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spk01: Good day, ladies and gentlemen, and welcome to MCOR's second quarter 2022 earnings call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Tom Minichiello. Please go ahead.
spk05: Thank you. Good afternoon, everyone, and welcome to our conference call to discuss MCOR's fiscal 2022 second quarter results. The news release we issued this afternoon is posted on our website, mcor.com. On this call, Jeff Redicher, 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 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 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.
spk03: Thank you, Tom, and good afternoon, everyone. MCOR's second fiscal quarter revenue was 32.7 million, roughly at the consensus midpoint for revenue, but down about 23% over Q1. Non-GAAP operating loss was 738,000, and adjusted EBITDA was positive 270,000. Semiconductor and supply chain challenges affected our gross margin significantly, bringing it down to 30%. On a brighter note, cash on the balance sheet continued to grow, increasing by almost $5 million. Semiconductor availability was a difficult problem in the quarter, and costs were up across the board. Microcontrollers and FPGAs were particularly problematic, experiencing substantial price increases. Other unpredictable logistics challenges that we saw in Q1 remained with us in Q2, causing some surprise pushouts of material that we expected. Those problems are likely to persist going forward, and we don't see a catalyst to drive predictability into the supply chain in the short term. Some components have lead time stretched to over 90 weeks. The shutdown of all of our remaining manufacturing operations in China was completed on schedule within Q2. Subsequently, all of the remaining cable television manufacturing equipment was shipped to our EMS partner. This is one of the principal reasons for the strong improvement in working capital. We reduced CATV inventory, and going forward, we will get billed on the same day that we bill our customers. We're expecting the manufacturing facility to be returned to the landlord within Q3, leaving a very small group in China to support EMS and certain engineering tasks. Beyond the manufacturing transition, which is now complete, Cable TV contributed to expected levels of performance within the broadband unit in Q2. Beyond the cable TV operation, the chips business received an additional development contract with its own NRE funding. As we stated last quarter, pre-production volumes of the shipments of these first products are expected to begin this quarter with low volumes of product from a second customer plan for the September quarter. As it stands today, these new products should have a significant impact on FAB absorption within the first half of calendar year 23. Beyond that point, they are expected to be margin accreted to the broadband business, ultimately contributing tens of millions in revenue by 2025. It is important to note that FAB utilization from these new products is expected to drive the majority of wafer FAB production. pushing cable TV requirements into the minority of wafer starts, stabilizing costs, and ultimately improving gross margins in the broadband business. Aerospace and Defense experienced a customer-specific air pocket in orders that drove revenue down by approximately 10%. Since quarter end, most of those issues related to new compliance procedures at the customer have been resolved, and only one remaining order is expected this week. QMEM's revenue rebounded by 24% with improving yields, partially offsetting the impact of delayed orders for fog and defense optoelectronics. On a related note, we've recently fielded questions from investors about how the war in Ukraine affects MCOR's A&D business. The short answer is it really hasn't. Weapons such as the Javelin use infrared seekers, not inertial navigation, to find their targets. Our business developments in aerospace and defense have generated significant momentum. We gained important new contracts in QMEMS and added the L3 Harris space and navigation business to MCOR in a transaction which closed last Friday on April 29th. We announced two important contracts for QMEMS product today and received a third contract this morning. The first was a $21 million agreement to expand our relationship with GyroData. a world leader in directional drilling systems for oil and gas applications. This agreement can significantly increase the volume of business that we do with gyro data. We also announced our first contract for precision guided munitions, or PGM, applications for an important international customer. PGMs are the largest market segments for inertial measurement systems and are expected to be an area of significant growth for MCOR in FY23. We continue to test and validate our SDI-170 with defense contractors worldwide have been advised that their annual volumes target ranges from 1,000 to 4,000 units per year with a total value of about $30 million per year. Finally, we received a $5 million contract this morning to provide critical components to upgrade the flight control systems of one of our frontline fighter aircraft. Collectively, these contracts demonstrate the growing momentum for our QMEMS navigation products and future growth beginning this year. The acquisition of L3Harris' space and navigation business also brought significant opportunities to MCOR. We've received letter subcontracts authorizing MCOR to proceed on both the BORG and TAMU programs. BORG means, or stands for, booster rate gyro, which will be used in the United Launch Alliance first stage control system. Through our space and navigation business, MCOR will produce BORG IMUs for the United Launch Alliance Atlas and Centaur programs. This is the first of several expected orders for BORG. or Tri-Axial IMU, will be an integral part of the guidance system for the ULA, Centaur, and Atlas launch vehicles. The flight control system employs three true navigation-grade IMUs to guide each spacecraft. Over the next year and a half, MCOR will complete the design and qualification of TAMU IMUs and start delivering them for launch in early 2024. Now I will move on to guidance for the third fiscal quarter. Although we are feeling the same headwinds with semiconductor and supply chain problems as everyone else in the technology business, we are expecting a solid rebound in A&D revenue in Q3. On the cable TV side, excess transmitter will remain a major challenge, forcing us to reduce our guidance range for June quarter to 25 to 27 million, which includes 3.5 million in revenue from our new acquisition. Cyclicality has been a frustrating part of cable television for the 20 years that I've been involved with it. With that said, we began work nearly seven years ago to meet the challenge of this cyclicality and expected changes in the market. We've divested the assets and inventory in cable TV and returned those assets to cash. We've developed a chip business that is now bearing fruit and have taken down our headcount substantially in cable television. The company has a strong balance sheet and a growing order book for our inertial navigation products. In summary, the future of MCOR is bright despite the near-term frustration of the current cable TV down cycle. With that, I will turn the call back over to Tom. Thank you, Jeff.
