Q4 2022 EMCORE Corp Earnings Call
Speaker 3: To ask a question during the session, you'll need to press star 1 1 on your telephone. Please be advised that today's conference may be recorded. I would now like to hand the conference over to your speaker today, Tom Minicello, Chief Financial Officer. Please go ahead.
Speaker 4: Thank you and good afternoon everyone and welcome to our conference call to discuss MCORES fiscal 2022 fourth quarter results.
Speaker 5: The news release we issued this afternoon is posted on our website, MCORP.com.
Speaker 6: On this call, Jeff Ritcher, MCOR's President and Chief Executive Officer, will begin with the discussion of our business highlights. I will then update you on our financial results and will conclude by taking questions. But before we begin, we would like to remind you that the information provided herein may include forward-looking statements within the meaning of Section 27A of the secure...
Speaker 7: statements about plans, strategies, business prospects, and changes and trends in the business and in the markets in which we operate.
Speaker 8: 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.
Speaker 9: to be materially 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.
Speaker 10: located at sec.gov, including the sections entitled Risk Factors in the company's annual report on Form 10-K .
Speaker 11: 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.
Speaker 12: 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.
Speaker 13: 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.
Speaker 14: I will now turn the call over to Jeff.
Speaker 15: Thank you, Tom, and good afternoon, everyone. Q4 represented a major turning point for MCOR as it accelerated its move into aerospace and defense with the purchase of KVH and the continued integration of the former L3Harris Space and Navigation Team.
Speaker 16: MCOR is now the largest independent provider of inertial navigation solutions.
Speaker 17: putting us on a runway to being a much larger business in the future.
Speaker 18: Consolidated revenue for fiscal Q4 was $25.6 million, with 82% coming from Aerospace and Defense and 18% coming from Broadband. Cable TV represented less than 8% of the company's revenue.
Speaker 19: Changes of this magnitude...
Speaker 20: present significant operating challenges under any circumstances. And in Q4, the changes created significant turbulence in our operating results.
Speaker 21: generating an operating loss of 10.8 million and adjusted EBITDA of negative 9.4 million.
Speaker 22: Our non-GAAP operating loss was 6.3 million and adjusted non-GAAP EBITDA was negative 5.1 million.
Speaker 23: Tom will provide color on Q4's gross margin, but I will start off by saying that margins were affected by a number of events that are not expected to repeat themselves going forward.
Speaker 24: In the aftermath of COVID, the cable TV industry itself continues to struggle underneath the overhang of a demand bubble that caused nearly five years' worth of products.
Speaker 25: that were built within a two-year period.
Speaker 26: The players in the industry are also changing as well. In our last call, we pointed out that Cisco decided to exit the cable TV equipment business.
Speaker 27: However, just last week, ATX publicly announced that they licensed the entire Prisma 2 technology platform from Cisco, allowing that technology to move forward.
Speaker 28: While these developments are expected.
Speaker 29: To improve cable DV demand over the longer term, we don't expect them to provide a meaningful catalyst for recovery in the next few quarters.
Speaker 30: Semiconductor availability slowed down shipments for wireless and chips within broadband in Q4, as our customers were not able to get enough silicon to ship transceivers and DAS systems to meet their own internal projections.
Speaker 31: With that said, our chip business continued to get additional traction with customers in the form of engagements and planned growth and shipments.
Speaker 32: Going forward on the chip business, we expect to see the ramp get a bit steeper during the summer, setting the stage for a much stronger FY24.
To conclude my statements about broadband, I'd like to return to a statement from our last call in which I made the point that cable TV was increasingly incongruent with our strategic direction. Today, I would update this to say that we've made meaningful progress.
on resolving the strategic mismatch between non-core assets and our direction in aerospace and defense.
Turning now to aerospace and defense, I'll begin my comments.
with our Chicago operation, which was formerly owned by KVH.
