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EMCORE Corporation (NASDAQ:EMKR) Q1 2023 Earnings Call Transcript

EMCORE Corporation (NASDAQ:EMKR) Q1 2023 Earnings Call Transcript February 8, 2023

Operator: Good day and thank you for standing by. Welcome to the EMCORE Corporation Fiscal 2023 First Quarter Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation there will be a question-and-answer session. . Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Tom Minichiello, Chief Financial Officer.

Tom Minichiello: Thank you, and good afternoon, everyone and welcome to our conference call to discuss EMCORE's fiscal 2023 first quarter results. The news release we issued this afternoon is posted on our Web site 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 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.

Photo by NASA on Unsplash

Jeff Rittichier: Thank you, Tom, and good afternoon, everyone. Q1 continued EMCORE's strategic transformation into an Aerospace & Defense business. Consolidated revenue for fiscal Q1 was $25 million, with 87% coming from Aerospace & Defense. Only 13% came from broadband and cable television represented less than 6% of the company's revenue. There were encouraging improvements in the business as it continued to work through the operating challenges of such a significant transformation, generating a GAAP operating loss of $11.5 million. However, our non-GAAP operating loss was $8 million and adjusted non-GAAP EBITDA improved from negative$9.4 million to negative $6.5 million. Tom will provide color on Q1's gross margin, but I will start out by saying that Aerospace & Defense margins showed significant improvement at 22% with inertial navigation higher than that.

Not much has changed with respect to the cable television industry and the inventory glut of head-end transmitters. In our last call, we pointed out that ATX publicly announced that they had licensed the entire Prisma II technology platform from Cisco, allowing that technology to move forward. Although ATX's entry continues to be an encouraging opportunity over the long-term, we do not see any short-term catalyst for improved demand, although we do see some signs of improvement in the underlying inventory positions within our customer base. Semiconductor availability continued to tamp down shipments for wireless and chips within broadband in Q1 as our customers were still not able to get enough silicon to ship transceivers and distributed antenna systems to meet their internal projections.

Consistent with what we said in December, our chip business continued to get additional traction with customers in the form of engagements and planned growth in shipments. Going forward in the chip business, we expect to see the ramp get a bit steeper during the summer setting the stage for a much stronger FY '24. To conclude my comments about broadband, I'd like to return to a statement from our last call in which I made the point the cable television was complete -- was increasingly incongruent with our strategic direction. Consistent with these objectives, EMCORE is in discussions with several interested parties to divest our nonstrategic product lines. We are also exploring other strategic alternatives. Turning now to Aerospace & Defense.

I will begin my comments by stating the demand for our inertial navigation products continues to build nicely. In Q1, our book-to-bill in Aerospace & Defense was approximately 1.2. In particular, we're seeing increased demand for AMPV in real-world situations experiencing GPS denial, such as in the Ukraine. International bookings were strong for turret-based platforms, stemming from our supplier position in both and ESCRIBANO's GUARDIAN 2 programs. We also received additional interest in the Middle East for long dormant large-scale armored vehicle navigation programs. On the naval side of our business, we are leveraging our expertise in critical lightweight and heavyweight torpedo programs such as the Mark 48 and 54 by supporting next-generation Torpedo platforms.

Finally, we rewarded a follow-on order in a precision-guided munition program that continues to gain momentum in international markets. Chicago's book-to-bill was actually better than the overall 1.2 that I mentioned earlier, with stronger visibility for key programs in all four branches of service. The on program CAPTURE, we're seeing important signs of acceleration of key programs into their LRIP phase, low rate of initial production. This is a leading indicator of long-term growth. In particular, infrared search and track has become a key area of focus across the services and our multiple design wins in this applications stand to benefit in terms of production timing. As I stated in December, the efforts of the extended engineering teams in Budd Lake and Concord allow shipments for two critical programs to begin in the December quarter and greater volumes are projected for the March quarter.

The space and navigation team has started to build multiple TAIMU inertial measurement units in support of the design and validation -- design validation and qualification as it continues to meet shipment targets for BoRG. These two systems are critical to the launch schedule for United Launch Alliance. BoRG is part of the boost stage flight control for Atlas- Centaur and Vulcan launch vehicles, while TAIMU will be the primary inertial measurement unit used for navigation. Critical milestones for TAIMU must be met over the next few months as well as the beginning of product builds in Alhambra. Our expectation is to complete qualification late in the calendar year to enable significant volume builds and launches in calendar year '24. When these products hit full production, they're expected to produce$20 million to $25 million in revenue per year and are also expected to significantly contribute to gross margins.

QMEMS suffered from some unexpected test set problems in late December and we're expecting QMEMS revenue to bounce back in the March quarter. We saw a steady stream of orders for QMEMS from our major programs of record, along with the precision guided munitions order that I mentioned earlier. As we've said before, PGMs are the largest market segment in inertial navigation and are expected to be a significant area of growth for EMCORE in FY '23. We remain bullish on these applications. Before I move on to guidance, I'd like to provide an update on integration, which is a key area of focus. As of today, space and navigation is now running a common ERP system within the rest of EMCORE and has made the cutover from L3Harris's IT systems. This will enable us to exit the cost of the transition services agreement that was part of the transaction.

