EMCORE Corporation

Good day and welcome to the MCOR third quarter 2021 earnings call. Today's conference is being recorded. At this time, I would like to turn the conference over to Tom Minichiello. Please go ahead, sir.

Thank you. Good morning, everyone, and welcome to our conference call to discuss MCOR's fiscal 2021 third quarter results. The news release we issued yesterday afternoon is posted on our website at mcorr.com. On this call, Jeff Riddicher, MCORR'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 forward looking statements relate to future events or future financial 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 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 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 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. Now I'll turn the call over to Jeff.

Thank you, Tom. Pardon me. And good morning, everyone. M-Corp's third fiscal quarter revenue grew 11% over Q2, coming in at $42.7 million. Non-GAAP profitability grew even faster, showing an 18% increase from $0.17 to $0.20 per diluted share. Our strong top line growth and disciplined expense control continued to produce excellent flow through in the P&L, producing a non-GAAP operating profit of $7.9 million or 18% of revenue. This represents M4's fourth consecutive quarter of growing profitability and earnings, demonstrating the strong operating leverage in our business. We achieved this strong performance against the backdrop of COVID challenges and semiconductor shortages. Semiconductor availability tightened during the quarter and surprised pushouts of orders materialized as expected. While we believe that we're in good shape in terms of inventory for the current quarter, we expect to continue to redesign certain products to accommodate ongoing problems in the semiconductor supply chain. Inventory levels increased a bit quarter over quarter. However, we expect that this will resolve itself completely as we finished the transfer project from Beijing to Thailand. As I laid out in our last call, we added transmitter manufacturing equipment to increase capacity in Thailand. As a result, we saw significant production increases in Thailand during the June quarter with high yields. Achieving this milestone enables us to shut down transmitter builds in China starting in October. While COVID-19 outbreaks in Bangkok have caused turbulence in our CATV production output, our manufacturing lines are back up and running. Entry restrictions for foreign workers into Thailand have remained a significant hindrance to getting our Beijing team into Bangkok. However, we continue to make progress on production yields nonetheless. Turning to our individual business areas, cable TV drove strong performance in the broadband unit. Ships were up slightly as well. Our order book in cable TV grew despite the record pace of shipments. We continue to enjoy strong backlog in cable TV, although we will always be cautious about its cyclical nature. Broadly, our LIDAR and sensing components continue to garner interest from a wide variety of potential customers. Outside of sensing, we signed a contract for a new highly differentiated chip product which could be a major source of revenue growth beyond FY22. Overall, we are encouraged by the continued demand that we see for our new chip and sensing products and see a bright future for the broadband business unit beyond its cable TV route. Aerospace and defense declined slightly due to startup delays in a new EMS provider to our defense optoelectronics business. Our previous supplier decided to relocate their SoCal assembly facility to the Bay Area, which left us to find and qualify a new supplier on short notice. QM's and FOD's revenue were both up slightly, and QM's margins improved substantially due to a breakthrough in manufacturing engineering in Concord. Our pace of innovation in navigation has remained high, and has produced some important results. Our EN300, which has 10x the performance of competitive fog products, recently released improvements which will expand the range of applications from targeting platforms to more vibration-intensive environments. Customers are increasing their activities to evaluate and qualify our Quark MEMS products based on the compelling test results reported by both foreign and U.S. Defense Laboratories, where the SDI-500 came out number one against 18 other IMUs. We've made steady progress in design validation and qualification testing for our FARG products and see a slow return to normal operations within our customer base. Clearly, the Delta variant has injected caution into the plans of businesses everywhere, but with that said, we continue to see evidence of improvement. While we're not out of the woods yet, even in states like Texas and Florida, progress on qualification and integration continues. Over the next several quarters, we expect to make important announcements about the growth of our navigation business. Moving on to overall guidance for the second fiscal quarter, third fiscal quarter, and into the fourth, we expect to see similar performance in our cable TV business with slightly increased revenue from our other product lines. Our biggest notes of caution remain tied to COVID-19 infection rates and semiconductor supplies. Taking all of this into consideration, we currently expect revenue for the fourth quarter to be in the range of 42 to 44 million. With that said, I will turn the call back over to Tom.

