Good day, and welcome to the EMCORE Second Quarter 2021 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Tom Minichiello, Chief Financial Officer. Please go ahead..

Thank you, and good morning everyone and welcome to our conference call to discuss EMCORE's fiscal 2021 second quarter results. The news release we issued yesterday afternoon is posted on our website, emcore.com. On this call, Jeff Rittichier, EMCORE's President and Chief Executive Officer will begin with a discussion of our business highlights.

I will then update you on our financial results for the quarter, and we'll conclude by taking questions. Before we begin, we would like to remind you that the information provided herein, may include forward-looking statements within the meaning 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 the business.

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

Management cautions that these forward-looking statements relate to future events or 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 in the 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, which are included in the company's filings available on the SEC's website located at sec.gov, including the 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 operating performance and facilitates comparisons across reporting periods.

Investors are encouraged to read these non-GAAP measures, as well as the explanation and reconciliation of these measures, to the most comparable GAAP measures included in our news release. I'll now turn the call over to Jeff..

Thank you, Tom, and good morning everyone. EMCORE's second fiscal quarter revenue was up 15% over Q1, coming in at $38.4 million. More importantly, GAAP profitability increased from $0.08 to $0.13 per diluted share, a 63% increase.

This combination of topline growth and disciplined expense control, resulted in excellent flow-through in the P&L producing a non-GAAP operating profit of $5.9 million or 15% of revenue.

This represents EMCORE's third consecutive quarter of growing profitability and represents the best financial performance that the company has turned in on a non-GAAP basis since at least 1997. Our strong financial performance happened against the backdrop of operational challenges.

Of particular note were semiconductor shortages that we overcame in cable television transmitter production. Although, we believe we're in good shape in terms of inventory for the June quarter, we are already working potential flash points for the September and December quarters, since we expect these shortages to last at least six months.

Of particular concern or RFICs and passives, which are being used in 5G and Wi-Fi six systems. If supplies get tighter, we have designs that use alternative parts and believe that we can deploy and qualify them on short notice. Inventory levels increased a bit quarter-over-quarter.

However, we expect that this will resolve itself completely, as we finish the transfer project from Beijing to Thailand. The transition of our cable TV manufacturing operations to Hytera's Bangkok facility has reached a point, where we will be adding additional transmitter manufacturing equipment to increase capacity in Thailand.

Transmitter yields in Bangkok have remained solid and we expect to see production increases in Thailand in the June quarter. While COVID-19 concerns have generally been reduced in the US, Thailand has only vaccinated a limited number of people to date.

The infection rates in the Bangkok area are worrisome and could disrupt our cable TV production plan. Consequently, we will watch things closely there, until disease incidents decline and the vaccination rates meet the goals of the Thai government.

Entry restrictions for foreign workers into Thailand have been loosened a bit, giving us an opening to get our Beijing team into Bangkok to finish the transfer. However, this window could close at any time. Turning to individual business areas, cable TV and sensing shipments drove strong performance in the Broadband unit.

Chips were up slightly as well. MSOs continued to invest in their networks to break bottlenecks, created by bandwidth demands, from work-at-home initiatives and even home security systems. Somewhat surprisingly, MSOs have mentioned that video doorbells are placing significant bandwidth demand on networks and that their use is growing rapidly.

Recent public comments from MSOs and major OEMs are consistent with our longer-term order book, which now extends well into the March '22 quarter. Although, we are always cautious about the cable TV business, given its cyclical nature our backlog remains strong.

Looking beyond the very near-term in cable TV, we're seeing additional evidence that our proprietary linear optics will continue to lead the industry for many years. In the 2050 project, which was an extensive survey of MSOs sponsored by ATX Corporation and freely available on their website, several points were made that are worthy of quoting.

ATX reported more than 60% of cable operators with more than 1 million subs expect to be serving customers from their HFC networks 20 years into the future. Nearly 30% of cable operators serving one million or more subscribers, expect the lifetimes of their HFC networks to extend 30 years.

As I discussed, Broadband had a great Q2, led by cable television. However, the Broadband business unit generated important successes outside of cable TV. We had strong sensor demand in the quarter, which we expect to continue for the foreseeable future.

Broadly our LiDAR and sensing components continue to garner interest from a wide variety of potential customers. Outside of sensing, we continue to rack up more design wins for highly differentiated chip products and expect to see growth materialize toward the end of calendar year 2021.

