EMCORE Corporation

Good day and welcome to the MCOR First Quarter 2021 Earnings Conference Call. Today's conference is being recorded. All participants are in a listen-only mode. There will be an opportunity to ask questions later, and you can do so by pressing star 1 on your telephone keypad. At this time, I would like to turn the conference over to Tom Minichiello, MCOR Chief Financial Officer. Please go ahead.

Thank you, Marion. Good morning, everyone. and welcome to our conference call to discuss NCORP's fiscal 2021 first quarter results. The news release we issued yesterday afternoon is posted on our website, NCORP.com. On this call, Jeff Rittercher, NCORP's president and chief executive officer, will begin with the discussion of our business highlights. I will then update you on our financial results for the quarter, 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 27A of the Securities Act of 1933 and Section 21E of the Exchange Act of 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, in particular, projections about future results statements about plans, strategies, business prospects, and changes in trends in the business and the markets in which we operate. Management cautions that these slower-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. 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 FDC's website located at fdc.gov, including the sections entitled Risk Factors in the company's 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 facilitate comparisons across reporting periods. Investors are encouraged to review these non-GAAP measures, as well as the explanation and reconciliation of these measures with the most comparable GAAP measures included in our news release. With that, I'll now turn the call over to Jeff.

Thank you, Tom, and good morning, everyone. From a revenue standpoint, MCOR's first fiscal quarter was nearly identical to the previous quarter. However, GAAP profits increased from two cents to nine cents per share, This combination of top-line consistency and expense control resulted in a non-GAAP operating profit of $3.4 million, or 10% of revenue. The NCORE team executed well, improving our financial results from Q4. From an operational perspective, the supply chain and operations team continued to meet the challenges of COVID-19-driven shortages. The biggest difficulties were delays caused by air freight and customs, especially at the end of the quarter. While we foresaw these problems, they were a bit worse than we expected. We don't expect improvement here until COVID begins to break. As we previously described, friction in the customer-facing business activities, such as development and new program capture and qualification, remained a challenge. We made good progress on these efforts in Q1, but many of the defense prime contractors that we work with have stringent work-from-home policies that continue to push schedules to the right. As you doubtlessly know, COVID made a major resurgence in California in December. We brought in mobile testing on a frequent basis and thankfully only saw a handful of cases at MCOR with no evidence of transmission inside of our clean rooms. Protecting the manufacturing and engineering teams that must work in our factories remains a top priority. Many of our non-technical staff are out of the office to minimize opportunities for transmission. Consistent and frequent testing will continue to be part of our protocols. We believe that we've gone the extra mile to protect people, but are mindful of the situation and continue to look to mitigate COVID-19 risks where possible. The transition of our cable TV manufacturing operations to Hytera's Bangkok facility made significant progress against its operational milestones. Transmitter yields in Bangkok remain on target and laser module yields continue to improve. Strong demand from our customers and the rash of COVID-19 outbreaks in both the Hebei Province in China as well as Thailand dictate that our best strategy is to hedge the geographic risk of COVID-19 outbreaks by continuing to operate Beijing and Bangkok in parallel until the end of the calendar year. In addition, our customers simply cannot afford the temporary loss of production capacity associated with the final move to Bangkok. We responded rapidly to challenges to keep production on plan but these incidents demanded additional measures to deal with the problems. Going forward, we will also ship lasers for our sensing customers out of Alhambra to further hedge risks and increase production volumes. Inventory levels increased a bit, quarter over quarter, due to customs delays and receipt of materials across three factories that are now producing laser modules. All things being equal, inventory should start to come down in the March quarter. Margins were strong on similar mix to Q4. We're still volume sensitive, and additional revenue will have good flow through in the P&L. The Thai government started to allow foreign workers back into the country right at the end of the December quarter. They have since tightened entry requirements to only admit Thai citizens. while our Thai manufacturing teams continue to improve their effectiveness, adding the highly experienced EA engineers into the mix would have a positive impact. I would also like to point out that the strong demand for cable PV products more than justifies parallel operation at both facilities until the end of the calendar year and enables us to better hedge the COVID-19 risk. Our customers expect certainty in their ship date and a multi-facility operation helps to provide that. Turning to individual business areas, cable TV and sensing demand throws strong performance in the broadband unit. MSOs continue to invest in their networks to break bottlenecks caused by bandwidth demand from work and home initiatives. Charter and Comcast recently announced earnings and their capital plans for the year. Comcast reported increases in scalable infrastructure balanced against reductions in CPE, while Charter highlighted the larger amount of node splitting that they're doing to meet bandwidth demands. These statements are consistent with our strong order book through the September quarter. Furthermore, we believe that the trend should continue through at least the December quarter. Although the cyclical nature of the cable TV business gives us pause regarding the ultimate duration of this upgrade cycle, we remain confident that we can complete our move to variable cost manufacturing while orders are strong. Looking beyond the very near term in CATV, we believe that MSOs will continue to invest in linear optics technology to meet their needs. DAA, or Remote PHY, keeps pushing further out to the right, while our development work on linear Remote PHY shelf products continues to gain traction. The broadband business unit also generated some important successes outside of cable television. Most importantly, we're seeing growing traction with our LIDAR and sensing components. On the LIDAR front, our chip design has already been qualified for the major design win we announced with the Tier 1 manufacturer. Beyond that, we are about to start sampling a second generation package designed to at least three more Tier 1 automotive subsystem manufacturers. Although volume shipments won't really occur until sometime in FY22, we're excited at the response that we're getting from these customers. Our China Rail design win drove strong demand in the quarter, which should continue for the foreseeable future. Outside of sensing, we continue to rack up design wins in highly differentiated chip products and expect to see growth materialize toward the end of calendar year 21. Taken together, the broadband business has many important growth opportunities outside of cable television. Aerospace and defense declined slightly due to contract delivery dates which tend to mirror the government fiscal year, which ends in September. Defense opto was steady, while QMEMS was down about 8%. Overall, I would characterize our manufacturing performance as solid. One of the most significant events that recently occurred was the State Department's ruling that our new SDI 500 Rev. F is no longer subject to ITAR export regulations. This dramatically increases the size of the market that we can address. The difficulties in getting ITAR export licenses are well known in the industry and substantial. With some caution, we expect that our newer QMEMS products will also fall into this EAR license category when we get our rulings from state. As we discussed last quarter, the QMEMS development team is staying on their schedules for new product introductions and process improvements, which will help productivity and margins as these can get qualified and rolled out. We remain excited about our first products for weapons platforms such as the JDAM Smart Bomb, and demand for our defense optoelectronic products remains solid, with shipments for FAA control power upgrades making up a significant fraction of the revenue. Descent Opto's new millimeter wave Q and V band products continue to gain customer interest in the market across military and commercial applications. Production orders for our fiber optic gyroscopes similarly remain steady. We are making slow but steady progress on new product testing and qualification for our FOG products and look forward for the time when COVID is behind us. We also received our first pre-production contract for a custom IMU and are working with our customer on this phase of a very large program. The excitement over the EN300 is growing. It is now being evaluated by six tier one prime contractors. As I pointed out, our confidence in the new FOD products remains strong despite the COVID-19 driven slowdowns in testing and validation. Moving on to guidance for the second fiscal quarter, we're expecting to see stronger than normal performance from our cable television and QMEMS product line. Our biggest note of caution remains tied to COVID-19 impacts on our personnel and supply chains in the US, China, and Thailand. Taking all of this into consideration, we currently expect revenue to be in the range of 34 to 36 million. With that, I will turn the call back over to Tom.