EMCORE Corp (EMKR) 2023 Q4 法說會逐字稿

Thank you for standing by, and welcome to EMCORE Corporation's fiscal 2023 Fourth Quarter Results Conference Call. At this time, all participants on a listen-only mode. After the speakers' presentation there will be a question and answer session to ask a question. At that time, please press star one on your telephone. As a reminder, today's call is being recorded. I will now turn the conference over to your host, Mr. Tom Minichiello, Chief Financial Officer. Please go ahead.

Thank you, and good afternoon, everyone, and welcome to our conference call to discuss EMCORE's fiscal 2023 fourth 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, and then I'll be updating 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 27 A of the Securities Act of 1933 and Section 21 E 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 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, but 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.

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

Thank you, Tom, and good afternoon, everyone. In the fourth quarter, our initial Navigation business continued to show progress with another strong top line performance at 26.8 million and gross margin at 31% non-GAAP. Tom will provide additional financial details in his remarks.

Book-to-bill came in under 1.0 due to concerns about the government shutdown. However, the majority of those expected orders were received in October. Therefore, the backlog in the business remained steady at approximately 67 million. With the closing of the sale of the linear business to photonic foundries in early October and the shutdown of the indium phosphide wafer fab.

The operational components of the restructuring plan that we announced in April are complete. EMCORE is now a pure play aerospace and defense business. In our press release, we announced that we have entered into a nonbinding letter of intent to sell the indium phosphide wafer fab. This agreement is secured with the deposit and also includes an obligation for the buyer to assume the lease obligations of two buildings on the Alhambra campus, resulting in a reduction in long-term liabilities and cash out for outflow for EMCORE. We expect to complete this sale by the end of the December quarter.

Moving on to the business, I'll begin my comments by stating that we had strong performance from space and navigation and Tinley Park, Concord and our Hamburg operations came in low, but largely due to mix changes and timing of orders in the current quarter, we expect that the book to bill will recover and believe that Q2 will be stronger yet operating expenses came in below budget for R&D and sales and marketing.

We are mindful of our high internally funded research and development spending otherwise known as I read, and we're working to drive this down substantially. Used may operating expenses came in below budget and are working to drive this down substantially in the coming quarters through nonrecurring engineering contracts from our customers. I will address this in more detail later on in the discussion in October we announced an agreement with Cree does to provide inertial navigation systems for four of their high-performance drones.

In particular, the XQ 58 Valkyrie contains multiple M core systems developed under the LCAT. program between Kratos and the Air Force Research Labs. This extraordinary stealthy AI driven platform can serve as a loyal wingman to advanced pilot operated aircraft. The Air Force has stated that it wants to acquire a fleet of at least 1,000 of these systems.

The Navy also directly awarded us additional business for the mark 48 torpedo, and we have been notified that we will need to nearly double production in FY24. We are expecting significant upside business for our EN 300 products. The return of orders for MTSBs and expect to make our first low rate of initial production shipments of an advanced targeting system this quarter, depending on the receipt of circuit boards that are late by a month.

During the quarter, we received additional production orders for precision guided munitions program and expect this to transition into a growing yearly order pattern business from the Ukraine is also expected to expand beyond program capture. We are nearing completion of preproduction units for Raytheon's advanced ELIR. pods.

We expect to complete the current phase of our MMS. program in June, along with several small smaller programs over the next 6 to 12 months this year, we are expecting nonrecurring engineering funding from our customers to be at least $7 million, of which 70% is already booked.

Unfortunately, L3 Harris informed us that they received a demand letter from the United Launch Alliance for breach of contract and that L3Harris was terminating our development contract for Tamiflu for convenience. I don't have any additional details to share at this time and must refrain from making additional comments until we fully evaluate our options. Obviously, we are disappointed by this development and are considering all remedies available to us, but we believe that upside from our other unrelated programs from other product families can substantially offset the loss of team in FY24.

We have three high confidence programs alone, which could offset at least $10 million out of the approximately $14 million in table revenue that was expected in FY24. I'd like to provide additional insight into our integration programs and our continued work on optimization all of which are key areas of focus this year with Chicago and Bud Lake.

Now on Sightline 10, we will now transition Alhambra in March and Concord in June, unifying the Company's ERP systems. Beyond ERP, we should complete the product line and product data management in blood Lake in the March quarter, which will complete the unification of our product data systems Canstar manufacturing execution systems will be integrated into Concord and Chicago facility starting in the new year. Beyond the integration programs that I mentioned, EMCORE has begun its initiative to leverage its state of the art inertial measurement unit and INS. architecture from blood Lake across the entire company. A singular focus on this common architecture will streamline our operations, reduce development expense, and improve our ability to create new component technologies.

Component technology differentiation is the key to gross margin of this business. Beyond these actions, we are working to reduce the amount of floor space that we require with the wafer fab sale. Alhambra will be down to just one building from five. Concord will have its footprint cut in half, and we are working on a plan to rightsize the blood Lake facility. It is tempting to think that reducing floor space is as simple as relocating processes and equipment. However, there are expensive structural power gas and environmental systems required to support any move and not all of these exist in some of our facilities.

