Q4 2021 EMCORE Corp Earnings Call
'twenty one earnings call today's conference is being recorded at this time I'll turn the call back over to Mr. Tom Mitchell. Please go ahead Sir.
Okay.
Thank you good morning, everyone and welcome to our conference call to discuss <unk> fiscal 2021 fourth quarter results.
The news release, we issued yesterday afternoon is posted on our website <unk> dot com.
On this call, Jeff furniture and of course, President and Chief Executive Officer will begin with a discussion of our business highlights I will then update you on our financial results and we'll 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 of the Securities Act of 1933 and section 21 E of the Exchange Act of 1934.
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 future events or future financial performance and are subject to 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 material.
Different from those expressed or implied by any forward looking statements.
We caution you not to rely on these 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's website located at SEC Gov, including the sections entitled risk factors in the Companys annual report on Form 10-K, the company assumes no.
To update any forward looking statements to conform such statements to actual results or to 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 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 to the most comparable GAAP measures included in our news release.
I'll now turn the call over to Jeff.
Thank you John and good morning, everyone.
<unk> fourth fiscal quarter reached a high point for the year coming in at $44 million.
Non-GAAP earnings were $6 8 million and adjusted EBITDA was $7 8 million semiconductor and supply chain challenges affected our gross margins, just a little bit still generating a solid 39%.
EMCORE continues to perform well despite supply chain headwinds and continued to demonstrate the strong operating leverage in our business semi.
Semiconductor availability was largely adequate during the quarter.
But as additional logistic challenges emerged in the supply chain unusual push outs a material occur we believe that our semiconductor inventories are in good shape for the current quarter. However, we've seen surprise delays in receipts of materials ranging from special purpose, he proxies to sheet metal components and everything.
And between inventory levels may have to rise temporarily however, we expect that inventories will drop as we finished the transfer project from Beijing to Thailand.
The shutdown of transmitter built in.
China and Theyre transfer, Thailand should be completed this quarter beyond this the current schedule shows that the remaining laser line in China, We will move to Thailand After Chinese new year, completing the entire production transfer project.
We've recently fielded questions regarding power outages in Beijing, and how those have affected production. We're pleased to report that our Chinese manufacturing operations have been almost completely unaffected by the recent power problems and we've also managed to steer clear of any COVID-19 problems as well.
Entry restrictions for foreign workers into Thailand have eased somewhat and we now have a Chinese team in Bangkok working on technology transfer and expect this to transition into normal kaizen operations through the March quarter.
The most important takeaway is that we will sell our remaining inventory and manufacturing assets to high tariff fast strain over the coming months, reducing inventory and fixed assets, while returning cash to the balance sheet.
Turning to our individual business areas cable TV continued to drive strong performance in the broadband unit we.
We continue to enjoy strong backlog and cable TV, although we will always be cautious about cyclical nature of the business.
Chip's wireless and sensing taken together were roughly flat with the previous quarter.
The most important things to note about the broadband business is the growing number of chip development contracts. We've received along with the total level of customer funding. So far the total several million dollars.
With three such contracts in place and two others that are expected to close within the next couple of months comma EMCORE has firmly planted the seeds of growth in broadband.
Furthermore, the first of these new chip products are expected to start shipping in Q3, and Q4 of FY 'twenty, two and are expected to contribute tens of millions of dollars in revenue by 2025.
These development agreements represent an important milestone for EMCORE because they are expected to drive consistent fab utilization, which will counteract cable tv's cyclical nature.
This is an important area of focus for the company and we're confident we can put the additional capacity in place to take full advantage of these opportunities.
Aerospace and defense declined slightly due to continued supply chain delays with the new EMS provider in our defense Opto electronic business.
<unk> Mems and Bob taken together were roughly flat with fog being up slightly Q.
<unk> margins were affected by a large shift in mix towards a notoriously difficult product that we make for the U S. Navy.
We're seeing improvement on that IMU during the current quarter and expect to see continued progress beyond that.
Our new automated assembly tools should also make a positive impact on margin as they arrive in our installed over the next few quarters.
Multiple negotiations with international defense contractors are underway.
Our STI 70 IMU.
Discussed annual target volumes, ranging from 1% to 4000 units per year, most of which will be used in precision guided munitions.
We fully expect this application will be a primary growth driver for <unk> aerospace and defense business within the next two years driving incremental revenue in excess of $20 million a year.
The SEC 500 is also undergoing qualification testing for several domestic and international programs with a serviceable market of one to 2000 units per year taken together. These results demonstrate the growing momentum for our Q Mems navigation products and future growth beginning this year.
Beyond the short term in Q Mems the test results that EMCORE presented at the joint Navigation Conference, where judge best in conference demonstrating our ability to drive fog level performance into our Q Mems technology.
