EMCORE Corporation

Good morning and thank you for standing by. Welcome to the MCOR Corporation fiscal 2023 third quarter results. At this time, all participants are in a listen-only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during the session, you'll need to press star one one on your telephone. You will then hear an automated message advising you your hand is raised. To withdraw your question, press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Tom Minichiello, MCOR's Chief Financial Officer. Please go ahead.

Thank you, and good morning, everyone, and welcome to our conference call to discuss MCOR's fiscal 2023 third quarter results. The news release we issued yesterday afternoon is posted on our website, MCOR.com. On this call, Jeff Riddichert, MCOR's President and Chief Executive Officer, will begin with the discussion of our business highlights. I'll 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 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 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 and subsequent periodic reports. 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. Well, I guess it is morning. In Q3, MCOR's inertial navigation business came into its own, growing 10% over the March quarter, representing the fifth sequential quarter of growth. Book-to-bill kept pace with this growth at 1.0, and the business has $68 million in backlog. Non-GAAP gross margin for inertial navigation was 30%, and the A&D segment overall was 29%. Operating expenses for inertial navigation were approximately 9.9 million. Consolidated revenue in fiscal Q3 was 26.7 million. Inertial nav came in at 26.7. Defense optoelectronics was 300K, and broadband posted a negative $300,000 in revenue due to a terminated $1.3 million broadband development contract. Tom will provide additional details on this in his remarks. Simply put, inertial navigation performed significantly better than expectations, setting the stage for the company's evolution into a pure play aerospace and defense business. Turning now to the broadband business, I'd like to focus on our announcement of the letter of intent sell the linear part of the business to photonic foundries. Completion of this sale would accelerate MCOR's ability to narrow its focus onto inertial navigation. It should also meet our objectives to create a seamless transition of supply to our customers and opportunities for our employees. We expect to complete the sale during the September quarter. The last remaining component of broadband is the wafer fab. and we expect to conclude production for the last time by, pardon me, within the September quarter as originally planned. Since the completed sale of the linear product line would transfer the order backlog for the affected products to Photonic Foundries, we expect that the remaining wafer fab backlog to be approximately $3.2 million. Once the wafer fab production processes are complete in Alhambra, EMS takes over from there, assembling chips onto carriers and completing tests and burn-ins. Since there are production limits in EMS, it will take at least a year to complete all of the orders with just a handful of MCOR employees remaining to manage the process. That said, we have several interested parties conducting due diligence on the chip business and expect to have a decision on the future direction of the FAB within the current quarter. bringing the tale of two companies to an end. Moving on to inertial navigation, I'll begin my comments by stating that we had a strong performance from our space and navigation, Tinley Park, and Concord operations. Revenue was up about 10% quarter over quarter with the book to bill at 1.0. This is a little misleading by itself, considering the fact that inertial navigation has grown 30% from the December quarter. which was the first full quarter in which the former KDH team was merged into MCOR. Backlog came in at a solid $68 million. Please keep in mind that this only includes hard purchase orders against our long-term contracts, not the value of the contracts themselves. In the current quarter, we expect that the book-to-bill will remain above 1.0. Operating expenses came in below budget for research and development and sales and marketing. We are mindful of our high internally funded research and development spending, otherwise known as IRAD, and are working to drive this down substantially in the coming quarters through non-recurring engineering contracts from our customers. Consequently, we should see IRAD approach 10% of revenue within the next few quarters. We received full-rate production orders for BAE's armored multipurpose vehicle program and expect this to transition into a solid yearly order pattern from this point forward. For AMPV, foreign military sales and spare orders should book periodically from here onward, providing additional upside. International bookings improved significantly this quarter, most notably in Taiwan and Poland. These included a group of unmanned and turreted platforms. We also saw substantial interest from customers in the EN300 platform, especially in the space sector, with several key test runs starting this quarter. We've seen some positive results early in the game and eagerly await the full results of these tests to drive additional momentum. On the precision-guided munitions side of the business, we have been pursuing a tiered product placement strategy to ease licensing requirements for our international customers. This approach takes a bit more time, but we should begin to see orders this quarter based on this strategic direction. Beyond program capture, we are seeing important signs of acceleration of key programs into the low rate of initial production phase. This is a leading indicator of long-term growth. Infrared search and track has become a key area of focus, and our multiple design wins should benefit in terms of production timing. The EARTH program has secured an additional bank of orders that reflect the strength and duration of the program. We are also working with major primes on securing long-term manufacturing partnerships, and orders are expected to produce improved production costs and predictability. The Space and Navigation Team has continued to integrate multiple TAMU inertial measurement units in support of tests and validation, as it continues to meet shipment targets for BORG, which is the booster rate gyro. These two systems are critical to the launch schedule for United Launch Alliance. The next important milestone should be reached by the end of September. Beyond that, when ULA reaches its targeted launch rates, HEMU and BORG are expected to produce 20 to 25 billion in revenue per year and help significantly improve gross margins. Quartz MEMS had a very nice uptick in shipments this quarter and scaled up margin well. We saw a favorable mix in the Concord shipments, but the operations team executed a very clean quarter with no surprises in the way of unplanned variances. We expect to continue to reduce the lumpiness in Concord as we upgrade Concord to a new ERP system in the coming months. Before I move on to guidance, I'd like to provide some comments on integration, which is a key area of focus this year. We did successfully transition our Chicago operations to Siteline 10, which will end the need for transition services from KDH, as well as eliminate the expense. Since it's the last quarter of the year, we will not upgrade Alhambra or Concord to Sideline 10 until the due fiscal year and should complete this work in a quarter or so after getting started. Beyond ERP, we should complete the PLM PDM unification in early October, and we'll integrate CAMSTAR MES into the Concord and Chicago facilities after we complete the ERP upgrade. Ultimately, this will make MCOR more efficient and will help us to improve our processes, costs, and reduce inventory. Beyond the systems integration programs I've mentioned, MCOR has a solid roadmap for stripping out redundancy within engineering programs to streamline our operations and reduce development expense. Over the next few years, you should expect to see a reduction in the amount of manufacturing floor space we require a reduction in inventory, and improvements in profitability. Turning now to guidance. We are expecting a few supply chain issues and order delivery dates will tamp down on growth a bit for the September quarter. Assuming that the sale of the linear product line to photonic foundries is completed, we expect consolidated revenue in the $26 to $28 million range. This includes inertial navigation at $25 to $27 million, along with approximately $1 million in last-time buys from the chip business. Looking beyond that into the December quarter, we expect inertial navigation to have a revenue range of $28 to $30 million. With that, I'll turn the call back over to Tom.