Ladies and gentlemen, thank you for standing by, and welcome to the EMCORE Corporation Fiscal First Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, today's call is being recorded.

At this time, I'd like to turn the conference over to Erica Mannion of Sapphire Investor Relations. Ma'am, please go ahead..

Thank you and good morning everyone. Before we begin, we would like to remind you that the information provided herein may include forward-looking statements within the meanings of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act of 1934.

These forward-looking statements are largely based on our current expectations and projections about future events and trends affecting our business.

Such forward-looking statements include in particular, projections about future results, statements about plans, strategies, business prospects, changes and trends in the business in the markets in which we operate.

Management cautions that these forward-looking statements relate to future events or our future financial performance and are subject to business, economic, and other risks and uncertainties, both known and unknown, that may cause actual results, levels of activity, performance or achievements of the business or our industry to be materially different from those expressed or implied by any forward-looking statements.

We caution you not to rely on these statements and to also consider the risks and uncertainties associated with these statements and the business that are included in the Company's filings with the U.S.

Exchange Commission that are available at the SEC's website located at www.sec.gov, including sections entitled Risk Factors in the Company's Annual Report on Form 10-K.

The Company assumes no obligation to update any forward-looking statements to conform such statements to actual results or to changes in our expectations, except as required by applicable law or regulation.

In addition, references will be made during this call to non-GAAP financial measures, which we believe provide meaningful supplemental information to both management and investors. The non-GAAP measures reflect the Company's core ongoing performance and facilitate comparisons across reporting periods.

Investors are encouraged to review these non-GAAP measures, as well as the explanation and reconciliation of these measures to the most comparable GAAP measures included at the end of our earnings press release included as Exhibit 99.1 to the Form 8-K, we furnished to the SEC yesterday.

These materials can also be found in the Investors section of our website at www.emcore.com. With me today from EMCORE are Jeff Rittichier, President and Chief Executive Officer; and Tom Minichiello, Chief Financial Officer.

Jeff will begin with a review of the first quarter and business highlights, and Tom will review the financial results before opening the call up for questions. I will now turn the call over to Jeff..

redesign of some of the wafer fab workflow and scheduling to allow for further headcount reduction; two, we took advantage of additional synergies with the SDI integration; and three, shed some additional personnel in R&D. Tom will provide you the details on the cost savings and timings in his remarks.

Taken together, and as evidenced by the progress we made in the first fiscal quarter, we believe we're on a clear path to deliver sustained positive EBITDA starting in the third fiscal quarter, followed by profitable top-line growth as our new programs in Aerospace and Defense begin production.

Moving on to guidance for the second fiscal quarter, I'd like to expand on my concern about the coronavirus outbreak in China and possible impacts to the business. We're at a critical juncture in our transition and schedules depend on the availability of our personnel and their ability to travel freely within the boundaries of our supply chain.

To that end, we were happy to learn that all of our Chinese personnel are healthy and unaffected by the coronavirus thus far. One person that may have been exposed is taking measures to ensure he's not affected before returning to work.

Because of travel difficulties, we're scheduling a one-week delay in the reopening date for our Beijing facility, now February 10, and suspect that we'll experience modest delays due to travel restrictions both inside and outside of China.

Many of the major airlines have announced overall service reduction as well as stringent restriction on travel from China. This may have an impact on the timing of the EA shutdown if line audits and PCNs need additional work to complete.

Furthermore, if our raw material supply chain is affected, or we have to respond to late orders in the quarter, which is common in Q2, it could negatively impact revenue. In summary, we're cautiously optimistic about the state of production in Asia, but recognize that the Chinese situation is fluid and unpredictable.

Consequently, we're taking a more conservative view and expect revenue to be in the range of $23 million to $25 million down slightly from Q1. With that, I will turn the call over to Tom..

$4.5 million was paid in conjunction with the Phoenix litigation matter, $3.4 million was used to fund business operations, and $2.3 million was received from the sale of cable TV production assets.

To update you on the marketing of our Concord facility that we acquired with The Quartz MEMS business last year, as announced in early January, we entered into a purchase agreement for a sale leaseback transaction that is now expected to close on February 10 and to net out cash proceeds of approximately $12.8 million.

With that, we'd like to now open up the call for your questions..

Thank you, sir..

In closing, I'd like to thank all of you for your time this morning and your interest in EMCORE actually. Sorry, I jumped the gun. It's time for questions..

