Good morning and thank you for standing by. Welcome to the EMCORE Corporation Fiscal 2023 Third Quarter Results. At this time all participants are in listen-only mode. After the speaker's presentation, there'll be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Tom Minichiello, EMCORE, Chief Financial Officer. Please go ahead..

Thank you. Good morning, everyone, and welcome to our conference call to discuss EMCORE’s fiscal 2023 third quarter results. The news release we issued this afternoon 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 projections about future results, statements about plans, strategies, business prospects and changes and 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 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 and subsequent periodic reports.

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 will now turn the call over to Jeff..

Thank you, Tom. And good afternoon, everyone, my guess it is morning. In Q3, EMCORE's inertial navigation business came into its own growing 10% over the March quarter, representing the fifth sequential quarter of growth. Book-to-bill kept pace with this growth at 1.0 and the business has $68 million in backlog.

Non-GAAP gross margin for inertial navigation was 30% and the A& segment overall was 29%. Operating expenses for inertial navigation were approximately $9.9 million.

Consolidated revenue in fiscal Q3 was $26.7 million and inertial nav came in at $26.7 million, Defense Optoelectronics was $300,000 and broadband posted a negative $300,000 in revenue, due to a terminated $1.3 million broadband development contract. Tom will provide additional details on this in his remarks.

Simply put inertial navigation performed significantly better than expectations, setting the stage for the company's evolution into a pure play aerospace and defense business. Turning now to the broadband business, I'd like to focus on our announcement of the letter of intent. Sell the linear part of the business to Photonic Foundries.

Completion of this sale would accelerate EMCORE's ability to narrow its focus on to inertial navigation. It should also meet our objectives to create a seamless transition of supply to our customers and opportunities for our employees. We expect to complete the sale during the September quarter.

The last remaining component of broadband is the wafer fab and we expect to conclude production for the last time by - pardon me within the September quarter as originally planned.

Since the completed sale of the linear product line would transfer the order backlog for the affected products to Photonic Foundries, we expect that the remaining wafer fab backlog to be approximately $3.2 million.

Once the wafer fab production processes are completed in Alhambra, EMS takes over from there assembling chips onto carriers and completing tests and burden. Since there are production limits in EMS, it will take at least a year to complete all of the orders with just a handful of EMCORE employees remaining to manage the process.

That says, we have several interested parties conducting due diligence on the chip business and expect to have a decision on the future direction of the fab within the current quarter, bringing the tale of two companies to an end. Moving on to inertial navigation.

I'll begin my comments by stating that we had a strong performance from our space and navigation Tinley Park and Concord operations. Revenue was up about 10% quarter-over-quarter with a book-to-bill of 1.0.

This is a little misleading by itself considering the fact that inertial navigation has grown 30% from the December quarter, which was - the first full quarter in which the former KVH team was merged into EMCORE. Backlog came in at a solid $68 million.

Please keep in mind that this only includes, hard purchase orders against our long-term contracts and not the value of the contracts themselves. In the current quarter, we expect that the book-to-bill will remain above 1.0. Operating expenses came in below budget for research and development and sales and marketing.

We are mindful of our high internally funded research and development spending, otherwise known as IRAD and are working to drive this down substantially in the coming quarters through non-recurring engineering contracts from our customers. Consequently, we should see IRAD approach 10% of revenue within the next few quarters.

We receive full rate production orders it's for BAE's Armored Multi-Purpose Vehicle program and expect this to transition into a solid yearly order pattern from this point forward. For AMPV foreign military sales and spare orders should look periodically procure onward providing additional upside.

International bookings improved significantly this quarter, most notably in Taiwan and Poland. These included a group of unmanned and iterative platforms. We also saw substantial interest from customers in the EN-300 platform, especially in the space sector, with several key test runs starting this quarter.

We've seen some positive results early in the game and eagerly await the full results of these tests to drive additional momentum. On the precision guided munition side of the business, we have been pursuing a tiered product placement strategy to ease licensing requirements for our international customers.

This approach takes a bit more time, but we should begin to see orders this quarter based on this strategic direction. Beyond program capture, we are seeing important signs of acceleration of key programs into the low rate of initial production phase.

This is a leading indicator of long-term growth, infrared search and tract has become a key area of focus and our multiple design wins should benefit in terms of production timing. The Eris program has secured an additional bank of orders that reflect the strength and duration of the program.

