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spk05: Good day and welcome to the MCOR fourth quarter 2021 earnings call. Today's conference is being recorded. At this time, I'll turn the conference over to Mr. Tom Minichiello. Please go ahead, sir.
spk06: Thank you. Good morning, everyone, and welcome to our conference call to discuss MCOR's fiscal 2021 fourth quarter results. The news release we issued yesterday afternoon is posted on our website, mcor.com. On this call, Jeff Ritticher, 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 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 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 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 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 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'll now turn the call over to Jeff.
spk03: Thank you, John, and good morning, everyone. MCOR's fourth fiscal quarter reached a high point for the year, coming in at $44 million. Non-GAAP earnings were $6.8 million, and adjusted EBITDA was $7.8 million. Semiconductor and supply chain challenges affected our gross margins just a little bit, still generating a solid 39%. MCOR continued to perform well despite supply chain headwinds and continue to demonstrate the strong operating leverage in our business. Semiconductor availability was largely adequate during the quarter, but as additional logistic challenges emerged in the supply chain, unusual pushouts of material occurred. We believe that our semiconductor inventories are in good shape for the current quarter. However, we've seen surprise delays in receipts of materials ranging from special purpose epoxies to sheet metal components, and everything in between. Inventory levels may have to rise temporarily. However, we expect that inventories will drop as we finish the transfer project from Beijing to Thailand. The shutdown of transmitter builds in China and their transfer to Thailand should be completed this quarter. Beyond this, the current schedule shows that the remaining laser line in China will move to Thailand after Chinese New Year, completing the entire production transfer project. We've recently fielded questions regarding power outages in Beijing and how those have affected production. We're pleased to report that our Chinese manufacturing operations have been almost completely unaffected by the recent power problems. And we've also managed to steer clear of any COVID problems as well. Entry restrictions for foreign workers into Thailand have eased somewhat, and we now have a Chinese team in Bangkok working on technology transfer and expect this to transition into normal Kaizen operations through the March quarter. The most important takeaway is that we will sell our remaining inventory and manufacturing assets to Hytera Fastrain over the coming months, reducing inventory and fixed assets while returning cash to the balance sheet. Turning to our individual business areas, cable TV continued to drive strong performance in the broadband unit. We continue to enjoy strong backlog in cable TV, although we will always be cautious about the cyclical nature of the business. Chips, wireless, and sensing taken together were roughly flat with the previous quarter. The most important thing to note about the broadband business is the growing number of chip development contracts we've received, along with the total level of customer funding so far, that totals several million dollars. With three such contracts in place and two others that are expected to close within the next couple of months, MCOR has firmly planted the seeds of growth in broadband. Furthermore, the first of these new chip products are expected to start shipping in Q3 and Q4 of FY22 and are expected to contribute tens of millions of dollars in revenue by 2025. These development agreements represent an important milestone for MCOR because they are expected to drive consistent FAB utilization, which will counteract cable TV's cyclical nature. This is an important area of focus for the company, and we're confident we can put the additional capacity in place to take full advantage of these opportunities. Airspace and defense declined slightly due to continued supply chain delays with the new EMS provider in our defense optoelectronic business. QMEMS and fog taken together were roughly flat, with fog being up slightly. QMEMS margins were affected by a large shift in mix towards a notoriously difficult product that we make for the U.S. Navy. We're seeing improvement on that IMU during the current quarter and expect to see continued progress beyond that. Our new automated assembly tools should also make a positive impact on margin as they arrive and are installed over the next few quarters. Multiple negotiations with international defense contractors are underway for our SDI-170 IMU with discussed annual target volumes ranging from 1 to 4,000 units per year, most of which will be used in precision-guided munitions. We fully expect this application will be a primary growth driver for MCOR's aerospace and defense business within the next two years, driving incremental revenue in excess of $20 million a year. The SDC-500 is also undergoing qualification testing for several domestic and international programs with a serviceable market of 1,000 to 2,000 units per year. Taken together, these results demonstrate the growing momentum for our QMEMS navigation products and future growth beginning this year. Beyond the short-term in QMEMS, the test results that MCOR presented at the Joint Navigation Conference were judged best in conference, demonstrating our ability to drive fog-level performance into our QMEMS technology. These improvements in performance and size will create significant new opportunities in the market and are already being designed into a less than nine cubic inch inertial measurement unit with better than one degree per hour bias performance under all clauses. This product will be used in interceptor missiles where accuracy and size, weight, and power are crucial to success. Our fog products are also gaining traction in the market. We expect to deliver the remainder of pre-production units in the first phase for a new airborne pot, which will start low-level production in the next year. The total value of this program is now estimated at $70 million over the next seven years. We expect to be awarded one more non-recurring engineering contract to complete some modest engineering changes for production before everything is completely locked down. The newly ruggedized EN300 IMU is being vetted by more than 10 prime contractors and laboratories in the U.S., approximately doubling the size of its application space. The EN300 has demonstrated 10x improvement in bias stability and noise performance at the same cost points as the main competing Northrop Grumman LN200 We are also working to push the EN300 to short-term navigation grade specs with approximately twice the price performance of the Honeywell HG5700. At the high end of our product line, the EN2000 INS has met all of its required specifications on a confidential Navy program. The EN2000 achieves better than .01 degree per hour bias stability and will be our main platform to address long-term navigation-grade IMU, INS applications that require superior cost, size, weight, and power. We're very encouraged that we've been able to finally get in front of our defense customers for face-to-face meetings over the last month and hear firsthand how things are going. We see these meetings as important milestones for an industry that is just starting to reopen. Over the next quarters, we expect to make multiple important announcements about the growth of our navigation business. Moving on to overall guidance for the first quarter, we're expecting to see increased revenue from aerospace and defense product lines and a little bit less in cable TV, largely because of the holidays. Our biggest notes of caution remain tied to surprises in the supply chain, Taking all this into consideration, we currently expect revenue to be in the range of $41 to $43 million. With that, I will turn the call back over to Tom.
