EMCORE Corporation

Good day and welcome to the MCOR First Quarter 2022 Earnings Call. Today's conference is being recorded, and at this time I'd like to turn the call over to Mr. Tom Minichiello, Chief Financial Officer. Please go ahead, sir.

Thank you, and good afternoon, everyone, and welcome to our conference call to discuss MCOR's fiscal 2022 First Quarter results. The news release we issued this 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 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 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. With that, I'll now turn the call over to Jeff.

Thank you, Tom. And good morning. Well, actually, good afternoon, everyone. First of all, I'd like to offer up a quick apology for my cough. Half a dozen tests say it's not COVID. And enough other tests have been run that we know it's not anything serious. But nevertheless, it can be annoying. So I apologize for any loss of clarity here. MCOR's first quarter revenue was down about 4%. From Q4, coming in at $42.2 million. Non-GAAP earnings were $5.3 million. And adjusted EBITDA was $6.3 million. Semiconductor price increases and supply chain shortages affected our gross margin, bringing it down to 38% from 39%. MCOR continued to perform well financially despite unpredictable supply chain headwinds and increased component costs. Semiconductor availability was generally adequate during the quarter, but prices were definitely up across the board. The same sort of unpredictable logistics challenges we saw in Q4 remained with us in Q1, causing pushouts of material. We expect to see these problems persist going forward and don't see a catalyst to drive predictability into the supply chain in the short term. We are temporarily moving to increase safety stock levels, but given the lumpy flow of material, this move isn't a perfect hedge for the situation. On the cable TV side, I would point out that even though we are no longer producing cable TV transmitters in China, we are paying close attention to semiconductor inventories and expect few problems in the current quarter. The shutdown of transmitter builds in China and the final transfer to Thailand was completed in the December quarter. As we previously pointed out, CATV inventory levels have already made a drop downward. New laser module starts in China were concluded before Chinese New Year as planned. The remaining material in the line will flow through within two weeks or so, and then the laser module manufacturing tools will move to Thailand as well. From that point, a much smaller group of Chinese personnel will remain focused on CATV production support and manufacturing engineering. With this transition complete, we will have sold all of the CATV production assets and inventory, and we'll be buying product from our EMS supplier at a fixed price. Turning to individual business areas, cable TV continued to drive performance in the broadband unit in Q1. Beyond cable TV, the broadband business received two more chip development contracts with their own NRE funding, bringing the total to five such contracts. We have additional business developments underway and expect to continue to expand this business. As we stated last quarter, the first and possibly the second of these new chip products are expected to start shipping in fiscal Q3 and Q4 of FY22 and are expected to contribute tens of millions in revenue by 2025. These development programs are an important business for MCOR because they will help drive consistent FAB utilization despite CATD's cyclical nature and will result in strong gross margins in the broadband business. Aerospace and defense declined again, primarily due to continued supply chain delays with the new EMS provider in our defense optoelectronics business. Fog was up about 20%, quarter over quarter, with Q MEMS down, primarily due to bottlenecks with test equipment near the holidays. Yields did improve, but we were a bit back-end loaded and just couldn't get everything through testing that we wanted to. We're expecting the QMEMS mixed issue to ease up over the next quarter or two. On the business development side of aerospace and defense, COVID outbreaks made it a bit difficult to keep testing and qualification on schedule for new programs. Omicron hit hard and fast, derailing our customers' plans and some flight testing. Going forward, we're already starting to see the situation ease up and expect it to normalize by early spring. Multiple negotiations with international defense contractors have continued with target volumes ranging from 1 to 4K units per year. Most of these higher volume products will be used in precision guided munitions. We fully expect these applications will be the primary growth drivers for MCOR's A&D business within the next two years with incremental revenue in excess of $30 million. 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 QMEMS navigation products and future growth beginning this year. Our fog products are also gaining traction. We completed the first phase of pre-production. For our new airborne pod, we're awarded the final pre-production phase, I think, in December, which we expect to complete within calendar year 22. Low-level production for this program is expected to begin in fiscal 23, and the total value for the program estimates are unchanged at about $70 million over seven years. The newly ruggedized EM300 IMU is being vetted by more than 10 primes, and laboratories in the U.S. and abroad approximately doubling the size of its originally intended application space. Although we're disappointed that COVID threw a wrench into our business development efforts in defense, we already see signs that this is temporary. Over the next several quarters, we expect to make several important announcements about the growth of our navigation business. Now I'll move on to guidance for the second fiscal quarter. As we've stated before, CATV visibility is at its worst in the March quarter, especially early in the March quarter, with capital budgets just being released and winter weather interfering with installations. Nevertheless, we've conducted extensive customer and channel checks to try to understand FY22 demand to us and determine the true amount of inventory in the channel. It's clear to us that a substantial amount of transmitter inventory is tied up in the channel, probably due to competitive positioning between our customer at one MSO. From what we can gather today, we should expect this to clear out by around the end of the calendar year. I would remind everyone that cable TV is notoriously cyclical, and the CATV boom that was driven by COVID lasted nearly two years. now requiring an inventory correction. Taking all of this into consideration with some of the supply chain challenges we're seeing, we currently expect revenue for the March quarter to be in the range of $32 to $34 million. With that, I will turn the call back over to Tom.