Q3 2022 EMCORE Corp Earnings Call
Sure.
Please standby.
Good day and welcome to the EMCORE third quarter 2022 earnings call. Today's conference is being recorded at this time I'd like to turn the conference over to Mr. Tom Minichiello, Chief Financial Officer. Please go ahead Sir.
Thank you and good afternoon, everyone and welcome to our conference call to discuss <unk> fiscal 2022 third quarter results as well as the acquisition of the inertial navigation business from PVH industries that we announced today.
The news release, we issued this afternoon covering both our fiscal <unk> results and the acquisition is posted on our website EMCORE 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, a of the Securities Act of 1933 and section 21 E of the Exchange Act with 1934. These forward looking statements are largely based on our current expectations and projections about future events and trends.
Second the business such forward looking statements include in particular projections about future results, including those with the acquisition of Kb Ages of nursing navigation business statements about plans strategies business prospects and changes in trends in the business and the markets in which we operate.
As well as the anticipated benefits and cost of EMCORE is the acquisition of the inertial navigation business acquired from Kv H industries.
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.
Flight by any forward looking statements. We caution you not to rely on these statements and to also consider the risks and uncertainties associated with the statement with these statements and the business, which are included in the company's filings available on the SEC's website located at <unk> Dot Gov, including the sections entitled risk factors in the.
Companys 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 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 measure is included in our news release.
I'll now turn the call over to Jeff.
Thank you Tom and good afternoon, everyone I'm going to begin my comments with a review of our third quarter before discussing our acquisition of PVH as inertial navigation business and how it fits into our growing aerospace and defense focus.
And of course third quarter fiscal revenue was $23 7 million slightly below the bottom of our guidance range for revenue, but down about 27% over Q2.
Approximately 57% of our revenue came from aerospace and defense with 43% from broadband <unk>.
non-GAAP operating loss was $6 3 million.
And adjusted EBITDA was negative $5 1 billion Q.
Q3's production, particularly in Q Mems was affected by a COVID-19 outbreak as well as the semiconductor and supply chain problems that are well known to everyone.
These problems combined to affect our non-GAAP gross margin significantly, bringing it down to 18% operating.
Expenses held steady despite the increased head count from integrating the former L. Three Harris space and navigation team on.
On a brighter note cash on the balance sheet came in a bit higher than expected at approximately 70 $75 1 million.
Covid and supply chain and production issues aside the cable TV business became more turbulent with the exit of one of the two largest Oems in the cable business.
Semiconductor availability remained a significant problem in the quarter and costs were up across the board. This is particularly frustrating because you can't ship a product when you only have 99% of the parts again microcontrollers in F. P. G as we're particularly problematic.
Spirits <unk> substantial price increases.
Semiconductors aside quartz Mems production continues to be constrained by the availability of certain high performance Hermetic connectors, we expect those problems to ease slightly in the September quarter and continue to improve throughout the end of the calendar year while.
While availability of some semiconductors is expected to improve somewhat in the coming quarters, we don't see a catalyst to drive predictability into the supply chain in the short term.
Component lead times continued to stretch to levels not seen in many years triggering efforts to redesign these older parts out.
We received the last payment for cable TV production equipment that was sold to our EMS supplier fast strain in the quarter closing the door on M of course, Chinese manufacturing operations for cable television.
Earlier, I described cable TV as being becoming more turbulent.
The exit of one of the two largest Oems from the cable TV equipment business certainly bears that statement out is true. This announcement came in the form of a product obsolescence notice for all of their remote phy and hybrid fiber coax project products, leaving one major OEM.
The smaller players to serve the Msos.
While this permanent alteration of our customer base won't change the demand from the Msos a single dominant OEM creates a different set of cable TV market dynamics going forward.
Increasingly the direction that the cable TV market is taking is incongruity with our growth strategy.
From a tactical perspective during the quarter, our customers appeared to concentrate more effort on clearing their transmitter inventory problems at the expense of new orders.
For lasers.
And other components damping cable TV revenue we.
We expect the next few quarters in cable TV will be difficult to forecast because of last time buys optimization of inventory positions and competitive dynamics between the Oems.
Beyond cable TV the chips team made their first production shipments as expected from here, we will ramp up in the September quarter and beyond constrained only by test capacity because of equipment that has a year late.