We're encouraged by the demand that we see for our new chip and sensing products and see a bright future for the Broadband business unit beyond its cable television roots. Aerospace and Defense declined slightly due to seasonal variation in delivery dates from QMEMS and Defense Opto even with FOG being slightly up.

Margins were right around where we expected them to be. As we discussed last quarter, our QMEMS team in Concord announced several exciting new products. The SDI170 was announced, which is our first product for airborne weapons platforms such as the JDAM smart bomb.

Perhaps more importantly, the 170 has gone through rigorous testing at a foreign national laboratory and received high marks for its performance. The SDI500 went through even more rigorous testing at a US defense laboratory and came out number one against 18 other IMUs. These validations bode well for the future of our QMEMS products.

Demand for our Defense Optoelectronics products remained solid with shipments for the FAA control tower, making up a significant fraction of revenue. Production orders for Fiber Optic Gyro products remained steady to slightly up with additional contract revenue for preproduction non-recurring engineering driving down our net engineering costs.

The excitement over the EN-300 is growing and it continues to be evaluated by six Tier 1 prime contractors. We made steady progress in design validation and qualification testing for our FOG products and are beginning to see the first signs of a return to normal operations within our customer base.

As the number of vaccinated personnel increase both here at EMCORE and with our customers, we expect to see a trajectory toward normal qualification scheduling.

While we're seeing the first signs of this improvement it hasn't become a significant change just yet even in states like Texas and Florida, where COVID-19 restrictions have largely been lifted.

Moving on to overall guidance for the second fiscal quarter, we're expecting to see stronger than normal performance from our cable TV products with slightly increased revenue from our other products. The biggest notes of caution remain tied to semiconductor supplies and any unexpected changes with COVID-19 infection rates in Thailand.

Taking all of this into consideration, we currently expect revenue to be in the range of $40 million to $42 million. With that I will turn the call back over to Tom..

on May 18, the 16th annual Needham Technology and Media Conference; and then right after -- excuse me, right after Memorial Day on June 1, the Cowen 49th Annual Technology Media and Telecom Conference; and on June 2, the 18th Annual Craig-Hallum Institutional Investor Conference. We plan on providing further details prior to each event.

So with that, we will now open up the call for your questions..

Thank you. [Operator Instructions] Our first question is coming from Jaeson Schmidt with Lake Street. Please go ahead..

Hi, guys. Thanks for taking my questions. I just want to follow-up on your comments on the supply chain constraints.

Are you seeing any impact on gross margin or expect to see any impact on gross margin just with increased freight cost and things of that nature?.

Hi, Jaeson. Not really. There's a number of let's call bottleneck components where we've seen some pretty outrageous price increases since you're going out to brokers and smaller distributors that have figured out that they're the only ones that have supplies.

But right now it doesn't look like any of that makes up a substantial fraction of the cost, so I don't think it is really going to hurt us. The other thing is that in the case of the cable TV transmitters, of course, we do have fixed prices coming from our supplier, and so they have to eat some of those costs. So I don't think it's going to hurt us..

Okay. That's helpful. And obviously, the Broadband segment continues to see some really nice traction with that order book extending even further out.

Just given that is it fair to assume that you guys will be able to sort of bought back that traditional seasonality in the December and March quarters?.

As it looks right now, especially, because I just reviewed some manufacturing schedules, certainly, we're not expecting to see much in the way of seasonality change in the December quarter. Going into March probably not much, but it's way too early to tell for sure. A lot of things move around and we try to accommodate customer requests.

But right now the order book is quite full in March..

Okay. I’ll jump back in the queue. Thanks a lot guys..

You’re welcome..

Thank you. [Operator Instructions] Our next question is coming from Richard Shannon with Craig-Hallum. Please go ahead..

Great. Hi, Jeff. And thanks for taking my questions. Congratulations on some nice numbers here. Maybe quick tactical questions for Tom on the guidance here. You've given a very nice revenue number here and you're suggesting that the cable TV is most of the growth here.

How should we think about the rest of the P&L here? I would imagine that gross margins could probably move upwards somewhat.

And how should we think about the OpEx movement as well here?.

Sure, Richard. The gross margin and the OpEx has been steady the last few quarters as you can tell from looking at the -- if you look back not just this quarter, but even the two quarters prior. So we'd expect more of the same. We like where the gross margins are for Broadband in this 43% range.

It could move a little bit up, a little bit down in any given quarter, but it's likely to get a little bit better with volume increasing in the next quarter. There's always mix and other absorption components that could that could change that, but that's what we expect to see.

