Q4 2020 EMCORE Corp Earnings Call
Good day and welcome to the EMCORE fourth quarter 2020 earnings call. Today's conference is being recorded at this time I would like to turn the conference over to Tom Mitchell live and.
Of course, Chief Financial Officer share. Please go ahead.
Thank you Katie good morning, everyone and welcome to our conference call the discussed and of course difficult 2024th quarter results for.
The news release, we issued yesterday afternoon, and is posted on our website and for Dot com.
On this call, Jeff literature and of course, the President and Chief Executive Officer.
Beginning with the discussion of our business highlights.
And then update you on our financial results for the quarter and we'll conclude by taking questions.
Before we begin we would like to remind you that the information provided here and they include forward looking statements within the meaning of section 27 day of the Securities Act of 933 and section 21 of the of the Exchange Act of 1930 for the.
These forward looking statements are largely based on our current expectations and projections about future events and trends affecting the business.
Such forward looking statements include in particular projections about future results of statements about plans strategies, the business prospects and changes and trends and the business and the markets in which we operate.
Management cautions that these forward looking statements relate to future events for future financial performance and are subject to the business economic and other risks and uncertainties for known and unknown that may cause actual results levels of activity performance or achievements of the business or in our industry to be materially different from those expressed or implied.
By any forward looking statements.
We caution you not to rely on the statements and the also consider the risks and uncertainties associated with these statements and the business, which are included in the company's filings available on the Fccs website FCC Dot Gov income.
Including the sections entitled risk factors, and the companies and and reports on form 10-K.
Company assumes no obligation to update any forward looking statements to conform such statements to actual results for two changes and 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 we believe provide meaningful shuffle and metal information for both management and investors.
The non-GAAP measures reflects the company's core ongoing operating performance and facilitates comparisons across reporting periods and.
Investors are encouraged to review these non-GAAP measures as well and the explanation <unk> reconciliation of these measures to the most comparable GAAP measures is included in our news release.
I will now turn the call over to Jeff.
Thank you Tom and good morning, everyone.
And the fourth quarter and core growth of 23% quarter over quarter revenue increase the cash.
Combination of top line growth and operational improvements.
Alton and a gross margin of 38%.
For point improvement over Q3.
Pardon.
Operating expenses came down as well, resulting in a GAAP profitable quarter of the entire team and EMCORE really came together and put together a great set of results.
From an operational standpoint, and supply chain and operations team. We're well ahead of the COVID-19, driven shortages the required a lot of work to overcome in previous quarters.
It's really it's only a modest number of challenges with our supply chain throughout Asia.
Nevertheless, the pandemic continued to increase the general level of friction.
The ongoing business activities, particularly with the customer development schedule and new programs, forcing us to adjusted our plans.
Our work force this remains healthy and protecting our manufacturing and engineering team the must work and our factories remains the top priority.
We believe the we've gone the extra mile to protect our people, but are mindful of the increase in new cases and our surrounding communities.
The transition of RC and TV manufacturing operations to high chairs Bangkok facility has made significant progress of all the move of the last laser module why continues to face the fluid schedule.
Transmitter yields and Bangkok current target.
So we need to see some improvement and laser module of yield to get them to the Beijing standard before we finish the movie.
Our working capital efficiency and continued to improve with production increases and banks are.
The inventory levels remain similar to last years, even though revenue was up by nearly.
Excuse me every one of the please remain on the line actually reconnect with our speakers.
[music].
Thank you for your patience and holding we now have our speakers Jeffrey Please go ahead.
Thank you.
And it back up just a little bit to make sure that I've covered every day. So if I said a few of the census for my apologies looking for the strong cable TV demand is to continuing to require us to maximize total production output and minimize the potential losses, so that volume from the yield fallout.
The good news is that the type of government is starting to allow for and workers back into the country. After negative kobin tests and a two we foresee weighted.
We're beginning the process of getting our EA engineers set up to travel to Thailand for three months assignments, which for.
The strength and archive team and allow us to finish the job sometime and.
Early in the June quarter arc.
Our time manufacturing engineering team continues to get stronger and improve their effectiveness, but adding the highly experienced engineers and did the mix will have a positive impact it's important to note the dairy sufficient product demand to justify parallel operation of both facilities, enabling us to hedge the risk of.
