EMCORE's (EMKR) CEO Jeff Rittichier on F3Q 2018 Results - Earnings Call Transcript
EMCORE Corporation (NASDAQ:EMKR) F3Q 2018 Results Earnings Conference Call August 2, 2018 8:00 PM ET
Erica Mannion - Sapphire Investor Relations
Jeff Rittichier - President and CEO
Jikun Kim - CFO
Jaeson Schmidt - Lake Street Capital Markets
Tim Savageaux - Northland Capital Markets
Ladies and gentlemen, thank you for standing by and welcome to the EMCORE Corporation Fiscal Third Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, today’s call is being recorded.
At this time, I would like to turn the call over to Ms. Erica Mannion of Sapphire Investor Relations. Please go ahead.
Thank you and good morning everyone. 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 our 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 our future financial performance and are subject to business, economic and other risks and uncertainties, both known and unknown, that may cause actual results, level of activity, performance or achievements of the business or 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 that are included in the company’s filings with the US Securities and Exchange Commission that are available on the SEC’s website located at www.sec.gov, including the sections entitled Risk Factors in the company’s Annual Report on Form 10-K and quarterly reports on Form 10-Q. 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, investors are encouraged to review these non-GAAP financial measures, as well as the explanation and reconciliation of these measures to the comparable GAAP financial measures included at the end of our earnings press release included as exhibit 99.1 to the Form 8-K we furnished to the SEC today. These materials can also be found in the investor section of our website at www.emcore.com.
With me today from EMCORE are Jeff Rittichier, President and Chief Executive Officer and Jikun Kim, Chief Financial Officer. Jikun will review the financial results and Jeff will discuss business highlights and fiscal fourth quarter guidance before we open the call up to questions.
Now, I will turn the call over to Jikun.
Thank you, Erica and good morning everyone. Today, I will discussion EMCORE’s Q3 FY’18 financial results ending June 30, 2018. Consolidated revenue for the quarter came in at 17.7 million within our guidance range of $17 million to $19 million which we provided on their last earnings call. These revenues were 43% lower year-over-year and 5% lower quarter-over-quarter.
As we discussed on our prior earnings call, over the past two quarters, revenue from our cable TV products have been impacted by inventory correction with our largest cable TV customer. This particular customer chose to consolidate this outsourced EMS in to our own captive facility. While the impact of this decision continues in EMCORE’s fourth quarter, strong demand from our other cable TV customers offset this decline, such that overall cable TV revenues remained flat in Q3 quarter-over-quarter.
In Q3, our cable TV revenues were 66% of total revenues and our non-cable TV revenues comprised 34% of revenues. Decomposing the non-cable TV revenues, chips were at 14% of revenues, Satcom, video and wireless was at 11% of total revenues, and navigation was at 9% of total revenues. Cable TV and Satcom video and wireless products remained flat quarter-over-quarter, while chips and navigation products were nominally down due to the timing of shipments during the quarter.
GAAP gross profits in Q3 were approximately 1.2 million or 6.8% of revenues, down from 26.6% in the prior quarter. Gross margin under performance in Q3 was driven by several unique challenges including the timing of wafer fab period expenses, inventory write downs for cable TV related DFB lasers and long inventory, under-absorption by wafer fab facilities driven by lower shipments, new L-EML transmitter introduction cost, lower chip yields and higher chip testing costs as we ramped up new suppliers to add on new chip delivery capacity.
Taken together these expenses totaled approximately 2.6 million or 15% of sales. Pro forma for these expenses, which we do not anticipate returning in Q4, our gross margins would have been 22% in the quarter. While we typically do not provide gross margin guidance, directionally we would expect gross margin to be in the low to mid 20s in the fourth quarter, as we continue to increase chip capacity and transition L-EML based transmitters to production.
Total GAAP operating expenses for R&D and SG&A were 9.1 million in line with prior quarters and 0.3 million higher than prior year. Also in Q3, we recognized approximately 520,000 of G&A expenses related to Satcom and chip customer allowances for bad debt reserves. These are included in our non-GAAP expenses and were not added back in the [recent] reconciliations.
On a GAAP basis, the consolidated operating loss for the third quarter was 8 million. Our non-GAAP operating loss after excluding certain adjustments all of which are set forth in the non-GAAP tables included in today’s press release was a loss 6.9 million, a 4.7 million decline compared to the prior quarter, principally driven by higher cost of goods sold that we discussed. As a percent of revenue in Q3 FY’18, non-GAAP operating income was a negative 39.1%. Our non-GAAP pre-tax loss on continuing operations was 6.7 million.
Moving on to the balance sheet and cash flow statement; at the end of Q3 FY’18, the company’s cash and cash equivalents including restricted cash were approximately 65.5 million or a decrease 200,000 over the prior quarter. Regarding our working capital metrics, DSOs were at 63 days flat compared to the prior quarter, lower compared to the prior year of 68 days. Net inventory turns including non-current inventory was at 2.1 times, capital expenditures in the quarter $1 million and depreciation in the quarter was 1.5 million.