spk06: Thank you, Jeff. As you may have seen in our news release yesterday afternoon, we delivered very strong results for the fiscal fourth quarter. Consolidated revenue was $44 million, which was at the high end of our guidance range. Revenue for the quarter increased 1.3 million or 3% when compared to the 42.7 million in the fiscal third quarter. Broadband segment revenue is 32.2 million, an increase of 1.9 million or 6% when compared to the 30.3 million last quarter. The broadband performance was driven by continued strong customer demand for our cable TV products. Aerospace and defense segment revenue was $11.7 million this quarter, compared to $12.3 million in the prior quarter. The sequential A&D revenue change was attributable to our QMEMS product line, primarily due to a mixed shift to a product with lower production yields, and defense optoelectronics, primarily due to an ongoing supply chain transition. Partially offsetting these changes was higher FOD revenue, driven by an increase in orders for our single-access gyro. For the full 2021 fiscal year, consolidated revenue was 158.4 million, with approximately two-thirds broadband and one-third A&D. The 158.4 million for the year was an increase of 48.3 million, or 44 percent, when compared to the 110.1 million during the prior fiscal year. Let me now turn to the rest of the operating results, the focus of which will be on a non-GAAP basis. Consolidated gross margin was 39% for both 4Q and the year. On a sequential quarter basis, the 39% compares to 41% in the third quarter, largely due to the A&D segment's gross margin in 4Q, where a combination of lower revenue, a year-end physical inventory adjustment, and lower than normal production yields at our Concord operation impacted margin. On the broadband side, the increased revenue and higher overabsorption of fixed costs drove a sequential quarter increase to its gross margin. For the full year, the 39 percent consolidated gross margin was a six percentage point increase when compared to the 33 percent in fiscal 2020, driven largely by broadband's 10 percentage point year-over-year expansion. Operating expenses were $10.5 million in fiscal 4Q compared to $9.6 million in the prior quarter. The sequential movement was due to increased R&D expense as a result of lower customer-funded R&D and increased project material usage. While SG&A was higher in 4Q, also due primarily to a couple of lumpy items, namely business taxes and professional services fees. For the year, OpEx decreased to $38.2 million in fiscal 2021, compared to $39.7 million the year before, driven by lower R&D expenses for the A&D business. In addition, OpEx as a percent of revenue was well below the 30% mark for the year, finishing at 24% of revenue. Moving on to the bottom line, operating profit was very strong again in the September quarter at $6.8 million, for an operating margin of 16%. For the year, operating profit was $24.1 million for a margin of 15%. Adjusted EBITDA was $7.8 million in 4Q and $28.1 million for the year, and 18% of revenue for both periods. Net income in EPS for the quarter was $6.8 million and 17 cents per diluted share, and for the year was $24 million and 67 cents per diluted share. Shifting to the GAAP results for a moment, net income in EPS for the quarter was 5.1 million and 13 cents per diluted share, and for the year was 25.6 million and 72 cents per diluted share. The full year results included two non-recurring gains totaling 7.5 million that were reported in the third fiscal quarter. Excluding those one-time items, full year GAAP net income in EPS would have been 18.2 million and 51 cents per diluted share, still a substantial turnaround from the prior year. Turning to the balance sheet, we had cash of $71.7 million at September 30th compared to $68.3 million at June 30th. The quarterly cash increase of $3.4 million consisted of $5.4 million of operating cash flow, less $2.4 million used for CapEx, plus $300,000 from financing activities. Not only was this the sixth consecutive quarter of positive cash from operations, on a year-over-year basis, MCOR's cash generated from operations grew by $15.2 million. So with that, we are now opening up the call for your questions.
