(EMKR) 2022 Q1 法說會逐字稿

Good day, and welcome to the EMCORE First Quarter 2022 Earnings Call. Today's conference is being recorded.

And at this time, I'd like to turn the call over to Mr. Tom Minichiello, Chief Financial Officer. Please go ahead, sir.

Thank you, and good afternoon, everyone, and welcome to our conference call to discuss EMCORE's fiscal 2022 first quarter results.

The news release we issued this afternoon is posted on our website, emcore.com. On this call, Jeff Rittichier, EMCORE's President and Chief Executive Officer, will begin with the discussion of our business highlights. I will then update you on our financial results, and we'll conclude by taking questions.

Before we begin, we would like to remind you that the information provided herein may include forward-looking statements within the meaning of Section 27A of the Securities Act 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, in particular, projections about future results, statements about plans, strategies, business prospects and changes and trends in the business and the markets in which we operate.

Management cautions that these forward-looking statements relate to future events or future financial performance and are subject to business, economic and other risks and uncertainties, both known and unknown, that may cause actual results, levels of activity, performance or achievements of the business or in our industry to be materially different from those expressed or implied by any forward-looking statements. We caution you not to rely on these statements and to also consider the risks and uncertainties associated with these statements and the business which are included in the company's filings available on the SEC's website located at sec.gov, including the sections entitled Risk Factors in the company's annual report on Form 10-K.

The company assumes no obligation to update any forward-looking statements to conform such statements to actual results or to changes in our expectations, except as required by applicable law or regulation. In addition, references will be made during this call to non-GAAP financial measures, which we believe provide meaningful supplemental information to both management and investors. The non-GAAP measures reflect the company's core ongoing operating performance and facilitates comparisons across reporting periods. Investors are encouraged to review these non-GAAP measures as well as the explanation and reconciliation of these measures to the most comparable GAAP measures included in our news release.

With that, I'll now turn the call over to Jeff.

Thank you, Tom, and good morning. Well, actually, good afternoon, everyone. First of all, I'd like to offer up a quick apology for my cough. Half a dozen tests say it's not COVID. And enough other tests have been run that we know it's not anything serious, but nevertheless, it could be annoying so I apologize for any loss of clarity here.

EMCORE's first quarter revenue was down about 4% from Q4 coming in at $42.2 million. Non-GAAP earnings were $5.3 million and adjusted EBITDA was $6.3 million. Semiconductor price increases and supply chain shortages affected our gross margin, bringing it down to 38% from 39%.

EMCORE continued to perform well financially despite unpredictable supply chain headwinds and increased component costs. Semiconductor availability was generally adequate during the quarter, but prices were definitely up across the board. The same sort of unpredictable logistics challenges we saw in Q4 remained with us in Q1, causing pushouts of material. We expect to see these problems persist going forward and don't see a catalyst to drive predictability into the supply chain in the short term. We are temporarily moving to increase safety stock levels, but given the lumpy flow of material, this move isn't a perfect hedge for the situation.

On the cable TV side, I would point out that even though we are no longer producing cable TV transmitters in China, we are paying close attention to semiconductor inventories and expect few problems in the current quarter. The shutdown of transmitter builds in China and the final transfer to Thailand was completed in the December quarter. As we previously pointed out, CATV inventory levels have already made a drop downward. New laser module starts in China were concluded before Chinese New Year as planned. The remaining material in the line will flow through within 2 weeks or so. And then the laser module manufacturing tools will move to Thailand as well. From that point, a much smaller group of Chinese personnel will remain focused on CATV production support for manufacturing engineering. With this transition complete, we will sell all of those CATV production assets and inventories, and we'll be buying product from our EMS supplier at fixed price.