During Q4, the Chicago team met the shipment goals we set during due diligence and began the integration process.
We subsequently identified two development programs that needed help to get back on schedule and were able to get them back on track. The combined efforts of the extended engineering teams in Bud Lake and Concord allowed shipments of these new products to begin in the December quarter.
We also began to lean on coil winding technology and supply agreements that originated in Chicago, validating important scalability and cost synergy arguments that we made in favor of the transaction last summer.
Chicago has a strong book of orders and is now able to begin the production ramp for several of their new products.
I would also point out that they were recently awarded several new contracts, the largest of which is for over $30 million for five years worth of production.
The space and navigation team continued to make solid progress on the new TAIMU, or TAMU, long-term, navigation-grade IMU even as it continues to meet shipment targets for BORG.
These two systems are critical to the launch schedule for United Launch Alliance.
Borg is part of the boost stage flight control for Atlas, Centaur, and Vulcan launch vehicles, while TAMU will be the primary IMU used for navigation.
Critical milestones for Tebu are set to happen in the March quarter, as well as the beginning of product builds in Alhambra.
Our expectation is to complete qualification late in the calendar year to enable significant volume builds and launches in calendar year 24.
When these products hit full production, they are expected to produce $20 to $25 million annually in revenue.
The QMEMS product line continues to recover its order book from the civil aviation downdraft that happened during COVID.
We are getting more 777X orders along with a significant uptick of demand for inertial systems used in business and regional jets.
In Q4, we shift all of a critical precision guided ammunition or PGM order for an important international customer.
We're expecting that this will enable us to be qualified for larger domestic contracts as well as exports.
As we've said before, PGMs are the largest market segment for inertial measurement systems and are expected to be an area of significant growth for MCOR in FY23.
Beyond this customer, we are working to test and qualify the SDI 170 with defense contractors worldwide. In a recent international trip, I was advised that annual target volumes range from 1,000 to 4,000 units per year, with a total value of approximately $30 million.
Before I move on to guidance, I'd like to focus a few comments on the integration of space and navigation and the former KBH team.
One of our key objectives in this year is to make all four of our manufacturing facilities work like a single entity. As of today, Space and Navigation is now running a common ERP system with the rest of MCORE and has made the cutover from L3Harris' IT system.
This will enable us to exit the cost of the transition services agreement that was part of the transaction.
Chicago is running about a quarter behind space and navigation, but we've already moved the Rhode Island engineering team out of the KBH building.
While cutting costs is important, the true benefits of scale are only realized when we have all the facilities on common ERP, MES, and PLM systems.
We began rolling out CAMSTAR MES for shop floor control in Alhambra and expect to integrate this into the other facilities after we complete the ERP upgrades and exit transition services.
Ultimately, this will make MCore more efficient and will help us improve our processes and reduce OPEX in inventory.
Turning now for guidance to the current quarter, we continue to see weakness in the cable TV and wireless markets.
Although we will make modest gains in chip revenue, it won't be enough to offset the weakness in cable TV.
Inertial navigation will see growth largely driven by a full quarter's performance out of Chicago. Consequently, we're expecting revenue in the $25 to $27 million range for the December quarter.
With that, I will turn the call back over to Tom.
Thank you Jeff.
Consolidated revenue for fiscal 4Q was $25.6 million with 82% coming from aerospace and defense and 18% from broadband.
Aerospace and defense segment revenue was $21 million, a $7.6 million increase when compared to the prior quarter.
The A&D revenue growth was largely attributable to the addition of the Inertial Navigation operation in Tinley Park, Illinois, located just outside of Chicago, that was acquired from KVH Industries on August 9th.
In addition, the rest of the A&D segment was collectively up by 1.5 million or 11% on a sequential quarter basis.
a rebound in sales of QMEMS products following supply chain shortages during the prior quarter, increased space and navigation revenue, and higher fog shipments all led the way, partly offset by lower defense optoelectronics revenue.