With that I will turn the call over to Jeff.
Thanks Jikum and good morning everyone. As Jikun highlighted in the third quarter we continue to experience a headwind due to the inventory overhang at one of our cable TV customers. However, in aggregate, our cable TV products performed better that expected, driven largely by higher demand from our other customers.
With respect to the inventory overhang, the third quarter represented the trough in terms of demand and we had begun to see orders return. Although this is encouraging, we need to be mindful of the traditional sources of CATV volatility and competitive dynamics between our customers. As such, we're going to restrict our visibility comment to the current quarter.
Looking beyond the specific customer dynamics, we have seen an overall strengthening in demand for our cable TV product, notably for our L-EML based solutions. We shipped a record number of L-EML transmitters in the quarter and notched two more design wins for our L-EML mini transmitter at the [Anga] show in June. The increased adoption of L-EML products provide solid evidence that this technology provides a distinct competitive advantage in the markets that enables substantially higher transmission efficiency versus legacy, DSP based products.
This technology gives MSOs an inexpensive powerful tool to break bottlenecks in their networks without ripping up and replacing their existing linear based infrastructure. As with prior generation cable TV products such as O-Band which is a 10 year old plus technology still shipping in some volume today, we expect DSP products to continue to contribute to cable TV revenue for years to come.
With that said, EMCORE technological leadership in linear components is manifested in the L-EML and we are thrilled that how quickly these products are being adopted by the market. Last quarter, L-EML transmitter sales grew by over 75% quarter-over-quarter. Overall, our other major customers in cable TV continues to meet or exceed their forecast, demonstrating that overall MSO spending levels remain on a solid footing.
Outside of cable TV, as Jikun highlighted, our other broadband products remained flat quarter-over-quarter with near-term strength in the Satcom product line, offsetting lumpiness in the Sat sampling activity of our DAS wireless products. While project engagement in this area remained robust, we continue to expect material revenue contribution to be normally 2019 to 2020 event when 5G deployments move beyond trial phases.
Moving on to the chip market; in the second quarter, we continue to see strong demands for 2.5 GPON product within China. However, as we noted last quarter, we were unable to service all the demand in the third quarter due to limitation in external supply chain. Beyond GPON, the uncertainty around ZTE in China continued to create headwinds for our customers customer in the third quarter, which in turn impact our overall chip revenue as expected. However, we believe this is more of a timing issue and would expect to see this demand return in subsequent quarters.
Finally within the navigation market, the production level for our products remains on plan with a growing backlog of programs. Most notably, we were notified when we had been selected as the winner of two new programs for our flagship product that we are expected to formally announce in the coming quarter. Both wins were achieved against strong competition from incumbent suppliers, pointing to the strength in EMCORE’s technology.
We continue to be encouraged by the major customers that are pulling us in to ever more important programs and note that our business development funnel has never been stronger. We recently introduced our EN-150 Inertial Measurement Unit at the Farnborough Airshow in July. This is an important milestone because it’s the world’s smallest closed-loop FOG based inertial measurement unit and demonstrates EMCORE’s ability to leverage common building blocks from our EG family of FOGs and our EN family of IMUs to create a broad portfolio of products that address a variety of customer needs.
The EN-150 is targeted at [munition] applications as well as small platform tactical requirements, delivering a lower cost alternative to ring laser gyros in a form factor that was previously only achieved with MEMS based sensors. We continue to work diligently to close the [NTSB] long term agreement with Raytheon and expect this to be resolved in the very near term.
Now turning to the outlook for the entire business, in the fourth quarter given the relatively limited demand visibility inherent in the cable TV business, we expect revenue to be in the range of $21 million to $23 million. Fundamentally, we expect to see growth across all three of our product areas namely cable TV, chips and navigation.
Overall, we are executing in the areas we can control and working to hold down expenses as we return to a normalized cable TV demand level across all of our served customers. I remain encouraged by our progress and navigation in particular, and believe we’ll enable us to build a stronger, larger company over the long term.
Now I’ll turn the call over to the operator to open up for questions. Operator?
[Operator Instructions] our first question comes from Mr. Jaeson Schmidt with Lake Street Capital Markets.
Jeff I know you mentioned you don’t want to comment on visibility beyond the current quarter, but wondering if you can provide some color if visibility has worsen at all over the past 30 months specifically in the CATV business?
No, this is where it certainly had not worsened. I would say that there is some competitive dynamics in the market which I can’t elaborate on because its confidential information that maybe making the picture a little less clear than normal. But again at a macro level what we’ve been saying for the past couple of quarters is that we expect demand to drop in Q3, which we believe that was the trough, we’ve orders returning. So overall the comments that I’ve made about say penetration of Remote 5, those remain on point and we are encouraged by what we’ve got here in cable TV in the current quarter. So I wouldn’t say that there’s anything new to concern ourselves with.
