Enablence Technologies Inc. (ENA) Earnings Call Transcript
December 7, 2022
Earnings Call Speaker Segments
Greetings. Welcome to Enablence Technologies Annual and Special Meeting of Shareholders Webcast. Please note, this conference is being recorded. I will now turn the conference over to Derek Burney, Chair of the Meeting and Director. Thank you. You may begin.
Thank you. Good morning, ladies and gentlemen. Welcome to the Annual and Special Shareholders Meeting of Enablence Technologies Inc. We are pleased to be hosting this year's meeting in an in-person format once again. As a courtesy for certain folks who could not be here today, we've set up a video conference to allow certain directors, officers and other stakeholders to listen-in on the meeting. We note, however, that only registered shareholders that are here in person can participate in the meeting. We therefore ask that those listening via video conference, please mute their microphone. Shareholders that are in attendance here today could be pleased to ask that you refrain from speaking unless specifically called upon by myself or the scrutineer to speak. Once the formal business of the meeting has concluded, there will be a management presentation, after which you will have an opportunity to ask questions. I ask that general comments and questions unrelated to the specific matter to be voted on at this meeting be reserved until after the management presentation. In order for the meeting to be conducted efficiently, we have prearranged with certain persons to move and second certain resolutions. We have done this as a way to expedite proceedings. This meeting will now come to order. My name is Derek James Burney. I am a member of the Board of Directors. With the consent of the Directors of Enablence, I will act as Chairman of the meeting. With me today is Todd Haugen, CEO, who will be providing a management presentation after the conclusion of this meeting. I will now ask Andrew Disipio of Bennett Jones to act as Secretary of the meeting. I will also ask Roxanne Parsel of Computershare to act as scrutineer of the meeting. An important housekeeping reminder, only registered shareholders or their duly appointed proxy holders are entitled to vote at today's meeting. We have previously mailed the meeting materials. I read those copies of the meeting materials and the statutory declaration of mailing be kept by the Secretary with the minutes of the meeting. If there is no objection, the reading of the notice of meeting will be dispensed with. All right. In accordance with the bylaws of the corporation, business may be transacted at this meeting if, 2 persons who are entitled to vote at this meeting and holding not less than 10% of the outstanding shares of the corporation, which may be voted at the meeting are present or represented by proxy at this meeting. Based on the preliminary scrutineer's report, there is a quorum of shareholders present at the meeting. I now declare that this meeting is regularly called and properly constituted for the transaction of business. I direct that a copy of the scrutineer's report on attendance be kept with the records of the meeting. Only shareholders of record as at November 2, 2022, or their properly appointed proxy holders are entitled to speak and vote upon matters at this meeting. Each shareholder of the corporation is entitled to 1 vote for each share held. The corporation proposes that voting will take place by a show of hands for all matters unless a vote by ballot is demanded or deemed appropriate. Please note that under the Canada Business Corporations Act, each shareholder or proxy holder at this meeting has the right to demand that a ballot be conducted on any resolution, either before the show of hands, vote or following that vote. For ballots conducted on any resolution, I will vote all proxies submitted to me as proxy holder as required by law. I now place before the meeting the financial statements of Enablence for the fiscal year ended June 30, 2022, and June 30, 2021, together with the report of the auditor thereon. A copy of these financial statements have been mailed to shareholders. There are extra copies available at the meeting for anyone who's missing one. Are there any questions relating to the financial statements? No, we will proceed. The next item of business is the approval of the amended and restated equity incentive plan as more particularly described in the circular. I'll now entertain a motion on the matter, which requires the approval of a simple majority by shareholders of Enablence.
Mr. Chairman, I move that the amended and restated equity incentive plan be approved.
Mr. Chairman, I second the motion.
We will now proceed to the vote. All in favor, signify by raising your hand. [Voting]
Any contrary? I received from the scrutineers the preliminary vote on proxy relating to the amended and restated equity incentive plan resolution. Based on the preliminary report on proxy, I declare the motion carried and that the amended and restated equity incentive plan resolution has been approved. We will now continue with the meeting. Appointment of auditor. The next item of business is the appointment of the auditor of the corporation for the ensuing year and to authorize the directors to fix the auditor's remuneration.
Mr. Chairman, I move that MNP LLP be reappointed as the auditor of the corporation until the next Annual Meeting of the Shareholders or until its successor is appointed and that the directors of the corporation be authorized to fix the remuneration of such auditor.