Turning to individual business areas. Cable TV continued to drive performance in the Broadband unit in Q1. Beyond cable TV, the Broadband business received 2 more chip development contracts with their own NRE funding, bringing the total to 5 such contracts. We have additional business developments underway and expect to continue to expand this business. As we stated last quarter, the first and possibly the second of these new chip products are expected to start shipping in fiscal Q3 and Q4 of FY '22 and are expected to contribute tens of millions in revenue by 2025. These development programs are an important business for EMCORE because they will help drive consistent fab utilization despite CATV's cyclical nature and will result in strong gross margins in the Broadband business.

Aerospace and Defense declined again, primarily due to continued supply chain delays with the new EMS provider in our Defense Optoelectronics business. FOG was up about 20% quarter-over-quarter, with 2 MEMS down primarily due to bottlenecks with test equipment near the holidays. Yields did improve, but we were a bit back-end loaded and just couldn't get everything through testing that we wanted to. We're expecting QMEMS mix issue to ease up over the next quarter or 2.

On the business development side of Aerospace and Defense, COVID outbreaks made it a bit difficult to keep testing and qualification on schedule for new programs. Omicron hit hard and fast, derailing our customers' plans and some flight testing. Going forward, we're already starting to see the situation ease up and expect it to normalize by early spring. Multiple negotiations with international defense contractors have continued with target volumes ranging from 1,000 to 4,000 units per year. Most of these higher-volume products will be used in precision-guided munitions. We fully expect these applications will be the primary growth drivers for EMCORE's A&D business within the next 2 years with incremental revenue in excess of $30 million.

The SDC500 is also going -- undergoing qualification testing for several domestic and international programs with a serviceable market of 1,000 to 2,000 units per year. Taken together, these results demonstrate the growing momentum for QMEMS navigation products and future growth beginning this year.

Our FOG products are also gaining traction. We completed the first phase of preproduction for our new airborne pod. We're awarded the final preproduction phase, I think, in December, which we expect to complete within calendar year '22. Low level of production for this program is expected to begin in '23 -- fiscal '23. And the total value for the program estimates are unchanged at about $70 million over 7 years. The newly ruggedized EN-300 IMU is being [bedded] by more than 10 primes and laboratories in the U.S. and abroad approximately doubling the size of its originally intended application space. Although we're disappointed that COVID threw a wrench into our business development efforts in defense, we already see signs that this is temporary. Over the next several quarters, we expect to make several important announcements about the growth of our navigation business.

Now I'll move on to guidance for the second fiscal quarter. As we've stated before, CATV visibility is at its worst in the March quarter, especially early in the March quarter, with capital budgets just being released and winter weather interfering with installations. Nevertheless, we've conducted extensive customer and channel checks to try to understand FY '22 demand to us and determine the true amount of inventory in the channel. It's clear to us that a substantial amount of transmitter inventory is tied up in the channel, probably due to competitive positioning between our customer at 1 MSO. From what we can gather today, we should expect this to clear out by around the end of the calendar year. I would remind everyone that cable TV is notoriously cyclical, and the CATV boom that was driven by COVID lasted nearly 2 years.

Now we're requiring an inventory correction. Taking all of this into consideration with some of the supply chain challenges we're seeing, we currently expect revenue for the March quarter to be in the range of $32 million to $34 million. With that, I will turn the call back over to Tom.

Thank you, Jeff. As you may have seen in our news release that we issued this afternoon, we delivered another strong quarter in fiscal 1Q. Consolidated revenue was $42.2 million, of which $32.3 million came from the Broadband business segment and $9.9 million from Aerospace and Defense. Broadband revenue increased slightly when compared to the fourth fiscal quarter of 2021. The cable TV products performed at a high level again this quarter, representing 88% of total broadband segment revenue. In addition, chip-level sensing products were sequentially higher in the December quarter. Aerospace and Defense segment revenue decreased when compared to the $11.7 million in the prior quarter. As was the case in the September quarter, the sequential A&D revenue change in the December quarter was attributable to our Quartz MEMS product line, primarily due to a mix shift to a product with lower production yields and Defense Optoelectronics products primarily due to supply chain disruptions. Partially offsetting these changes was higher FOG revenue driven by an increase in orders for our single-access gyro.

