There you go. Okay, everybody. I'd like to introduce our next presentation here at Planet MicroCap Las Vegas, powered by MicroCapClub. We have a fireside Q&A with Vishal Mishra and management from M-tron.
All right. Thank you, Bobby.
Thank you, Bobby. We are talking about M-tron Industries, ticker symbol MPTI. We have Cameron Pforr, CEO of MPTI, with us. He calls MPTI a 20-year-old startup, which has been around for 60 years. I'll explain that in a minute. The company started in the 1960s, along with many RF houses, making components for radio and telecom segments. In 2005, about 20 years ago, it pivoted into the aerospace and defense sector. Now, 70% of the revenues are from aerospace and defense, 20% from commercial aircraft, and 10% is the remaining business. M-tron is unique in the marketplace that it makes both oscillators and filters under the same roof, and it bestows competitive advantages, and we'll talk about that in a minute. As a result of its unique position, M-tron now has 40 Department of Defense programs.
It's designed into 40 programs, and it is on every Boeing and Airbus aircraft, with 16 design wins. This is a phenomenal position where M-tron is right now. It was spun out of The LGL Group, Inc. in October 2022, and since then, revenues have grown 75%, gross margins have increased from 30 to mid-40s, and the stock price, oh my gosh, has gone from $13 to $95. Cameron calls it's an American advanced manufacturer whose decades of engineering depth and customer trust are now being rewarded by a strong defense environment. Cameron joined us about two years ago, and I'm excited to ask him questions about where this business could be in the next three to five years. Cameron, to begin with, what did you like about M-tron and why did you join?
Sure. Thanks, Vishal, for doing this with me. I appreciate it. Just a real quick note, we trade on the NYSE under MPTI. I'm also joined by my colleague, Linda Biles, who's our EVP of Finance. Linda, thanks for coming. We're going to be at booth, I think, 520. We've got a lot of one-on-ones, but if you don't have one scheduled, just stop by and give us your card if you want to talk later. I love this business. I've been in and around the defense sector since I got out of college, and that was quite a few years ago. I had longer hair in those days. My first job out of college was as a military analyst. I used to do the balance assessments. I worked with Net Assessment in the Pentagon and others.
We worked on Soviet and U.S. balance of power. I looked at North Korea and China and places like that. In those days, we used all this war gaming and combat modeling to figure out how to spend the budget and what to buy next. I went off and did other things, but this is the third company that I've managed that's very defense and intel focused. For me, it's a little bit like coming home, but the environment is just totally different these days. M-tron was, before I joined, they'd been doing a lot of work over the years. They really shifted out of the telecom sector, that Vishal mentioned, from its beginnings. They were in space. They were doing CB radio filters.
They were a lot of high volume products, but they were crushed, like many companies, by the collapse of the network build-outs in the early 2000s. They made a really intelligent choice to move towards long-term program business, both in the defense sector and then some other areas that are moving out of the commodity markets and figuring out who really values what you design and build. We've found really a great home in the defense area and also in avionics. We're also in some other areas like space, where reliability is critical and your ability to test and build a product that's going to meet rigorous environmental conditions as possible. I saw this company as early a gem. It had been already producing some good growth, and it had taken its gross margins from the mid-30s to mid-40s, before I joined.
Now I think we're well-positioned to really grow and exceed what we've done in the past by scaling what we're doing internally, organically, and I'll talk about that a little bit, but also it has a huge opportunity on the M&A front. Just the changing dynamic in the defense sector is something I hadn't even contemplated when I joined, but it's a very unique opportunity. We'll talk about that window. That's a little bit about why I got jazzed up about it.
Great. Thanks.
Yeah.
Long hair and Department of Defense, you were contracting officer. How did that go? How was that looking at that point of time and how things have changed?