Thank you, Jeff. Consolidated revenue in the fiscal third quarter was 42.7 million. an increase of $4.3 million or 11% when compared to $38.4 million in the fiscal second quarter. Aerospace and defense segment revenue was $12.3 million this quarter compared to $13.1 million in the prior quarter. The overall lower A&D revenue was attributable to our defense optoelectronics product line due to the timing of customer orders and transitioning to a new contract manufacturer. This was partly offset by increased revenue for our navigation business, as both the QMEMS and FOG product lines were up in 3Q versus the quarter before. Broadband segment revenue was $30.3 million, an increase of $5 million, or 20%, when compared to the $25.3 million last quarter. The broadband performance was driven by continued strong demand for our cable TV products. Through the first three quarters of fiscal 2021, Consolidated revenue was $114.5 million, which is already higher than the total for all of the prior fiscal year. Let me now turn to the rest of the operating results for the quarter, the focus of which will be on a non-GAAP basis. The A&V segment gross margin in 3Q was 33% compared to 30% the quarter before, driven primarily by improved QMEMS margins. The growth of our broadband business resulted in its gross margin coming in strong again in 3Q at 44%, slightly better than the 43% last quarter. Segment gross margins on a trailing 12-month basis for A&D and broadband were 31% and 43% respectively. Given the overall shift this quarter to a higher mix of broadband revenue, the consolidated gross margin increased to 41% in fiscal 3Q compared to 39% in the prior quarter. On a year-to-date basis, our consolidated gross margin of 39% is significantly ahead of the 31% during the same period a year ago. Operating expenses were $9.6 million in fiscal 3Q compared to $8.9 million reported in the prior quarter. This was primarily due to R&D expense. As noted on our last call, due to a higher level of NRE contract revenue in fiscal 2Q, the OPEX reported for that quarter excluded some engineering labor expenses that were recorded as cost of goods sold. This quarter, due to lower contract revenue, those costs remained in R&D expense. In addition, R&D project material costs for both business segments were up in 3Q compared to 2Q. It's important to keep our OPEX level in perspective During the first three quarters of fiscal 2021, operating expenses were 24% of revenue, significantly better than the 39% of revenue during the same period last year. Moving to the bottom line, as a result of rising revenue and continued gross margin shrink, we grew operating profit in the June quarter to 7.9 million and operating margin to 18%, compared to 5.9 million and 15% the quarter before. On sequential revenue growth of 11%, operating profit grew 33%. Adjusted EBITDA increased to 8.9 million or 21% in 3Q compared to 6.9 million or 18% in the prior quarter. Adjusted EBITDA on a trailing 12-month basis was 24.3 million or 16%. Net income and EPS was 7.9 million and 20 cents per diluted share compared to 5.9 million and 17 cents per diluted share the quarter before. Shifting to the GAAP results for a moment, there are a couple of items I'd like to point out. Net income and EPS reported for the quarter was 13.6 million and 35 cents per diluted share and included two non-recurring gains totaling 7.4 million. One was for $6.4 million due to the extinguishment of debt associated with our previously disclosed PPP loan forgiveness, and a second one was for $1 million related to the expiration of uncertain foreign tax reserves. Excluding both of these one-time items, 3Q GAAP net income and EPS would have been $6.2 million and $0.16 per diluted share compared to $4.4 million and $0.13 in 2Q. Turning to the balance sheet, we had cash of $68.3 million at June 30th compared to $65.3 million at March 31st. The cash increase of $3 million consisted of $5 million of operating cash flow, less $1.9 million used for CapEx, and $100,000 for financing activities. The third quarter now marks the fifth consecutive quarter of positive cash from operations. So with that, we are now opening up the call for 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 1 to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions. We'll take our first question from Jason Smith with Lake Street.

Hey, guys. Thanks for taking my questions. I just want to look at the cable TV business. I think, Jeff, last quarter you mentioned that order book extended through the March 22 quarter. Just curious if there's any update on how far that extends out today.

