11 December 2017
Emcore’s quarterly revenue suppressed by vendor-managed-inventory deferral
For fiscal fourth-quarter 2017 (to 30 September), Emcore Corp of Alhambra, CA, USA – which provides indium phosphide (InP)-based optical chips, components, subsystems and systems for the broadband and specialty fiber-optics markets – has reported revenue of $29.2m (at the low end of the $29-31m guidance range). This is up 14% on $25.6m a year ago but down 5.7% on $30.9m last quarter, affected by discontinuation of the video product line and a slight downtick in chip revenue, while cable TV held steady and navigation revenue grew. However, late in fiscal Q4 Emcore shipped about $800,000 of products to a cable TV customer’s vendor-managed inventory partner, for which revenue recognition was consequently recorded after the end of the quarter.
Of total revenue (compared with last quarter), satcom video and chips each fell from 7.5-12.5% to 5-10%, while navigation rose from 2.5% of total revenue to 2.5-7.5% and cable TV rose from 75-80% to 77.5-82.5%.
Full-year revenue has risen by 33.6%, from $92m for fiscal 2016 to $122.9m for fiscal 2017.
“2017 was a strong year for Emcore,” says president & CEO Jeff Rittichier. “Compounded annual growth rate (CAGR) is nearly 31% over the last three years,” he adds. “Once again in 2017, our core cable TV products were a significant growth driver, as all three leading MSOs [multi-service operators] deployed DOCSIS 3.1 architecture.”
Revenue growth was driven by cable TV, which includes $17-19m of RF-over-glass (RFoG) products in full-year fiscal 2017. Cable TV in Q4 saw continued strong market demand for transmission products as cable operators continued the deployment of DOCSIS 3.1 transmitters, modules and receivers. Beyond the firm’s traditional strength in laser modules and transmitters, its RF micro-node products (launched in late 2016) provided almost a $13m revenue boost year-over-year. However, during Q4, Emcore saw a slowdown in sales of these micro-nodes as portions of the market began to favor low-cost, low-performance modules from competitors.
Also, full-year growth was offset by year-over-year declines in satcom video and navigation. However, in the second half of fiscal 2017, Emcore saw chip and navigation product lines recover from the weakness seen in the first half of the year, when the chip product line saw a sharp decline in the 2.5G GPON market.
On a non-GAAP basis, full-year gross margin has risen from 34.1% for 2016 to 35.1% for 2017, driven by variances in cable TV revenue mix. Most recently, Q4 gross margin was 36.9%, up from 35.4% last quarter, aided by the new high-power DOCSIS 3.1-based cable TV transmitter introduced during the quarter.
While full-year sales, general & administrative (SG&A) expenses grew by only $0.3m (1.8%) year-on-year, R&D expenses rose by $2.5m (26%). “We continue to invest in R&D [especially during fiscal Q3-Q4] to accelerate delivery of new products across all three of our major product families,” notes chief financial officer Jikun Kim. “In the [fourth] quarter, we invested aggressively in new navigation chips [working on multiple products with larger ASPs] and cable TV products,” he adds.
Operating income was $3.3m (operating margin of 11.4% of revenue), up from $2.5m (9.8% margin) a year ago but down from $3.6m (11.5% margin) last quarter (and below the 12.5% margin guidance). However, results include final expenses of about $100,000 from Emcore’s relocation of its Beijing manufacturing facility. Without this, as well as the $800,000 of revenue shifted from fiscal Q4 to Q1 by the cable TV customer’s logistics partners, operating income would have been close to $3.7m (operating margin of 12.7%, slightly above the 12.5% guidance). Full-year operating income has risen from $5m in 2016 to $7.7m in 2017 (with operating margin more than doubling from 5.4% to 11.5%).
Q4 pre-tax income was $3.4m ($0.12 per diluted share), down slightly from $3.6m ($0.13 per diluted share) last quarter but up from $2.6m ($0.10 per diluted share) a year ago. Full-year pre-tax income has risen from $9.2m ($0.19 per diluted share) in 2016 to $14.3m ($0.52 per diluted share) in 2017.
