13 February 2015

Advanced Photonix's revenue falls 25% due to delayed telco spending

For its fiscal third-quarter 2015 (ended 26 December 2014), Advanced Photonix Inc (API) of Ann Arbor, MI, USA (which designs and makes APD, PIN, and FILTRODE photodetectors, HSOR high-speed optical receivers, and T-Ray terahertz instrumentation) has reported net sales of $5.8m, down 22% on $7.45m a year ago and down 25% on $7.8m last quarter.

Revenue grew year-on-year for both the Military/Aerospace and Medical markets. Military/Aerospace revenue was $905,000, up 106% (predominantly due to long-lived Optosolutions military missile programs that have ramped up recently). Medical market revenue was $306,000, up $178,000 (although fluctuations are due mainly to the timing of shipments related to one customer).

However, sales were weak for Telecoms and Comtest (Test & Measurement). Telecom revenue has fallen 54% on a year ago to $771,000, due mainly to major carriers pushing out 100G capital spend in their infrastructures (to direct some of the cash savings to finance significant merger & acquisition activity). For the same reason, Comtest revenue was $3.8m, down $1.4m on a year ago.

Specifically, HSOR product sales slowed down significantly in both the Telecom and Comtest markets, as a result of delayed infrastructure capital spending by Verizon and AT&T due to unusually large acquisitions (including the most recent purchase of wireless spectrum from the FCC) plus a delayed 100G product ramp from a large Chinese customer.

Gross margin was 32.2%, up from 25.3% a year ago (when there was a one-time accelerated depreciation charge related to the shutdown of silicon photodiode production) but down from 33.7% last quarter (due to the large decline in HSOR volume).

Total operating expenses have been cut from $3.2m a year ago and $2.9m last quarter to $2.6m. Operating expenses in all categories have been trending below the firm's breakeven point, notes the firm.

On a non-GAAP basis, net loss was $602,000 ($0.02 per fully diluted share), down from $517,000 ($0.02 per fully diluted share) a year ago but up from $152,000 ($0.00 per diluted share) last quarter, as the positive effects of cost-reduction measures over the last 12 months were offset by the weaker sales volume. Adjusted EBITDA (earnings before interest, taxes, depreciation, amortization and stock compensation) was -$437,000, compared to -$205,000 a year ago and +$74,000 last quarter. The firm finished the quarter with $110,000 in cash compared with $120,000 at the end of March 2014.

"The third quarter was lower than expected, given weakness in telecommunication revenues which has also spilled over into our fourth quarter," says president & CEO Richard Kurtz. "This is a temporary condition as the backlog is currently growing again. We have landed several recent awards from Telecommunication customers that lead us to believe that fiscal 2016 growth could be very robust, given the large infrastructure upgrade going on in China. Further, we were given the long-awaited $1.4m Terahertz development contract that will commercialize a Terahertz system for F-35 maintenance purposes," he adds. "The combination of new products in the pipeline today, a return to normalized capital expenditures by service providers, and the infrastructure build out in China will lead to a resumption of growth in fiscal 2016," Kurtz believes.

"Given the minimal cash on hand, we are dependent on our line of credit with Silicon Valley Bank in order to maintain our liquidity and compliance with our debt covenants so that lenders do not demand payment on our existing debt outstanding," comments chief financial officer Jeffrey Anderson. At the end of the quarter, Advanced Photonix had $630,000 to draw on its line of credit. "However, we experienced a $2.1m reduction in HSOR revenues in the third quarter relative to the second quarter, which is more than anticipated in November 2014 when we last reset our covenants with our major lenders," says Anderson.

As a result, on 5 February, Advanced Photonix obtained further covenant relief from lenders by reducing the rolling six-month adjusted EBITDA requirement for January through June to -$1,250,000 ($1 of adjusted EBITDA required in July and $100,000 each month thereafter until maturity, with up to $150,000 in transaction costs carved out of the calculation). The parties also agreed to reduce the minimum liquidity ratio to 1.30 to 1.00 from January until the maturity of each party's respective debt.

In addition, Advanced Photonix has agreed to merge with Luna Innovations Inc of Roanoke, VA, USA (a manufacturer of fiber-optic sensing and test & measurement products for the telecoms, aerospace, automotive, energy and defense markets), which has complementary capabilities and a strong balance sheet. "The proposed merger is expected to provide liquidity needed for us to execute our growth plans," says Anderson. "The cost of being a small public company is high, and the combination offers many positive synergies," comments Kurtz. "While the merger is still subject to shareholder approval, we believe it provides a path to significant long-term shareholder value," he adds. 

The merged firm will be have optical technology based products serving the telecom markets and the non-destructive testing (NDT) market. "With this strong balance sheet combined with significant savings that will be realized from the elimination of public company costs, it will enable continued investment in our combined organic growth platforms of HSOR, Terahertz and Luna's temperature- and strain-sensing instrumentation products," says chief operating officer Robin Risse.

If the merger is not approved by stockholders or its closing is not timely or the projected revenue increases do not occur as forecast, then Advanced Photonix may need to seek additional funding sources to meet its obligations, says Anderson. This would include "the alternatives of raising capital, restructuring existing debt or exploring strategic options which could include the sale of a portion or all of our product lines," he adds.

See related items:

Advanced Photonix to merge with Luna Innovations

Advanced Photonix receives 2015 commitment from major customer for 100G coherent receivers

Advanced Photonix's Telecom revenues dip due to pause in demand for 100G transmission products

Advanced Photonix amends lending agreements

Advanced Photonix's growth pauses while silicon photodiode production shut down

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