All right. Good afternoon, everyone, and welcome to the Precision Optics Fireside Chat. My name is Robert Blum, managing partner here at Lytham Partners. Up next here, I will be moderating a question-and-answer discussion with Joe Forkey, Chief Executive Officer at Precision Optics. As a reminder, Precision Optics trades under the ticker symbol POCI on the Nasdaq. All right, let's get started. Joe, welcome.
Thanks, Robert. Nice to be here.
Absolutely. I always like to start off for those new to the company, give us a little bit of a high-level overview of the company, the markets you serve, and how the business has evolved.
Sure. As the name implies, Precision Optics, everything we do has something to do with optics. Generally speaking, we're working on imaging systems and communication systems. We are a technology company. What I mean by that is that we've developed some core technology in the area of optics, and we show that core technology to our prospective customers. If they and we agree that the technology that we have can enable their next generation product, then we work with them to develop their new product. When their product goes into production, we're the ideal partner to manufacture that product. The way that Precision Optics will grow is by having more and more programs go through this engineering pipeline into production, because typically these programs that we're involved with tend to be pretty sticky. They last for a long time once they get to production.
As we move more and more programs into production, we expect the overall revenue and size of POCI to continue to grow. We work mostly in medical device and we are moving more and more in the direction of doing more and more with defense and aerospace. In particular, we are doing a lot with satellite laser communications these days. In terms of optics, we work in three very specific areas that we focus on. One is micro-optics, where we make some of the smallest optics in the world. This can be used for making small endoscopes that can go places in the body you cannot go otherwise, and this helps with anything that is lifted off the ground, drones and satellites, in particular, the satellite communication, because of the small size and high precision.
The second area we focus on is ultra-high precision systems, so very high-resolution imaging, like ultra-high definition or 4K, as well as very high precision when you are doing things like aligning optical systems. When you are communicating one satellite to another, you have to have things aligned very precisely to send beams 400 mi, 500 mi, 1,000 mi. The third area we focus on is digital imaging, which is an area where we take the technology that has been developed, so-called CMOS imager technology for cell phones and laptops, and we use that same technology, combine it with our micro-optics or ultra-high precision to make very small endoscopes, to be able to make single-use and disposable endoscopes.
The company has evolved over many years, but we are really at an inflection point today because we have two very large programs that have gone into production over the last two years. We have built out our manufacturing side of the business over the last two years. Anyone who looks at our financials will see that our revenues have gone up quite dramatically in the last year. This is because of these two big programs, one in satellite communication, one in single-use endoscopy, that have gone into production over the last 12 months - 18 months. It is a very exciting time for the company, as we see that part of our business model finally coming to fruition and starting to grow the company in a significant way.
All right, very good. At the company's core, what is it that the company does better than any other company out there? How can the same micro-optics and precision manufacturing capabilities serve both the device market as well as the aerospace market?
Yeah. The things that we do best are those three areas that I just outlined, micro-optics, ultra-high precision, and digital imaging. There is the core technology, which is technology that we have developed that other people just do not know how to do. Micro-optics is a great example. When I say micro-optics, we make some of the smallest optics in the world. The smallest individual optic that we have made is 50 microns, 5 0- micron, which is about the width of a human hair. The way that you have to handle these optics, the way you have to design a system that has components that are so small, you have to put them together under a microscope with special tools and fixtures. The way that you design those systems is unique, and you have to have experience in designing those systems.
The way that you manufacture those systems is unique, and you have to have people who are familiar with manufacturing systems that are that small. When you put it all together, the thing that we really do better than anybody else is go from the design phase all the way through to the mass manufacturer with all of the technology in each one of the areas that you have to string together in order to get a product that is ready to go to market. We have designers who know how to design the micro-optics that our manufacturing teams can then manufacture. We have a manufacturing engineering team that knows how to design and build the tools and fixtures that allow our manufacturing team to be able to build these things efficiently and cost effectively. It is really putting all of these pieces together that makes us quite unique.