We are still expecting these products to have significant impact on fab absorption.
Late in 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.
As I pointed out last quarter. It is important to note the fab utilization from these new products is expected to drive the majority of wafer fab starts pushing cable TV requirements into the minority stabilizing costs and ultimately improving gross margins in the broadband business.
We are currently working to close additional chip programs and are excited by the progress that the chip development and production teams are making.
Aerospace and defense was the majority of our business in the quarter driven by our new space and navigation team offsetting the drop in Q Mems production we are.
<unk> Q Mems revenue to bounce back in the current quarter and continue to grow throughout FY 'twenty three.
Although margins overall were low due to under absorption in Concord margins came in better than expected. It Budd Lake Wow hamburgers Borg products performed at expectation.
Defense Opto electronics bounce back nicely in the quarter with shipments up clearing backlog that was previously supply constraint.
During the quarter, we saw the first high Mars units shipped from the U S Army to the Ukraine with additional interest from foreign customers, who are anxious to build up their defenses.
United Launch Alliance had two successful launches.
Using EMCORE supported EMCORE supplied board guidance systems and the team made good progress on the T. A I M <unk> or <unk> development for this important end user.
In our press release, we announced that we acquired Kv ages inertial navigation business today for $55 million. This is being funded from cash on our balance sheet and a new credit facility that Tom will discuss later.
We previously told investors that we went out to raise cash in our secondary offering in February of 2021 in order to fund M&A and we've.
Now funded to acquisition out of those funds and approximately $20 million in debt minimizing dilution to our shareholders.
It is also important to note the carve outs take time and we've now done two of them space and navigation and kv H. These are opportunities that we started working on as early as 2017.
We've also told investors that we have three primary criteria for acquisition number one it's got to fit within our strategic umbrella number two it must be quickly accretive and three must have additional operating synergies space and navigation met all three criteria in the first quarter within EMCORE and we expect.
And our latest acquisition will perform as well.
We think that we've just acquired a great business and an excellent team. We expect the addition of kv ages inertial navigation products located in Tinley Park, Illinois to generate over $30 million in revenue on an annual basis and be EBITDA positive with cost synergies anticipated to play out in the <unk>.
Two years.
Value creation opportunities exist at every level of the P&L in both our existing operations and the Tinley Park operation.
<unk> chips and packaging technologies will ultimately go to Tiddly part and they will produce coils that will lower our costs.
On the demand side, we were impressed with the breadth of the customer base in both commercial and defense applications in particular, the U S. Army is an important customer and the armored multipurpose vehicle or a NPV is just about to go into production and should run for a very long time.
K V. H has opened up some important applications in industrial vehicles, and robotics, which should represent strong growth opportunities going forward.
Now I will move on to guidance for the fourth fiscal quarter, we will be adding approximately half a quarter's worth of revenue from Tinley Park.
We are expecting a rebound in Q mems shipments within the quarters. However, within broadband chips should continue to grow a bit but cable TV sales should weaken further due to the dynamics that I described earlier.
From this point forward aerospace and defense will be the dominant business at EMCORE.
For the fourth fiscal quarter, we are expecting revenue in the $24 million to $26 million range.
The company has reached a critical inflection point with the addition of kv H's inertial navigation products.
And coupled with our datacenter chip business EMCORE has an increasingly bright future with that I will turn the call back over to Tom.
Thank you Jeff.
Consolidated revenue for fiscal <unk> was $23 7 million with 57% coming from aerospace and defense and 43% from broadband.
<unk> segment revenue was $13 4 million, a $4 4 million increase when compared to the prior quarter.
The sequential quarter A&D revenue growth was largely attributable to the addition of space and navigation revenue of $4 3 million.
Which was acquired from L. Three Harris on April 29.
The rest of the A&D segment revenue was up slightly driven by increased sales of defense Opto electronics products and higher fog revenue. However, this was almost entirely offset by lower sales of Q Mems products, which was affected by multiple supply chain delays and shortages as well as the COVID-19.
Break at our Concord facility.
Broadband revenue was $10 3 million, a $13 $4 million decrease when compared to fiscal <unk>.
Sales of our cable TV products continued on a downward slide decreasing by $14 million, while non cable TV broadband revenue was up 600000.