We were also working with major primes on securing long-term manufacturing partnerships and orders are expected to produce improved production costs and predictability.

The space and navigation team has continued to integrate multiple TAIMU inertial measurement units in support of tests and validation, as it continues to meet shipment targets for board, which is - booster rate gyro. These two systems are critical to the launch scheduled for United Launch Alliance.

The next important milestone should be reached by the end of September, beyond that, when ULA reaches its targeted launch rates, annual board are expected to produce $20 billion to $25 billion in revenue per year, and help significantly improve gross margins. Quartz MEMS had a very nice uptick in shipments this quarter and scaled up margin well.

We saw a favorable mix in the Concord shipments. But the operations team executed a very clean quarter with no surprises in the way of unplanned variances. We expect to continue to reduce the lumpiness in Concord as we upgrade Concord to a new ERP system in the coming months.

Before I move on to guidance, I'd like to provide some comments on integration, which is a key area of focus this year. We did successfully transition our Chicago operations to sideline 10, which will end the need for transition services from KVH as well as eliminate the expense.

Since it's the last quarter of the year, we will not upgrade Alhambra or Concord to sideline 10 until the new fiscal year and should complete this work in a quarter or so after getting started.

Beyond ERP, we should complete the PLM/PDM unification in early October, and will integrate Camstar MES into the Concord and Chicago facilities after we complete the ERP upgrades. Ultimately, this will make EMCORE more efficient, and will help us to improve our processes costs and reduce inventory.

Beyond the systems integration programs I've mentioned, EMCORE has a solid roadmap for stripping out redundancy within engineering programs to streamline our operations and reduce development expense.

Over the next few years, you should expect to see a reduction in the amount of manufacturing floor space we require, a reduction in inventory, and improvements in profitability. Turning now to guidance, we are expecting a few supply chain issues and order delivery dates will tamp down on growth a bit for the September quarter.

Assuming that the sale of the linear product line to Photonic Foundries is completed, we expect consolidated revenue in the $26 million to $28 million range. This includes inertial navigation at $25 million to $27 million, along with approximately $1 million than last time buys from the chip business. Looking beyond that into the December quarter.

We expect inertial navigation to have a revenue range of $28 million to $30 million. With that, I'll turn the call back over to Tom..

Thank you, Jeff. Let me first start off with the restructuring plan, we announced during the June quarter. This plan consisted of a shutdown of the Broadband segment and a discontinuance of the Defense Optoelectronics product line within the A&D segment.

Because we have been keeping these operations running to fulfil customer last time by orders, both broadband and Defense Optoelectronics were included in consolidated results as continuing operations for fiscal 3Q. So, I'll first start with consolidated and segment results. After that I'll provide a financial review for inertial navigation.

Consolidated revenue in fiscal 3Q was $26.7 million net of $27 million for A&D, less $300,000 reported for broadband. In an unusual set of circumstances subsequent to our announced shutdown of broadband, development contracts for chips and sensing products were prematurely terminated.

As these contracts are under the cost incurred percent of completion accounting method of which the timing of revenue recognition is independent of the milestone billing and cash collection cycle a $1.3 million adjustment was recorded in 3Q to properly account for the close out of these contracts, i.e.

true-up final contract revenue to final cash received. Excluding this adjustment, broadband was $1 million within A&D defense optoelectronics revenue was $300,000. This brings total last time by shipments in 3Q to $1.3 million slightly above our guidance of $1 million.

Turning to the rest of the consolidated results on a non-GAAP basis, consolidated gross margin was 16% flat with 2Q and for the same reason, the highly diluted Broadband segment gross margin. On the A&D side 3Q segment gross margin strengthened to 29% driven by significant improvements for the inertial nav business which came in at 30%.

For the A&D segment overall, the inertial nav 30% gross margin was partly offset by lower gross margin for the discontinued defense optoelectronics component. Consolidated operating expenses were $11.1 million in fiscal 3Q, compared to $12.4 million in the prior quarter.

The $1.3 million decrease was largely due to lower materially material expenses for R&D work on FAA programs, as well as lower G&A. Consolidated operating loss in the June quarter improved to $6.5 million, compared to $8.1 million in the March quarter. Adjusted EBITDA was also better at negative $4.3 million versus $6.5 million in fiscal 2Q.

