(EMKR) 2021 Q1 法說會逐字稿

Good day and welcome to the EMCORE First Quarter 2021 Earnings Conference Call. Today's conference is being recorded. (Operator Instructions).

At this time, I would like to turn the conference over to Tom Minichiello, EMCOR's Chief Financial Officer. Please go ahead.

Thank you, Marion. Good morning, everyone, and welcome to our conference call to discuss EMCORE's fiscal 2021 first quarter results. The news release we issued yesterday afternoon is posted on our website, emcore.com. On this call, Jeff Rittichier, EMCORE's President and Chief Executive Officer, will begin with a discussion of our business highlights. I will then update you on our financial results for the quarter, 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 in 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, everyone.

From a revenue standpoint, EMCORE's first fiscal quarter was nearly identical to the previous quarter. However, GAAP profits increased from $0.02 to $0.09 per share. This combination of top line consistency and expense control resulted in a non-GAAP operating profit of $3.4 million, or 10% of revenue. The EMCORE team executed well, improving our financial results from Q4.

From an operational perspective, the supply chain and operations team continued to meet the challenges of COVID-19-driven shortages. The biggest difficulties were delays caused by airfreight and customs, especially at the end of the quarter. While we foresaw these problems, they were a bit worse than we expected. We don't expect improvement here until COVID begins to break.

As we previously described, friction in the customer-facing business activities, such as development and new program capture and qualification remained a challenge. We made good progress on these efforts in Q1, but many of the defense prime contractors that we work with have stringent work-from-home policies that continue to push schedules to the right.

As you doubtlessly know, COVID made a major resurgence in California in December. We brought in mobile testing on a frequent basis, and thankfully, only saw a handful of cases at EMCOR, with no evidence of transmission inside of our clean rooms. Protecting the manufacturing and engineering teams that must work in our factories remains a top priority.

Many of our non-technical staff are out of the office to minimize opportunities for transmission. Consistent and frequent testing will continue to be part of our protocol. We believe that we've gone the extra mile to protect people, but are mindful of the situation and continue to look to mitigate COVID-19 risks where possible.

The transition of our cable TV manufacturing operations to Hytera's Bangkok facility made significant progress against its operational milestones. Transmitter deals in Bangkok remain on target, and laser module yields continue to improve. Strong demand from our customers and the rash of COVID-19 outbreaks in both the Hubei province in China, as well as Thailand, dictate that our best strategy is to hedge the geographic risk of COVID-19 outbreaks by continuing to operate Beijing and Bangkok in parallel until the end of the calendar year.

In addition, our customers simply cannot afford the temporary loss of production capacity associated with the final move to Bangkok. We responded rapidly to challenges to keep production on plan, but these incidents demanded additional measures to deal with the problems. Going forward, we will also ship lasers from our -- for our sensing customers out of Alhambra to further hedge risks and increase production volumes.

Inventory levels increased a bit, quarter-over-quarter, due to customs delays and receipt of materials across 3 factories that are now producing laser modules. All things being equal, inventory should start to come down in the March quarter.

Margins were strong on similar mix to Q4. We're still volume sensitive, and additional revenue will have good flow-through in the P&L.

The Thai government started to allow foreign workers back into the country right at the end of the December quarter. They have since tightened entry requirements to only admit Thai citizens. While our Thai manufacturing teams continue to improve their effectiveness, adding the highly experienced EA engineers into the mix would have a positive impact.

I would also like to point out that the strong demand for cable TV products more than justifies parallel operation at both facilities until the end of the calendar year and enables us to better hedge the COVID-19 risk. Our customers expect certainty in their ship dates, and a multi-facility operation helps to provide that.

Turning to individual business areas, cable TV and sensing demand drove strong performance in the broadband unit. MSOs continue to invest in their networks to break bottlenecks caused by bandwidth demand from work and home initiatives. Charter and Comcast recently announced earnings and their capital plans for the year. Comcast reported increases in scalable infrastructure, balanced against reductions in CPE, while Charter highlighted the larger amount of node splitting that they're doing to meet bandwidth demand. These statements are consistent with our strong order book through the September quarter. Furthermore, we believe that the trend should continue through at least the December quarter. Although the cyclical nature of the cable TV business gives us pause regarding the ultimate duration of this upgrade cycle, we remain confident that we can complete our move to variable cost manufacturing while orders are strong.