spk05: Thank you. If you wish to ask a question, please signal by pressing star 1 on the telephone keypad And if you use your speakerphone, please make sure that your mute function is turned off. Again, it's star one for a question. We will now pause for just one moment. And our first question comes from Paul Silverstein from Cowan. Please go ahead.
spk02: Yeah, Jeff and Tom, can you just go over the margin outlook both what drove the shortfall, and more importantly, what your expectations are over the course of the next 12 months and beyond?
spk03: Yeah, let me try and tackle that to begin with. So if we break things into two chunks and we look at broadband, I think things are going to stay pretty similar to where we are right now. Remember, the move to EMS essentially allows us to buy at a fully landed cost that's been negotiated. And so I don't see margins moving around very much from where they are right now. Let's call it the low 40s. For the aerospace and defense business, we need to, you know, essentially what's happening is as the A&D business, and especially navigation, cranks up a bit, we're going to see stronger absorption in A&D, and as that happens, margins are going to rise quite a bit from where they are. There's a lot of moving parts in that, but overall, I would say we're going to see something stable on a broadband and some improvement in A&D over the next year.
spk02: Can I push you a little bit on that, Jeff, in terms of you're expecting meaningful improvement over the course of the next four quarters? Any range you can put on that? By meaningful, is that a couple of points? Is it more than that? Anything, any granularity you can offer?
spk03: I would say it's more than a couple points. Right, but it's a little bit dependent on mixed ball. You know, could we see, I don't know, Tom, 5 to 10?
spk06: Yeah, you could.
spk03: 5 to 10 seems reasonable over an AMD.
spk06: Yeah, it will always be a mixed factor between the two business segments as well, Paul.
spk02: All right. And obviously, I trust it goes without saying, that's you all take into account the current supply chain environment. So it's not that 5 to 10 improvement is not dependent upon improvement in supply chain. That's what you're expecting to do independent of any improvements.
spk03: Yeah, that's true. You know, realistically, what we've got in supply chain issues, one of them, the biggest one, is a transition issue that we expect to exit or, you know, complete the work on that within the current quarter. We're going to buy a little bit more material to solve some other problems where, you know, again, we get these surprise push-outs. I don't think it's going to be very much, you know, maybe a million or two. And beyond that, you know, we feel like we're in good shape on semiconductors. You know, the crazy place where you can get hit is like connectors of all things. So, you know, we're taking steps to deal with that, but I wouldn't see it as a major impediment going forward.
spk02: All right. And Jeff, the 5 to 10 you're referencing, I trust you're referencing specifically gross margin, which begs the question, is there also some operating leverage to be had Above and beyond that 5 to 10 percentage point improvement in AMD and the contribution that makes overall, is there operating leverage to be had as revenue improves?
spk03: Absolutely.
spk02: And can you quantify that?
spk03: Wow, moving parts. Again, let me describe it this way, Paul, and then I'll see if Tom wants to add anything. We're very volume sensitive for production volumes in both Alhambra and Concord. And so as volume picks up, absorption is very efficiently dealt with. And so that's what moves the needle on the P&L. As far as a range for that, again, it's a little bit mix dependent. And there are you know, a series of issues as far as, you know, for example, what becomes the rate limiting step in what facility, you know, for a product that generates X margin? And the answer to that isn't completely crisp. But I think, I don't know, Tom, you got any color on the operating leverage piece? Yeah.
spk06: Well, I think we've got the operating leverage overall in the business is you know, pretty evident by the results in the past year. That's going to continue because on the OpEx side, you know, we don't really need to move the OpEx up with, you know, revenue increases going forward in the near term. So, you know, OpEx is, you know, call it 10 million plus or minus, uh, on a quarterly basis, which is where we've been pretty much. And, uh, The growth in A&D will help the gross margin on A&D. It's, Paul, it's going to follow the growth in that business.
spk03: Yeah, one important thing to note, Paul, one important thing is that the growth in OpEx was not a headcount issue at all.
spk02: All right, but Jeff, to Tom's statement, you're expecting to hold OpEx at around $10 million per quarter throughout fiscal 22. Is that correct? Yeah.
spk06: All right. No, go ahead, Paul. No, I said, you know, will there be, you know, items that are lumpy a little bit from quarter to quarter? Yes, but the $10 million plus or minus is a good way to think about it.
spk02: And, Tom, in the event of meaningful revenue upside, you don't expect to flex OpEx meaningfully up from that $10 million level?
spk06: Not in the near term.
spk02: No. Perfect. All right. I'll pass it on if there are any. Thanks, Chris.