Let me now turn to the rest of the operating results, the focus of which will be on a non-GAAP basis. Consolidated gross margin was 38% in fiscal 1Q compared to 39% the quarter before. Broadband's gross margin, still very strong at 44%, was slightly lower on a sequential quarter basis due to a variety of small changes in material costs, mix and overhead cost absorption. While there was no change in the A&D gross margin on a sequential basis, the 18% this quarter was primarily due to the revenue decrease and the lower-than-normal production yields at our Concord operation.

On a trailing 12-month basis, Broadband and A&D gross margins were 45% and 25%, respectively. Operating expenses were $10.6 million in fiscal 1Q compared to $10.5 million in the prior quarter. G&A expenses were up due to higher professional services fees and a few other onetime items. This was partly offset by decreased R&D due to lower project material expenses. OpEx as a percent of revenue was well below the 30% mark for the quarter, coming in at 25% of revenue.

Moving to the bottom line. Operating profit was very strong again in the December quarter at $5.3 million for an operating margin of 13%. Adjusted EBITDA at $6.3 million was 15% of revenue. Net income and EPS was $5.3 million and $0.14 per diluted share.

Shifting to the GAAP results for a moment. Fiscal 1Q net income and EPS was $2.4 million and $0.06 per diluted share. This included a $1.3 million charge for severance costs associated with the planned shutdown of manufacturing operations in China.

Turning to the balance sheet. We had $76 million at December 31 compared to $71.7 million at September 30. The quarterly cash increase of $4.3 million consisted of $6.2 million of operating cash flow, less $1.9 million used for CapEx. On a trailing 12-month basis, EMCORE has generated $16 million in cash from operations.

And with that, we are now opening up the call for your questions.

(Operator Instructions) And we will go first to Jaeson Schmidt of Lake Street Capital Markets.

Just wanted to start with guidance. And I mean, first of all, it seems like some of the softness here in March, that's entirely related to demand and less on the supply side. Is that correct? And then, I guess, relatedly, if it's not, how much of -- can you quantify sort of the supply chain impact you expect here in March?

Yes. The supply chain problems would largely be over in A&D and could contribute, call it, a couple million dollars to $3 million. The primary point that you made about demand, yes, it is cable TV transmitters again, probably geared for 1 MSO.

Okay. Understood. And then just sticking with guidance. I mean, based on sort of previous comments about that cable order book continuing to extend throughout calendar '22. And now, obviously, it appears like there was some double ordering going on. I mean, how confident are you that those issues could actually be worked through in the relatively near term?

Well, great question. The order book is continuing to move forward on laser modules, which are sort of -- which are used by 1 customer that goes to another one of the largest MSOs in the world. So that part, we feel pretty good about because there are orders that go out over a quarter, and that's strong comparatively. When you look at, call it, the probability that everything on the transmitter side will clear out by the end of the calendar year, of course, we have to -- we're not 100% confident in that because our calculations are based on customer forecasts. And we've gone in and seen some movement in terms of where their inventory is going. That gives us confidence that we're going to see the transmitter bubble get cleared out by the end of the year, but it ain't over until it's over, right?

I mean it's -- forecasts change. And again, I guess there's no more share to take. We've taken it all. Look at AOI's margins. We've not lost a deal to anyone that we shouldn't have lost the deal to in terms of competitors. And so there's no more share to take, right? Our options are limited, but that's the nature of cable. And for us, it's about getting our manufacturing operations to fixed expense, which is where we're at, so that margins aren't hit very much as we ride this thing out.

Okay. No, that's helpful. And then just a last question for me, and I'll jump back in the queue. In regards to margins, how should we think about gross margin trending here, I guess, in the March quarter and then maybe as we progress throughout fiscal '22?

Yes, Jaeson. Tom here. The way to think about it is -- so you could start with A&D. On the last couple of quarters, we've been at 18%. And certainly, that's not indicative of the normal gross margin for that business. We've had a mix to a different product that has caused us to take a little bit of a setback on yields because we were making really good progress throughout most of last year. It's improving, but it's going to take another quarter or 2, like Jeff said, to get that back up.