Let me now turn to the rest of the operating results the focus of which will be on a non-GAAP basis Consol.
Consolidated gross margin was 18% in fiscal <unk> compared to 30% the quarter before.
The decrease was primarily attributable to under absorption of fixed overhead across both the A&D and broadband segments.
As it relates specifically to the A&D side, where gross margin was 13% compared to 15% in fiscal two Q the under absorption, which was largely due to lower Q Mems volume.
Was partly offset by improved production yields and a favorable contribution from space in NAV and defense Optoelectronics.
Operating expenses were $10 5 million in fiscal <unk> compared to $10 4 million in the quarter before due largely to an uptick in travel as well as increased insurance expense and G&A.
Moving to the bottom line the changes to our revenue levels and gross margin in fiscal <unk> resulted in an operating loss of $6 3 million. Adjusted EBITDA was negative $5 1 million net loss was $6 3 million or <unk> 17 per share.
Shifting to the GAAP results for a moment fiscal <unk> net loss was $7 6 million or <unk> 20 per share. This included costs of 700000 associated with the space in Nab acquisition, and a $1.3 million gain on the sale of cable TV equipment to our third party manufacturer fast train.
Note that this was the final shipment of equipment completing our transition of cable T. The operations from in house the fast trains.
Turning to the balance sheet, we had cash of $75 1 million at June 30th compared to $80 9 million at March 31st.
The $5 8 million decrease included $3 5 million used for operating cash 1.6, and Capex and $2 4 million at the closing of the space in that acquisition.
Partly offsetting these uses of cash during the quarter was $1 7 million in proceeds from the equipment sale.
In connection with our all cash $55 million acquisition of the inertial navigation business from kv H. The deal was paid for with $35 million from cash on hand, with the balance being financed with a new ABL credit facility provided by Wink spire capital, which at close consisted of.
A 6 million dollar senior.
Secured machinery and equipment term loan and $14 million drawn down from a revolving line of credit.
With that we are now opening up the call for your questions.
Thank you if you'd like to ask a question. Please signal by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure. Your mute function is turned off till Arsenal treat chart equipment.
Again press Star one to ask a question.
Pause for a moment to assemble the roster.
Yes.
We'll take our first question of day from Richard Shannon with Craig Hallum.
Hi, Jeff and Tom Thanks for taking my questions here pause here a few questions come to mind here, let's quickly Jeff touched on the cable TV comments, you mentioned here I'm, assuming this is a much bigger customer here that exited the business.
Is that accurate yep Acme right, there's really only two large.
I would describe as large Oems in the business.
And those are Commscope and Cisco.
Okay.
Hum.
Would you would you take a guess as to how you think the competitive dynamics here.
Settle out as we get past the turbulent times as you as you mentioned a couple of times here. I mean is this just the potential for share gain or share losses in any way you can kind of help us think about those in a minute.
State fashion.
Yeah, it's I'm.
The only other supplier that commscope buys from Sumitomo.
And the only other supplier that Cisco had bought from was a L y.
And CIS.
Cisco's primary business had been with charter communications and since they are 100% linear E M L.
And all the rest of their D. F E business, we owned 80% share it's actually a pretty small amount that was with a O Y at Cisco and roughly the same amount with sumitomo over at Commscope.
So it's a little bit of an unusual situation to start but it's important to.
I think give you that color on things.
So you know the thing that we had been watching you know with with Cisco was you know after they bought scientific Atlanta as cable business.
They ultimately got rid of the set top box.
Hum operation to Technicolor.
It was only a couple of years and then they gradually kept taking down the head count and about two to three years ago.
They eliminate most of their development engineers and at that point.
Think we started to wonder whether or not they were going to continue at all and in fact it was you know in our view was it was just a matter of time.
And so sure enough some period of time ago, a couple months ago. Those end of life notices popped up on the website.
And it was all of the remote phy products and all of the HFC products.
And so the question is what happens from here.
So Cisco is sitting on inventory as well as commscope, So certainly theres going to be efforts.
To move that our understanding is that there are serious conversations going on between the msos.
And Cisco about.
The abruptness with which things have happened.
And Theres usually.
Some sort of a plan that gets put together when those kinds of things happen. So I don't think it'll be the straight exit that you know the black letter of the content would lead you believe is going to happen.