spk05: Next question comes from Richard Shannon from Craig Hallam. Please go ahead.
spk04: Hi, guys. Thanks for taking my questions as well. I guess I need to ask on the A&D gross margins here.
spk00: I'm not sure what your answer to Paul's question here is, so I'm going to ask it my own way here.
spk04: Your gross margins here for the September quarter, quarter and quarter, went down from 33% in June to 18% in September. So you commented about increasing 5 to 10 points. Was it from that point, and over what time will you expect that to happen? And I guess my question is, when does it get back up to that 33% number from June?
spk03: Okay, now I understand what you're saying. We saw the, so first of all, the 33% down to 18% was really, you know, let's just call it a transitory effect. I think we'll be back into those kinds of numbers. You know, certainly if it's not this quarter, it'll be next. And then the improvement will happen from there. Gotcha.
spk04: I know that you've been asked this on past calls and even offline from me, but what is your view on AND margins, you know, over time, especially as you've talked about some growth here from a number of programs? I mean, is this a business with a certain level of scale that can get to 40% or even higher?
spk03: Oh, absolutely. I mean, there's no question about that, Richard. You know, you're volume sensitive in a high fixed cost manufacturing facility or facilities. So all it takes is a bit of volume and, you know, the flow through in the P&L is really quite good. So if you increased A&D by 50%, you probably get back up by, you get up over 40%. So it's not a bill of material issue. It's not a pricing issue. It's strictly an absorption question.
spk04: Okay. I think I heard you in your prepare comments talk about some of the automated assembly equipment and some yields on products, you know, due to a mix here. So, I mean, does the mix have to change here meaningfully in the next couple quarters or is this just purely an absorption thing?
spk03: It's really an absorption thing. I'll give you a little more color. on this move to a notoriously difficult product to build. It requires a lot of screening for vibration performance. It goes into a torpedo. And occasionally, we have these events which occur that we just, screening takes out more of them than we'd expect. And that was pretty much what happened. There was a bit of a cycle count thing that Tom indicated, again, transitory. But no, normally we can make that product with better margins than 33%. Just when you shift that much of production into it, you end up with more variability than you want.
spk04: Got it. Okay. That makes sense. That's very helpful. Maybe a couple other questions here. On cable TV, I think your comments were that the backlog has continued to extend out here, and I know you obviously have said time and time again you remain cautious on this, but can you mention how far the backlog is going out here and any other permutations or detail on where that's improving?
spk03: Well, you know, the thing is that It's a little hard to say, right? And let me explain why. Because what we don't know, for example, is exactly what customers are going to want to take delivery of, say, in the March quarter. We certainly know what they're going to take delivery of now. But we get into March, and every year this happens, you know, part of the U.S. is not friendly to installs. And so, you know, we frequently get requests to push things out of March. and into June. And so it's a little hard to say, well, geez, you know, you're at one quarter visibility, you're at two quarters of visibility. What I will say is we're substantially better than normal for this time of year where you don't have, you know, the benefit of real guidance on CapEx for the year from Comcast and Charter. You're heading into the winter months. And so, you know, we're substantially better than we normally are. But as far as giving you a crisp answer about the backlog, the dollars, you know, have continued to flow in as far as new orders. But I can't give you a hard answer on that.
spk04: Okay. All right. That's helpful. My last question, I'll jump out of line here. The projects for chips within the broadband business sounds like you've picked up a lot of pace here, both with number of engagements and and maybe even visibility into this. I think you talked about tens of millions of dollars out a few years. Maybe give us a little bit more color on what's driving this, applications, et cetera, and kind of help us give a feel for the changes in the last quarter.
spk03: Yeah, so, you know, we've added one customer we had one project with. They've added a second. and they may even add a third. These are customers that do not have the ability to fabricate their own indium phosphide, especially some of these very specialized devices, but are looking to build products for the data center and telecom applications. They don't want us talking about exactly what those are because of competitive reasons, because it signals ahead of time what they're doing, and can create their own problems for them. So it's mainstream data center in telco. These are high margin, strongly differentiated products as opposed to doing something like 10 GPON or something like that, although we certainly supply some parts into those applications. And that's really about all I'm allowed to say, Richard. I'd love to tell you more, but I'm just not allowed to because of NDAs.
spk04: I certainly understand that. Well, it sounds like things are going well in that area, and we look forward to hearing more about that. That is all the questions from you guys. Thank you.
spk05: Once again, to ask a question, press star 1.
spk03: All right. I'd like to thank all of you for your interest in MCOR, and I would like to close by recognizing our team for a great quarter and an outstanding year of financial results. Please stay safe, everyone, and goodbye.
spk05: This concludes today's call.
spk03: Thank you for participation. You can now disconnect.
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