EMCORE Corporation

on your telephone. Please be advised that today's conference may be recorded. I would now like to hand the conference over to your speaker today, Tom Minichiello, Chief Financial Officer. Please go ahead.

Thank you, and good afternoon, everyone, and welcome to our conference call to discuss MCOR's fiscal 2022 fourth quarter results. The news release we issued this 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. But 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 projections about future results, statements about plans, strategies, business prospects and changes and trends in the business and in 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 will now turn the call over to Jeff.

Thank you, Tom, and good afternoon, everyone. Q4 represented a major turning point for MCOR as it accelerated its move into aerospace and defense with the purchase of KVH and the continued integration of the former L3Harris space and navigation team. MCOR is now the largest independent provider of inertial navigation solutions, putting us on a runway to being a much larger business in the future. Consolidated revenue for fiscal Q4 was $25.6 million, with 82% coming from aerospace and defense and 18% coming from broadband. Cable TV represented less than 8% of the company's revenue. Changes of this magnitude present significant operating challenges under any circumstances, and in Q4, the changes created significant turbulence in our operating results. generating an operating loss of 10.8 million and adjusted EBITDA of negative 9.4 million. Our non-GAAP operating loss was 6.3 million and adjusted non-GAAP EBITDA was negative 5.1 million. Tom will provide color on Q4's gross margin, but I will start off by saying that margins were affected by a number of events that are not expected to repeat themselves going forward. In the aftermath of COVID, the cable TV industry itself continues to struggle underneath the overhang of a demand bubble that caused nearly five years worth of products that were built within a two-year period. The players in the industry are also changing as well. In our last call, we pointed out that Cisco decided to exit the cable TV equipment business. However, just last week, ATX publicly announced that they licensed the entire Prisma 2 technology platform from Cisco, allowing that technology to move forward. While these developments are expected to improve cable DV demand over the longer term, we don't expect them to provide a meaningful catalyst for recovery in the next few quarters. Semiconductor availability slowed down shipments for wireless and chips, within broadband in Q4 as our customers were not able to get enough silicon to ship transceivers and dash systems to meet their own internal projections. With that said, our chip business continued to get additional traction with customers in the form of engagements and planned growth and shipments. Going forward on the chip business, we expect to see the ramp get a bit steeper during the summer setting the stage for a much stronger FY24. To conclude my statements about broadband, I'd like to return to a statement from our last call in which I made the point that cable TV was increasingly incongruent with our strategic direction. Today, I would update this to say that we've made meaningful progress on resolving the strategic mismatch between non-core assets and our direction in aerospace and defense. Turning now to aerospace and defense, I'll begin my comments with our Chicago operation, which was formerly owned by KVH. During Q4, the Chicago team met the shipment goals we set during due diligence and began the integration process. We subsequently identified two development programs that needed help to get back on schedule and were able to get them back on track. The combined efforts of the extended engineering teams in Bud Lake and Concord allowed shipments of these new products to begin in the December quarter. We also began to lean on coil winding technology and supply agreements that originated in Chicago, validating important scalability and cost synergy arguments that we made in favor of the transaction last summer. Chicago has a strong book of orders and is now able to begin the production ramp for several of their new products. I would also point out that they were recently awarded several new contracts, the largest of which is for over $30 million for five years' worth of production. The space and navigation team continued to make solid progress on the new TAIMU, or TAMU, long-term navigation-grade IMU, even as it continues to meet shipment targets for Borg. These two systems are critical to the launch schedule for United Launch Alliance. Borg is part of the boost stage flight control for Atlas, Centaur, and Vulcan launch vehicles, while TAMU will be the primary IMU used for navigation. Critical milestones for TAMU are set to happen in the March quarter, as well as the beginning of product builds in Alhambra. Our expectation is to complete qualification late in the calendar year to enable significant volume builds and launches in calendar year 24. When these products hit full production, they are expected to produce $20 to $25 million annually in revenue. The QMEMS product line continues to recover its order book from the civil aviation downdraft that happened during COVID. We are getting more 777X orders along with a significant uptick of demand for inertial systems used in business and regional jets. In Q4, we shipped all of a critical precision guided munition or PGM order for an important international customer. We're expecting that this will enable us to be qualified for larger domestic contracts as well as exports. As we've said before, PGMs are the largest market segment for inertial measurement systems and are expected to be an area of significant growth for MCOR in FY23. Beyond this customer, we are working to test and qualify the SDI-170 with defense contractors worldwide. In a recent international trip, I was advised that annual target volumes range from 1 to 4,000 units per year with a total value of approximately $30 million. Before I move on to guidance, I'd like to focus a few comments on the integration of Space and Navigation and the former KBH team. One of our key objectives in this year is to make all four of our manufacturing facilities work like a single entity. As of today, Space and Navigation is now running a common ERP system with the rest of MCOR and has made the cutover from L3Harris' IT system. This will enable us to exit the cost of the transition services agreement that was part of the transaction. Chicago is running about a quarter behind Space and Navigation, but we've already moved the Rhode Island engineering team out of the KVH building. While cutting costs is important, the true benefits of scale are only realized when we have all the facilities on common ERP, MES, and PLM systems. We began rolling out CamStar MES for shop floor control in Alhambra and expect to integrate this into the other facilities after we complete the ERP upgrades and exit transition services. Ultimately, this will make MCOR more efficient and will help us improve our processes and reduce OPEX and inventory. Turning now for guidance to the current quarter, we continue to see weakness in the cable TV and wireless markets. Although we will make modest gains in chip revenue, it won't be enough to offset the weakness in cable TV. Inertial navigation will see growth largely driven by a full quarter's performance out of Chicago. Consequently, we're expecting revenue in the $25 to $27 million range for the December quarter. With that, I will turn the call back over to Tom.