These improvements in performance and size will create significant new opportunities in the market and are already being designed into a less than nine cubic inch inertial measurement unit with better than one degree per hour bias performance under all causes this product will be used in interceptor missiles were accurate.
C and size weight and power are crucial to success.
Our fog products are also gaining traction in the market, we expect to deliver the remainder of preproduction units and first phase.
For a new airborne pod, which will start low level production in the next year. The total value of this program is now estimated at $70 million over the next seven years, we expect to be awarded one more nonrecurring engineering contract to complete some modest engineering changes for production before everything.
Is completely locked down.
The newly Ruggedized E 300, IMU is being vetted by more than 10 prime contractors and laboratories in the U S. Approximately doubling the size of its application space.
The M 300 has demonstrated <unk> improvement and biased stability and noise performance at the same cost points is the main competing Northrop Grumman <unk> 200.
We're also working to push the 300 to short term navigation grade specs with approximately twice the price performance of the Honeywell HG 57.
At the high end of our product line.
In 2000 Ians has met all of its required specifications on a confidential Navy program. The <unk> thousand achieved better than 0.01 degree per hour bias stability and will be our main platform to address long term navigation grade IMU ians applications.
That require superior cost size weight and power.
We're very encouraged that we've been able to finally get in front of our defense customers for face to face meetings over the last month and hear firsthand how things are going we see these meetings as important milestones for an industry that is just starting to reopen over.
Over the next quarters, we expect to make more multiple important announcements about the growth of our navigation business.
Moving on to overall guidance for the first quarter, we're expecting to see increased revenue.
From aerospace and defense product lines, and a little bit less in cable TV largely because of the holidays. Our biggest notes of caution remain tied to surprises in the supply chain, taking all this into consideration. We currently expect revenue to be in the range of <unk> $41 million to $43 million.
With that I will turn the call back over to Tom.
Thank you Jeff.
As you may have seen in our news release yesterday afternoon, we delivered very strong results for the fiscal fourth quarter consolidated revenue was $44 million, which was at the high end of our guidance range.
Revenue for the quarter increased $1 3 million or 3% when compared to the $42 7 million in the fiscal third quarter.
Broadband segment revenue was $32 2 million, an increase of $1 9 million or 6% when compared to the $33 million last quarter.
Broadband performance was driven by continued strong customer demand customer demand for our cable TV products.
Aerospace and defense segment revenue was $11 7 million this quarter compared to $12 3 million in the prior quarter. The sequential A&D revenue change was attributable to our <unk> product line, primarily due to a mix shift to a product with lower production yields and defense optoelectronics primarily due.
To an ongoing supply chain transition.
Partially offsetting these changes was higher fog revenue driven by an increase in orders for our single axis gyro.
For the full 2021 fiscal year consolidated revenue was $158 4 million with approximately two thirds broadband and one third A&D.
The $158 4 million for the year was an increase of $48 3 million or 44% when compared to the $110 1 million during the prior fiscal year.
Let me now turn to the rest of the operating results the focus of which will be on a non-GAAP basis.
<unk> gross margin was 39% for both <unk> and the year on.
On a sequential quarter basis, 39% compares to 41% in the third quarter largely due to the A&D segments gross margin in <unk>, where a combination of lower revenue a year end physical inventory adjustment and lower than normal production yields at our Concord operation impacted margin.
On the broadband side, the increased revenue and higher over absorption of fixed costs drove a sequential quarter increase to its gross margin.
For the full year to 39% consolidated gross margin was a six percentage point increase when compared to the 33% in fiscal 2020, driven largely by broadband 10 percentage point year over year expansion.
Operating expenses were $10 5 million in fiscal <unk> compared to $9 6 million in the prior quarter the.
The sequential movement was due to increased R&D expense as a result of lower customer funded R&D and increased project material usage.
SG&A was higher in <unk> also due primarily to a couple of lumpy items, namely business taxes and professional services fees.
For the year Opex decreased to $38 2 million in fiscal 2021 compared to $39 7 million in the year before.
Driven by lower R&D expenses for the A&D business.
In addition, opex as a percent of revenue was well below the 30% Mark for the year, finishing at 24% of revenue.
Moving on to the bottom line operating profit was very strong again in the September quarter at $6 8 million for an operating margin of 16%.
For the year operating profit was $24 1 million for a margin of 15%.
Adjusted EBITDA was $7 8 million in <unk>, and $28 1 million for the year and 18% of revenue for both periods.
Net income and EPS for the quarter was $6 8 million and <unk> 17 per diluted share and for the year was $24 million and 67.
Per diluted share.
Shifting to the GAAP results for a moment net income and EPS for the quarter was $5 1 million and <unk> 13 per diluted share and for the year was $25 6 million and <unk> 72 per diluted share.
