Q2 2022 EMCORE Corp Earnings Call
Good day, ladies and gentlemen, and welcome to M Corps second quarter 2022 earnings call. Today's conference is being recorded at this time I'd like turn the conference or at a time and a cello. Please go ahead.
Thank you good morning, good afternoon, everyone and welcome to our conference call to discuss <unk> fiscal 2022 second quarter results.
The news release, we issued this afternoon is posted on our website <unk> Dot com on this call, Jeff <unk>, 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, a of the Securities Act 1933, and section 21 E of the Exchange Act of 1934. These forward looking statements are largely based on our current expectations and projections about future events and trends.
The business such forward looking statements include in particular projections about future results statements about plans strategies business prospects and changes and 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 materially different from those expressed or implied by any forward looking statements.
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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 Dot Gov, including the sections entitled risk factors in the company's annual report on Form 10-K, the <unk>.
<unk> assumes no obligation 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, but 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 Tom and good afternoon, everyone EMCORE.
<unk> second fiscal quarter revenue was $32 7 million roughly of the consensus midpoint for revenue, but down about 23% over Q1, non-GAAP operating loss was $738000 and adjusted EBITDA was positive 270000 semi.
Semiconductor and supply chain challenges affecting our gross margin significantly, bringing it down to 30% on a brighter note cash on the balance sheet continued to grow increasing by almost $5 million.
Semiconductor availability was a difficult problem in the quarter and costs were up across the board Microcontrollers, FPGA is where particularly problematic experiencing substantial price increases.
Other predict unpredictable logistics challenges that we saw in Q1 remained with us in Q2, causing some surprise push outs of material that we expected.
Those problems are likely to persist going forward and we don't see a catalyst to drive predictability into the supply chain in the short term some components have lead times stretched to over 90 weeks.
The shutdown of all of our remaining manufacturing operations in China was completed on schedule within Q2 subs.
Subsequently all of the remaining cable TV manufacturing equipment with shift to our EMS partner. This is one of the principal reasons for the strong improvement in working capital, we reduced CATV inventory and going forward, we will get build on the same day that we bill our customers we're expecting demand.
Factoring facility to be returned to the landlord within Q3, leaving a very small group in China to support EMS and certain engineering tasks.
Beyond the manufacturing transition, which is now complete cable TV contributed to expected levels of performance within the broadband unit in Q2 beyond the cable television operation. The chips business received an additional development contract with its own NRG funded.
As we stated last quarter preproduction volumes of the shipments of these first products are expected to begin this quarter with low volumes of product from a second customer planned for the September quarter.
As it stands today these new products should have a significant impact on fab absorption within the first half of calendar year 'twenty three beyond that point. They are expected to be margin accretive to the broadband business ultimately contributing tens of millions in revenue by 2025.
It is important to note that fab utilization from these new products is expected to drive the majority of wafer fab production pushing cable TV requirements into the minority of wafer starts stabilizing costs and ultimately improving gross margins in the broadband business.
Aerospace and defense experienced a customer specific air pocket in orders that drove revenue down by approximately 10% since quarter end most of those issues related to new compliance procedures at the customer have been resolved and only one remaining order is expected this week.
Q Mems revenue rebounded by 24% with improving yields partially offsetting the impact of delayed orders for fog and defense Opto electronics on a related note. We recently fielded questions from investors about how the war in Ukraine effects EMCORE as A&D business.
Short answer is it really hasnt weapons, such as the javelin used infrared seekers, not inertial navigation to find their targets.
Our business development in aerospace and defense have generated significant momentum we gained important new contract in Q Mems and added the L. III, Paris space and navigation business to EMCORE in a transaction, which closed last Friday April 29.
We announced two important contracts for Q Mems product today have received a third contract. This morning, but first was a $21 million agreement to expand our relationship with Giro data a world leader in directional drilling systems for oil and gas applications. This agreement can significantly increased volume of business.
That we do with Giro data.
We also announced our first contract for precision guided munitions for PGM applications for an important international customer Pgm's are the largest market segments or inertial measurement systems and are expected to be an area of significant growth for EMCORE in FY 'twenty. Three we can continue we continue to.
And validate our STI 70 with defense contractors worldwide have been advised that their annual volumes target ranges from 1000 to 4000 units per year with a total value of about $30 million per year.
Finally, we received a $5 million contract. This morning to provide critical components to upgrade the flight control systems of one of our frontline fighter aircrafts collectively these contracts demonstrate the growing momentum for our Q Mems navigation products and future growth beginning this year.