Mr. Chairman, I second the motion.
That's great. We will now proceed to the vote. All in favor, signify by raising your hand. [Voting]
Any contrary? I received from the scrutineers, the preliminary report on proxy relating to the appointment of the auditor. Based on the preliminary report and proxy, I declare the motion carried and the MNC LLP is reappointed as the auditor of the corporation until the next annual meeting of the shareholders. We will now continue with the meeting. The next item of business is the election of directors. The nominees of management are as follows: Derek H. Burney, Louis De Jong, Dan Shmitt and Derek J. Burney. I will now entertain a motion nominating those persons as directors.
Mr. Chairman, I nominate for election as directors of the corporation for the ensuing year, the 4 persons whose names have been read.
Mr. Chairman, I second the motion.
Are no further no nominations? There are no further nominations. Would someone please move to close nominations and to elect the directors.
Mr. Chairman, I move that the nominations be closed and that the 4 persons nominated be elected as directors.
Mr. Chairman, I second the motion.
Okay. We will now proceed to the vote. All in favor, signify by raising your hand. [Voting]
Any contrary? I have received from the scrutineers to preliminary report on proxy relating to the election of the directors. Based on the preliminary report on proxy, I declare the motion carried and that the 4 persons nominated are elected as directors of the corporation for the ensuing year. Unless there are any -- there is any further business to come before the meeting, would someone please move to conclude this meeting.
Mr. Chairman, I move that this meeting be concluded.
I second the motion.
Any objections? Hearing none, I declare the motion carried and declare the formal part of this meeting concluded. We will now transition to the management presentation by the company's CEO, Todd Haugen, after which you will have an opportunity to ask questions. Over to you, Todd.
Good morning. Thank you for joining us in person and online. It's going to be -- the first time I've had a chance to present to everybody. I'm quite looking forward to it. As you just heard, we went through the formal order of business, and we'll now talk through the history -- the recent history and going forward strategy for Enablence to coming 2 to 5 years. And so just a quick start out, just a quick glance at where we are from a market standpoint. As of yesterday, the share price of $1.24, 18 million shares outstanding, a little over $20 million market cap and enterprise value. And we continue to have offices in Ottawa, Fremont and Suzhou, that's Ottawa is our R&D, Fremont manufacturing and we have a sales office in Suzhou. We sold 20 million or $2 million -- we made $2 million in revenue this year, and so a pretty straightforward year. We're going to spend the next 20 minutes going through current status in the future direction. And what I want to draw attention to is for the coming year, we're going to really focus on drawing additional attention to Enablence in the marketplace. Historically, we having done a great job of making our presence And so we're taking 3 actions. One, we've hired Spinnaker Capital, Ali Mahdavi, for you folks who know as our Investor Relations person. Two, we'll be bringing regular updates to the market in the form of key close of business, new customers, for example, and other strategic advancements. And three, for clarity, we will start to report as of fiscal '23, our earnings in 2 lines of business: One, Datacoms, our tried-and-true revenue generator for many years now and will continue to be an important source of revenue; and Advanced Vision. With which we'll spend most of our time talking about today, as it is our future strategy and main engine for growth. Before we get into the strategy, I want to start with just a quick look back at fiscal '22. Fiscal '22 is all about putting a solid foundation in place for the growth -- future growth of the company. And there's really 3 things that happened this year that really impacted that: One, we completed our recapitalization, eliminating $30 million in debt to help put that foundation in place. Two, we restructured our loans, reducing interest rates by almost 5% and delaying payments until December of 2026, which is really key. And then we got management leadership -- senior leadership in place across the board to give ourselves the capacity to expand on the foundation that we put in place. With that said, we do have some headwinds in the coming 6 to 12 months. First, we've seen a slowdown in investment to hyperscale data centers with the large tech companies such as Microsoft, Amazon and Google. And so that's reducing Datacom's revenue in the near term. Two, the sales funnel, which you'll see us discuss later, is significant in order to meet the needs of the future sales. We're going to have to grow the capacity -- manufacturing capacity is very rapid pace, which puts pressure on manufacturing. And three, we continue to see long sales cycles. It's a high engineering product. Those sales cycles mean that you are very sticky. Customers can't easily leave and go to a new customer, but it does take a while to ramp up sales in which you'll see as we go through this today. Going forward, building on that foundation, what are we going to see? And first, we're going to take the Datacom business and leverage it to profitability. We expect to be