And then on A&D, as we've discussed in the past, that's a gross margin again that's been steady as has been the revenue in that business segment over what's now probably five or six quarters. And that's all about scale in the gross margin for A&D. So we probably expect it to be pretty consistent in the near term.

And then OpEx is -- it came in lower than expected this quarter. But there is a -- as you probably heard in my prepared remarks there's a -- we transfer engineering labor expenses when it's attached to NRE contract revenue and that hit a high point this quarter. And so there was more of that moved on the P&L.

So we would expect a little bit less of that next quarter and you're probably looking at operating expenses back in the range where we've been, which is in the mid 9 million..

Okay, great. That's helpful. Jeff, a question here as it relates to your comments on the supply constraints past this quarter. You noted some issues here and well-known in the industry.

How should we think about the impact on potential trends in your broadband or more specifically cable business going beyond the June quarter, obviously, a fantastic number here for June.

Are you suggesting to us it's going to flatten out for a few quarters or a couple of quarters while these get burned through, or could we actually see it down sequentially from June after that?.

Well, let me fire up my crystal ball here. Right now we think we understand and certainly in the June quarter, we feel pretty comfortable that we've got the supplies sorted through. And the things we're counting on are largely in hand at this point.

I wouldn't call it a shocker necessarily, but the behavior we've seen out of some of the semiconductor manufacturers is orders, which had been confirmed three times all of a sudden get pushed with no warning.

And so it's -- our supply chain's view of the world is that a bird in the hand is what really matters in terms of getting a hold of the components. There are -- as I pointed out earlier there are a couple of little -- there's literally half a dozen components that are what I'll term the bottleneck components.

And we are actively going after those for Q4 September quarter and December quarter. The good news is that we don't need hundreds of thousands or millions of these things. And so we can go into the smaller distributors and be successful. So I don't think it's going to hurt us.

And beyond the current quarter in terms of guidance, I see reasons why cable TV could still continue to move up a bit in terms of revenue. But we've got to let our customer's scheduling tell us that. And it's a little hard when we start talking about the September quarter shipments to know exactly where we're going to end up.

Does that answer your question Richard?.

Yeah. Yeah, that's very helpful. Thanks for that view. My last question before I jump in the queue here is probably a multipart one here, Jeff. You referenced it in your comments and your -- really we're talking about the press releases we've seen from you in the last month or so on your two new SDI products, which seem very intriguing.

Going after some markets that have been -- they have been sole-sourced for a long time here and showing some very strong performance specs here.

How do we think about these -- getting design wins going through validation qualification processes and eventually showing benefit to your income statement? What kind of time frame? These obviously are -- could be long lead-time projects. So I want to get a sense of when we start to see some success from those in the income statement..

Yeah. If we were in a normal world, I think it would be very easy to lay this out. The challenge we've got is that in some cases customers are really spending limited amounts of time in the office. And we're certainly starting to see some of that break now in terms of scheduling.

But for let's call it, it's well-known that the -- for example the SBI170 is a form fit and function compatible replacement for the Honeywell HG1700. So in semiconductor parlance, we're going to try to engage in some socket stealing. And for applications like that, you can typically get qualified in six to nine months.

And then you start into a lower volume production as tens multiples of tens even 100 a quarter and then it can move up from there. So I think there's a chance that some of the stuff we could see right at the end of the calendar year. But certainly into 2022 there should be a pretty significant impact from some of these products..

Okay, great. That's a great perspective. I think that’s all the question from me. I’ll join back in the queue guys. Thank you..

Richard, let me give you one more thing. Interestingly I mentioned that the SDI170 was tested in a foreign national laboratory. One of the things they did was validate that our communications protocols, the electrical performance of the communications interface was indeed drop-in.

And so that while technically not terribly demanding is one of these things that you really want to make sure you get right. And we were glad to see these guys come back and say, yeah, you got it right..

Great additional perspective, Jeff. Thank you, and that's all for me..

You're welcome..

Thank you. That concludes today's question-and-answer session. Mr. Rittichier at this time I will turn the conference to you for any final remarks..

Thank you. And I'd like to thank all the rest of you for your interest in EMCORE and your time and attention on the call. I also want to recognize our team for such a great quarter and producing outstanding financial results. Please take stay safe everyone and goodbye..

Thank you. This concludes today's call. Thank you for your participation. You may now disconnect..