Yeah, I think the best way to describe it is it continues to push out to the right. You know, the rate at which the, we call it the backlog, is growing has slowed a bit. But overall, you know, you have to take a little bit of the message in context because the March quarter is the slowest one of all. And so, as companies look at placing orders for, let's call it the winter, Of 2022, you'd always expect to see something happen that's a little slower. But we're not, you know, at this point, we don't believe it's part of a significant trend.

Okay, that's helpful. And just following up on your supply chain comments on redesigning some certain products, is that causing some demand to also be pushed to the right?

So far, no. What it really boils down to, Jason, is the latest caught package types, micro BGAs that are very, very dense, are in the strongest demand. We're shifting to package types that are a little bit bigger. and have better availability. So it's not like it's a major issue, just a lot of detail involved with it.

Okay, that makes sense. And the last one from me, and I'll jump back into Q. I know there's a lot of moving parts with the manufacturing move, but just curious how we should think about gross margin going forward.

At this point, I wouldn't expect gross margin to change a lot. What we're suggesting here is not suggesting. The plan is that right after we're done with the fiscal year end, the transmitter bills that are currently occurring both in Beijing and Thailand will switch 100% to Thailand. And so we'll lose some fixed costs then. And because the box bills, which is the major part of the bill of materials, will no longer be owned by us until the very end of the process, we'll also expect to see inventory come down and cash work its way back into Tom's cold little heart. So I don't think you're going to see gross margins change much at all. Yields are good. You know, costs are stable. We've always got to be a little mindful of the wild card, if any, is just, you know, when you're buying parts from brokers, you've got the opportunity to see purchase price variance go against you for a period of time. And, you know, it is what it is. Everybody's dealing with it.

Yeah, just to add, Jason, I think once we're in a good spot on the broadband gross margin, I think once we're at full outsourcing, it'll then largely be a function of the product mix and absorption in the FAB.

Okay, that's helpful. Thanks a lot, guys.

We'll take our next question from Paul Silverstein with Cowan.

Jeff and Tom, at the risk of beating the dead horse, I just want to make sure the supply chain, from what you just said, it had zero impact or virtually no impact on either revenue or on margin structure? I'm referring both to the quarter you reported and looking forward.

Yeah, that's true. For example, Paul, we've got one product that's nearly through qualification. It's just a change to microprocessor to accommodate supply chain issues on NXP devices, which are pushed out 52 weeks. Just a lot of detail associated with any recall, but that's not expected to cause much turbulence in the gross margin line. And it hasn't affected us in terms of what we're able to ship. We've been pretty careful about making sure supplies on hand are the cases that we build our production model around as opposed to when manufacturers are telling us that delivery dates are going to materialize because they're not accurate, not even close. It's certainly a source of a lot of problems, but it hasn't hurt us yet. And we think we're okay.

And I heard your comments on cable TV and your expectations with respect to ongoing strength, albeit the slowdown in the rate of growth. But I would think from the comments out of Comcast and Charter, and particularly off their earnings calls, and I'd love to get your take. To my ear, it sounded relatively positive in terms of implications for ongoing demand strength. But, again, I'd like to hear your take. I trust you're fully aware of what they're thinking and saying.

Yeah, we are. You know, we get the incestuous nature of the cable TV business. I mean, you have guys who used to be customers that are now, you know, working in the MSOs, and, you know, we all have conversations in between quarters. Long and short of it is, you know, we're – Confident that, you know, the bandwidth growth requirements are not going away. The MSOs are continuing to invest for the reasons that you heard. If we're, you know, focusing on anything in terms of, you know, rate limiting steps for them, it's, you know, availability of trucks and, you know, the folks that can pull new fiber and, you know, get things up on poles So for right now, I would say status quo is probably right. We've heard, we've had conversations that strength is gonna materialize or keep going all the way through 22, maybe into 23. We've heard people that are on the short side of that argument. And so if you sort of try to integrate all the comments, we still see a very positive environment for cable. And the nice thing is, you know, for us, as we continue to shed fixed costs and bring the inventory, you know, back into the cash line of the balance sheet, you know, our financial performance will continue to improve. And so I don't have a lot of counterarguments to what, you know, we heard from Comcast and Charter. I've only skimmed through the transcripts. So I'm going to read through them a little more carefully, but I didn't see anything in there that I would have disagreed with.

