Please stand by. Good day and welcome to the EMCORE Third Quarter 2022 Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Tom Minichiello, Chief Financial Officer. Please go ahead sir..

Thank you and good afternoon, everyone, and welcome to our conference call to discuss EMCORE's fiscal 2022 third quarter results as well as the acquisition of the Inertial Navigation Business from KVH Industries that we announced today.

The news release we issued this afternoon covering both our fiscal 3Q results, and the acquisition is posted on our website emcore.com. On this call, Jeff Rittichier, EMCORE's President and Chief Executive Officer, will begin with the discussion of our business highlights.

I will then update you on our financial results, 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, including those with the acquisition of KVH's Inertial Navigation Business statements about plans, strategies, business prospects and changes and trends in the business and the markets in which we operate as well as the anticipated benefits and costs of EMCORE's acquisition of the Inertial Navigation Business acquired from KVH Industries.

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 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, 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 review 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..

Space & Navigation and KVH. These are opportunities that we started working on as early as 2017. We've also told investors that we have three primary criteria for acquisition. Number one, it's got a fit within our strategic umbrella. Number two, it must be quickly accretive and three, must have additional operating synergies.

Space & Navigation met all three criteria in the first quarter within EMCORE, and we expect that our latest acquisition will perform as well. We think that we've just acquired a great business and an excellent team.

We expect the addition of KVH's Inertial Navigation products located in Tinley Park, Illinois, to generate over $30 million in revenue on an annual basis and be EBITDA positive with cost synergies anticipated to play out in the first two years.

Value creation opportunities exist at every level of the P&L in both our existing operations and the Tinley Park operation. EMCORE's chips and packaging technologies will ultimately go to Tinley Park, and they will produce coils that will lower our costs.

On the demand side, we were impressed with the breadth of the customer base in both commercial and defense applications. In particular, the U.S. Army is an important customer and the armored multipurpose vehicle or AMPV, is just about to go into production and should run for a very long time.

KVH has opened up some important applications in industrial vehicles and robotics, which should represent strong growth opportunities going forward. Now I will move on to guidance for the fourth fiscal quarter.

We will be adding approximately half a quarter's worth of revenue from Tinley Park and are expecting a rebound in QMEMS shipments within the quarter. However, within Broadband, chips should continue to grow a bit, but cable TV sales should weaken further due to the dynamics that I described earlier.

From this point forward, Aerospace and Defense will be the dominant business at EMCORE. For the fourth fiscal quarter, we are expecting revenue in the $24 million to $26 million range. The company has reached a critical inflection point with the addition of KVH's Inertial Navigation products.

And coupled with our data center chip business, EMCORE has an increasingly bright future. With that, I will turn the call back over to Tom..

Thank you, Jeff. Consolidated revenue for fiscal 3Q was $23.7 million, with 57% coming from Aerospace and Defense and 43% from Broadband. A&D segment revenue was $13.4 million, a $4.4 million increase when compared to the prior quarter.

The sequential quarter A&D revenue growth was largely attributable to the addition of Space & Navigation revenue of $4.3 million, which was acquired from L3Harris on April 29. The rest of the A&D segment revenue was up slightly, driven by increased sales of Defense Optoelectronics products and higher FOG revenue.

However, this was almost entirely offset by lower sales of QMEMS products which was affected by multiple supply chain delays and shortages as well as a COVID outbreak at our Concord facility. Broadband revenue was $10.3 million, a $13.4 million decrease when compared to fiscal 2Q.

Sales of our cable TV products continued on a downward slide, decreasing by $14 million, while noncable TV Broadband revenue was up $600,000. Let me now turn to the rest of the operating results, the focus of which will be on a non-GAAP basis. Consolidated gross margin was 18% in fiscal 3Q compared to 30% the quarter before.

The decrease was primarily attributable to under absorption of fixed overhead across both the A&D and Broadband segments.

As it relates specifically to the A&D side, where gross margin was 13% compared to 15% in fiscal 2Q, the under-absorption, which was largely due to lower QMEMS volume was partly offset by improved production yields and a favorable contribution from Space and Nav and Defense Optoelectronics.

Operating expenses were $10.5 million in fiscal 3Q compared to $10.4 million in the quarter before due largely to an uptick in travel as well as increased insurance expense in G&A. Moving to the bottom line, the changes to our revenue levels and gross margin in fiscal 3Q resulted in an operating loss of $6.3 million.

Adjusted EBITDA was negative $5.1 million. Net loss was or $0.17 per share. Shifting to the GAAP results for a moment, fiscal 3Q net loss was $7.6 million or $0.20 per share. This included cost of $700,000 associated with the Space and Nav acquisition and a $1.3 million gain on the sale of cable TV equipment to our third-party manufacturer fast train.

Note that this was the final shipment of equipment completing our transition of cable TV operations from in-house to fast train. Turning to the balance sheet, we had cash of $75.1 million at June 30 compared to $80.9 million at March 31.

The $5.8 million decrease included $3.5 million used for operating cash $1.6 million in CapEx and $2.4 million at the closing of the Space and Nav acquisition. Partly offsetting these uses of cash during the quarter was $1.7 million in proceeds from the equipment sale.