How long is that take to sort itself out probably another quarter or two.
So in the next quarter or two we're going to expect to see you know a.
Combination of last time buys and or you know jockeying to move inventory between Commscope and Cisco's distributor and.
It's really a hard thing to handicap as far as.
You know how exactly that's going to work, but we've modeled in pretty low numbers in cable and you know we're just.
Got to they've got to deal with it.
So it sounds like a whole crazy.
Yeah, the Crazy thing is.
That there's no loss of share in any of this and I want to say Tom Correct Me you know in the.
December quarter, we did like $32 million in cable.
That's yes right.
Given the 32 million in broadband.
Just under 30 and cable yeah, just under 30 and cable and Youre going to see.
18, 90% of that.
With no share losses on our side and nothing we did to screw up as far as deliveries or quality or anything like that.
And you know it's a <unk>.
Covid took five years of demand put it into two.
And are the.
The same the backside of the forces that caused.
Yeah.
The cruise industry to lose I don't know 19, 95% of its business Collins Aerospace had a huge sort of equivalent percentages decrease between 19, and 20, and eventually things equalize and they pop back up.
Cable in particular, you know someone had said well you know cable business fell off a cliff I said you have a cable sort of like a cliff diving with a bungee cord. It tends to spring back. It's just only a question of how low it goes before it does and that's the nature of the Beast right and it's just an increasingly congruent with where we're.
To go with this business and that's a challenge that.
You know, we and management and our board have.
<unk> been working on for.
[noise] forever really but continue to.
Look at alternatives.
Okay. That's a lot of helpful detail them and it takes some of that in directly go into the guidance for the September quarter here. So.
24 to 26, I take roughly half of the run rate you mentioned here per quarter, maybe three or 4 million that would put the midpoint here like 'twenty one 'twenty two.
With the organic EMCORE business.
So if you grow in humans, a little bit it seems like cable TV is got to be much much Laura. Thank you had $7 million in in the June quarter, if I caught that correctly. So it sounds like you're literally talking about one to two or $3 million in September as am I doing that math right.
Your math is impeccable as always Richard.
Must have been there.
Gotcha.
It's actually probably Sam but that helps too.
<unk>.
Okay. Thanks for that and then maybe two quick questions on aviation.
So an interesting business, where it's I don't know a lot about here, but let's let's try to understand some of the synergies here. It seems like if youre, making an asset purchase for isn't necessarily a lot of overhead to be taken out here. So maybe you can discuss the synergies you expect near term and over time.
Yeah, So true that there isn't a lot of overhead other than corporate overhead and I think our numbers are smaller.
But when you look at it there's a.
There's a lot of opportunity to improve cost things they buy that they're getting for a better price and vice versa.
You know I made the point in my prepared comments that we are in a position where we'll be in a position to supply them with advanced.
Advanced more advanced technologies for closed loop.
Fog control.
At a you know a.
The price that you just can't get in the merchant market, because we make them.
They wind coils and could reduce our coil costs by 30%.
We will certainly see synergies in the sales and marketing side.
A little bit of overlap in in engineering, but its really hard to make that judgment a being that we're so busy in development. So you know not a lot was figured out other than we took out you know to get to the synergy number some.
Let's call it a project expense outside material and development that maybe we don't need to do because we've already got a bunch of of that technology that we can fork lift into Tinley Park and they've got a whole bunch of knowhow.
That we can take advantage of Oh Cambrian.
Cambrian and maybe even an Budd lake.
Okay.
I'm going to jump out of line and maybe come back in and ask some more detailed financial questions with the last one I wanted to ask you. Jeff here is you've obviously made two acquisitions here and 55 million less.
The debt raise your take your cash balance down a bit here does this and your appetite for M&A or can you still potentially see it after of course, the digestion period that continue.
Well you know we'd like to see.
We'd like to see improved results drives.
You know a wall street's opinion of us and less reliance on cable TV contributing to that.
Does it.
Does it make us want to stop M&A, no, but it but as always.
Pretty narrow laundry list.
Of things that we're interested in again, we started talking to Martin kits fan Heineken about this business in 2017, we had been working on trying to.
Pri L three space and navigation out since 2019.
