Q3 2023 EMCORE Corporation Earnings Call

Good morning, and thank you for standing by and welcome to the EMCORE Corporation fiscal 2023 third quarter results.

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I'd now like to hand, the conference over to your speaker today, Tom minute cello.

I'm of course, Chief Financial Officer. Please go ahead.

Thank you and good morning, everyone and welcome to our conference call to discuss <unk> fiscal 2023 third quarter results.

The news release, we issued yesterday afternoon is posted on our website amcor dotcom.

On this call jeopardy cure EMCORE sheet.

Of course, the President and Chief Executive Officer will begin with a discussion of our business highlights.

And 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 affecting the business such forward looking statements include 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.

Slide 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 Companys filings available on the SEC's website located at SEC Gov.

<unk> the sections entitled Risk factors in the company's annual report on Form 10-K, and subsequent periodic reports.

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.

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 will now turn the call over to Jeff. Thank.

Thank you Tom and good afternoon, everyone. I guess it is reported in Q3, <unk> inertial navigation business came into its own growing 10% over the March quarter, representing the fifth sequential quarter of growth book.

Book to Bill kept pace with this growth one point out and the business has $68 million in backlog.

non-GAAP gross margin for inertial navigation was 30%.

A&D segment overall was 29%.

Operating expenses for inertial navigation.

Were approximately $9 9 billion.

Consolidated revenue in fiscal Q3 was $26 7 million.

Inertial NAV came in at $26 seven defense Opto electronics was 300, K and broadband posted a negative $300000 in revenue due to a terminated $1 3 million broadband development contract.

Tom will provide additional details on this in his remarks.

Simply put inertial navigation performed significantly better than expectations.

Setting the stage for the company's evolution into a pure play aerospace and defense business.

Turning now to the broadband business I'd like to focus on our announcement of the letter of intent to sell the linear part of the business to photonics foundries.

Completion of this sale would accelerate <unk> ability to narrow its focus entrepreneurship navigation.

It should also meet our objectives to create a seamless transition of supply to our customers and opportunities for our employees.

We expect to complete the sales during the September quarter.

The last remaining component of broadband is the wafer fab and.

And we expect to conclude production for the last time buy.

Pardon me within the September quarter as originally planned.

With the completed sale of the linear product why would transfer the order backlog for the affected products two photonic batteries.

We expect that the remaining wafer fab backlog to be approximately $3 2 million.

Once the wafer fab production processes are complete at Alhambra.

MS takes over from their assembly chips onto carriers, and completing test and burn in.

Since there are production limits in MFS it will take at least a year to complete all of the orders with just a handful of EMCORE employees remaining to manage the process.

That said, we have several interested parties conducting due diligence on the chip business.

And expect to have a decision on the future direction of the fab within the current quarter.

Bringing the tale of two companies too.

Moving onto inertial navigation I'll begin my comments by stating that we had a strong performance from our space to navigation Tinley Park in Concord operations.

Revenue was up about 10% quarter over quarter with a book to Bill at one point out.

This is a little misleading by itself considering the fact that inertial navigation has grown 30% from the December quarter.

Which was before which was the first full quarter in which the former PVH team was Merck merged into <unk> <unk>.

Backlog came in at a solid $68 million.

Please keep in mind that this only includes hard purchase orders against our long term contracts not the value of the contracts themselves.

In the current quarter, we expect that the book to Bill will remain above 100 point out.

Operating expenses came in below budget for research and development and sales and marketing.

We are mindful of our high internally funded research and development spending otherwise known as Iraq and.

And are working to drive this down substantially in the coming quarters through nonrecurring engineering contracts from our customers. Consequently, we should see Iraq approached 10% of revenue within the next few quarters.

We received full rate production orders for Bae's.

Armored multipurpose vehicle program and expect this to transition into a solid yearly order pattern from this point forward for.

Our A&P for military sales spare orders should book periodically procure onward, providing additional upside.

International bookings improved significantly this quarter, most notably in Taiwan in Poland.

These included a group of unmanned and turned it platforms. We also saw substantial interest from customers in the 300 platform, especially in the space sector with several key tests run starting this quarter.

We've seen some positive results early in the game and eagerly await the results of these tests to drive additional momentum.

On the precision guided munitions side of the business, we have been pursuing a tiered product placement strategy to eat like E licensing requirements for our international customers. This approach takes a bit more time.

Should begin to see orders this quarter based on this strategic direction.

Beyond program capture we're seeing important signs of acceleration of key programs into the low rate initial production phase of.

This is a leading indicator of long term growth infrared search and track has become a key area of focus and our multiple design wins should benefit in terms of production timing.

