Q3 2020 EMCORE Corp Earnings Call

[music].

Youre currently on hold for this.

Corporation fiscal third quarter Twentytwenty earnings conference call.

I'm going to something todays audience tend to be on the way. Shortly you appreciate your patience and piece we made.

[music].

Joe coffee on hold for this EMCORE Corporation fiscal Oh, so what's the trend you're trend you sometimes called.

At this time, we are something today, its audience and trust would be nobody shocking.

We appreciate your patience and she's remain.

[music].

Ladies and gentlemen, thank you for standing by welcome EMCORE corporations, that's caused fourth quartile Twentytwenty earnings conference call.

At this time.

Just a bench listen only mode. Later, we will conduct a question answer session and instructions given at that time.

At this time I would like to talk to call over too early on and off so far you Investor Relations. Please go ahead.

Thank you and good morning, everyone before we begin would like to remind you that information provided here. They include forward looking statements within the meaning of section 27 area. The Securities Act of 1933 and section 21 any of the Exchange Act of 1934.

Forward looking statements are largely based on our current expectations and construction, it's about future events and trends affecting our business.

Such forward looking statements include in particular projections about future results statements about plans and strategies isn't its prospects changes and trends in our business in the markets in which we operate.

Management cautions that these forward looking statements relate to future events or future financial performance and are subject to business economic in other words, you uncertainties, both known and unknown that may cause actual results level of activity the formats or excuse me into the business or our industry to move materially different from.

As expressed or implied by any forward looking statements.

We caution you not to rely on these statements and you also considered the worsened in certain genes associated with these statements in the business that are included in the company's filings with the U.S. Securities and exchange conditions that are available on the Fccs website located at Www Dot FCC dot gov, including what's actually going to try to which factors.

In our company and report on form 10-K.

The company assumes no obligation to update any forward looking statements to conform such statements actual results for the changes in our expectations, except as required by applicable law or regulation.

In addition references will be nature of this call the non-GAAP financial measure measures, which we believe provide meaningful supplemental information to both management and investors.

Non-GAAP measures for looks like the company's core ongoing perform operating performance and facilitate comparisons across reporting periods.

Investors are encouraged to review these non-GAAP measures as well as the explanation <unk> reconciliation of these measures to the most comparable GAAP measures included at the end of our earnings press release included as exhibit 99.1 to the form 8-K, b furnished to the FCC today.

These materials can also be of changing investors section of our website at www Dot Evercore dot com.

[laughter] with me today for EMCOR, or just furniture, president and CEO.

Todd vendor Chello CFO.

Jeff will begin with her view that third quarter and business highlights and Tom will review the financial results before opening the call for questions.

Now I'll turn the call the Jeff furniture.

Thank you are good and good morning, everyone.

In Q3 and of course girls.

Since.

Well done.

Great.

<unk> percent increase quarter over quarter.

Accommodation topline growth and operational initiatives resulted in a seven point improvement in gross margin despite facing the quarter's impact.

Yeah.

[laughter] morbidity suffered operations improved their productivity, thanks to the diligent efforts of our supply chain.

Actually partners and more importantly, because of the commitment.

Cool.

Although we settled into a rhythm to deal with most of the C. Nike outbreak.

Well just constantly urge them to be dealt.

In Q3, we saw surprise push outs, you cancellation key component deliveries, which required significant creativity to resolve.

In addition to the list from identifiable areas such as LIBOR The journal supplies logistic service.

Endemic continues to increase the general level friction and ongoing business activities.

Sure I'll take longer than they should customer development schedules continues to be pushed to the right. So we've had to jumpstart plans accordingly.

So we're keeping our works they work force I don't see remains a top priority and we go on the extra mile to protect our team to the best.

The transition of our cable TV manufacturing operations are you care as they call facility continues to see a schedule.

The positive side cable TV demand very strong which is required to minimize the downtime a major line though.

James banks are to meet critical customer demand.

On the negative side, our manufacturing engineers still can't traveled to pilots to complete the transfer target you.

There was the best strategy for mitigating the risk.