Thank you, Jeff. Consolidated revenue for fiscal 4Q was $25.6 million, with 82% coming from aerospace and defense and 18% from broadband. Aerospace and defense segment revenue was $21 million, a $7.6 million increase when compared to the prior quarter. The A&D revenue growth was largely attributable to the addition of the inertial navigation operation in Tinley Park, Illinois, located just outside of Chicago. that was acquired from KVH Industries on August 9th. In addition, the rest of the A&D segment was collectively up by 1.5 million or 11% on a sequential quarter basis. A rebound in sales of QMEMS products following supply chain shortages during the prior quarter, increased space and navigation revenue, and higher fog shipments all led the way, partly offset by lower defense optoelectronics revenue. Broadband revenue was $4.6 million, a $5.7 million decrease when compared to fiscal 3Q. $5 million of the drop was due to the continued downward slide of optical transmitters and lasers sold into the cable TV infrastructure market. These products generated revenue of $2 million in the quarter, compared to $7 million the quarter before, and compared to $29.5 million in the fourth fiscal quarter of last year. Clearly, this time around, we are in a much deeper cable TV down cycle than the company has experienced in at least the last 10 years. Non-cable TV broadband revenue was down $700,000, due mostly to sales to wireless customers. Chips and sensing revenues were essentially flat. 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 of 2% compared to 18% the quarter before was impacted by several factors that include the following. First, 4Q was the first full reporting quarter for the space and navigation business in Bud Lake and included higher than normal costs due to the timing of revenue and cost recognition under its percentage of completion accounting method. Second, The Chicago inertial navigation business was acquired in the middle of the quarter and included prorated costs that resulted in a gross margin for the partial quarter significantly below levels consistently achieved in the past. Third, our QMEMS operation in Concord included two non-recurring charges, one associated with a revaluation of inventory to a more recent slash lower component costs, and the other was an adjustment resulting from a full physical inventory count taken at year end. Fourth, for the broadband segment, the low gross margin was the result of the aforementioned drop in cable TV revenue and continued underabsorption of overhead costs, including the Alhambra wafer fab. Many of the factors related to the two recently acquired operations in Bud Lake and Chicago are transitional in nature. and we expect once fully integrated that both businesses will return to their historical margin performances or better. Operating expenses were 11.2 million in fiscal 4Q compared to 10.5 million in the prior quarter, due largely to the inclusion of the inertial navigation acquisition for part of the quarter. Before moving to the bottom line, It's important to highlight that MCOR has undergone a momentous and rapid change to the revenue profile. The first half of fiscal 22 accounted for 60% of total year revenue during which time broadband accounted for 75% of the business. In just a couple of quarters later in fiscal 4Q, this has completely flipped to over 80% of revenue coming from aerospace and defense. The company is now better positioned for higher growth with a broader base portfolio of inertial navigation products, expanded customer reach, and in a substantially larger and more stable marketplace than the highly cyclical cable TV market. There is no doubt A&D is our future. We are now the world's fourth largest and largest independent provider of inertial navigation solutions. Our fiscal 4Q results reflect the significant and swift changes to the size and mix of the top line. Together with the gross margin items I just outlined, as well as the need to invest in future growth, 4Q operating loss was $10.8 million, adjusted EBITDA was negative $9.4 million, and net loss was $10.9 million or 29 cents per share. Shifting to the GAAP results for a moment, Fiscal 4Q net loss was $16.9 million, or $0.45 per share. This included one-time transaction costs of $5.2 million associated with the acquisitions. The GAAP results also included two non-cash items excluded from the non-GAAP measures, a $3 million long-lived asset impairment charge associated with the Alhambra Fog operation, and a $3.1 million accounting credit related to the reversal of variable incentive comp accrued during the first three quarters of fiscal 22. Turning to the balance sheet, we had cash of $26.1 million at September 30th compared to $75.1 million at June 30th. The $49 million decrease consisted of $55 million to acquire the Chicago inertial navigation business, $2.4 million representing the second and final payment related to the space and nav acquisition, $5.2 million in acquisition transaction costs, and $1.8 million in capex. Offsetting these uses of cash was $15.5 million included in cash from financing activities, which represents the borrowing level at September 30th under a credit facility entered into with Wingspire Capital at the time of the inertial NAV acquisition from KVH. Before we get to questions, I'd also like to cover a couple of other recent events. First, the integration of our two acquisitions involved a recently completed management reorganization and cost rationalization initiative. This included a reduction in force designed to reduce costs and expenses by a total of approximately $3.6 million annually, split between roughly 55% cost of goods sold and 45% OPEX. We expect to record a charge in the December quarter for related severance costs, which we anticipate will comprise a combination of accelerated stock vesting and cash over time. Second, as announced last week, we completed the sale and leaseback transaction of the Tinley Park property obtained as part of the inertial NAV asset acquisition from KVH. This transaction generated $10.3 million in net cash proceeds. So with that, we are now opening up the call for your questions.

Thank you. As a reminder, to ask a question, you will need to press star 1-1 on your telephone. Please stand by while we compile the Q&A roster.

Richard Shannon, your line is now open.

Okay, great, guys.

Thanks for taking my questions here. I think the first one's on gross margins. Tom, you mentioned a number of items here that you're saying are one time in nature. I don't want to repeat them. I think there are four of them. The broadband one certainly makes sense. It seems like other ones are potentially transitional here. I wonder if you could help us understand how much magnitude that added to COGS in the September quarter, and ultimately, how do we think about, what are you thinking about for gross margins for December?

