EMCORE Corp (EMKR) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the EMCORE Corporation first-quarter 2016 earnings call. (Operator Instructions) As a reminder, this conference is being recorded.

I would like to introduce your host for today's conference, Mr. Victor Allgeier. Sir, please begin.

Thank you and good afternoon, everyone. 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 of our future events and trends affecting our business.

Such forward-looking statements include, in particular, projections about our future results, statements about our plans, strategies, business prospects, changes in trends in our business and the markets in which we operate. Management cautions that these forward-looking statements relate to future events or our 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 our business or our industry to be materially different from those expressed or implied by any forward-looking statements.

Neither management nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We caution you not to rely on these statements without also considering the risks and uncertainties associated with these statements and our business that are addressed in our filings with the US Securities and Exchange Commission that are available on the SEC's website, located at www.sec.gov, including the sections entitled risk factors in our annual report on Form 10-K and our quarterly reports on Form 10-Q. We assume 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.

With us today from EMCORE are Jeff Rittichier, President and Chief Executive Officer, and Mark Weinswig, Chief Financial Officer. Mark will review the financial results and Jeff will discuss business highlights before we open the call up to questions.

I'll now turn the call over to Mark.

Thank you, Vic, and good afternoon, everyone. Today I'm going to focus my discussion on our first fiscal-quarter operating results and our balance sheet. Please note that consistent with the prior quarters, today's results include the effects of classifying our telecom division and the photovoltaic segment as discontinued operations. Therefore, the results we have released and we will discuss today are only for our broadband fiber optics division.

Consolidated revenue for our first fiscal quarter totaled $22.5 million, which is a decrease of $0.5 million or 2% over the prior quarter. Similar to last quarter, the results reflect continued strength in our CATV and components product line, despite seeing more pressure on our chips area. Our Q1 2016 revenue guidance was $22 million to $24 million. Jeff will discuss the outlook for the business later in the call.

Broadband fiber optics gross margin was 32.9%, an 8.2 percentage point decrease from the prior quarter, primarily due to a reduction in ASPs, lower favorable variances, and lower factory utilization and absorption of the fixed costs as a percentage of revenue. These items, coupled with a slightly unfavorable product mix in the quarter, helped made our gross margins being on the lower side of our target range of the mid-30%s.

While we are implementing a new strategy that should improve our operating model in future periods, those activities will lead to some additional cost in the next couple quarters and take some time to realize. As a result, we would expect our gross margins to be in the low to mid 30%s for Q2 2016, excluding any unusual items.

In the broadband cable TV segment, over the past six quarters, we have seen significant strength in the results and outlook. In general, after tough times in 2012 and 2013, the cable TV optical network infrastructure business has seen improving market trends. Looking forward, EMCORE is excited about opportunities with the migration to DOCSIS 3.1 and the further investment by the MSOs to increase the capacity of their networks.

For the chip level device products, as we have discussed in prior quarters, our revenues have grown significantly from two years ago. This quarter, we recognized revenues of $4 million, with the majority being from GPON applications. Jeff will discuss the outlook for this product line later in the call.

Total operating expenses for R&D and SG&A were $7.4 million, down $0.9 million from the prior quarter. The decrease was primarily due to lower compensation costs and other items. In SG&A, we expensed more than $900,000 associated with our arbitration activities, which was similar to the prior quarter. We expect a significant reduction in legal fees relating to the arbitration in the March quarter. We filed our final closing statements in January relating to the arbitration and are now waiting for the arbitration panel's final ruling.

On a GAAP basis, the consolidated net income for the first quarter was $1 million, which includes $1.1 million of net income from discontinued operations. Our GAAP net loss from continued operations was $0.1 million, a $1.5 million decrease from the prior quarter, primarily from lower gross profits.

Our non-GAAP income from continuing operations after excluding certain adjustments, all of which are set forth in the non-GAAP tables included in today's release, was $1.3 million of income. Please note that we have included additional information regarding amortization, stock comp, legal-related costs, and other items in today's release to provide further clarity on our results.

