21 May 2018

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

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For its fiscal second-quarter 2018 (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 $18.6m, down 22.5% on $24m last quarter and 43% on a $32.6m a year ago, and below the initial guidance of $21-23m.

“Revenues from our cable TV products were impacted by an inventory correction with our largest cable TV customer when they consolidated their contract manufacturing [EMS] capabilities into their own captive facility,” says chief financial officer Jikun Kim. “The impact of this inventory correction was more acute than anticipated,” he adds. “Although general cable TV MSO [multi-service operator] capital expenditures showed consistent demand in the quarter, the portion of the MSO capital expenditures resulting in orders from our direct customers were received too late to ship before the end of Q2,” he adds. “The product mix in these orders was substantially different than the forecast and outside of our normal lead times for purchased assemblies,” notes president & CEO Jeff Rittichier.

“Our other major customers met or exceeded their forecasts, confirming that the inventory situation was not the result of a downturn in MSO spending but a straightforward yet painful inventory bubble,” stresses Rittichier.

“We saw good design-win traction with our LEML [linear externally modulated laser] products, an uptick in demand from our other CATV customers and good performance in line with our expectations in our Chip and Navigation businesses,” says Rittichier.

Of total revenue (compared with last quarter), Broadband comprised 74% (down from 87%) including a less-than-expected 65% from cable TV (down from 72%). So, total non-CATV revenue comprised 35% of overall revenue (up from 28% last quarter). Specifically, Navigation comprised 11% (up from just 4%) and Chips a more-than-expected 16% (up from 9%). “We continue to see strong demand for 2.5G PON [passive optical network] products within China,” notes Rittichier. “In China, price drives an awful lot of decisions… 10G is not going to really take over from 2.5G for quite some time, just because its a fair bit more expensive - it’s probably more than four times as expensive,” he adds.

On a non-GAAP basis, gross margin has fallen from 34.4% a year ago and 33.6% last quarter to 27.3%, driven by lower volumes that negatively impacted manufacturing overhead absorption.

Operating expenses were $8.9m, back up slightly from last quarter’s $8.7m but cut from $9.3m a year ago, as Emcore continues to hold down expenses while it works through the cable TV inventory headwind.

Operating loss was $2.2m (operating margin of -12% of revenue), compared with an operating profit of $0.6m (+2.5% margin) last quarter and $3.7m (+11.4% margin) a year ago.

Likewise, pre-tax net loss was $2.1m ($0.08 per diluted share), compared with a profit of $0.7m ($0.03 per diluted share) last quarter and $3.7m ($0.14 per diluted share) a year ago. Capital expenditure (CapEx) was just $850,000 (cut further, from $2m last quarter). Depreciation was $1.4m. During the quarter, cash and cash equivalents nevertheless rose by $1.3m, from $64.2m to $65.5m.

For fiscal third-quarter 2018 (ending 30 June) Emcore expects revenue of $17-19m, as the continued inventory overhang in broadband cable TV will be largely offset by growth in Navigation and Chips.

“We expect additional growth in the PON market in the third quarter,” says Rittichier. “Outlook for this market is limited more by third-party testing capacity than our internal fab capacity. However, we expect to have this bottleneck resolved in the beginning of the fourth quarter,” he adds. “Although we don’t sell chips directly to [China-based] ZTE, our supply chain checks have shown us a few places where we could see some headwinds with our customer’s customers. We have factored this into our forecast for Q3.”

“In our February call, we estimated that it would take our [CATV] customer approximately two quarters to work through this overhang. However, predicting the exact slope of the recovery down to the month remains outside of our normal forecast window,” says Rittichier. “Offsetting the inventory headwinds however is the potential for new product introductions with the same customer which would use a different part from Emcore versus the ones that are currently in inventory,” he adds. “We believe the third quarter represents a trough in demand from this customer and that the slope and sustainability of any ramp will be predicated on our customer’s product mix for the next several quarters. We have a terrific relationship with this customer and we're working together in a positive, productive process to meet both of our operational goals.”

“Beyond these customer-specific issues, we continue to see solid demand in the cable TV transmission market as a whole. As we look to the third quarter, we expect the demand strength to continue and we placed additional inventory in assembly to better take advantage of any upside,” notes Rittichier. “Demand for linear optics space, DOCSIS 3.1 remains on a solid footing, while the number of linear EML design wins increases. There are now five LEML transmitter designs in the market, up from two in 2017, and the total volume of LEML sales through Q2 is a 130% of what we saw in all fiscal 2017. In addition, we are expecting at least two more design wins in fiscal year 2018.”

See related items: 

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

Emcore’s quarterly revenue up 38% year-on-year to $31m as DOCSIS 3.1 growth continues

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