One last question, if I may. Any incremental insight y'all can offer on the A&D pipeline?

I'm sorry, Paul. That one didn't quite come through.

Any incremental color you can offer regarding pipeline activity in A&D? Yeah, there's a couple of points I can make.

What we're expecting to see this quarter, for example, over in the fog line, you're going to see roughly five new customers start shipping in very small volumes on EN-300s. We're starting to see bits and pieces of the commercial aircraft business come back. That was one of the first things that got clobbered with COVID were the BizJet upgrades and Boeing 777X. Collins Aerospace, which is now part of Raytheon, is taking more product, and we see more signs of life from those guys. I mean, their revenue got clobbered by 90% in fiscal 20. The other point I would make is that we're now actually having visits with customers that we haven't been able to physically see in 12 to 18 months. We've got a team over in England right now working with a major customer. We've got another group leaving for Turkey, a larger group, this week to talk to major customers about opportunities. You know, what we're seeing, Paul, is a combination of, let's call it, small shipments of NAP products that are a good harbinger of things to come and more aggressive engagements by companies that are starting to open their doors, you know, despite some of the, you know, COVID, you know, wet blanket that's being thrown on everything.

I appreciate the responses. I'll pass them on. Thank you. You're welcome.

And again, if you would like to ask a question, please press star 1. That's star 1 if you would like to ask a question. I would now like to take our next question from Richard Shannon with Craig Howland.

Hi, Jeff and Tom. Thanks for taking my questions as well. Maybe I'll follow up on the cable TV topic here. You've obviously had a great improvement over the last few to several quarters here in the your guiding cable TV flattened in the quarter. With the continuing backlog here and your thoughts you just conveyed, Jeff, here, would you kind of view your cable TV business as a kind of a steady level here for a while, obviously taking into account seasonality that you mentioned? Or would you have us think about any sort of other trajectory in this business for the next year or so?

Interesting perspective inside that question, Richard. I think you got it largely right. I don't see a lot of things changing, albeit if you hit the winter and you've got the normal sort of seasonality impact just due to installs. We'll expect to see some level of moderation, but overall I think things in cable are steady, they're good, they're a powerful source of cash and profits. and really giving us the chance to, it's not so much weather the COVID storm as much as it is be patient through the process of our defense customers opening their doors again. I think they've been some of the most cautious folks in terms of the way that they've looked at opening up their facilities, hosting visits, When you go to do some of these integration tasks, doing things over the phone doesn't really, it's nowhere near as effective as having a couple of engineers sitting down with instrumentation in front of something that isn't quite working the way we expect it. And integration issues, little software things, Those are the sort of bugaboos that tend to put schedules to the right. But we're now seeing signs, again, that that is improving. So yeah, steady as she goes with cable. But again, from my standpoint, we've talked about this. Dismantling the fixed cost structure inside of cable is a top priority for me and Tom. Getting that working capital back into cash And, you know, cutting inventory down, this is, you know, the time to do it. As I like to say, an ancient Chinese proverb, right, dig a well before you're thirsty. So long-winded answer to a good question.

Okay, that's helpful. I'm going to follow up on one of the prior questions here on the navigation sensor business. You know, if you look at the sales trend here, It's been roughly in a flattish line here, the reasons why you've talked about liberally here. Can you give us a sense of where you might see the sources of a breakout from these levels here? Is it more from QBEMS or FOG? What type of customers? Anything you can kind of give us a sense of the expected breakout of revenues in that segment?