Moving on to the balance sheet, at the end of December, the Company's cash and cash equivalents balance and restricted cash was over $116 million. The increase in cash from the September quarter was due to a significant reduction in accounts receivable and inventory.

Regarding our working capital metrics, DSOs were at roughly 58 days, below our typical range of 65 to 70, and that was due to better collections at the end of the quarter. Inventory turns were at 3.9 times, which was at the high end of our historic range.

Overall for the first quarter, the broadband fiber optics financial results showed positive -- were positive. EMCORE's continuing operations were profitable on a non-GAAP basis and the Company generated strong cash flow from operations.

On the operating expense area, as we've discussed before, we saw higher levels of expenses in Q1 than historical periods due to additional costs for the arbitration and typical year-end corporate activities. We expect our normal SG&A levels to decrease in the March quarter and to remain relatively flat throughout calendar year 2016.

Turning to our operating model, our goal is to be at a breakeven level on a non-GAAP basis, excluding the items we noted earlier, at $20 million per quarter of revenue depending on product mix and the timing of certain spending. During the first fiscal quarter on $22.5 million of revenue, we realized $1.3 million of non-GAAP income from continuing operations and we generated strong cash flow. In summary, we were pleased with the financial results.

Finally, with the continued strong results and large cash position, the Board of Directors is continuing to review options to enhance shareholder value. Last quarter, we noted that the Board of Directors continued to evaluate the Company's cash needs, and that the Company expects to approve a cash dividend or distribution to shareholders, with the timing and amounts to be determined in the next few months following a completion of the review. We are still in the process of working through this matter and expect to update shareholders in the future.

With that, I will turn the call over to Jeff, who will discuss his reflections on the Company's strategic and operating initiatives and provide revenue guidance for the second quarter. Jeff?

Thank you, Mark. To start my comments, I'd like to review our financial achievements in the quarter. As Mark stated, our revenue was $22.5 million and non-GAAP net income was $1.3 million. And cash flow was strong at positive $5 million. I'd say overall, we put in a solid quarter.

Next, I'm going to break out some of the key factors behind the numbers, starting with demand. First, it appears that MSO CapEx was down in the historically strong fourth quarter. And as we pointed out in August, we saw inventory levels building last summer and were able to adjust our expectations and reduce our internal sales forecast for cable television shipments to be in line with our current shipment levels.

Beyond cable television, our satcom, video, and fiber optic gyro products came in at plan. Over the past year, our chip business grew substantially, although it was relatively flat with the prior quarter. We shipped approximately $4 million in chips in Q1 alone, nearly 50% of our entire chip revenue for all of last year.

Gross margins were on the low side, at 32.9%. While this is typical for the optics industry in general, three factors caused us to be at the low range of our model. In no specific order, the contributing factors were number one: low cable television shipments led to some underabsorption of our manufacturing overhead. Two: a slightly unfavorable product mix. And three: repricing of GPON chips during the quarter. We believe that as cable television volumes increase, we will see improvement on the overhead and mix.

On the chip business, previously we expected chip pricing pressure to materialize in the latter half of calendar year 2016. As we discussed in our last conference call, we saw the impact beginning in our first fiscal quarter. We are taking actions and implementing initiatives for cost reduction in the fab and expect to see improvements in our cost structure in the calendar year.

As Mark indicated, we kept our expenses under control during the quarter and shaved $800,000 from R&D and SG&A over the previous quarter while still investing in our product development efforts. Beginning in the current quarter, we expect to see a rapid decline in legal defense costs from the $900,000 we expensed in Q1.

Now let me direct my comments to the forward-looking picture of our business, including our cable television, satcom, fiber gyro, and telecom chip product lines. As we described in December, the cable television transmission product business outlook remains strong. Consolidation at both the MSO and OEM levels caused a bit of turbulence along with inventory buildup, which we believe is currently winding itself down.