But we also have to move the top line up. So 18%, I don't think we're going to see that in the next quarter and after. But we should be making our way back into like, let's call it, like the mid-20s. And on the Broadband side, with the challenges ahead, the cable TV P&L within Broadband is going to stay strong because we'll be pretty much at variable cost model at almost 100% towards the end of this quarter. And so -- and the transmitters are already there. So -- but we'll have a fab absorption situation that we've enjoyed very good the last 4 or 5 quarters. And that's likely to be not as good. So look for that margin to -- that to affect the Broadband margin. So overall, to repeat, 38% again in this quarter is not likely, a couple of points below that is more in the range.

Yes. The other thing to note, Jaeson, is that the NRE that comes in with these development programs -- chip development programs does get spent in the fab, which is helpful. So within reason, of course, our ability to bring those in does help. But with Q3 and Q4, and that's our fiscal, starting to see shipments of components, the first 2 of the 5 programs. We think the situation resolves itself, certainly, as we're exiting the year. In terms of any fab absorption, yes, seeing that depressed a little bit for a while.

And we'll go next to Sam Peterman of Craig-Hallum Capital Group.

I guess a couple for me. I wanted to start first on cable TV. I don't want to beat a dead horse here, but I want to just try to understand maybe how we should be modeling seasonality throughout the year. I know March is going to be a tough quarter, and it looks like it's going to be. Do you have any visibility into kind of -- is that the low point? Should we model normal seasonality? Or is it kind of hard to say at this point, just with the inventory dynamics you described?

I think it's a little hard to -- Sam, this is Jeff. It's a little hard to say. And the reason is we've -- we're looking at this as a 3-quarter problem. Whether or not it is determines where the low point is, and we don't have an answer to that. What I would say, if we had to go and make a stab, Tom, at the remainder of the year, keep it roughly where the results or the guidance is for the March quarter.

Yes, I think that's right. I think in the absence of any other sort of way to look at it, I think that's a good way to think about it, Sam.

Okay. That's helpful, guys. Second, I want to go back to the gross margins, but specifically the A&D gross margin. I know last quarter was in the teens, and I kind of thought that would be a 1 or 2-quarter phenomenon. And some automated test equipment, I think, was coming in that you thought would help. And so I think I just want to get a little more color on -- did that equipment not come in yet? Do you have visibility into that mix? The [30-unit] QMEMS kind of resolving -- and just if you could walk us through a little bit more specifically the A&D gross margin, that would be great.

Yes. So when a lot of folks think about gross margin, they think about ASP declines, they think about component costs causing issues. But in our case, more than anything, it's overhead absorption that's driving the gross margins. Could affect us a bit in terms of some of the scrap that we see in Quartz MEMS, but that's generally not the major driving factor, okay? So in the December quarter, we have largely beaten back some of the yield issues. The good news is we did it in October. The bad news is that some of the products take 3 months from that point to get all the way through the system. And so these vibration tests, which occur in the -- at the very tail end of the process, we just didn't have the capacity to get everything through.

Alhambra now has its vibration table set up. It hasn't quite been commissioned yet. Within the next week or 2, it will. And the upgrades in Concord, which will provide additional capacity, those are expected to be installed within the next month. And again, this is the environment where COVID-induced friction really screws things up. The -- that shaker -- those shaker tables with these really expensive hydrostatic bearings sat in the Port of Long Beach for almost a month and could not be unloaded. And then when we were ready to go get them installed, there's nobody down at building and safety to issue the permits. And you deal with all this stuff, right? But the point is that this constant friction of everybody slowing down hurts you in ways that you don't necessarily expect at the beginning of the project. So the good news is that these issues are being beaten back. The bad news is, is that they're somewhat unpredictable in nature. These shaker tables come in from B&K over in Europe. And there's just no way around it. Did that answer your question, Sam? Or is there a specific place you want me to provide some more color?