So, Richard, the total of, let's just stick with the A and D side, where we had the two acquisition gross margins and the charges that I mentioned for QuartzMem and Concord. So, you know, when you take all of those and the impact in the quarter, and you adjust for that, you know, you're taking an A and D gross margin up to call it, you know, high, you know, mid, mid to mid to high teens, 16, 17%, just with that alone. Um, and so, you know, you're getting back to even better than where it was last quarter. And, you know, there's other activities and things that we've have done with this business as we integrate the acquisitions. And as we do things in the courts, MEMS operation with yields and prices and things like that, that put us on a much, much healthier trajectory.

Okay. Do you want to try to quantify what you're thinking about that for December? I think given your 11 days from the end of the quarter or so here, it seems like you'd have a good view on what that is. So a good start with the A&D number here in the mid-teen, 16, 17. But how would you put this all together here?

Yeah, I think that number is, if you just sort of adjust for the items that I outlined in the prepared remarks. The way to think about it is, so A and D, between the changes we're doing in Quartz MEMS and the acquisition integration, I would call it, you know, mid to sort of low to mid 20% range for A and D. And if you, so the issue then becomes for the consolidated gross margin, you know, broadband isn't going to be all that much better because it's, you know, it's cable TV down cycle we're in is not going to improve for several quarters. So you'll see that continue to struggle because of the, just the size of the revenue alone. So when you put it together, you know, you're looking at a consolidated number you know, 20% plus or minus, maybe a little bit higher, 20, 21, 22, if things go well. That's just in the December quarter. Because a lot of the things that we're doing have some impact in the December quarter. But for example, the reduction in force that I just talked about, that happened late in the quarter, kind of early December. So we'll get a little bit of that in the December quarter, but most of that will take full effect in the March quarter. So as we take those kinds of actions and we do other things on the integration front, some of the things that Jeff mentioned in terms of getting everybody onto a single system, that would come sort of towards the end of the March quarter, and you'll start to see an improvement through the fiscal year on gross margins.

Okay. So to catch to that last part here, so going back to the reduction of force here, you said $2.6 million annually with 55% of it in COGS here. So it sounds like there's been relatively little, if any, of that happened so far. It happened fairly late in the December quarter, but it sounds like it won't be coming into COGS necessarily immediately. So it might take a couple quarters to see the benefit from that rip.

So just one correction. It's $3.6 million. If I heard you correctly, I thought you said 2.6.

I think I said three, but that's what I heard from you. Yeah, yeah, yeah.

Okay. I hope I said three. Yeah, okay. So, yeah, 3.6. And so, you know, that's, what, $900 a quarter. So you're looking at roughly, you know, $500 in cost of goods sold and $400 in operating expenses on a full quarter. And since we took the action – at the early part of the last month of the December quarter, just a few weeks ago, you'll see the full impact of that in the March quarter.

Hey, Richard, Jeff, let me give you two other little pieces of color here. So, for example, one of the things that we're not expecting to repeat on the gross margin line, hey, the good news is that we nearly doubled yield of quartz forks for the Concord QM's products. Bad news is we took an inventory valuation hit that was significant in the quarter. So that's the sort of thing that we're actually expecting to see some benefit from, but it hurt us in Q4. The other thing to think about in terms of the RIF is that really as MCOR continues to simplify its business, we are going to simplify the management structure and remove the folks that had positions that were more, let's call it, more broadly considered part of a larger set of BUs, right? So what it does is it just, It collapses the BU structure, eliminates positions because we're simplifying the mission of the company.

Okay. Okay, fair enough. Jeff, let's talk a little bit about kind of top line here.

Your guidance for the quarter is clear. It sounds like it's mostly coming from the additional month of the KVH operation here. I think we've been hearing about some constraints in supply chain in parts of the business, and QMEMS, among other things. So maybe kind of talk about the trends here, how much is being held back by supply or other dynamics here, and then how do we think about that, you know, going forward into March quarter?

Yeah, so, you know, it's an interesting problem because the supply chain issue, and primarily semiconductors, We weren't hit too badly in some other places. Connectors, oddly enough, are still an issue. But what we've seen is customers push back that are expecting chip shipments because they actually can't get enough silicon to build transceivers and or the distributed antenna systems used in wireless. But what we're expecting to see, because we are now getting shipments of circuit boards that aren't going to help us much in the current quarter, but they will help us in March. So I would expect to see March look better from a supply constraint perspective.

Okay, fair enough. And then last question, I'll jump in line here, see if there's other ones out here, but Just kind of putting this all together and thinking about when you guys get to break even and what that looks like. If you could give us any thoughts. I guess I'm probably more interested in the structure than timing because it seems like we're looking at a few quarters at least here. But maybe both of you can talk about the structure here when you get to a break even.

Sure. So, yeah, it's several quarters out, Richard. And, you know, with improvement quarter by quarter until – call it sort of the back half of the fiscal year potentially early uh fy 24 it's going to depend on a lot of factors um you know the revenue will need to grow into the 30 to 35 million dollar range on a quarterly basis um and if we can hit sort of the middle of that range uh you know with a mid 30s gross margin or we can get up to like 35 with a sort of maybe even a lower gross margin. I mean, there's a lot of moving pieces here. So somewhere in that sort of 32 to 35 top line with a gross margin in the low to mid 30s would put you at adjusted EBITDA break even if you tack on sort of the forecast for operating expenses.