Yeah. I actually had a lot of fun. I used to teach the military analyst course when I was 22, 23. I didn't teach the whole course, but I taught a lot of it, and how to use technology. I was a technologist that was brought in to help improve how they'd make things more efficient, make things more complete. What I really enjoyed about it was, I went deep in my subject matter, so I was pretty confident about what I spoke about, but I was with colonels and generals all day long. They would ask you questions, and I would just give them a straight answer, and I don't actually think they were accustomed to always getting a straight answer, right? People that work for them are in the chain of command.
They're not going to lie to them, they certainly want to stay on the good side.
Right.
For me, it was a really enjoyable environment. A lot of give and take. Traveled a lot. The contracting officer thing was funny. It was just really to learn how to move money around so that the programs we ran because we were building systems could be done more efficiently. Before the government contracts like SEWP and other ones existed, it was very hard at the end of the year to spend the money you had in your budget. We specialized in scooping up end of year monies. We would use it for our programs, but also buy equipment and do favors for other programs. We had a really good working relationship. We brought in some really cool technologies into the DoD and intel world. We used to build analytic workstations that would do military analysis and terrorism analysis and things like that.
It's more or less an early version of what Palantir's early products were like.
How has the contracting changed from-
Yeah
almost 30 years ago to now?
Yeah, in those days it was very much a very long process. Obviously you were trying to have as much competition as possible, it was really oriented on finding the lowest-cost provider, which is not a great outcome necessarily, that part fortunately has changed. Like at M-tron, for example, we're on about 45 programs of record, I'd say over half of our defense revenue is sole source, right? We're also able to do it at a much higher margin than they had encouraged in those days. Instead of margins of 10%, now we can move to 40%, 50% gross margins where appropriate, that results in a pretty good bottom line for our investors. We more or less have 20%, 21% EBITDA margins.
Yeah. That's fantastic. You make both filters, oscillators, and sub-assemblies, so you can wrap up other people's connectors, amplifiers also, and make sub-assemblies and produce that for our Department of Defense.
Yeah.
That's unique that you make both sides of the communication channel.
Yeah.
You said last week, I'm reading a comment here, with this pressure in the defense budgets for Raytheons and Lockheeds and Leonardos to build more systems of scale, they're looking to outsource more and more of the design work and integration. What does the process look like, and that your team works with them, or how does the process look like?
It is evolving with the advent of the neo-primes and also these Department of War efforts to put more money into companies quickly that can innovate. The traditional process, it would take probably three to five years, closer to the five-year mark, to develop a part or a component or a subsystem for a new weapon system. That's because we would get an RFQ, so a request for quote. We would answer that if we thought we could produce something that met their needs, that was reliable, that we could do profitably at a decent margin. Then we would produce prototypes, and then a year down after that, if we won the bid or we were one of two winners in the bid, we'd produce a low rate of production.
You made that investment up front, but you weren't seeing the revenue from it for three to five years. That's a long time. That's a great moat, to be honest, for defending what we do. What makes it really interesting doing filters and oscillators and also resonators and some other sub-assemblies is that we're more strategic for our customers. Instead of going to three or four different vendors, we're able to produce them all ourselves. What we've found is that they're under tremendous pressure, these are the primes that we're operating with, to build more, to build faster, to build new systems, to build cheaper systems, and they don't necessarily have enough engineering headcount inside. They look to others like us to do more for them, and they would rather push more out.
The sub-assemblies we do today were all developed with the current clients. We were already selling them at least a component. Then what we ended up doing was offering to integrate the sub-assembly they were trying to build. We might buy power amplifiers or circulators or something else from other people. We'll integrate it for our client and test it. We're doing a lot of the design and engineering work for them.
That is great. It's the customer saying, "We can't do this. Why don't you do it for us?
Yeah.
This is a close connection between your engineering team and their engineering team.
Yeah, exactly. It is a partnership, definitely.
And that's for-
Yeah
Existing prices. What about the, you mentioned it a little bit, the neo-primes where the Anduril and the AeroVironment and those of the world, how does this capability, is this still relevant?