Broadband revenue was $4.6 million, a $5.7 million decrease when compared to fiscal 3Q.
Five million of the drop was due to the continued downward slide of optical transmitters and lasers sold into the cable TV infrastructure market.
These products generated revenue of $2 million in the quarter.
compared to $7 million the quarter before, and compared to $29.5 million in the fourth fiscal quarter of last year.
Clearly, this time around we are in a much deeper cable TV down cycle than the company has experienced in at least the last 10 years.
Non-cable TV broadband revenue was down $700,000 due mostly to sales of wire to sales of wireless I'm sorry to sales to wireless customers.
GIPS and sensing revenues were essentially flat.
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 of 2% compared to 18% the quarter before was impacted by several factors that include the following.
First, 4Q was the first full reporting quarter for the space and navigation business in Budd Lake and included higher than normal costs due to the timing of revenue and cost recognition under its percentage of completion accounting method.
Second, the Chicago Inertial Navigation business was acquired in the middle of the quarter and included prorated costs that resulted in a gross margin for the partial quarter significantly below levels consistently achieved in the past.
Third, our Q-MEMS operation in CONCORD included two non-recurring charges.
one associated with a revaluation of inventory to a more recent slash lower component costs.
the other was an adjustment resulting from a full physical inventory count taken at year-end.
Fourth, for the broadband segment, the low gross margin was the result of the aforementioned drop in cable TV revenue and continued under-absorption of overhead costs, including the Alhambra wafer FAB.
Many of the factors related to the two recently acquired operations in Bud Lake and Chicago are transitional in nature, and we expect, once fully integrated, that both businesses will return to their historical margin performances or better.
Operating expenses were $11.2 million in fiscal 4Q compared to $10.5 million in the prior quarter, due largely to the inclusion of the Inertial Navigation Acquisition for part of the quarter.
Before moving to the bottom line,
It's important to highlight that MCOR has undergone a momentous and rapid change to the revenue profile.
The first half of Fiscal 22 accounted for 60% of total year revenue.
during which time broadband accounted for 75% of the business.
In just a couple of quarters later, in fiscal 4Q, this has completely flipped to over 80% of revenue coming from Aerospace and Defense.
The company is now better positioned for higher growth with a broader base portfolio of inertial navigation products.
expanded customer reach, and in a substantially larger and more stable marketplace than the highly cyclical cable TV market.
There is no doubt A&D is our future.
We are now the world's fourth largest and largest independent provider of inertial navigation solutions.
Our Fiscal 4Q results reflect the significant and swift changes to the size and mix of the top line.
Together with the gross margin items I just outlined, as well as the need to invest in future growth,
4Q operating loss was 10.8 million.
Adjusted EBITDA was negative 9.4 million and net loss was 10.9 million or 29 cents per share.
Shifting to the GAAP results for a moment, fiscal 4Q net loss was $16.9 million or $0.45 per share. This included one-time transaction costs of $5.2 million associated with the acquisitions.
The GAAP results also included two non-cash items excluded from the non-GAAP measures. A $3 million long-lived asset impairment charge associated with the Alhambra fog operation.
and a $3.1 million accounting credit related to the reversal of variable incentive comp accrue during the first three quarters of fiscal 22.
Turning to the balance sheet, we had cash of $26.1 million at September 30th compared to $75.1 million at June 30th.
The $49 million decrease consisted of $55 million to acquire the Chicago Inertial Navigation business.
$2.4 million representing the second and final payment related to the space and nav acquisition.
$5.2 million in acquisition transaction costs, and $1.8 million in capex.
Offsetting these uses of cash was $15.5 million included in cash from financing activities, which represents the borrowing level at September 30th under a credit facility entered into with Winxpire Capital at the time of the Inertial Nav acquisition from KVH. Before we get to questions...
I'd also like to cover a couple of other recent events.
First, the integration of our two acquisitions involved a recently completed Management Reorganization and Costs Rationalization Initiative.