The full year results included two nonrecurring gains totaling seven 5 million that were reported in the third fiscal quarter excluding.
Excluding those one time items full year GAAP net income and EPS would have been $18 2 million and 51 per diluted share still a substantial turnaround from the prior year.
Turning to the balance sheet, we had cash of $71 7 million at September 30.
Compared to $68 3 million at June 30.
The quarterly cash increase of $3 4 million consisted of $5 4 million of operating cash flow less $2 4 million used for Capex plus 300000 from financing activities.
Not only was this the sixth consecutive quarter of positive cash from operations on a year over year basis and of course cash generated from operations grew by $15 2 million.
So with that we are now opening up the call for your questions.
Thank you Bruce.
Awesome.
Please proceed.
Pressing star one on the telephone keypad.
If you use your speaker phone. Please make sure your mute function is turned off again. It is star one for a question we will now pause for just one moment.
And our first question comes from Paul Silverstein from Cowen. Please go ahead.
Yeah.
Can you just go over the margin outlook, both what drove the shortfall and more importantly, what your expectations are.
Over the course of the next 12 months and beyond.
Yes, let me try and tackle that to begin with so if we break things.
Into two chunks and we look at broadband.
I think things are going to stay pretty similar to where we are right now remember the move to MFS.
Essentially allows us to buy at.
Our fully landed cost that's been negotiated and so I don't I don't see margins moving around very much from where they are right now let's call. It the low forties.
For the aerospace and defense business.
We need to.
Essentially what's happening is as the A&D business, especially navigation cranks up a bit.
See stronger absorption in the.
In A&D.
And as that happens margins are going to rise quite a bit from where they are.
There's a lot of moving parts in that but overall I would say.
Going to see something stable on a broadband and some improvement in A&D over the next year.
Can I push you a little bit on that Jeff in terms, so youre expecting meaningful improvement over the course of the next four quarters any range you can put on that by meaningful is that a couple of points is more than anything.
Any granularity you can offer.
I would say, it's more than a couple of points.
But it's a little bit dependent on mix Paul.
Could we see I don't know Tom five to 10, yes, you could.
Five to 10 seems reasonable over in A&D and will always be a.
Mixed factor between the two business segments as well Paul.
Alright, and obviously.
Trust It goes without saying that's you all take into account the current supply chain environment. So it's not that five to 10 improvement is not dependent upon improvement in supply chain. That's what you were expecting to do independent of any improvement.
Yes, that's true.
Realistically, what we've got in supply chain issues one of them. The biggest one is that a transition issue that we expect to exit or.
Fleet the work on that within the current quarter.
We're going to buy a little bit more material.
To solve some other problems where again, we'll get these surprise push outs I don't think its going to be very much.
One 1 billion or two.
And beyond that we feel like we're in good shape on semiconductors.
The Crazy place, where you can get hit us like connectors of all things.
So we're taking steps to deal with that but I wouldn't see it as a major impediment going forward.
Alright, Jeff the funds just shown you referenced I trust, you're referencing specifically gross margin, which begs. The question is there also some operating leverage to be had above and beyond that five to 10 percentage point improvement in AMD.
The contribution that makes it overall is there operating leverage to be had as revenue improves.
Absolutely.
And can you quantify that.
Well moving parts again.
Let me describe it this way Paul and then I'll see if Tom wants to add anything.
The.
We're very volume sensitive for production volumes in both our ambra.
And.
Comfort and so as volume picks up absorption is very efficiently dealt with and so that's what moves the needle on the P&L as far as a range for that again, it's a little bit mixed dependent.
And there are.
A series of issues as far as.
For example, what becomes the rate limiting step in what facility.
For product that generates ex margin.
The answer to that is it.
<unk> Chris.
But I think.
Tom do you have any color on the operating leverage piece.
We've got the operating leverage.
Overall in the business is pretty.
Pretty evidenced by the results in the past year.
That's going to continue because on the Opex side.
We don't really need to move the opex up with.
Revenue increases.
Forward in the near term so opex as COO.
Call, it $10 million plus or minus.
On a quarterly basis, which is where we've been pretty much.
And.
The growth in A&D.
It will help the gross margin on A&D, it's Paul it's going to follow the.
Growth in that business wondering Tom anything to note.
One important thing is that the the growth in.
Opex was not a head count issue at all.
Alright.
Tom's favorite youre expecting to hold opex at around $10 million per quarter throughout fiscal 'twenty two sorry.
Correct.
Yes.
Alright.
It will take.
Yes.
Hi, Paul.
Yes.
Will there be.
Items that are lumpy, a little bit from quarter to quarter, yes, but the $10 million plus or minus is a good a good way to think about it.
