5 February 2016

Emcore's quarterly revenue up 22% year-on-year to $22.5m

For fiscal first-quarter 2016 (ended 31 December 2015), 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 $22.5m, down 2.3% on $23m last quarter but up 22% on $18.4m a year ago.

Results are for the Broadband Fiber Optics division, classifying the Telecom division and Photovoltaics segments as discontinued operations. 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.

"Similar to last quarter, the results reflect continued strength in our CATV and components product lines despite seeing more pressure on our chips area," says chief financial officer Mark Weinswig.

"In the broadband cable TV segment, over the past six quarters, we have seen significant strength in the results and outlook," he adds. "In general, after tough times in 2012 and 2013, the cable TV optical network infrastructure business has seen improving market trends."

Revenue for chip-level device products has grown significantly over the last two years ago, but was relatively flat on last quarter at $4m (nearly 50% of the entire chip revenue for all of last year), with most being for Gigabit passive optical network (GPON) applications. "Previously we expected chip pricing pressure to materialize in the latter half of calendar year 2016," says president & CEO Jeff Rittichier. "We saw the impact beginning in our first fiscal quarter," he adds. "We are taking actions and implementing initiatives for cost reduction in the fab and expect to see improvements in our cost structure in the calendar year."

On a non-GAAP, gross margin was 32.9%, up on 28.1% a year ago but down from 41.1% last quarter and on the lower side of the targeted range of mid-30s, due primarily to: (1) low cable TV shipments leading to lower factory utilization and under-absorption of fixed manufacturing overhead costs (as a percentage of revenue); (2) a slightly unfavorable product mix; and (3) a reduction in average selling prices (ASPs) due to re-pricing of GPON chips during the quarter. "As cable TV volumes increase, we will see improvement on the overhead and mix," believes Rittichier.

Operating expenses have been cut further, from $10.2m a year ago and $8.2m last quarter to $7.4m (due mainly to lower compensation costs), while still maintaining product development efforts (with R&D spending of $2.6m level on last quarter and up on $2.2m a year ago). Selling, general & administrative (SG&A) expenses have been cut further, from $8.6m a year ago and $5.6m last quarter to $4.8m. This is despite Emcore spending over $900,000 on arbitration activities related to Sumitomo (similar to last quarter).

Income from continuing operations was $1.3m ($0.05 per share), down from $2.7m ($0.10 per share) last quarter but still an improvement on a loss of $0.8m ($0.03 per share) a year ago.

Cash flow was a strong $5m. During the quarter, cash and cash equivalents rose by $3.6m from $111.9m to $115.5m, due to a significant reduction in accounts receivable in the inventory.

"With the continued strong 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 second-quarter 2016 (to 31 March), Emcore expects revenue to be steady at $21-24m. "The trends in cable TV continue to be strong, but we are mindful of any remaining inventory positions and upcoming product changes within our customer base," says Rittichier.

"While we are implementing a new strategy that should improve our operating model in future periods, those activities will lead to some additional costs in the next couple of quarters and take some time to realize," says Weinswig. Emcore hence expects gross margins to be in the low-to-mid 30s for fiscal Q2. 

Also, beginning in the fiscal Q2, Emcore expects to see a rapid decline in legal defense costs. The firm filed its final closing statements in January relating to the arbitration and is now awaiting the arbitration panel's final ruling (within 60-90 days, during April). Normal SG&A levels should decrease in the March quarter then remain relatively flat throughout calendar year 2016.

"The cable television transmission product business outlook remains strong but consolidation at the MSO and OEM levels has caused a bit of turbulence along with inventory build-up, which we believe is currently winding itself down," notes Rittichier. "We also see the MSOs rapidly shifting their spend to DOCSIS 3.1 product as they deploy architectures which will allow them to compete against deep and all-fiber networks and allow them to deploy over-the-top services efficient," he adds.

"For the chip-level device products, we do expect non-GPON chips to comprise a greater fraction of our chip business than they did over the past year, with our goal for non-GPON to be one-third of our chip revenues over the year," says Rittichier. "Non-GPON chip shipments in 2016 could be larger than our entire chip business was in 2015. Emcore's long history as one of the industry's premier optical semiconductor companies has given us a substantial portfolio of chips to sell, and the divestiture of our telecom module business eliminated any channel conflict concerns in the minds of our customers," he adds.

"The GPON business is really just our initial offering in the merchant chip market as Emcore fully intends to become a broad supplier of chip-level products to the entire telecom industry, as well as an important supplier of GPON chips," continues Rittichier. "We have a number of process and technology initiatives in the fab which will help us drive down costs, such as a migration to 3-inch wafers, outsourcing of commodity epi growth and automated techniques for coding, simulation, test and sort," he adds. "These steps will enable us to compete more aggressively in the market over the long-term. Automation is especially important to this initiative, as we have operating leverage into the chip fab operations." New equipment is currently being installed to modernize the firm's fab and improve its productivity.

Emcore is working to implement new manufacturing strategies to improve performance and to turn fixed and semi-fixed expense into variable costs. "Our expectation is that these initiatives will also lower our working capital requirements further, tying up less cash and inventory, while reducing cycle times and improving yields," says Rittichier. "You should expect to see some buildup activities in our inventory position over the next few quarters, as we build bridge inventory to accommodate movements of certain manufacturing processes to EMS [electronics manufacturing services]," he adds. The transformation of the manufacturing processes has been underway since the beginning of the March quarter, aiming to improve operating leverage, cycle times, yields and product costs. The key components to the initiative are: (1) moving low-value-added processes to EMS; (2) installing more robust measurement and process control technologies at key points in assembly lines; and (3) improving operating leverage through automation.

Emcore also aims to reduce the fixed and semi-fixed expense of its assembly operations. "We've nearly completed the outsourcing of our first true turnkey assembly products to EMS from Emcore China, freeing those engineers to focus on the areas that give us meaningful cost advantages or opportunities for competitive advantage," says Rittichier. "Upgraded processes are also in their final stage of development for a laser module in transmitter families that will smooth the automation of transmitter assembly by improving process shields," he adds. "We expect to further strengthen Emcore China's automation and engineering teams and look forward to seeing improvements as streamlined processes are developed and inserted into operations during our Six Sigma Black Belt projects."

Emcore's target operating model goal is to be at breakeven level (on a non-GAAP basis) at $20m per quarter of revenue.

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