This included a reduction in force designed to reduce costs and expenses by a total of approximately 3.6 million annually.
Split between roughly 55% cost of goods sold and 45% OpEx.
We expect to record a charge in the December quarter for related severance costs, which we anticipate will comprise a combination of accelerated stock vesting and cash over time.
Second, as announced last week, we completed the sale and lease-back transaction of the Tinley Park property obtained as part of the Inertial NAV asset acquisition from KVH. This transaction generated $10.3 million in net cash proceeds.
So with that, we are now opening up the call for your questions.
Thank you. As a reminder, to ask a question you will need to press star 1 1 on your telephone. Please stand by while we compile the Q&A roster.
Richard Shannon, your line is now open.
Okay, great guys. Thanks for taking my questions here. I think the first one's on gross margins. Tom, you mentioned a number of items here that you're saying are one-time in nature.
I don't want to repeat them. I think there are four of them. The broadband one certainly makes sense. It seems like other ones are potentially transitional here. One, if you could help us understand how much magnitude that that added to COGS in the September quarter. And ultimately, how do we think about, what do you, what are you thinking about for gross margins for December ?
So Richard, the total of let's just stick with the the A&D side where we had the two acquisition gross margins and our the charges that I mentioned for Quartz Mem and Concord. So, you know when you take all of those and the impact in the quarter.
and you adjust for that, you know, you're taking an A and D gross margin up to
call it, you know, high, you know, mid to high teens, 16-17%, just with that alone.
And so you're getting back to even better than where it was last quarter. And there's other activities and things that we have done with this business as we integrate the acquisitions.
and as we do things in the quartz MEMS operation with yields and prices and things like that that put us on a much much healthier trajectory.
Okay, do you want to try to quantify what you're thinking about that for December ? I think given your 11 days from the end of the quarter or so here, it seems like you'd have a good view on what that is. So, a good start with the A&D number here in the mid-teens, 16-17, but how would you put this all together here? Yeah, I think that number is...
you just sort of adjust for the the items that I outlined it in the in the prepared remarks. The way to think about it is
So A and D between
the changes we're doing in Quartz MEMS and the acquisition integration.
I would call it, you know, mid to sort of low to mid 20% range for A and D.
And if you, so the issue then becomes for the consolidated gross margin. You know broadband isn't gonna be all that much better because it's you know it's cable TV down cycle we're in is not going to improve for several quarters. So you'll see Blind line
that continue to struggle because of the just the size of the revenue alone. So when you put it together you know you're looking at a consolidated number.
you know 20% plus or minus maybe a little bit higher 2021-22 if things go go well. That's just in the December quarter.
because a lot of the things that we're doing have some impact in the fourth in the December quarter but for example the reduction in force that we I just talked about that happened late in the quarter kind of early December so we'll get a little bit of that in the December quarter but that'll most of that will take full effect
the March quarter. So as we take those kinds of actions and we do other things to on the integration front some of the things that Jeff mentioned in terms of getting everybody onto a single system that would come sort of towards the end of the March quarter.
and you know you start to see an improvement through the fiscal year on gross margin. Okay, so to catch to that last part here, so going back to the reduction of force here said 3.6 million annually with 55% of it in COGS here, so sounds like there's been relatively little if any of that.
I think I said three, but that's what hurts me. Yeah, yeah, yeah. Okay. I hope I said three. Yeah. Okay. So, yeah, 3.6. And so, you know, that's 900 a quarter. So you're looking at roughly, you know, 500 in cost of goods sold and 400 in operating expenses on a full quarter.
And since we took the action at the early part of the last month of the December quarter, just a few weeks ago, you'll see the full impact of that in the March quarter.
Hey Richard, Jeff, let me give you two other little pieces of color here. So for example one of the things that we're not expecting to repeat on the gross margin line, hey the good news is that we nearly doubled yield of quartz forks
for the Concord 2-Mens products.
