EMCORE Corporation (EMKR) on Q4 2021 Results - Earnings Call Transcript
Operator: Good day and welcome to the EMCORE Fourth Quarter 2021 Earnings Call. Today's conference is being recorded. At this time, I will turn the conference over to Mr. Tom Minichiello, please go ahead, sir. Tom Minichiello : Thank you. Good morning, everyone. And welcome to our conference call to discuss EMCORE 's Fiscal 2021 Fourth 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 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 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 these non-GAAP measures, as well as the explanation and reconciliation of these measures to the most comparable GAAP measures included in our news release. I will now turn the call over to Jeff. Jeff Rittichier : Thank you, Jonathan. And good morning, everyone. EMCORE's fourth fiscal quarter reached a high point for the year, coming in at $44 million. non-GAAP earnings were $6.8 million and adjusted EBITDA was $7.8 million. Semiconductor and supply chain challenges affected our gross margins just a little bit, still generating a solid 39 %. EMCORE continued to perform well despite supply chain headwinds and continued to demonstrate the strong operating leverage in our business. Semiconductor availability was largely adequate during the quarter but as additional logistic challenges emerged in the supply chain, unusual pushouts of material occurred. We believe that our semiconductor inventories are in good shape for the current quarter. However, we've seen surprise delays in receipts of materials, ranging from special purpose epoxies to sheet metal components, and everything in between. Inventory levels may have to rise temporarily. However, we expect that inventories will drop as we finish the transfer project from Beijing to Thailand. The shutdown of transmitter builds in China, and their transfer to Thailand should be completed this quarter. Beyond this, the current schedule shows that the remaining laser line in China will move to Thailand after Chinese New Year completing the entire production transfer project. We've recently fielded questions regarding power outages in Beijing, and how those have affected production. We're pleased to report that our Chinese manufacturing operations had been almost completely unaffected by the recent power problems. And we've also managed to steer clear of any COVID problems as well. Entry restrictions for foreign workers into Thailand have eased somewhat, and we now have a Chinese team in Bangkok working on technology transfer and expect this to transition into normal Kaizen operations through the March quarter. The most important takeaway is that we will sell our remaining inventory and manufacturing assets to Hytera Fastrain over the coming months, reducing inventory and fixed assets while returning cash to the balance sheet. Turning to our individual business areas, Cable TV continued to drive strong performance in the Broadband unit. We continue to enjoy a strong backlog in cable TV, although we will always be cautious about the cyclical nature of the business. Chips, wireless, and sensing taken together were roughly flat with the previous quarter. The most important thing to note about the Broadband business is the growing number of chip development contracts we've received along with the total level of customers funding so far, they total several million dollars. With 3 such contracts in place and 2 others that are expected to close within the next couple of months come up. EMCORE has firmly planted the seeds of growth in Broadband. Furthermore, the first of these new chip products are expected to start shipping in Q3 and Q4 of FY 2022, and are expected to contribute tens of millions of dollars in revenue by 2025. These development agreements represent an important milestone for EMCORE because they are expected to drive consistent fab utilization, which will counteract cable TV's cyclical nature. This is an important area of focus for the Company, and we're confident we can put the additional capacity in place to take full advantage of these opportunities. Aerospace and Defense declined slightly due to continued supply chain delays with the new EMS provider in our Defense Optoelectronics business. QMEMS and FOG, taken together, were roughly flat with FOG being up slightly. QMEMS margins were affected by a large shift in mix towards a notoriously difficult product that we make for the U.S. Navy. We're seeing improvement on that IMU during the current quarter and expect to see continued progress beyond that. Our new automated assembly tools should also make a positive impact on margin as they arrive and are installed over the next few quarters. Multiple negotiations with international defense contractors are underway for our SDI170 IMU, with discussed annual target volumes ranging from 1,000 units to 4,000 units per year, most of which will be used in precision guided munitions. We fully expect this application will be a primary growth driver for EMCORE's aerospace and defense business within the next 2 years, driving incremental revenue in excess of $20 million a year. The SDC500 is also undergoing qualification testing for several domestic and international programs with a