Capital expenditure (CapEx) was $2.4m (falling back from $2.7m last quarter). Depreciation was $1.1m. Despite the increased CapEx, driven by the strong profits and effective management of working capital, cash and cash equivalents rose by $4.4m during the year and by $2.2m during the quarter to $68.3m.
“Operating performance and earnings growth delivered 182% year-over-year non-GAAP pre-tax net income and a 174% year-over-year non-GAAP EPS growth as we demonstrated the operating leverage that we have built into our business,” says Rittichier. “We have grown while reducing headcount by over a third [by 38%, from a peak of nearly 430 in December 2016 to about 270] and reducing facilities expense and footprint all while keeping inventories roughly constant… Emcore is a far more efficient operation than it was when we started rebuilding it nearly 3 years ago,” he adds. Over the past 3 years, revenue has grown 121% from about $55m to $123m, with profits growing from a loss of $0.46 a share to a profit of $0.52 a share (a nearly $1 improvement in non-GAAP EPS). Emcore also generated cash despite massive capital reinvestment, all via organic growth and improved execution.
“We have not only brought our operational fixed costs down and created a much more flexible manufacturing operation, but we have also increased our leverage of Chinese engineering resources for future operational improvement and product development initiatives,” says Rittichier. “We expect to add fully automated material management systems to our Beijing assembly test & tune process in fiscal Q1 and Q2/2018,” he adds. Also in fiscal 2018, Emcore’s facility in Alhambra, CA will have important automation upgrades in its fab along with the FOG/IMU (fiber-optic gyroscope/inertial measurement unit) assembly process. “We would expect that operations hiring will be very limited going forward, enabling us to take advantage of the operating leverage that we are creating.”
“The company is now at an inflection point that it has been preparing to take advantage of for nearly three years,” continues Rittichier. “Emcore is finally poised to become much more than a cable TV business. The operational and technical foundation that we have built in the chip and navigation market is ready to support rapid growth and we have got the team necessary to build those two businesses,” he adds. “My most important set of objectives for this year revolve around building revenue diversity. We are going to do that by taking advantage of our cross-product synergies in broadband by accelerating the growth in our chip and navigation businesses… Emcore now has the foundation to increase our non-CATV revenue to 30% for the next year as well as improve non-GAAP operating margins to 15% as we exit fiscal year 2018.”
For fiscal first-quarter 2018, Emcore expects revenue to fall to $24-26m, given the RFoG market dynamics combined with the vendor-managed inventory. The latter is “a relatively new phenomenon”, says Jikun Kim. “We are anticipating a greater impact in our fiscal Q1/2018 financial results due to the extended holidays,” he notes. “This will effectively result in shipment cutoff three weeks prior to actual fiscal quarter-end for this particular customer.”
Emcore’s third-generation L-EML (linear externally modulated laser) micro-nodes (launched at June’s ANGACOM 2017 Exhibition & Congress for Broadband, Cable and Satellite in Cologne, Germany) will not complete qualification until early calendar 2018, enabling delivery only in fiscal Q3 and Q4/2018 (leading Emcore to remove RFoG revenue from its fiscal Q1 guidance). “This is the primary reason why projections for our first fiscal quarter are soft, as the rest of our cable TV and other product families are actually showing growth in the quarter,” notes Rittichier. “Outside of RF micro-nodes, we have a number of exciting developments within the cable TV market, notably, the traction that we are seeing with our L-EML transmitter product line,” he adds. In fiscal Q4, Emcore began shipping LEML head-in transmitters for RFoG applications and received design wins for additional L-EML transmitters that will start shipping as early as fiscal Q1.
“We expect to recover the RFoG revenue and grow the base cable TV business over fiscal 2018 through new L-EML transmitters that are just starting to ship and a streamlined RF micro-node distribution model,” says Rittichier. “As our revenue diversity initiatives take hold, we will see greater than 30% of the company’s revenue coming from non-cable TV products over the whole year, exiting at an even higher rate in Q4, setting the stage for larger absolute growth in fiscal 2019. We expect to do this while keeping our goal of 15% non-GAAP operating margin on a run-rate basis as we exit Q4,” he adds.
Over the next 3-5-years, Emcore believes that it can grow its chip and navigation businesses to each be the same size as its current cable TV business, concludes Rittichier.