And Tom and the meaningful revenue upside you don't expect to flex opex meaningfully up from that $10 million level.
Not in the near term.
Perfect all right I'll pass it on thanks, guys.
Okay.
Sure.
Next question comes from Richard Shannon from Craig Hallum. Please go ahead.
Hi, guys. Thanks for taking my questions as well.
I guess I need to ask on the A&D gross margins here is I'm not sure what Youre answered to Pauls question here someone ask it in my own way here as we look at your gross margins here for the.
September quarter quarter on quarter went down and went down from 33% in June 2018% in September.
You commented about increasing 5% to 10 points.
From that point and over what time will you expect that to happen and I guess my question is when does it get back up to that 33% number from June.
Okay.
Okay, now I understand what you're saying.
We saw the.
So first of all the 33% down 18% with really.
Let's just call it a transitory effect I think we'll be back into those kinds of numbers.
Certainly if its not this quarter it'll be next.
And then the improvement will happen from there.
Okay.
I know that you've been asked this on past calls and even offline for me, but what is your view on A&D margins over time, especially as you've talked about some some growth here from a number of programs. I mean is this a business with a certain level of scale that can get to 40% or even higher.
Oh absolutely.
If I.
I mean, there's no question about that Richard you volume sensitive and a high fixed cost manufacturing facility or facilities. So all it takes is a bit of volume and.
The flow through in the P&L is really quite good so.
If you increased A&D by 50% and probably get back up by.
You get up over over 40%. So it's not a bill of material issue, it's not a pricing issue. It's strictly an absorption question.
Okay, I think I heard you in your prepared comments talked about some.
Automated assembly equipment.
Some some yield issues or yields on products.
Due to a mix here. So I mean does it does the mix has to change here meaningfully in the next couple of quarters or is this.
Just purely an absorption.
It's really an absorption thing.
I'll give you a little more color on.
This move to a notoriously difficult product to build it requires a lot of screening for vibration performance. It goes into a torpedo.
And occasionally we have these events which occur that.
We just.
The screening takes out more of them that we would expect and that was pretty much what happened.
There was a bit of a cycle count thing that Tom indicated again transitory.
But.
Normally we can make that product with better margins than 33%.
Just when you when you shift that much of production into it.
You end up with more variability than you want.
Got it okay that makes sense, that's very helpful. Maybe a couple of other questions here on cable television. Thank you.
Comments were that the backlog has extended continue to extend out here and I know you. Obviously have said time and time again you remain cautious on this but can you can you mentioned how far the backlog is going out here and.
Any other permutations or or detail on where that's where that's improving.
Well.
The thing is that it's a little hard to say right and let me explain why.
Because what we don't know for example is exactly what customers are going to want to take delivery of say in the March quarter, We certainly know what theyre going to take delivery up now when we get into March every year. This happens.
Part of the U S is not friendly to installs and so.
We frequently get request to push things out of March and into June and so it's a little hard to say well geez, you're at one quarter visibility or at two quarters of visibility, but I will say is were substantially better than normal.
For this time of year, where you don't have the benefit of real guidance on Capex for the year from Comcast and charter Youre heading into the winter months.
So.
We're substantially better than we normally are but as far as giving you a crisp answer about the backlog.
The dollars.
You don't have continued to flow in as far as new orders.
But I can't give you a hard answer on that.
Okay.
Alright Thats helpful.
My last question I'll jump out of line here.
The projects for.
Chips within the broadband is it sounds like you picked up a lot of pace, you're both a number of engagements and maybe even visibility into this I think you talked about tens of millions of dollars out of few years can you give us a little bit more color on what's driving this applications et.
Et cetera, and kind of help us give a feel for the changes in the last quarter.
Yes, so we've added.
One customer we had one project with they've added a second.
And maybe even add a third these are customers that do not have the ability to fabricate their own indium phosphide.
Especially some of these very specialized devices.
But are looking to build.
<unk> products for the data center and telecom applications.
Don't want us talking about exactly what those are because of competitive reasons.
Because it signals ahead of time, what Theyre doing.
And can create their own problems for them.
So it's mainstream datacenter in telco.
It is.
These are high margin strongly differentiated products as opposed to doing something like <unk> or something like that although we certainly supply some parts ended out into those applications.
And that's really about all I'm allowed to say Richard I'd Love to tell you more but I'm just not allowed to.
Because of NDA.
Certainly understand that as well it sounds like things are going well in that area. When we look forward to hear more about that that is all the questions from me guys. Thank you.
Once again to ask a question press star one.
Alright, I would like to thank all of you for your interest in EMCORE and we'd like to close by recognizing our team for a great quarter and an outstanding year of financial results. Please stay safe everyone and goodbye.
This concludes today's call. Thank you for your participation you may now disconnect.
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