CPSH - NASDAQ

Good day, and welcome to the CPS Technologies Q1 2023 Earnings Conference Call. The floor will be open for questions and comments following the presentation. It is now my pleasure to turn the floor over to your host, Chuck Griffith, CFO and acting CEO at CPS Technologies. Sir, the floor is yours.

Thank you, operator, and good afternoon, everyone. I'm joined today by Anthony Koski, our Corporate Development Officer. And in addition, I'd like to introduce Chris Witty from Darrow and Associates. Many of you have asked about Investor Relations on these calls, and we have made the decision to work with Chris and Darrow moving forward. So I'm now going to ask Chris to provide the Safe Harbor statement. Chris?

Thanks, Chuck, and good afternoon, everyone. Before we begin the business portion of the call, I would like to point out that statements in this conference call that are not strictly historical are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and should be considered as subject to the many uncertainties that exist in CPS' operations and environment. These uncertainties include, but are not limited to, the war in Ukraine, economic conditions, market demands and competitive factors. Such factors could cause actual results to differ materially from those in any forward-looking statement. Additional information can be found in our filings with the SEC. Now I'd like to turn the call over to Chuck to offer his perspectives on the first quarter results. Chuck?

Thank you, Chris. So first, let's address the elephant in the room, and that is the departure of Michael McCormack. So out of respect for Michael and his family and their privacy, I don't want to get into too much detail regarding his resignation. Suffice it to say that we will miss his drive, his leadership and his sense of humor. Michael was an advocate of Jim Collins' book, Good to Great. Collins said, "Make sure you have the right people on the bus and in the right seats." Of the 4 senior managers, 3 were hired during Michael's tenure, and I am very humbled personally by the confidence he showed in retaining me. The point is that I'm trying to make that Michael built a great team not just at the senior level, he made the company stronger and better throughout his tenure, and he will be missed. The Board will, as announced, evaluate a candidate to take his place full time. Due in part to the foundation Michael laid, we are extremely confident that we're headed for another record year. Our business development team, led by Anthony Koski, has been able to maintain a strong book-to-bill ratio in spite of the fact that the denominator billing part of the equation continues to grow. Working with our product development team, led by Dr. Steve Kachur, we've been able to evaluate customer problems and find unique solutions to meet their needs. Finally, under Dan Barton's leadership, our operations team continues to produce technologically complex parts on time and within budget, making it that much easier for Anthony's group to win additional business. Now let's turn to the financial results. Today, we're pleased to announce first quarter revenue rose to $7.1 million for the quarter ending April 1, 2023, compared with $6.7 million in the prior year period. The $7.1 million in revenue represents a new record high for CPS, surpassing the previous record set during the second quarter of 2022. Revenue growth in Q1 was driven by expansion with one of our major customers, which had been particularly hard hit by the COVID-19 pandemic as well as increased armor shipments. Gross profit in the first quarter of 2023 totaled $2.2 million or 32% of sales. This compares with gross profit of $2 million, $2.0 million or 30% of sales in the prior year period. This increase in gross margin was primarily due to the impact of higher sales on fixed factory costs as well as improved factory efficiencies and product yield. Selling, general and administrative expenses totaled $1.6 million in the first quarter versus $1.4 million in the prior year period. Two factors were primarily responsible for this increase. Travel costs were significantly higher this year than in 2022, which have been negatively impacted by the COVID-19 pandemic. Many conferences last year were still virtual and many customers were still restricting on-site visits. As part of our plan to hire and retain good employees, we also increased the company's 401(k) match for 2023. The company generated operating income of $694,000 in the first quarter of 2023 compared with $547,000 last year. This increase of 27% was the result of higher gross profit, partially offset by greater SG&A expense, as I just discussed. This quarter's operating profit was our second highest in over 10 years. Our book-to-bill for the quarter was 112%, further enhancing the 110% book-to-bill we reported for 2022. We are cautiously optimistic that the order win rate and ongoing demand will directly translate into steadily increasing revenue and operating profit for the rest of fiscal 2023 and into fiscal 2024. Turning to the balance sheet. We ended the quarter with $7.4 million of cash versus $8.3 million on hand at the end of fiscal 2022. The decrease in cash was due primarily to increases in accounts receivable and significant reductions in deferred revenue, partially offset by operating cash flow. Although it remains open and available to us, no additional cash was raised under our ATM program in the first quarter. Before turning the call over to Anthony, let me just add. In the first quarter, we also announced another SBIR win. Dr. Kachur and his team will be working on the development of armor floor panels for the UH-60 Black Hawk helicopter. We're very excited about the prospects for this project as the lightweight attributes of our hybrid tech armor make it ideally suited for this type of application. While there is no guarantee that this particular project will become a full-scale production order, we remain optimistic. As we continue to apply for and win SBIRs, the likelihood of one or more of these becoming a major win for CPS increases dramatically. So you can see there are a lot of good things going on here at CPS. We believe the company is well positioned for strong performance in the quarters to come. And I would now like to turn the call over to Anthony, so he can get into a little more detail about the growing opportunities on the business development front. Anthony?