Consolidated net loss was $7 million or $0.13 per share, compared to $8.3 million or $0.18 per share the quarter before. Shifting to the GAAP results for a moment fiscal 3Q loss was $9.9 million or $0.18 per share, compared to $12.2 million or $0.27 per share in 2Q.

GAAP results included a $1.8 million charge for severance costs related to the April 21 restructuring announcement and a $1.2 million credit as a result of insurance proceeds received in 3Q. Let me now turn our attention to the non-GAAP inertial navigation results.

Inertial navigation revenue grew to $26.7 million in fiscal 3Q a 10% increase compared to 2Q driven by double-digit growth for both our space and navigation site in Budd Lake and for QMEMS shipments in Concord. Operations in Tinley Park continued on a steady growth path with revenue up 5% sequentially.

As noted inertial navigation gross margin expanded to 30% in 3Q not only on the higher revenue, but also driven by a better mix and significantly improved Quartz MEMS production yields. Inertial nav R&D expense was $4.2 million in fiscal 3Q compared to $4.7 million in the prior quarter.

The $500,000 decrease was due to the lower project material spend noted earlier. Turning to the balance sheet, we had cash of $20.2 million at June 30, compared to $24.8 million at March 31.

The $4.6 million change during the quarter included the aforementioned insurance proceeds of $1.2 million and positive operating working capital of $1.5 million offset by the following uses of cash during the quarter.

$4.3 million adjusted EBITDA, $600,000 for litigation related expenses $500,000 paid for severance, $500,000 for acquisition related costs, $900,000 used for financing activities, and $500,000 for CapEx. With that, we are now opening up the call for your questions..

Thank you. [Operator Instructions] First question comes from Max Michaelis with Lake Street Capital. Your line is open..

Good morning, guys. First question.

I got to - the first one is related to the supply chain weakness you guys mentioned, I was wondering if you're seeing any material changes in the supply chain guys or not supply chain just lead times I guess?.

So, the question is I'm trying breaking up a little bit.

Is whether or not there are material changes in supply chain?.

Yes, sorry, the lead times and yes what's that breaking up there?.

Yes, it's really not. I wouldn't read a lot into it. One of the things that's become a bit of a flashpoint is that military grade systems on a chip FPGAs still remain quite difficult to get. And we see last minute push outs of deliveries. And unfortunately, you can have 99% of the parts available to build will be missing one and then you're stuck.

So, it's really that sort of an issue as opposed to an overall supply chain deficiency. There's just a few parts that are military grade that we just don't believe we're going to get on schedule..

All right. Thanks. And then my next one is related to book-to-bill, you mentioned it was 1.0.

this quarter do you expect to see above one in Q4, just wondering if you could share few points of confidence that kind of give you that outlook for that?.

Could you repeat that?.

So you mentioned that book-to-bill is going to be above 1.0 in Q4, I was wondering if you could share your point of confidence that's giving you that outlook?.

Well, there's really a solid demand out there in the market. We see - all the product lines doing quite well. I wouldn't necessarily call it a headwind, one of the things that's occurred, because of the Ukraine war.

And I don't think this is widely understood, is that when products are shipped to support Ukraine, it gets registered as foreign military sales. But the reality is, it comes out of the storehouses of the various branches of service.

And so, what happens then is the budget priorities get shifted, and the service branches that have had product shipped are demanding the cash in the budget, to immediately replenish their stores.

And sometimes that's at odds with you know, what the, say the Navy or the Air Force program managers have budgeted, if they have to give up money to the Army, where, you know, a lot of the material is come from.

So it's really, call it a phase lag between shipping something from stores, and then the - push and pull between freights of service against existing budget priorities, if that makes sense..

Yes, no, that makes sense. Thanks, guys..

Thank you. And our next question will come from Richard Shannon with Craig-Hallum Capital Group. Your line is open..

Well, thanks. Jeff and Tom, for taking my questions here. I guess to get a few of them in no particular order. Maybe I'll just pull up on the guidance here.

Jeff, thanks for the little bit greater detail here in your prepared script versus the press release here and understanding lifetime buys, but also want to get a sense of what you're thinking about for gross margins here.

I think at the midpoint of the inertial nav only revenues? I think it's slightly down from your performance in the quarter, but not much.

And would we expect to see an inertial nav gross margin near that 27% - you just excuse me 30% number you just reported?.

Yes, I think we should. The only thing that really is going to move around here from this point forward, Rich is Richard is the just the product mix, can shift a little bit quarter-to-quarter.

