Q1 2021 EMCORE Corp Earnings Call
Good day and welcome to the EMCORE first quarter 'twenty 'twenty One earnings Conference call. Today's conference is being recorded all the participants are in a listen only mode. There will be an opportunity to ask questions. Later and you can do so by pressing star one on your telephone keypad.
At this time I would like to turn the conference over the Thomson Channel EMCORE Chief Financial Officer. Please go ahead.
Thank you Marion.
Morning, everyone welcome to our conference call to discuss EMCORE.
So 2021 first quarter results the.
The news release, we issued yesterday afternoon is posted on our website EMCORE dotcom on this call jeopardy of your enforce president and Chief Executive Officer will begin with the discussion of our business highlights.
I'll then update you on our financial results for the quarter and we will conclude by taking questions.
Before we begin we would like to remind you that the information provided herein may include forward looking statements within the meaning of section 27, a of the Securities Act with 1933 and section 21 E of the exchange at the bank from 34.
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 statements about plans strategies business prospects and changes in trends in the business and the markets in which we operate.
Management cautions that these forward looking statements relate to the future events or future financial performance and are subject to the business economic and other risks and uncertainties, both 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.
Any forward looking statements.
We caution you not to rely on the statements and to also consider the risks and uncertainties associated with these statements and the business, which are included in the company's filings available on the SEC website located at SEC Gov.
Including the sections entitled Risk factors in 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 from changes in our expectations, except as required by applicable law or regulation.
In addition references will be made during this call the non-GAAP financial measures, which we believe provide meaningful supplemental information to both management and investors the non.
GAAP measures reflect the company's core ongoing operating performance and facilitates comparisons across reporting periods.
Investors are encouraged to review these non-GAAP measures as well as the explanation and reconciliation of these measures. The most comparable GAAP measures is included in our news release.
With that I'll now turn the call over to Jeff.
Thank you, Josh and good morning, everyone.
From a revenue standpoint and of course first fiscal quarter was nearly identical to the previous quarter. However, GAAP profit increased from Houston.
<unk> per share the.
The combination of top line of consistency and expense control, resulting in a non-GAAP operating profit of $3 4 million or 10% of revenue.
The EMCORE team executed well on improving our financial results from Q4.
From an operational perspective, the supply chain and operations team continued to meet the challenges of COVID-19, driven shortages the day.
These difficulties were delays caused by the airfreight and gossip.
Specially at the end of the quarter.
While we foresaw these problems they were a bit worse than we expected.
We don't expect improvement here until Covid begins to break.
As we previously described friction in the customer facing business activity such as the development of New program capture and qualification remains a challenge.
We made good progress on these efforts in Q1, but many of the defense Prime contractors that we work with extreme heat work from home policies that continue to push push schedules of the right.
As you do all of those clean, though COVID-19 made of major service resurgence in California in December.
Brought in bulk testing on a frequent basis and thankfully only saw a handful of cases at EMCORE.
No evidence of transmission inside of our cleaning of protecting the manufacturing and engineering teams must work in our factories remains the top priority.
Many of our non technical staff are out of the office to minimize the opportunities for transmission.
Consistent and frequent testing will continue to be part of our protocols. We believe that we've gone the extra mile.
To protect people, but are mindful of the situation and continue to look to mitigate COVID-19 risks where possible.
The transition of our cable TV manufacturing operations to high terrorist Bangkok facility made significant progress against its operational milestones.
Transmitter yields in Bangkok remain on target and laser module yields continued to improve.
The strong demand from our customers.
And the rash of COVID-19 outbreaks in both the Hebei province in China, as well as the Thailand dictate that our best strategy is to hedge the geographic risks of COVID-19 outbreak.
The continuing to operate the king in Bangkok in parallel until the end of the calendar year.
In addition, our customers simply cannot afford the temporary loss of production capacity associated with the final move the bank.
We responded rapidly to challenges to keep production on plan, but these incidents demanded additional measures to deal with the problems going forward. We will also ship lasers from our for our something customers out of our camera to further hedge risks and increased production volumes.