It is the core technology combined with the capability of taking a product from the design phase all the way through to the mass manufacturer. Your question about how is it that we can use the same technology to enable some of the most advanced medical device equipment that is very small, that goes inside the body, how can we use that same technology on satellite systems that are launched by rockets up into space? At the end of the day, we are really application agnostic. What we have really built here, what the real value of the company is in the technology. Historically, we have really focused on using the core technology for medical device because there is a pretty clear application for really small, really high resolution, and that is endoscopy.
Going places in the body that you just could not go before was a natural application for these capabilities. Frankly, it sort of grew out of our long history in medical device, which we have been working in for many decades. We sort of advanced the technology following the advances in the medical device space.
What we discovered, however, and actually we discovered it by going to optics shows and having people from defense companies come over and see what we were doing, or from satellite companies come over and see what we were doing and saying to us, "Hey, we can use these technologies, these things that you're doing in some of the applications that we have." We've been addressing some very specific customers' needs over the last four, five, six years in both defense and in satellite communication, and we're just at a point now as we're growing and we have more marketing resources, we're able to go out and understand those applications a little bit better and go out and actively market into those communities.
At the end of the day, the thing that we can do is we can make optical systems that are smaller and more precise than anybody else in the world, and that small size and the high precision can be used both for medical imaging inside of the body, but also for systems like satellite communication, where you have to have small elements to be able to get it off the ground and not have extra weight on the rocket, and high precision to be able to point the lasers in the right direction to be able to communicate satellite to satellite.
All right, very good. Let's dive into the satellite market a little bit more.
Yeah.
What is it that the company is providing? Talk about sort of the growth that you're seeing more broadly for your applications within the broader satellite market.
Sure. Generally speaking, it is pretty clear, we can all see this in the popular press, that the space industry is really expanding in a pretty dramatic way. A large part of the requirement to support that expansion of activities in space is to be able, in the most fundamental way of looking at it, to be able to communicate with the satellites that are in space. A lot of the communication happens satellite to satellite, particularly for these big satellite networks, satellite constellations, if you like.
What has developed is a recognition that if the satellite communication is done with optical means, basically lasers, sending beams from one satellite to another satellite, also from the ground to satellites and satellites to ground, but more so today satellite to satellite, the bandwidth that can be supported is orders of magnitude higher than more traditional communication technology that used radio waves or microwaves. Right? As the space industry is developing, and as there is a recognition that laser-based communication can provide the best solution for bandwidth of that kind of communication, there is a set of industry standards that are being developed and that are evolving, and we are at a point now where the government is trying to standardize those.
The Space Development Agency, which is an agency of the U.S. government, has now standardized the requirements for the optical systems, the laser systems that are used for satellites to communicate with each other. I like to equate this, others have done this as well, this is not just from me. But I like to think of this as the early days of the internet. Right? Today, it does not matter who you buy the computer from. You plug the LAN cable into the wall, you hook up your Wi-Fi, and all the computers can talk to each other because there are standards for ethernet and internet communication. The same thing is happening in the satellite world, and a critical part of that is the laser communication. Starting from the top, we see the satellite market growing just in general.
More specifically, we see the need for the laser communication growing with it. Even more specifically, the piece that we can make very well that very few other companies can make is some of the components that go inside of those laser communication systems. They are called Optical Communication Terminals. The things that go inside of those so-called OCTs require that the mechanics and the optics be aligned and fabricated in very precise ways so that you can point the laser beam from one satellite to another satellite, which is hundreds or thousands of miles away, in a very precise way, and also so that you can ensure that the laser beam is focused so that when the beam gets to the next satellite, it is not spread out over very large areas, in which case the signal would be too low.
Without going into all the technical details, it is the alignment of the fiber optics, the optical components, the mechanical components to very, very high precision in order to support the precise pointing in the right direction for one satellite to communicate to the next. Just to give you an idea of the kind of precision that we are talking about here, there are some elements that we align to within 5 microns in all three dimensions. That is one tenth the width of a human hair in all three dimensions, and we do that with adhesives and structures that can support operations in space, and that can maintain that kind of precision even as they are launched with all of the stresses and shaking that happens when you are launching a satellite through a rocket.