And then shifting gears to L-EML, if we look out to 2019 or even a bit longer term, how should we be thinking about how much that product portfolio should comprise of your CATV business?
I think it’s a really good situation. I would say that next year by far the majority of the product shipments will be linear EML. The customer adoption has been terrific; it’s gone about as well as we could hope. As Jikun pointed out, there’s a couple of little things that we need to square away on the production side of things, but these are probably solved before, a typical sort of sorting for yield that used to occur at chip before they go in to module. So, it’s going to be the majority of the products as we report in to FY’19 Jason.
That’s helpful. And last one from me and I’ll jump back in to queue. How should we think about OpEx going forward? It seems to be a pretty sizeable jump sequentially in June. Just try and get a sense of how OpEx should ramp throughout the remainder of this calendar year.
Jikun, you want to [answer] that one?
Sure. So Jaeson I think I talked about this on the prepared remarks. We’ve had a $520,000 increase in OpEx quarter-over-quarter due to a reserve that we took for allowances for bad debt, as well as our R&D expenses jumped up quite a bit in the quarter, just due to the acceleration of certain product development efforts on the FOG side. So if you adjust for those, I think you will see that our SG&A expenses actually went down a bit. R&D, we’re expecting it last quarter or Q2 was closer to 3.1 million, in Q3 it was 3.9. I think you could see that hovering between those two numbers.
[Operator Instructions] our next question comes from Tim Savageaux with Northland Capital Markets.
A couple of questions, maybe first, sorry on the GPON side I did get on a little late, so may have missed the chip breakout there. Sounds like you had some positive and some negative commentary there with strong 2.5 gig demand with some ZTE impact that we’ve been hearing pretty consistently about somewhat of a burst of activity around ZTE post the lifting of the band. I think you talked to growth across product segment sequentially in the September quarter. So I imagine you’re seeing some of that, but I wondered if you can kind of amplify on your first word were on chip sale was down in the quarter sequentially and then what are you expecting in September, especially focused on any increase in activity at ZTE?
Sure. So the thing is, lets sort of break out the contrast between say Huawei and ZTE. We’ve been designed in to a lot of applications that ultimately go through Huawei for some time, and so in the case of GPON, when the spend is more quality centric, things are quite good. If it goes a little more ZTE centric, then we have fewer design wins with ZTE supply chain and so it’s not quite as good.
The other piece to this is that our customers’ customers on the higher margin, higher ASP chips have more ZTE exposure. So you may feel a little less ZTE demand in the net from the GPON side, but we’ll see more demand on game chips and other products that go in to slightly different applications. So the net is timing issues aside and those can always crap up. ZTE coming back means a richer margin picture for us at the expense of possibly damping down some amount of demand on the GPON side. Does that make sense?
Yeah, crystal clear actually. Thank you for that. And again I may have missed – to the extent you made some initial kind of RFI comments or at least I think your indication was you haven’t seen much change there. I think we see a lot of conflicting data points out there. Some indications of acceleration, some less so, but I wonder if you wouldn’t mind kind of at least refreshing those comments around and is the pace of RFI adoption, one of the competitive factors that you referred to in terms of still having some degree of uncertainty on the cable TV object side?
As we’ve said in the past, RFI is not affecting us, but it’s not protected to affect us very much. Even through ’19 we did see the harmonic comments. So a little bit curious because they talked about their architecture serving a 100,000 modems which is a unique way of expressing what they are doing. I’ll just interpret that as homes path and say that that’s consistent with low end of the estimates for the actual amount of RFI penetration at one customer that we’re very familiar with. So in fact what we see is continued robust spending on the linear optic side.
Again, it’s interesting because there is a data point out there that I think some folks need to heave a little bit and that is that we’re still shipping significant amounts of 13/10 [OVAM] technology which is three generations old. I mean that stuffs’ been out there for 10 years. The cable TV industry does not move as fast especially when you look at it globally, as many people would wish and in fact would happen. And there’s a lot of engineering that goes in to even the smallest Remote 5 applications or rollout in test cases, and that’s all that’s really happening now.
So, our view is that based on the numbers of linear EML transmitters stems that linear optics is going full force, and we don’t expect to see that change, at least through ’19.
And at this time, we have no other questioners in the queue, so I will turn it back to Mr. Rittichier for closing comments.
In closing, I’d like to thank all of you for your time this morning and your interest in EMCORE. I would also like to acknowledge the entire EMCORE team located around the world and those of you who are on the call for their hard work and commitment through a real tough quarter. We’re going to do better going forward. Thank you every one.
Ladies and gentlemen that concludes this mornings’ presentation. You may disconnect your phone lines and thank you for joining us this morning.
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