Q2 2020 Earnings Call
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Hello, everyone. Thank you for somebody body and welcome to be Uncork Corporation fiscal second quarter Twentytwenty earnings Conference call. At this time all participants are in listen only mode nature will conduct a question lots are session and instructions will be given at that time as a reminder, today's call is being recorded.
At this time I'd like to turn the call overall, Erica Mannion of Sapphire Investor Relations. Please go ahead.
Thank you and good morning, everyone before we begin let your line seems to be information provided here in may include forward looking statement.
Meaning of section 27 at the Securities. After 1933 inflection 21 E. A beach change after going from 34.
Forward looking statements are large based on our current expectations and projections about future events and trends affecting our business such forward. Looking statements include in particular projections about future results statements about plans strategies business prospects changes in trends in the business and markets in which we have Corey.
Management cautions that these forward looking statements relate to future events or future financial performance and are subject to fitness economic and other risks and uncertainties, both known and unknown that may cause actual results levels of activity performance achievement of the business or industries, we materially different from those expressed implied.
Any forward looking statements.
We caution you not to realign these statements and you also consider.
The risks and uncertainties associated with these statements business that are included in these filings the U.S. Securities and Exchange Commission that are available on the Fccs website located at Www Dot after two dotcom, including sections entitled Risk factors and the company's annual report on form 10-K.
The company assumes no obligation to update any forward looking statements to conform such statements to actual results or changes in our expectations, except as required by applicable law or regulation.
In addition references will be made during this call to non-GAAP financial measures, which would lead to provide meaningful supplemental information to both management and investors. The non-GAAP measures reflect the company core ongoing operating performance and facilitates comparisons across reporting periods.
Investors are encouraged to review these non-GAAP measures as well as the ex explanation and reconciliation of those measures and the most comparable GAAP measures included at the end of our earnings release as exhibit 99 point to the form 8-K, we furnished to the FCC today yesterday excuse me.
He's materials can be obtained in the Investor section upper website at Www Dot Amcor Dot com.
With me today from him.
Jeffrey <unk>, President and Chief Executive Officer, and Tom the New Chello Chief Financial Officer.
Jeff will begin with a review of the second quarter and business highlights and Tom will review the financial results before opening the call.
Now <unk>.
This is Jeff furniture.
Thank you, Eric and good morning, everyone.
Before discussing our second quarter results.
Back to take them over to address how focused 19 is impacting our business.
They hope to report or employees remain healthy and say, we're grateful for their diligent effort and minimizing disruption to our customers.
These are impressive credit cards.
That's the lunar new year began in January we recognized covert 19, what's going to have a meaningful impact on or Asian operations.
And began integrating probably shortages and you are planning process and guidance for the March quarter. The framework, we used to examine often what could be construct our supply chain into with labor component and logistic service functions.
Finally, there is the individual teams, which met several times a week to drive actions.
To stay ahead of the changes obstacles you techniques approved effect.
Within China.
Well to reestablish 75% of operations by February tenet.
And we're at plant capacity by the end of February office staff work on the line to bolster output well manufactured engineers [noise].
Who are important teens guided down with webcam by video conference.
By March we saw activity return to normalized levels in Beijing.
Keep in mind the prior to the Cobot 19 problem nearly half of our equipment had already been transferred to our Terra in Thailand and was unavailable to offset production shortfalls as we were still awaiting customer product change notification or pcms approval before beginning production in bank.
[noise] farming, although our Beijing facility was up and running by the end of February.
All three of our California factories were subsequently impacted didn't get mark when shelters place orders were first implemented they created labor and he component shortages at a critical juncture in our normally backend loaded March quarter.
These initial disruptions ultimately gateway to a determination that EMCORE was it looks central business that serves defense commercial aviation and telecommunications industry and Doug Arthur Silly, we're able to remain open, albeit at reduced capacity.
As such while demand from aerospace and defense customers remained as expected during the quarter supply certain critical components were impacted which caused delays and being able to ship products to be ended the quarter.
Related to the strategic initiatives, we outlined at our last call and despite the obstacles within China during the quarter. We completed all of the transmitter qualifications from Hite Harris Bangkok facility. They received the necessary pcms on schedule.