Bad news is we took an inventory valuation hit that was significant in the quarter. So that's the sort of thing that we're actually expecting to see some benefit from, but it hurt us in Q4. The other thing to think about in terms of the RIF is that really, is MCOR continues to simplify its business.
use.
Right? So what it does is it just it collapses the BU structure, eliminates positions.
because we're simplifying the mission of the company.
Okay, fair enough. Jeff, let's talk a little bit about kind of top line here. Your guidance for the quarter is clear. It sounds like it's mostly coming from the additional month of the KVH operation here. I think we've been hearing about some constraints in supply chain in parts of the biz, I think, to MEMS among other things.
issue and primarily semiconductors. We weren't hit too badly in some other places where connectors oddly enough are still an issue but what we've seen is customers push back for you know that are expecting chips shipments.
because they actually can't get enough silicon to build transceivers and or the distributed antenna systems used in wireless. But what we're expecting to see, because we are now getting shipments of circuit boards,
that aren't going to help us much in the current quarter, but they will help us in March. So I would expect to see March look better from a supply constraint perspective.
Okay, fair enough. And then last question, I'll jump in line here, see if there's other ones out here, but just kind of putting this all together and thinking about when you guys get to break even and what that looks like. If you could give us any thoughts, I guess I'm probably more interested in the structure than timing because it seems like we're looking at a few quarters at least here.
Maybe both of you can talk about the structure here when you get to a break even. Sure, so yeah, it's several quarters out. Richard.
And, you know, with improvement quarter by quarter until, call it sort of the back half of the fiscal year, potentially early FY24, it's going to depend on a lot of factors. You know, the revenue will need to grow.
into the 30 to 35 million dollar range on a quarterly basis. And if we can hit sort of the middle of that range, you know, with a mid 30s gross margin, or we can get up to like 35 with a sort of maybe even a lower gross margin. I mean, there's a lot of moving pieces here. So.
Somewhere in that sort of 32 to 35 top line with a gross margin in the low to mid 30s would put you at adjusted EBITDA breakeven.
if you tack on, you know, sort of the forecast for operating expenses.
Yeah, so Richard, the other thing to point out here, and it echoes Tom's remarks a bit.
is that the gross margin number is constrained more by overhead absorption than you might think. When people look at gross margins, oftentimes they say, oh, prices are collapsing in the market. Or your costs are out of control. But the reality is overhead absorption, high fixed costs.
in facilities that have 30,000 gallons of liquid nitrogen, for example, are a significant factor. And so, as I mentioned in my comments, one of the important things that's about to start happening and in the March quarter is we are going to be building a high volume, high-end navigation product.
that was designed in Bud Lake for ULA. And that will make a significant dent in this volume slash margin constraint that we've been feeling for a while now.
I think also the signs are positive in Chicago. Now that we've collectively cleared out a few things with. And.
a new product which we just announced, I believe you asked me about, it's TAC450, and the whole generation of those products.
from the former KBH team, they are now shipping in volume. All of that will start to really make an impact, I would say, in the March quarter.
Tom's got the numbers right. Qualitatively, it's about overhead absorption. It's not about driving the material costs down or the prices up, although we are instituting a 10 percent price increase on Quartz MEMS. Doesn't affect all of our contracts because some of those awards results or who shell that recommendation to protect those who vote on one occasion. But no, thebenscore is not civil. There are nickers that are most most serious about this type of thing.
are locked in for a period of time. But certainly for new orders, that is going to help us a bit. It's just about recovering the higher cost of semiconductors mostly.
Okay, great. That was good detail. I will jump out of line, Jeff and Tom. Thank you.
Thank you, Richard. Thank you.
Thank you. One moment for questions. One moment for questions.
And as a reminder to ask a question you will need to press star 1 1 on your telephone. Our next question comes from Tim Savadro with Northland Securities. You may proceed.
