For fiscal third-quarter 2017 (ended 30 June), Emcore Corp of Alhambra, CA, USA – which provides indium phosphide (InP)-based optical chips, components, subsystems and systems for the broadband and specialty fiber-optics markets – has reported revenue of $30.9m (at the high end of the $29-31m guidance). This is down 5% on $32.6m last quarter but up 38% on $22.4m a year ago, driven by strengthening demand across most product lines, offset by a return-to-normalized RF-over-glass (RfoG) volumes (following the fiscal Q2 product transition to OBI-mitigated products). However, adjusting for the $3m of revenue shift in fiscal Q2 of low-margin RFoG products, revenue grew 5% sequentially.
Of total revenue, cable TV comprised 75-80% (down from 80-85% last quarter), chips 7.5-12.5% (up from 5-10%), satcom video 7.5-12.5% (up from 5-10%), and fiber-optic gyro products (FOG) 2.5% (roughly level with last quarter).
Cable TV revenue grew 2% quarter-on quarter (excluding the low-margin RFoG shipments) and 38% year-on-year, with continued strong demand for DOCSIS 3.1 products.
Merchant chip revenue grew further, by 21% quarter-on-quarter, due to a combination of GPON customer orders (which were received in Q2 and began shipping in Q3) as well as a small but increasing number of 10G parts.
Satcom video revenue grew more than normal sequentially, since a large project shipped during the quarter.
Fiber-optic gyro sales grew normally (receiving a small order for MTS-B fiber-optic gyros from Raytheon, while contract negotiations for the multi-year opportunity continue).
On a non-GAAP basis, gross margin has risen further, from 33.6% a year ago and 34.4% last quarter to 35.4%, benefitting from a positive mix shift to higher-margin products, partially offset by relocation and redundancy expenses for the Beijing facility of about $300,000 (slightly lower than last quarter).
Operating income was $3.6m (operating margin of 11.5% of sales), down slightly from $3.7m last quarter but up from just $0.6m a year ago, despite higher-than-planned expenses caused by heavy R&D investments and the relocation of the China manufacturing operations. Adjusting for the Beijing facility transition expenses, operating income would have been closer to $3.9m (12.5% of revenue, hitting the fiscal Q4 target).
Net income was $3.64m ($0.13 per diluted share), down from $3.75m ($0.14 per diluted share) last quarter but up from $0.6m ($0.02 per diluted share) a year ago.
Capital expenditure was $2.7m, offset by $0.3m cash collected from the sale of fully depreciated assets. Emcore again recognized about $0.9m in depreciation. Overall, free cash flow was -$2.4m. During the quarter, cash and cash equivalents hence fell by $2.5m to $66.1m.
“Emcore completed important operational transition milestones and delivered a solid quarter financially,” says president & CEO Jeffrey Rittichier. “We made strong investments in R&D in the quarter and announced the new Emcore Orion family of inertial navigation systems.” In addition, Emcore received major design wins from its CATV customers for new linear transmission products based on its L-EML [linear externally modulated laser] technology, positioning the firm for future growth.
“Looking into fiscal Q4 and the recent comments made by MSOs [multi-service operators] regarding their capital spending plan, we expect to see strong demand on the infrastructure side of CATV in general and DOCSIS 3.1 in particular,” says Rittichier. For fiscal fourth-quarter 2017 (to end-September), Emcore expects revenue of $29-31m, with operating margin growing to hit the targeted 12.5%.
“Development work on new chip products such as our 6.5GHz wireless product and data-center products continues, with the goal of broadening our chip portfolio and the number of markets we serve,” says Rittichier. “This growth will drive revenue as well as higher blended margin both for our chip business and for the company overall.”
During fiscal Q3, Emcore completed the transition of its satcom manufacturing operations to its US-based electronics manufacturing services (EMS) partner and discontinued its non-core video products. “Keeping our EMS operations in the US allows us to meet the TAA [Trade Adjustment Assistance] and ITAR [International Traffic in Arms Regulations] requirements from our military customers,” notes Rittichier. “This transition paced away towards incremental operating leverage, as we continue to grow the volume of our satcom product lines through the introduction of new low-cost L-band links and technologies for 5G radio-over-fiber DAS [distributor antenna system] and, of course, focused on larger systems,” he adds.
“With our new automated facility inside the 5th Ring of Beijing now in production, we are working hard to complete the qualification of the remaining automation equipment,” reports Rittichier. “We’ve reduced our direct headcount from a peak of 370 in December 2016 to about 160 people, and we’ll conclude this stage with 100 directs by the end of August for a total headcount – including all functions such as manufacturing and engineering, supply chain, etc – of 150 people in Emcore Asia, down from 430,” he adds. “We stopped production at the facility in Langfang two months ago, and we have moved out nearly all of the equipment and inventory. We’ll return the buildings to the landlord this month. While this work has been finalized in Q4, we expect to incur a decline in transition costs,” Rittichier continues.
Emcore expects these actions in China, combined with the transformation of the US manufacturing operation, to result in a breakeven revenue point of $1-1.5m less per quarter. “While we expect to realize some of the benefit in Q4, we should fully realize the benefit at the start of fiscal 2018,” forecasts Rittichier.
“This manufacturing transformation is not the endpoint. For example, we expect to add fully automated material management systems to our newly automated transmitter line in Q1 and Q2 of fiscal 2018. This will complete the move of the entire transmitter build process, improving our working capital and costs,” says Rittichier.
“Over the next year, we expect to devote the majority of our Six Sigma Green Belt and Black Belt projects to wafer fab operations, where we will not only improve the standard process controls but build process nodes that will launch new generations of chip products for captive and merchant markets. We see the fab as a key area for investment both in terms of capital and world-class technologies as we work to improve our ability to execute and invent,” Rittichier concludes.