profitable in FY '24 Q2 or Q3 calendar year. And -- sorry, fiscal year '24, Q2 or Q3. And then -- and that's based upon more than doubling our active evaluations in Datacom from about $2 million to $1.75 million in annual sales contracts and the addition of key strategic customers II-VI, SiPhx, Onet and ColorChip over the last 6 months. Additionally, we'll be releasing new Datacom products to the market, so an additional 5 DWDM as well as an 8-channel CWDM, all these 6 products are in high demand. In addition to the Datacom, we'll focus significant investment in Advanced Vision. The remainder of the presentation is going to dig in on the details of Advanced Vision, what it is and why it's a key strategic move for Enablence. So what is Advanced Vision? Advanced Vision is the use of controlled light source often a laser outside of the visual spectrum of light. So it's safe and can be used at high power to gather additional detailed information from the environment. So you can think about speed, position, distance, things that can't easily be detected at a high level of precision with normal cameras can be through Advanced Vision. And so in addition to that level of detail, it also allows you to see in the things like human tissue to have safer medical examination procedures that you would normally have. And so it's -- today, Advanced Vision is already in use across the industry. So you see it in mobility. You see it in medical and you see it in manufacturing, but it's quite early and growing rapidly. As a result, we're going to see a total addressable market in excess of $100 billion by early 2030s. And so when you think about what we do in Datacoms and the addition of Advanced Vision, they're quite complementary. Datacom is a maturing market. It's greats got standardized products in a really well-known sales cycle, whereas Advanced Vision is an emerging market, quickly growing and allowing us to maintain a higher rate of growth. So you see over by FY '26, we expect CAGR for Advanced Vision to continue at a high level, say, 24% versus more like 15% for Datacoms. When we look at margins in FY '26, margins are going to be upheld by the Advanced Vision market, keeping us closer to 40% rather than 15% margin for Datacom. And we're experiencing a higher close rate for contracts, meaning with less competition in this space and aggressive purchasing, we're closing accounts somewhat faster, not significantly faster, but significant higher close rates. And Advanced Vision continues to enjoy significant barriers to entry. For a new competitor to come in, from scratch, it would take at least 5 to 7 years and over $100 million of investment to even get started. For an existing competitor, it's at least $80 million and 24 to 36 months before any incremental revenue can be driven by a new manufacturing line that can support this line of business. And so it's a good market and our technology is specifically suited to capitalize -- to deliver on the requirements of the market. And so PLC has a distinct advantage here. And so -- when you look at the market, there's 3 ways people can address -- can provide Advanced Vision to the market. Silicon Nitride, Silicon Photonics and PLC, Planar Lightwave Circuits. And so you can see from the chart, PLC has a distinct advantage, particularly in the efficiency, sensitivity and capacity. These are an absolute requirement for Advanced Vision. Our customers are demanding as little -- being able to detect as little as 10 photons, virtually no light are being able to detect it. And so we will -- the benefits of PLC in Advanced Vision are significant and will be maintained for at least 5 to 10 years in the future. And that's over other -- in laser-based systems. We want to talk about competition versus traditional cameras, and that's the pictures that you see here. This is a Tesla, traveling at a high rate of speed down freeway. You can see in the upper right, there's a first point at which the Tesla detects the upper turn semi and it locks up its breaks. You can see the smoke coming off the tires. In the second image, you can see actually it's taken off the brakes. Oh, it looks like there's nothing there I made a mistake. Then the third picture, it locks them up again right before it hits the semi. And then the fourth picture shows it from another angle. And then the fifth picture shows it's smashing into the semi where airbags to deploy and the passengers were injured. This is an example of the types of optical illusions that happen with standard camera-based systems that Advanced Vision is just not prone to those kinds of collisions. In fact, motorcycles that have 2 taillights driving towns, the freeway are getting rear-ended because it just looks like a car farther out in the distance. But again, this type of optical illusion that Advanced Vision is just simply doesn't fall prey to. And so it's a pretty key technological advancement for society. And really, that's the foundation of the strategy why we're tackling Advanced Vision going forward. And so the strategy really has 4 pillars: One, engage the market; two, extend our Advanced Vision capabilities; three, build a supply chain that is robust enough to be able to deliver on the types of volumes that we're talking about and build out -- increase the strength of in people directly to be able to deal with the volumes that we're talking about. So for those of you who haven't had a chance to look at, we've released a new website as of today that focuses on