Of the switchover before we're ready for our.
For our customers expect certainty and their ship day and two facility operation provides day.
As more operations moving from Beijing, the Thailand, we expect to see upward pressure on gross margins and cable TV.
Turning to our individual business areas cable TV demand drove strong performance and the broadband your day.
And this does continue to invest in their networks. The break bottlenecks created by the bandwidth demands from work at home and stay at home Entertainment.
Well, we don't know the and this shows kind of what are your 20 was spending plans in their entirety until January and.
And of course cable TV products had a strong order book well into the June quarter.
Although we remain cautious of the ultimate duration of the upgrade cycle. We're confident that we will complete our move to variable cost manufacturing while orders are strong.
On the demand side, there are no major architectural changes and the cable TV networks that are in the name as M.S. those continue to rely on.
And proven linear optics technology to meet their needs and.
And the migration to the a remote phy keeps pushing further out for the right in.
In the meantime, [laughter] development work continues on at EMCORE on remote Phy shelf products, which are built on a proven linear optics backup.
In the aerospace and defense arc document and the test opto, let a quarter where revenue was up 3%.
The weaker mix drove margins down a bit but our overall manufacturing performance was good growth.
Cuba and development team is staying on their schedules for several important new products and it made the breakthroughs, which will help productivity and margins in the coming year, we're especially excited about our first product for the weapons platforms, such as the J damn smartphone as well as important.
Rates across the Q Mems portfolio.
Demand for our defense Optoelectronic products remained strong with shipments for the Epay control tower project, making up for significant fraction of the revenue.
The sense off does the new millimeter wave Q and V band products are gaining traction in the market across the military and commercial applications.
Production orders for our fiber optic gyro products.
Similarly remained steady although we did see continued delays and new product testing and qualification, which were driven by koby slowdowns.
The key completion milestones for one of the three products I described earlier has been reached and we do expect to get a pre production contract within the month the next month or so.
Additionally, our manufacturing and engineering teams have significantly improved the assembly process, and resulting yields for our new E and 300, I and you, reaching the general availability milestone, which we announced a few weeks ago [noise].
The excitement over it and 300 is growing as it is now being evaluated by five tier one prime contractors as you would expect.
Our confidence in our new products remains strong despite the coated driven slowdowns and testing and validation.
Moving on to guidance and the fourth fiscal quarter, we're expecting to see strong performance.
I'm sorry, the first fiscal quarter, we're expecting to see a strong performance from cable TV to mens and our defense opto electronic product lines. However.
We continue to be cautious about annual slowdowns that we see the various customs authorities, which it delayed shipments over quarters and in the past taking this into consideration. We currently expect revenue to be in the range of 32 to 34 million and with.
With that I will turn the call back over to total.
Thank you Jeff.
Consistent with our preliminary results announced in October the consolidated revenue and the fiscal fourth quarter was 33.5 million.
This is a 6.2 million for 23% increase when compared to 27.3 million and the third quarter and is the largest quarterly revenue from EMCORE since December 2014.
Aerospace and defense revenue was 14.5 million this quarter up from.
The percent when compared to 14 million and the prior quarter driven.
Driven by increases in revenue for Q man and the French Opto electronics.
Broadband revenue was 19 million up 44% when compared to 13.3 million in the quarter before driven by the robust demand for our cable TV transmitters and compelling as MSR sales continue to expand their networks to meet increased bandwidth demands.
On an annualized basis consolidated revenue for fiscal 2020 was 110.1 million, a 26% increase when compared to 87.3 million for fiscal 2019.
With annual revenue increasing in fiscal 2020 for both the a and B and broadband segment.
Moving onto the gross margin consolidated non-GAAP gross margin grew to 38% and digital for Q, a 4% increase when compared to 34% for the quarter before.
The higher gross margin was driven by a 42% gross margin for broadband up from 33% and the prior quarter.
Partly offset by a sequential quarter change and and these gross margins of 32% in for Q compared to 36% last quarter.
Contributing to the broadband gross margin performance and for Q were higher cable TV revenues over absorption of production overhead costs and a favorable product mix, while and these change was due to nonrecurring credits in Threeq, you any less favorable product mix.
For fiscal year 2020, we significantly expanded our consolidated non-GAAP gross margin to 33% compared to 23% for the two previous fiscal years why all of the higher revenue was a factor for the full 10% increase was also driven by cost reductions and improve production yields and better.