Thank you, sir. [Operator Instructions]. Our first question will come from Jaeson Schmidt with Lake Street Capital Markets..

Hi guys, thanks for taking my questions. Jeff, just want to start with a clarification on one of your earlier comments.

Did I hear correctly, you expect the cable business to be down 15% to 20% here in March?.

Historically that's been the trend. Every year Q1 is down from Q4, calendar Q4. So it dropped down and then it climbs throughout the year sort of looks like a sawtooth and that seasonality goes back 20 years.

So historically that's where the trend has been whether it's 10%, 15%, 20%, it's a little too hard to say at this point but cable is always down in calendar Q1..

Okay, understood.

And then I know the situation is fluid, but can you help us try quantifying the potential impact here in March from the coronavirus and some of the travel restrictions that you're seeing?.

Yes. So what's happening in Thailand right now is there are restrictions on personnel traveling directly from China, okay. And if you've been in China within a two-week period, I believe the travel restrictions are pretty significant.

So we have scheduled line audits and with a couple of our major customers in cable television and we're going to have to support those efforts with personnel from the U.S. and we don't have a perfect match with the headcount reduction between the manufacturing engineers that still are here inside the business and the needs of -- for the line audit.

So it's a tougher situation than we'd like. And it's a sort of thing well, where if a customer comes back and ask for additional samples to be made, or there's a discrepancy in the audit that gets revealed, we need to address that and it can more than anything, what's likely to happen is it would affect the actual shutdown date of EA.

But depending on the small amount of residual capacity that we have here in Alhambra, to produce certain things like laser modules, we could get caught not being able to produce everything that would be ordered for the quarter. And so that's why, we're striking a note of concern. So if anything happens, it's temporary.

It could move things around, maybe a month or two, in terms of actual dates and times for everything to be completed. We've got a plan to support these efforts from the U.S., but we just don't have a whole lot of folks here to do it. So we're being cautious about it.

I mean we've seen a pretty significant set of restrictions emerge from China, or emerged from companies or countries surrounding China and we need to be mindful of that..

Okay, that makes sense. And then the last one and I'll pass it. It seems like operating expenses in December came in better than what you guys had expected with the previously announced restructuring and then this new round of restructuring.

How should we think about sort of the pro forma OpEx level here in March?.

Jaeson, Tom here. Good morning. I think in March, let me put it this way. I think going forward, we're going to hold the line at the current level, we were at $9.4 million this quarter.

And in fact over time, let's say another couple of quarters out back half of the fiscal year; we'd like to drive that down further, in part due to the new reduction that we just spoke about.

Getting to your specific question about the March quarter, we may not see that much of a change between quarters because the restructuring is going to happen in phases, and much as it gets completed at the end of June.

We also had some kind of one-time credits this quarter that won't repeat but that's been washed out with reductions we're taking company-wide just in the normal course of managing expenses. So look for us to hold the line in the short-term next quarter or two, but I expect it to go down back half of the fiscal year..

Yes, Jaeson, everybody's been notified, but not everybody rolls-off because there's certain things that have to be completed before the full impact of the change itself..

[Operator Instructions]. Our next question comes from Tim Savageaux with Northland Capital..

Good morning, Tim..

Hey, Tim..

Good morning. Good morning and congrats on the results for the quarter at least in terms of the margins and EBITDA break-even and maybe I'll start there. Obviously, you're guiding down a bit. And it would be big kind of back in the loss position here.

And maybe you mentioned this in the commentary, but I guess any revised thinking on especially given the OpEx decline for the timing to re-obtain EBITDA break-even or profitability, however you want to go about it.

On the one hand, and then I just want to sort of focus back on the drivers of the top-line guide, Cable TV seasonality, understood and it looks like by itself, that's the delta in terms of sequential declines, but are we seeing a situation where maybe growth on the defense side of the business is blunted by the China issues, or is that only impacting cable and then I'll follow-up..

Yes, so couple of things. The all of the defense products are made in the U.S. So there's nothing going on in China that has any impact on the Defense business, either Quartz MEMS or the Optoelectronic piece. Yet, we're essentially looking at cable as call it the principal culprit, if you will, for softness in the quarter.

The challenge is just predicting the net impact of a whole bunch of really big changes. And if, for example, I mean, we've already lost a week with the reopening of Beijing just due to travel difficulties, and I don't think that's going to go away. So we're going to be cautious with the Cable TV piece.