The <unk> program has secured an additional bank of orders that reflect the strength of duration of the program we.

We are also working with major prime securing long term manufacturing partnerships and orders are expected to produce improved production cost and predictability.

The space to navigation team has continued to integrate multiple teemu inertial measurement units.

In support of test and validation as it continues to meet shipment targets for port, which is abuse booster rate gyro.

These two systems are critical.

So the launch scheduled for United launch Alliance. The next important milestone should be reached by the end of September .

And that when <unk> reaches its targeted launch rates <unk> report are expected to produce 20% to 25 billion in revenue per year and helped significantly improve gross margins.

Quartz Mems had a very nice uptick in shipments this quarter and scaled up margin well, we saw a favorable mix in the Concord shipments, but the operations team executed a very clean quarter no surprises in the way of unplanned variances.

We expect to continue to reduce the lumpiness in Concord as we upgrade.

Concord to a new ERP system in the coming months.

Before I move onto guidance I'd like to provide some comments on integration.

As a key area of focus this year we.

We did successfully transitioned our Chicago operations to sideline Ted.

Which will and the need for transition services from <unk> as well as eliminate the expense.

Since it's the last quarter of the year, we will not upgrade alhambra or Concord.

<unk> 10 until the new fiscal year and should complete this work in a quarter or so after getting start.

Beyond the ERP, we should complete the Pls tdm unification in early October and we will.

Integrate Cam star Mes into the concrete and Chicago facilities. After we complete the ERP upgrades.

Ultimately this will make EMCORE and more efficient.

Will help us to improve our processes cost reduce inventory.

Beyond the systems integration programs I mentioned EMCORE has a solid roadmap for stripping out redundancy within engineering programs to streamline our operations and reduce development expense.

Over the next few years, you should expect to see a reduction in the amount of manufacturing floor space, we require a reduction inventory and improvements in profitability.

Turning now to guidance.

We are expecting a few supply chain issues and order delivery dates will tamped down our growth a bit for the September quarter.

Assuming that the sale of the linear product line to Photonics foundries is completed we expect consolidated revenue in the $26 million to $28 million range.

This includes inertial navigation at 25% to $27 billion, along with approximately $1 billion in last time buys in the chip business.

Looking beyond that into the December quarter, we expect inertial navigation to have a revenue range of $28 million to $30 million with that I will turn the call back over to Tom.

Thank you Jeff.

Let me first start off with the restructuring plan, we announced during the June quarter.

This plan consisted of a shutdown of the broadband segment and a discontinuance of the defense Opto electronics product line within the A&D segment.

Because we have been keeping these operations running to fulfill customer last time buy orders, both broadband and defense Optoelectronics were included in consolidated results as continuing operations for fiscal <unk>.

So I'll first start with consolidated and segment results after that I'll provide our financial review for inertial navigation.

Consolidated revenue in fiscal <unk> was $26 7 million net of $27 million for A&D last 300000 reported for broadband.

And an unusual set of circumstances subsequent to our announced shutdown of broadband development contracts for chips and sensing products were prematurely terminated.

Since these contracts are under the cost incurred percentage of completion accounting method of which the timing of revenue recognition is independent of the milestone billing and cash collection cycle.

A $1 $3 million adjustment was recorded in <unk> to properly account for the close out of these contracts.

E true up final contract revenue to final cash received.

Excluding this adjustment broadband was $1 million.

Within A&D defense Opto electronics revenue was 300000. This brings total last time buy shipments in <unk> to $1 $3 million.

Slightly above our guidance of $1 million.

Turning to the rest of the consolidated results on a non-GAAP basis consolidated gross margin was 16% flat with QQ and for the same reason the highly dilutive broadband segment gross margin.

On the A&D side <unk> segment gross margin strengthened to 29% driven by significant improvements for the inertial NAV business, which came in at 30%.

The A&D segment overall, the inertial NAV, 30% gross margin was partly offset by a lower gross margin for the discontinued defense Opto electronics component.

Consolidated operating expenses were $11 1 million in fiscal <unk> compared to $12 4 million in the prior quarter. The $1 $3 million decrease was largely due to lower materially material expenses for R&D work on fog programs as well as lower G&A.

Consolidated operating loss in the June quarter improved to $6 5 million compared to $8 1 million in the March quarter.

Adjusted EBITDA was also better at negative four three versus six five in fiscal <unk>.

Consolidated net loss was $7 million or <unk> 13 per share compared to $8 $3 million or <unk> 18 per share the quarter before.

Shifting to the GAAP results for a moment fiscal <unk> loss was $9 $9 million or <unk> 18 per share compared to $12 2 million or <unk> 27 per share in <unk>.