Looking beyond the very near-term in CATV, we believe that MSOs will continue to invest in linear optics technology to meet their needs. DAA or remote PHY keeps pushing further out to the right, while our development work on linear, remote-size shelf products continues to gain traction.

The broadband business unit also generated some important successes outside of cable television. Most importantly, we're seeing growing traction with our LiDAR and sensing components. On the LiDAR front, our chip design has already been qualified for the major design win we announced with a Tier 1 manufacturer. Beyond that, we are about to start sampling a second-generation package designed to at least 3 more Tier 1 automotive subsystem manufacturers. Although volume shipments won't really occur until sometime in FY '22, we're excited with the response that we're getting from these customers. Our China rail design win drove strong demand in the quarter, which should continue for the foreseeable future.

Outside of sensing, we continue to rack up design wins in highly differentiated chip products and expect to see growth materialize toward the end of calendar year '21. Taken together, the broadband business has many important growth opportunities outside of cable television.

Aerospace and defense declined slightly due to contract delivery dates, which tend to mirror the government fiscal year, which ends in September. Defense (inaudible) was steady, while QMEMS was down about 8%. Overall, I would characterize our manufacturing performance as solid.

One of the most significant events that recently occurred was the State Department's ruling that our new SDI500 [Rev F] is no longer subject to ITAR export regulations. This dramatically increases the size of the market that we can address. The difficulties in getting ITAR export licenses are well-known in the industry and substantial. With some caution, we expect that our newer QMEMS products will also fall into this EAR license category when we get our rulings from state.

As we discussed last quarter, the QMEMS development team is staying on their schedules for new product introductions and process improvements, which will help productivity and margins as these can get qualified and rolled out. We remain excited about our first product for weapons platforms, such as the JDAM smart bomb, and demand for our defense optoelectronic products remain solid, with shipments for FAA control tower upgrades making up a significant fraction of the revenue. Defense Opto's new millimeter wave Q&V band products continue to gain customer interest in the market across military and commercial applications.

Production orders for our fiber optic gyroscopes similarly remains steady. We are making slow but steady progress on new product testing and qualification for our FOG products and look forward to the time when COVID is behind us.

We also received our first preproduction contract for a custom IMU and are working with our customer on this phase of a very large program. The excitement over the EN-300 is growing. It is now being evaluated by 6 Tier 1 prime contractors. As I pointed out, our confidence in the new [prod] products remains strong despite the COVID-19-driven slowdowns in testing and validation.

Moving on to guidance for the second fiscal quarter, we're expecting to see stronger than normal performance from our cable television and QMEMS product line. Our biggest note of caution remains tied to COVID-19 impacts on our personnel and supply chains in the U.S., China, and Thailand. Taking all of this into consideration, we currently expect revenue to be in the range of $34 million to $36 million.

With that, I will turn the call back over to Tom.

Thank you, Jeff. Consolidated revenue in the 2021 fiscal first quarter was $33.4 million, essentially flat when compared to $33.5 million in the 2020 fiscal fourth quarter.

Aerospace and Defense segment revenue was $13.6 million this quarter, lower by 6% when compared to $14.5 million in the prior quarter. The sequential quarter revenue change was due primarily to program timing for our QMEMS navigation products. Revenue for Defense Optoelectronics was essentially flat.

Broadband segment revenue was $19.8 million, up 4% when compared to $19 million the quarter before, driven by the continued surge in demand for our cable TV transmitters and components, as MSOs continue to expand their networks to meet increased bandwidth demands.

Turning to the rest of the operating results. On a non-GAAP basis, consolidated gross margin was 38% in fiscal 1Q, the same as the prior quarter. Segment gross margins changed slightly, consistent with the sequential revenue trend. Broadband's gross margin was 43% compared to 42% the quarter before, while A&D was at 31% compared to 32% last quarter.

OpEx improved again this quarter to $9.3 million and 28% of revenue, compared to $9.7 million and 29% of revenue in the prior quarter. The lower OpEx was primarily due to reduced project-related R&D expenses.