These customer approvals authorized EMCORE to bill production transmitters at high Terra SCR.
During the June quarter, we expect to complete the PC and for all of laser and linear email modules, enabling us to completely switch manufacturing to Thailand. During the September quarter exact timing of the cutover remains somewhat fluid because it's crucial to our engineers be able to travel to some.
Port the production processes in the new facility.
Traveled to Thailand remains difficult with mandatory quarantine periods that effect.
We're also being cautious with this transition so it's not to concentrate our geographic risk during the Kogan 19 pandemic.
By building across Chinese and type facilities or the current quarter, we will hedged the risk of labor shortages at the cost of lower total capacity in our operations and some additional cost.
We see this at the right that given the circumstances. Furthermore, we successfully completed our ERP installations in the corporate facility as planned enabling us to remain on schedule and our efforts to reduce operating expenses.
Turning to individual product areas broadband performed as expected in the second quarter with our wireless modules and sensing products shipping According to plan.
Cable TV overperformed slightly and show stronger demand towards the ended the quarter well welcome. This additional demand created unplanned complications insecurity air freight capacity in time to recognize revenue.
Furthermore, getting products through customs in time also approved problematic preventing us from recognizing the full value of our shipments as revenue in the second quarter.
In aerospace and defense, we expected a seasonally soft Q2, however, the Bismarck shelter in place orders in California presented additional challenges to completing our revenue plan not only did our conquered and alhambra facilities experienced disruptions, but our contract manufacturing part.
Her in Orange County was also impacted.
Although EMCORE is an essential business the orders created limitations in labor component supply. In addition, the rapid decline in commercial airline traffic, creating shortages and airfreight capacity, making it more difficult and costly to produce.
As covert 19 spread it continually changed the challenges that we faced over the quarter, making our jobs much more difficult.
In addition to the increased risk from identifiable areas, such as labor and material supplies. The logistics service. The pandemic also created what can best be described it increased friction in ongoing business activities normal business actions took significantly longer and required more energy to.
Complete and they did just a few months prior with that said our team responded with energy and creativity, making the best of a very difficult situation.
As we look ahead I'll take a moment to discuss the demand we see in each of our business segments and provide color on the contingency plan, we have put in place to manage the challenges that cobot 19 created.
Starting with broadband we expect the smaller wireless and chip components in the broadband business to read to maintain their contribution.
But we're seeing strength in our cable television products.
Recent comments from the MSR those have pointed to significant bandwidth demands from workers complying with work from home initiatives in one particular case, a leading M.S. So stated that a whole years' worth of bandwidth growth concentrated itself into a single month.
Yes, those are now reacting strongly to improve capacity in response to their networks, which has resulted in a full order book for EMCOR cable TV business going out into Q4.
It's clear that Msos are relying on proven technology to meet their needs and then any thoughts of larger D.A. or remote phy deployment are being pushed into the distant future.
I would also offer that remote phy shelf products, which incorporate linear optics built by EMCORE continued to gain traction in the longer term planning of Vmosos.
Although it's impossible to say with any degree of certainty how long. This upgrade cycle will last EMCORE is very well positioned to meet these demands as it works to complete the CMS transfer by the ended the fiscal year.
Within aerospace and defense, our defense customers continue to place orders for programs that are in production.
These represent most of the revenue in this segment.
New defense product going through design validation and qualification tests are being delayed because many engineers are working from home.
We expect to continue to make progress on these programs, but have to accept that timeline will continue to push to the right until our customers are back in their facilities and working with equipment every day.
Although we fully expect these challenges to be transient in nature, it's difficult to project the testing milestones at this point.
Our aerospace customers tied to commercial aviation are showing signs of weaker demand and if requested push out for the December quarters in September quarters.
We are still negotiating.
Given the broad uncertainty in the markets around us as a company we're focused on managing the aspects of our business within our control and preparing action plans around various demand scenarios, which may emerge as we move into the June quarter labor shortages due to coded 19 remain our biggest concern beyond that.