Yeah. So Richard, the other thing to point out here, and it echoes Tom's remarks a bit is that the gross margin number is constrained more by overhead absorption than you might think right when people look at gross margins oftentimes they say oh prices are collapsing in the market or you know your costs are out of control but the reality is overhead absorption high fixed costs in facilities that have you know 30,000 gallons of liquid nitrogen for example Are a significant factor and so as I mentioned in my comments one of the important things that's about to start happening and in the March quarter is We are going to be building a high-volume high-end navigation product Long-term navigation product that was designed in Bud Lake for ULA and That will make a significant dent in this volume of slash margin constraint that we've been feeling for a while now. I think also the signs are positive in Chicago. Now that we've collectively cleared out a few things with a new product, which we just announced, I believe you asked me about, it's TAC 450. And the whole generation of those products from the former KVH team, they are now shipping in volume. So all of that will start to really make an impact, I would say, in the March quarter, right? So Tom's got the numbers right. Qualitatively, it's about overhead absorption. It's not about driving the material costs down or the prices up, although we are instituting a 10% price increase on quartz MEMS. Doesn't affect all of our contracts because some of those are locked in for a period of time. But certainly for new orders, that is going to help us a bit. It's just about recovering the higher cost of semiconductors, mostly.

Okay. Great. That was good detail. I will jump out of line, Jeff and Tom. Thank you. Thank you, Richard.

Thank you. Thank you. One moment for questions. And as a reminder, to ask a question, you'll need to press star 1 1 on your telephone. Our next question comes from Tim Savage with Northland Securities. You may proceed.

Hi, good afternoon. My first question, at least, is on the cable side. I know it's a small part of your business now and I guess getting very small. I mean, looking at the guidance, I think we must be headed to zero. in the December quarter or somewhere pretty close to that. And you frame it in the context of kind of a broader down cycle in CapEx, but that's not really what we're seeing, right, with regard to, you know, Charter talking about a multi-year investment program and most suppliers actually having pretty decent years, even near term. So I guess my question was, I'm kind of searching for the disconnect there, and there are several potentials, whether it's Cisco abruptly exiting the business. I know you've mentioned inventory builds before among several customers. And of course, the final factor, maybe we are at a point where some of the linear analog technology is moving out of the network more quickly. If you look at those three factors, how would you assess, at least what looks from my perspective, covering, you know, half a dozen plus names in the universe, this sort of disconnect between what MCOR is seeing in cable and what others are seeing?

Sure. I'll tackle that one, Tom. Real simple. It's five years worth of lasers and transmitters that shipped in two years for COVID. And, you know, a large fraction of that was never installed. And so it's sitting in the warehouses of CommScope and it is sitting in you know, the former major distributor of Cisco product in the U.S. And so, you know, the overhang is there. mCore is not a broad-based supplier of, you know, many different cable optics products. And so that's where the concentration is. You know, we had a terrific run-up, big profits because we were so efficient during the trip down. I'm sorry, during the time that we were running it at big numbers. But the interesting thing is, you know, here we are with $2 million worth of cable. And believe it or not, it's still making a little bit of a profit. And it's because we became efficient. That's how we were able to do what we did, you know, during COVID. But the reality is that the pile of inventory is there, is what our customers are telling us. They are actually selling more linear EML transmitters to try to clear out their warehouses. And there's just nothing we can do about that. There's no competitive losses. And, you know, the back end of the cable business, certainly with nodes and amplifiers, has done very well and will continue to do well. But, no, for us, it's mostly about inventory that's out there.

Great, and thanks for that color. And just to follow up on that, you made a comment about making progress, I guess, on the strategic front in terms of cable. I mean, it sounds like you guys are preparing to exit that business. Do you have any color you'd want to add on that?

Wish I did and wish I could, Tim. As soon as we've got something to say, we're going to get it out there as fast as we can.

Okay, and then last one for me.

I wonder if you might be able to take just a quick moment, because you went through a number of programs that you were working on on the chip side, I think last quarter or maybe a couple quarters ago, spanning, you know, datacom, telecom, sensing. It sounds like you've been making some progress there. Have you added to that? And... I know you mentioned supply issues as maybe a gating factor, but how does that opportunity look compared to what you saw a quarter or two ago?

Yeah, so there are, I believe, and I'm trying to think of exactly when it happened, so I could be off a little bit. I believe we picked up one more program in Q4 from an existing customer, and the production shipments that we talked about are moving as we said they would. They just haven't picked up as fast as we'd hoped. And what our customers are telling us is, yes, because we can't get enough silicon. You know, oddly enough, the sensing piece over in China, which is run through China Rail in Shanghai, for example, you know, they've had COVID issues and continue to. And so you have people Even in the offices, I know it seems a little strange given, you know, how much progress there's been in Europe and in the U.S., but in parts of China, it's still an issue. So I would say that, you know, and we've talked about it being transceivers. These are chips that are used in tunable lasers. Beyond that, I'm not allowed to mention customer names. But hopefully that gives you just a little more insight into what's going on. There's just a lot of silicon shortages in that business right now. Okay. Thanks very much.

Thank you. I would now like to turn the call back over to Jeff Ritticher for any closing remarks.

Sure. I'd like to close by thanking you all for your interest in MCORP. I also want to recognize our team for their perseverance as we reinvent the company as an aerospace and defense business. And finally, I'd like to wish you all a wonderful holiday season and a happy new year. Thank you.

Thank you. This concludes today's conference call. Thank you for participating.

You may now disconnect.