We also see the MSOs rapidly shifting their spend to DOCSIS 3.1 product as they deploy architectures which will allow them to compete against deep and all fiber networks, and allow them to deploy over-the-top services efficient. We would point out that the relative percentages of spend can still be a little unpredictable to some degree because they shift between optical infrastructure and CPE, or set-top boxes. We see strong evidence that MSOs are moving forward with their DOCSIS 3.1 deployments, and that's good for EMCORE due to our broad transmission product offering.

As the industry migrates to the new DOCSIS 3.1 technology in calendar year 2016, we will expect to see a return to more normal ordering patterns. These transitions are usual and customary and have been figured into our planning cycles.

As you know, the cable television industry remains very competitive and our customers, the MSOs, -- I'm sorry, the OEMs continue to consolidate and exert their influence in the supply chain. Despite a smaller number of MSOs, we see no credible evidence that any of EMCORE's competitors will exit the business and we expect competition to remain strong.

In cable television, we are now reaping the fruits of significant investments that we've made in the cable television chip technology and are ramping our new linear EML into production beginning this quarter. These transmitters are designed with leading customers and are now nearing production and are in qualification trial with the MSOs, as we expected.

The successful commercialization of this technology represents an important new opportunity for our cable television business over the next few years, as LEMLs have superior cost performance ratios to the traditional externally modulated transmitter technology. Over the next year, we expect to produce a wide range of products based on the LEML and its derivatives and that those products will set the standard for demanding DOCSIS 3.1 transmission links.

Along with the strength in our cable television product line, we've also seen good progress in streamlining and optimizing our satcom products for our new production strategy, which I will describe in a little more detail later. Satcom has meaningful growth opportunities going forward, some of which are centered on distributed antenna system applications, which are being deployed in large venues such as stadiums, in tunnels, and other less accessible points in the network.

To that end, we've reached a partnership agreement with one of the world leaders in DAS technology for their 5G system deployment. As wireless networks are upgraded to the new 5G standard, we expect that linear fiber transmission between equipment hubs and smaller, more densely populated antennas will be critical.

Additionally, not having to convert from digital to RF at the antenna itself provides significant cost savings. We see EMCORE's linear optics technology continue to reach further into wireless applications going forward.

We've also seen good progress in our fiber gyro product line. As we said before, our fiber optic gyro product leverages what is largely the same optical chip technology as our core cable television products. From this position of strength, we've made significant inroads into the defense business and are getting traction from multiple Tier 1 customers.

In December, we successfully delivered handheld navigation-grade targeting systems to one customer. Although we are still a little early in the game to forecast the future with any degree of accuracy, we are increasingly encouraged with the commitments that we are getting from the world leaders in defense systems. If we continue to meet our commitments here, we will significantly grow the revenue from these unique, long-lifecycle, and high-gross margin products.

For the chip level device products, as we've discussed in prior quarters, our revenues have grown significantly from two years ago. The past quarter we recognized revenues of $4 million, with the majority being from GPON applications.

Going forward, we do expect non-GPON chips to comprise a greater fraction of our chip business than they did over the past year, with our goal for non-GPON to be one-third of our chip revenues over the year. As a matter of fact, non-GPON chip shipments in 2016 could be larger than our entire chip business was in 2015.

EMCORE's long history as one of the industry's premier optical semiconductor companies has given us a substantial portfolio of chips to sell. And the divestiture of our telecom module business eliminated any channel conflict concerns in the minds of our customers.

The GPON business is really just our initial offering in the merchant chip market, as EMCORE fully intends to become a broad supplier of chip level products to the entire telecom industry as well as an important supplier of GPON chips. As I indicated earlier, we have a number of process and technology initiatives in the fab, which will help us drive down costs, such as a migration to 3-inch wafers, outsourcing a commodity epi growth, and automated techniques for coating, singulation, test, and sort. These steps will enable us to compete more aggressively in the market over the long term.

Automation is especially important to this initiative as we add operating leverage into the chip fab operations. New equipment is being installed as we speak to modernize our fab and improve its productivity.