It absolutely is. Also what helps us there is we just have a huge, very deep library of designs. If you go on our website, there's something called a FastFinder. You can see or get an idea of all the different products, not all the products, but a lot of the products we've built. We put them up there so that engineers who are looking to design a new system, who are looking for a certain spec or frequency range or whatever it might be, will see that we've done it before. We can sell them parts they can use in their prototypes when they're experimenting and then work with them to actually customize it to meet their exact needs to improve the performance they're trying to achieve.
The also is that our engineers, when we work with people like these neo-primes, they are iterating so quickly, and they need people like us who are willing to engage really early to do that with them just to meet their requirements.
That was my actually next question. Does this vertical integration, does it give you some speed in execution? Because that speed in execution is being desired by especially the neo-primes.
Yeah
Three to five years.
Yeah.
So how does this process-
How does that work? Okay. These are, I think, some of the differentiators of the company. One is we talk about vertical integration on the left and then this blue-chip customer base. On the vertical integration side, what we do there is we have pulled in a lot of processes in-house that allow us to deliver products with a shorter lead time than competitors, essentially, and also more reliably. Like many manufacturers, we are also depending upon many suppliers, and we would find that suppliers would deliver stuff late, or it wasn't to spec or wasn't performing well. When that happened, and this might be very simple processes like machining or painting or plating, we would look at, should we bring that in-house or have that capability in-house? We've done that, and we make these buy to build decisions every day.
It lets us deliver a product in a shorter timeframe, and helping them meet their need quicker.
Is there anything in the business, is it like engineering knowhow, process, or capital, which protects the speed advantage as we move along?
Well, there's a lot of pieces to it, right? Including getting the materials in-house early enough, like forecasting well, things like that. I think we're making continual investments along this front. We just brought in a four-axis CNC machine. It's about as big as, I don't know, two or three rows of these tables, that can run without human intervention for days, making parts. We're doing a lot of automation like that, pick-and-place machines, other technologies, and it's a continual battle.
That sounds good.
Yeah.
You are in the marketplace with these competitive advantages, and the marketplace is changing. Which is first with the Iran war, and you have a slide which shows how stock, missile stock has depleted dramatically. We have seen replenishment rates are substantially higher than where it is right now.
Yeah.
How does this particular change, where the missile production will be multiple times what it had been in the past, relate to the competitive advantages?
Sure. I'll just move it to that slide so people online can see what we're talking about. These are some of the markets that we serve. These are some of the end markets we serve. This is online if you want to check this out later. This talks a little bit about some of the changes taking place in the procurement process. This is the slide that Vishal Mishra was referring to. We're very competitive. Precision guided munitions is one of the larger sub-segments for the company. It's probably roughly 30% of our revenue, which I think is, for a public company, pretty high. I don't think this is a new problem. This just was recognized, but people weren't doing much about it in the past. Our ability to produce in the country had really dwindled.
I think last year, this is a Center for Strategic and International Studies study. We also have some budget numbers. I think we only built like 38 Tomahawk missiles last year.
Oh, got you.
Just to give you a feel for it. Crazy. We went through 1,000 of them in the past two, three months. Depleted at least a third of our stock, if not half. This takes years and years to build. Right now, we're engaged. We were already working with many of the missile producers. They were already clients. We were on a majority of these systems, not all. We're now seeing with the new DoW framework agreements that these are all being put out to bid. It's kind of being done piecemeal. We're very actively engaged right now, competing for longer term contracts with much higher ramp rates. In some areas it's like 7X the capacity in the past.
Like Tomahawks, I think are two 7x. Yeah.
Yeah. AMRAAM is one that's growing quite a bit, that's not on this page.
Yeah.
SM-3 and SM-6 are also growing at a huge rate. I think Patriot is actually supposed to go like 20x. There's going to be a lot of change in the industry. We are, at this point, pretty well capitalized, I think, and we also have a lot of experience developing at scale. That helps position us to be one of their strategic suppliers going forward. I think we're going to win our fair share of these bids, and I think we'll probably increase the content we provide. Yeah.