In connection with our all-cash $55 million acquisition of the Inertial Navigation business from KVH, the deal was paid for with $35 million from cash on hand with the balance being financed with a new ABL credit facility provided by Link Fire Capital, which at close consisted of a $6 million senior secured machinery and equipment term loan and $14 million drawn down from a revolving line of credit.

With that, we are now opening up the call for your questions..

[Operator Instructions] We'll take our first question today from Richard Shannon with Craig Hallam..

Hi Jeff and Tom thanks for taking my questions here. Let's see a few questions come to mind here. Let's quickly Jeff touch on the cable TV comments you mentioned here. I'm assuming this is your - much bigger customer here that's exited the business.

Is that accurate?.

Yes, exactly right. There's, really only two large, what I would describe as large OEMs in the business. And those are CommScope and Cisco..

Would you take a guess as to how you think the competitive dynamics here settle out as we get past the turbulent times as you mentioned a couple of times here.

I mean, is this the potential for share gain or share losses any way you can kind of help us think about those in a steady-state fashion?.

Yes it's - I'm afraid the answer is going to take a little longer than I normally like, but I think it's important that it's a complete answer. So there's sort of a strange competitive dynamic in the cable business anyways. The only other supplier that CommScope buys from is Sumitomo and the only other supplier that Cisco had bought from was AOI.

And Cisco's primary business had been with Charter Communications. And since they are 100% linear EML and all the rest of their DFB business, we own 80% share is actually a pretty small amount that was with AOI at Cisco and roughly the same amount with Sumitomo over at CommScope.

So it's a little bit of an unusual situation to start, but it's important to, I think, give you that color on things. So the thing that we had been watching with Cisco was after they bought Scientific Atlanta's cable business, they ultimately got rid of the set-top box operations to Technicolor.

It was only a couple of years and then they gradually kept taking down the headcount. And about two to three years ago, they eliminated most of their development engineers. And at that point, I think we started to wonder whether or not they were going to continue at all. And in fact, it was -- in our view was it was just a matter of time.

And so sure enough, some period of time ago, a couple of months ago, those end-of-life notices popped up on the website, and it was all of the Remote PHY products and all the HFC products. And so the question is what happens from here. So Cisco is sitting on inventory as well as CommScope. So certainly, there's going to be efforts to move that.

Our understanding is that there are serious conversations going on between the MSOs and Cisco about the abruptness with which things have happened. And there's usually some sort of a plan that gets put together when those kinds of things happen.

So I don't think it will be the straight exit that the black letter of the content would lead you to believe is going to happen. How long does that take to sort itself out, probably another quarter or two.

And so in the next quarter or two, we're going to expect to see a combination of last time buys and/or jockeying to move inventory between CommScope and Cisco's distributor. And it's really a hard thing to handicap as far as how exactly that's going to work.

But we've modeled in pretty low numbers in cable, and we just got to deal with it [technical difficulty]. Yes. The crazy thing is that there's no loss of share in any of this. And I want to say Tom to correct me in the December quarter, we did like 32 million in cable..

Yes - given the 32 million in broadband just under 30 million in cable..

Yes just under 30 cable and you're going to see 80%, 90% of that go with no share losses on our side and nothing we did screw up as far as deliveries or quality or anything like that.

And it's - COVID took five years of demand, put it into two and the same -- the backside of the forces that caused the cruise industry to lose, I don't know, 90%, 95% of its business, Collins Aerospace had a huge sort of equivalent percentages decreased between 2019 and 2020.

And eventually, things equalize and they pop back up, cable in particular, someone had said, well, cable business fell off the cliff. I said, you have a cable sort of like clip diving with a bungee cord. It tends to spring back. It's just only a question of how low it goes before it does.

And that's the nature of the beast, right? And it's just increasingly congruent with where we're trying to go with this business, and that's a challenge that we and management and our Board have been working on forever, really, but continue to look at alternatives..

Okay, that's a lot of helpful detail. I'm going to take some of that and directly go into the guidance for the September quarter here. So 24 to 26, if I take roughly half of the run rate you mentioned here for quarter, maybe $3 million or $4 million, I would put the endpoint here like 21, 22 with the organic EMCORE business.

So if you're growing QMEMS a little bit, it seems like cable TV has got to be much, much lower. I think you had $7 million in the June quarter, if I caught that correctly.

So it sounds like you're literally talking about $1 million, $2 million or $3 million in September, am I doing that math right?.

Your math is impeccable as always, Richard. Let's spend the interaction..

It actually probably same, but that helps to. Okay thanks for that and then maybe two quick questions on KVH and I'll get on line here, so an interesting business, which I don't know a lot about here, but let's try to understand some of the synergies here.

It seems like if you're making an asset purchase there isn't necessarily a lot of overhead to be taken out here.

So maybe you can discuss the synergies you expect in near term and over time?.

Yes, so true that there isn't a lot of overhead other than corporate overhead, I think our numbers are smaller. But when you look at it, there's a lot of opportunity to improve costs, things that they buy that they're getting for a better price and vice versa.