For inventory management.
Turning to operating expenses non-GAAP, Opex improved to 9.7 million and 29% of revenue in for Q compared to 10.1 million and 37% of revenue in the prior quarter.
The reduced Opex was all the attributable to X gene and <unk> expenses, and R&D was flat on a sequential quarter basis.
The lower equity and and was largely the result of ongoing expense management activities.
During fiscal 2020, we lowered our quarterly non-GAAP op ex by 2.7 million for 22% when compared to the 12.4 million for Q of fiscal 2019, while improving our opex as a percentage of revenue from 51% to 29%.
Moving to the bottom line and for Q, we generated a non-GAAP operating profit of 2.9 million and an operating margin of 9%.
Not only was this our first of positive results and for fiscal 2018 first quarter. It was also a $3.6 million or 12% swing from just the quarter before.
Adjusted EBITDA, which adds back the appreciation also improved significantly to 4 million or 12% in fourq, you compared to 300000 or 1% and free cash.
Fourth quarter net income and EPS on non-GAAP basis was 2.9 million and 10 cents for share compared to a net losses of 700003 cents per share last quarter net.
Net income and eat the EPS on a GAAP basis was 700002 cents per share compared to the net loss of 1.3 million and four cents per share in Threeq and.
Turning to the balance sheet, we had cash net of the loan payable of $24 million at September Thirtyth compared to 23.2 million at June Thirtyth.
The 800000 generated during the quarter. It was the result of $1.6 million and cash from operations and 300000 and cash from financing activities less capex of 1.1 billion.
With that and you're now opening up the calls for your questions.
Thank you Sandy.
If you would like to ask the question, we signaled by pressing star one on your telephone keypad, if you're using the speaker phone.
[noise]. Please make sure your mute function is turned off to allow for signature for each our equipment.
Again, Please press star one to ask the question.
Total pause for just a moment to allow everyone the opportunity the signal for questions.
Our first question comes from Jason Schmidt with Lake Street.
Hey, guys. Thanks for taking my questions Jeff in your prepared remarks, you mentioned some continued kind of supply chain challenges. Just curious if you could quantify what sort of impact that had on the revenue in the September quarter.
And.
I guess, what sort of impact do you think that is having on the December quarter.
[noise].
Well in my prepared comments, what I said was you know in previous quarters, we had a few challenges the supply chain that we had virtually completely beaten back and for Q. So and these are component shortages.
Of.
Custom linear components that were in short supply because the co the breakout in packaging operations and Phoenix, I'm, sorry, in Taiwan, and and ER, Malaysia, right and so those things are pretty well resolved itself, we had no trouble getting the components.
We needed.
We've had a few problems little things just with total production availability with a couple of sub component suppliers over in Taiwan.
But there's nothing we couldn't get past. So I think you know there's we've established the rhythm in terms of dealing with the problems I think we've got a pretty good handle on where you know the concerns are and the component supply chain.
And it's it's not going to hold us back at all of that we can see a.
Going forward unless something changes right I mean, it's the fluid situation everywhere.
Yeah.
Okay, No that's helpful and I mean, obviously demand and the cable business her man's for a boss just curious if from your position. You think this is more of of Ah of rising tide or if you guys think you're actually taking share as well.
[noise] and that's trying to get our competitors round. The we probably have taken some share the.
There is certainly hasn't call the majority of the rising tide.
You know as a more and more msos are demanding linear anl.
Which were the only people and the world the can make.
Of course, we're going to get a benefit from that and linear emails or of.
The largest part of our business day.
Of our cable television business.
Okay, and then just the last one for me and I'll jump back into cute and and I mean based on your comments on as the transition to the new facility continues you would see and uplifting gross margin and I mean.
And is it fair to assume that gross margin from September should continue the trend higher.
Meat into the into one Q.
Correct.
[noise].
I'd say the numbers are going to be similar.
You know I don't have a scalpel available to cut things that finally, but it's going to be similar right with the guidance range. That's similar.
There are there are always <unk>.
Mixed issues the change quarter to quarter.
But we would expect similar sorts of results.
There's not a wholesale movement and Hugh one.
Of product being built in Thailand, so that the effect, which really happens as.
