9 February 2018
Emcore’s quarterly revenue down 17.6% while awaiting qualification of L-EML RFoG micro-nodes
© Semiconductor Today Magazine / Juno PublishiPicture: Disco’s DAL7440 KABRA laser saw.
For its fiscal first-quarter 2018 (to end-December 2017), 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 $24m (at the low end of the $24-26m guidance range), down 17.6% on $29.2m last quarter and 20% on $30.2m a year ago.
Of total revenue, chips comprised 9%, navigation 4%, and broadband 87%, including 72% cable TV (down from about 80% last quarter). Of the remaining broadband business, Emcore saw steady demand for Satcom products. So, total non-cable TV revenue comprised 28% of overall revenue (up from 21% for full-year fiscal 2017).
“With the broadband market and specifically CATV, in the fourth quarter we made a decision to exit the RF-over-glass [RFoG] micro-node market, while we await qualification of our third-generation L-EML [linear externally modulated laser] RFoG micro-nodes,” says president & CEO Jeff Rittichier. This action drove a drop of about $4m in cable TV product revenue (which is expected to continue through fiscal Q2).
In addition, at the end of the quarter Emcore saw delivery push-outs for some products due to an inventory bubble at one of its largest cable TV customers. “This situation resulted from a transition at one of our customers from EMS to in-house manufacturing,” says Rittichier. “Significant transmitter buffer stock was built to mitigate the risks of moving the factory and several months’ worth of laser inventory were also consolidated, resulting in a large overall inventory level,” he adds.
“Our CATV business met some headwinds at the tail end of the quarter which damped down revenue, while our Chip and Navigation businesses performed well,” says Rittichier. “Emcore made solid progress with increasing momentum in our end-market diversification strategy, offsetting a portion of the sequential CATV softness,” he adds. “One of our most important objectives this year revolves around building revenue diversity, and this past quarter represented important evidence of our progress towards this goal.”
Emcore saw accelerating demand for 2.5G and 10G chip products within China (expected to continue into fiscal Q2). Chip product revenue was above planned, with a projected return of certain telecom chips materializing as expected, driving fab utilization and contributing to corporate gross margin.
On a non-GAAP basis, gross margin was 33.6%, down from 36.9% last quarter, driven by lower volumes (which negatively impacted manufacturing overhead absorption), offset by a favorable mix shift of highly profitable cable TV products that began shipping last quarter. Also, this is level with a year ago, despite revenue falling 20% year-on-year, demonstrating the effectiveness of both cost-reduction efforts and operational improvements made over the last several years.
Operating expenses were $8.7m, down slightly from $8.9m last quarter but up on $7.8m a year ago. “We continue to invest in R&D [up from $2.2m a year ago to $3.8m] to accelerate delivery of new products across all three of our major product families,” notes chief financial officer Jikun Kim. “We invested aggressively in new navigation, chips and cable TV products. The benefits of these investments are expected to meaningfully contribute to our revenues and gross margin percentage line in the future quarters,” he adds. Otherwise, selling, general & administrative (SG&A) expenses have been cut from $5.6m a year ago and $5.2m last quarter to $4.8m, as Emcore works to hold down expenses while it works through the cable TV inventory headwind.
Operating income was $0.6m (operating margin of 2.5% of revenue), down from $3.3m (11.4% margin) last quarter and $3.5m (11.5% margin) a year ago.
Likewise, pre-tax income has fallen further, from $3.4m ($0.12 per diluted share) last quarter to $0.7m ($0.03 per diluted share). Capital expenditure (CapEx) was $2m (cut further, from $2.4m last quarter). Depreciation was $1.2m. During the quarter, cash and cash equivalents fell by $4.1m from $68.3m to $64.2m.
“At current demand levels, it will take about two quarters for our [CATV] customer to work through the inventory on hand,” says Rittichier. “This will create a sequentially larger impact in the fiscal second quarter than the first, followed by shipments returning to normalized levels at some point during the fiscal third quarter.”
Given the continuing RFoG market dynamics combined with the inventory overhang, for fiscal second-quarter 2018 (to end-March), Emcore expects revenue to fall further to $21-23m.
“While we still remain confident in our abilities to grow cable TV revenue on a sequential basis in Q3 and Q4 of 2018 through a combination of both average selling price (ASP) expansion with L-EML products and the resumption of RFoG shipments in the second half, we’ve got to clear the inventory bubble first,” says Rittichier. Emcore hence now expects cable TV revenue (including RfoG) to fall $23-27m year-on-year.
“The current inventory dynamic is in no way a reflection of the overall health of the cable TV market or the demand for our products,” continues Rittichier. “Near-term demand volatility is a function of several factors: cable TV’s high customer concentration, adverse weather (which limits installs in the winter) as well as infrastructure and CPE spending shifts. These factors combine to cause supply chain imbalances like the one we’re experiencing now.”
“Over the mid- to long-term however, big picture trends tend to hold, which is the case for DOCSIS 3.1 deployments and the migration to L-EML technology, which reflect quite favorably for Emcore,” Rittichier believes. “End-market dynamics remain robust, with strong demand for transmission products as cable operators continue the deployment of DOCSIS 3.1 architectures, including transmitter, modules and receivers,” he adds.
“Outside of the cable TV market, we continue to be enthusiastic about our revenue diversification initiatives,” says Rittichier. “Emcore is taking important steps to be more than a cable TV business. The operational and technical foundations that we’ve built in the chip and navigation markets are ready to support rapid growth, and we’ve got the team that's necessary to build these businesses.”
Emcore expects chip sales to be ahead of plan in fiscal Q2. “Sampling activity has also picked up with several different chips outside of the PON market, and several new development projects are moving forward for data -products with strong expressions of interest from customers,” notes Rittichier. “The heart of the Emcore’s business has always been optical semiconductor chips, and we’re committed to driving growth in this business to make meaningful contribution to the business overall this year.”
Emcore expects to see 33-37% of revenue come from non-cable TV products over the whole year, setting the stage for larger absolute growth in fiscal-year 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.”