maybe help a little bit to relieve some of the financial pressure and maybe accelerate your growth. Do you see any effect like that?
It's hard to say. I think that the interest rate decreases that the Fed is at least being pressured and somewhat considering. They're looking at various different market data, some of which is conflicting, and how that actually filters down is the actual interest rates that businesses are subject to is also still a question mark, I think, in the market. So we're not really looking to what happens with interest rates to figure out how our business is going to do going forward, but it is something we'd watch as you'd expect.
Just a very last question. Considering the large growth you had this quarter, do you still expect the regular seasonality to take place? Do you still expect Q4 to be the strongest?
Well, we don't really forecast on a quarterly basis. And our business also is a business that can have a lot of volatility in it. But right now, we're optimistic. Appreciate your questions. I was happy that you've asked a number of them. I'm happy to answer those. We tend to restrict the questions just to 2 per institutional investor. Dean, are there any other questions or operator, excuse me?
We'll take our next question from James Winchester with Quantified Value Partners.
I wanted to ask if you could provide more clarity on what is influencing gross margin. I know you mentioned before that during the market's downturn, you kept your infrastructure and capacity intact, which negatively impacted you at that time. However, I’ve noticed that we’ve experienced several consecutive quarters of significant gross margin growth. Could you elaborate on what is contributing to this improvement?
Sure. There's two things that impact our margins significantly. One is the product mix. The products that we offer particularly on the fiber optic cable side, but also across our other product lines can vary based on product mix, not just from what the market price is for certain products. And so that creates an issue. And also on the cable manufacturing side, that product mix can particularly impact from a processing standpoint. So I put those kind of in one bucket, which is really product mix. The second piece that really impacts us and then we benefit from higher sales levels is the operating leverage, and that operating leverage in our business is significant. Yes, we do tend to not like to pull back in personnel significantly on the manufacturing side when there's pullbacks in the marketplace, but a lot of the cost relates to just the fixed cost of having a manufacturing facility. And as our sales dollars go up, those fixed costs get spread over those higher dollars very quickly, and that results in higher gross profit margins. We did see the same effect in SG&A costs because we have a substantial amount of fixed SG&A costs. And being a public company, those public company costs also factor into that. I addressed that in my letter to the shareholders in our 2024 last year's letter to the shareholders, that kind of gives you a sense of what you can see over several quarters, which may be of interest to you if you haven't looked at that before.
That's very helpful. Following up on the first question, can you provide a general overview of whether your new joint venture with Lightera will lead to increased volume in your manufacturing infrastructure? Additionally, could you share your current capacity utilization rates? For example, are you operating at a quarter, half, or 90% capacity, and should we anticipate needing more capacity next year? A broad assessment of your situation would be appreciated.
We definitely hope that our partnership with Lightera will increase our production volume. We believe we are well-positioned with our products and markets, and adding Lightera's offerings should ultimately boost demand for us, which is our main objective. From a capacity perspective, as Tracy mentioned earlier, the biggest factor affecting us comes from the personnel side of manufacturing. We generally have more equipment capacity than we fully utilize. This is partly due to the diversity of our product line, which requires us to be prepared for various types of product flows, especially on the cable side. We adjust our workforce through overtime and new hires as demand grows, without needing significant additional investments in equipment, which also contributes to our operating leverage. According to our Form 10-Q, we typically calculate our capacity at about 50%. Although that figure may seem low, it's important to note that it reflects our machinery and how we use shifts rather than our staffing levels. In two of our facilities, we do not operate 24 hours a day, and in Roanoke, we are not fully staffed all day every day like some companies. This approach is strategic for us because we don't just produce a limited number of cable products in long runs. Our offerings include customized and specialty products, allowing for flexibility as different product lines move through our facility in various ways based on demand. While we calculate capacity at around 50%, our manufacturing team would likely view this differently. Nonetheless, maintaining excess capacity is essential for flexibility and reflects the nature of our business, which differs from companies focused solely on running hundreds of cable products non-stop.
We'll take our next question from Sergey Mascara with Kelper Capital Firm.
I'm wondering why you are not talking about the data center opportunity on your website and your data center products?
Let me make sure I understood the question, why we're not talking about the collaboration more extensively on our website yet, is that what you're talking about?
No, no, no. I'm asking if I check your website, it seems that you are not offering products for data centers. I'm wondering why you are not advertising the product that you have on your website?
We are currently working on improvements to our website for a couple of reasons. First, there are definitely areas that need enhancement. We do feature data center products on our site, and I need to verify how much we've promoted them specifically. Nevertheless, we are planning to make improvements. It's important to note that a significant portion of our sales comes from long-standing industry relationships rather than relying solely on website advertising like some other companies do.
And there are no further questions on the line at this time. I'll turn the program back to management for any additional or closing remarks.
Thank you, David. I would like to thank everyone for listening to our third quarter fiscal year 2025 conference call today. As always, we appreciate your time and your investment in Optical Cable Corporation. Additionally, on today, specifically, I'd like to thank those men and women who have served and are serving our country around the world to protect our freedom and liberty. And to honor those who perished in the terrorist attack on our country 24 years ago today in New York, Pennsylvania and Virginia. In OCC, we will never forget. Thank you.
This does conclude the Optical Cable Corporation's Third Quarter of Fiscal Year 2025 Earnings Conference Call. Thank you for your participation, and you may now disconnect.