The inventory levels increase the good quarter over quarter due to customer delays in receipt of materials across three factories that are now producing laser modules, all things being equal inventory should start to come down in the March quarter margins were strong on similar mix for Q4.
Sure.
Still volume sensitive and additional revenue, we'll have good flow through on the P&L.
The type of government started to allow foreign workers back into the country right at the end of the December quarter.
They have since tightened entry requirements to only admit Thai citizens.
All of our time manufacturing teams continue to improve their effectiveness.
Adding the highly experienced E of engineers into the mix would have a positive impact.
I'd also like to point out both of the.
Strong demand for cable TV products more than justifies the parallel operation.
Pardon me at both facilities until the end of the calendar year and enables us to better hedge the COVID-19 risks.
Our customers expect certainty in their ship dates and multi facility operation helps to provide that.
Turning to the individual business areas.
Keep them T D incentive demand drove strong performance in the broadband unit <unk>.
<unk> continued to invest in their networks to break bottlenecks caused by the bandwidth demands from work at home initiatives.
Charter and Comcast recently announced earnings.
And their capital plans for the year Comcast reported increases in scalable infrastructure.
Balanced against reductions in Cte while charter highlighted of.
The larger amount of node splitting what they're doing to meet the bandwidth demand in <unk>.
Statements are consistent with our strong order book through the September quarter.
Furthermore, we believe that the trend should continue through at least the December quarter.
Although the cyclical nature of the cable TV business gives us pause regarding the ultimate duration of this upgrade cycle. We remain confident that the we can complete our move to variable cost manufacturing while orders are strong.
Looking beyond the very near term in CATV we.
Believe that Msos will continue to invest in linear optics technology to meet their needs.
DAA or remote phy keeps pushing further out to the right.
Our development work on linear remote phy shelf products continues to gain traction.
The broadband business unit also generated some important successes outside of the cable TV.
Most importantly, we're seeing growing traction without of Lidar sensing components.
On the Lidar front, our chip design has already been qualified for the major design win we announced with the tier one manufacturer.
On that we're about to start sampling of our second generation package designed to at least three more tier one automotive subsystem manufacturers.
Although the volume shipments will really occur until sometime in FY 'twenty two.
We're excited with the response that we're getting from these customers.
Our China rail design wins drove strong demand in the quarter, which should continue for the foreseeable future.
Outside of sensing we continue to rack up of design wins of highly differentiated chip products and expect to see growth materialize towards the end of calendar year 'twenty one.
Taken together the broadband business has many important growth opportunities outside of cable television.
Aerospace and defense declined slightly due to contract delivery dates which tend to mirror the government fiscal year, which ends on September <unk>.
A sense of those steady.
A few members was down about 8% overall I would characterize our manufacturing performance is solid.
One of the most significant events.
The recently occurred with the state Department is really that our new <unk> 500.
<unk> is no longer subject to ISR export resolution revenue relations.
This dramatically increases the size of the markets that we can address the difficulties in getting ISR export licenses are well known in the industry and substantial with.
With some caution you expect that are newer to Mems products will also fall into the EHR license category, when we get our rulings from the state.
As we discussed last quarter, the Q Mems development team is staying on their schedules for new product introductions.
Process improvements, which will help productivity and margin.
You can get qualified and rolled out remain we remain excited about our first products for weapons platforms, such as the JDM smart bombs.
And demand for our defense Opto electronic products remains solid with shipments per FAA control tower upgrades, making up a significant fraction of the revenue.
The first off those new millimeter wave Cuban V band products continued to gain customer interest in the market across the military and commercial applications.
Production orders for our fiber optic gyroscopes Similarly remained steady.
We are making slow, but steady progress on new product testing and qualification for our fog products.
And look forward to the time when Covid is behind us.
We also received our first preproduction contracts were accustom IME and are working with our customer on this phase of a very large program.
The excitement over the M 300 is growing and is now being evaluated by six tier one prime contractors.
