3 June 2013

Emcore reports below-guidance quarterly revenue of $42.3m, but breaks even

For fiscal second-quarter 2013 (to end-March), Emcore Corp of Albuquerque, NM, USA, which manufactures compound semiconductor-based components and subsystems for the fiber-optic and solar power markets, has reported revenue of $42.3m, up 11.9% on $37.8m a year ago but down 14.3% on $49.3m last quarter (and below the guidance of $45-49m).

Fiscal	Q2/2012	Q3/2012	Q4/2012	Q1/2013	Q2/2013
Revenue	$37.8m	$41.1m	$47.5m	$49.3m	$42.3m

“The decrease was primarily due to lower fiber-optics revenue as our broadband fiber shipments fell,” explained chief financial officer Mark B. Weinswig. Fiber Optics revenue was $23.1m (55% of total revenue), up 5.4% on $21.9m a year ago but down 22.1% on $29.7m last quarter. “The revenue decline is related primarily to the softness of our cable TV broadband business, which showed a sequential drop of $6.5m or about 30% in revenues,” added CEO Hong Hou. The revenue contribution from new products – tunable XFPs (TXFPs) and micro-ITLAs – was about $1m.

Photovoltaics revenue was $19.1m (45% of total revenue), up 20.9% on $15.8m a year ago but down 2.5% on $19.6m last quarter.

Photovoltaics’ gross margin has grown from 20.9% a year ago and 30.5% last quarter to 32.5%, due to “the early CapEx investments to improve the production yields and also due to the more efficient loading of the manufacturing OpEx,” saidHou. “We were able to reach gross margins of greater than 30% this quarter, which is our target,” added Weinswig. In contrast, Fiber optics’ gross margin was 7.0%, down from 9.4% a year ago and 16.7% last quarter. However, excluding a warranty charge of $1.4m on previously divested product lines, gross margin from continued operations in Fiber Optics would have been 13.5%. Overall gross margin was 18.5%, up from 14.2% a year ago but down on 22.2% last quarter (although it would have been 22% without the warranty charge).

“Margins have been impacted primarily due to lower revenue levels and our $1m negative impact from the TXFP product line through the ramp-up stage,” said Weinswig. “We expect our gross margins in the Fiber Optics segment to improve in future quarters as we complete the ramp-up of our new product line at our contract manufacturer and as our fiber-optic revenues increase,” he concluded.

Operating income was $12.2m, a $21.1m improvement over the $8.9m loss a year ago and a $9.3m improvement on last quarter’s income of $2.8m, due primarily to higher insurance proceeds related to the flooding in Thailand at primary contract manufacturer Fabrinet Co Ltd in October 2011. “We recovered $14.8m from flood-damage insurance claims during the quarter [up from $4.2m last quarter] and do not expect any further amounts in future quarters,” noted Weinswig. In particular, operating income for the Photovoltaics segment improved to more than $4m, which is “among the best results that this business has been able to achieve over the last several years,” said Hou.

“Despite the lower revenues and partly due to the receiving the final payment from the insurance claim related to the Thailand flooding in the fall of 2011, we showed a significant net profit [of $11.7m on a GAAP basis],” said Hou.

Even on a non-GAAP basis (excluding the insurance proceeds), Emcore reported net income of $36,000, an improvement on a loss of $5.2m a year ago although down slightly on net income of $107,000 last quarter. “We were able to achieve a slightly positive operating income, which continues to be the positive outcome of the restructuring that the company has been focused on over the last year,” said Hou.

Cash, cash equivalents and restricted cash balance has more than halved from $12.8m to $6.2m. However, this does not include $8.2m in cash received on 2 April from insurance recoveries. “As a result of our final insurance recoveries, we have significantly improved our net working capital balance to be at the highest level in the last eight quarters,” noted Weinswig.

At the end of March, order backlog for the Photovoltaics segment was $36.5m (included $9.2m of terrestrial solar cell orders from Emcore’s Suncore joint venture). This is up 3% on $35.3m at the end of December (which included $3.4m from Suncore).

Regarding the Fiber Optics business segment: “Booking activities for the cable TV business has been very slow, starting in December 2012,” said Hou. “We saw in the beginning it was an easy seasonality because the March quarter is usually weaker. However, the softness continued throughout the March quarter due to the overall decline in capital spending from the CATV service providers,” he added.

“In early May, two major cable service operators reported their CapEx during the March quarter and their budgets for the whole of 2013. Compared to the December 2012 quarter, their March 2013 quarter CapEx spending decreased over 20% in the infrastructure upgrades category, which related to our products,” Hou said.

“On a positive note, they reported a generally higher total annual CapEx spending for 2013 versus 2012,” he added. “For instance, one MSO [multi-system operator] reported a 16% increase in their annual CapEx budget for operating spending, and in their March quarter spending ratcheted only about 18% of their annual 2013 total budget. This suggests a much higher spending rate toward the second half of the year. So we are hopeful that the CapEx will be more back-end loaded for their 2013.”

Outlook

For fiscal third-quarter 2013 (ending 30 June), Emcore expects revenue to fall to $35-39m (including revenue from the joint venture Suncore). Revenue from optical components should remain roughly flat. However, for the space photovoltaics business, Emcore expects a $4-5m decline. “This is mainly due to some delays we are experiencing with the start of a few new programs,” Hou noted. “In addition, we are seeing a mix shift towards more international-based business, which is lower margin traditionally,” he added.

“We have implemented certain cost-reduction activities in our Fiber Optics business to reduce overhead expenses,” Hou said. “We have restructured several departments and have moved some non-essential functions to our operators in China. Although we are seeing revenue pressure, we have worked hard to establish a profit-focused culture, and we're seeing the benefit of that hard work now. Our forecasted revenue for [full year] 2013 is expected to be near record levels, and our profit margins are currently projected to show marked improvement over the last year’s results,” Hou concluded.

See related items:

Emcore’s increased solar shipments drive return to profit

Emcore reports revenue of $47.5m, down 9% year-on-year but up 16% quarter-to-quarter

Emcore reports higher-than-expected quarterly growth of 9%, as Fiber Optics revenue rises a further 18%

Emcore reports quarterly Fiber Optics revenue up 20% sequentially

Emcore’s quarterly revenue falls 28% due to Thailand flood

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Author: Matthew Peach, Contributing Editor