EMCORE Corporation

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.

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.

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.