So it's not like we're sitting there you know thrown darts up against the board and trying to figure out what we're going to do next in fact, we've been very deliberate which is something I think our board appreciates.
Okay. Thanks for that answer I will jump out of line. Thank you Jeff.
Yeah.
As a reminder press star one if you have a question, we'll pause for a moment.
We have a follow up from Richard Shannon with Craig Hallum.
Alright, well I guess, just like last quarter I didn't have to jump out of line.
Tom a couple of questions here as we look at the September quarter below the sales line here looking at the filings for KPH. It looks like the gross margins might've been in the 30% range here. So it looks like it's accretive on that line Navy. If you can help us maybe do the quick math about how we should think about total gross.
And the Opex here I have been able to do all that math here, maybe you could help us out a little bit on that please.
Yes, sure if you look at and it's obviously easy to get to they were a separate reportable segment for KPH Youll see revenues.
Ranging from low thirty's to high thirties.
There is a.
Our base business of fog products.
That is the majority of the business, but there's also a product line called tack NAV that is a little bit more lumpy and when that.
And in quarters, where there's a lot more attack NAV revenue the.
Revenues in total for the navigation business is in the high Thirty's and it's also high margin. So it really changes the the the combined gross margin of the segment. So on average if you average it out you're looking at mid thirties in revenue.
Mid 30, 35 ish plus or minus on gross margin and their opex is.
On the carve out is in the sort of $11 million annualized range. So.
So that should give you.
Just a good sense for.
You know what you can expect from the business.
We were planning on.
Synergies call it over the next.
No year year and a half.
Oh that Jeff spoke about it.
To help it further but it is a contributory business that we expect that to continue and get even better as the quarters tick by as its part of EMCORE. Yeah. The point to mention here is that all the synergies that we figured in in our case and the board and obviously.
We had a team evaluating.
An outside team evaluating their their revenue.
Alrighty of revenue we.
Send it by Cowen on the banking side.
And.
So we got pretty conservative numbers.
The synergies are all on the cost side as opposed to the revenue side.
So revenue upside represents gravy on top of things that obviously, we're going to be working in that direction, but those weren't the base commitments in the acquisition case. It was just the cost side because it tends to be more controllable.
Okay.
Okay that makes sense and maybe one question one more question for me on the topic of indium phosphide chips.
Let's hear Jeff I think you said that you're starting to ship into production for your first customer.
Which is great to see you talked about kind of tens of millions of dollars by 2025.
Maybe I guess the first part of my question is can you summarize the number of customers and contracts that you have and does that number about 10 customers and contracts.
Is that sufficient to get you to kind of that tens of millions of dollars of revenues. You gave did you see more so how do we think about future announcements.
Yeah. So.
And I think I've got this right so.
Forgive me, if I'm off by a customer here or there, but I believe there are five and a total of eight projects. So there are customers with multiple products or projects.
Does this get us to tens of millions, yes. It does.
But there are you know additional large players that we are starting to.
Continuing to work with to bring in.
You know additional volume in these areas and so the way to think of it rich.
Richard is we've got a set of core technologies.
And customers oftentimes want certain tweaks peak power level, a slope efficiency. They wanted to fit on a certain kind of sub Mount Theres, a particular mounting scheme, they've got and all that requires process engineering and a significant amount of expertise and so you know when you say 70%.
<unk> of the chip, maybe sort of common do a couple of customers. There is also a significant amount of difference in terms of the way it's implemented.
And in particular, the target for packaging on that.
So it's not like we're going out reinventing the wheel each time.
I would say you know within the next quarter.
A quarter or so there's good probability we'll have two more customers with.
With at least one program each.
And we just see this continuing to grow nicely.
Teams executing well.
And you know, it's going to be the primary growth engine over in broadband period.
Okay, Great that is all from me guys. Thank you.
Mhm.
Yes.
And that will conclude today's question and answer session I will turn the call over to Mr. Jeff <unk> for any additional closing remarks.
Sure I'd like to thank all of you from your for your interest in EMCORE today, I want to recognize our team and actually the extended team of experts that worked with us on the.
PVH transaction for tremendous effort to get this done.
And please stay safe, everyone and goodbye for now.
This concludes today's call. Thank you for your participation you may now disconnect.
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