No, I think that's really helpful. That's great color and I think will just help investors get a sense of the puts and takes there. So thanks for that. And then I did want to ask on Broadband gross margins a little bit. Just looking at this quarter, looks like it came down almost a little bit more than 300 basis points, which last quarter was very, very high. And it's still very profitable for the segment as a whole in Broadband. But I'm curious if you're seeing both lower volumes and, I guess, kind of a mix shift to maybe more of these modules versus the transmitter. What kind of effect does that have on the Broadband gross margin? And should we still expect that to hang around to kind of the low- to mid-40s like it's been the last couple of quarters? Or is that maybe a little optimistic given just kind of the product mix outlook?

Sam, this is Tom. So similar to what I just answered to Jaeson on his similar question. As you know, we've been talking a lot about our outsourcing for our cable TV product. So we're at the end of being 100% in outsourcing by the middle of this quarter. The transmitters are already there. So what that means is that the cable TV gross margin within Broadband will remain at a very healthy clip, call it, right around the 40%, plus or minus, given the mix. And we've had good mixes lately that have had to go in even a lot higher than that.

But the other thing that's in the segment is the wafer fab, which like I was telling Jaeson, that is something that we've been absorbing and in some cases, over-absorbing over the last, call it, the last year. And so that situation, if it changes, and it's likely to change at least for the March quarter and potentially the second -- the third fiscal quarter, second calendar quarter of June, will cause the broadband margin to be lower than what the cable TV gross margins are. So you're likely to see something lower than where we've been. How much lower will depend on a little -- it's always dependent on mix, but it will be more dependent on fab absorption.

So again, just to amplify this point because it is important. The historical, let's call it, the structural issue with cable TV at EMCORE was that on the assembly side, we owned all of our own assets and inventory. And so operating leverage was great on the way up, but it always worked against you on the way down. Well, that problem is now solved, okay? On the wafer fab, you have the same issue, right, because you have a large fixed asset that is -- its margins depend on the amount of utilization. And so for the past 2 years, we have been working with a group of very important customers to bring far from commodity, actually, custom high-margin chips into our fab. And the first 2 of those are expected to ship -- 2 model numbers of those are expected to ship in the June and September quarter. So as those pick up, the cable TV absorption in the fab also goes away, right? It would have been great if the bubble would have given us another quarter or 2. You may not have even noticed it, but it is what it is. So does that make sense, Sam?

Yes. Yes. That makes sense. Thanks for clarifying that one for you guys. Then I'll ask one last quick one here. On the chip contracts, you mentioned -- I think last quarter, you had 3, and that you expected 2 more to close. And it sounds like those 2 did close this quarter. I guess my question is are those -- those additional 2 engagements, are those with the same or different customers from the customers behind the initial 3 chip contracts?

Those are different customers.

And are those also in kind of the same telecom datacom space?

Exactly. Yes.

(Operator Instructions) We'll go next to Tim Savageaux of Northland Capital Markets.

Good to -- starting a little bit later here, although better news early in the morning, I guess. So...

Yes. Maybe that was the key, and we just blew it.

Yes. So I want to follow up on that last discussion there. And so I wonder if you could be more specific as the 2 new guys, are they both telecom? One each? Or how does that look? And can you estimate, now that you've got 5 of these guys in-house, kind of the aggregate amount of NRE that you're -- that's associated with this on kind of a run rate basis or however you want to do it? And it sounds like, to the extent that you've got, what, a $10 million hole here for cable short term, as you begin to ramp these 2 initial contracts, I mean, are they of such magnitude that they could fill a substantial portion of that hole? Is that what you meant to suggest when you said, you might not have even noticed it given different timing?

No. It's an important point to make. So the overhead absorption for chip product would be highly selective towards the wafer fab, right, which gets rolled up into Broadband. So my point was that as these chip products roll out and start to hit production, what you'll see it in is the broadband margin. And it will tend to push it up, okay? I know the total value of the contracts, but I don't know where we are as far as how much we've spent. So as far as estimating the run rate and duration, I don't have that in front of me. But if we said it was going to be hundreds of thousands of dollars a quarter, a few hundred thousand, that would probably be right. It's mostly to pay for lots of wafers running through the fab, right? Design efforts are pretty much completed.