spk05: Consolidated revenue for fiscal 2Q was $32.7 million within our previously stated guidance range for the quarter. Broadband revenue was $23.6 million an $8.7 million decrease when compared to fiscal 1Q. $7.5 million of the sequential quarter revenue change was attributable to our cable TV products, which, as indicated during our last call, was impacted by transmitter inventory tied up in the channel at 1MSO. The remainder of the decline was due to lower sales of our chip-level sensing products, which are largely tied to a single customer for the China Rail project and therefore can be lumpy from quarter to quarter. Aerospace and defense segment revenue is $9 million, a $900,000 decrease when compared to the prior quarter. While revenue performance for our QMEMS product line improved this quarter, our FARG revenue is down due to a delay of a customer order for our single-axis gyro. In addition, defense optoelectronics revenue was sequentially lower, primarily due to program delays and supply chain disruptions. 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 30% in fiscal 2Q compared to 38% the quarter before. Broadband's gross margin at 35% decreased on a sequential quarter basis due to the lower revenue, higher material costs, and underabsorption of fixed overhead costs in the Alhambra wafer fab as well as at our China facility for part of the quarter. On the A&D side, QMEM's gross margins improved sequentially due primarily to higher volume and improving yields. However, this was more than offset by the decreased margins for fog and defense optoelectronics, both largely due to the lower revenue. Operating expenses were $10.4 million in fiscal 2Q, slightly better than the $10.6 million in the prior quarter. Quarterly OPEX has remained consistent over the past four quarters, and has averaged $10.3 million over that time period. Moving to the bottom line, the changes in our revenue levels and gross margin in fiscal 2Q resulted in an operating loss of $738,000. Adjusted EBITDA was positive $270,000. Net loss was $750,000, or two cents per share. Shifting for a moment to the GAAP results, fiscal 2Q net loss was $2.2 million, or six cents per share. This included several items associated with the transition of our cable TV operations to our third-party manufacturer, Fast Train, notably $432,000 of shutdown costs and a $788,000 gain on the sale of transmitter equipment to Fast Train. The GAAP results also included $456,000 of expenses associated with the space and navigation acquisition. Turning to the balance sheet, We had cash of $80.9 million at March 31st compared to $76 million at December 31st. The $4.9 million increase consisted of $5.3 million of operating cash flow and $1.1 million in proceeds from the sale of equipment, less $1.4 million used for CapEx and $100,000 related to financing activities. On a trailing 12-month basis, MCOR has generated $22 million in cash from operations. Before we get to Q&A, I'd like to share with everyone that both Jeff and I plan to be available for virtual meetings on June 1st at the Craig Halem Institutional Investor Conference and for in-person meetings in New York City on June 2nd at the Cowan TMT Conference. We plan on providing further details prior to each event. So with that, we will now open up the call for your questions.
spk01: Thank you. Ladies and gentlemen, if you'd like to ask a question, you may do so by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off so the signal can be read by our equipment. Star 1 for questions. We'll pause a moment to assemble the phone queue.
spk06: Star 1 for questions or comments, please. Star 1.
spk01: We'll take our first question from Richard Shannon with Craig Helium. Please go ahead.