We expect the general amount of friction in the supply chain, we'll continue to present, a changing set of obstacles for us to overcome.
We have plans in place to deal with shortages airfreight custom staffing as well as sourcing of certain limited components, but we do recognize that unpredictable event could create new challenges in the months ahead.
During our second fiscal quarter, we implemented a reduction in force redesigned our wafer fab workflow and optimize other R&D functions around the smaller staff as I mentioned before the finance team completed their ERP implementation and conquered which will result in smaller accounting finance team going.
For the remaining synergies with the FBI integration are on on track to be completed by the end of the June quarter.
As evidenced by our first half results improved operational performance combined with expense reductions at actions to improve our cash balance and liquidity levels.
Have placed us in a much improved financial footing, even at the current revenue levels. This leads us to believe that we have the necessary resources to navigate through these unprecedented times.
Moving onto guidance for the third fiscal quarter.
While we're cautiously optimistic about the level of demand, we're seeing and the plans that we currently have in place we can't ignore the sheer magnitude of uncertainty in the supply chain and the fluid nature of the challenges that will doubtlessly arrive. Consequently, we're taking a cautious view and expect revenue to be in the range of 25 to 20.
The 7 million.
With that I will turn the call over to Tom.
Thanks, Jeff and good morning, everyone.
Consolidated revenue in the fiscal second quarter was 23.8 million compared to 25.5 million in the first quarter.
At the segment level Aerospace and defense revenue was 13 million compared to 13.7 million in the prior quarter.
And broadband revenue was $10.8 million this quarter compared to $11.8 million the quarter before.
Due to revenue is largely impacted by the typical march quarter seasonality of our two largest product lines, our courts Mems navigation products within a and b and our cable TV transmitters and components within broadband.
A few Mems was additionally affected by the cobot 19 related supply chain headwinds that you have noted.
For the a and B segment, the lower Q Mems revenue was partly offset by double digit percentage increases for our fraud navigation and defense opto electronic product lines.
For the broadband segment, the typical cable TV demand softness early in the quarter and the impact of the extended Chinese new year was somewhat mitigated by a stronger than expected rebound towards the end of the quarter.
Moving on to the rest of the operating results non-GAAP gross margin was 28% for the quarter compared to 30% in the prior quarter.
There were a number of factors that netted to the 2% sequential change.
The more significant items, Dan the lower revenue, which resulted in about a point in a half decrease.
Lower a and B production yields accounting for about another point in the half drop.
And cost reductions within broadband, which drove about a one percentage point improvement.
Additionally, wild swings in overhead cost absorption at the consolidated level was not a significant factor when you compare the march quarter to the December quarter. It did have a meaningful impact on our segments ASV was unfavorably impacted by lower absorption due to decreased production output and why.
Club and improved as a result or reduced under absorption.
Largely as a result of lower costs in China.
As a result, non-GAAP gross margin for a and b into Q was 23% compared to 33% last quarter and broadband was 34% compared to 26.
On a fiscal year to date basis segment gross margins for Andy and broadband were 28% and 30% respectively.
Non-GAAP operating expenses were 10.4 million compared to 9.4 million in the prior quarter.
The majority of the sequential increase was in SGN today, It was largely attributable to onetime credits in the prior quarter.
Driven by recent expense reduction actions quarterly non-GAAP Opex has been reduced by 2 million or 15% from just two quarters ago.
Due to the revenue seasonality and lower gross profit non-GAAP operating loss was 3.8 million in the second fiscal quarter compared to 1.8 million last quarter, adjusted EBITDA, which adds that depreciation was negative 2.5 million compared to positive 200000 the quarter before.
Turning to the balance sheet, we had 22.1 million cash with no debt at March 31st compared to 10.9 million net of short term debt at December 31.
The net cash increase of 11.2 million was attributable to the following factors.
12.8 million received from the February 10 sale and leaseback transaction of our key Mems facility in Concord, California.
100000 received from my previous quarter shipment of cable TV equipment as part of our production asset sale agreement with high Tara.
And 1.7 million used during the quarter of which 900000 funded routine operating activities and 200000 was for employee severance.