The acquisition of L. Three harrises space and navigation business also brought significant opportunities to EMCORE. We've received letter sub contracts authorizing EMCORE to proceed on both the board and team and programs Board means sort of stands for booster rate gyro, which will be.
Used in the United launch Alliance first stage control system through our space and navigation business EMCORE will produce Borg iron use for the United launch Alliance Atlas and sent to our programs. This is the first of expected several expected orders per board.
Teemu, where triaxial IMU will be an integral part of the guidance system for the <unk> and Atlas launch vehicles.
The flight control system employees, three true navigation grade iron used to guide each spacecraft.
Over the next year and a half EMCORE will complete the design and qualification of team, who I am use and start delivering them for launch in early 2024.
Now I will move on to guidance for the third fiscal quarter. Although we are feeling the same headwinds in semi with with semiconductor and supply chain problems as everyone else in the technology business, we are expecting a solid rebound in A&D revenue in Q3.
On the cable TV side excess transmitter will remain a major challenge, forcing us to reduce our guidance range for June quarter.
$225 million to $27 million, which includes $3 5 million in revenue from our new acquisition.
Cyclicality has been a frustrating art cable TV for the 20 years that I've been involved with it.
With that said, we began work nearly seven years ago to meet the challenge of this cyclicality and expected changes in the market, we have divested the assets and inventory in cable TV and return those assets to cash we've developed the chip business that is now bearing fruit and have taken down our head count substantially in cable TV.
The company has a strong balance balance sheet and a growing order book for our inertial navigation products in summary, the future of EMCORE is bright despite the near term frustration of the current cable TV down cycle with that I will turn the call back over to Tom.
Thank you Jeff.
Consolidated revenue for fiscal <unk> was $32 7 million within our previously stated guidance range for the quarter.
Broadband revenue was $23 6 million and $8 $7 million decrease when compared to fiscal <unk>.
Seven $5 million of the sequential quarter revenue change was attributable to our cable TV products, which as indicated during our last call was impacted by transmitter inventory tied up in the channel at one MSL.
The remainder of the decline was due to lower sales of our chip level sensing products, which are which are largely tied to a single customer for the China rail project and therefore, it can be lumpy from quarter to quarter.
Aerospace and defense segment revenue was $9 million and $900000 decrease when compared to the prior quarter.
While revenue performance for our <unk> product line improved this quarter, our foreign revenue was down due to a delay of a customer order for our single axis gyro and.
In addition, defense Opto electronics revenue was sequentially lower primarily due to program delays and supply chain disruptions.
Let me now turn to the rest of the operating results the focus of which will be on a non-GAAP basis.
Consolidated gross margin was 30% in fiscal <unk> compared to 38% the quarter before.
<unk> gross margin at 35% decreased on a sequential quarter basis due to the lower revenue higher material costs and under absorption of fixed overhead costs and the Alhambra wafer fab as well as at our China facility for part of the quarter.
On the A&D side, Q Mems gross margins improved sequentially due primarily to higher volume and improving yields. However, this was more than offset by the decreased margins for fog and defense optoelectronics, both largely due to the lower revenue.
Operating expenses were $10 4 million in fiscal <unk> slightly better than the $10 6 million in the prior quarter.
Quarterly Opex has remained consistent over the past four quarters and has averaged $10 $3 million over that time period.
Moving to the bottom line the changes in our revenue levels and gross margin in fiscal <unk> resulted in an operating loss of 738000 adjusted.
Adjusted EBITDA was positive 270000, net loss was 750000 or <unk> <unk> per share.
Shifting for a moment to the GAAP results fiscal <unk> fiscal <unk> net loss was $2 2 million or <unk> <unk> per share. This included several items associated with the transition of our cable TV operations to our third party manufacturer fast train, notably 432000 of shutdown costs and a 780.
$8000 gain on the sale of transmitter equipment to fast shrink.
The GAAP results also included 456000 of expenses associated with the space and navigation acquisition.
Turning to the balance sheet, we had cash of $80 9 million at March 31, compared to $76 million at December 31.
A $4 $9 million increase consisted of $5 3 million of cash of operating cash flow and $1 1 million in proceeds from the sale of equipment less.
<unk> $1 4 million used for Capex and 100000 related to financing activities.
On a trailing 12 month basis, EMCORE has generated $22 million in cash from operations.
Before we get to Q&A I'd like to share with everyone that both Jeff and I plan to be available for virtual meetings on June <unk> at the Craig Hallum Institutional Investor Conference and for in person meetings in New York City on June 2nd at the Cowen TMT Conference.
We plan on providing further details prior to each event.
So with that we will now open up the call for your questions.
Thank you, ladies and gentlemen, if you'd like to ask a question you may do so by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure. Your mute function is turned off so the signal can be read by our equipment.
