EMCORE Corporation

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.

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.

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.