Moving to the bottom line. As a result of another strong quarterly performance for revenue and gross margin, combined with the lower OpEx, we grew non-GAAP operating profit in the December quarter to $3.45 million and operating margin to 10%, compared to $2.9 million and 9% the quarter before.

Adjusted EBITDA, which adds back depreciation, also improved to $4.4 million, or 13%, in 1Q, compared to $4 million, or 12%, in the prior quarter. December quarter's net income and EPS on a non-GAAP basis was $3.4 million and $0.12 per share, compared to $2.9 million and $0.10 per share the quarter before. Net income and EPS on a GAAP basis was $2.6 million and $0.09 per share, compared to $700,000 and $0.02 per share in the September quarter.

Turning to the balance sheet. We had cash, net of a loan payable, of $24.7 million at December 31, compared to $24 million at September 30. The cash generated during the quarter was the result of $1.6 million from operations, less $900,000 in CapEx.

So, with that, we'll now open up the call for your questions.

(Operator Instructions) We will take the first question from Jaeson Schmidt from Lake Street.

Jeff, you mentioned some delays in air freight and customs. Just curious if you could quantify the revenue impact do you think that had in December, and I guess, relatedly, how much you think that is impacting the March quarter guide as well.

If I had to take a swing at it, it would probably be close to $0.5 million. And as far as how much additionally, it would affect March, it's a little hard to say. At the end of the year, we have issues with the holidays, right, and people wanting to take time off, and that tends to not be as big of an issue in the March quarter. So, maybe a little bit of improvement there, but it would purely be random. So I don't think it's going to get any worse.

I mean, what we've done, Jaeson, is a double book across several different carriers. And we've had to enlist customer help to expedite shipment through customs in places where that has been a problem. But just to give you an example, shipping one product from -- sorry, one piece of CapEx from the U.S. to Beijing incurred an 8-week delay in getting it through customs. I mean, these things happen. So I don't think it's going to get any worse. We'll call it a steady-state number for now. But that's roughly, roughly it.

Okay. No, that's helpful. And then, it sounds like you guys are seeing some nice traction in the sensing opportunities. Just curious if you can help us sort of quantify or think about what the potential size of these opportunities could be?

Yes, so it depends on the customer. I would say, at the low end, where you've got -- where the design win is, where we've got identified programs, not just with our subsystems, but with -- going all the way out to the buyer of a near-autonomous vehicle, tens of thousands of units a year, but pretty good ASPs on those. And we're still working all that out, so I hesitate to give a hard number there.

Some of the longer-term opportunities where people are really trying to put them into mainstream cars, first as safety systems, and then as autonomous driving tools, those are in the hundreds of thousands or millions a year. You're just not going to see them on every Volkswagen. They're going to show up at the high-end luxury vehicles first. This technology does pretty much everything from parking sensors to antilock brake [pads]. And this is going to roll out over a period of years.

Automotive qualification is no joke, and the FIT rates that they're looking for, failure in time rates that they're looking for, are superior to the -- some of the toughest telecom applications that approach submarine pump laser sort of specs. So it's going to take its time, but it's going to be a good steady rollout. Like I said, FY '22, we're going to get some volume out of it. And how fast it ramps after that, depends on a lot of factors that are pretty hard to predict.

Okay. That makes sense. And then just last one for me, and I'll jump back into queue. Looking at the gross margin line, another nice improvement here in December. How should we think about gross margin trending the rest of this fiscal year with all the moving parts?

Well, again, as I pointed out in the script, we are volume sensitive, so our contribution margin to gross margin spread is -- means that as volume increases will flow more through the P&L. So, in the places where we don't -- normally don't have great absorption, we will see better absorption, and I do think there's some upward pressure on gross margin. It all depends on exactly how much in the way of, say, lasers we ship out of Alhambra and some of the other products that we're going to use (inaudible) for California personnel to build as opposed to EMS, just because we need the volume. And we've got trained people here, and we can move them between different functions. I mean, even between the [wafer] fab and certain fine assembly processes. So I would say there's some light upward pressure on margins. Tom, you got any other color on that?

Yes. No, I think it's well said. Agreed.

(Operator Instructions) We will now take the next question from Tim Savageaux from Northland Securities.

I guess a couple of questions on each side of the business.