Darwin for questions, we'll pause a moment to assemble the phone queue.
Darwin for questions or comments, please star one.
We will take our first question from Richard Shannon with Craig Hallum. Please go ahead.
Hi, Jeff and Tom Thanks for taking my questions here.
Let's see here.
It's a good one one question kind of looking backwards here on gross margins are obviously disappointing to you on that.
The street as well here.
Maybe you can help us understand some of the dynamics here in supply chain.
Driving this.
Jeff You said in your prepared remarks, you don't have good visibility on when they return and maybe you can give us a sense of how sustainable those problems are and if theres anything thats under your control that you can do it do to help them.
Sure.
So theres really.
Two.
A little bit different sets of issues cable TV. It was strictly a pricing issue, we were able to get a hold of everything that we needed to complete.
The transmitter builds.
The problem was that.
You take.
Orders for four transmitters.
A year ago, roughly and so you don't get the opportunity to renegotiate prices with the customer.
Things change in the supply chain it and normally you see the cost of the data.
In particular the microcontroller.
Have grown substantially in some case several 100%.
And so it was strictly a price issue.
And we were able to get what we needed in the market. So that had the majority of the impact on cable TV margins was simply purchase material.
And so as the mix in the business changes away from transmitters, meaning cable TV, we will expect to see that problem abate quite a bit because it's going to be module centric laser module centric for a number of quarters right.
And.
As that happens Youre, just not as sensitive to the.
Semiconductor prices because modules don't have much of that in there at all.
Over on the A&D side, it's a little bit different and this is where cause supply chain or just lack of availability causes issues and the principal problem is.
The techniques you employ over on the commercial side of the business to break.
What's called availability problems going to brokers.
Finding customers that may have excess inventory, they don't work and it's because of the slowdowns and requirements. We have for these government contracts for counterfeit protection on parts. So.
It's impractical to pay $50 $70000 to test a lot of ships.
For a relatively low volume application.
I can give you. One particular example is just astonishing to me that for a part needed for the stars program that cost us $14, just 18 months ago.
<unk>.
Registered and authorized distributors, we are charging $2 a piece for.
And.
That's just the market that we live in.
Where I see the semiconductor availability.
Trajectory.
Is some improvement towards the latter half of 'twenty three.
But I think it will be with us to 'twenty four it is simply because <unk>.
Not only are.
Call it availability of new chip plants.
An issue, but demand continues to grow for a lot of the semiconductors and so.
See semiconductor costs as an issue I will tell you that we are now.
Renegotiating prices.
So when you talk about these long orders that we're taking a long time ago, especially in cable TV.
The customers reaction would be Oh, you want to renegotiate price why don't we just cancel.
And so it's just a better business decision to sell at a reduced margin.
<unk>.
Take the business off the table rather than give it to a competitor potentially or see it go away altogether.
The rest of the supply chain problems are really a hodgepodge of things.
There is continued transportation problems, we nearly had 7000 transmitters.
That didn't get on a boat to out of Thailand, simply because there wasn't room.
And.
It's.
I wish I could tell you that as any one thing in the supply chain, but it's a combination of everything.
And the problem is that having 99% of the parts when you try to put something together is not good enough.
Alright, and so you tend to be limited by things that have never been problems in the past people to assure you that they are going to ship on time and then they don't add.
Its not like Theres, a lot of recourse, especially when.
You've got only one or two qualified suppliers for something you just take it on the chin.
You go you look at Apple you look at EBIT, Raytheon was talking about lack of availability of components affecting their missile business.
And.
Everybody is struggling with this.
Okay.
No doubt.
But I appreciate all that detail Jeff. Thank you for that next topic I want to touch on here is in cable.
Kind of a two part question here you talked about an inventory burn going on here and you talked about it being it largely at one MSL is it still just one MSL.
Or is it bleeding into the second one at all do you see any visibility.
On one this inventory will be gone is the other MSR msos still ordering.
And how do we think about the kind of the levels youre expecting for cable on the June quarter as I try to fit the guidance together here. It seems like we're going to be down at levels that we might've seen.
Charting in.
Or 2019, and before and after two years ago a year.
Hey, Richard I'll tell you exactly what it's going to be it's going to look like June quarter in 2019.
69.
Yes somewhere right in Panama.
Got it okay.
Okay.
So just sort of the dynamic.
Go ahead.
Just just repeating my question about the dynamic share with inventory.
Whether it is more of a problem with more than one MSL here.
Well I think.
So there's really nothing that I would change in terms of my comments.