You know the the primary facility for manufacturing becomes Bangkok, that's when it really manifests itself and so it's.
Transmitters will virtually all the over there in some point in the March quarter, and the laser modules early and the June quarter.
Okay. Thanks, a lot guys.
Thank you. Our next question comes from the space King would be Riley.
Thank you good morning.
First of all of my first question is on the op can you.
Tell us how we should go and Opex clumsy and apologize day. This is the conference operator, please hold while we reconnect with our speakers.
Thank you for holding day for you do have our speakers back and conference. Please continue with your question.
Yeah. Good morning, I guess, there was a disruption but my vote for the first question is on the Opex, how should we think about opex as and you start to travel how.
And how much will outburst the increase going forward.
Yeah, Hey day. This is Tom so look for.
Pretty much and a I would say in a and a run rate of no nine and a half 10 million on the quarterly non-GAAP Opex.
So I think and continue to to look at it that way the the.
The the fourth calendar the quarter of our physical and once you is if you look at the past the here and there was the reason for it usually does trend lower than the other quarters for a variety of reasons and the way payroll costs cycle around the year. So you know, we think will be under 10 and for Q.
But we're kind of in that night and a half the 10 range on the run rate basis going forward.
Yeah and that is.
Far and cost involved with the he a travel it's and.
And that's something I'd concern yourself with.
Got it and then I'm just going back to them and gross margin. So you said once transition is complete and there could be upward pressure on Bravo and gross margins, so you're saying it could be hired and 42% once to transition is complete.
Yeah, it could be the the danger and making that statement is just you don't know what the mix is gonna be when we make that final transition.
And whether or not and we'll still have the over absorption.
So you gotta be a little careful with that but but fundamentally yeah, there's upward pressure on it.
The day, but I would add this that you know we have some benefit now because.
Of the assets and he may have been put in a help for sale account on the balance sheet. So that there's no depreciation expense and still have other fixed cost and and E E R and China and call. The a internally and those will go away and when we get into the variable model and full force.
Deep into the school of 21.
The key there is is that we'll be able to hold the higher margin regardless of the top line one of them.
And then we have a variable model you know.
Right now and we're still especially in the for fiscal quarter, and we were still largely and in house.
You know operation.
Got it and then aerospace and defense I'm, Andy of gross margin and went from 36. The 32 sounds like you of it so uhm mix driven so it is gross margin going forward and a and the basically a mixture of of it or do you have any controls to improve the gross margin.
We do.
So there's there's a little bit of issue.
Also and the way that absorbed and get spread around and the U S facilities, but mix and I'm just getting the.
Card number's up and we'll make the.
Pretty pretty decent size and back and so we're you know we're working really hard to get get for qualification flight testing on a couple of these programs and and that will start to move the needle, which also will improve margins.
Got it and my last question is turning the actually physical third.
Order earn his call you talked about and possibly commercial aerospace projects being pushed out by want the two quarters can you give us an update on that.
Yeah, I don't think much has changed.
One of the things of note.
Is is that.
We did settle and old set of problems with the call it the aerospace.
That showed up and the and the gap R&D line of sort of a one time thing.
Part of what was the negotiated and that agreement was push out of some commercial aerospace products and will expect the shipments and start coming back and the March quarter.
Thank you.
So it doesn't look like it's getting any worst day and it's just.
Continuing to move it forward.
Thank you and our next question comes from the Savage out with the Northland capital.
Pardon me good morning.
And go ahead regulations, congratulations and the results and and especially the the bottom line.
Execution.
Uhm I guess my first question is.
<unk> focused on cable optics demand.
And the last quarter of you commented about order of visibility extending into the March quarter now you can move that.
The June and I guess my overall question is the sort of what's driving that and you don't appear to be capacity constrained.
And any way is the.
You know the visibility and of the timing of.
Cable deployment C and I'm stretching and the 21.
Are you building backlog or Hunter can give us some more color on that comment about order visibility.
Uhm stretching from from the March into the June quarters.
Sure you know the principal use over on the on the cable operator side and this is this is no split driven it's purely pushed.
Pushing additional capacity and of the networks.
Peter Snow, you know fancy virtualized the cast stuff on top of it the <unk>.
Aware of driving the spending it's just the bath breaking bottleneck.
And.
