Giga-tronics Incorporated

Steve Lance - VP, Finance and CFO John Regazzi - Chief Executive Officer

Thank you, Sophia. First, I’d like to read our Safe Harbor Statement.

This conference call contains forward-looking statements concerning operating performance, future orders, long-term growth, and shipments. Actual results may differ significantly due to risks and uncertainties such as delays with manufacturing and orders for new products, receipt or timing of future orders, cancellations or deferrals of orders, the company’s going concerns, need for additional financing, ability to be traded on NASDAQ, the volatility in the market price of our common stock and general market conditions.

For further discussions, see Giga-tronics’ most recent annual report on Form 10-K for the fiscal year ended March 29, 2014, Part I under the heading Risk Factors, and Part II, under the heading Management’s Discussion and Analysis of Financial Condition and Results of Results of Operations. I will now turn the call over to John Regazzi, our Chief Executive Officer.

John?

Thank you, Steve. Good afternoon and thank you for joining our quarterly earnings conference call.

I am again pleased to be able to report positive news regarding the Company’s operating performance. I’d like to first discuss the annual numbers summarizing the fiscal year we just completed and then I’ll cover our fourth quarter results.

Net sales for fiscal year 2015 increased 39% to $18.5 million, as compared to $13.3 million for the prior year. The increase was primarily due to the $6.5 million contract we received for developing a variant of our radar YIG filter for another aircraft platform and due to the $2.4 million order we received from the U.S.

Navy for our scale or measurement equipment. Both orders were received in the first quarter of fiscal 2015.

The increase in net sales gave us a profit of $14,000 from operations in fiscal ‘15, compared to a loss from operations of $4.5 million for fiscal 2014. Non-GAAP net income for fiscal 2015 was $538,000 or $0.10 per fully diluted share as compared to a non-GAAP net loss of $3.2 million or $0.64 per fully diluted share for the prior year.

This is a tremendous improvement for the company. Non-GAAP income or loss excludes non-cash expenses associated with warrants and stock-based compensation.

Now for the fourth quarter. Net sales for the fourth quarter of fiscal ‘15 increased 48% to $4.3 million as compared to $2.9 million for the same quarter a year ago.

The increase was primarily due to a $771,000 increase in deliveries of radar filters in support of our two ongoing fighter jet programs and $499,000 of revenue recognized in conjunction with the initial customer acceptance of the Company’s new Advanced Single Generation platform. Non-GAAP net income for the fourth quarter of fiscal ‘15 was $179,000 or $0.03 per fully diluted share as compared to a non-GAAP net loss of $1.2 million or $0.23 per fully diluted share for the same quarter a year ago.

I am very pleased to see the Company achieving non-GAAP profits for the past three quarters and for all of fiscal 2015. Looking ahead, I am encouraged by the acceptance of our Advanced Signal Generation product from customers using it in very complex applications.

As this is a new platform as it enters production, I expect it should begin contributing to our long-term success. In addition, we recently received a $3 million order, extending production of our radar filters for the F-15 aircraft.

We expect to start shipment for this order in September 2015 and have it completed before the end of our current fiscal year. Also today we announced finalizing the terms of a $10 million production order for a variant of our radar filter developed under contract during this year, slated for use on the F-16.

The associated development work on that component has been ongoing since the June 2, 2014 announcement and it’s near completion. Regular production is scheduled to begin August 2016, following final evaluation by the aircraft integrator.

I am pleased to see the backlog growth of these components which will provide the Company a reliable future revenue stream. Lastly, I want to acknowledge the $1.5 million of net proceeds received from Alara Capital from their recent exercise of warrants.

This was a big help to the Company, allowing us to regain compliance with NASDAQ listing requirements and greatly improving the financial stability of Giga-tronics. With that, I would like to open the call for questions.

Good afternoon gentlemen. Thank you for taking my question and congratulations on the great quarter.

Would you please characterize the size of the market opportunity for the new platform, the new Advanced Signal Generation System? And how is the pricing you measure in terms of units and how quickly might this ramp?

The size of the market is, in our estimates is roughly $180 million, give or take, growing over the next three years to slightly over $200 million. To address that size, you also need to have some components of software, not just hardware which we will be working on in the future.

The hardware only portion of the market is smaller than that but the -- you don’t need many units in order for the revenue to ramp up rather quickly. Each item sells in excess of $200,000 for a basic installation.

The average selling price of our previous products was more like 25,000; this is more like 200,000. And we are pretty much at par with other competitors in this space.

Can you tell us a little bit more about what the product does?

Yes. The product, it has several modes.

The mode that we’ve introduced first, you can view it as a calibrated transmitter that produces a very high fidelity signal, much, much greater fidelity than our previous products. And we are able to accurately emulate radar and electronic warfare signals.

And it allows prime contractors and it allows the armed forces to evaluate their systems without actually flying the airplanes into an environment that has these signals. So, if you are flying into a theatre that might have anti-aircraft systems, you want to evaluate the effectiveness of your jamming equipment against the radar that might be tracking you and you would like to be able to do that in a laboratory rather than in a real environment.

That’s one use.

Yes, I wanted to ask earlier, approximately how many customers worldwide have you identified for this product and are there any national security concerns? In other words, I imagine the scope of your market opportunity is limited by ton case [ph] to United States Government willing to sell to, if you could give us more color on that?

The total customers worldwide are in the -- maybe in the 60 range. Major places that would buy this, these are either military base installations or prime contractors.

There are export restrictions from the commerce department just due to the performance of the unit. We cannot sell to certain countries without a license.

Then there are also state department restrictions on selling complete solutions. So, it’s likely that internationally we will be selling more of just hardware based solutions.

We’ll be partnering with local entities and foreign countries to sell full solutions. And we will be restricted to selling the full solutions within just domestically.

So of these 60 customers, how many have already been approached or could you give us any color on the pipe or where you are on the pipeline of introducing this new platform to these customers? It would seem a fairly exciting opportunity to produce $200 million of revenues with that smaller number of customers?

Well, let’s see the -- our sales and our marketing organization have been approaching customers right from the beginning of the project’s development because we wanted to make sure we didn’t miss any requirements. So, we’ve been talking to almost all of these customers already for the last couple of years.

And we just started -- the hardware has just been available, so we’ve been basically receiving our first orders over the last six to nine months. I’m not sure I understand your question about $200 million annually.

We’re hoping to grow this Company by $7 million to $10 million over the next few years and then accelerating that more to $30 million in revenue from this product.

No, I’ve asked you how big the market was in terms of $180 million growing to $200 million, so I think I misunderstood to characterize that has an annualized market opportunity.

There is some large incumbency, so very complete solutions that by themselves sell through $20 million each.

Well, thank you very much for your participation in the call and for your interest in Giga-tronics. Good afternoon.