a combination of Datacom and Advanced Vision. I encourage you to check it out. And we'll have additional activities to engage the market, most notably releasing an RDK/PDK. This is a development kit for customers. It dramatically simplifies and accelerates their ability to adopt our products. Additionally, we're seeing significant demand from trade shows -- for us to come and present on our technology. We're going to continue to capitalize on that as a huge source of leads and interest in the market. And then we are continuing to expand our academic partnerships with key universities such as Caltech and UCLA. We'll also be expanding our capabilities. So we're releasing new product technologies, specifically targeted at FMCW LiDAR, which is what we discussed on the last page. We are increasing our artificial intelligence use in design process -- design and development process. And we'll be focused on increasing our manufacturing capacity by 10x no later than FY '26. And that will be through a combination of investments and outsourcing to other manufacturers. From a supply chain standpoint, you can imagine 10x is a huge challenge. You have to have redundancy and resiliency across the supply chain to be able to deliver those. And so we've taken -- we started that process in FY '23, and we will continue that process in FY '24 and '25. Developing primary, secondary and tertiary suppliers at a consistent level of compliance. And then because of the market we're going into is automotive. Automotive requires annual pricing concessions from the supply chain, and we will be negotiating that with our supply chain partners as well. And then finally, growing our people. We have to add automotive sales experience to really capitalize on the LiDAR market. We need additional designers. Our designers are pull out of capacity and continue to be booked out for more than 6 months. And so adding design capacity will be a key strategic advancement going forward. We have to add additional process engineers. Again, the rapid rate of growth is going to require process engineers to help stabilize it. And we're going through 6 Sigma training across the board for all our technicians to help drive appeal level quality. And so what kind of progress have we made so far to Advanced Vision? This year, FY '22, 20% or 80% of our revenue comes from Datacom and 20% Advanced Vision. But we have more than $60 million per annum in contracts that are under active evaluation today. In fact, in the recent weeks, we've signed up additional customers driving that number even higher. We expect in FY '25, Advanced Vision revenue will surpass Datacom's revenue for the first time. And by FY '26, Datacom's will be roughly 30% of the revenue stream with 70% going to Advanced Vision. And so it's a pretty significant transition from Datacom's to Advanced Vision in terms of revenue that requires sizable investments, and we'll be drawing those investments from a combination of strategic investors and government funding in Canada and the United States, chips funding activities. And so we'll be drawing from those as well to achieve the 10x capacity increase over the next 3 years. And so really, this is a fantastic strategy. It's going to require a lot of work to execute on. Why is Enablence has positioned so well to excellent -- to execute, experienced management team in place across the board, in sales, manufacturing and operations. The technology is world-class for actual manufacturing and design. An established track record of delivering on optical chips designs and being able to manufacture them. Our sales pipeline is larger than it's ever been, very robust. And we now have a total addressable market in excess of $100 billion by early 2030s. And so Enablence is better positioned for the future than it's ever been and management is very excited about the coming 24 to 36 months and executing -- getting us to that 10x expansion. With that, I'd like to turn it over to questions from the audience.
So are there current customer engagements that you can talk about at all in Advanced Vision? Obviously, there's long lead times to be able to get through design and manufacture and into the OEMs. So can you talk at all about where you are in terms of customer engagements at this stage?
We can't specifically talk about customer names, they're all under NDA. But we can talk about the different customers, the types of volumes and where we expect they are going. So today, we have 5 different customers in the automotive LiDAR space that are in various stages of either our evaluation, which is really where we're doing custom engineering work to make sure that we can couple up to their equipment and then do test on that to make sure we deliver against that. Evaluation is a significant step, it's post NRE, but before trials. And so we are -- we have 1 customer that were past engineering and in trials with, and we have 3 customers that we are almost complete with trials. We expect to be through -- sorry, the valuation we expect to be through a valuation by the end of January. And 1 customer we just started evaluations with that we expect to be done by the end of calendar Q1 of '23. Those all have a fairly rapid time line. What I mean by that is these are for the automotive year of '26, which means they start manufacturing cars in fall of '25. And if you work that back to today, those contracts will have to be signed and in place by the midpoint of calendar year '23. Does that answer your question?