The conference will begin shortly. To raise your hand during Q&A, you can dial star 1 1. I'm sorry. Bye.

hello thank you for standing by and welcome to the m core corporation fiscal 2022 fourth quarter results conference call at this time all participants are in a listen-only mode after the speaker presentation there will be a question and answer session to ask a question during the session you'll need to press star 1 1 on your telephone please be advised that today's conference may be recorded i would now like to hand the conference over to your speaker today Tom Minichiello, Chief Financial Officer, please go ahead.

Thank you, and good afternoon, everyone, and welcome to our conference call to discuss MCOR's fiscal 2022 fourth quarter results. The news release we issued this 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. But 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 projections about future results, statements about plans, strategies, business prospects, and changes in trends in the business and in 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. 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 gap financial measures which we believe provide meaningful supplemental information to both management and investors the non gap measures reflect the company's core ongoing operating performance and 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 will now turn the call over to Jeff.

Thank you, Tom, and good afternoon, everyone. Q4 represented a major turning point for MCOR as it accelerated its move into aerospace and defense with the purchase of KVH and the continued integration of the former L3Harris space and navigation team. MCOR is now the largest independent provider of inertial navigation solutions, putting us on a runway to being a much larger business in the future. Consolidated revenue for fiscal Q4 was $25.6 million, with 82% coming from aerospace and defense and 18% coming from broadband. Cable TV represented less than 8% of the company's revenue. Changes of this magnitude present significant operating challenges under any circumstances. And in Q4, the changes created significant turbulence in our operating results, generating an operating loss of 10.8 million and adjusted EBITDA of negative 9.4 million. Our non-GAAP operating loss was 6.3 million and adjusted non-GAAP EBITDA was negative 5.1 million. Tom will provide color on Q4's gross margin, but I will start off by saying that margins were affected by a number of events that are not expected to repeat themselves going forward. In the aftermath of COVID, the cable TV industry itself continues to struggle underneath the overhang of a demand bubble that caused nearly five years' worth of products that were built within a two-year period. The players in the industry are also changing as well. In our last call, we pointed out that Cisco decided to exit the cable TV equipment business. However, just last week, ATX publicly announced that they licensed the entire Prisma 2 technology platform from Cisco, allowing that technology to move forward. While these developments are expected To improve cable DP demand over the longer term, we don't expect them to provide a meaningful catalyst for recovery in the next few quarters. Semiconductor availability slowed down shipments for wireless and chips within broadband in Q4 as our customers were not able to get enough silicon to ship transceivers and DAS systems to meet their own internal projections. With that said, our chip business continued to get additional traction with customers in the form of engagements and planned growth and shipments. Going forward on the chip business, we expect to see the ramp get a bit steeper during the summer, setting the stage for a much stronger FY24. To conclude my statements about broadband, I'd like to return to a statement from our last call in which I made the point that cable TV was increasingly incongruent with our strategic direction. Today, I would update this to say that we've made meaningful progress on resolving the strategic mismatch between non-core assets and our direction in aerospace and defense. Turning now to aerospace and defense, I'll begin my comments with our Chicago operation, which was formerly owned by KVH. During Q4, the Chicago team met the shipment goals we set during due diligence and began the integration process. We subsequently identified two development programs that needed help to get back on schedule and were able to get them back on track. The combined efforts of the extended engineering teams in Bud Lake and Concord allowed shipments of these new products to begin in the December quarter. We also began to lean on coil winding technology and supply agreements that originated in Chicago, validating important scalability and cost synergy arguments that we made in favor of the transaction last summer. Chicago has a strong book of orders and is now able to begin the production ramp for several of their new products. I would also point out that they were recently awarded several new contracts, the largest of which is for over $30 million for five years' worth of production. The space and navigation team continued to make solid progress on the new TAIMU or TAMU long-term navigation grade IMU, even as it continues to meet shipment targets for Borg. These two systems are critical to the launch schedule for United Launch Alliance. Borg is part of the boost stage flight control for Atlas, Centaur, and Vulcan launch vehicles while TAMU will be the primary IMU used for navigation. Critical milestones for TAMU are set to happen in the March quarter, as well as the beginning of product builds in Alhambra. Our expectation is to complete qualification late in the calendar year to enable significant volume builds and launches in calendar year 24. When these products hit full production, they are expected to produce $20 to $25 million annually in revenue. The QMEMS product line continues to recover its order book from the civil aviation downdraft that happened during COVID. We are getting more 777X orders along with a significant uptick of demand for inertial systems used in business and regional jets. In Q4, We shipped all of a critical precision guided munition or PGM order for an important international customer. We're expecting that this will enable us to be qualified for larger domestic contracts as well as exports. As we've said before, PGMs are the largest market segment for inertial measurement systems and are expected to be an area of significant growth for MCOR in FY23. Beyond this customer, We are working to test and qualify the SDI-170 with defense contractors worldwide. In a recent international trip, I was advised that annual target volumes range from 1,000 to 4,000 units per year, with a total value of approximately $30 million. Before I move on to guidance, I'd like to focus a few comments on the integration of space and navigation and the former KBH team. One of our key objectives in this year is to make all four of our manufacturing facilities work like a single entity. As of today, Space and Navigation is now running a common ERP system with the rest of MCOR and has made the cutover from L3Harris' IT system. This will enable us to exit the cost of the transition services agreement that was part of the transaction. Chicago is running about a quarter behind Space and Navigation, but we've already moved the Rhode Island engineering team out of the KVH building. While cutting costs is important, the true benefits of scale are only realized when we have all the facilities on common ERP, MES, and PLM systems. We began rolling out CAMSTAR MES for shop floor control in Alhambra and expect to integrate this into the other facilities after we complete the ERP upgrades and exit transition services. Ultimately, this will make mCore more efficient and will help us improve our processes and reduce OpEx and inventory. Turning now for guidance to the current quarter, we continue to see weakness in the cable TV and wireless markets. Although we will make modest gains in chip revenue, it won't be enough to offset the weakness in cable TV. Inertial navigation will see growth largely driven by a full quarter's performance out of Chicago. Consequently, we're expecting revenue in the $25 to $27 million range for the December quarter. With that, I will turn the call back over to Tom.