GAAP results included a $1 $8 million charge for severance costs related to the April 'twenty, one restructuring announcement and a $1 2 million credit as a result of insurance proceeds received in <unk>.

Let me now turn our attention to the non-GAAP inertial navigation results and there are still navigation revenue grew to $26 7 million in fiscal <unk>, a 10% increase compared to <unk>.

Driven by double digit growth for both our space and navigation site in blood Lake and for Q Mems shipments and conquer.

Operations in Tinley Park continued on a steady growth path with revenue up 5% sequentially.

As noted inertial navigation gross margin expanded to 30% in <unk> not only on the higher revenues, but also driven by a better mix and significantly improved quartz mems production yields.

And National Nab R&D expense was $4 2 million in fiscal <unk> compared to $4 7 million in the prior quarter.

$500000 decrease was due to the lower project materials spend noted earlier.

Turning to the balance sheet, we had cash of $20 2 million at June 30, compared to $24 8 million at March 31.

The $4 $6 million changed during the quarter included the aforementioned insurance proceeds of $1 2 million and positive operating working capital of $1 5 million.

All set by the following uses of cash during the quarter.

$4 3 million adjusted EBITDA 600000 for litigation related expenses 500000 paid for severance 500000 for acquisition related costs 900000 used for financing activities and 500000 for Capex.

With that we are now opening up the call for your questions.

Thank you.

Reminder, to ask a question. Please press star one on your telephone and wait for your name to be announced.

Withdraw your question. Please press star one again please.

Please standby, while we compile the Q&A roster.

Okay.

First question comes from Maxwell Michaelis with Lake Street Capital Your line is open.

Hey, Good morning, guys first question I've got.

<unk>.

First one is related to the supply chain weakness you guys.

As I mentioned I was wondering if youre seeing any material changes in supply chain.

Perhaps if I can just lead times I guess.

So the question is I'm, just trying to break even breaking up a little bit.

Is whether or not there are material changes in supply chain.

Oh, yes, sorry, the lead times with.

Breaking up there.

Yeah, it's really not.

I wouldn't read a lot into it one of the things that's become a bit of a flash point is that military grade systems on a chip FPGA.

Still remain quite difficult to get and we see last minute push outs of deliveries.

Unfortunately, you could have 99% of the parts.

Available to build would be missing one in and then youre stuck so it's really that.

Sort of.

Issue as opposed to an overall.

Supply chain deficiency was just a few parts that are military grade that we just don't believe we're going to get.

Schedule.

Yeah.

Alright, Thanks, and then my next one is related to book to Bill.

You mentioned at one point, all this quarter or do you expect it to be above one.

Q4, just wondering if you could share a few points of confidence.

Is that outlook.

Could you repeat that.

So you mentioned that book to Bill is going to be about one point in Q4 I was wondering if you could share points.

That outlook.

Yes.

Well there is.

Really a solid demand out there in the market.

We see.

All the product lines.

Doing quite well.

On the <unk>.

Necessarily call it a headwind one of the things that's occurred because of the Ukraine War.

And I don't think this is widely understood is that win.

Our products are shipped to support Ukraine.

It gets registered as.

Foreign military sales, but the reality is it comes out of the store houses of the various branches of service and so what happens then is.

The budget priorities.

Get shifted and the service branches that have had product shift are demanding the cash in the budget to immediately replenish their stores and sometimes that's at odds with.

What the say the navy or the Air Force program managers have budgeted.

If they have to give up money to the army, where a lot of the material has come from.

So it's really.

Caught a phase lag between shipping something from stores and then the.

The push and pull between the branches of service.

Against existing budget priorities, if that makes sense.

Yes, no that makes sense thanks, guys.

Thank you.

Yes.

And our next question will come from.

Richard Shannon with Craig Hallum Capital Group Your line is open.

Okay.

Well, thanks, Jeff and Tom for taking my questions here, I guess to get a few of them in no particular order.

I'll just follow up on the guidance here Geoff thanks for the little bit greater detail here in your prepared script versus the.

Press release here and understanding last time buys, but I just wanted to get a sense of what youre thinking about for gross margins here I think get the mid point of the inertial NAV only revenues.

It's slightly down from your performance in the quarter, but not much and would we expect to see an inertial NAV gross margin near that 27%.

Just or excuse me, 30% number you just reported.

Yes, I think we should.

The only thing that really is going to move around here.

From this point forward rich as Richard is the.

Just the product mix can shift a little bit quarter to quarter. One of the things for example that will affect gross margins in the next couple of quarters is.

