EMCORE Corporation (NASDAQ:EMKR) Q4 2023 Earnings Call Transcript
EMCORE Corporation (NASDAQ:EMKR) Q4 2023 Earnings Call Transcript December 12, 2023
EMCORE Corporation beats earnings expectations. Reported EPS is $-0.03, expectations were $-0.1.
Operator: Thank you for standing by, and welcome to EMCORE Corporation's Fiscal 2023 Fourth Quarter Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder, today's call is being recorded. I would now like to turn the conference over to your host, Mr. Tom Minichiello, Chief Financial Officer. Please go ahead.
Thomas Minichiello: 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 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 in 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. And with that, I'll now turn the call over to Jeff.
Jeffrey Rittichier: Thank you, Tom, and good afternoon, everyone. In the fourth quarter, our Inertial 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 non-binding letter of intent to sell the indium phosphide wafer fab. This agreement is secured with a 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 Alhambra 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 IRAD and are working to drive this down substantially -- 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 Kratos to provide Inertial Navigation Systems for four of their high-performance drones. In particular, the XQ58 Valkyrie contains multiple EMCORE 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 FY '24. 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 EO/IR pods. We expect to complete the current phase of our MMS program in June, along with several smaller programs over the next six to 12 months. This year, we are expecting non-recurring engineering funding from our customers to be at least $7 million, of which 70% is already booked. Unfortunately, L3Harris 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 TAIMU 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 TAIMU in FY '24.
We have three high confidence programs alone, which could offset at least $10 million out of the approximately $14 million in TAIMU revenue that was expected in FY '24. 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 Siteline 10, we will now transition Alhambra in March and Concord in June, unifying the company's ERP systems. Beyond ERP, vision complete (ph) the product line and product data management in Blood Lake in the March quarter, which will complete the unification of our product data systems. Camstar manufacturing execution systems will be integrated into Concord and Chicago facilities 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 I&S architecture from Bud 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 in 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 right-size 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 floor space 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 TAIMU shutdown, 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.
Thomas Minichiello: Thank you, Jeff. Let me start 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'll 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 Alhambra 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. The slight improvement was largely driven by the Bud 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. The continued steady Tinley Park growth also contributed favorably to the overall 4Q margin performance, while Concord and Alhambra 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 $28.8 million or $0.42 per share. GAAP results from continuing operations included asset impairment charges totaling $22.6 million, which included goodwill, TAIMU, IP, R&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. The $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 30 compared to $11.7 million at June 30.
The $10.6 million as of September 30 consisted of $6.4 million on a 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. With that, we are now ready to open up the call for your questions.
Operator: Thank you. [Operator Instructions] Our first question comes from the line of Shadi Minali of Craig. Your line is open.
See also 20 Best Vodkas for a Moscow Mule and Ark Invest Stock Portfolio: 16 Biggest Positions.
To continue reading the Q&A session, please click here.