I pointed out our confidence in the new fraud products remained strong despite the COVID-19, driven slowdown in testing and validation.
Moving on to guidance for the second fiscal quarter, we're expecting to see stronger than normal performance from our cable television and <unk> product lines.
Our biggest note of caution remains tied to COVID-19 impacts on our personnel and supply chains in the U S, China and Taiwan.
Taking all of this into consideration. We currently expect revenue to be in the range of 34 to 36 million.
With that I will turn the call back over the top.
Thank you Jeff consolidated.
Consolidated revenue in the 2021 fiscal first quarter was $33 4 million essentially flat when compared to the $33 5 million into 2020 fiscal fourth quarter.
Aerospace and defense segment revenue was $13 6 million this quarter lower by 6% when compared to $14 5 million in the prior quarter the.
The sequential quarter revenue change was due primarily to the program timing for our Q Mems navigation products revenue per defense Optoelectronics was essentially flat.
Broadband segment revenue was $19 8 million up 4% compared to $19 million in the quarter before driven by the continued surge in demand for our cable TV transmitters and components.
<unk> continued to expand their networks to meet increased bandwidth demands.
Turning to the rest of the operating results on a non-GAAP basis consolidated gross margin was 38% from fiscal <unk>. The same as the prior quarter segment gross margin has changed slightly consistent with the sequential revenue trends.
Broadband gross margin was 43% compared to 42 of the quarter before while the A&D was at 31% compared to 32% last quarter.
Opex improved again this quarter to $9 3 million and 28% of revenue compared to $9 7 million and 29 per cent of revenue in the prior quarter.
The lower Opex was primarily due to reduced project related R&D expenses.
Moving to the bottom line as a result of another strong quarterly performance for revenue and gross margin combined with the lower Opex. We grew non-GAAP operating profit in the December quarter, the three four of $5 million and operating margin of 10%.
The $2 $9 million of 9% of the quarter before that.
Adjusted EBITDA, which adds back depreciation also improved to $4 4 million or 13% in <unk> compared to $4 million or 12% in the prior quarter.
December quarters, net income and EPS on a non-GAAP basis, with $3 4 million and <unk> 12 per share compared to $2 9 million and 10 cents per share of the quarter before net income and EPS on a GAAP basis was $2 6 million of <unk> <unk> per share compared to 700000 of <unk> per share in the.
The September quarter.
Turning to the balance sheet net cash net of of loan payable of $24 7 million at December 31.
Impaired to 24 million of September 30 of the.
The cash generated during the quarter was the result of $1 6 million from operations less 900000 in Capex.
So with that we'll now open up the call for your questions.
Thank you if you would like to ask the question. Please press star one on your telephone keypad. Please ensure the mute function on your telephone is switched off the low your signal to reach our equipment.
If you find that your question has been answered you may remove yourself from the queue by pressing star two again, please press star one to ask a question.
Yeah.
Okay.
We would take some of the first question from Jason Smith from Lake Street.
Hey, guys. Thanks for taking my questions. Jesse you mentioned from delays in the air Freighting cost I'm. Just curious if you could quantify the revenue impact do you think that had in December.
Relatedly how much do you think that is impacting the March quarter guide as well.
If I had to take a swing at it.
It would probably be close to a half a million dollars.
And as far as how much. Additionally.
It would affect March at the little hard to say.
You know at the end of the year, we have issues with the holidays right and people wanted to take time off.
And that tends to not be as big of an issue in the March quarter.
So we may get a little bit of improvement there, but it would it would purely be random.
So I don't think it's going to get any worse I mean, what we've done Jason is the double book.
Across several different carriers.
We've had two.
And this customer health.
To expedite shipments through customs.
In places where.
You know that instead of problem, but just.
To give you. The example <unk>.
Shipping one product from.
One piece of Capex from the U S. The Beijing incurred an eight week delay in getting it through customs.
And.
I mean these things happen.
Don't think it's going to get any worse, we'll call. It a steady state number for now.