The A&P deepwater I mentioned for <unk>. There are some other product order, we're expecting those margins significantly above.

Caught that let's call it a 30% number.

There are also a few products, which are not quite as good.

But volume drives the margin at Evercore.

So as volumes pick up we will expect to see continued improvement.

<unk> gross margins in general.

Yeah.

Okay Fair enough and then let's talk about your comments.

December quarter, inertial NAV getting up to 30 or $28 million to $30 million year. The mid point is a nice growth there.

Like double digits from the midpoint Youre, telling us for September . So can you talk to us a little bit about some of the drivers there.

Sure.

There are.

The planned delivery date.

But it moved around a little bit customers.

Do it.

Take advantage of the fact that.

Government fiscal year at the end of September .

And so when you look at that some guys that have additional money will want to pull things in and some guys who don't have money until Q1 that I'd like to push things out so theres a little bit of that in there, but overall the trend is that.

You've got new programs that are picking up heading into low rate of initial production.

And we're expecting to see those require support in terms of shipments in the December quarter.

So we're looking at some <unk> orders that will come in we're looking for.

Final shipments of one of our development programs that it's one of these things it's a little lumpy.

But sometimes.

Sometimes you get nonrecurring engineering billings, and then you'll have a bit of a chunk at the end of.

The particular program phase as the prototypes are delivered but overall.

What I'm really trying to get across is that there is a.

Strengthening.

And.

Strengthening of demand there is a consistency within the order patterns that give us confidence.

To go out a little further to provide guidance, where we wouldn't ever have done that as a broadband company again.

$68 million in backlog.

We can we can see out several quarters now consistently and we'll expect that to continue to improve.

Okay, and then given that visibility I guess I would assume that your gross margins behind IMS segment here would be at least as high in December .

September just because of the growth in.

Volume drives gross margin that fair John .

Yes, that's completely fair.

Okay good to hear.

Maybe jumping over to the.

I'm not even sure what that what they call the activities that you announced yesterday.

Disposal of defense Opto et cetera here.

Do I understand correctly that that.

Yes.

Effective purchase price and its really just a liability transfer and Opex savings dynamic here for you or do you expect some sort of proceeds.

On the completion.

And our disposal I guess, we'll call it.

Yes.

Good.

That it was the former scenario within what you mentioned.

There are significant.

Liabilities.

Pardon me associated with broadband.

With one particular.

Supplier.

And the supply chain.

I would also say that.

There.

We've done a reasonable job of getting the factory our factories more correctly moving again.

But every time you do this sort of thing do you run into problems as far as <unk>.

Gosh, we need a special silver buildup oxy, we needed to get it into China.

Got export restrictions.

And it's going to take eight weeks to get something that you can get here in the states overnight.

So.

What it does is it puts all of that.

Sort of activity that really.

It's amazing how much.

Management cycle bandwidth.

It takes up to crack these problems.

It also enables us to.

Spin out our organization even further.

For example, we still have to have quality people and.

Here's available inside the business deal with RFA.

And service requirements.

And.

This.

The sale of the linear portion of broadband.

Essentially solve that problem for us as well.

Yes.

Speeds up the <unk>.

Our ability to focus.

<unk>.

Works out I think well for all parties.

Okay, and I guess can you just kind of give us some sense of what opex or cost structure savings.

That youll achieve upon close here.

Yes.

Gosh.

Well, what we what we gave you I think was $9 9 billion Opex, Yes, I think you'd go back to the restructuring announcement on the 20 <unk> of April Richard and are those numbers.

Pretty much hold up because most of it.

As gall broadband in defense Opto.

Related so as the business gets transferred and eventually the.

We figure out the wafer fab.

You save all that money. There is also a slice of that maybe upwards of around $2 million of it was in the G&A. So that'll help the business going forward. So what you are likely to see an operating expenses on a go forward basis inertial navigation pure P&L is around 10.

Nine.

Eight somewhere in that range.

From what will be 12, five before we started all of this so.

There's your.

And then there's some cost of goods sold savings of at least $12 million right there.

The other point that I'd make Richard is that.

As we as we get into this.

We have identified a few areas, where we might be able to take down opex towards further which is not quite ready to talk about those in detail.

But we certainly will in our in our next call. So you haven't seen the opex.

Opex reduction.

The other point to make.

Especially as we get into December quarter will be this.

We've talked about research and development.

Just as a monolithic number but youre going to see us talk more about.

What the the Iraq portion of the internally funded research and development number is.

And we're going to make some additional refinements.

Which.

Should help to make it make it obvious how much we're really spending and how much our customers are supporting.