I made the point in my prepared comments that we are in a position - or will be in a position to supply them with more advanced technologies for closed-loop FOG control at a price that you just can't get in the merchant market because we make them. They wind QMEMS and can reduce our coil cost by 30%.

We will certainly see synergies in the sales and marketing side. A little bit of overlap in engineering, but it's really hard to make that judgment being that we're so busy in development.

So not a lot was figured out other than we took out to get to the synergy numbers, some, let's call it, a project expense outside material and development that maybe we don't need to do because we've already got a bunch - of that technology that we can forklift into Tinley Park, and they've got a whole bunch of know-how that we can take advantage of in Alhambra and maybe even in Bud Lake..

I'm going to jump off the line and let me come back in and ask some more detailed financial questions. But the last 1 I want to ask you, Jeff here is that you've obviously made two acquisitions here and $55 million less the - debt raise your take your cash balance down a bit here.

Does this end your appetite for M&A or can you still potentially see it after, of course, of digestion period that's continuing?.

Well, we'd like to see improved results drive Wall Street's opinion of us and less reliance on cable TV contributing to that. Does it make us want to stop M&A? No. But as always, it's a pretty narrow laundry list of things that we're interested in. Again, we started talking to Martin Kits van Heyningen about this business in 2017.

We had been working on trying to acquire L3 space and navigation out since 2019. So it's not like we're sitting there throwing darts up against the board and trying to figure out what we're going to do next. In fact, we've been very deliberate, which is something I think our Board appreciates..

Okay thanks for that answer. I will jump off the line, thank you Jeff..

[Operator Instructions] We have a follow-up from Richard Shannon with Craig-Hallum..

All right well, I guess, just like last quarter, I didn't have to jump off the line. And Tom, a couple of questions here as we look at the September quarter below the sales line here. Looking at the filings for KVH, it looks like the gross margins might have been in the 30% range here.

So it looks like it's accretive on that line? Maybe if you can help us maybe do the quick math about how we should think about total gross margins and the OpEx you have been able to do all that math.

Maybe you could help us a little bit on that, please?.

Yes, sure. If you look at - it's obviously easy to get to, they were a separate reportable segment for KVH. You'll see revenues ranging from low 30s to high 30s there's a base business of FOG products that is the majority of the business, but there's also a product line called TACNAV that is a little bit more lumpy.

And when that in quarters where there's a lot more TACNAV revenue, revenues in total for the Navigation business is in the high 30s, and it's also high margin. So it really changes the combined gross margin of the segment. So on average, if you average it out, you're looking at mid-30s in revenue, mid-35-ish plus or minus on gross margin.

And their OpEx is, if you -- on the carve-out is in the sort of $11 million annualized range. So that should give you it's a good sense for what you can expect from a business. We were planning on synergies, call it, over the next year, year and a half that Jeff spoke about to help it further.

But it is a contributory business that we expect that to continue and get even better as the quarters tick by as its part of EMCORE..

Yes, the point to mention here is that all the synergies that we figured in, in our case and the Board. And obviously, we had a team evaluating an outside team evaluating their revenue. quality of revenue. We represented by Cowen on the banking side. And so, we've got pretty conservative numbers.

The synergies are all on the cost side as opposed to the revenue side and so revenue upside represents gravy on top of things. And obviously, we're going to be working in that direction, but those weren't the base commitments in the acquisition case, it was just the cost side because it tends to be more controllable..

That makes sense. One more question for me on the topic of the new classified chips. Jeff, I think you said that you're starting to ship into production for your first customer, which is great to see. You talked about kind of tens of millions of dollars by 2025.

Maybe I guess, the first part of my question is, can you summarize the number of customers and contracts that you have? And does that number both in customers and contracts, is that sufficient to get you to kind of that tens of million dollars of revenues or you continue to see more. And so how do we think about future announcements..

Yes so - and I think I got this right. So forgive me if I'm off by a customer here or there, but I believe there are five and a total of eight projects. So there are customers with multiple projects. Does this get us to tens of millions? Yes, it does.

But there are additional large players that we are starting to -- continuing to work with to bring in additional volume in these areas. And so the way to think of it, Richard, is we've got a set of core technologies and customers oftentimes want certain tweaks, peak power level a slope efficiency. They want it to fit on a certain kind of submount.

There's a particular mounting scheme they've got. And all that requires process engineering and a significant amount of expertise. And so, when you say 70% of the chip may be sort of common to a couple of customers, there's also a significant amount of difference in terms of the way it's implemented and in particular, the target for packaging on that.

So it's not like we're going out reinventing the wheel each time. I would say, within the next quarter or so, is good probability we'll have two more customers with at least one program each. And we just see this continuing to grow nicely. Team's executing well and it's going to be the primary growth engine over in broadband period..

Okay great, that is all from me Jeff, thank you..

And that will conclude today's question-and-answer session. I will turn the call over to Mr. Jeff Rittichier for any additional closing remarks..

Sure. I'd like to thank all of you for your interest in EMCORE today. I want to recognize our team and actually the extended team of experts that worked with us on the KVH transaction for tremendous effort to get this done. And please stay safe, everyone, and goodbye for now..

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