Ispire Technology Inc. (ISPR) Q4 2025 Earnings Call Transcript

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Overview

The earnings call revealed declining gross margins, increased operating expenses, and a net loss, which are concerning. The Q&A highlighted uncertainties in regulatory approvals and a strategic pivot away from cannabis, indicating potential risks. Despite some positive developments, such as improved cash flow and strong IP protection, the overall sentiment is negative due to financial challenges and unclear timelines for key projects.

Key Financial Performance

Revenue for fiscal year 2025 $127.5 million, a decline of $24.4 million (from $151.9 million in fiscal year 2024). The decline was due to the strategic pivot away from cannabis to focus on the nicotine sector.

European revenue for fiscal 2025 $74.5 million, an increase of $8.8 million or 13.6% (from $65.3 million in fiscal 2024). The increase was attributed to growth in the region.

North American revenue for fiscal 2025 $32.6 million, a decline from $63.1 million in fiscal 2024. The decline was due to the strategic pivot away from cannabis and focusing on larger, quality customers.

Asia Pacific revenue for fiscal 2025 $12.3 million, a decline from $17.6 million in fiscal 2024. The decline was due to the strategic shift in business focus.

Revenue from other countries for fiscal 2025 $8.5 million, an increase of $2.6 million (from $6 million in fiscal 2024). The majority of these sales were from South Africa.

Gross profit for fiscal 2025 $22.7 million, a decline from $29.8 million in fiscal 2024. Gross margins decreased to 17.8% (from 19.6% in fiscal 2024) due to the strategic repositioning away from cannabis.

Operating expenses for fiscal 2025 $60.5 million, an increase from $43.7 million in fiscal 2024. The increase was due to higher sales and marketing expenses, bad debt expenses, and credit losses, offset by reductions in stock-based compensation and R&D expenses.

Net loss for fiscal 2025 $39.2 million, a slight improvement from $40.8 million in fiscal 2024. The improvement was due to cost-cutting initiatives.

Cash at June 30, 2025 $24.4 million, a reduction of $10.7 million compared to the previous year. The reduction was due to operational and investment activities.

Net cash flow used by operating activities for fiscal 2025 $7.4 million, an improvement from $18.3 million in fiscal 2024. The improvement was due to better accounts receivable management and cost reductions.

Net cash used in investing activities for fiscal 2025 $5.2 million, compared to $3 million provided by investing activities in fiscal 2024. The change was due to increased investments.

Net cash provided by financing activities for fiscal 2025 $1.9 million, compared to $10.1 million used in fiscal 2024. The change was due to financing adjustments.

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Operating Highlights

Breakthrough Technologies: Investments in IKE Tech and G-Mesh technology are gaining traction with major tobacco companies, positioning the company for future growth.

Geographic Revenue Shifts: European revenue increased by 13.6% to $74.5 million, while North American revenue declined significantly due to the strategic pivot away from cannabis.

International Expansion: Malaysian operations are being scaled up to 80 production lines, diversifying production and addressing global demand for precision vaping.

Cost Optimization: Annual expenses reduced by $10.2 million, with general and administrative expenses declining from $7.6 million in Q3 to $6.7 million in Q4 of fiscal 2025.

Accounts Receivable Management: Net accounts receivable reduced by over 21% year-over-year, and quarter-over-quarter gross accounts receivable decreased by $6.9 million.

Strategic Shift to Nicotine: Intentional pivot from cannabis to the higher-value nicotine sector, focusing on sustainable and profitable growth.

Regulatory Leadership: Advancing PMTA activities and awaiting FDA review of IKE Tech's blockchain-based age verification technology, which could transform nicotine delivery systems.

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Risk or Challenges

Revenue Decline: The company experienced a revenue decline in fiscal 2025, dropping from $151.9 million to $127.5 million. This was attributed to the strategic pivot away from the cannabis industry, which led to reduced revenue from North America and Asia Pacific.

Gross Profit and Margins: Gross profit declined from $29.8 million in fiscal 2024 to $22.7 million in fiscal 2025, with gross margins decreasing from 19.6% to 17.8%. This was due to the shift away from cannabis, which impacted overall profitability.

Operating Expenses: Operating expenses increased from $43.7 million in fiscal 2024 to $60.5 million in fiscal 2025, driven by higher sales and marketing expenses, bad debt allowances, and credit losses. This rise in expenses poses a challenge to achieving profitability.

Net Loss: The company reported a net loss of $39.2 million in fiscal 2025, only a slight improvement from the $40.8 million loss in fiscal 2024, indicating ongoing financial challenges.

Cash Flow and Liquidity: Net cash flow used by operating activities was $7.4 million in fiscal 2025, compared to $18.3 million in fiscal 2024. However, cash reserves declined by $10.7 million, leaving the company with $24.4 million in cash and a working capital balance of $0.4 million, highlighting liquidity concerns.