spk04: Hi, Jeff and Tom. Thanks for taking my questions here. Let's see here. Let's get one question kind of looking backwards here on gross margins. We're obviously disappointing to you and I think the street as well here. Maybe you can help us understand some of the dynamics here in supply chain that are driving this. I know, Jeff, you said in your prepared remarks you don't have good visibility on when they return. Maybe you can give us a sense of how sustainable those problems are and if there's anything that's under your control that you can do to help that.
spk03: Sure. So there's really two a little bit different sets of issues. Cable TV was strictly a pricing issue. We were able to get a hold of everything that we needed to complete The transmitter builds. The problem was that, you know, you take orders for transmitters a year ago, roughly, and so you don't get the opportunity to renegotiate prices with the customer when, you know, things change in the supply chain.
spk06: And normally you see the cost of the digital. In particular, the microcontractors,
spk03: you know, have grown substantially, in some cases several hundred percent. And so it was strictly a price issue, and we were able to get what we needed in the market. So that had the majority of the impact on cable TV margins was simply purchased material, okay? And so as the mix in the business changes away from transmitters, meaning cable TV, we'll expect to see that problem abate quite a bit because it's going to be module-centric, laser module-centric for a number of quarters, right? And, you know, as that happens, you're just not as sensitive to the semiconductor prices because modules don't have much of that in there at all. Over on the A&D side, it's a little bit different. And this is where, you know, call it supply chain or just lack of availability causes issues. And the principal problem is, you know, the techniques you employ over on the commercial side of the business to break what's called availability problems, going to brokers, finding customers that may have excess inventory, they don't work. And it's because of the flow downs in requirements we have for these government contracts for counterfeit protection on parts. So it's impractical to pay $50,000, $70,000 to test a lot of chips for a relatively low volume application. I can give you one particular example. It's just astonishing to me that for a part needed for the STARS program that cost us $14 just 18 months ago, Registered and authorized distributors were charging $2,000 a piece for, and that's just the market that we live in. Where I see the semiconductor availability trajectory is some improvement toward the latter half of 23, but I think it'll be with us. to 24, and it's simply because, you know, not only are, call it availability of new chip plants an issue, but demand continues to grow for a lot of these semiconductors. And so, I just see semiconductor costs as an issue. I will tell you that we are now renegotiating prices. So, when you talk about these long, you know, orders that were taken a long time ago, especially You know, the customer's reaction would be, oh, you want to renegotiate price? Well, why don't we just cancel, right? And so, you know, it's just a better business decision to sell at a reduced margin and take the business off the table rather than give it to a competitor potentially or see it go away altogether. The rest of the supply chain problems are really a hodgepodge of things. You know, there's continued transportation problems. We nearly had 7,000 transmitters that didn't get on a boat out of Thailand simply because there wasn't room. And, you know, I wish I could tell you that it's any one thing in the supply chain, but it's a combination of everything. And, you know, the problem is that having 99% of the parts when you try to put something together is not good enough, right? And so... you know, you tend to be limited by things that have never been problems in the past. People assure you that they're going to ship on time and then they don't. And it's not like there's a lot of recourse, especially when, you know, you've got only one or two qualified suppliers for something. You just take it on the chin. And, you know, you go, you look at Apple, you look at even Raytheon was talking about lack of availability of components affecting their missile business. And, you know, Everybody's struggling with this.
spk04: No doubt. But appreciate all that detail, Jeff. Thank you for that. Next topic I want to touch on here is in cable. Kind of a two-part question here. You talked about an inventory burn going on here, and you talked about it being largely at one MSO. Is it still just one MSO, or is it bleeding into the second one at all? Do you see any visibility? on when this inventory will be gone. Is the other MSO or MSOs still ordering? And how do we think about the kind of the levels you're expecting for cable in the June quarter? As I try to fit the guidance together here, it seems like we're going to be down at levels that we might have seen, you know, starting in, you know, or in 19 and before an average period of years.
spk03: Hey, Richard, I'll tell you exactly what it's going to be. It's going to look like June quarter in 2019.
spk04: Yeah, somewhere right in there. Got it. Okay. Okay. Go ahead. Just repeating my question about the dynamics here with inventory and whether there's a problem with more than one MSO here.