The balance covered previous periods capex and legal matters.
Finally yesterday after market close we issued an 8-K regarding securing the alone and the amount of 6.448 million under the Paychex protection program or PPP.
In accordance with the requirements of the PPP, we intend to use proceeds from the loans primarily for payroll expenses.
With that we now I'd like to open up the call for your questions.
Thank you, ladies and gentlemen, if you wish ask a question to signal by pressing star one again, but is there one to ask a question.
We will then take our first question from Jason Smith of Lake Street Capital Partners. Please go ahead.
Hey, guys. Thanks for taking my questions. Just let me start with a cable TV business, Jeff just curious if you could quantify how much revenue you were unable to recognize in March due to supply constraints.
Well thanks, so much.
Jason on the cable TV stuff. It was it was really getting product into one customer it over the border.
There's a couple of hundred thousand dollars.
Okay, and then just sticking with the.
Cable TV business when you look at inventory in the channel or what are your thoughts there and I guess more specifically with this uptick from sort of the work from home trends.
That you're benefiting from here in March and likely June do you think there are pulled in orders into this first half of calendar 2020.
Yes so.
First of all as it relates to.
Inventory in the channel there basically non.
And.
At least not that we're able to find anywhere and thats based on.
Where do we see orders coming one of our major customers users distribution and the other does not.
But were intimately familiar with the situation in both customers.
So thats not a factor.
What we're really seeing is the result of you know called a year's worth of bandwidth expansion that showed up in a month and the realization by vmosos, but they needed to go into break bottlenecks and so well what you're seeing is a lot of notes flows.
And so anybody in the nose business anybody in the transmitter business should benefit from that.
In our particular case the orders in cable Didnt show up until.
March and then they started to show up with the vengeance into the current quarter. So not only are we booked completely for the current quarter, but going up fairways out into the September quarter as well. So the demand is very strong.
It's unusually high and.
You know the big question becomes as far as how quickly we can meet it is.
Largely actually driven by material.
While TSMC and the other big semiconductor manufacturers guys to build wafers and then sell dive go they're doing quite well to the issues are going to be in the packaging area in places where coproduce hit that includes the Philippines, Malaysia. So.
Bottlenecks tend to be where.
Packaging occurs and the good news this week, we're not trying to buy billions of things right. So we're able to go into smaller part the distribution channel to get what we want.
But largely in the in the short term our production capacity is going to be limited by the number of of components that we can we can bring in.
Okay. Appreciate that color and then the last one from me ill jump back into queue up broadband gross margin very strong in March how should we think about that going forward given the moving parts of mix within that segment as well as the cost reductions you guys have undertaken.
Yes, good morning, Jason its time here, so I think the way to think about it is.
Continued at the levels were at we've got the benefit of some cost reductions both here and with the restructuring actions that we've taken and then we also had some costs that were taken out in.
China related to the moves to high tariff examples.
She Asian expenses now off the books, because if you will notice on our balance sheet those assets have been moved in a in a held for sale.
Mode.
So that's a permanent change going forward, so I see it still in the low to mid Thirtys, We just did 34%.
Given where we're headed here volume wise going forward would expect it to be to continue at that level.
Okay. Thanks, a lot guys.
Okay.
We will now take our next question from Tim Savageaux of Northland Capital markets. Please go ahead. Your line is open.
Hi, good morning.
During the morning right from.
So that we can do this environment.
A couple of questions.
With regard to the strength and cable.
You know any chance you can give us color on.
I guess magnitude of booking strength and unless you have book to Bill.
Type metrics you can share we are as you saw this a certain remarks that continues into the.
Into the current quarter and I guess, you know in line with that.
You characterize pretty solidly up for clinical side as cautious I guess.
Without that closer to what what would the.
Wow, that's a tough question to answer.
First of the caution largely revolves around access to components Tim.
We think of lot of these situations will resolve themselves in the September quarter as we get into.
Into June and July shipments from.
The big packaging operations.
But you know cable would be up even more substantially.
Than we'd indicated.
I think the best way to explain it and we havent been providing book to bill, but but normally you know cable are our production cycles are so short now.