But that's roughly roughly.
Okay No that's.
That's helpful and then it sounds like you guys are seeing some nice traction in the sensing opportunities just curious if you could help us sir.
If I or think about what the potential size of these opportunities could be.
Yes, so it depends on the on the customer.
I would say at the low end, where you've got.
You know what.
The design win is.
Where we've got identified programs not just.
You know with our sub systems, but without going all the way out to the buyer of a mere autonomous.
Vehicle.
Tens of thousands of units a year, but pretty good asps on the we're still working all of that out so I hesitate to give a hard number there.
Some of the longer term opportunities where people are really trying to.
Put them into the mainstream.
The cars are.
First the safety systems, and then as autonomous.
Driving tools.
Those are in the hundreds of thousands or millions of year.
Youre, just not going to see them on every Volkswagen.
They're going to show up at the high end luxury vehicles.
This technology does pretty much as you know everything from parking sensors too.
Antilock brake pad.
And you know this is going to roll out over.
On a period of years automotive.
Automotive qualification is no joke.
The fifth rates that theyre looking for failure in time rates that they're looking for.
Our superior to the some of the toughest telecom applications.
Submarine pump laser sort of specs.
So it's going to take at the time, but it's going to be a good.
Good steady rollout.
Like I said FY 'twenty, two we're going to get some volume out of it and how fast it ramps after that it depends on a lot of factors the.
Pretty hard to predict.
Okay that makes sense and then just last one from me and I'll jump back into queue.
Looking at the gross margin line another nice improvement here in December how should we think about gross margin trending the rest of this fiscal year with all the moving parts.
Well again, if you know as I pointed out in the script.
Our volume sensitive so our contribution margin to gross margin spread is.
No.
Is that as volume increases will flow more through the.
The P&L.
So in the places where we normally don't have great absorption.
We will see better absorption and I do think there is some upward pressure on gross margin. It all depends on exactly how much of the way of say lasers, we shipped out of our Hamburg.
And some of the other products that we're going to use EMCORE, California personnel to build as opposed to E&S I, just because we need the volume and we've got trained people here, we can move in between.
Different different functions I mean, even between the wafer fab and certain final assembly processes. So.
I would say you know there is theres some light upward pressure on margins, Tom you've got any other color on that yeah, No I think it's well said.
Great.
Okay. Thanks, a lot guys.
Mhm.
As a reminder to ask a question please.
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The show from Northland Securities.
Okay.
Good morning.
Good morning designation here.
The kind of an all time record for conference calls kind of integration right yeah.
Yeah morning, Congratulations on I guess of couple of questions on.
And each side of the business could you speak up a little bit Tim Herbert of heartburn thinking yet.
Okay, what about though.
Better thank you.
Right.
On the labor line too.
Okay, sorry about that on the cable T. The optic side.
Once again moved out another quarter.
Again, a couple of quarters ago talking about March visibility the June now or in the September.
So obviously that business continues strong I assume that's the primary driver of your you know much better than seasonal growth in March but feel free to provide color on that.
And I guess the broader question is.
I guess, we have visibility into continued order strength, but do we have visibility as to.
Kind of the the peak of the cycle. If you will to some degree you know historically I think you've gotten up to around 20 billion of quarter end.
On the cable side, you're pretty close right now.
Can that business continue to grow throughout that September time frame or do you see it more of kind of steady on an elevated level for a period of time.
Great questions. So first of all of you hit it hit the nail on the head as far as the March quarter contribution.
Second thing as far as the ultimate duration of the cycle.
This is an area, where we've spent an awful lot of time.
Not just the.
The jockeying of our own spreadsheets around the talking to our major customers.
One of the interesting things that we've discussed with them.
It's the difference between 2000, 2017, where cable peak and where we are now and there is a really interesting story underneath it which is the.
The principal volume of.
Parts that were shift in 17.
We're laser modules right with an ASP of roughly $220 something like that if you take a look at the mix now it's overwhelmingly linear <unk> with a an ASP of $600.
