7 August 2018

Emcore’s inventory correction from main CATV customer offset by revenue growth from other customers in Q2

© Semiconductor Today Magazine / Juno PublishiPicture: Disco’s DAL7440 KABRA laser saw.

For fiscal third-quarter 2018 (to end June), 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 $17.7m, down 4.9% on $18.6n last quarter and 43% on $31m a year ago.

Of total revenue, cable TV comprised 66%. Of the 34% in non-CATV revenue, Chips comprised 14%, Satcom video & wireless 11%, and Navigation 9%.

“Over the past two quarters, revenue from our cable TV products has been impacted [more than expected] by inventory correction with our largest cable TV customer. This particular customer chose to consolidate their outsourced EMS [electronics manufacturing services] into their own captive facility,” says chief financial officer Jikun Kim. “Strong [better-than-expected] demand from our other cable TV customers offset this decline, such that overall cable TV revenues remained flat in Q3 quarter-over-quarter,” he adds. “Our other major customers in cable TV continue to meet or exceed their forecast, demonstrating that overall MSO spending levels remain on a solid footing.” In particular, sales for L-EML (linear externally modulated laser) transmitters grew by over 75% quarter-on-quarter.

Of other (non-CATV) broadband products, revenue for Satcom video & wireless products also remained flat quarter-over-quarter, with near-term strength in the Satcom product line offsetting lumpiness in the Sat sampling activity of DAS (distributed antenna system) wireless products (for which project engagement remains robust, so Emcore continues to expect a material revenue contribution in 2019-2020, when 5G deployments move beyond trial phases).

Revenue for Chips and Navigation products were both nominally down due to the timing of shipments during the quarter.

“In the chip market, we continue to see strong demand for 2.5G PON [passive optical network] product within China. However, we were unable to service all the demand in the third quarter due to limitation in external supply chain,” comments president & CEO Jeffrey Rittichier. “Beyond GPON, the uncertainty around ZTE in China continued to create headwinds for our customers’ customers in the third quarter [who are more exposed to ZTE in higher-margin, higher-ASP chips], which in turn impacted our overall chip revenue as expected. However, we believe this is more of a timing issue and would expect to see this demand return in subsequent quarters,” he adds.

“In the navigation market, the production level for our products remains on plan, with a growing backlog of programs,” Rittichier says. “We were selected as the winner of two new programs for our flagship product that we are expected to formally announce in the coming quarter. Both wins were achieved against strong competition from incumbent suppliers.”

On a non-GAAP basis, gross margin has fallen further, from 35.4% a year ago and 27.3% last quarter to just 7.3%. However, this was driven by several unique challenges including the timing of wafer fab period expenses, inventory write-downs for CATV-related DFB [distributed fiber Bragg] lasers and long inventory, under-absorption by wafer fabs driven by lower shipments, new L-EML transmitter introduction cost, lower chip yields and higher chip testing costs as Emcore ramped up new suppliers to add on new chip delivery capacity. Without these expenses (totalling about $2.6m or 15% of sales) which are not expected to recur in fiscal Q4, gross margins would have been 22%.

“The trough in CATV orders hurt us on the top line, while a poor product mix exerted additional pressure on margins,” notes Rittichier.

Operating expenses rose from $8.9m last quarter to $9.1m. A rise in R&D expenses from $3.3m to $3.9m (due to the acceleration of product development on the fiber-optic gyro side) offset a cut in sales, general & administrative (SG&A) expenses from $5.6m to $5.2m. Also, the latter included a $520,000 G&A expense due to a reserve taken as an allowance for bad debt related to Satcom and Chip customers.

“When coupled with higher factory costs due to weak absorption and higher E&O [excess and obsolete] charges, our net income fell well below expectations,” says Rittichier.

Compared with pre-tax income of $3.6m ($0.13 per diluted share) a year ago, pre-tax loss from has worsened from $2.1m (-$0.08 per diluted share) last quarter to $6.7m (-$0.26 per diluted share).

Capital expenditure (CapEx) was $1m, and depreciation was $1.5m. Despite the challenges during the quarter, cash and cash equivalents fell by just $0.2m, from $65.5m to $65.3m.

“We continue to experience a headwind due to the inventory overhang [at our main cable TV customer,” says Rittichier. “Looking beyond the specific customer dynamics, we have seen an overall strengthening in demand for our cable TV product, notably for our L-EML based solutions,” he remarks. “We shipped a record number of L-EML transmitters in the quarter and notched two more design wins for our L-EML mini transmitter at the ANGACOM show [Exhibition & Congress for Broadband, Cable and Satellite in Cologne, Germany] in June. The increased adoption of L-EML products provides solid evidence that this technology provides a distinct competitive advantage in the markets that enables substantially higher transmission efficiency versus legacy DSP-based products,” he adds.

For fiscal-fourth quarter 2018 (to end-September), given the relatively limited demand visibility inherent in the cable TV business, Emcore expects revenue to grow to $21-23m. “We expect to see growth across all three of our product areas, namely Cable TV, Chips and Navigation,” says Rittichier. “ZTE coming back means a richer margin picture for us at the expense of possibly damping down some amount of demand on the GPON side,” he adds. “We expect gross margin to be in the low to mid 20s in the fourth quarter, as we continue to increase chip capacity and transition L-EML based transmitters to production,” says Kim. “Next year by far the majority of the [CATV] product shipments will be linear EML,” forecasts Rittichier.

See related items:

Emcore’s quarterly revenue falls 22% after larger-than-expected inventory correction from main broadband CATV customer

Emcore lowers quarterly revenue forecast from $21-23m to $18-19m

Emcore’s quarterly revenue down 17.6% while awaiting qualification of L-EML RFoG micro-nodes

Emcore’s quarterly revenue suppressed by vendor-managed-inventory deferral

Tags: Emcore InP

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