serviceable market of 1000 to 2000 units per year. Taken together, these results demonstrate the growing momentum for our QMEMS navigation products, and future growth beginning this year. Beyond the short-term in QMEMS, the test results that EMCORE presented at the Joint Navigation conference were judged best in conference demonstrating our ability to drive FOG level performance into our QMEMS technologies. These improvements in performance in size will create significant new opportunities in the market and are already being designed into a less-than-9 cubic-inch inertial measurement unit with better than 1 degree per hour bias performance under all causes. This product will be used in interceptor missiles where accuracy, and size, weight and power are crucial to success. Our FOG products are also gaining traction in the market, we expect to deliver the remainder of preproduction units in the first phase for a new airborne pod, which will start low level production in the next year. The total value of this program is now estimated at $70 million over the next 7 years. We expect to be awarded one more non-recurring engineering contract to complete some modest engineering changes for production before everything is completely locked down. The newly ruggedized EN-300 IMU is being bedded by more than 10 prime contractors and laboratories in the U.S. approximately doubling the size of its application space. The EN-300 has demonstrated 10-X improvement in bias stability and noise performance at the same cost points as the main competing Northrop Grumman LN-200. We are also working to push the EN-300 to short-term navigation grid specs, with approximately twice the price performance of the Honeywell HG5700. At the high end of our product line, the EN-2000 INS has met all of its required specifications on a confidential navy program. The EN-2000 achieved better than 0.01 degree per hour bias stability and will be our main platform to address long-term navigation grade IMU INF applications that require superior cost, size, weight and power. We're very encouraged that we've been able to finally get in front of our Defense customers for face-to-face meetings over the last month and hear first-hand how things are going. We see these meetings as important milestones for an industry that is just starting to reopen. Over the next quarters, we expect to make more multiple important announcements about the growth of our navigation business. Moving on to overall guidance for the first quarter, we're expecting to see increased revenue from Aerospace and Defense product lines and a little bit less in Cable TV, largely because of the holidays. Our biggest notes of caution remain tied to surprises in the supply chain. Taking all this into consideration, we currently expect revenue to be in the range of $41 million to $43 million. With that, I will turn the call back over to Tom. Tom Minichiello : Thank you, Jeff. As you may have seen in our news release yesterday afternoon, we delivered very strong results for the fiscal fourth quarter. Consolidated revenue was $44 million, which was at the high end of our guidance range. Revenue for the quarter increased $1.3 million, or 3% when compared to the $42.7 million in the fiscal third quarter. Broadband segment revenue was $32.2 million, an increase of $1.9 million or 6% when compared to the $30.3 million last quarter. The broadband performance was driven by continued strong customer demand for our cable TV products. Aerospace and Defense segment revenue was $11.7 million this quarter compared to $12.3 million in the prior quarter. The sequential A&D revenue change was attributable to our QMEMS product line, primarily due to a mix shift to a product with lower production yields and Defense Optoelectronics, primarily due to an ongoing supply chain transition. Partially offsetting these changes was higher FOG revenue driven by an increase in orders for our single access gyro. For the full 2021 fiscal year, consolidated revenue was a $158.4 million with approximately 2/3 Broadband and 1/3 A&D. The $158.4 million for the year was an increase of $48.3 million, or 44% when compared to the $110.1 million during the prior fiscal year. 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 39% for both 4Q and the year. On a sequential quarter basis, the 39% compared to the 41% in the third quarter, largely due to the A&D segment's gross margin in 4Q, where a combination of lower revenue, a year-end physical inventory adjustment and lower-than-normal production yields at our Concord operation, impacted margin. On the Broadband side, the increased revenue and higher over absorption of fixed costs drove a sequential quarter increase to its gross margin. For the full year, the 39% consolidated gross margin was a 6%-point increase when compared to the 33% in fiscal 2020 driven largely by Broadband, 10%-point year-over-year expansion. Operating expenses were $10.5 million in fiscal 4Q compared to $9.6 million in the prior quarter. The sequential movement was due to increased R&D expense as a result of lower customer-funded R&D and increased project material usage. While SG&A was higher in 4Q, also due primarily to a couple of lumpy items, namely business taxes and professional