Yes. It does. And then just a quick follow-on on the Datacom business. So just to clarify, there's a path to operational breakeven with the Datacom's engagements and current customer engagements that you have over a period of time. Is that correct?
Yes. Advanced Vision is a huge and future market. But as we said, it takes a little while to ramp into it. The contracts will be applied, and we won't see that until meaningful revenue until FY '26. But between now and then, we're seeing -- continuing to see significant growth in Datacom, and that drives us to profitability by roughly this time next year. What we talked about is either fiscal '24 Q2, that's right now or Q3, which is January through March of '24.
Todd, if memory serves on that particular slide, you had a $4.7 million target for Datacom, if I recall. From one point, whatever -- I mean, I guess, let me ask my second question first. The 10x is based on what starting point in terms of the revenue base of the company or the production base of the company like where do we -- that's a 3-year trajectory. And so where do we start from?
Yes. So there's 2 things that you talked about there, Tony. One, you talked about the revenue growth. The revenue growth in Datacom is saying we have $1.9 million at the start of the fiscal '22. We had $1.9 million in annual contracts under negotiation. And now we have $4.75 million in Datacom, annual with Datacom's revenue rotation that on top of the revenue base that we have today. So if you total those together, it would be roughly $6.75 million.
Good. So that's incremental to the...
That's right. That's the revenue. Revenue, when we talk about 10x, we're talking about manufacturing capacity, not revenue. And so today, we have the ability to manufacture about 400, little over 400 6-inch wafers a day. Slide 26, we need the ability to manufacture as many as 6,000 6-inch wafer -- sorry, not a day a month. 400 6-inch wafers a month, and we need the ability to manufacture 6,000, as many 6,000 6-inch wafers a month by 2026. Today, we have theoretical capacity in the factory to be able to produce 1,100 6-inch wafers today. So that's between when you take 400, that's the start of our 10x, 400 to somewhere between 4,000 and 5,000 would be 10x. I expect we're actually going to need even more capacity than that given the current ramp of sales just the current expansion of the sales pipeline.
I recall in, I think, the last quarter, the reference was made to the fact that there were -- you'd be doubling again in Q1 calendar '23. In other words, the next quarter coming, I think less the benchmark that was in the quarterly report.
That's right. We can't discuss future earnings here because of standard market. We can't trust them in the data...
I'm not talking about it.
In terms of expansion of capacity, we have purchased a significant new hardware, new equipment for the fab. It's all being installed. We continue to be on track for fab expansion.
You mentioned the potential market of $80 billion in 8 years or 7 years. What's the market -- that part of that market you would address? I mean it's not really mean you couldn't -- if you had 100% of the market with your products, your sales wouldn't be $80 billion, was it?
So I believe the question is when you look at the $80 billion total addressable market that's referenced in the slide deck, how much of that comes from Advanced Vision that comes from the chips portion of the Advanced Vision technology. And so when you look at the total -- you're talking about the total supply chain effectively. When you look at the total supply chain, that number is really the combination of 2 tiers, 2 main tiers in the supply chain. The chips themselves and the components that the chips go into. It's not the actual -- the end product that's sold cars, et cetera. It's also not the raw material, silicon wafers, photodiodes and those things, those fall outside of it. It's those 2 parts of the tier. When you look at that, it wildly varies depending on which product markets you're in. But on the low end, it's 30-70, 30% chip, 70% components. On the high end, it's 60-40, 60% revenue driven by chips, 40% by the components themselves. When you look at the total addressable market, what percentage is going to be -- could we actually access with our sales? I would say it's going to be roughly 45% of that. And so you're looking at somewhere around $35 billion in total market -- total addressable market that we could sell into. Still quite large.
Especially when you started with $2 million? Or a 0 actually...
Yes. Fortunately, we're not at 0. We've been doing Advanced Vision now for. We started that first Advanced Vision sales in FY '22. So we have been continuing to grow for some time. So we're not starting from 0.
Other questions? Fantastic. Well, thank you or for participating. With that, we'll conclude the fiscal '22 Annual Shareholders' Meeting, and I look forward to seeing everybody at future meetings.
Thank you. This will conclude today's presentation. You may disconnect at this time, and thank you for your participation.
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