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14 August 2020

Emcore grows revenue 14% in June quarter, despite COVID-19-related constraints

For fiscal third-quarter 2020 (to end-June), Emcore Corp of Alhambra, CA, USA – which provides mixed-signal products for the aerospace & defense and broadband communications markets – has reported revenue of $27.3m, up 14% on $23.8m last quarter and up 59% on $17.2m a year ago, as revenue increased for both business segments.

Aerospace & Defense (A&D) revenue was $14m, up 8% on $13m last quarter, driven predominantly by sales of Quartz MEMS (micro-electro-mechanical system) navigation products - acquired through buying Systron Donner Inertial (SDI) of Concord, CA, in June 2019 - rebounding strongly from its seasonally soft March quarter, plus Defense Optoelectronics revenue roughly level with its high-growth fiscal Q2 (maintaining high double-digit growth year-on-year). This was partially offset by fiber-optic gyroscopes (FOG) revenue falling due to COVID-related constraints on access to testing facilities for new products and the ability to collaborate with customers to complete the necessary qualification work.

Broadband revenue was $13.3m, up 22% on $10.8m last quarter, driven largely by increased sales of cable TV (CATV) transmitters and components, as well as chips and sensing products.

“Our four manufacturing operations improved their productivity thanks to the diligent efforts of our supply chain, manufacturing partners and, more importantly, because of the commitment of the team at Emcore,” says president & CEO Jeff Rittichier. “Although we settled into a rhythm to deal with most of the COVID-19 outbreak, new challenges constantly emerge that have to be dealt with. In Q3, we saw surprise push-outs and cancellations of key component deliveries, which required significant creativity to resolve,” he adds. “In addition to the risks from identifiable areas such as labor, material supplies and logistics services, the pandemic continued to increase the general level of friction in ongoing business activities. Tasks take longer than they should; customer development schedules continue to be pushed to the right, and we’ve had to adjust our plans accordingly.”

“Despite facing a full quarter’s impact from the COVID pandemic, top-line growth and ongoing operational improvements resulted in a seven-point improvement in gross margin, led by our QMEMS team,” says Rittichier.

On a non-GAAP basis, gross margin has risen further, from 22.3% a year ago and 28% last quarter to 34%. This was due largely to Aerospace & Defense segment gross margin rising from 23% last quarter to 36%, driven by improvements for Defense Optoelectronics and by raising QMEMS margins to be in line with the corporate average (mainly through better production yields and a more favorable product mix). Broadband segment gross margin fell slightly from 34% last quarter to 33%, as the higher volume was offset by a less favorable product mix. Following two back-to-back fiscal years of gross margin at 23%, fiscal 2020 year-to-date gross margin has climbed to over 30%, as consolidated and both segment gross margins were all at 31% through the first three quarters of the year.

Operating expenses were cut from $10.4m last quarter to $10.1m, due mainly to headcount-related reductions (including lower travel expenses) as well as a non-recurring expense recorded last quarter. This was partly offset by higher insurance expense and Broadband R&D expenses rising from $0.49m to $0.81m (whereas Aerospace & Defense R&D expenses remained about $3.85m). Expense reduction actions over the past three quarters have lowered quarterly OpEx by $2.3m (18%). For example, restructuring actions and enterprise resource planning (ERP) implementation in Concord (completed in the March and June quarters) resulted in a net decrease in headcount. “We’ve also begun to realize the synergies projected as part of the SDI acquisition by applying Six Sigma discipline to the QMEMS manufacturing process,” says Rittichier.

Net loss has been cut further, from $5m ($0.18 per share) a year ago and $3.8m ($0.13 per share) last quarter to $0.74m ($0.03 per share).

Operating cash flow was $0.7m. In addition, $1.4m was received in connection with a prior-quarter shipment of CATV manufacturing equipment as part of a production asset sale agreement with Hytera. This was offset by capital expenditure (CapEx) of $1m. Free cash flow was hence $1.1m.

During the quarter, cash and cash equivalents rose from $22.1m to $29.7m (or $23.2m, net of a $6.5m loan payable).

“The transition of our cable TV manufacturing operations at Hytera’s Bangkok facility continues to face a fluid schedule,” notes Rittichier. “On the positive side, cable TV’s demand is very strong, which requires that we minimize the downtime of a major line move from Beijing to Bangkok to meet critical customer demand. On the negative side, our manufacturing engineers still can’t travel to Thailand to complete the transfer of target yields. Therefore, the best strategy for mitigating the risk and maximizing the revenue is to delay the final transmitter-line move to the end of the September quarter and the remaining operations to the end of December,” he adds. “We’ve also taken additional steps to build out a stronger Thai manufacturing engineering team to support the schedule, should travel continue to be restricted. This move to variable-cost manufacturing is a critically important strategic initiative. As more operations move from Beijing to Thailand, we will see upward pressure on the gross margins from cable television.”

“MSOs continued to invest in their networks to break the bottlenecks created by bandwidth demand from both work-from-home initiatives and stay-at-home entertainment. This has resulted in a full order book for Emcore’s cable TV products through the December quarter,” says Rittichier. “Beyond this point, we remain cautious of the ultimate duration of the upgrade cycle, and are working to complete our move to variable-cost manufacturing while orders are strong,” he adds.

“Looking ahead into our September quarter, the demand picture from our CATV and Aerospace & Defense customers remains strong, which should allow us to stay on the path of improved operational results despite the global impact of the pandemic,” says Rittichier.

For fiscal fourth-quarter 2020 (to end-September), Emcore expects revenue to grow to $29-31m, and would have been higher without COVID-19-related order push-outs (related to the commercial aviation side of the QMEMS business). “We’re expecting to see a strong performance from cable television, QMEMS and our Defense Optoelectronic product lines while we work through the challenges caused by the pandemic,” concludes Rittichier.

See related items:

Emcore’s cost cutting limits quarterly loss

Emcore hits adjusted EBITDA break-even two quarters ahead of schedule, aided by OpEx cuts

Emcore completes sale and leaseback of Concord facility, generating $12.8m

Emcore sells CATV production assets to Shenzhen-based Hytera for $5.5m

Emcore’s quarterly revenue falls by 20.8% due to soft CATV demand and Huawei-impacted chip sales

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