I will say that the inventory situation that everybody has is causing a lot more fluidity than you'd expect so for example, there have been a lot of comments about the growth in remote phy, which we always saw as inevitable.
It's just that it happens.
Seven years later than everybody else was saying that we were able to make a lot of money in the process.
<unk> that some of the same semiconductor shortage issues that.
You are planing everything else are particularly difficult for products over in that market.
So does that mean then that.
Some manufacturer OAS Msos will elect to do a bit more over on the hybrid fiber coax side.
Yes as possible. So there is there's a lot of things going on underneath the water line there.
That.
Candidly are conflicting pieces of information, but there's really nothing that I would add and say, okay, clearly, here's here's where things are going on right. So we've got a backlog of modules and.
As we look at the replenishment cycles for that probably by the next call we're going to update everyone. If anything changes.
Okay Fair enough. That's helpful. Maybe two last quick questions I'll jump out of line here I had a couple of contract announcements.
Plus a couple of the ones I think you mentioned on the prepared remarks here one of them looks kind of interesting Sci $1 70 in the in the precision guided musician editions excuse me.
It sounds like maybe a substantial or important piece of this opportunity to run revenues up to $30 million per year, maybe if you can give.
<unk> context within that and then any dynamics here about timing.
And customer and anything else on that.
Yes so.
The STI 70 has been.
Thoroughly tested by government at leading Oems.
Over the past year.
We haven't had a single failure in testing either flight testing with.
Rotary aircraft helicopters and.
What we've got now is the beginning of traction for low volume production orders and these guys are pretty <unk>.
Careful.
We expect the first.
Order to go out largely in the June quarter, and then within a couple of months.
We're expecting to see some significantly larger orders.
It is a very important part of this.
At peak.
The JDM program Honeywell is selling at half a billion dollars worth of I have used the year to Boeing.
And now what you've got is an international market that is adding their own smart bond capability.
Meaning inertial NAV based products into there.
Our own weapons programs and those are the ones that were.
Getting designed into first so yes, it's important.
The first PGM program is a big deal.
And there is a lot more volume to be expected and.
It's going to move the needle.
Okay, I will look forward to hearing more about that and I'll ask some more questions offline on that one my last question for Thomas is.
Just wanted to get a sense of how we're expecting the financials to look here, probably more importantly on a pro forma basis with any well. Three addition here, particularly on gross margins and Opex thing if you can give us any.
Thoughts on how to model for us.
Yes, Richard its going to be a little tricky because.
This particular business.
Was.
Part of the greater L. Three Harris.
<unk>.
The way they did their accounting and where a lot of the services that were performed financially and administratively we're really out.
Outside of the Budd Lake Operation. So, we're inheriting a model and a method that mirrors contract kind of a government contract accounting, where just about everything that they spend on is included in the.
The project cost, which would translate to cost of goods sold.
But the best way to think about it is.
The recent run rate is producing about a 10% <unk>.
On <unk>.
$5 million to $6 million in quarterly revenue.
So hence our guidance, which includes two months of the full three months of the full June quarter at around three and a half. So if you think about it that way.
Then it becomes a question of you.
What's opex and what's margin and right now the majority of that is in margins. So it produces a much lower gross margin rate almost closer to its operating margin.
But once we get through the.
The accounting and how we're going to do with going forward that could change so call it around.
Maybe half a million dollars more in opex and somewhere in the 15% to 20% gross margin, but bear in mind, it's still producing.
Profit at those revenue levels.
Okay and just a quick follow up does this does this include kind of the fixed cost of the <unk>.
Overbearing lease that you hope to get out of either ahead of time or once it sometimes I think next year.
Yes, it does yeah, okay. Okay.
Okay. Okay.
With.
We're just just a quick add on remember most things over in that side of the world. We're all done cost plus.
Yes.
And so just because you had an outrageous lease.
Didn't mean, you couldnt get paid for it.
Yes, okay.
Fair enough I will jump out of line guys. Thank you.
Thank you thanks.
As a reminder, star one for questions or comments Darwin. Please we'll pause a moment to assemble the queue.
And we will take a follow up with Richard Shannon with Craig Hallum. Please go ahead.
Alright, well I guess I didn't have to get out of line here.
Jeff just maybe just one.
One question here.
Indium phosphide chip.
Chip opportunity I think is a very interesting one and it sounds like you're making some good progress if I caught your prepared comments you one another I don't know if I'd call. It a contract or a development agreement or something but maybe you can help us understand that.
Its going on there when you see the MRE what.
Patients in and how is how is the size of the opportunity relative to some reserves you've already signed.
Yes so.
The application for all of this stuff is going to be data center based.
And I can't tell you exactly what type of chip. It is because we've got some competition sensitive information in there.