I would say that you know we do have some production constraints uhm.
Running across low.
Operations meeting Bangkok and Beijing.
The managing them.
And continuing to work through them and you know I think customers would always liked the happening sooner rather the later.
But with the current schedules again, we've moved.
The bar from the March quarter into June and.
And you know, we're not looking at material shortages and it's just making sure that we can build these products.
The high.
Hi, low quality and high yields and the other complicating factor I didn't really talk about very much is the the customers have pretty rigorous processes for.
Approving product change notices and so again. This is an example, with my comments about general correction and the business.
Originally with one of our three major customers.
We had an audit scheduled and Bangkok I Wanna say it was for July.
And and just got completed last week.
And it was literally it went from being of line audit, which is you know a whole team of people involved too of virtual audit, where you know of.
Walking around with the cameras, and Bangkok, and showing all of the processes and going through the documentation.
And it it just took a long time to set up and get through we're expecting that other very few finding of.
Any substance were expecting to get those P C and completely signed off.
For that particular customer of for that particular product and again, it and it'll and.
Improve our flexibility to put the capacity and where we need it.
And plus the sort of of complex thing, but at the end of heart, Tim It's still about breaking bottlenecks and the case of the Enso's of.
Lot of any linear email is going out into the market.
Uh-huh.
Got it and and I and.
The context and I wanted to follow up and you did express I guess some caution at the <unk>.
Timing of sustainability of this upgrade activity.
Which I suppose is healthy and general, but you know outside of.
And do you have any real kind of substance to to support that caution or do you feel like Hey, you know.
Cable optics revenue has accelerated to the celebrated level and you.
Oh, it's it's reasonable to think that that's not sustainable forever. Despite your increasing order of of visibility or I wonder if he could you know, yeah, and and go a bit and so that the commentary around the.
The length of <unk> or sustainability of the upgrade activity that you're saying.
Yeah, So [noise].
We're seeing very very well plugged into the channel and.
We don't see inventory building up anywhere.
You know, it's just very unusual to run with this level of backlog and cable and so you know perhaps paranoia of seeing.
Just how quickly.
Things turned from.
Thousand 17 of 2018.
Has has a little bit cautious, but if you'll remember of part of that was driven by a major customer and it was just over order and and we don't have any evidence to suggest that that's what's going on now.
The other point to note is.
Every year, we get a picture from the Msos and early January about what their plans spend is.
And and so that's always a good thing to have and we haven't had of.
Other than you know our informal conversations with those guys, which we do have outside of.
Our normal conversation with our major.
Oh, yes, so I would just describe you know my words of caution and just you know comments from a guy that's been.
You know has taken the heavy lessons of volatility and cable T V. The harder.
I would read and tried to read anything into it and we're actually very very happy with the other.
The situation as it is.
Now that that makes sense I mean as you mentioned.
You know.
Not being used to running with this level of of backlog and cable are there any metrics you can give us.
And that would describe kind of where you are now from that backlog perspective relative to maybe your normal operating level.
Yeah, I would say we're running maybe if you think about what the peak was in 2017 for cable.
You know EMCORE was running at about 25 million a quarter and.
Of that 25 million five of of it was going into RF over glass and essentially that whole effort has lost scheme.
Worldwide, certainly and the U S. So you take that off the top of and you say okay for roughly.
A year 18 months, we were running of $20 million.
And if you take a look of the total number of of link and it was.
Sort of.
We were selling a lot more and lasers back then and we were selling transmitters. So the number of of links that we're going out of that we were enabling.
And was probably.
Somewhere between and.
Mm Spitballing this for the little bit I would say, 50% to 75% higher than what we're running at now.
So this is what you know.
Gives us just a.
A little bit of comfort that we're not looking at a build a build a build it stop and stop it stop and scenario because of the actual number of the links that are going out the still substantially lower.
Then the links we we're enabling and 2017 that makes sense then.
It does and and I'll pass it on and thanks.
Okay.
Thank you that concludes today's Q&A and now turn the call back over to jazz for closing remarks.
Thank you.
And I'd certainly like to think the all of you for your interest and EMCORE and the entire EMCORE team for putting together for such a great set of results.
Please stay safe and thank you again.
Uh-huh.
Thank you ladies and gentlemen. This concludes today's teleconference. You may now disconnect.
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