Can you just pick up a little bit, Tim? Having a hard time picking you up.

Okay. What about now?

Better. Thank you.

All right. On the landline, too. Okay. Sorry about that. On the cable TV optics side, we've once again moved out another quarter. You began, a couple of quarters ago, talking about March visibility, then June. Now we're into September, so obviously, that business continues strong. I assume that's the primary driver of your much better than seasonal growth in March, but feel free to provide color on that.

And I guess the broader question is, I guess, we have visibility into continued order strength, but do we have visibility as to kind of the peak of this cycle, if you will, to some degree? Historically, I think you've got an upturn around $20 million a quarter on the cable side. You're pretty close right now. Can that business continue to grow throughout that September time frame, or do you see it more kind of steady at an elevated level for a period of time?

Great questions. So first of all, you hit it -- hit the nail on the head as far as March quarter contribution. Second thing, as far as the ultimate duration of the cycle, this is an area where we've spent an awful lot of time, not just jockeying or our own spreadsheets around, to talking to our major customers.

One of the interesting things that we've discussed with them is the difference between 2017, where cable peak, and where we are now. And there's a really interesting story underneath it, which is the principal volume of parts that were shipped in '17 were laser modules, right, with an ASP of roughly $220, something like that. If you take a look at the mix now, it's overwhelmingly linear EML with an ASP of $600. So, if you say, okay, in Q1, EMCOR did roughly $20 million in cable, and at peak, EMCORE did about $20 million in cable when you take the old RF over glass stuff out, you say, wow, we're running off the end of the cliff.

Except, when you correct for the fact that we're selling a much more expensive part, you see that the actual volume of links is considerably smaller. And so, that is what I will call one of the indicators that this could run considerably longer than just being a spike or even a surge.

As we talk to customers and their customers, what they're telling us is scalable infrastructure is the priority for CapEx. The reason why they love the linear EML is, it's just more bang for the buck. It's more bandwidth for every transmitter that's installed when compared to a DSP. And since we're the only guys in the world that can build these things, it has an outsized impact on us.

So you hit on this dynamic spot on, Tim. What we're saying is, hey, we're completely covered with the order book through September. Reality is, it's already leaking over into Q1, so we certainly don't expect a big slowdown there. But the question is, are we at the peak? I think the answer is that part of it is that we're a little bit production constrained. Customers would probably like more product from us than we can provide. But I also think that there are catalysts within the MSO CapEx strategy that could make this go considerably longer. It's just a little bit early to talk about.

So I doubt that I really gave you everything you were looking for, but hopefully, that helped.

That was actually a ton, and it really suggests that, given the unit volume and ASP dynamics, that you can continue to grow. And...

Yes.

And then more broadly, it seems like we're in relatively early stages of a lot of this node split activity, that this could continue for quite a while. So I think...

Yes, you're right.

Go ahead.

Yes. No, it's -- you've hit the nail in the head again. And the -- as we take a look at -- because oftentimes, node splitting is limited by bucket trucks, right, and the time available to go out and hang the fiber and get everything installed.

The other thing is, is that the tools that the MSOs use to predict where the problems are in the network in terms of congestion, I think has improved dramatically and have shown them some weaknesses that possibly they didn't know they had. It's funny the way a crisis like this will surface these sorts of things.

Got it. The other question over on the -- coming off that sort of sensing discussion, and really maybe more focused on other applications. Obviously, you've got laser capability that feeds several aspects of your business, right? That includes parts of the defense business, standalone laser chips [for comms] and other applications, and we've just discussed this kind of sensing dynamics. So, over on the sensing side, there's a lot of different approaches to doing this, at least from a light source perspective. Some guys are using VCSELs, some guys are using things that look more like telecom lasers, some guys are using diodes, and there's a lot of different approaches. I wondered if you might take us through the pros and cons of using kind of EMCOR's approach there relative to others.

And also, as you look at those indium phosphide fab assets, what sort of other applications or verticals do you see the potential to be relevant to? Again, there's I think 3 that can be discussed now, right, defense, comms, and sensing. And I think you've got new things going on, on a couple of those fronts. Maybe touch on those a little bit.