Thank you, Charles, and hello, everyone. Another quarter of record results is certainly a great way to start 2023. First, I'd like to take this opportunity to echo Chuck's earlier comments on Michael's departure. He has been very influential to the organization and me personally as a mentor and a friend. We wish him and his family all the best and thank him again for his significant contributions. Now some updates on how we're planning for the future of CPS. The business development team and I continue to focus on identifying and penetrating new avenues of growth to scale our operations. In close collaboration with our product development team, led by Dr. Steve Kachur, we are actively pursuing opportunities within the Advanced Materials space, prioritizing high-value projects with significant potential upside. Although the development qualification and overall sales cycle can be long for any material solutions, we are 100% committed to realizing the long-term upside these programs can produce. This long game approach has not prevented us from converting many opportunities into near-term wins, as demonstrated by our strong book-to-bill ratio. Considering this is calculated on a growing revenue number, as Chuck mentioned, makes it even more significant. We remain focused on managing our sales pipeline and ensuring we have an adequate funnel to meet our top line goals for the year. Suffice it to say that the pipeline is growing and diverse. It includes both existing and developing customers and products. I am pleased at the rate we were able to convert in Q1, and I'm optimistic we will be able to hit our sales goals for the year, including solid growth over fiscal '22. A few more highlights from the first quarter. The business development team has expanded. We recently welcomed Joe Englin as our new Senior Business Development Manager. Joe has over 15 years of experience in aerospace composites manufacturing, having previously held leadership positions in both engineering and business development. Joe has hit the ground running and is already generating high-value prospects. We are excited to have him on the team and are confident he will make a significant contribution to the organization. As previously announced, in Q1, we received a significant order for hermetic packages from a leading aerospace electronics manufacturer. I'm not able to disclose the company or the specific applications, but I can share that the packages will primarily support U.S. space programs. I would also like to highlight that this represents a 100% increase in sales from this customer and includes both existing and new product designs. This is a direct result of our team's ability to actively listen to our customers and be a solutions provider at a larger scale. We are confident that we will be able to continue driving incremental growth with this client and increase our portfolio of parts supporting our ongoing and development programs. We also initiated over 30 new product qualification projects in the first quarter. This has been a deliberate effort to bring in more new product qualification opportunities each quarter, and we are pleased with our target for Q1. Lastly, we successfully delivered new armor panels for qualification testing on a significant international opportunity supporting enhanced survivability of combat vehicles. This effort builds upon our proven hybrid tech offer technology packaged in a new way to achieve a higher level of protection. We are partnering with a global defense systems integrator and expect the qualification testing to happen later this year. Thank you. This concludes my prepared remarks. Chuck and I are now available to answer any questions. Operator, please go ahead.

At this time, we'll be conducting a question-and-answer session. [Operator Instructions] And the first question today is coming from [Chris Wachowski].

Congratulations on the great results. Can you give us kind of an estimate of how much of your revenues are commercial and how much are there for government military programs?

So sure. I believe that the parts that are going to defense contractors, so we're not selling directly to the government. I'm not sure if that's your question. But the portion going to defense contractors, I want to say, is about 30% to 40% in that range.

Okay. Yes, that's what I was asking about. And my -- the main reason for that is because defense contracts can be volatile in terms of starting and ending up programs. And do you see that kind of volatility coming? Or are you -- it seems like you're in the beginning of programs on all of your products. So it does...

Yes, yes. I'm sorry, finish. Sorry.

Go ahead. Go ahead.

Yes. So we haven't seen that yet. And I think we're actually seeing a growth in that part of our business. The -- we're getting a lot of these defense contractors coming to us with products for the first time, or at least the first time that we're seeing them because of the confidence that we've been building with them. So I think we're actually very excited about the future of the defense portion of our business. I don't know, Anthony, do you want to add anything to that?

Yes. The only thing I would add is, obviously, government contracting and programs can be lumpy. I'll use that as a word to describe it. And so as Chuck alluded to, we haven't seen a significant portion of that yet. But I think that using the armor as a perfect example, we were actively delivering on our program with hermetic protection for the U.S. Navy. And a lot of times with contracts like that, they're significant in scale and then you kind of work them off a bit. And then once you get towards the end, you're working on the next contracting action. So it's all about kind of foreseeing that life cycle of the program and ensuring that we have an adequate pipeline of what’s next to kind of backfill so that we don't see that lumpiness in the business. But yes, we haven't seen a ton of it yet, but we're actively managing and preparing for that cycle.

Okay. That's good to hear. Another question is on the -- more on the commercial side. It might also be the science. But on the non-armor, the electronics side for using your products for cooling plates for electronics. It seems like looking at -- listening to other conference calls, it seems like the power electronics market in industrial power electronics is very strong despite what might be happening with the economy. Are you seeing a corresponding strength there? And is there a possibility for you to move into kind of more mass market applications and to kind of have products that we use for not really extremely high-power devices, but more of -- kind of more plentiful industrial devices that might be lower power?