I think you've said in the past, so we have a ratio of 7x, 20x, and maybe some like 2 to 4x is what you've said that's where your existing missile business will grow.
This is provided obviously the budgets come through.
Yeah.
Also just to put a finer point on it, which I think is where you're going, is that we don't expect to see this 2x, 4x in our numbers this year.
Yeah.
This is a long-term goal of the country.
Yeah.
They're trying to rectify years of neglect.
Yeah.
Already Raytheon and Lockheed and others have started investing and figuring out how to build out their infrastructure so they can hit these targets. That does mean that we'll have to do the same thing. We do expect, provided we win our fair share of these bids, to see a pretty heavy ramp rate hit the kind of the back end of 2027 going into 2028 into the future.
The people who have not read this in the last week or 10 days, The Wall Street Journal has like three to four articles, really good articles, which explain why Patriot takes like three to five years to build it.
Yeah.
Just this Monday, they had an article about low-cost missiles. It's called containerized missiles. It will give you a sense of where this market is going. In the low cost, they call it affordable mass, like more stuff at faster development cycles than three to five years.
Yeah.
How does your competitive advantage, we don't know, what's your sense of how do they fit or don't fit in this space?
Yeah. We've been dealing with this issue for a couple of years. Not in the missile area, but we've been working in the drone space with some of the neo-primes on building great capabilities at a much less expensive cost. It doesn't mean it's cheap. In the drone area, we've been involved in the drone space since 2014. We are traditionally in the larger, more sophisticated drones, and it's been a good revenue source for us because they have so many different systems on board. They'll have guidance systems, with using radar for that. We'll have comm systems. They'll have EW systems on board, will be in the ground station and the satellite. Now, with some of these newer systems they're trying to build at much less expense, they'll be a little bit less sophisticated. I don't think we'll have quite as much content.
Right.
The volumes they're talking about are much larger.
Right.
That article you're referring to was an award that was done, I think, mid-May, for lower-cost cruise missiles and hypersonics.
Yeah.
I think that's going to be a really rich vein for many, hopefully us included.
Right. Yeah. You've said a $10,000 per missile, about 2,000 missiles per year. That's about a $20 million business now.
Yeah.
The low-cost missile, we probably don't know-
Yeah
The content per missile, but the number will increase so much that you may actually exceed what you know.
Yeah, I think the content, the dollar value per missile will go down quite a bit, right?
Yeah.
Hopefully, we'll make up for it in volume. I think the profitability of each part will be about the same.
Great. Low-cost drones. We have Department of Defense's Group 1 or Class 1, 2, 5 drones. I assume because you have these military-grade components which can last a long time, and if a drone will just go and finish up in 10, or actually should be five minutes. You just need it for a few minutes, your components will not go there, correct? Which-
Yeah
Drones your components will go in?
Yeah. We don't play in the FPV space at all. You read about Ukraine. All these missiles in the first 10 kilometers from the front are traditionally $1,000-$10,000 drones. They use a lot of inexpensive parts made in Asia, not made for reliability because they're only supposed to last 20 minutes in the air. What it really has driven for us is we're seeing huge opportunities in the counter-drone space. Just in the past two months, we have announced about $9 million of orders for counter-drone deployments-
Yeah
We have several other clients that we've been working with on this new product we're building called eVIBE, that's what's driving this. We're expecting to see some other big orders too this year. We're seeing the ramifications and the benefits of what's happening in the drone area and the changes on the battlefield, but it wasn't necessarily in an area that we anticipated going into it.
eVIBE is a new product you all developed in-house, and now it's finding great use. Are you winning the counter drone business because you have high-performing products, or is it because you're more responsive? Why'd you get that business? You give $9 million of booking you've announced.