Mark mentioned earlier that we are working to implement new manufacturing strategies to improve our performance and to turn fixed and semi-fixed expense into variable cost. Our expectation is that these initiatives will also lower our working capital requirements further, tying up less cash in inventory while reducing cycle times and improving yields.

With that said, you should expect to see some buildup activities in our inventory position over the next few quarters as we build bridge inventory to accommodate movements of certain manufacturing processes to EMS. The transformation of our manufacturing processes has been underway since the beginning of the quarter.

As I said in our last call, this effort is designed to improve our operating leverage, cycle times, yields, and product costs. There are four key components to this initiative. Number one: moving low value-added processes to EMS; number two: install more robust measurement and process control technologies at key points in our assembly lines; and number three: improve operating leverage through automation. We will also reduce the fixed and semi-fixed expense of our assembly operations.

Satcom manufacturing operations are being readied for relocation to EMS as we speak, with upgraded processes for assembly and new automated test systems. This will improve our margins and reduce fixed expense. We also are looking at a number of options to improve the efficiency of our detector chip fab operations, which will improve operational efficiency.

The critical parts of our coating and test operations will remain in the US, but will feature the introduction of our first robots into chip fab operations. As we said previously, these moves will not affect any of our ITAR products, which will continue to be primarily built in the US. We have nearly completed the outsourcing of our first true turnkey assembly products to EMS from EMCORE China, freeing those engineers to focus on the areas that give us a meaningful cost advantages or opportunities for competitive advantage.

Upgraded processes are also in their final stage of development for our laser module and transmitter families that will smooth the automation of transmitter assembly while improving process yields. We expect to further strengthen EMCORE China's automation and engineering teams and look forward to seeing improvement as streamlined processes are developed and inserted into operations during our Six Sigma Black Belt projects.

We're doubling down on Six Sigma implantation across the board, beginning with my executive team. Those that are currently not Black Belts -- and there are three Black Belts on my staff already -- will enter Green Belt training within the next few weeks. Black Belt training will start in both our Alhambra and Chinese facilities within the next few weeks as well.

The second session of Green Belt training will be conducted in both facilities, and White Belt training will be institutionalized for new hires that don't already have a certification. Our scientists and engineers are receiving advanced design of experiments and statistical process control training over the next few quarters and we expect to integrate this training regimen with our new manufacturing execution software in our primary manufacturing facilities. Over the next year, specific Six Sigma projects will also be conducted by our manufacturing engineers in our supplier's facility.

I recently attended the Green Belt projects at our Chinese facility and was especially proud of the fact that they completed their Green Belt training and executed their project so successfully. I'm looking forward to reviewing the US Green Belt projects in the next few weeks. Despite our progress with Lean Six Sigma, we still have a lot of opportunity to drive waste out of manufacturing operations and extend our leadership position.

As Mark stated and on the legal side, we completed both the Sumitomo arbitration itself as well as the post-arbitration filings and expect our legal defense costs to be down significantly from this point forward. We hope to hear a decision from the panel in 60 to 90 days from now.

Turning to guidance, for the second quarter of fiscal 2016 ending March 31, our revenue expectation is in the range of $21 million to $24 million. As I said, we see the trends in cable television continue to be strong, but we are mindful of any remaining inventory positions and upcoming product changes within our customer base.

In closing, I like to thank the EMCORE team for their efforts this quarter and state that I'm looking forward to updating you all in early April and after the close of Q2. In addition, Mark and I will be at the Northland investor conference in early March, and we will be meeting with customers at the upcoming Optical Fiber Communication Conference from March 21 to 24, and I will be at CIOE in China the same week.

With that, I will turn over the call to Q&A.

(Operator Instructions) At this time, I see no questions in queue. I'd like to turn it back to management for any closing remarks.

Thank you all for taking the time out of your busy days. I know there's a lot of calls going on right now, but we appreciate your time and attention. And look forward to speaking with all of you soon. Thank you very much.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program; you may now disconnect.