11 May 2017

Emcore’s quarterly revenue grows by 8% to $32.6m, driven by greater-than-seasonal CATV sales

For its fiscal second-quarter 2017 (to end-March), 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 $32.6m, up (in what is normally the seasonally softest quarter) by 8% on $30.2m last quarter and by 51% on $21.5m a year ago (and above the guidance of $29-31m).

Of total revenue, cable TV comprised 80-85%, chips 5-10%, Satcom 5-10%, and fiber-optic gyro products (FOG) about 2.5%.

Cable TV revenue grew 9% quarter-on quarter and 107% year-on-year. Of this, RF-over-glass (RFoG) product shipments grew more than expected from a small base, while DOCSIS 3.1 product revenue held steady relative to fiscal Q1 in what is normally a seasonally low quarter, countering the typical seasonal softness usually seen in the cable business.

Emcore also saw nominal growth for its Satcom & video product line. Fiber-optic gyro revenue fell, driven by the timing of customer orders.

Merchant chip revenue rose as much as 51% quarter-on-quarter (continuing the strongest sector performance over the past four quarters), contributing solid gross margins.

On a non-GAAP basis, gross margin has risen from 33.2% a year ago and 33.6% last quarter to 34.4%. This was despite the adverse impact of a heavier one-time mix towards the low-margin end of the RFoG product family (marking the end of a model changeover) plus $340,000 in expenses from the relocation of the firm’s Beijing manufacturing operations from the existing facility to a new automated facility.

“While Q2’s RFoG heavy mix created an incremental headwind to the gross margins, we kept our operating expenses for those products below the corporate average, allowing them to contribute to operating profit and margin,” notes president & CEO Jeff Rittichier.

Operating income has risen further, from just $0.6m a year ago and $3.5m last quarter to $3.7m (operating margin of 11.4%, at the high end of the 9.5-11.5% guidance), despite the Beijing transition costs plus heavy R&D investment. Without these, operating income would have been closer to $4m (12.4% of revenue), near to the fiscal Q4/2017 operating margin target of 12.5%.

Pre-tax income was $3.7m ($0.14 per diluted share), up from $3.5m ($0.13 per diluted share) last quarter and $0.02 per diluted share a year ago.

Capital expenditure (CapEx) has been cut back from last quarter’s $3.2m to a more normal $1.3m as the Beijing facility transition nears completion. Depreciation was $0.9m. Free cash flow was strong, at $5.2m. During the quarter, cash and cash equivalents rose from $62.2m to $68.6m.

“We transitioned production to our new Beijing facility; opening the door to even more efficient operations going forward,” says Rittichier. “The combination of strength in the CATV market, a more efficient manufacturing platform and growth in other high-profit-margin products gives us confidence that we will exceed our target of 12.5% non-GAAP operating margin commitment.”

For fiscal third-quarter 2017 (to end-June), Emcore expects revenue to fall to $29-31m (without the one-off $3m in low-end RFoG units in fiscal Q2), despite continued strength in the infrastructure side of cable TV business (driven by a resumption in growth for DOCSIS 3.1 products). Operating margin should be 11-13% (en route to the target of 15% exiting fiscal 2018). Going forward, RFoG shipments will primarily consist of more sophisticated, higher-margin products.

Within the Satcom and video market, Emcore started restructuring its product line over a year ago and is starting to see the benefits from those actions. “We just completed the discontinuation of our video products, which carried excessive engineering costs, and cut out over 60% of the product options for our Satcom product line as well,” notes Rittichier. With the introduction of new low-cost L-band links, technologies for 5G radio over Fiber DAS are focused on larger Satcom systems. “We expect profits to grow faster than revenue in these product areas,” says Rittichier. “With all that final testing transitioned to our EMS [electronics manufacturing services] partners in the US complete, we believe we are in a good position to realize incremental operating leverage in these product lines,” he adds.

All captive CATV-related manufacturing has now been shifted to the new Emcore Asia automated facility (inside the 5th Ring in Beijing). Over the next 3 months or so, the remaining automation equipment will be installed (reducing direct headcount from a peak of 370 last December to about 100). This may cause some additional transition cost in the quarter (about half the level of fiscal Q2). “Even as our Chinese facilities are being transformed, our US operations shifted postcode simulation test and sort operations as well as chip-on-block assembly to EMS providers as well,” says Rittichier. “Combined with the changes in our Satcom manufacturing strategy, these actions will result in our breakeven point declining by $1-1.5m per quarter. We should see some impact from these changes in our numbers this quarter, but will fully realize the benefits in Q4,” he adds.

“This manufacturing transformation is not really the end point,” Rittichier continues. “Over the past year, two of our Six Sigma Green Belt projects have given us the ability to automatically tune CATV transmitters with high accuracy and minimal touch time. The deep learning project was particularly insightful in raising our understanding of profit dynamics. When combined with new automation techniques, we've achieved 90%+ reduction in touch time per unit. We are going to move transmitter tuning to the EMS providers to eliminate transportation, inventory, carrying cost and to further improve cycle time,” he adds. “Over the next year, we expect to devote a majority of our Six Sigma Green and Black Belt projects to wafer fab operations, where we will not only improve our standard process controls but build the process nodes that will launch new generations of chip products for both captive and emerging markets. We see the fab as a key area for investments in both in terms of capital and the world-class technologist we need as we work to improve our ability to both execute and invent.”

Regarding merchant chip business, for GPON, Emcore is only going to supply 2.5G products (mainly from inventory) to customers that are multi-generational. “It’s really the 10G targets that are going to get 2.5G attention from us when and if they need it… We are not going to be running around in China selling small amounts of this and that,” says Rittichier. “Early indications from our customers remain very positive for our 10G parts, while we continue product development work on parts to address data-center markets,” he adds. “With our OFC announcements, we marked the availability of 6.5GHz 5G wireless devices, and expect to continue the development of those products,” continues Rittichier. “We also received additional customer orders in the GPON market, which we can fill from stock, in Q3 and Q4. At a high-level, we expect our penetration into these markets will drive a higher blended margin for both our chip business and for the company overall.”

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