Thank you, Jeff. Consolidated revenue for fiscal 4Q was $25.6 million, with 82% coming from aerospace and defense, and 18% from broadband. Aerospace and defense segment revenue was $21 million, a $7.6 million increase when compared to the prior quarter. The A&D revenue growth was largely attributable to the addition of the inertial navigation operation in Tinley Park, Illinois, located just outside of Chicago, that was acquired from KVH Industries on August 9th. In addition, The rest of the A&D segment was collectively up by 1.5 million, or 11%, on a sequential quarter basis. A rebound in sales of QMEMS products following supply chain shortages during the prior quarter, increased space and navigation revenue, and higher fog shipments all led the way, partly offset by lower defense optoelectronics revenue. Broadband revenue was 4.6 million, a $5.7 million decrease when compared to fiscal 3Q. $5 million of the drop was due to the continued downward slide of optical transmitters and lasers sold into the cable TV infrastructure market. These products generated revenue of $2 million in the quarter compared to $7 million the quarter before and compared to $29.5 million in the fourth fiscal quarter of last year. Clearly, this time around, we are in a much deeper cable TV down cycle than the company has experienced in at least the last 10 years. Non-cable TV broadband revenue was down $700,000, due mostly to sales to wireless customers. Chips and sensing revenues were essentially flat. 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 of 2% compared to 18% the quarter before was impacted by several factors that include the following. First, 4Q was the first full reporting quarter for the space and navigation business in Bud Lake and included higher than normal costs due to the timing of revenue and cost recognition under its percentage of completion accounting method. Second, The Chicago inertial navigation business was acquired in the middle of the quarter and included prorated costs that resulted in a gross margin for the partial quarter significantly below levels consistently achieved in the past. Third, our QMEMS operation in Concord included two non-recurring charges, one associated with a revaluation of inventory to a more recent slash lower component costs, and the other was an adjustment resulting from a full physical inventory count taken at year end. Fourth, for the broadband segment, the low gross margin was the result of the aforementioned drop in cable TV revenue and continued underabsorption of overhead costs, including the Alhambra wafer fab. Many of the factors related to the two recently acquired operations in Bud Lake and Chicago are transitional in nature. and we expect once fully integrated that both businesses will return to their historical margin performances or better. Operating expenses were 11.2 million in fiscal 4Q compared to 10.5 million in the prior quarter, due largely to the inclusion of the inertial navigation acquisition for part of the quarter. Before moving to the bottom line, It's important to highlight that MCOR has undergone a momentous and rapid change to the revenue profile. The first half of fiscal 22 accounted for 60% of total year revenue during which time broadband accounted for 75% of the business. In just a couple of quarters later in fiscal 4Q, this has completely flipped to over 80% of revenue coming from aerospace and defense. The company is now better positioned for higher growth with a broader base portfolio of inertial navigation products, expanded customer reach, and in a substantially larger and more stable marketplace than the highly cyclical cable TV market. There is no doubt A&D is our future. We are now the world's fourth largest and largest independent provider of inertial navigation solutions. Our fiscal 4Q results reflect the significant and swift changes to the size and mix of the top line. Together with the gross margin items I just outlined, as well as the need to invest in future growth, 4Q operating loss was $10.8 million, adjusted EBITDA was negative $9.4 million, and net loss was $10.9 million or 29 cents per share. Shifting to the GAAP results for a moment, Fiscal 4Q net loss was $16.9 million, or $0.45 per share. This included one-time transaction costs of $5.2 million associated with the acquisitions. The GAAP results also included two non-cash items excluded from the non-GAAP measures, a $3 million long-lived asset impairment charge associated with the Alhambra Fog operation, and a $3.1 million accounting credit related to the reversal of variable incentive comp accrued during the first three quarters of fiscal 22. Turning to the balance sheet, we had cash of $26.1 million at September 30th compared to $75.1 million at June 30th. The $49 million decrease consisted of $55 million to acquire the Chicago inertial navigation business, $2.4 million representing the second and final payment related to the space and nav acquisition, $5.2 million in acquisition transaction costs, and $1.8 million in capex. Offsetting these uses of cash was $15.5 million included in cash from financing activities, which represents the borrowing level at September 30th under a credit facility entered into with Wingspire Capital at the time of the inertial NAV acquisition from KVH. Before we get to questions, I'd also like to cover a couple of other recent events. First, the integration of our two acquisitions involved a recently completed management reorganization and cost rationalization initiative. This included a reduction in force designed to reduce costs and expenses by a total of approximately 3.6 million annually, split between roughly 55% cost of goods sold and 45% OPEX. We expect to record a charge in the December quarter for related severance costs, which we anticipate will comprise a combination of accelerated stock vesting and cash over time. Second, as announced last week, we completed the sale and leaseback transaction of the Tinley Park property obtained as part of the inertial NAV asset acquisition from KVH. This transaction generated 10.3 million in net cash proceeds. So with that, we are now opening up the call for your questions.

Thank you. As a reminder, to ask a question, you will need to press star 1-1 on your telephone. Please stand by while we compile the Q&A roster.

Richard Shannon, your line is now open.