Yeah. So I'm trying to give you a couple ideas for concrete catalysts. One of them is a return of business from commercial aviation into QMES. We lost a couple million bucks a year in revenue as Collins got hit, and we're now seeing forecasts that look considerably better and order rates that are picking up from Collins. As we take a look at navigation on the fog side, again, you've got about five customers that are going to be taking low-level production orders this quarter. The bad news is it takes a little while to get to full production. The good news is that once that happens, it's also hard to slow down. We've got a major program. We announced in the press A couple months ago, this was for an airborne pod. It was a million-dollar contract. There's going to be another one to accommodate some additional design changes that the customer wants, and that's going to move into a higher rate of production probably in the second half of 22. And so it's a wide variety of things, Richard. It's not just any one thing. To, you know, amplify the point I made About EN300, it offers up to 10x the accuracy in bias, inaccuracy, errors over temperature compared to other products. And now we've expanded the vibration range that it works in so you can get it off of just airborne targeting systems and into places where vibration matters a lot more. ground applications, guns, et cetera, et cetera. I know it seems a bit prehistoric that you've got to worry about aiming guns, but you have to be able to do it in GPS-denied environments, and it turns out the ability of the EN-300 to handle that application is important, and shock and vibe matters a lot. So when I talk about... you know, expectations that we're going to have some more important announcements, it's going to come from those areas.

Okay. That is helpful commentary as well, Jeff. Next question here is on your chip business here. I think you mentioned you signed a new contract for an exciting area that you didn't elaborate on. Maybe if you can give us a little bit more details on application and when we might see that come to fruition here. And then any other progress in the LiDAR space, either from existing customers or progress or even new customers signed up there?

Sure. So providing color is a little bit hard in terms of who it is and what they're doing with it. But it's certainly got a potential to be a multiple seven-figure-a-year sort of a product. It's a big deal, and we have a contract which provides NRE payments from the customer. And so, you know, they've got skin in the game, and both sides are happy with the way the agreements work. So, you know, clearly it's a Tier 1 with the kind of sophistication and resources to engage in that kind of development with us. As far as LIDAR goes, It's interesting because, you know, the planning cycle is over on the traditional automobile side. I was having this conversation with our business unit VP, you know, when I was working for GM many years ago. It was, you know, close to 10 years. And it's shrunk since then, but it's really hard for the big guys to, you know, hit a planning cycle less than five years. And so what we're seeing is more activity in the three to five years from now. Additionally, what we're seeing is new potential uses that are non-automotive with customers that are approaching us, albeit from lower volumes, but still interesting in terms of maybe starting to hit us at the end of 2022. A lot of samples are going out, large numbers of samples, 50 at a time, 100 at a time. I think the big takeaway there, Richard, is just that there are non-automotive uses for the LiDAR product, which are now starting to hit the radar, that are on a shorter integration time path than cars. when we have something to say about that, we'll certainly, you know, get announcements out there.

Okay. We look forward to hearing about that. My last question, you know, just kind of looking at your nav sensor business here, you obviously have added to an internal business here with an acquisition a couple years ago. I wonder what you're seeing out there in terms of potential, you know, bolt-ons here to help out either technology-wise or advertising. add new technologies or, you know, gain some scale. Just any thoughts about the potential there and what the environment looks like.

Sure. So, you know, Mark Tomagielo, our VP of CorpDev, and I have spent a lot of time on this. You know, there's one company that we really, you know, made a hard run at, and they're just not interested in, you know, any kind of a combination or relationship that makes sense. When you get past Northrop Grumman and Honeywell, the market starts to get fragmented in a hurry. But with that said, what we're seeing is large vertically integrated guys that have an interest in carving out parts of their business devoted to NAV, and we've seen some synergies which could make those attractive opportunities acquisitions for us. There's less than a handful, right, of those, you know, three, five, maybe tops, various sizes, you know, ranging from, I don't know, $10 to $50 million a year in revenue. And Mark and I are working on, you know, on those efforts as they become actionable. There are also, there is a way of looking at the market a little differently. And if you've ever heard about resilient PNT, you'll know what I mean. And we are also investigating how those product lines could be integrated underneath an M4 umbrella as well.

Okay. Very interesting. I appreciate the thoughts. That's all for me. Thanks a lot.

Thanks, Richard.

That concludes today's question and answer session. Speakers, at this time, I will turn the conference back over to you for any additional or closing remarks.

Thank you. I'd like to thank all of you for your interest in MCOR and tuning in so early. And finally, I'd like to recognize our team for a terrific quarter and producing outstanding financial results for our shareholders. Please stay safe, everyone, and goodbye.

this concludes today's call thank you for your participation you may now disconnect