Okay, you kind of hit on my last question here on this I read so relative to the numbers that Tom just mentioned as you get more of this.

That.

Is Iran. Shine out then that will be a further improvement in the opex cost structure, and then is that right.

Yes.

Okay, Alright, great then I figured I'll pick that one up.

Okay, I think thats all the questions from me guys I will jump out of line. Thank you.

Thank you Richard Thanks.

Okay.

Thank you.

Our next question will come from Brian .

Ken's linger from Alliance Global Partners. Your line is open.

Great. Thanks, so much for taking my questions.

You mentioned the $68 million backlog at I'm curious if you could provide a total value of contracts. It's not included in backlog.

Funded backlog if you will.

Oh Wow.

Yes.

Not off the top of my head, but I'll give you two big ones right just to give you. An example, if you look into the <unk>.

We announced.

Last winter I think it was.

$32 million contract for Crows, five which will go on for three years.

We're expecting the first purchase order for <unk> five coming up here soon but that would not appear in backlog at all.

Another example team move.

<unk>.

If you take the time to look into the original documents we signed.

When we.

Purchased L. Three based on navigation it specifies that.

A minimum of 222 units.

We will make their way into purchase orders at a minimum.

We don't have a final production price for that yet because it doesn't have to be set until after we are done with production readiness review, which is something that happens.

Yes.

After the final configuration is dose.

That would be at least $50 billion if not more.

And Thats just part of it all right.

<unk>.

Double triple yes, it's possible, but those are just two and those two alone would double more than double that.

The backlog.

Great.

Understood as it were.

Relates to <unk>.

Mentioned in September as the next milestone.

When do you expect <unk> deliveries too.

Become mature or are we a year away are we 18 months away to get to that run rate you've discussed.

Okay.

I think youre, probably looking at about a year from now.

It's.

The thing that you need to understand about this is you're already seeing.

Bits obtained move within the Bud late number so we were able to recognize the revenue for.

A.

And item in backlog, which is over $9 million, which is an advanced by a long lead materials.

Not all of the materials, just the longest lead parts.

And as our customer.

And we completed critical design review is the configuration gets locked down you'll see that progress into more production. The interesting part is of course that.

Just recognizing revenue for the material, there's not that much margin in it but even with that.

We are doing.

The sheer amount of Av.

Work flowing through Budd Lake has improved the operating results significantly.

So what I've said this I think.

Every conference in Vail.

A very large number of conversations you don't think a team of us as a hockey stick what youre going to see is continued sequential improvement in.

Sure.

The revenue number for Budd Lake.

As we progress through the program.

Okay. My last question.

I'm not sure if I understood correctly, but as it relates to the shortages.

You've talked about them for a couple of quarters are they related to a different component or the same components. The circuit Board you talked about.

And are you hearing or seeing or expecting any changes in the near future on these shortages how.

How much revenue are you unable to generate as a result of these shortages and did the customer wait for you to get these products or are they urgent needs where they have to go find them elsewhere.

Thank you.

Well.

In the aerospace and defense business.

Nothing happens quickly and it's rare that you have a situation where.

Any supplier would have a large number of these components.

Or even the final end product on a shelf and lead times tend to be very long in this business.

The particular components are again, primarily driven by temperature range and reliability requirements.

And so this.

Set of things, we're chasing is different from let's call. It general supply chain issues, which I think I've got better.

Over the past few quarters.

When you get to these high rail.

<unk> microprocessors Fpga's systems on a chip to go down to minus 55 degrees centigrade. There are very few people that can make them.

And everybody has what are called D pass ratings, which set priorities for acquisition.

And so what we may be able to buy.

For <unk> and get our hands on it.

Because it has.

A DFAST rating of <unk>, we can't get them for some of the other products because they don't have a DFAST rating.

So it's sort of complicated, but it's really confined to only several components.

Hopefully we will see this start to ease as we get into 'twenty four but I don't think this is.

Varies.

Much across the entire spectrum.

Sure.

Aerospace and defense companies in terms of getting their hands on these parts.

That makes sense yeah.

I appreciate all your time thanks.

Thank you.

I'm showing no further questions in the queue I'd like to turn the call back to Jeff.

Okay, that's fair for closing remarks.

Thank you.

And again I apologize for that.

Yes.

Bringing back a bug from the far reaches of the customer.

<unk> base.

But I'd like to thank everyone for their interest in EMCORE.

And recognize especially the aerospace and defense team for turning in such a strong effort in the past quarter.

And we look forward to the next chapter of EMCORE is in aerospace and defense business.

Okay.

This concludes today's conference call. Thank you you may now disconnect.

Okay.

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