Being able to design and to manufacture those sub-assemblies that support that kind of precision is really the thing that we do that supports the laser communication in the satellite networks that are growing in leaps and bounds.
All right. Excellent. You talked about two big programs, obviously, this being one of them. It has grown pretty dramatically beyond the original commitment that was made a couple of years back here. Talk about how durable this program is going forward, and maybe the opportunity to win additional satellite communication programs.
Sure. The first thing is, as I already mentioned, and as we all know, the use of space for all sorts of applications is growing dramatically. We're working with one particular company right now, and that's the one that we've talked a lot about for the satellite communication, and as you pointed out, the volume of production has gone up dramatically from what the initial commitments were. We anticipate that this customer is going to continue for the indefinite future. They've basically told us they don't have another supplier. We're a sole source.
We have talked about the fact that they have some excess inventory, so for six months or so, we expect their revenue from that customer to drop back a little bit, but we have full confidence that it will recover in six months or so because we know a lot about their network, and they're going to be back to building it out. In fact, they're talking about expanding it even beyond that. Beyond that one customer, we are talking to other customers for the same kinds of systems. We're looking at moving up the value chain and doing more of this Optical Communication Terminal, so I expect that we'll be able to move up the value chain. I expect that we will be able to capture more customers as the number of people who are using space for various applications continues to grow.
The other thing that I would point out is with the customer that we're working with now, and for many of the customers that are dealing with satellite communication, they're working in low Earth orbit. In low Earth orbit, without going into all the technical details, there are forces that cause the satellites eventually to spiral back in towards the Earth. So our customers design their satellites in such a way that they have rockets on the satellites that continue to push the satellite, keep it in orbit, but eventually, they run out of fuel, and they will come back into the atmosphere and burn up.
These satellites typically last three to five years in orbit, and even once we have supported our customers getting their networks up into the atmosphere, we expect that there will be a continuous turnover of the satellites that they have, which will represent ongoing revenue for us where they replace their satellite networks every three to five years.
All right. Excellent. Let's transition to defense here momentarily. Talk about your defense programs and what you're seeing more broadly within the spending priorities and the procurement trends that are affecting demand for Precision Optics systems, again, within the defense program side specifically.
Yeah, sure. We have one major defense contract separate from the satellite communication contracts that we've been working on for five or six years. We know that there are other applications, particularly in laser weapons where we've built some prototypes, and also we expect in the drone market where lifting the system off of the ground will derive benefits from our small size optics and such. But what we see, even with the one program that we're working with now, which we've talked about it being a little bit delayed, we've had recent conversations with our customer, that program is continuing, and we expect to get a purchase order almost any day now. But what we've heard from them and what we've seen more generally is that defense spending is increasing. This is all over the public press.
The other thing that's happening is a lot of the defense programs are looking at longer term commitments. Both of those things bode well for us because the increase in defense spending is coming just at a time when we're starting to look at the defense industry more proactively, recognizing that we have one big program and believing that there are a number of other programs out there. We just have to get out and go after them. Also, with the defense industry being interested in longer term contracts, that fits very well with our business model, which says once we get through the development program, we like to go into production. Of course, longer term orders add to stability and help us with planning going forward, being able to forecast and align our manufacturing resources with the long-term requirements for those programs.
We see defense as a real opportunity for us at this point in time.
All right. Let's transition then to the last, which really was kind of where you started which is medical device here.
Yeah.
Talk more broadly about the shift towards single-use endoscopy. Talk about the couple of programs that you have within single use and t hese programs are going into the future here.
Single-use endoscopy is an area that the industry has been working towards for many, many years. We started working with some of the early technology even 10 years ago, 10 years, 12 years, 14 years ago. We have a very strong partnership with OmniVision, which is one of the world's largest CMOS manufacturers. The CMOS imager is really a critical component of the single-use endoscope because it reduces the cost so substantially from some of the more traditional technologies. We can take that CMOS imager, and then we can build the endoscope around it. The real motivation for single-use endoscopes, really disposable endoscopes, is the ability to use them, sterilize them once after they're manufactured, use them once, and then discard them.