I'll tell you that.
Significant.
There are there are let's call. It a group of these customers that are asking for similar but different enough things that the design has to change a little bit.
And there is a growing interest in.
In Lidar as well.
But that wasn't the agreement that was recently signed.
So.
These are not commodity chips.
You talk about things like <unk> or even <unk> right Youre talking about devices that are anywhere between I don't know a few tens of cents $30 35 up to maybe a dollar.
These are devices that start at $20 and go up from there.
And you would call if I, if I could tell you who the customers were you'd call them tier ones.
So we're really excited about it the thing is.
We had another.
Question from an investor.
Sort of like well why don't you just go fill the fab and this is not like Mcdonald's as reintroducing the MC rib and.
You put it on the menu and people start walking through the door. There is a lot of.
Work to do the development and then you've got qualification, which ranges anywhere between 5012 thousand hours, depending on the customer requirements.
And so obviously to get to the point, where we're shipping small preproduction volumes, we've been through that now we've actually been through it a couple of times.
So there's a real serious milestones that are behind what we're doing.
The other point that I made earlier in the.
In my prepared comments.
I started talking about the impact on fab absorption and the way to think about this.
Is that the fab cost us roughly $2 million a quarter okay.
Cable TV takes a piece.
That does other parts of the business do.
And so what Youre left with.
Is $1 million plus or minus the cable TV needs to to.
By essentially from the fab.
And the implication of that let's just to keep the math simple call it $1 million at 50% margin.
It implies that once you're shipping $2 million a quarter Im sorry, yeah.
$2 million a quarter worth of devices, you are effectively paying for the fab with or without cable TV.
And we sort of expect to be at that point.
Certainly within a year from now.
So what youre going to see is a declining amount of fab under absorption and then once we get to the point, where we're shipping $2 million a quarter worth of devices, which will take us too long.
Right then it starts to turn margin accretive.
That makes sense.
Yes, it does make sense I think even I can do that math. So thanks, thanks for that Jeff.
I'd make one other interesting comps.
You didn't make one interesting comment.
About just open up the fab and expect business to come in the door.
You said these are serious milestones.
Really interesting there is that.
That said, we've got some customers coming in were very similar applications.
Yes, and then when you talked about here is data center.
I guess my first question is what other what other options do these guys have to go with and why are they coming to EMCORE.
Yes.
Without without revealing too much.
What I what I can tell you is we are one of a very few.
Liam phosphide Fabs in the world capable of building a visa advanced devices that is also not selling a competing product.
So for example.
If someone wanted to go by say a.
800 G.
The group of 800 lasers for <unk> Transceivers right.
Youre not going to have in this this is not what were making either way.
If youre selling those transceivers that you own the fab are you going to sell them the raw die.
Of course not.
Alright, and so we don't have that strategic conflict, we're not producing finished components for the data center market and because of that.
Customers are coming to us.
Right, maybe they want to roll their own components, maybe they've got other ideas.
So that's about as far as I can go.
Okay. That's.
That's fair enough that's good perspective.
I think that's enough for me guys. Thank you much I will jump out of line again.
No. Thank you Richard Thanks, Richard.
Yes.
We will take our next question from Jared Shaw.
Johan with Cowen <unk> Company. Please go ahead.
Hi, Jeff and Tom This is Jared on for Paul Silverstein.
Was curious if you guys could give us an update on the M&A environment surrounding smaller A&D companies do you guys see any opportunities for another small tuck tuck in deal.
Yes, we do.
Period end of story.
So I'm not trying to be Kurt it's just that.
And I believe we mentioned this before possibly for you started in Paul shop, Jared is that.
The <unk> III Harriss thing.
Which we view as we've got a terrific bargains.
Would not be the last deal that we did we just got to find the right one.
There are some candidates.
Okay, and I'm guessing you guys can provide any color as to timeline or anything.
When you think about soar.
I wish I could.
Sometimes these things go quicker than you expect other times they take longer.
So that kind of speculation I don't think is.
There is going to help us understand.
Thank you Barry.
Yes.
Well that's it for me I appreciate the answer.
Youre welcome Jarrett.
Darwin for questions, we'll pause a moment.
At this time I would like to turn it over.
Star one for questions. Please starwood.
Thank you I'd like to thank all of you who joined US on the call for your interest in EMCORE.
Additionally, I want to welcome the former LPG aerospace and navigation team to the company and I'm confident that we're going to have a meaningful impact going forward.
<unk>.
Please stay safe, everyone and goodbye for now.
Ladies and gentlemen. This concludes today's conference. We appreciate your participation you may now disconnect.
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