As far as overall profitability goes, certainly Q3 is -- we're expecting to have an adjusted EBITDA positive quarter. Could we get there in Q2? Whole bunch of things would have to line-up in a positive direction that we just can't count on given some of the uncertainties.

Just small changes in timing could push us a couple hundred thousand bucks in one direction or another easily and two or three of them pile up. Well, it's isn't as favorable as we would like it.

But by the same token with the expense controls and now eliminating a lot of the under absorption problems that we see because in China, for example, we have been taking down headcount as equipment gets shipped, so it's not as though the shutdown at EA is a binary event. It's not.

The largest chunk of expense in EA that remains is the manufacturing engineering and supply chain team that really run that business. And so until the transition is complete, you can't take any action on the professional headcount side of things because you got to make sure you can ship otherwise you'd have a very, very big problem.

Did that answer your question, Tim? Did I miss anything?.

No, that's good. And I would follow-up on kind of top-line trends on the Defense side of the business and the new segment reporting much appreciated by the way and very helpful.

And that is you saw sequential revenue decline in the December quarter, while little bit of a surprise, you mentioned the FOG decline, but was that anticipated, I guess or just any color there would be helpful? And then as we head forward, doesn't seem to be any offset from growth in Defense modeled into the March quarter or is it the case that any of that growth is kind of offset by the greater than the seasonal cautionary aspect of the cable TV guide from the China issue?.

Sure. So if you sort of go back to my prepared comments, and I'll give you a little color on the FOG piece in particular. Prepared comments are that we talked about good multi-quarter visibility in Defense Opto and Q MEMS. And the reason for that is you've got production programs where orders are released in very large chunks.

On the FOG side, there's only a handful of production programs at this point. Now we had done a whole bunch of sponsored R&D programs last year, these are the five projects that are in the process of making their way through qualification, flight testing, whatever you want to call it, in the case of the airborne platforms at least.

And the thing about these qualification tests, in Defense they're very expensive to do. And so Defense primes do them in blocks. So for example, the test program that we're on in one particular case includes a whole bunch of upgrades in the software.

Actually, there's a mechanical upgrade for parts of the turret and so the testing doesn't take place until all of those things are ready. And if you know the ground tests are delayed, then we get pushed, we get pushed out, we have no control over that.

So what's happening in the FOG world is that as the non-recurring engineering programs that we took two years ago, one-year ago, in some cases become prototypes, you have a choppy period where you're not going to be smoothly transitioning into larger volume production where it gets very, very predictable.

And that's just the period we're in with FOGs right now. It's a little unusual that there's so many of them, but it sort of reflects the way that those programs came in because they tend to be -- they came in together in a group of three within a few months of each other.

And so what we're going to expect to see as the various projects get through flight testing qualification that the whole thing smooths out, you see more predictable trajectory on the FOG side of the world. So it's really nothing that we didn't expect. We're not able to control the schedules for these blocks of changes that gets qualified together.

So that's the source of it all.

Did that answer your question, Tim?.

Sure.

For next quarter in particular, so it's fair to say you expect kind of I guess a flattish outlook for the Defense business?.

It's just a little bit too early to say there's a couple programs where we may start to get some, some production orders and we're prepared to deal with that. But we're going to be conservative this time because partially because cable TV has a few more issues that slow us down.

We don't want to drop below the mid-point of the range, if we can avoid it at all. So it's an overall hedge.

Tim?.

We did lose, Tim..

I think we may have lost, Tim..

We'll move onto our next question. Our next question comes from Dave King with B. Riley FBR..

Thank you, good morning. First, I may have missed this. But then so gross margin of 30%, that's about two quarters ahead of the plan.

Can you just talk about maybe your end of the year fiscal fourth quarter? What's that gross margin might look like, what your target is?.

Yes, hey, good morning, Dave. It's Tom here. So I think back half of the fiscal year, we're expecting and forecasting in our plans that, that that margin and maybe even a little higher than that. If you look now at the segment reporting, you'll see that the quarter we just reported on A&D was 33%, Broadband was 26%.

So if you take the revenue weight, we ended up at 30% to a consolidated. Back half of the year in A&D, we can hold that margin in fact with higher volume, can improve upon that.

And then certainly in Broadband once we get through all the EMS outsourcing in Asia, and we talked about that on the last call that the Broadband margins can also begin to approach that 30%, and all of this is dependent on mix in both segments and in total. So that's what we're planning our business around and expecting to see in the back half.