Customers also require significant requalification efforts to certify new equipment in new facilities. Requalification is typically done during block changes and the timing is driven by their schedules and the needs of end users, not ours. Nevertheless, we are working to drive down the amount of floorspace we require within the capital and qualification limits in the business.

Turning now to guidance, I'd like to remind everyone that any chip sales which will occur in the quarter will be logged as part of discontinued operations and are not a part of guidance given that Q4 came in above expectations. And we do expect to see some short-term impact of the team who shut down. We expect that revenue for the December quarter will be within the range of $26 million to $28 million, which represents 35% year-over-year growth at the midpoint of the range.

As we look to the full year, we see a solid order book and a funnel that should support revenue in the range of $115 million to $125 million, which would be a 23% year-over-year growth at the midpoint of the range.

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

Thank you, Jeff. Let me start out with making mention of the fact that starting in the fiscal fourth quarter, the results from our legacy business, namely the former Broadband segment and the defense optoelectronic products are now reported in the income statement under discontinued operations and as of September 30 on the balance sheet, as assets and liabilities held for sale.

So with that, I will move to a discussion of the results from continuing operations, which is now exclusively the inertial navigation business and to facilitate apples to apples comparisons, any references to previous period earnings are solely also solely on inertial navigation only.

Revenue in fiscal 4Q was $26.8 million near the high end of the guidance range provided during our last quarterly call and the sixth consecutive quarter of sequential growth revenue from the two most recently acquired operations in Tinley Park and Bud Lake led the way both achieving their best revenue quarters since their acquisitions. And while Concord and on Hamburg were sequentially lower in 4Q, both of these operations are expected to pick up significantly in fiscal '24. For the full 2023 fiscal year, inertial navigation revenue was $97.7 million.

Let me now turn to the rest of the operating results, which will be on a non-GAAP basis. Gross margin was 31% in 4Q compared to 30% in 3Q. Slight improvement was largely driven by the Budd Lake revenue increase, including a significantly more favorable mix that was due to a large percentage of revenue coming from a repair and support contract. Continued steady Tinley Park growth also contributed favorably to the overall 4Q margin performance, while Concord and Hamburg were below average due to the lower volumes already mentioned, operating expenses were $10.1 million in fiscal 4Q operating loss in the September quarter was $1.9 million. Adjusted EBITDA improved to negative $900,000. Net loss was $2 million or $0.03 per share.

Shifting for a moment to the GAAP results. Fiscal 4Q from continuing operations was it was $28.8 million or $0.42 per share. Gaap results from continuing operations included asset impairment charges totaling $22.6 million, which included goodwill, TMOIPR. and D. and ROU. or right of use leases associated with vacating space in Alhambra.

Turning to the balance sheet, we had cash of $26.7 million at September 30 compared to $20.2 million at June 30, $6.5 million net increase consisted of $15.6 million in net cash proceeds received from the financing completed in August, offset by $9.1 million used during the quarter as follows $900,000 negative adjusted EBITDA, $2.2 million associated with the loss on discontinued operations, $3.5 million for working capital, $700,000 for severance $500,000 for M&A related costs, $800,000 for financing activities and $500,000 for CapEx outstanding debt on our credit facility was $10.6 million at September 30th compared to $11.7 million at June 30, $10.6 million as of September 30, consisted of $6.4 million on our revolving line of credit and a $4.2 million balance on the term loan component.

The overall $1.1 million reduction during the quarter included $860,000 in proceeds from equipment sales that went directly to paying down the term loan that we're now ready to open up the call for your questions.

Thank you again, ladies and gentlemen, if you'd like to ask a question, please press star one on your telephone. Again to ask a question, please press star one moment please.

Thank you.

Our first question comes from the line of Sallie Mae, Wally, Craig-Hallum. Your line is open.

Hey, guys. Thanks for taking my questions. This shoddy filling in for Richard Shannon on cost. Few questions here on May starting off on their guises gross margins. It was solid for the September quarter. And do you guys expect that positive trend continuing into the December quarter? And if so, what do you think will contribute to that?

Let me tackle that first short answer is yes, we do.

The biggest thing is that we still have facilities which are have a lot of locked up operating leverage.

So as volumes go up and there's a significant component of contribution margin well in excess of the gross margin line. So all you got to do is crank the volume and margin start to improve on current quarter, we're expecting that the product mix is equivalent to favorable. So yes, we will expect to see the trend continue Okay.

Thanks, Arnold. And then a similar question on the December quarter, but what do you expect the cash burn to be for December? And how much of that do you expect to be from other non-core operations?