Our customers, we typically quarter with only about a month to six weeks' worth of backlog.
Right now.
[noise] you know in the current quarter, we are completely book.
And we are well past the normal call July one number we're long past that a week or two ago. So you know I think the book to Bill would be.
Sort of numbers that you haven't seen since you know 2016 2017.
Yeah, but more concentrated because back in 16 and 17 of course, there was a bunch of RF over glass stuff that.
Is no longer being deployed so it's really transmitter and laser focus it's all in those splits and it's across.
All three major MSR, those those being Comcast charter and Liberty Global.
And we also.
We can recognize where it's going just by the channel plans and other specifics, but we're also seeing additional demand from places like Cod Cox Rogers and shop.
From the two major equipment Oems so it's it's everywhere right.
Matter of fact, we've even seen product going into Japan, and normally they're extremely steady and there are very few.
Surprises either on the upside or downside, so it's a pretty uniform.
You know uptick everywhere and it's very strong.
Got it and just sort of follow up on that.
It seems like there's a particular focus among cable operators on.
Pressure on upstream traffic in the network I Wonder if you could you describe how EMCORE is exposed to.
Operator efforts to try to address that concern.
Yeah. So.
First of all the no split themselves saw a whole lot of that problem, even without throwing technology at it.
Where we tend to see some.
Let cost impact by changing technology on the return path.
We see it in a in the node with some of our high speed receivers, but.
But that's not really big dollars I mean, these things are pretty cheap and so I wouldn't describe that is a major driver.
I wouldn't say that the changes going forward into.
Increased bandwidth on the return side.
Our being figured into our product plans, but that as you know very little if nothing to do with the next couple of quarters, that's really sort of a year out.
So so wouldn't describe you know changes in the returns have plan is driving anything over the next couple of quarters, but a year from now yeah, we're going to be in the middle of that.
The other and one more cool and I'll pass it on on you mentioned outsourcing contracts or overall coming in line Broadcom quarter.
Anticipated.
Laser chip side.
You to some growth there no recently, one of the teachers and give us any more specific color on.
Chip demand either on the honor telecom side and what's your expectation further forward.
Yeah. So.
As we described before we really.
Have de emphasized let's call it the commodity coupon parts at two and a half G.
And we supply.
Not even a handful right.
To customers.
With those parts.
Because we've got big relationships with them that we need to maintain and you know paid sometimes do things you don't don't really want to but it's important to the customer and we are seeing more activity in 10 G components.
We are seeing additional demand for other sites types of telecom products I can't quite describe what they are certainly they fall way out of the category of commodities.
And.
We've had good traction with.
Our major customer on the gain chip side.
Neophotonics and meeting their requirements.
So what I would describe them as Tim is is more high end focused sales, it's not huge dollars, but it pays a lot of bills in the fab.
Thank you.
And as a reminder, if you wish ask a question Tcl by pressing star one lever my take our next question from Dave Kang.
Steve Riney FBR. Please go ahead.
I think big I'm wondering.
Regarding the fiscal fourth quarter outlook looks like you're talking about 2 million growth there.
Should we assume perhaps equally split between 80 and broadband or or maybe.
Let's see probyn drilling any any color on that.
I would describe it at this point is probably pretty evenly cost pro rata.
Evenly split again, the thing that's going to limit some of the broadband production. The current quarter, there's just availability of components.
The demand is there for a bigger number.
But there's just a bunch of stuff, that's really hard to get and.
Yeah.
So.
Yeah, there's just some supply chain challenges.
Going forward.
You know, we're looking at a real strong Q4 cable I, we're not prepared right now to come up with a number there, but you'll see growth from Q3 into Q4 or from the June quarter into the September quarter.
And we expect to C and D continue to do good things as well as the only the only is there's two pieces that I want to make sure that everybody understands.
The defense piece.
Orders are continuing to move along for production programs as if nothing happens.
That's what we're forecasting.
<unk>. Thank you.
[noise], Oh, sorry, I know for their questions that may have complete the call. Thank you for your participation you may know disconnect.
Mm.
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Oh.
Yeah.
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Yeah.
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