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IQE

11 February 2019

Emcore’s quarterly revenue falls 4.9% to $24m

For its fiscal first-quarter 2019 (to 31 December 2018), 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, down 4.9% on $25.2m last quarter and level with $24m a year ago.

The Navigation segment remained flat, at 10% of revenue, although the firm says it continued to make progress in both production contracts as well as product development initiatives for new programs.

Chip sales rose from 10% to 18% of total revenue, driven by growth in demand in both 2.5 GPON products in China and non-GPON-related products.

Broadband comprised 72% of total revenue, down from 80% last quarter - which had included a large order for L-EMLs (linear externally modulated lasers) - as the cable TV market returned to a more normalized demand environment (falling from 71% to 62% of revenue in fiscal Q1).

Demand for CATV products was hence split between legacy distributed feedback (DFB) products and L-EML products, as expected (a natural consequence of returning to normalized inventory levels of legacy products in the fiscal fourth quarter, resulting in normal production splits between laser modules and L-EML transmitters in Q1). “Demand for our new L-EML products continued to be strong,” says president & CEO Jeffrey Rittichier. “Our L-EML product line continues to perform beyond expectation, including production shipments of the design wins that were previously announced.”

Non-CATV broadband products (Satcom video & wireless) remained steady quarter-over-quarter, with Satcom nominally up.

“Revenue in our first fiscal quarter of FY19 met expectations, as did the sequential improvement in gross margin,” says Rittichier.

On a non-GAAP basis, gross margin was 24.7%, up from 18.1% last quarter (due to stronger factory loading and a favorable product mix). “Improved operational performance over the quarter helped drive margins upward, despite slightly lower volume,” says Rittichier. However, gross margin was down from 33.6% a year ago. “This transition to L-EML has generated near-term costs in three areas: production immaturity; the secondary impact of L-EML products on excess and obsolete (E&O) charges; and improvements in standard cost, which drive balance-sheet changes that ultimately affect the profit & loss.”

Operating expenses have risen further, from $8.7m a year ago and $10m last quarter to $11.6m. R&D investment in Navigation products fell slightly due to the timing of project material expenses, while sales, general & administrative (SG&A) expenses rose (from $5.5m last quarter to $7.6m) due to an increase in consulting and litigation-related expenses.

Driven by the improved gross margin performance, pre-tax loss from operations has been cut further, from $3.3m (-$0.12 per diluted share) last quarter to $2.4m (-$0.09 per diluted share), although this compares with a profit of $0.7m (($0.03 per diluted share) a year ago.

Capital expenditure (CapEx) remained $2.8m. Depreciation was $1.6m. During the quarter, cash and cash equivalents (including restricted cash) hence fell by $5.8m to $57.3m.

“The overall decline in cash was in line with our expectations for the quarter, as we continue to invest in our fab and modernize our campus,” notes interim principal financial & accounting officer Mark Gordon. “We expect to continue the modernization of our wafer fab equipment and physical plant to improve our ability to build 25G-and-beyond products as well as chip-level products across multiple material systems,” says Rittichier. “We embarked on a general campus upgrade that was long overdue and we’ll complete this in phases over the next two years or so. This will allow us to recover significant amounts of space which was poorly organized in the original buildout of the Alhambra facility. This will also enable us to produce more products in Alhambra and will significantly improve manufacturing asset utilization,” he adds.

“We are continuing to optimize the geographic footprint of our EMS [electronics manufacturing services] supply chain to increase the leverage that we have with suppliers and to minimize any tariff impacts,” says Rittichier. “The tariff situation is fluid but, given what we know today, we don’t expect a material impact from changes in the short-term and feel that we have a solid strategy for staying ahead of the issue.”

For fiscal second-quarter 2019 (to 31 March), Emcore expects revenue to fall to $21-23m, taking into account the traditional weather-related seasonal softness in cable TV demand, coupled with the impacts of Chinese New Year, offset by expected growth in all non-CATV product revenue.

“The rapid acceptance of the L-EML has caused us to have to take unplanned impairment charges for the internally competitive technologies such as externally modulated transmitters and DFB lasers,” says Rittichier. “We see those charges coming down in the current quarter, but will see those improvements moderated somewhat due to under-absorption caused by the traditional soft cable TV cyclicality in the winter and Chinese New Year,” he adds.

“We’ve been executing on our margin improvement plan for nearly two quarters and are seeing the results that we were expecting,” comments Rittichier. “Costs are coming down as planned, and we expect to see the benefits of this after the current inventories are turned over in the coming months. While there’s still work to be done to improve gross margins overall, our progress in this area is on track,” he adds.

“Looking beyond Q2, we do expect to see improvement in gross margin, as we continue to increase chip contribution and see the production cost of our L-EML-based transmitters decline,” says Gordon. “As is typical of new products when first introduced, our L-EML transmitters are working down the manufacturing cost experience curve as projected, leading to stronger gross margins on this product line in the quarters ahead.”

“Finally, the improvements that we’ve made in standard cost caused capitalized variances in inventory over the past few quarters that are now rapidly declining,” says Rittichier. “As a result, we expect to see continual improvement in gross margin throughout the second half of fiscal 2019, as costs associated with these areas return to normal levels.”

See related items:

Emcore quarterly revenue rebounds by 42.5%, driven by larger-than-expected cable TV orders

Emcore’s inventory correction from main CATV customer offset by revenue growth from other customers in Q2

Emcore’s quarterly revenue falls 22% after larger-than-expected inventory correction from main broadband CATV customer

Emcore lowers quarterly revenue forecast from $21-23m to $18-19m

Emcore’s quarterly revenue down 17.6% while awaiting qualification of L-EML RFoG micro-nodes

Tags:  Emcore InP

Visit:  www.emcore.com

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