So if you say okay.
Q1, EMCORE did roughly 20 million Bucks in cable.
Peak.
EMCORE did about 20 million Bucks in cable when you take the old RF over glass stuff out.
You say Wow.
Running off at the end of the Cliff.
Except when you correct for the fact.
Like a much more expensive part you see the the actual volume of links is considerably smaller.
And so that is what I will call you know one of the indicators of this could run.
Considerably longer than.
You know just being a spike or or even the surge as we talk to customers and their customers.
What they're telling US is scalable infrastructure is the priority for Capex.
The reason why they loved the linear <unk> is it just more bang for the Buck it's more bandwidth for every transmitter of this installed when compared to the F. B and since we are the only guys in the world of can build these things.
It has the outside of impact on us.
So.
You you've hit on the this dynamic you know.
Spot on him.
What we're saying is hey, we're completely covered with the order book through September reality is it's already leaking over into the queue one.
So we certainly don't expect a big slowdown there, but the question is you know are we at the peak I think the the answer is that part of it is that we're a little bit.
Production constraint.
Uhm customers would probably like more product from US then we can provide but I also think that there are catalysts within the.
Uhm the M. S O capex strategies that could make this go considerably longer it's just a little bit early to talk about.
So I I doubt that I really gave you everything you were looking for but hopefully that helps.
Yeah that was actually a ton and cause it really suggested it you know.
Given the unit volume they S. P dynamics that you can you can continue to grow and yeah, and then more broadly it seems like we're you know we're.
Relatively early stages of of a lot of this note split activities. That's good can see on for for quite for quite a while.
I'm sorry go ahead of you write the good sense.
Go ahead.
Yeah, No. It's you you hit the nail on the head again and the you know as we take a look at the cause oftentimes no splitting is limited by bucket trucks right on the the time available to go out and.
Hang the fiber in and you know get everything installed.
The other the other thing is is that the the tools that the msos used to predict where the problems are on the network in terms of congestion I think of improved dramatically and of showrooms the weaknesses the possible. They didn't know they had.
It's funny the way of crisis like this will will surface these sorts of things.
And.
And thanks for that other other question over on the.
Come and kind of go off that sort of sensing discussion and it really made me more focused on the other applications obviously you've got.
You know laser capability that feed several aspects of your business Alright that include writing of parts of the defense business.
Standalone Uhm laser chips for comes in other applications and we've just discuss this.
You know kind of sensing dynamics so.
You know over on the sensing side.
Yeah, there's a lot of different approaches to doing this lease from.
Oh light source perspective, some gotcha you. Some <unk> some guys are using things that look more of like telecom lasers.
Some guys are using diodes, and there's a lot of different approaches I wonder if you might.
You know take us through.
The the pros and cons of of of using you know kind of.
Of course approach their relative to others.
And also as you look at those you know indium phosphide five assets.
What sort of of other applications or or verticals.
Uhm.
Do you see the the potential to.
To be relevant to the <unk> I mean, three the or it can be discussing the alright defense comes in the in censoring.
Uhm and I think you've got new things going on on on a couple of those fronts, maybe touch on those of a bed.
Yeah.
So.
Obviously, the first <unk> in the sensing space and I'll just focus on light on because.
This is where we get from the classroom.
Uhm well you can off lasers with the very high power.
And you know the the classic Valentine product, where where they of just you know taken the world by storm and.
And I have really done a nice job with it the the challenge for them and it wouldn't surprise me at all if they're developing an F. M. CW system is that you know the pulse of high power pulse lasers.
Uhm baseline of ours can interfere with each other.
And the F. M C. W. So so you could have two or three cars pulling up to an intersection if they're all receiving the same reflection from the wrong vehicle pretty much impossible to tell which which sense, which which signal you're reading on the.
F M C. W side, because they are coherent system.
You know by design, you don't have that problem and so one of the reasons. The one of the chief reasons, why we believe in F. M. C. W over a long term.