Yep. In this particular case, this eVIBE product we make is very unique in the industry. I think we're really the only ones that do it. It's a motion-compensated oscillator. Usually an oscillator, if it's shaken, it's like on a battlefield, on an APC or a helicopter, it's going to drift, so it's not going to be as accurate, the frequency it generates. In a radar, that means that the radar's not going to actually get the signal back where they thought it would, and it wouldn't recognize a target. It's really been critical for these counter-drone deployments. The other thing it's driving is a lot of business in EW, which is another big growth area for us this year. In EW, it's also extremely accurate, right?
Yeah.
They like that because it actually produces a very precise frequency signal.
Okay. EW and counter-drone defense both you've said are a fast-growing business for you. You've not-
Yeah
quantified EW. Maybe you have.
Yeah.
Yeah.
We don't publish it in terms of it's not in our SEC reportings, but it's roughly $2 million each. Both of those areas are expected to double or one might even triple this year, and going forward for several years. It's definitely a big area of investment, and it's an area that frankly, I think the U.S. is a little behind and needs to recognize that and is making good strides.
The seven-year contracts, and you mentioned last week that many smaller companies, some private, who were doing some really cool weapon systems that are much less expensive, and the Department of Defense wrote seven-year deals with them. These are even next level, even beyond Anduril and AeroVironment. How are you positioned or not positioned to do business with them?
Yep. Some of those companies we'd worked with in the past, some of them we hadn't. Of the ones that were in that announcement, we don't have any content in any of those particular systems. We are always targeting those types of systems. We are making good headway there. We're also, if you looked at the more traditional missile systems, we've gotten engaged with several new vendors that are also competing to win those. I think we'll get more content there.
Last week also, you said of European business, they're increasing their defense budgets. Would you get any part of the business there?
Yeah. Good question. I was very bullish on doing more in Europe a year ago. The German budget now is real.
Yeah
The U.K. budget is expanding. We've had reps there was nothing really to sell because there was just no money. That is changing. We've done a lot of business with these European primes, that's been done in the U.S. BAE, Cobham, Thales, people like that, are clients. We are looking to do more in Europe. We're actively engaged there, and we might even consider buying a European manufacturing capability if that made the difference. Because there is a desire, and it's understandable. We do the same thing here. They want to buy European-made products, just like we want to buy U.S.-made products.
M&A, you've raised through warrant exercises and through rights offering, like $70+ million. Why, what are you going to do with that?
Yeah. We have to wrap up here, just three things. We did raise a lot of money this year. We just did a $40 million rights offering in April. It's really designed to, first of all, strengthen the balance sheet of the company as we're going into this area. This time of scale up, we're well-positioned to do that and be a strategic partner to our clients. Also, it opens the door for us doing M&A. A year and a half ago, when we had $10 million on the balance sheet, there weren't banks bringing us deals or opportunities to look at because every deal that we would actually put a term sheet out for was contingent on us raising money. That has changed, this is giving us a lot more optionality here.
We're looking at doing tuck-in acquisitions, which complement our product suite and broaden it, as well as some things that are more transformative. Being able to take advantage of some of the corporate spin-outs that are going to take place as the government puts pressure on the primes to split up.
Last sort of like global question. When I put all this together, we have the existing missile business, $20 million, two x, four x, let's say three x, in my mind, next few years goes to $60 million.
Yeah.
Your prime business, we don't know the size, and we have electronic warfare, we have counter defense. I can easily see organically it's almost close to doubling, and then you have inorganic on top of that. To me, it seems like you have a very high growth runway for years ahead.
Yeah. I think it's an execution game at this point, right?
Yeah.
We've done a good job to date scaling our business. I think we're at an inflection point if the defense budgets come through, so I do expect to see growth there that's definitely going to accelerate. Our goal is to really double or triple the size of the business in the next couple of years, and we have several different ways to get there. If you add up the numbers, there's multiple paths to success.
Right. I hope that you do get there, double or triple your business. Thank you, Cameron, for speaking with us.
Thanks, Vishal. Appreciate it.