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12 February 2020

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

For its fiscal first-quarter 2020 (to end-December 2019), Emcore Corp of Alhambra, CA, USA – which provides mixed-signal products for the aerospace & defense and broadband communications markets – has reported revenue of $25.5m, up 5% on $24.3m last quarter and 6.3% on $24m a year ago.
Broadband segment revenue was $11.8m (46% of total revenue), down from $33.3m a year ago but up from $10.3m last quarter, driven by increased sales across the full portfolio of product lines, i.e. cable television (37% of total revenue), chips and wireless. However, although demand for cable television (CATV) products rose, it remained relatively low given the continuing softness in spending by multi-service operators (MSOs), while demand for other broadband products (notably chips and wireless) grew off low volumes.

Aerospace & Defense (A&D) segment revenue was $13.7m (54% of total revenue), down slightly on $14m last quarter. Defense Optoelectronics revenue grew by double-digits and revenue for quartz MEMS navigation products (gyroscopes and accelerometers) – acquired through buying Systron Donner Inertial (SDI) of Concord, CA, USA last June – also grew sequentially. However, this was offset by lower revenue for Emcore’s internally developed fiber-optic gyroscope (FOG) navigation products.

On a non-GAAP basis, gross margin has risen from 19% last quarter to 30%, aided by the non-recurrence of last quarter’s physical inventory adjustments, navigation production yield issues and professional service fees.

A&D gross margin improved from 21% to 33%, driven by product mix and volume cost improvements in the quartz MEMS and Defense Optoelectronics product lines.

Broadband’s gross margin rose from 17% last quarter to 26%, driven by a more favorable CATV product mix and the first full-quarter impact of a restructuring of CATV activities and the reduction of Alhambra wafer fab operations to one shift (to reduce under-absorption, as the firm focuses on higher-margin chip products) as well as a cut in Broadband R&D expenses from $1.7m to $0.6m.

Operating expenses (OpEx) were hence slashed from $12.4m last quarter to $9.4m, driven mainly by the Alhambra cost reductions as well as a significant decrease in R&D material expenses for projects related to the development of new FOG products. Overall R&D expenses were reduced by $1.8m (or 29%) to $4.5m (of which Aerospace & Defense comprised 87% and Broadband 13%) and SG&A expenses by $1.2m or 20% sequentially.

Net loss was cut from $7.7m ($0.27 per share) last quarter to $1.8m ($0.06 per share). By segment, Broadband profit was increased from just $0.1m last quarter to $2.5m, while A&D recovered from a loss of $1.7m to a profit of $0.7m.

The increase in gross margin, combined with the operating expense reductions, yielded positive adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) of $0.176m, compared with negative $5.7m last quarter.

“Emcore delivered solid results in the first quarter, with significantly improved operating performance, as well as break-even adjusted EBITDA two quarters ahead of schedule,” says president & CEO Jeff Rittichier.

Nevertheless, cash used during fiscal Q1 was $5.6m, comprising: $4.5m paid in conjunction with the Phoenix litigation matter; $3.4m used to fund business operations; and $2.3m received from the sale of cable TV production assets. During the quarter, cash fell from $22m to $15.4m.

“There is still much work to be done this year to further improve our operations, including the completion of our move to EMS [electronics manufacturing services] for our cable TV products [initiated in 2015],” says Rittichier. At the end of October, Emcore announced the sale of its CATV production equipment for $5.5m and transfer of its CATV manufacturing operations from its Beijing facility to Hytera Communications (Hong Kong) Co Ltd and Shenzhen Hytera Communications Co Ltd. Hytera will use the equipment to manufacture CATV components and subsystems from its facility in Southeast Asia.

“A complete set of transmitter qualification samples were built and submitted to customers during the December quarter. All of the transmitter manufacturing equipment has been shipped to Thailand on schedule,” says Rittichier. “Going forward but subject to final product change notice approvals by customers, we’re no longer planning to produce transmitters in China. The first of two laser module manufacturing lines were shipped and installed last quarter and the module builds and qualification process is underway. The gating activity on this action is largely driven by the number of hours that qualification samples must operate before passing qualification criteria. This initiative remains on schedule to finish at approximately the end of the March quarter,” he adds.

“We must keep the Beijing facility operating in parallel to ensure that we can ship products without negatively impacting revenue. We expect this to have a negative impact on margin in the second quarter, as we will in essence be running two facilities while the transition is completed,” notes Rittichier.

“We’re also mindful of the recent coronavirus outbreak and its impact on travel as we work to fully transition operations to Thailand. In Thailand there are restrictions on personnel traveling directly from China. We’re at a critical juncture in our transition, and schedules depend on the availability of our personnel and their ability to travel freely within the boundaries of our supply chain,” says Rittichier. “Barring any delays outside of our control, we expect to see the benefits of the transition in the third fiscal quarter.”

Emcore delayed its Beijing facility’s reopening (following the Lunar New Year holiday in China) by one week, to 10 February, expecting modest delays due to travel restrictions both inside and outside of China. “This may have an impact on the timing of the Emcore Asia [Beijing] shutdown if line audits and PCNs [process change notifications] need additional work to complete,” notes Rittichier. “Furthermore, if our raw material supply chain is affected, or we have to respond to late orders in the quarter, which is common in Q2, it could negatively impact revenue. We’re cautiously optimistic about the state of production in Asia, but recognize that the Chinese situation is fluid and unpredictable. Consequently, we’re taking a more conservative view.”

Hence for fiscal second-quarter 2020 (to end-March) Emcore expects revenue to fall slightly to $23-25m. CATV should fall by 15-20% (as normal) to its seasonal low (due to weather-related issues and MSO CapEx release schedules).

Gross margin – both overall and in Aerospace & Defense specifically – is expected to remain at or above 30% in fiscal second-half 2020, while Broadband margin should begin to approach 30% once Emcore gets through all the EMS outsourcing in Asia.

“We have taken additional actions to further improve our operating performance,” says chief financial officer Tom Minichiello. “We finalized a new restructuring plan designed to save $4m annually, including additional OpEx synergies in R&D and SG&A across the Alhambra and Concord locations, as well as further wafer fab efficiencies in Alhambra. These reductions are scheduled to be implemented in phases over the next several months, and we anticipate all actions to be fully completed by 30 June. The restructuring plan should result in a fiscal Q2 charge of about $450,000 to cover severance costs.”

“Taken together, and as evidenced by the progress we made in the first fiscal quarter, we believe we’re on a clear path to deliver sustained positive EBITDA starting in the third fiscal quarter, followed by profitable top-line growth as our new programs in Aerospace & Defense begin production,” says Rittichier.

Also, on 6 January, Emcore announced that it had entered into a purchase agreement for the sale and leaseback of its quartz MEMS facility in Concord. On 11 February the firm completed the transaction, generating $12.8m in net proceeds.

See related items:

Emcore agrees sale and leaseback deal for Concord MEMS facility

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

Emcore cuts June-quarter revenue guidance from $20-22m to $17-17.5m

Emcore’s quarterly revenue grows 16.7% year-on-year to $21.7m

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

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