services fees. For the year OPEX decreased to $38.2 million in fiscal 2021, compared to $39.7 million the year before, driven by lower R&D expenses for the A&D business. In addition, OpEx as a percent of revenue was well below the 30% mark for the year, finishing at 24% of revenue. Moving onto the bottom line, operating profit was very strong again in the September quarter at $6.8 million for an operating margin of 16 %. For the year, operating profit was $24.1 million for a margin of 15 %. Adjusted EBITDA was $7.8 million in 4Q and 28.1 million for the year, and 18% of revenue for both periods. Net income and EPS for the quarter was $6.8 million and $0.17 per diluted share, and for the year was $24 million and $0.67 per diluted share. Shifting to the GAAP results for a moment, net income and EPS for the quarter was $5.1 million and $0.13 per diluted share and for the year was $25.6 million and $0.72 per diluted share. The full-year results included two non-recurring gains totaling $7.5 million that were reported in the third fiscal quarter, excluding those one-time items, full-year GAAP Net Income and EPS would have been $18.2 million and $0.51 per diluted share. Still a substantial turnaround from the prior year. Turning to the Balance Sheet, we had cash of $71.7 million at September 30th, compared to $68.3 million at June 30th. The quarterly cash increase of $3.4 million consisted of $5.4 million of operating cash flow, less $2.4 million used for capex plus $300,000 from financing activities. Not only was this the 6th consecutive quarter of positive cash from operations, on a year-over-year basis, EMCORE's cash generated from operations grew by $15.2 million. With that, we are now opening up the call for your questions. Operator: Thank you. We will pause for just 1 moment. And our first question comes from Paul Silverstein, from Cowen. Please go ahead. Paul Silverstein: Jeff and Tom, can you just go over the margin outlook, both what drove the shortfall, and more importantly, what your expectations are over the course of the next 12 months and beyond? Jeff Rittichier : Let me try to tackle that to begin with. So, if we break things into 2 chunks and we look at Broadband. I think things are going to stay pretty similar to where we are right now. Remember, the move EMS essentially allows us to buy as a fully landed cost that's been negotiated, and so I don't see margins moving around very much from where they are right now. below 40s. For the Aerospace and Defense business. We need to -- essentially what's happening is as the A&D business and especially navigation cranks up a bit, we're going to see stronger absorption in A&D. And as that happens, margins are going to rise quite a bit from where they are. There's a lot of moving parts in that, but overall, I would say we're going to see something stable on a Broadband and some improvement in A&D over the next year. Paul Silverstein: Can I push you a little bit on that, Jeff? In terms -- so you're expecting meaningful improvement over the course of the next 4 quarters? Any range you can put on that, by meaningful, I that a couple of points? Is it more than that? Anything -- any granularity you can offer? Jeff Rittichier : I would say it's more than a couple of points. Great. But it's a little bit dependent on mix, Paul. Could we see, I don't know, Tom, 5 to 10? Tom Minichiello : Yeah, you could. Jeff Rittichier : 5 to 10 seems reasonable over an A&D. Tom Minichiello : And it will always be a mix factor between the 2 business segments as well, Paul. Paul Silverstein: All right. And obviously, I trust it goes without saying, that's you-all consider, the current supply chain environment, so it's not -- that 5 to 10 improvement is not dependent upon improvement in supply chain, that's what you are expecting to do independent of any improvement. Jeff Rittichier : Yes, that's true. Realistically, what we've got in supply chain issues, one of them, the biggest one is a transition issue, that we expect to exit or complete the work on that within the current quarter. We're going to buy a little bit more material to solve some other problems where again, we get this surprise push-out, I don't think it's going to be very much maybe a million or two. And beyond that, we feel like we're in good shape on semiconductors. The crazy place where you can get hit is like connectors of all things. So, we're taking steps to deal with that, but I wouldn't see it as a major impediment going forward. Paul Silverstein: All right. And Jeff the FOG continues referencing. I trust you're referencing specifically gross margin, which begs the question, is there also some operating leverage to be had, above and beyond that 5 to 10%-point improvement in A&D, and the contribution that makes it overall, is through operating leverage should be had, its revenue improves? Jeff Rittichier : Absolutely. Paul Silverstein: And can you quantify that? Jeff Rittichier : Moving parts again let me describe it this way, Paul, the -- and then I'll see if Tom wants to add anything. The -- we're very volume-sensitive for production volumes in both Alhambra and Concord. So as volume picks up, absorption is very efficiently dealt with and so that's what moves the needle on the P&L as