Regulatory Risks: The company is awaiting FDA approval for its PMTA submission, which is critical for its nicotine products. Delays or rejections could significantly impact its ability to capitalize on the nicotine market.

Geopolitical and Supply Chain Risks: The company is expanding its manufacturing capabilities in Malaysia to mitigate geopolitical risks and diversify its supply chain. However, this expansion involves significant investment and operational risks.

Cannabis Market Challenges: The company has intentionally reduced its focus on the cannabis market due to ongoing financial challenges and uncertainty in the industry, which has impacted revenue and customer base.

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Guidance & Outlook

Future Manufacturing Expansion: The company plans to expand its Malaysian operations to accommodate up to 80 production lines, significantly increasing from the current 6 lines. This expansion aims to meet the growing global demand for precision dosing vaping and diversify production to mitigate geopolitical risks.

Regulatory Advancements: Ispire is advancing its PMTA activities for its devices and awaiting updates on the component PMTA submission by IKE Tech LLC. The approval could transform the regulatory landscape for nicotine delivery systems, enabling modular deployment across numerous products.

Growth in International Nicotine ODM Business: The company expects its international nicotine ODM business to be a substantial contributor to revenue growth in the coming quarters, supported by expanding Malaysian manufacturing capabilities and discussions with major international nicotine and tobacco providers.

Cost Optimization and Financial Stability: Ispire has implemented cost-cutting measures, achieving an estimated annual savings of $10.2 million. The company expects the trend of declining costs to continue, focusing on larger, higher-quality customers with improved payment terms to strengthen financial stability.

Technological Innovations: The company is investing in breakthrough technologies like IKE Tech's blockchain-based age verification system and G-Mesh technology, which are gaining traction with major tobacco companies and have the potential to reshape industry standards.

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Shareholder Return Plan

The selected topic was not discussed during the call.

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Key Q&A

Q:What are the key milestones and timetable for the age gating technology approval?

A:The age gating technology is being discussed globally, with the U.S. filing a component PMTA in late April. The FDA accepted the application within 4 weeks, which is unprecedented. The next step is the FDA's issuance of a deficiency letter, which could take 3 months to over a year. This is the first case of a component PMTA being reviewed, and there is no prior experience. The company is optimistic about expedited review due to the youth e-cigarette epidemic.

Q:Is it realistic to expect approval for age verification technology in other major markets outside the U.S. sooner than in the U.S.?

A:While the company is optimistic about the FDA's expedited review, at least two countries outside the U.S. are moving faster in embracing the technology. The names of these countries were not disclosed, but they are progressing quickly.

Q:What intellectual property protections does the company have for its age verification technology?

A:The company has filed patents in the U.S., EU, U.K., and China. They own critical patents, particularly in blockchain-based technology for device communication and data processing. IP defensibility is a key strategy for both providing and defending the solution.

Q:What was the reason for the $22 million provision on receivables in the fourth quarter?

A:The $22 million provision was not related to a single client or region but was a cumulative effect of all customers over the past two-plus years since going public.

Q:Why did the company pivot away from the cannabis industry despite its strong market demand?

A:The U.S. cannabis industry faces cash flow challenges due to the lack of federal legalization and financial services. These challenges directly affect the company's business. The company will consider re-entering the industry when the capital market becomes available.

Q:What is the status of the U.K. supply agreement and its impact on order trends?

A:The initial version of the product did not meet expectations due to market changes. However, after design upgrades, the product launched in summer 2023 and received encouraging feedback. The backlog of $18 million is largely tied to this customer, and the company is working on the next iteration of the product.

Q:What is the company's strategy regarding the tariff landscape and its Malaysian facility?

A:The company is expanding its Malaysian operations to diversify production outside China. They are considering a third, much larger facility to handle potential large ODM projects. Regulatory approvals are a factor in the expansion timeline.

Q:What is the outlook for the U.S. cannabis business and the impact of potential rescheduling?

A:The Q4 cannabis revenue was the bottom, and the company is gaining new customers and developing new products. If rescheduling occurs, the company will evaluate increasing investment in the cannabis sector.

Q:Review of Unclear Management Responses

A:Management avoided directly naming the two countries progressing faster than the U.S. in approving age verification technology. Additionally, they did not provide specific timelines for these approvals or detailed financial impacts of the Malaysian facility expansion.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

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ISPR Report

Ispire Technology Inc. 10-K

10-K

2024-09-27

Ispire Technology Inc. 10-Q

10-Q

2024-05-14

Ispire Technology Inc. 10-Q

10-Q

2024-02-20

Ispire Technology Inc. S-1

S-1

2024-02-01

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