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.

Thank you, Jeff. Consistent with the preliminary results announced in April, consolidated revenue in the 2021 fiscal second quarter was $38.4 million, an increase of 15% when compared to $33.4 million in the 2021 fiscal first quarter. Aerospace and defense segment revenue was $13.1 million this quarter, lower by 4% when compared to $13.6 million in the prior quarter. Timing of customer orders for our QMMS navigation and defense optoelectronics product lines was the primary reason for the sequential quarter change, while revenue for our fog navigation business increased slightly. Driven by higher sales of single-access gyros for Raytheon's multispectral targeting system, and increased non-recurring engineering, or NRE, contract revenue. Broadband segment revenue is $25.3 million, up 28% when compared to $19.8 million the quarter before, driven by strong demand for our cable TV products as MSOs continue to expand their networks to meet increased bandwidth demands. In addition, revenue for our growing sensing business on a sequential quarter basis almost doubled largely on strong demand for the China Rail Project. Through the first two quarters of fiscal 2021, consolidated revenue was $71.8 million, which is already roughly two-thirds of the total for all of the prior fiscal year. Turning to the rest of the fiscal 2Q operating results on a non-GAAP basis, the A&D segment gross margin was 30% compared to 31% the quarter before, due primarily to volume and mix changes. Broadband's gross margin was 43% consistent with the prior quarter. Gross margins on a trailing 12-month basis for A&D and broadband were 32% and 41% respectively. Given the overall shift this quarter to a higher mix of broadband revenue, the consolidated gross margin increased to 39% in fiscal 2Q compared to 38% in the prior quarter. On a year-to-date basis, our gross margin of 38.4% is significantly ahead of the 28.9% during the same period a year ago. Operating expenses came in at 8.9 million in fiscal 2Q compared to 9.3 million last quarter. The main driver for the decrease was R&D expense within the A&D segment, which was $500,000 or lower for two primary reasons. One was the transfer to cost of goods sold of a higher amount of engineering labor expenses related to NRE contract revenue. The other was reduced material costs associated with several navigation product development projects. To put our operating expenses in perspective, OpEx during the first two quarters of fiscal 2021 totaled 18.2 million or 25% of revenue, substantially better than the 19.9 million and 40% of revenue during the same period last year. Moving to the bottom line, as a result of rising revenue, continued gross margin strength, and disciplined expense management, we grew operating profit in the March quarter to 5.9 million, and operating margin to 15%, compared to 3.5 million and 10% the quarter before. The significance of the operating leverage we have in our business model was on full display this quarter. On sequential growth of 15%, On sequential revenue growth of 15%, operating profit grew 72%. Adjusted EBITDA, which adds back depreciation, increased to 6.9 million or 18% in 2Q compared to 4.4 million or 13% in the prior quarter. March quarter's net income and EPS on a non-GAAP basis was 5.9 million and 17 cents per diluted share, compared to 3.4 million and 11 cents per diluted share the quarter before. Net income in EPS on a GAAP basis was 4.4 million and 13 cents per diluted share compared to 2.6 million and 8 cents per diluted share in the December quarter. Especially noteworthy in 2Q was our GAAP net income at 11.4% of revenue. Turning to the balance sheet, we had cash, net of a loan payable of 58.8 million at March 31st compared to 24.7 million at December 31st. The cash increase of 34.1 million included net proceeds of 33.1 million from the public offering completed in February. The additional one million was generated from ongoing business activities. The 2021 second fiscal quarter now marks the fourth consecutive quarter of positive cash from operations. Before we get to the Q&A, I'd like to share with you that both Jeff and I expect to be available for investor meetings at the following upcoming virtual conferences. On May 18th, the 16th Annual Needham Technology and Media Conference, and then right after Memorial Day, on June 1st, the Callen 49th Annual Technology, Media, and Telecom Conference, And on June 2nd, the 18th annual Craig Hanlon Institutional Investor Conference. We plan on providing further details prior to each event. So with that, we will now open up the call for your questions.

Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. We will pause for just a moment to allow everyone the opportunity to signal. Our first question is coming from Jason Schmidt with Lake Street. Please go ahead.

Hey, guys. Thanks for taking my questions. Just want to follow up on your comments on the supply chain constraint. Are you seeing any impact on gross margin or expect to see any impact on gross margin just with increased freight costs and things of that nature?

Hey, Jason. Not really. There's a number of what's called bottleneck components where we've seen some pretty outrageous price increases because you're going out to brokers and and smaller distributors that have figured out that they're the only ones that have supplies. But right now, it doesn't look like any of that makes up a substantial fraction of the cost, so I don't think it is really going to hurt us. The other thing is that in the case of the cable TV transmitters, of course, we do have fixed prices coming from our supplier, and so they have to eat some of those costs. So I don't think it's going to hurt us.

Okay, that's helpful. And obviously the broadband segment continues to see some really nice traction with that order book extending even further out. Just given that, is it fair to assume that you guys will be able to sort of buck that traditional seasonality in the December and March quarters?

As it looks right now, especially because I just reviewed some manufacturing schedules, Certainly, we're not expecting to see much in the way of seasonality change in the December quarter. Going into March, probably not much, but it's way too early to tell for sure. A lot of things move around, and we try to accommodate customer requests, but right now the order book is quite full in March.

Okay, I'll jump back in the queue. Thanks a lot, guys. You're welcome.

