8 February 2017

Emcore's quarterly revenue grows 18% to $30.2m, driven by CATV

For fiscal first-quarter 2017 (to 31 December 2016), 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 $30.2m, up 17.9% on $25.6m last quarter and up 34% $22.5m a year ago, and above the $28-30m guidance.

"The cable TV market continues to drive revenue both for our DOCSIS 3.1 and RF-over-glass (RFoG) products," notes chief financial officer Jikun Kim. "We continue to make solid financial progress during the quarter with strong top-line growth as the market continues to adopt the DOCSIS 3.1 solutions," he adds. "We also recognized phenomenal growth on our SatCom & video and fiber-optic gyro product lines." Emcore's emerging chip products held steady in the quarter. Of fiscal Q1 revenue, cable TV comprised 80-85%, SatCom & video 5-10%, fiber-optic gyro 2.5-5%, and chip-level products 2.5-7.5%.

Within the cable TV market, Emcore continued to see strong sequential growth, with the business up about 19% on last quarter and 91% year-on-year. "The overall strength in the infrastructure side of cable television not only demonstrates the MSOs' [multi-service operators'] commitment to deploying DOCSIS 3.1 fiber deep networks but also highlights Emcore's leadership position within the space," reckons president & CEO Jeff Rittichier.

On a non-GAAP basis, gross margin was 33.6%, down from the 35.6% gross margin last quarter (and down on the guidance of 34-36%). However, normalizing for the effects of $350,000 in accelerated spending related to the Beijing manufacturing transition efforts, gross margin would have been closer to 34.8%.

Operating expenses have risen from $7.36m last quarter to $7.78m, due to higher stock-based compensation expenses, annual performance bonus accruals, and year-end audit fees (raising selling, general & administrative expenses from $4.96m to $5.58m), offset by R&D investments being cut slightly from $2.39m to $2.2m. However, on a non-GAAP basis (adjusting for non-recurring items), operating expenses would have been level quarter to quarter.

Operating income has risen further, from $2.5m (operating margin of 9.9% of revenue) last quarter to $3.5m (operating margin of 11.5%). However, normalizing for the effects of the accelerated Beijing facility transition expenses, operating margin would have been closer to 12.7%, exceeding the 12.5% target. "With our improvement in non-GAAP operating margin to 11.5%, we are rapidly closing in on our target of 12.5% by the end of fiscal year 2017," notes Rittichier.

Pre-tax income from continuing operations has risen further, from $1.29m ($0.05 per share) a year ago and $2.59m ($0.10 per share) last quarter to $3.5m ($0.13 per share). "We demonstrated our improved manufacturing efficiency and operating leverage by growing non-GAAP pretax net income sequentially by approximately 35%," says Rittichier.

Capital expenditure (CapEx) has risen from $1.3m last quarter to $3.2m (remaining elevated due to the Beijing facility transition and the investments that Emcore is making in lasers). Depreciation & amortization was again about $750,000. During the quarter, cash and cash equivalents fell from $63.9m to $62.2m.

Given the continued strength seen in the cable TV business, for fiscal second-quarter 2017 (to end-March) Emcore expects revenue of $29-31m. "Fiscal Q2 has traditionally been a seasonally soft quarter due to weather limitations," notes Rittichier. "Our roughly flat guidance is significantly better than planned." Operating margin should be 9.5-11.5% (constrained by costs related to the Beijing facility transition being at a peak).

"We are still in the early innings of this network build-out, and are poised to benefit from our new products such as our LEML [linear externally modulated laser]-based solutions, which are being integrated across our product lines," says Rittichier. "We remain optimistic about growth opportunities in this business, and expect to see strong upgrade spending for major and regional MSOs," he adds.

"We look to expand our addressable market within the cable TV space with new products such as RF-over-glass. In our RFoG products, sales, marketing and engineering expense scaled down in lockstep with product margins," says Rittichier. "We expect to see a bit heavier mix of the low end of our RFoG product in Q2, driving revenue and non-GAAP net income up in dollars, but at the expense of the gross margin line."

Emcore's 18-month transition to a hybrid EMS (electronics manufacturing services) model was nearly complete at the end of fiscal Q1. "We expect to end the fiscal second quarter with production almost completely shifted over [from the firm's assembly operation in Langfang, China] to our new EA facility [Emcore Asia, the firm's new, smaller automated facility near central Beijing], a key milestone in the evolution of Emcore," says Rittichier. The new facility has now been audited by all major customers.

Within the SatCom and video markets, Emcore continues to see strong market share and close relationships with customers in legacy markets, while continuing to make progress on introducing new products for adjacent markets such as L-band link used by services such as Dish and DirecTV. "We are currently in the process of outsourcing our SatCom products to TAA [Trade Adjustment Assistance], which is essentially 'Made in America', an ITAR-compliant manufacturing facility operated by our EMS partners," says Rittichier. This transition was largely complete by the end of the fiscal first quarter. "We expect to see modest growth in the SatCom product line in fiscal 2017," he adds.

"Our automation activities will have made us 180% more efficient on a cost of goods (COGS) per employee basis, while our outsourcing initiative continue to transform fixed expense to variable costs as we focus on processes where we can demonstrably add value over competing merchant electronic manufacturing facilities," says Rittichier. These actions should lower Emcore's breakeven revenue point by $1-1.5m per quarter.

"The automation processes and cable TV module assembly that are responsible for the dramatic improvement in our commercial business were designed for dual use in our military program, allowing us to drive cost reduction and quality improvement in our US manufacturing operation, even though the equipment was originally developed by our team in China," notes Rittichier. "You should expect to see more of this automation development from us going forward, as we strive to make our US manufacturing operation capable of competing with offshore low-cost labor," he adds.

"Moving on to the Chip market, we have begun production shipments of 10G parts at low volumes, and we are continuing our product development work to address the wireless and data-center markets, which we plan to enter toward the end of 2017," says Rittichier. "Emcore is working to become a broad supplier of chip-level products to the entire telecom industry, thereby optimizing our production mix between captive and merchant use, driving a higher blended margin for both our chip business and for the company overall."

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