Yes. So obviously, the first movers in the sensing space, and I'll just focus on LIDAR, because this is where we get the most questions. We're all using pulse lasers with very high power and the classic Velodyne product, where they have just taken the world by storm and have really done a nice job with it. The challenge for them, and it wouldn't surprise me at all if they're developing an FMCW system, is that the pulse -- high-power pulse lasers, base LiDARs, can interfere with each other. And the FMCW -- so you could have 2 or 3 cars pulling up to an intersection. If they're all receiving the same reflection from the wrong vehicle, it's pretty much impossible to tell which sense -- which signal you're reading on the FMCW side. Because they are coherent systems, by design, you don't have that problem.

And so, one of the reasons -- one of the chief reasons why we believe in FMCW over a long term is because of this ability to discriminate between, let's call it, collisions of sensing systems. The other thing that we like about it is, at least at a theoretical level, because it is a coherent system, you could have single-photon detection. That's going to depend on a lot of things, but it will enable, I think, an FMCW system to see better through rain, snow, sleet than something that's just going to rely on -- a LiDAR that's going to rely on peak optical power.

The other thing is that the FMCWs can be built in a smaller package, smaller size. And our view is that it won't be a one-size-fits-all. You're going to have LiDARs with different characteristics, looking forward to sides, and possibly, even behind you. And so, we like the fact that the FMCW approach allows that sort of design flexibility. And so, the only place where we're really driving our technology is on the FMCW front.

Now you've hit on this point about our laser technology and commonality. We originally started all of this work on the LiDAR lasers from our very narrow line with cable TV source lasers. And we've been able to improve it a couple of orders of magnitude without increasing the cost of the size, and now we're driving down costs with different packages -- package types. So it was -- it's surprising, I think, to some that aren't well versed in the technology of just how versatile this set of tools that we have really is as far as different applications.

When you go into the China Rail application, what these devices are doing, to the best of our understanding, is they're sensing vibrations, presence of trains, even the ability to create a signature of a train track where any bearing issues in the train. And so it enables predictive maintenance as opposed to preventative maintenance, which is a really big deal. Oddly enough, when you get into QMEMS, there is a sensing application for it. The QMEMS products go down whole in a drill bit that enables directional drilling for fracking applications. The company called Gyrodata is our big OEM partner there.

So we keep building out a wider range of sensing products that started out out of a common toolkit. So, on the merchant ship side, which you also asked about, we've really gotten away from trying to sell commodity chips in China. We supply game chips to leading tunable laser manufacturers. We can build semiconductor optical amplifiers. We can build other products that have highly differentiated features. And so, what we see as far as the trajectory for our merchant chip business, Tim, is more along the lines -- let's call it medium volume, highly differentiated devices with good margins.

And this actually is consistent with what we're doing with lithium niobate. We are producing components, which are similar to modulators, for certain defense partners that make fiber optic gyroscopes. We're good at this. We're getting better at it. And we see no reason not to profit from the IP that we have there.

The other point to finally close on, because you mentioned defense, if you took a look at one of our fiberoptic gyroscopes, you'd find the light source is similar to our gain chips. You'd find all of our detectors, we make ourselves. You'd find the IOC, which is a sort of a lithium niobate modulator that we make. And we're now making the [Q&B] band -- well, starting with K, but we'll be moving to Q&B band detectors for the [SENS OpCo] business and going into some interesting applications over in 5G, both on the commercial and military side.

So at its very heart, EMCORE is a chipmaker, and we do best in terms of the economics in our business when it has -- when our products have a high amount of chip content. And so that's -- if you call our strategic direction, that's where we're headed.

Got it. And congrats on the results.

(Operator Instructions) As there are no further questions in the queue, I'd like to hand the call back over to your host for any additional or closing remarks.

Thank you, Marion. I'd like to thank all of you for your interest in EMCOR, especially those of you on the West Coast, who woke up real early for the call. In particular, I also want to recognize the team at EMCOR for their commitment and very hard work the past quarter. In particular, the EA team in Beijing overcame shutdowns and supply chain roadblocks, which delayed their cause to work, and yet still delivered as they committed. And really, the strong commitment from the team is showing up in the results, and we're thrilled with that.

So please say thank everyone, and have a good one.

Thank you. That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.