Hi, my good afternoon. My 1st question, at least is on the cable side. I know it's a small part of your business now and.
I guess getting very small. I mean, looking at the guidance, you know, I think we must be headed to zero in the December quarter or somewhere pretty close to that.
And you frame it in the context of kind of a broader down cycle in CapEx, but that's not really what we're seeing, right? With regard to charter, talking about a multiyear investment program, and most suppliers actually having...
Pretty decent years, even near term. So I guess my question was, I'm kind of searching for the disconnect there, and there are several potentials, whether it's Cisco abruptly exiting the business. I know you've mentioned inventory builds before among several customers.
And of course, the final factor, maybe we are at a point where some of the linear analog technology is moving out of the network more quickly. If you look at those three factors, how would you assess at least what looks from my perspective?
covering half a dozen plus names in the universe, this sort of disconnect between what MCOR's seeing and cable and what others are seeing. Sure, I'll tackle that one, Tom. Real simple, it's five years worth of lasers and transmitters that shipped in two years for COVID and...
you know, a large fraction of that was never installed. And so it's sitting in the warehouses of CommScope and it is sitting in the former major distributor of Cisco product in the US.
And so, you know, the overhang is there. M-Core is not a broad-based supplier of...
many different cable optics products.
And so that's where the concentration is. You know, we had a terrific run up.
big profits because we were so efficient during the trip down, but I'm sorry, during the time that we were running it in big numbers. But the interesting thing is, here we are with $2 million worth of cable. Believe it or not, it's still
making a little bit of a profit. And it's because we became efficient. That's how we were able to do what we did during COVID. But the reality is that the pile of inventory is there is what our customers are telling us. They are actually selling more linear EML transmitters to try to clear out their warehouses.
And there's just nothing we can do about that. There's no competitive losses.
And, you know, the back end of the cable business, certainly with nodes and amplifiers, has done very well and will continue to do well.
But no, for us it's mostly about inventory that's out there.
Great, and just thanks for that caller. And just to follow up on that, you made
a comment about
making progress I guess on the strategic front, in terms of cable, I mean it sounds like you guys are preparing to exit that business. Do you have any
What color do you want to add on that?
Wish I did and wish I could, Tim. As soon as we got something to say, we're going to get it out there as fast as we can.
Okay, and then last one for me. What if you might be able to take just a quick moment and because you went through a number of programs that you were working on on the chip side, I think last quarter or maybe a couple quarters ago.
spanning, you know, datacom, telecom, sensing, it sounds
like you've been making some progress there, have you added to that?
Have you added to that?
You know, I know you mentioned supply issues is maybe a gating factor, but how does that opportunity look, you know compared to what you saw a quarter to
ago? Yeah, so you know there are I believe and I'm trying to think of exactly when it happened so I could be off a little bit. I believe we picked up
one more program in Q4 from an existing customer.
and the production shipments that we talked about are moving as we said they would. They just haven't picked up as fast as we'd hoped. What our customers are telling us is, yeah it's because we can't get enough silicon.
You know, oddly enough, the sensing piece over in China, which is run through China Rail in Shanghai, for example, you know, they've had COVID issues and continue to and so you have people not even in the offices.
I know it seems a little strange given how much progress there's been in Europe and in the US, but in parts of China it's still an issue.
So I would say that, you know, we talked about it being transceivers. These are chips that are used in tunable lasers. Beyond that, I'm not allowed to mention customer names.
But hopefully that gives you just a little more insight into what's going on. There's just a lot of
a lot of silicon shortages in that business right now.
Okay, thanks very much.
Thank you, I would not like to turn the call back over to Jeff for any closing remarks. Sure. I'd like to close by thanking you all for your interest in MCORP.
I also want to recognize our team for their perseverance as we reinvent the company as an aerospace and defense business. And finally, I'd like to wish you all a wonderful holiday season and a happy new year. Thank you.
Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.
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