far as a range for that again, it's a little bit mixed dependent. And there are a series of issues as far as -- for example, what becomes the rate limiting step in what facility for product that generates X margin, and the answer to that isn't completely crisp, but I think -- Tom, you have any color on the operating leverage piece? Tom Minichiello : Yeah. Well, I think we've got -- the operating leverage overall in the business is pretty evident by the results in the past year. That's going to continue because on the OpEx side, we don't really need to move the OpEx up with revenue increases going forward in the near term. So OpEx is called at $10 million, plus or minus, on a quarterly basis, which is where we've been pretty much. And the growth in A&D will help the gross margin on A&D. It's -- Paul, it's going to follow the growth in that business. Jeff Rittichier : Yeah, one important thing to note, Paul, is that the growth in OpEx was not a headcount issue at all. Paul Silverstein: All right but Jeff, Tom's statement, you're expecting to hold OpEx at around $10 million per quarter throughout fiscal '22. Is that correct? Jeff Rittichier : Yeah. Paul Silverstein: Alright, that's all. Tom Minichiello : Go ahead, Paul. Paul Silverstein: No, I'm good. Tom Minichiello : Will there be items that are lumpy a little bit from quarter-to-quarter, yes. but the $10 million plus or minus is a good way to think about it. Paul Silverstein: And Tom, in the event of meaningful revenue upside, you don't expect to flex OpEx meaningfully up from that $10 million level? Tom Minichiello : Not in the near term. Jeff Rittichier : No. Paul Silverstein: Perfect. All right. I'll pass it on. . Thanks, guys. Operator: Next question comes from Richard Shannon from Craig - Hallum. Please go ahead. Richard Shannon : Hi, guys. Thanks for taking my questions as well. I guess, I need to ask on the A&D gross margins here is, I'm not sure what your answer to Paul's question, so I'm going to ask it my own way here. As we look at your gross margins here for the September quarter, quarter-on-quarter went down. It went down from 33% in June to 18% in September. So, you commented about increasing 5 to 10 points, was it from that point and over what time we expect that to happen? And I guess, my question is, when does it get back up to that 33% number from June? Jeff Rittichier : Okay. Now I understand what you said. We saw the -- so first of all, the 33% down to 18% was really -- let's just call it a transitory effect. I think we'll be back into those kinds of numbers certainly if it's not this quarter, it'll be next. Then the improvement will happen from there. Richard Shannon : Okay. I know you've been asked this on past calls and even offline from me. But what is your view on A&D margins over time, especially as you've talked about some growth here from a number of programs. I mean, is this a business with a certain level of scale that can get to 40% or even higher? Jeff Rittichier : Oh, absolutely. If -- and there's no question about that, Richard. You're volume-sensitive in a high-fixed-cost manufacturing facility -- or facilities. So, all it takes is a bit of volume. And the flow-through and the P&L is really quite good. So, if you increased A&D by 50 %, you probably get back up by -- you get up over 40 %. So, it's not a bill of material issue, it’s not a pricing issue, it’s strictly an absorption question. Richard Shannon : I think I heard you in your prepared comments, talk about some automated assembly equipment and some yield or yields on products due to a mix here. So, does a mix have to change here meaningfully in the next couple of quarters, or is this just purely an absorption thing? Jeff Rittichier : It's really an absorption thing. The -- I'll give you a little more color on this move to a notoriously difficult product to build. It requires a lot of screening for vibration performance, it goes into a torpedo. And occasionally, we have these events which occur that, we just -- screening takes out more of them than we'd expect. And that was pretty much what happened. There was a bit of a cycle count thing that Tom indicated, again, transitory, but no. Normally we can make that product with better margins than 33 %, just when you ship that much of production into it, you end up with more variability than you want. Richard Shannon : Got it. Okay. That makes sense. That's very helpful. Maybe a couple other questions here. On Cable TV, I think your comments whether the backlog has extended -- continued to extend out here. And I know you obviously have said, time and time again, you remain cautious on this, but can you mention how far the backlog is going out here and any other permutations or detail on where that's improving? Jeff Rittichier : Well, the thing is that it's a little hard to say, right? And let me explain why. Because what we don't know, for example, is exactly what customers are going to want to take delivery of, say in the March quarter. We certainly know what they're going to take delivery up now, but we get into March and every year this happens. Part of the U.S. is not friendly to installs. And so, we frequently get request to push things out of March and into June. And so, it's a little hard