9 December 2015

Emcore’s quarterly revenue rises 61% year-on-year to $23m

For its fiscal fourth-quarter 2015 (to end-September), 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 $23m, up 8.6% on $21.2m last quarter and up 61% on $14.3m a year ago, due to continued strength in components and specialty photonics product lines. Revenue for full-year fiscal 2015 was $81.7m, up 47.1% on fiscal 2014’s $55.5m and the highest level achieved for the broadband business since 2008.

Emcore completed the sales of its Space Photovoltaics business in mid-December 2014 to SolAero Technologies Corp and of its Telecommunications Fiber Optics business (the tunable laser and transceiver Digital Products lines) at the beginning of January to NeoPhotonics Corp of San Jose, CA, USA. The continuing Broadband Fiber-Optics business includes products for cable television (CATV) and fiber-to-the-premise (FTTP) networks as well as satellite communications, video transport and specialty photonics for defense & homeland security applications.

“In the Broadband Cable TV segment, for the past five quarters we have seen a significant improvement in the results and outlook,” notes chief financial officer Mark B. Weinswig. “In general, after tough times in 2012 and 2013, the Cable TV Optical Network Infrastructure business has seen improving market trends. Emcore is seeing robust activity for new design and prospects that should lead to additional revenue opportunities in the future,” he adds.

“In Chip-Level Device products, revenues have grown significantly from two years ago,” Weinswig continues. “This quarter we reached more than $4m, the highest level yet achieved.” 

Gross margin was 41.1%, up from 36.3% last quarter, due to higher revenue, lower unfavorable variances and reserves, and better factory utilization as well as absorption of fixed costs as a percentage of revenue, coupled with a favorable product mix. Full-year gross margin has risen from 21.8% in fiscal 2014 to 35.1% in fiscal 2015 (one of the highest levels achieved for the broadband business). “Gross margins are at the highest levels the company has realized in at least the past five years, reflecting improvements not just in volume but also in operating efficiency,” says president & CEO Jeffrey Rittichier.

Operating expenses were $8.2m, cut from $10.3m a year ago though up by $1.4m from $6.8m last quarter due mainly to higher compensation costs associated with hiring new staff plus additional sales & marketing-related activities, in addition to costs associated with year-end work. In sales, general & administrative (SG&A) expenses in particular, Emcore spent more than $800,000 associated with arbitration activities.

On a non-GAAP basis, income from continuing operations was $2.7m in fiscal Q4/2015, an improvement on $2m last quarter (due to higher revenue and gross profits, partially offset by the higher operating expenses) and a loss of $2.5m a year ago. Full-year income was $4.2m, an improvement of $18m from a loss of $13.8m in fiscal 2014.

“Most importantly, Emcore continuing operations were profitable on both a GAAP and a non-GAAP basis, generating positive cash flow from operations,” says Rittichier.

Cash, cash equivalents and restricted cash was $111.9m at the end of the fiscal year, up by $91.2m on a year ago but down further from $114.1m from at the end of last quarter due to a pay-down of certain liabilities and investments in working capital from higher revenue.

“With the improved results and large cash position, the board of directors is continuing to review options to enhance shareholder value,” says Weinswig. Currently, the board expects to approve a cash dividend or distribution to shareholders, with the timing and amount to be determined in a few months following completion of the review.

For fiscal first-quarter 2016 (to end-December 2015), Emcore expects revenue to be steady at $22-24m.

“The cable television transmission product business remain strong but consolidation at the MSO and OEM levels has caused a bit of turbulence and some build-up of inventory that is currently winding itself down,” notes Rittichier. “When viewed against a backdrop of MSO spending which is uniformly high, we expect any softness to be short-lived, although the relative percentages of CapEx spend can shift between optical infrastructure and customer premises equipment, and as a result be unpredictable,” he adds. “Even though we saw just such a swing between Q3 and Q4, orders for our product did not reflect this, resulting in a small build-up of inventory in the channel. We have already seen signs that this situation is resolving itself and our customers are telling us that their fundamentals are strong.”

“We’ve seen strength in our merchant chip business but are mindful of the strong competitive pressure developing in the GPON [Gigabit passive optical network] market,” says Rittichier. “Supply of GPON chips have nearly reached demand as of this time and we expect that this will drive our consolidated margins toward the mid-30s going forward,” he adds. “Nearly 30% of our chip business this year is expected to be from outside of the GPON application in areas where we can add greater value. Emcore’s fab continues to grow in output, but we fully intend to become a broad-based supplier of chip-level products to the entire telecom industry as well as the GPON chips.”

“All these products will be able to take advantage of additional improvements that we are making in operating efficiency as we add operating leverage into the chip fab operations through our automation initiatives, and these are simulation test and sort functions, and see the benefit of those projects reflected in reduced costs and improved yields. Additionally, we are starting to install new equipment to modernize our fab and improve its productivity,” Rittichier continues.

“Along with the strength in our cable TV and chip products, we’ve also seen good progress in market adoption for our specialty products, including our Fiber Optic Gyro product line. Leveraging what is largely the same core technology as our cable TV products, we’ve made significant inroads into the defense business and are getting traction from multiple tier-1 customers. We hope to significantly increase the revenue from these unique, long-lifecycle and high-gross-margin products in fiscal 2016,” Rittichier says.

“We have started the transformation of our manufacturing processes to improve operating leverage, cycle times, yield and overall product cost. Already we are in the process of moving our SatCom manufacturing operations to EMS [electronics manufacturing services] assembly & test in order to improve our margins and reduce the footprint of our US assembly operations,” says Rittichier. “Outside of these products, we are actively outsourcing more assemblies from Emcore China to EMS suppliers when make-or-buy decisions are favorable to these actions. Our first automation project is expected to be up and running in Alhambra in Q2 even as process automation is simultaneously being introduced into Emcore’s Asian manufacturing facilities. Emcore’s Asian operations have already been strengthened with the addition of its first automation team and was actually the first of our facilities to complete our Six Sigma Green Belt program. We expect to strengthen Emcore China’s team and insert automation and yield improvement projects which are already being developed through the Green Belt projects.”

“Overall, the trends in CATV are solid, even with some short-term turbulence, with respect to inventory and upcoming product changes in our customer base. We are developing a roadmap of actions necessary to reduce our breakeven point and transform semi-fixed manufacturing expense to variable product cost,” Rittichier concludes.

“While we are implementing new strategies that should improve our operating model in the future periods, those activities will lead to some additional costs in the next couple of quarters, and will take some time to realize,” notes Weinswig. “As a result, we would expect our gross margins to be in the mid-30s for the [fiscal] first quarter.” Emcore expects similar overall operating expenses in fiscal Q1 (despite an increase in SG&A), but expenses should then start to fall in subsequent quarters.

“Our operating model goal is to be at breakeven level on a non-GAAP basis at $20m per quarter of revenue, depending on product mix and the timing of certain spending,” says Weinswig.

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