Thank you. Once again, as a reminder to our audience, you may ask a question by pressing star 1. Our next question is coming from Richard Shannon with Craig Allum. Please go ahead.

Great, Jeff and Tom. Thanks for taking my question. Congratulations on some nice numbers here. Maybe a quick tactical question for Tom on the guidance. You've given us a very nice revenue number here, and you're suggesting that the cable TV is most of the growth here. How should we think about the rest of the P&L here? I would imagine the gross margins could probably move upward somewhat, and how should we think about the OPEX movement as well here?

Sure, Richard. The gross margin and the OPEX has been steady the last few quarters as you can tell from looking at the if you look back not just this quarter but the even the two quarters prior so we'd expect more of the same you know we like where the gross margins are for broadband in this 43 range you know they could move a little bit up a little bit down in any given quarter but you know it's likely to get a little bit better with with volume increasing in the next quarter There's always mix and other absorption components that could change that, but that's what we expect to see. Then on A&D, as we've discussed in the past, that's a gross margin, again, that's been steady, as has been the revenue in that business segment over what's now probably five or six quarters. That's all about scale and the gross margin for A&D. We probably expect it to be pretty consistent in the near term. And then OPEX is, you know, it came in lower than expected this quarter. But there is a, as you probably heard in my prepared remarks, there's a, we transfer engineering labor expenses when it's attached to NRE contract revenue. And that was, hit a high point this quarter. And so there was more of that moved. on the P&L. So we would expect a little bit less of that next quarter, and you're probably looking at operating expenses, you know, back in the range where we've been, which is sort of in the mid-$9 million.

Okay, great. That's helpful. Jeff, a question here as it relates to your comments on the supply constraints past this quarter. You noted some issues here and well-known in the industry. How should we think about the impact on potential trends in your broadband or more specifically cable business going beyond the June quarter here? Obviously a fantastic number here for June. Are you suggesting to us it's going to flatten out for a few quarters or a couple of quarters while these get burned through or could we actually see it down sequentially from June after that?

Well, let me fire up my crystal ball here. You know, right now, we think we understand, you know, and certainly in the June quarter, we feel pretty comfortable that we've got the supplies sorted through. And, you know, the things we're counting on are largely in hand at this point. You know, I wouldn't call it a shocker necessarily, but, you know, the behavior we've seen out of some of the semiconductor manufacturers is, you know, orders that have been confirmed three times, all of a sudden, you know, get pushed with no warning. And so it's, you know, our supply chain's view of the world is, you know, that a bird in the hand is what really matters in terms of getting a hold of the components. There are, you know, as I pointed out earlier, there are a couple of little, you know, literally a half a dozen components that are what I'll call, I'll term the bottleneck components. And we are actively going after those for, you know, Q4, September quarter and December quarter. The good news is that we don't need hundreds of thousands of millions of these things and so we can go into the smaller distributors and be successful. I don't think it's going to hurt us and beyond the current quarter in terms of guidance, You know, I see reasons why, you know, People TV could still continue to move up a bit in terms of revenue. But we've got to let our customer scheduling tell us that. And, you know, it's a little hard, you know, when we start talking about the September quarter shipments to know exactly where we're going to end up. Does that answer your question, Richard?

Yeah, that's very helpful. Thanks for that view. My last question before I jump in the queue here is probably kind of a multi-part one here, Jeff. You referenced it in your comments, and you're really talking about the press releases you've seen from me in the last month or so on your two new SDI products, which seem very intriguing. Going after some markets that have been sole source for a long time here and showing some very strong performance specs here, how do we think about these – getting design wins, going through validation, qualification processes, and eventually showing benefits to your income statement. What kind of time frame? These obviously are, you know, could be long lead time, you know, projects. So I want to get a sense of when we start to see some success from those in the income statement.

Yeah, you know, if we were in a normal world, I think it would be very easy to lay this out. You know, the challenge we've got is that in some cases, you know, customers are really spending limited amounts of time in the office. And we're certainly starting to see some of that break now in terms of scheduling. But for, let's call it, it's well known that the, for example, the FBI 170 is a form, fit, and function compatible replacement for the Honeywell HG1700. So in semiconductor parlance, we're going to try to engage in some socket stealing. And for applications like that, You know, you can typically get qualified in six to nine months, and then you start into a lower volume production as, you know, tens, multiples of tens, even 100 a quarter, and then it can move up from there. So I think there's a chance that some of this stuff we could see right at the end of the calendar year, but certainly into 22 there should be a pretty significant impact from some of these products.

Okay, great. That's a great perspective. I think that's all the questions for me. I'll jump back in the queue, guys. Thank you.

Richard, let me give you one more thing. Interestingly, you know, I mentioned that the SDI 170 was tested in a foreign national laboratory. One of the things they did was validate that our communications protocols, you know, the electrical performance of the communications interface was indeed drop-in. And so that, while technically not terribly demanding, is one of these things that you really want to make sure you get right. And we were glad to see these guys come back and say, yeah, you got it right.

Great additional perspective, Jeff. Thank you. That's all for me. You're welcome.

Thank you. That concludes today's question and answer session. Mr. Riddicher, at this time, I will turn the conference to you for any final remarks.

Thank you. And I'd like to thank all the rest of you for your interest in MCOR and your time and attention on the call. I also want to recognize our team for such a great quarter and producing outstanding financial results. Please stay safe, everyone, and goodbye.

Thank you. This concludes today's call. Thank you for your participation. You may now disconnect.