spk03: Well, I think so there's really nothing that I would change in terms of my comments. I will say that the inventory situation that everybody has is causing a lot more fluidity than you'd expect. So, for example, there have been a lot of comments about the growth in remote buy, which we always saw as inevitable. It's just that it happens seven years later than everybody else was saying, and we were able to make a lot of money in the process. The challenge is that some of the same semiconductor shortage issues that you are plaguing everything else are particularly difficult for products over in that market. So does that mean then that some manufacturers or MSOs will elect to do a bit more over on the hybrid fiber coax side? Yeah, it's possible. So there's a lot of things going on underneath the waterline that candidly are conflicting pieces of information. But there's really nothing that I would add and say, okay, clearly here's what things are going on, right? So we've got a backlog of modules. And as we look at the replenishment cycles for that, probably by the next call, you know, we're going to update everyone if anything changes.
spk04: Okay. Fair enough. That's helpful. Maybe two last quick questions. I'll jump out of line here. I had a couple of contract announcements plus a couple of the ones I think you mentioned on the prepared remarks here. One of them looks kind of interesting, the SEI 170 and the precision guided munitions. This sounds like maybe a substantial or important piece of this opportunity to run revenues up to $30 million per year. Maybe if you can give context within that and then any dynamics here about timing and customer and anything else on that.
spk03: Yeah, so the SDI-170 has been thoroughly tested by government and leading OEMs over the past year. We haven't had a single failure in testing, either flight testing with rotary aircraft, you know, helicopters. And what we've got now is the beginning of traction for low-volume production orders. And, you know, these guys are pretty careful. We expect the first order to go out largely in the June quarter, and then within a couple months, you know, we're expecting to see some significantly larger orders. It is a very important part of this. At peak, you know, the JDAM program, Honeywell was selling a half a billion dollars worth of IMUs a year to Boeing. And now what you've got is an international market that is adding their own SparkBomb capability, meaning inertial nav-based products, into their own weapons programs. And those are the ones that we're getting designed into first. So, yeah, it's important. The first PGM program is a big deal, and there's a lot more volume to be expected, and it's going to move the needle.
spk04: Okay. I look forward to hearing more about that, and I'll ask some more questions offline on that one. My last question for Tom is just want to get a sense of how we're expecting the financials to look here, probably more importantly on a performance basis with the new L3 addition here, particularly on gross margins and OPEX. Maybe if you can give us any insights. thoughts on how to model for this.
spk05: Yeah, Richard, it's going to be a little tricky because this particular business was part of the greater L3 Harris, the way they did their accounting and where a lot of the services that were performed financially and administratively were really outside of the Bud Lake operation. So we're inheriting a model and a method that mirrors contract, kind of government contract accounting, where just about everything that they spend on is included in the project cost, which would translate to cost of goods sold. But the best way to think about it is the recent run rate is producing about a 10% profit on, you know, five to six million in quarterly revenue. So, hence our guidance, which includes two months of the full, of the three months of the full June quarter at around three and a half. So, if you think about it that way, then it becomes a question of, you know, what's OPEX and what's margin. And right now, the majority of that is in margin. So, it produces a much lower gross margin rate, almost closer to its operating margin. But once we get through the accounting and how we're going to do it going forward, you know, that could change. So, you know, call it around, you know, maybe half a million more in OPEX and somewhere in the 15 to 20% gross margin. But bear in mind, it's still producing a profit at those revenue levels.
spk04: Okay. And just a quick follow-up. Does this include kind of the fixed costs of the kind of overbearing lease that you hope to get out of either ahead of time or once it sunsets, I think, next year?
spk05: Yes, it does. Yeah.
spk04: Okay. Okay.
spk05: Okay.
spk03: That's all the questions. Just a quick add-on. Remember, most things over in that side of the world were all done cost plus. And so just because you had an outrageous lease didn't mean you couldn't get paid for it. Yeah. Okay. Fair enough. I will jump on the line, guys.
spk04: Thank you.
spk06: Thank you. Thanks.
spk01: As a reminder, star one for questions or comments. Star one, please. We'll pause a moment to assemble the queue. And we'll take a follow-up with Richard Shannon with Craig Helium. Please go ahead.
spk04: All right. Well, I guess I didn't have to get a little out of line here. Jeff, maybe just one question here. The indium phosphide chip opportunity, I think, is a very interesting one, and it sounds like you're making some good progress. If I caught your prepared comments right, you won another round. I don't know if we call it a contract or a development agreement or something, but maybe you can help us understand what's going on there when you see the NRE, what application it's in, and how is the size of the opportunity relative to those you've already signed?