Lies in the revenue it to delay the final transmitter line due to the end of the September quarter.

Remaining operations to the end of December.

We've also taken additional steps you build out the stronger type manufacturing engineering team.

What's the schedule should travel continued to be restricted.

Needs to variable cost manufacturing is a critically important strategic initiatives.

There's more operations need for Beijing to Thailand, we will see upward pressure on gross margins from cable television.

Turning to the individual business areas.

The broadband unit.

Well, the third quarter, largely driven by cable television.

So continue to invest in their networks right bottlenecks created by bandwidth demands.

Both work from home initiative and stay at home Entertainment.

This has resulted in a full order book for Emcores cable TV products through the December quarter.

At this point, we remain cautious of the ultimate duration of the upgrade cycle and are working to complete RP variable cost manufacturing workers are strong.

As we said disobey call, it's clear and that's those are relying on the linear offers technologies to meet their current needs.

And then architectures that you see a five are being pushed into the distant future.

Continue to believe next generation for both sides shelf products, which incorporate linear optics built by EMCORE well gained traction in the market at the expense legacy Diego.

In aerospace and defense, our Q, most products saw returns and otherwise demand levels from the seasonally soft second quarter.

Experience improvements in gross margin.

Acumen team did a remarkable job improving their operational performance.

This conquered development team is expecting to release some exciting new products over the next few months expanding the market sport navigation products into weapons platforms.

<unk> book, because that's what chronic products remained strong with high double digit growth from the same period last year.

Production orders for our fiber optic gyro products. Similarly, we're being.

Not only on plan.

As we continued design validation and qualification testing on new products.

While our confidence in the new products remained strong.

Team continues to place constraints on access to testing facilities, and our ability to collaborate with customers to complete the necessary qualification work.

As a result, although we fully expect these challenges to be transient in nature, it's difficult for Jack the timing of testing milestones.

Independent of the ongoing uncertainty in the markets around us we continue to be take steps.

Optimize our business.

Great operating leverage as well as reduced costs restructuring actions and ERP implementation in copper completed in March quarters.

Resulted in a debt decreased in headcount.

We've also begun to realize the synergies projected just part of yes the acquisition.

Playing sixtyk the discipline to the Q battles manufacturing process, we successfully raised gross margins for these products to be in line corporate average.

Scrap rates are lower and we resolved several legacy process problems, which have impacted deals.

No the Cocker team, let the margin improvement programs across the company. This quarter. They also have significant opportunities for further improvements from here.

Moving onto guidance for the fourth fiscal quarter.

Second just see a strong performance for cable television Q bands and our defense dual across product lines.

Through the challenges caused by the pad.

Taking this into consideration we currently expect revenue to be in the range of 29 to 31 billion.

With that I will turn the call over to talk.

Thank you, Jeff and good morning, everyone.

Consolidated revenue in the fiscal third quarter was 27.3 million.

Up 14% compared to 23.8 million in the second quarter as revenue increase for both business segments.

Aerospace and defense revenue grew 8% to 14 billion this quarter compared to 13 million in the prior quarter.

Driven predominantly by Q Mems rebounding strongly from its seasonally soft March quarter.

The French opto electronics revenue continued to perform well staying essentially flat when compared to where I grew up quarter in fiscal Twoq, you well Faade revenue decrease due in part to coated related new product testing delays.

Broadband revenue was up 22% to 13.3 million this quarter.

Compared to 10.8 billion the quarter before.

Driven largely by the robust demand for our cable T.D. transmitters and components.

Quarterly revenue also increased sequentially for our chips and sensing products.

Moving onto the rest of the operating results consolidated non-GAAP gross margins expanded to 34% in fiscal Threeq, you, a 6% increase when compared to 28% the quarter before.

The sequential upturn was largely due to the 36% gross margin for the aerospace and defense segment rising from 23% into core in the prior quarter as humans margins grew substantially.

Driven primarily by better production yields at a more favorable mix.

We also continue to make progress improving our defense off their margins.