We are expecting the transition for Chicago to complete in the June quarter, but we've already moved the Rhode Island engineering team out of the KVH building. We began rolling out Camstar MES for shop floor control in Alhambra and expect to integrate it into the other facilities after we complete the ERP upgrades and exit transition services. Ultimately, this will make EMCORE more efficient and will help us improve our processes, costs and lower inventory. Turning now to guidance for the current quarter. We are expecting that inertial navigation will see some growth, largely driven by increased production in Chicago and Concord. This will be partially offset by continued weakness in cable television and wireless. Consequently, we are expecting revenue to be within the $27 million to $29 million range for the March quarter.

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

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Tom Minichiello: Thank you, Jeff. Consolidated revenue for fiscal 1Q was $25 million, with 87% coming from Aerospace & Defense, and 13% from broadband. Aerospace & Defense segment revenue was $21.7 million, a $700,000 increase when compared to the prior quarter. A&D achieved sequential quarter growth despite shipping delays for our QMEMS product line, as the rest of the A&D portfolio performed well. This included the first full quarter of results for the inertial navigation operation in Tinley Park that was acquired during the prior quarter and the space and NAV operation in Budd Lake that posted another solid quarter. Additionally, the FOG product line in Alhambra, along with Defense Optoelectronics, both increased over the prior quarter.

Broadband revenue was $3.3 million, a $1.3 million sequential quarter decrease due to a further drop in sales of optical transmitters and lasers sold into the cable TV infrastructure market. To add some perspective on the severity of the current down cycle, cable TV product revenue this quarter was $1.6 million compared to $28.5 million in the year ago quarter, and $20 million when looking back to just the March 2022quarter. As mentioned on our last call, we are in a much deeper cable TV down cycle this time around than the company has experienced in at least the last 10 years. Broadband revenue was also affected by lower nonrecurring engineering or NRE revenue associated with next-generation chip development. Let me now turn to the rest of the operating results, the focus of which will be on a non-GAAP basis.

A&D gross margin rebounded to 22%, driven by: a, the return to historical gross margins for the recently acquired operations in Tinley Park and Budd Lake; b, one-time QMEMS inventory valuation charges in the prior quarter; and c, better QMEMS manufacturing yields at our Concord site. Conversely, the very low level of revenue for the Broadband segment, combined with higher fixed cost under absorption resulted in an overall consolidated gross margin of 15%. Operating expenses overall came in lower-than-anticipated at $11.8 million in the December quarter compared to$11.2 million in the prior quarter. While we added a full quarter of results for the inertial NAV business, project-related R&D costs, which tend to be uneven quarter-to-quarter were lower than average in 1Q.

As mentioned during our last call, EMCORE has undergone a momentous and rapid change to the revenue profile. During the first half of fiscal '22, Broadband accounted for 75% of the business, and just a couple of quarters later in fourth quarter of fiscal '22 and first quarter of fiscal '23, this has completely flipped to over 80% of revenue coming from Aerospace & Defense. The company is now better-positioned for higher growth with a broader-based portfolio of inertial navigation products, expanded customer reach and in a substantially larger and more stable marketplace than the highly cyclical cable TV market. While the December quarter was better compared to the prior quarter, fiscal 1Q results still reflected the significant and swift changes to the size and mix of the top line.

1Q operating loss was $8 million compared to$10.8 million in the quarter before. Adjusted EBITDA improved to negative $6.5 million. Net loss was $8.2 million or $0.22 per share compared to $10.9 million or $0.29 per share in the prior quarter. Shifting over to GAAP results for a minute. Fiscal 1Q net loss was $11.7 million or $0.31 per share. This included acquisition-related costs of $2.1 million, severance charges of $475,000 and a $1.2 million book gain associated with the sale transaction of the Tinley Park property obtained as part of the inertial navigation asset acquisition from KVH. Turning to the balance sheet. We had cash of $24.2 million at December 31 compared to $26.1 million at September 30. The $1.9 million net decrease consisted of $6.5 million used to fund regular business operations, $3.5 million used for financing activities, consisting of a $3.2 million loan balance reduction and $300,000 in debt service costs.

$1.4 million for acquisition-related costs and $8,000 for CapEx. Offsetting these uses of cash was $10.3 million in net cash proceeds received from the sale leaseback of the Tinley Park property. Before we get to the Q&A, I'd like to share with everyone that both Jeff and I planned to be at the Cowen Aerospace/Defense & Industrials Conference on Thursday, February 16, in Arlington, Virginia, including a presentation and in-person investor meetings. We plan on providing further details prior to the event. And with that, we are now opening up the call for your questions.

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