One of the things for example, that will affect gross margins in the next couple of quarters is, the AMPV these orders I mentioned from BAE there are some other TACNAV product orders. We're expecting those have margins significantly above, let's call it a 30% number. There are also a few products, which are not quite as good.

But volume drives the margin at EMCORE. And so, as volumes pick up, we'll expect to see continued improvement in gross margins in general..

Okay, fair enough, then. Let's talk about your comments about December quarter inertial NAV getting up to $28 million to $30 million here. And the point is a nice quarter of looks like double-digits from the midpoint you're telling us for September.

So can you talk to us a little bit about some of the drivers there?.

Sure. There are some planned delivery dates that have moved around a little bit, customers do take advantage of the fact that, government fiscal year is the end of September. And so, when you look at that some guys that have additional money will want to pull things in and some guys who don't have money into Q1, like to push things out.

So there's a little bit of that in there. But overall the trend is that you've got new programs that are picking up heading into low rate of initial production. And we're expecting to see those require support in terms of shipments in the December quarter.

So, what we're looking at some AMPV orders that will come in, we're looking for final shipments of one of our development programs, one of these things, it's a little lumpy. But you sometimes you get non-recurring engineering billings, and then you'll have a bit of a chunk at the end of the particular program phase, as the prototypes are delivered.

But overall, you know, what I'm really tried to get across is that there is a strengthening and strengthening of demand. There is a consistency within the order patterns that give us confidence, to go out a little further to provide guidance, where we wouldn't ever have done that as a broadband company. Again, $68 million and backlog.

We can we can see out several quarters now consistently, and we'll expect that to continue to improve..

Okay.

And then given that visibility, I guess I would assume that your gross margins be here in the segment here would be at least as high in December as September, just because of the growth and it's all your drive growth part of that fair enough?.

Yes, that's completely fair..

Okay. Good to hear.

Maybe jumping over to the - I'm not even sure what to call the activities you announced yesterday, disposal, defense opto et cetera here? Do I understand correctly that there's no effective purchase prices really just a liability transfer and OpEx savings dynamic here for you? Or do you expect some sort of proceeds on the completion of this - on the disposal I guess we'll call it?.

Yes, so I would say that it was, is the former scenario, within what you mentioned. There are significant liabilities. Pardon me associated with broadband with one particular supplier in the supply chain. I would also say that the - I think we've done a reasonable job and getting the factory or factories more correctly moving again.

But every time you do this sort of thing, you run into problems as far as gosh, we need a special silver build epoxy we needed to get in China. China's got export restrictions, and it's going to take, eight weeks to get something that you can get here in the States overnight.

So what it does is it puts all of that sort of activity, that really, it's amazing how much management cycle bandwidth, it takes up to crack these problems. It also enables us to thin out our organization even further.

For example, we still have to have quality people and engineers, available inside the business to deal with RMAs and service requirements. And the sale of the linear portion of broadband essentially solve that problem for us as well. It's just, you know, speeds up - our ability to focus and works out I think, well for all parties..

Okay.

And I guess, can you just kind of give us some sense of what OpEx or cost structure savings that you'll achieve on upon close here?.

Gosh, well, what we gave you, I think was it was $9.9 million in OpEx..

Yes. I think you go back to the restructuring announcement on the 21st of April Richard, and those numbers are pretty much hold up, because most of it was called broadband and defense opto related. So as the business gets transferred, and eventually the, we figure out the wafer fab. You save all that money.

There's also a slice of it maybe upwards, around $2 million of it was in the G&A. So that will help the business going forward. So what you're likely to see in operating expenses on a go forward basis, inertial navigation, pure P&L is around $10 million, you know, $9.8 million somewhere in that range.

From what will be $12.5 million before we started all this, so, you know, there's your, and then there's some cost of goods sold savings, but there's your, at least $12 million right there..

The other point that I make, Richard is that as we as we get into this, we have identified a few areas where we might be able to take down OpEx a little further, we're not quite ready to talk about those in detail. But we certainly will, in our next call. So you haven't seen the end of OpEx reduction.

The other point to make, especially as we hit December quarter will be this. We talked about research and development, just as a monolithic number, but you're going to see us talk more about what the IRAD portion the internally funded research and development number is.

And we're going to make some additional refinements which - should help to make it obvious how much we're really spending and how much our customers are supporting..