Okay. Great. And so I guess you're saying you might not have noticed the fab under-absorption dynamic?

Yes, that was what I meant.

With the difference in timing.

Yes. So when you talk about the size of those contracts, Tim, I don't think they generate that kind of revenue for a year or 2.

Got it.

And then others drop in -- come in as well.

Right, right. So those 2 initial and then you got your following...

The other 3. Yes.

All right. So I don't know if you mean -- meant to imply, in response to another question, I realize there's some uncertainty as to when and where cable bottoms. But when you were talking about kind of a flattish outlook for the balance of the year, was that a comment about the company in general? Or broadband or cable TV in particular? And as you look at either this quarter's guide or that outlook, are there any offsets built into that thinking relative to the cable weakness from Aerospace and Defense improving or at least some of these early chip shipments?

Yes. I think -- Tim, Tom here. More near term, next quarter or 2, it's more overall. We're going to face a couple of challenging quarters here on the broadband/cable TV side until, call it, the back half of the calendar year, more towards the end of the calendar year. The chip business kicking in can obviously help that a lot. But for the next few quarters, think of it as a little bit more of a balance between Broadband and Aerospace and Defense with the total being relatively flat to the current guidance.

Got it.

So there is some leverage over at A&D, Tim. We're not counting on all of it, but there's a lot of really good stuff going on.

Got it. And last question on the inventory correction in cable. And I think you mentioned you didn't feel like you've lost any share or any deals. But would I be looking at this the right way to assume that your customer has lost some share or some deals? And whether that might be the onset of some of this next-generation technology we've been waiting for, for quite some time, which does appear to be ramping? And so I guess, can we discern between an inventory...

I knew it was coming. I knew it was coming.

Well, I mean, it's -- we've been waiting 5 years. So I mean...

I'm sorry. I couldn't hold back. Yes. I got Tom here...

I seem to have cured your cough there, too, which is good. And so do we get a sense that business, it's not coming back and part of a technology transition or competitive dynamic in current technology? Or maybe you could dive down a little deeper into what you think the dynamics might be there?

Yes. Okay. There are, let's call, MSO customers that have made decisions about whose technology they're going with, to some degree, based upon availability to ship immediately from stock, okay? So that has put a premium on both of our major customers to have plenty of inventory available to ship at a moment's notice. And obviously, only one can win or win the primary slot, right? But this is the root of what to us looks like a double ordering problem. So at this point, I wouldn't say that it has anything to do with rollout of Remote PHY. Remote PHY is certainly gaining traction and some credibility with Comcast, not so sure about everybody else.

And so looking at the whole market in a homogeneous way, I'm not sure, gets us to where we want to be because these architectural decisions are being made by the different MSOs are very different. So our view of all of this, and I believe I've said this, is for 7 years, we've been able to take a heck of a lot of profit out of the business out of this market by sticking with linear optics, right? So for the past 7 years, it's been a pretty good bet. Does that mean it's always going to be a linear optics-driven world? Of course, not. Could this be the beginning of a turning point? Maybe with 1 MSO, but I'm not sure I'd go any further than that at this point. Is that fair, Tim?

Yes. That's great color. I really appreciate it.

And with no further questions in the queue, I would now like to turn the call back over to Jeff Rittichier for any additional or closing comments.

Again, my apologies for hacking my way through the call. Whatever I've got, we've got enough tests to know it's nothing serious, but it's certainly annoying. So thank you for bearing with me and your interest in EMCORE. Team put in a lot of hard work this past quarter and dealing with some of the COVID issues, and I want to recognize all of their efforts. And I wish you all a great evening. Please stay safe, and goodbye.

And this concludes today's call. Thank you for your participation. You may now disconnect.