The broadband segment gross margin at 33% was essentially flat on a sequential quarter basis as the higher volume was offset by a less favorable mix.

Following two back to back fiscal years of non-GAAP gross margins at 23% our fiscal 2020 year to date gross margin has climbed to over 30% as our consolidated and bulk segment gross margins were all at 31% through the first three quarters of the year.

Non-GAAP operating expenses were 10.1 million compared to 10.1 billion in the prior quarter.

The lower Opex was primarily driven by headcount related reductions, including lower travel expenses as well as a nonrecurring expense recorded last quarter.

These reductions were partly offset by higher insurance expense and increased broadband R&D.

<unk> expense reduction actions over the past three quarters have resulted in lowering quarterly non-GAAP opex by 2.3 million or 18%.

Non-GAAP operating loss this quarter narrowed to 700000.

There's a 3.8 billion in the prior quarter.

Adjusted EBITDA, which adds back the appreciation turned positive again this quarter at 300000 compared to negative 2.5 billion the quarter before.

Turning to the balance sheet, we had cash net of a loan payable of 23.2 billion at June Thirtyth compared to 22.1 million at March 31st.

The 1.1 billion generated during the quarter was attributable to 700000 in cash from operations and 1.4 million received in connection with cable TV manufacturing equipment sales do you like Karen.

These cash increases were partly offset by 1 billion in capital expenditures.

With that we'd like to now open up the called for your questions.

Thank you very much if you put like to ask a question. Please take note by pressing star one no telephone keypad.

Using a speaker phone please make sure your mute function, it's true, though [laughter] towards I always say no to reach our equipment.

Good [laughter] Dod wanted to ask a question [laughter] pause for just a moment to allow everyone that opportunity to pick up for questions.

Well first question today comes from Jason Smith.

Topic Street. Please go ahead your line.

Hey, guys. Thanks for taking my questions, Jeff just want to make sure I caught your comment correctly I mean, it sounded like you there was a surprise push out and cancellation in the quarter. Just curious if you could quantify what sort of impact that had on June.

Surprise cancellation and push out not quite sure.

Can you give me a little more.

Okay I might have just miss heard that then so I guess just moving on to the cable business sounds like that remains strong any I think it's fair to categorize says that's what you're seeing more of a search then a spike or are you at all worried but that's just pulling forward some demand though.

Good question no I'm not really too concerned about that you know is we talk.

Yeah, I Miss those directly.

As well as to our customers you know what we see is a pretty significant shortfall in network capacity and you know the cable operators are scrambling to break those bottlenecks.

So you know the capex from the youngest those is highly slanted toward nodes lives which directly.

Impact you the bandwidth available at a homes and businesses.

So surge is probably a much better term I don't think is going away quickly.

But we're certainly not going to be Oh, you know driving investment into more equipment or anything it's all doubts completing the move to variable cost manufacturing that's.

This was a consuming us at this point.

Okay, and then b that constraints related to the macro backdrop on the fog business.

I mean, it's are you still building out years or engagement pipeline I understand that and design and qualification stages have been pushed out but do you continue to have pretty good dialogue interaction with customers.

Yeah, absolutely it's you know.

I wouldn't I wouldn't be.

Well, let me take a step back yeah. The conversations continue testing continues everything is just slowed down.

So I I, just see the schedules being pushed to the right as opposed to opportunities loss.

Okay and last one from me I'll jump back into queue I encourage margin, obviously very strong I think the highest level since September 17, the fed and looking at that correctly I mean, how should we think about gross margin going forward.

With for the moving parts in the push out cod moving the line.

So were a lot closer this quarter to where I think you're going to see it or at least the next quarter and and beyond.

So you know you can see a and b did a large quarter to quarter jump, but you know if you average it over the last couple of quarters. It's it's just over 30% like upset and we're getting better.

Operationally, which was really the key to to the Q Mems portion of that segment, which is you know significant amount of the revenue so.

I think about that one as you know we did 36%, it's gonna stay pretty close to that going forward.

We had a few onetime items this quarter that that you know rose it spiked up a little bit more but.