What this does is it virtually eliminates the possibility of cross-contamination from one patient to another, which unfortunately happens more often than many of us would recognize, I think. Sometimes we'll see stories in the press, but I think many times it happens, and we don't hear about it. The FDA has been after the industry for a long time, again, for decades, to figure out how to do better with the sterilization. Of course, using the product once and then discarding it is the best way to ensure that you don't have cross-contamination. It turns out hospitals really like it because it's much easier to track disposable equipment than reusable equipment. It's no longer capital equipment. They don't have to worry about where the equipment is, whether it's being cleaned or sterilized, or whether it's out at the manufacturer being repaired.
They just look at their inventory list, and they can see that they have the endoscope ready to be used. The surgeons, it turns out, really likes it because they get a brand-new image every time they open one of these packages, as opposed to a reusable device that's sterilized, which has a degrading image over a long period of time. The surgeons love it as well because they get a brand-new image every time. We have been working on these kinds of systems for a number of years. We have one program that went into production about two years ago. When we went into production two years ago, we were running at a run rate of about 1,000 units a year. Today, we're running at a run rate of almost 45,000 units- 50,000 units a year. We have ramped that manufacturing capability quite substantially.
It's a different kind of manufacturing to be manufacturing 50,000 units of anything per year. We've got a team now that's up and running and doing quite well. We have our second single-use program. The first one I just mentioned is for cystoscopy. The second one is for an ophthalmic application. It's an eye surgery. That one is just ramping this year, so we expect that one to contribute to our production revenue throughout this fiscal year, which we're just starting now. We continue to see the growth in single-use endoscopy outpacing the rest of medical device by 2x- 3x . So that certainly is an area of medical device that we are continuing to be focused on. We see a lot of interest from customers coming in with new devices.
We see a lot of customers coming in with existing devices, asking us if we can convert it to single-use. Having said all that, there is still a market for reusable medical devices, and we're not giving up on that. We're still working on it, but it's not growing quite as fast as the single-use. So the single-use really has been part of the motivator or part of the engine for the growth that we've seen over the last couple of years, and we're continuing to push that in a very significant way.
All right. Excellent. In the final couple of minutes here, as we look ahead 12 months- 24 months, talk about some of the milestones investors should be watching for and maybe what the market underappreciates pertaining to Precision Optics here.
Sure. A lot of what we're focused on these days, in contrast to the last couple of years where we were focused very heavily on building out our manufacturing team and our manufacturing infrastructure because we saw these two programs that have led to the increase in revenue coming online in production. That's pretty well in hand now. We've got a manufacturing team and a production team that's doing very well. A large part of the focus today in moving forward is on the marketing of the technologies that we have into some of these new areas I've talked about, as well as the medical device, which we continue to pursue.
In large part, what I think people should be looking for, what they should expect, is announcements related to going out and pushing the technologies in a more aggressive way maybe than we have in the past. The first thing is you will see announcements about our sales and marketing team. Just today we announced that we hired a new Senior Vice President of Sales and Marketing, Peter Thier, who has a great resume that is very well aligned with the business model that we have. He has a lot of experience selling engineering to customers for new products that need to be developed and then roll into production. So that is a great example of the kind of thing that I think people will see over the next 6 months- 12 months, enhancements of our sales and marketing team and the sales and marketing approach that we take.
In addition, there will be more information coming out about the expansion from the medical device space that we have been in to more and more applications in space communication and in defense applications. That will lead, we expect, to new programs on the front end in the engineering side of the business for those kinds of applications. So those are the kinds of things that I expect people will start to see more and more of over the next 6 months- 12 months.
All right. Excellent. Well, we will leave it there, Joe. Thank you, as always, for your participations in our summits here. Thank you, of course, everybody, for watching. Hope everyone has a great rest of the day here. Joe, again, thank you so much.
Thank you, Robert. Thanks, everyone.
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