Now, in the next quarter, we may see something different because we're transitioning out in Asia. We did have a very rich favorable margin, a mix in the margin this quarter. And that can change in any given quarter, but the trend line is 30% or better and improvement on both segments..

Hey Dave, let me give you one other little piece of color on Tom's comments about margin because one of them is sort of under the waterline in terms of its visibility. One of the important things that happened last quarter is that the product sales matched up very well with the costs and where they're incurred. Okay.

So for example we would have had an uptick over in an area where we have EMS as the manufacturing arm. Then the results wouldn't have been as good because the under absorption, if you will, in our own assembly facilities wouldn't have been dealt with so efficiently.

So think of it this way that as the costs come down as we get to EMS, we fully decouple the P&L from this effect. But in the current quarter, a slightly more cable TV rich mix, if we were to get lucky would have an outsized impact on the amount of absorption, right? So you got to dismantle the costs to get rid of the absorption issues.

And in Q4 -- Q1, I'm sorry it was a favorable condition.

Okay, that makes sense?.

Yes. Thank you.

And then my second question is on OpEx, Tom, once again, you said you guys are planning to drive down further, I was wondering if you can just quantify that?.

Sure. So I think it’s 9 for this quarter, we had some one-time credits in there that without that it would have been a little higher, but still a dramatic improvement with all the reductions we're doing in the restructuring plan and just in general, and so call it a little higher than that on the current run rate.

But with the new rep and continued focus on the expenses, over time we should be back to this 9.4 number, if not lower, that there's another variable here that's, that could swing it one way or another. And that's project costs material for R&D. That was a big reason why it came down dramatically quarter-over-quarter.

But we still have some of that in the number. So to the extent we can further reduce that we can get down to like a 9 number quarterly for non-GAAP OpEx..

Yes, Dave, it sounds like you may have got on the call just a little bit late. I think the key point here is there's about $1 million a quarter in expense reduction that's going to roll-off over the next two quarters. So that's the sum total of the new changes..

Got it..

And you actually heard that..

Got it.

And my last question is on, you talked about Broadband -- Broadband or specifically cable TV seasonality, can you just talk about A&D seasonality?.

Yes, it tends to be okay. So I'm going to have to break it up into a little bit of -- give you a little granularity.

So this is the first year that SDI had become part of EMCORE and they had finished up their fiscal year in traditionally in the calendar Q4 and because of that they tended to have let's call it the pushing the last minute to try to bring in all the revenue in Q4.

We've essentially discouraged call it the pull-in and so the Q4 number to Q1 number has a bit of let's call it a seasonal component, but it's not real. It's just because of the historical calendar Q4 positioned with respect to fiscal. So they're really in truth is not a lot of seasonality in Q MEMS if any and in Defense Opto there's really none.

FOG, there's also really none, right. Occasionally on the government fiscal year, you could have a customer that is looking to push out a few orders because they don't want to be stuck with inventory or pulling a few things. If there's -- if the acquisition is being done with their capital dollars per test set, and sometimes that happens.

But by and large the A&D business is decoupled from seasonal fluctuations. It's a teeny bit of it this quarter just because we got to sort of wash it out of the system. But again, it's not a real seasonal component; the only place where we have that is cable television..

Got it.

So to summarize, I mean without that -- without this corona impact or uncertainty, typically in the current March quarter, broadband will be down but then A&D will be up typically or flat?.

Again there's no seasonality between them. So there's -- it's just little tiny, relatively small movements in when customers want things. The only guy that's -- that's pushing the seasonality is cable and the coronavirus right now, I mean, it hasn't affected our people, where it's likely to hit us is our ability to travel to finish up the transition.

What's the cost? I don't know maybe a month or two and possibly it limits our ability to respond to last minute orders. But we're not seeing this as let's call it a disaster unless something changes that we're completely unaware of and I will tell you, we're talking to our people every night. So it's just a bit of caution in the current quarter.

But we should see a smaller effect of seasonality going forward just because cable is becoming a smaller part of the company..

Thank you. At this time, I'll turn the call back over to Jeff Rittichier for closing remarks..

Yes, so now I get to make my closing comments. I want to thank everyone for waking up early this morning and your interest in EMCORE and I'd also like to acknowledge our employees and thank the team for their hard work and commitment. I think they did a very good job in Q1 and it's reflected in the results. Thank you everyone..

Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect..