EMCORE Corporation

Good day, and welcome to the MCOR Second Quarter 2021 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the call over to Tom Minichiello, Chief Financial Officer. Please go ahead.

Thank you, and good morning, everyone, and welcome to our conference call to discuss MCOR's Fiscal 2021 Second Quarter results. The news release we issued yesterday afternoon is posted on our website, MCOR.com, On this call, Jeff Richer, 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 for the quarter and will 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 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 the industry to be very 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 located at sec.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 facilitates comparisons across reporting periods. Investors are encouraged to read these non-GAAP measures, as well as the explanation and reconciliation of these measures to the most comparable GAAP measures included in our news release. I'll now turn the call over to Jack.

Thank you, Tom, and good morning, everyone. MCOR's second fiscal quarter revenue was up 15% over Q1, coming in at $38.4 million. More importantly, GAAP profitability increased from $0.08 to $0.13 per diluted share, a 63% increase. This combination of top-line growth and disciplined expense control resulted in excellent flow-through in the P&L. producing a non-GAAP operating profit of $5.9 million, or 15% of revenue. This represents MCOR's third consecutive quarter of growing profitability and represents the best financial performance that the company has turned in on a non-GAAP basis since at least 1997. Our strong financial performance happens against a backdrop of operational challenges. Of particular note were semiconductor shortages that we overcame in cable television transmitter production. Although we believe we're in good shape in terms of inventory for the June quarter, we are already working potential flashpoints for the September and December quarters since we expect these shortages to last at least six months. Of particular concern are RFICs and passives, which are being used in 5G and Wi-Fi 6 systems. If supplies get tighter, we have designs that use alternative parts and believe that we can deploy and qualify them on short notice. Inventory levels increased a bit quarter over quarter. However, we expect that this will resolve itself completely as we finish the transfer project from Beijing to Thailand. The transition of our cable TV manufacturing operations to Hytera's Bangkok facility has reached a point where we will be adding additional transmitter manufacturing equipment to increase capacity in Thailand. Transmitter yields in Bangkok have remained solid, and we expect to see production increases in Thailand in the June quarter. While COVID-19 concerns have generally been reduced in the U.S., Thailand has only vaccinated a limited number of people to date. The infection rates in the Bangkok area are worrisome and could disrupt our cable TV production plans. Consequently, we will watch things closely there until disease incidents decline and the vaccination rates meet the goals of the Thai government. Entry restrictions for foreign workers into Thailand have been loosened a bit, giving us an opening to get our Beijing team into Bangkok to finish the transfer. However, this window could close at any time. Turning to individual business areas, cable TV and sensing shipments drawn strong performance in the broadband unit. Chips were up slightly as well. MSOs continue to invest in their networks to break bottlenecks created by bandwidth demands from work-at-home initiatives and even home security systems. Somewhat surprisingly, MSOs have mentioned that video doorbells are placing significant bandwidth demands on networks and that their use is growing rapidly. Recent public comments from MSOs and major OEMs are consistent with our longer term order book, which now extends well into the March 22 order. Although we are always cautious about the cable TV business, given its cyclical nature, our backlog remains strong. Looking beyond the very near term in cable TV, we're seeing additional evidence that our proprietary linear optics will continue to lead the industry for many years. In the 2050 project, which was an extensive survey of MSOs sponsored by ATX Corporation and freely available on their website, several points were made that are worthy of quoting. ATX reported more than 60% of cable operators with more than a million subs expect to be serving customers from their HSC networks 20 years into the future. Nearly 30% of cable operators serving a million or more subscribers expect the lifetimes of their HFC networks to extend 30 years. As I discussed, broadband had a great Q2 led by cable television. However, the broadband business unit generated important successes outside of cable TV. We had strong sensor demand in the quarter, which we expect to continue for the foreseeable future. Broadly, our LiDAR and sensing components continue to garner interest from a wide variety of potential customers. Outside of sensing, we continue to rack up more design wins for highly differentiated chip products and expect to see growth materialize toward the end of calendar year 21. We're encouraged by the demand that we see for our new chip and sensing products and see a bright future for the broadband business unit beyond its cable television roots. Aerospace and defense declined slightly due to seasonal variation in delivery dates from QMEMS and Defense Opto, even with fog being slightly up. Margins were right around where we expected them to be. As we discussed last quarter, our QMEMS team in Concord announced several exciting new products. The SDI-170 was announced, which is our first product for airborne weapons platforms such as the JDAM Smart Bomb. Perhaps more importantly, the 170 has gone through rigorous testing at a foreign national laboratory and received high marks for its performance. The FDI 500 went through even more rigorous testing at a U.S. defense laboratory and came out number one against 18 other IMUs. These validations bode well for the future of our QMEMS products. Demand for our defense optoelectronics products remained solid with shipments for the FAA control tower, making up a significant fraction of revenue. Production orders for fiber optic gyro products remain steady to slightly up, with additional contract revenue for pre-production non-recurring engineering driving down our net engineering costs. The excitement over the EM300 is growing, and it continues to be evaluated by six Tier 1 prime contractors. We've made steady progress in design validation and qualification testing for our FOG products and are beginning to see the first signs of a return to normal operations within our customer base. As the number of vaccinated personnel increase both here at MCOR and with our customers, we expect to see a trajectory toward normal qualification scheduling. While we're seeing the first signs of this improvement, it hasn't become a significant change just yet. Even in states like Texas and Florida, where COVID-19 restrictions have largely been lifted. Moving on to overall guidance for the second fiscal quarter, we're expecting to see stronger than normal performance from our cable TV products with slightly increased revenue from our other products. The biggest notes of caution remain tied to semiconductor supplies and any unexpected changes with COVID-19 infection rates in Thailand. Taking all of this into consideration, we currently expect revenue to be in the range of $40 to $42 million. With that, I will turn the call back over to Tom.