Yes, I got it, Jeff. So it's going to look similar to the fourth quarter. We are still digging out from, you know, all the restructuring the severance payments alone are not paid out all at one time. They're paid out over time. So that will continue. We still carried the legacy business into the month of October and while the fab was shut down, yes, there's still some costs associated with that that that lingered through and you'll notice in our GAAP results, we also had an accrual for a legal settlement on the P & L in September that got paid out in early October. That was around $1.3 million. And there will be some additional working capital needs. So overall, it's going to similar in cash used to what I just ran through for the fourth quarter.

Fair enough. And then maybe one last question on book-to-bill. It came under one for the September quarter and you guys expect it to improve for the December quarter. Are you able to give any more color on if you expect the book-to-bill to be over one for the next quarter?

Yes.

When we say recover, it would mean over one on the it's just there's a lot of unusual dynamics right now with some the way that the Pentagon is allocating funds again, you know, it's easy to look at in case, you know, Congress authorizes X amount of aid to the Ukraine and really what that means is we're sending stuff from our inventory platforms, weapon platforms, munitions, et cetera. And then the service branches need the cash to go recover that.

And there's a lot of give-and-take and on occasionally, you know, that pushes out some of the of the actual contracting timelines. I'll give you an example. But we were told by the Navy by the contracting authority that the Mark 54 contract was going to be let in March 22. And the most recent thoughts we have well from them are yes, it is going to get done here in December. So we expect it to recover. There's a lot of good things that can happen and even better than that in the in the March quarter you get hampered a little bit by the holidays. But yes, we think we'll be up back over one and done.

We look at a strong March quarter after that on the booking side pass on.

Thanks, guys, for taking my questions and I'll hop back in the queue.

Thank you.

One moment, please.

Our next question comes from the line of Tim Savageaux of Northland Capital Markets. Your line is open.

Our next question comes from Tim Savageaux of Northland Capital Markets.

Hi.

Sorry about that. And you've guided revenues for the year and I imagine that's reflective of some offsets from them came through cancellation. It's certainly not too far off what we might have originally expected.

That's correct, yes.

Yes, I don't know if you've explicitly stated in the past, I think the expectation was to achieve positive EBITDA exiting the year on given the positives on gross margin, right. And correct me if I'm wrong, but you say expect this trend to continue?

That would be the trend of sequential improvement in gross margins for the December quarter, and you did have a nice little bounce up in China in December sorry, in September and probably not the same order of magnitude. But how should we be thinking about that positive EBITDA target in light of maybe a stronger gross margin environment, you likely a change in mix. When do you think you can get to positive EBITDA and maybe positive cash flow tax?

I'll go ahead with that one, Tom.

So on this quarter is going to be close as we as we said, on a little more favorable on the gross margin line, tiny bit less on the revenue line. The only thing we got to be mindful of is, you know that this call once in a year OpEx, things like additional costs from auditing, right? Because we're trying to get the K filed here as quickly as we can. So on the adjusted EBITDA basis, if you're not there this quarter and certainly next, but it's, you know, we're going to be close as far as getting to cash flow breakeven. What we've said is one to two quarters after that. It's really just a function of moving the top line a little bit.

Thanks very much.

Thank you.

One moment, please.

Okay.

Next question comes from the line of Charlie Malawi. Craig Allen, your line is open.

Please make sure your phone is on mute. One moment please.

Our next question comes from the line of Brian Kinstlinger of Alliance Global Partners. Your line is open.

Great.

Thanks for taking my question. If I heard you correctly, I think you said three contracts, you have that kind of offset 10 million of the 14 million of revenue that was expected for the team and cancellation. Could you help tell us which three contracts, those are if you're able to.

And then the second part of that question and whether you are or not with those contracts previously in the backlog or they're expected to get into the backlog in the short term on.

So I would just tell you what, Tom, when we talked about mark, 48 production doubling in the year, right? So that's one of them. On the other two, we did not name, but when I say high confidence programs, they are things we have made and shipped before of four specific programs and you know, orders are being worked up inside of the system or are being we just got additional volume that's going to come with that. So I'd rather not name the other two, you know, it's a competitive world out there, but when we say high confidence quarters, that's what we make things we're already doing, right.

So what essentially is booked in the backlog and the other two, some sort of negotiation and business development you think are highly likely. Is that accurate?

I'm not quite so what I said was that we've been notified by the Navy that we are going to be ramping doubling production for the mark 48 program in fiscal calendar 24. And so we expect to get an order from them early in the year. With that said, we've got a bunch of other open orders with them. So it's not like them. It's really going to slow us down at all, but we haven't actually booked the order. So that's the only point of clarification.

Right, understood.

Thank you.

Thank you.

I'm showing no further questions at this time. I'd like to turn the call back over to Jeff MediChem for any closing remarks.

Thank you, and thank you all for your interest in EMCORE. I also want to recognize the team for completing the restructuring plan we announced in April, our positioning EMCORE as a pure-play aerospace and defense business.

Thanks again and happy holidays.

Thank you.

Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may now disconnect and have a great day.