spk03: Yeah, so the application for all of this stuff is going to be data center-based. And I can't tell you exactly what type of chip it is because we've got some competition-sensitive information in there. I will tell you that a significant, well, there are, let's call it a group of these customers that are asking for similar but different enough things that the design has to change a little bit. And there is a growing interest in LiDAR as well. But that wasn't the agreement that was recently signed. So these are not commodity chips. You know, when you talk about things like GPON or even 10GPON, right, you're talking about devices that are anywhere between, I don't know, a few tens of cents, you know, 30, 35 cents up to maybe a dollar. These are devices that start at $20 and go up from there. And, you know, you would call, if I could tell you who the customers were, you'd call them tier ones. So we're really excited about it. You know, the thing is, we had another question from an investor, you know, sort of like, well, why don't you just go fill the fab? And, you know, this is not like McDonald's is reintroducing the McRib. And, you know, you put it on the menu and people start walking through the door. You know, there's a lot of work to do the development. And then you've got qualification, which ranges anywhere between 5,000 and 12,000 hours, depending on the customer requirements. And so obviously to get to the point where we're shipping small pre-production volumes, we've been through that now. We've actually been through it a couple of times. And so there's real serious milestones that are behind what we're doing. The other point that I made earlier in my prepared comments because I started talking about the impact on fab absorption. And the way to think about this is that the fab cost is roughly $2 million a quarter, okay? And cable TV takes up a piece. NAB does. Other parts of the business do. And so what you're left with is a million plus or minus that cable TV needs to buy, essentially, from the fab. And the implication of that, let's just keep the math simple, call it a million. At 50% margin, it implies that once you're shipping $2 million a quarter worth of devices, you are effectively paying for the fab with or without cable television. And we sort of expect to be at that point, you know, certainly within a year from now. So what you're going to see is a declining amount of FAB under absorption. And then once we get to the point where we're shipping $2 million a quarter worth of devices, which won't take us too long, right, then it starts to turn margin accretive. Does that make sense, Richard?
spk04: Yep. Yeah, it does make sense. I think even I can do that math. So thanks for that, Jeff. You did make one interesting comment. You did make one interesting comment. about just open up the fab and expect business to come in the door. You said these are serious milestones. What I found was really interesting there is that we've got some customers coming in for very similar applications. The one you talked about here was data center. I guess my first question is what other options do these guys have to go with and why are they coming to mCorps?
spk03: Without revealing too much, what I can tell you is we are one of the very few indium phosphide fabs in the world capable of building these advanced devices that is also not selling a competing product. So, for example, if someone wanted to go buy, say, a – you know, a 800G, a group of lasers for 800G transceivers, right? You're not going to have, and this is not what we're making, by the way. If you're selling those transceivers and you own the fab, are you going to sell them the raw dye? Of course not. Right? And so we don't have that strategic conflict. We're not producing finished components for the data center market. And because of that, customers are coming to us. Right? Maybe they want to roll their own components. Maybe they've got other ideas. And that's about as far as I can go. Okay.
spk04: That's fair enough, and that's good perspective. I think that's enough for me, guys. Thank you much. I'll jump out of line again.
spk05: No, thank you, Richard. Thanks, Richard.
spk01: We'll take our next question from Jared Jungjohan with Cowan & Company. Please go ahead.
spk02: Hi, Jeff and Tom. This is Jared on for Paul Silverstein. I was curious if you guys could give us an update on the M&A environment surrounding smaller A&D companies. Do you guys see any opportunities for another small tuck-in deal?
spk06: Yes, we do. Period. End of story.
spk03: So I'm not trying to be curt. It's just that... You know, we, and I believe we mentioned this before, possibly for you, you started in Paul's shop, Jared, is that, you know, the L3 Harris thing, which we view as, you know, we got a terrific bargain, would not be the last deal that we did. We just got to find the right one, and there are some candidates.
spk02: Okay, and I'm guessing you guys can't provide any color as to timeline or anything of that sort.
spk03: I wish I could. You know, sometimes these things go quicker than you expect. Other times they take longer. So, you know, that kind of speculation I don't think is going to help at this point. Understood.
spk06: Thank you very much. Yeah. Well, that's it for me. I appreciate the answer. You're welcome, Jared. Star 1 for questions. We'll pause a moment. At this time, I'd like to turn the – Star 1 for questions, please.
spk01: Star 1.
spk03: Thank you. I'd like to thank all of you who joined us on the call for your interest in MCORP. Additionally, I want to welcome the former L3 aerospace and navigation team to the company. I'm confident that we're going to have a meaningful impact going forward. Please stay safe, everyone, and goodbye for now.
spk01: Ladies and gentlemen, this concludes today's conference. We appreciate your participation. You may now disconnect.
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