to say, well cheese, your one quarter visibility, your two quarters of visibility. But I will say is, we're substantially better than normal for this time of year, where you don't have the benefit of real guidance on CapEx for the year from Comcast and Charter. You're heading into the winter months. And so, we're substantially better than we normally are. But as far as giving you a crisp answer about the backlog, the dollars have continued to flow in as far as new orders. But I can't give you a hard answer on that. Richard Shannon : Okay. Great. That's helpful. My last question I'll jump out of line here. The projects for chips within the Broadband business sounds like you picked up a lot of paces, you're both at number of engagements and maybe even visibility into this. I think you talked about tens of millions of dollars out of few years. Can give us a little bit more color on what's driving these applications, etc. and help us give a feel for the changes in last quarter. Jeff Rittichier : Yes. So, we've added one customer, we have one project with. They've added a second and maybe even add a third. These are customers that do not have the ability to fabricate their own Indium Phosphide, especially some of these very specialized devices. But are looking to build products for the data center and Telcom applications. They don't want us talking about exactly what those are because of competitive reasons, because it signals ahead of time what they're doing and can create their own problems for them. So, it's mainstream data center and telco. It is -- these are high-margin, strongly differentiated products as opposed to doing something like 10G-PON or something like that, though we certainly supply some parts into those applications. And that's really about all I'm allowed to say, Richard. I'd love to tell you more, but I'm just not allowed to. Because then -- Richard Shannon : I certainly understand that. It sounds like things are going well in that area and we look forward to hear more about that. That is all the questions from me, guys. Thank you. Operator: Once again, . Jeff Rittichier : All right. I'd like to thank all of you for your interest in EMCORE, and I would like to close by recognizing our team for a great quarter and an outstanding year of financial results. Please stay safe, everyone, and good bye. Operator: This concludes today's call. Thank you for your participation. You can now disconnect.EMKR Ratings Summary
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Emcore (NASDAQ:EMKR) Downgraded by Craig-Hallum
On May 9, 2024, Craig-Hallum downgraded its rating on EMKR (Emcore) to "Hold" from the previous "Buy" grade, reflecting a shift in their perspective towards the stock. This decision came at a time when EMKR was trading at $1.41, with Craig-Hallum also revising their price target to $2. This cautious stance seems to be a reaction to the company's recent performance and market conditions. The downgrade and the new price target were reported by TheFly, shedding light on the financial analysis that led to this change in outlook.
The downgrade by Craig-Hallum appears to be closely tied to Emcore's fiscal Q2 2024 earnings report, which revealed a significant 41% drop in the stock price. This decline was a direct response to the company's reported revenue of $19.6 million for the quarter, which not only missed the Wall Street expectations of $23.86 million but also represented a decrease from the $24.25 million reported in the same period the previous year. Such a shortfall in revenue highlights the challenges Emcore is facing, possibly contributing to Craig-Hallum's revised view on the stock.
Despite the disappointing revenue figures, Emcore did report an improvement in its adjusted earnings per share, with a loss of 8 cents. This was better than the anticipated loss of 30 cents per share by analysts and showed significant progress from the $1.30 loss per share in the same quarter last year. This improvement in earnings per share might offer a silver lining, indicating some level of operational efficiency or cost management that could be beneficial in the long term.
Looking ahead, Emcore's Chief Financial Officer, Tom Minichiello, set the revenue expectations for the fiscal third quarter of 2024 to be in the range of $19 million to $21 million. This forecast falls notably below the Wall Street revenue estimate of $26.21 million for the upcoming quarter, potentially signaling continued challenges for the company. Such a conservative forecast could further justify Craig-Hallum's decision to downgrade EMKR to a "Hold" rating, as it reflects uncertainties in Emcore's ability to meet market expectations in the near future.
Currently, EMKR is trading at $1.13, marking a significant decrease of -60.82%. The stock has seen fluctuations between a low of $1.07 and a high of $1.44 during the day. Over the past year, EMKR's price has ranged from $1.07 to $10, with the company's market capitalization standing at approximately $22.93 million. This trading volume and market cap, along with the recent performance metrics, paint a picture of a company facing considerable headwinds, which likely influenced Craig-Hallum's decision to adjust their rating and price target for Emcore.