Okay, great, guys. Thanks for taking my questions here. I think the first one's on gross margins. Tom, you mentioned a number of items here that you're saying are one time in nature. I don't want to repeat them. I think there are four of them. The broadband one certainly makes sense. It seems like other ones are potentially transitional here. I wonder if you could help us understand how much magnitude that added to COGS in the September quarter, and ultimately, how do we think about, what are you thinking about for gross margins for December?

So, Richard, the total of, let's just stick with the A and D side, where we had the two acquisition gross margins and the charges that I mentioned for QuartzMem and Concord. So, you know, when you take all of those and the impact in the quarter, And you adjust for that. You know, you're taking an A&D gross margin up to call it, you know, high, you know, mid to high teens, 16%, 17%, just with that alone. And so, you know, you're getting back to even better than where it was last quarter. And, you know, there's other activities and things that we have done with this business as we integrate the acquisitions and And as we do things in the courts, MEMS operation with yields and prices and things like that, that put us on a much, much healthier trajectory.

Okay. Do you want to try to quantify what you're thinking about that for December? I think given your 11 days from the end of the quarter or so here, it seems like you'd have a good view on what that is. So a good start with the A&D number here in the mid-teen, 16, 17. But how would you put this all together here?

Yeah, I think that number is, if you just sort of adjust for the items that I outlined in the prepared remarks. The way to think about it is, so A and D, between the changes we're doing in Quartz MEMS and the acquisition integration, I would call it, you know, mid to sort of low to mid 20% range for A and D. and if you so the issue then becomes for the consolidated gross margin uh you know broadband is isn't going to be all that much uh better because it's you know it's cable tv uh down cycle we're in is not going to improve for several quarters uh so you'll see that continue to to struggle because of the um just just the size of the revenue alone uh so when you put it together you know you're looking at a consolidated number you know, 20% plus or minus, maybe a little bit higher, 20, 21, 22, if things go well. That's just in the December quarter. Because a lot of the things that we're doing have some impact in the December quarter. But for example, the reduction in force that I just talked about, that happened late in the quarter, kind of early December. So we'll get a little bit that in the December quarter but that'll most of that will take full effect in the March quarter so as we take those kinds of actions and we do other things too on the integration front some of the things that Jeff mentioned in terms of getting everybody onto a single system that would come sort of towards the end of the March quarter and you know you start to see a an improvement through the fiscal year on gross margin

Okay. So to catch to that last part here, so going back to the reduction of force, you said $2.6 million annually with 55% of it in COGS here. So it sounds like there's been relatively little, if any, of that happened so far. It happened fairly late in the December quarter, but it sounds like it won't be coming into COGS necessarily immediately. So it might take a couple quarters to see the benefit from that risk.

So just one correction. It's $3.6 million. If I heard you correctly, I thought you said 2.6.

I think I said three, but that's what I heard from you. Yeah, yeah, yeah.

Okay. I hope I said three. Yeah, okay. So, yeah, 3.6. And so, you know, that's, what, $900 a quarter. So you're looking at roughly, you know, $500 in cost of goods sold and $400 in operating expenses on a full quarter. And since we took the action – at the early part of the last month of the December quarter, just a few weeks ago, you'll see the full impact of that in the March quarter.

Hey, Richard. This is Jeff. Let me give you two other little pieces of color here. So, for example, one of the things that we're not expecting to repeat on the gross margin line, hey, the good news is that we nearly doubled yield of quartz forks for the Concord QM's products. Bad news is we took an inventory valuation hit that was significant in the quarter. So that's the sort of thing that we're actually expecting to see some benefit from, but it hurt us in Q4. The other thing to think about in terms of the RIF is that really as MCOR continues to simplify its business, we are going to simplify the management structure and remove the folks that had positions that were more, let's call it, more broadly considered part of a larger set of BUs, right? So what it does is it just, it collapses the BU structure, eliminates positions because we're simplifying the mission of the company.

Okay. Okay, fair enough. Jeff, let's talk a little bit about kind of top line here.

Your guidance for the quarter is clear. It sounds like it's mostly coming from the additional month of the KVH operation here. I think we've been hearing about some constraints in supply chain in parts of the business, and QMEMS, among other things. So maybe kind of talk about the trends here, how much is being held back by supply or other dynamics here, and then how do we think about that, you know, going forward into March quarter?

Yeah, so, you know, it's an interesting problem because the supply chain issue, and primarily semiconductors, We weren't hit too badly in some other places where connectors, oddly enough, are still an issue. But what we've seen is customers push back for, you know, that are expecting chip shipments because they actually can't get enough silicon to build transceivers and or the distributed antenna systems used in wireless. But what we're expecting to see, because we are now getting shipments of circuit boards that aren't going to help us much in the current quarter, but they will help us in March. So I would expect to see March look better from a supply constraint perspective.

Okay, fair enough. And then last question, I'll jump a line here, see if there's other ones out here, but Just kind of putting this all together and thinking about when you guys get to break even and what that looks like. If you could give us any thoughts. I guess I'm probably more interested in the structure than timing because it seems like we're looking at a few quarters at least here. But maybe both of you can talk about the structure here when you get to break even.

Sure. So, yeah, it's several quarters out, Richard. And, you know, with improvement quarter by quarter until – call it sort of the back half of the fiscal year potentially early FY 24 it's going to depend on a lot of factors you know the revenue will need to grow into the 30 to 35 million dollar range on a quarterly basis and if we can hit sort of the middle of that range you know with a mid 30s gross margin or we can get up to like 35 with a sort of maybe even a lower gross margin. I mean, there's a lot of moving pieces here. So somewhere in that sort of 32 to 35 top line with a gross margin in the low to mid 30s would put you at adjusted EBITDA break even if you tack on sort of a forecast for operating expenses.