Yes. I think the answer to that question is yes. We -- what we're seeing is -- I'll give you an example, is the shifts that they're putting on these plates typically have been silicon, and now there's a shift towards silicon carbide. And what that means with silicon carbide, as you may know, it was more efficient than silicon, especially this is important when we get the things like electric vehicles and battery storage and the ability to run further on the same charge. However, the silicon carbide runs at a hotter temperature than silicon. And that makes the AlSiC application more suited towards those middle-range power modules, where the -- where in the past from silicon, you were fine using a copper base plate, for example. But as we get to -- as we start running hotter, then you may want to consider AlSiC. So there was always an area where you always use AlSiC and an area where you always use copper, and then there was a gray area in between. And I think what we're seeing is that gray area is shifting towards using more of an AlSiC solution because of -- as you start developing silicon carbide. So there's certainly -- there are certainly applications. We've certainly been involved in our products going into electric vehicles, which, of course, has a tremendous upside, it appears. And whether what portion of that market we could potentially end up in, I really couldn't say at this point. But it's certainly something that we could see some great results. And Anthony, I'll ask if you want to expand on any of that?

No, I mean, you pretty much covered it, Chuck. It's -- we've made a lot of great progress in engaging with a lot of the semiconductor manufacturers that are trying to heavily utilize silicon carbide, as Chuck described. And just as we mature those discussions and understanding, we're still kind of targeting in that higher end, higher performance applications, [formula-E], military fleet electrification as a few couple of examples. The wider commercial HEV and EV market, as silicon carbide as a material continues to be used more and more to improve efficiencies and power density, it does increase the heat. I mean you're dealing with commercial marketplace and commercial EV, then you're dealing with the price war and you got competition overseas that you're dealing with. So I still see that, at least in the near term, having a big play in those higher end, more extreme applications. But the advance of silicon carbide as a material in those applications has made it even more appealing for our types of materials.

That's great. That's good to hear. And I was hoping that you would say that kind of the cutoff line where your devices applicable is going lower. So can you -- lastly, can you perhaps give us some estimate of what that cutoff line is that you will kind of market a device either by voltage or by power of silicon carbide. Is it like anything over 800 volts or 1,600?

I can't give you that number. I don't know.

I don't know if we have necessarily a specific line, but I think that you're kind of right in that range. So we've always kind of operated in this 1,100 to 1,200 volt. That was kind of where AlSiC started coming to play. And I think with the introduction of silicon carbide, it's probably getting closer to that between 700 to 800 volt. But that's not something that's been a line in the sand that we've kind of drawn to say that this is what we're going to market to, but it certainly expands that area that we have reached to.

[Operator Instructions] And the next question is coming from [Stefan Fasi].

Just a quick question about the vehicle armor. You guys at least -- I'm trying to remember here. But we're looking into the vehicle or working with somebody maybe a couple of years ago. Can you say whether it's the same customer or a different customer without necessarily -- I'm not necessarily asking the name. I'm just wondering.

Yes. [indiscernible]

It is leading to the same customer that we've been working it with right along. At least since in the 4 years since I've been here, it's mainly that 1 customer, so.

There were no other questions in queue at this time. [Operator Instructions] And we did have 1 more question come in. That question is coming from Ron Richards.

I was looking over our previous conference calls. And I noticed in the August 2022 conference call, you were talking about working on the benefits of additive manufacturing and 3D printing. And you talked about post updating your work in that area that you were doing some work for several customers. Any update on that project?

Yes. So we -- one of the SBIRs that we've been working on in the 3D printing, and that one is, I believe, that one is still moving forward. We've also done some internal work with 3D printing. In fact, Dr. Kachur was showing me just yesterday some really complex parts that we made that could be for just a company everybody on this probably has heard us. And so it's very interesting. So I think it's still early to talk about major commercial applications at this point in time. But we're definitely working on it, and we're definitely moving forward with that and think it certainly could be an area that could be very successful for us.

Okay. And also I was wondering what the hermetic deal. Have you guys been involved with Starlink used in your hermetic deals?

Not -- I can take this one. So not directly recently. But a lot of our customers sell into Starlink. But Starlink has been a target of ours for quite some time now, and we're actively beginning to reengage them. We actually kind of just started over the last couple of weeks to reengage them directly. But as I mentioned a few of our customers are selling into Starlink.

Okay. Great. Thank you guys.

Thank you. And there were no other questions in queue at this time. I would like to hand the call over to Chuck Griffith for some closing remarks.

Okay, so. Thank you, Paul, and thank you everybody for getting on the call. It’s been a pleasure talking to you all today and listening to the questions. And as we talked about before, we’re certainly looking forward to another great quarter and another great year for this year. And hopefully we’ll be back here in about 90 days and being able to tell you that we have achieved that goal at least for one more quarter. So again, thank you all for getting on. And with that we’ll close out.

Thank you. And there were no other questions at this time. This does conclude today’s conference call. You may disconnect your lines at this time and have a wonderful day. Thank you for your participation.