Nonetheless, the improvements where we're making our sustainable so you look for it to do mid Thirtys near term and and you know with improvement beyond and then you probably going to see a bit of an uptick in the broadband.

Gross margin is in the next quarter and going forward, we continue to get some of the benefits of outsourcing, but not all of them a that'll happen once it's all complete but at a couple of quarters from now up but where they've got good backlog. So we know what a lot of the mixes so that's going to improve over the quarter.

And the volume is up so you know when you put it all together.

You know mid Thirtys 35, plus a point or two isn't a you know isn't a at of the question.

Hey, Jason I, just want to give you one other a little bit of color on the QM side, you know when we when we bought Sci we've got great price on it part of the reason for that was you know historical set of challenges on gross margin I'm really meeting.

Scrap rates and so we felt we were much better solving those sorts of problems than the previous ownership and so we've applied that knowledge to the problem. The team has really stepped up and that's why you're seeing improvements. So this was expected to be a key area.

Contribution and you know we've got some some pretty strong restatements now.

Okay, I really appreciate that color. Thanks, a lot guys.

Thank you we were no take one next question from Tim Savageaux <unk> from <unk> capital markets. Please go ahead.

<unk>.

Hi, good morning, and congrats similar results, thank you to especially in this environment.

First I want to ask questions can be a.

The broadband or cable TV optic side.

Yeah, if you referenced a whole order book or through December.

To try and get a little more color on what that means.

With regard to.

Maybe capacity.

[noise] or Ah.

Yeah, I think your your cable TV optics numbers are also was as high as they've been in the water in a while they.

Certainly been higher.

So.

Should we take that full order book commentary to imply.

Along with.

Toms gross margin car commentary.

[laughter] debt that you think.

Guilty of your relatives can grow further.

And.

How does that marry up with some of the seasonality you might normally see you're heading earlier to your fiscal year, and then I'll follow up sometime.

Yeah.

So first of all <unk>, let's tackle the easiest piece, which is seasonality you know we normally got this sought to thing.

Where you know the.

On a calendar year basis, where march quarter tends to be the worse than the December quarter tends to be the best so.

Yes.

From.

Let's call it the guidance in the current quarter. If we were going to go break that out a little bit further and look into Q1 to explain you know my full orderbook combat.

I would say that numbers are going to be similar to slightly off that we do have some constraints on production capacity at this point and it's strictly related to the fact that we've got equipment in two facilities right.

And you know as I pointed out our ability to parachute team from Beijing into.

Hi lands to get them.

The production rates up and be more importantly, the scrap rates to the point, where they should be is really what's limiting the top wind at this point by the time were done those limits will be gone.

But for the short term you know, we're going to be a little bit cautious about.

Where things are.

Because our hands are tied.

Bar is how quickly we can bring up the the tie group.

Okay fair enough.

To follow up on aerospace and defense hard or last quarter, I think you'd said sort of these corporate controller headwind.

On the commercial aviation fried, possibly impacting couldn't <unk>.

Your read through the second half a year.

Obviously doesn't appear to be impacting your sorry, your guidance for the September quarter, but I wonder if we can get an update on your kind of thoughts there.

Sure I'm actually you know September guidance would have even been higher.

That's already factored in to.

You know the couple of push outs that we're looking at.

We will occur in the September December quarters.

Okay. So that's all baked in.

And it's strictly related to commercial aviation side.

The Q men's business.

In one particular customer service supplies, you know the commercial aviation market.

And they're just asking us to push out and workers supplier. So we'll play ball with them.

Its not a cancellation in orders. So you know our hope is that we can use some of that to offset the seasonally soft march quarter.

And you know we're in negotiations with our customer to do that.

Great and then.

Last question for me.

He mentions some growth on the chip side of the business within broadband.

Good to hear a little a lot of good things about a.

10 gig, Paul and Youre sort of globally.

Lately, where did you have some exposure there.

That's right back to the business also driven by real high speed telecom, but.

Theaters and your thoughts on the upon market these days and any opportunities that might present for EMCOR is just an overall update on trips.

