After the close on Thursday, Emcore Corp (NASDAQ:EMKR) reported their fiscal Q1 earnings. I've written previously in detail about the company and their impressive balance sheet, so right now I will focus on the quarterly update.
Revenue and EPS were both inline for the quarter and guidance, with an increase in the company's sizable cash position. There also were some very positive comments on the conference call that reiterate optimism for 2016 and beyond. While gross margins were lower than expected, this looks like a temporary situation, and the company was able to make up for the lower margins with higher volume to hit their numbers. In a bad day for the market, and what appears to be an overreaction to the gross margin, the stock is down double digits, and is trading even closer to its cash value.
Gross margin for the quarter was 32.9%, down from 35.5% in the last fiscal year. The decline was driven by under-absorption of overhead, product mix and pricing pressure on GPON chips. We believe that these issues are temporary as cable TV volumes increase with the DOCSIS 3.1 upgrade cycle, which will improve both product mix and cost absorption.
One of the most positive comments from the call was regarding the chip business. Currently, GPON chips represent almost 80% of the company's chip revenue, which is why GPON pricing pressure had such an impact on margins. As EMKR diversifies their chip business, they believe that non-GPON chip revenue will represent one-third of chip revenue this year. Further, and most interesting, is that non-GPON chip shipments in 2016 could be larger than the entire chip business was in 2015, signaling very strong growth in the coming year.
The balance sheet remains the most intriguing part of the EMKR story. The $4.3 million cash balance increase in the quarter gives the company $4.54 per share in cash, nearly 90% of the market cap, in addition to an NOL worth roughly $2 per share. In addition, other liquid assets (receivables plus inventory, minus payables) add $0.87 per share.
Company management is exploring options to return value to shareholders, which among other potential options will likely result in a one-time cash dividend that could be $2.50 to $3.00 per share. With the recent decline in the stock price to the low $5s, you are getting the company for essentially nothing. With an enterprise value of $23 million, and consensus EBITDA estimate for 2017 of $10.5 million, the stock is now trading at just 2.2x EBITDA.
Disclosure: I am/we are long EMKR.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.