Yeah. So Richard, the other thing to point out here, and it echoes Tom's remarks a bit is that the gross margin number is constrained more by overhead absorption than you might think right when people look at gross margins oftentimes they say oh prices are collapsing in the market or you know your costs are out of control but the reality is overhead absorption high fixed costs in facilities that have you know 30,000 gallons of liquid nitrogen for example Are a significant factor and so as I mentioned in my comments one of the important things that's about to start happening and in the March quarter is We are going to be building a high-volume high-end navigation product Long-term navigation product that was designed in Bud Lake for ULA and That will make a significant dent in this volume of slash margin constraint that we've been feeling for a while now. I think also the signs are positive in Chicago. Now that we've collectively cleared out a few things with a new product, which we just announced, I believe you asked me about, it's TAC 450. And the whole generation of those products from the former KBH team, they are now shipping in volume. So all of that will start to really make an impact, I would say, in the March quarter, right? So Tom's got the numbers right. Qualitatively, it's about overhead absorption. It's not about driving the material costs down or the prices up, although we are instituting a 10% price increase on quartz MEMS. Doesn't affect all of our contracts because some of those are locked in for a period of time. But certainly for new orders, that is going to help us a bit. And it's just about recovering the higher cost of semiconductors, mostly.

Okay. Great. That was good detail. I will jump out of line, Jeff and Tom. Thank you. Thank you, Richard.

Thank you. Thank you. One moment for questions. And as a reminder, to ask a question, you'll need to press star one, one on your telephone. Our next question comes from Tim Savage with Northland securities. You may proceed.

Hi, Maya. Good afternoon. My first question at least is on the cable side. I know it's a small part of your business now, and I guess getting very small. I mean, looking at the, looking at the guidance, you know, I think we must be headed to zero. in the December quarter or somewhere pretty close to that. And you frame it in the context of kind of a broader down cycle in CapEx, but that's not really what we're seeing, right? With regard to, you know, Charter talking about a multi-year investment program and most suppliers actually having pretty decent years, even near term. So I guess my question was, I'm kind of searching for the disconnect there, and there are several potentials, whether it's Cisco abruptly exiting the business. I know you've mentioned inventory builds before among several customers. And of course, the final factor, you know, maybe we are at a point where, you know, some of the linear analog technology is moving out of the network more quickly. You know, if you look at those three factors, you know, how would you assess, you know, at least what looks from my perspective, covering, you know, half a dozen plus names in the universe, this sort of disconnect between what MCOR is seeing in cable and what others are seeing?

Sure. I'll tackle that one, Tom. Real simple. It's five years worth of lasers and transmitters that shipped in two years for COVID. And, you know, a large fraction of that was never installed. And so it's sitting in the warehouses of CommScope and it is sitting in you know, the former major distributor of Cisco product in the U.S. And so, you know, the overhang is there. mCore is not a broad-based supplier of, you know, many different cable optics products. And so that's where the concentration is. You know, we had a terrific run-up, big profits because we were so efficient during the trip down. I'm sorry, during the time that we were running it at big numbers. But the interesting thing is, you know, here we are with $2 million worth of cable. And believe it or not, it's still making a little bit of a profit. And it's because we became efficient. That's how we were able to do what we did, you know, during COVID. But the reality is that the pile of inventory is there, is what our customers are telling us. They are actually selling more linear EML transmitters to try to clear out their warehouses. And there's just nothing we can do about that. There's no competitive losses. And, you know, the back end of the cable business, certainly with nodes and amplifiers, has done very well and will continue to do well. But, no, for us, it's mostly about inventory that's out there.

Great, and thanks for that color. And just to follow up on that, you made a comment about making progress, I guess, on the strategic front in terms of cable. I mean, it sounds like you guys are preparing to exit that business. Do you have any color you'd want to add on that?

Wish I did and wish I could, Tim. As soon as we've got something to say, we're going to get it out there as fast as we can.

Okay, and then last one for me.

I wonder if you might be able to take just a quick moment, because you went through a number of programs that you were working on on the chip side, I think last quarter or maybe a couple quarters ago, spanning, you know, Datacom, Telecom, Sensing. It sounds like you've been making some progress there. Have you added to that? And... I know you mentioned supply issues as maybe a gating factor, but how does that opportunity look compared to what you saw a quarter or two ago?

Yeah, so there are, I believe, and I'm trying to think of exactly when it happened, so I could be off a little bit. I believe we picked up one more program in Q4 from an existing customer, and the production shipments that we talked about um are moving um as we said they would they just haven't picked up as fast as we'd hoped and what our customers are telling us is yes because we can't get enough silicon um you know oddly enough the sensing piece uh over in china which is run through china rail in shanghai uh for example um you know they've had coveted issues and continue to and so you have people Even in the offices. I know it seems a little strange given, you know, how much progress there's been in Europe and in the U.S. But in parts of China, it's still an issue. So I would say that, you know, the and we've talked about it being transceivers. These are chips that are used in tunable lasers. Beyond that, I'm not allowed to mention customer names. But hopefully that gives you just a little more insight into what's going on. There's just a lot of silicon shortages in that business right now. Okay. Thanks very much.

Thank you. I would now like to turn the call back over to Jeff Ritticher for any closing remarks.

Sure. I'd like to close by thanking you all for your interest in MCOR. I also want to recognize our team for their perseverance as we reinvent the company as an aerospace and defense business. And finally, I'd like to wish you all a wonderful holiday season and a happy new year. Thank you.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.