Is the cause of the ability to discriminate between let's call it collisions of sensing systems.
Uhm the other thing that we the we like about it is.
At least at the theoretical level because of the physical in the system. You you could have single folk on detection you know that's gonna depend on a lot of things, but it will enable I think the I'd have to on C. W. The system.
To you know see better through rain Snow Sleet, then something it's just gonna rely on a leg out of that's gonna rely on the optical power.
The other thing is that the F. M C. W. As can be built in a smaller package.
Smaller size and in our view is that it won't be a one size fits all you know you're gonna have light ours with different characteristics, you know looking forward to the sides and possibly even behind you.
And so you know we like the fact that the F. M. C. W approach allows that sort of design flexibility and.
So you know where the only place where we're really driving our technology is on the F. M. C. W. From.
Now you've hit on this point about.
Our laser technology and commonality we.
The originally started all of this work on the the light or lasers from our very narrow line with cable T V sort of places and we've been able to improve it a couple of orders of magnitude without increasing the cost of the size of now we're driving down costs with different packages.
Package types.
So you know it was it's surprising I think to some that aren't well versed on the technology of just how versatile you know the set of tools that we have really is as far as as the different applications. When you go into the China real application Uhm what these.
Uhm devices are doing to the best of our understanding is there something vibrations presence of of trained even the ability to create a signature of of train track where I.
Any bearing issues in the train and so enables predictive maintenance as opposed to preventative maintenance, which is a really big deal.
You know oddly enough when you get into the queue. Ma'am there is of sensing application for it the the Cubans products go down hole.
In a drill bit that enables directional thrilling for cracking applications of the company called Giro data is our big OEM partner there. So we keep building out of wider range of sensing products.
The it started out out of of common toolkit.
So on the merchant ship side [noise], but you also ask it out.
We you know really gotten away from trying to sell commodity chips in China.
You know we supplied gain shifts the leading.
Tunable laser manufacturers you know we can build it was kind of conductor optical at the Flyers, we can build other products that have a highly differentiated features and so you know what we see as far as the trajectory for a merchant ship business Tim is more along the line.
<unk> medium volume Halloween differentiate of devices with good margin.
And this you know actually is consistent with what we're doing with lithium niobate, we are producing components.
Which are similar to modulators for certain defense partners.
The make fiber optic gyroscopes.
You know we're good at this we're getting better at it and we see no reason not the profit from the I P. The if you have there the.
The other the other point of finally closed on cause you mentioned defense. If you took a look at one of our of fiber optic gyroscopes <unk> you'd find.
Uhm the light source, so most of our pain chips you'd find all of our detectors, we make ourselves.
Find the I O C, which is a sort of of lithium niobate modulator, that's that we make and we're now making the queue and the man was starting with K, but we'll be moving to cute the band detectors four does that stop the business and.
Going into some interesting applications over and five G.
Both on the commercial and military side.
So you know at the end, it's very hard EMCORE as of Chipmaker.
And we we do best in terms of the economics on our business. When it has off when are products of of of high amount of check on that.
So that you know if you'd call on our strategic direction.
Where we're headed.
Got it thanks very much in the congrats on the results.
Thank you Sir.
[noise]. That's the reminder to ask the question Keith.
Keith <unk> style of one.
That's the I know further questions in the queue I'd like to have them call back on for your whole for any additional channel was over my ex.
Thank you Marianne I'd.
I'd like to thank all of you for your interested in EMCORE on especially those of you on the West Coast, who woke up real early for the call in particular I also want to recognize the team at at EMCORE for their commitment and very hard work out of the past quarter in particular or the E. A team in Beijing overcame shut the.
Down the supply chain, roadblocks, which too laid there could use the work and yet still delivered as the as a committed and you don't really the strong commitment from the team is showing up on the results.
And we're thrilled with that so please stay thank everyone and have a good one.
Thank you that'll of complaints news conference calls. Thank you for your participation, ladies and gentlemen, human out of disconnect.
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Yeah.
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