Sure we do have some exposure to 10 Jie Han.

And we're getting some business there you know that as you correctly pointed out that market has been solved for a couple of years I think.

Generally speaking the entire cost of the suite of device as necessary.

To deploy it production those problems have been solved.

So I would expect.

You know some continued improvement and chips.

And you know better better margins out of that group.

But.

Part of what we've got going on here is some additional.

Customers that are not buying you know what's called commodity products and that is also helping us.

Okay, that's very much and congrats again.

Thank you Jim Thanks, Dan.

Once again, if people would like to ask a question. Please press star one.

I will take our next question from Dave Kang from B. Riley. Please go ahead your line is.

Hi, Good morning, Hum in your prepared remarks, you talked about gross margins there some kind of like upward pressure can you explain that I think I can start.

Well that would be I think in the broadband we were referring to the a broadband segment largely the cable TV business, which.

It is in similar response to the question earlier.

We are likely to see a move upward there with a better mix quarter over quarter and continued progress and on the cost side as we transition to the outsourcing.

So I've got it okay, but that's pretty much what we were referring to.

And Oh, I'm, sorry, you talked about near term course margin in the mid.

30 years, and then beyond near term, we're kind of course marching go.

Well right now we know we're modeling in the mid Thirtys, but yeah. There's room to go north of that into the high Thirtys Ah you know we forecast out for a certain period of time and then it.

But you know long term.

We're looking to get towards 40, and and above its going to rely on a whole bunch, it's different factors, especially growth in aerospace and defense, but that's how we're we're looking at it over the next 18 months.

Got it and then are we getting on Opex, obviously a.

Benefited from a travel restrictions with all that but then once a things normalize and most of my bet is but ratable wish you know how should we expect a optitex let things normalize.

Well I would say near term next quarter or or to perhaps you know we're at 10 million or you could see or something go lower by the travel isn't going to come back in the fourth quarter or maybe not even in the December quarter, a we'll see how that all.

Works out, but we did have some benefit of a couple of restructurings. We did over the course of the fiscal year, and we'll get a little bit more of that benefit in the in the fourth fiscal quarter. So you know when modeling 10, but it's got to potential to.

To be a little bit lower than that.

Got it had been Jeff how are you talked about nexgen remote fly with up at a rough optics.

When should we expect that to Oh materialize.

Well I need to be a little careful here.

Because of you know and da's with our customers.

But these things are actively in the design cycles right. So you know cable TV tends to move you know little slower than some markets.

You know I think it's entirely possible to see an evolutionary product.

And you know dying.

Just 12 months out there in the market.

Got it and then definitely during your comments on it.

No that several issues due to current the virus sudden so can you kind of quantify how much that was how much revenue left on the table that has that been baked into the next quarter's guide.

If you're talking about the push out in aerospace and defense and commercial side does that mean David.

Not only that but then it looks like he has some some supply chain issues and all that well you know maybe that contributed to some revenue in that as well.

You know the supply chain issues, you were able to navigate there's a couple sole source components that completely went away and we had to get real creative to come up with alternative.

Solution getting qualified at approved by customers, there's a lot of work, but it didnt affect us.

Yeah.

On the aerospace and defense side.

You know what I said in the May quarter. The mail May call was it was very low single digit believes caught a billion or to that's already figured into our guidance.

For the next quarter, because that's it will be impacting us in the September quarter December quarter, So actually the growth in the rest of the business.

It was stronger than even might look.

But as far as a far goes it's just you know delays in getting stuff that we thought was going to be in production now.

Through the qualification cycle at all continues to move is just moving slower.

Got it thank you.

Mhm.

That concludes today's question and answer session.

Mr B. to shore up I wouldn't not no one likes to turn the conference back to your for any additional closing remarks [noise].

Sure in closing I'd, just like thank all of you for your interest in core and I'd like to take the import team for your commitment.

And very hard work.

Clearly showed an improved results all of you. Please stay safe Ah. Thanks again.

Oh.

[noise].

[noise] [noise].

[noise].

Oh I'm.

[noise].