Okay, you kind of hit on my last question around on this IRAD.

So relative to the numbers that Tom just mentioned, as you get more of this NRE that lets us IRAD ran shine out, then that'll be a further improvement in the OpEx cost structure is that right?.

Yes..

Okay. All right. Great. Then I'll pick that one up and. Okay. I think that's all the questions from me guys. I will jump on the line. Thank you..

Thank you, Richard..

Thanks..

Thank you. Our next question will come from Brian Kinstlinger from Alliance Global Partners. Your line is open..

Great. Thanks so much for taking my questions. You mentioned the $68 million backlog.

I'm curious if you could provide a total value of contracts, if not including backlog, an unfunded backlog if you will?.

Oh, wow. Not off the top of my head. But I'll give you two big ones. Right. Just to give you an example, if you look into the - we announced last winter, I think was a $32 million contract for CROS 5, which would go on for three years. We're expecting the first purchase order for CROS 5 coming up here soon, but that would not appear in backlog at all.

Another example TAIMU. TAIMU if you take the time to look into the original documents we signed, when we purchased L3 based on navigation, it specifies that a minimum of 222 units we'll make their way into purchase orders at a minimum.

We don't have a final production price for that yet, because it doesn't have to be set until after we are done with production readiness review, which is something that happens after the final configuration is done, and that would be at least $50 million, if not more. And that's just part of it, right. So, double, triple.

Yet, it's possible, but those are just two and those two alone would double more than double the backlog..

Great. Understood. As it relates to TAIMU. You mentioned September is the next milestone.

When do you expect TAIMU deliveries to become mature? Are we a year away, are we 18 months away to get to that run rate you've discussed?.

I think, you probably look at it about a year from now. It's - the thing that you need to understand about this is you're already seeing this of TAIMU within the Budd Lake number. So, we're able to recognize the revenue for an item in backlog, which is over $9 million, which is an advanced by a long lead materials. Okay.

It's not all of the material, it's just the longest lead parts. And it's our customer. And we complete critical design review, as the configuration gets locked down, you'll see that progress into more production. The interesting part is, of course that, just recognizing revenue for the material, there's not that much margin in it.

But even with that, we're doing it just the sheer amount of work flowing through Budd Lake has improved the operating results significantly.

So what - when I've said this, and I think, in every conference and in very large number of conversations, you don't think TAIMU as a hockey stick, what you're going to see is continued sequential improvement in the revenue number for Budd Lake, as we progress through the program..

Okay. My last question, I'm not sure if I understood correctly, but as it relates to this shortage is, I think you've talked about him for a couple of quarters.

Are they related to a different component or the same components? The circuit board you talked about? And are you hearing or seeing or expecting any changes in the near future on these shortages? How much revenue? Are you unable to generate as a result of these shortages? And does the customer wait for you to get these products? Or are they urgent needs where they have to go find them elsewhere? Thank you..

Well, in the aerospace and defense business, nothing happens quickly. And it's rare that you'd have a situation where any supplier would have a large number of these components. For even the final end product on a shelf. The lead times tend to be very long in this business.

The particular components are, again, primarily driven by temperature range and reliability requirements.

And so, this set of things we're chasing, is different from, let's call it general supply chain issues, which I think have got better over the past few quarters, but when you get to these high rail, microprocessors, FPGAs, systems on a chip, that go down to minus 55 degrees centigrade, there are very few people that can make them.

And everybody has what are called DPAS ratings, which set priorities for acquisition. And so what we may be able to buy for TAIMU and get our hands on, because it has a DPAS rating or DX A2, we can't get them for some of the other products, because they don't have a DPAS rating.

So it's sort of complicated, but it's really confined to only several components. Hopefully, we'll see this starts to ease as we get into '24. But I don't think this is very much across the entire spectrum of aerospace and defense companies terms of getting their hands on these parts. That makes sense..

Yes. Appreciate all your time. Thanks..

Thank you. I'm showing no further questions in the queue. I'd like to turn the call back to Jeff Rittichier for closing remarks..

Thank you. And again I apologize for bringing back a bug from the far reaches of the customer or our customer base. But I'd like to thank everyone for their interest in EMCORE and recognize especially aerospace and defense team for turning in such a strong effort in the past quarter.

And we look forward to the next chapter of EMCORE's and aerospace and defense business..

That concludes today's conference call. Thank you for participating. You may now disconnect..