12 August 2016

Emcore's quarterly revenue growth to $22.4m driven by cable TV rising 30%

For fiscal third-quarter 2016 (to 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 $22.4m, up 3.9% on $21.5m last quarter and up 5.7% on $21.2m a year ago.

Regarding Satcom, Emcore saw the timing of a large system shipment pushed from fiscal Q3 to Q4, impacting Q3 revenue.

So, quarter-over-quarter growth was driven by cable TV revenue - which includes the R5 optical networking unit (ONU) product line - returning to strong revenue growth both year-over-year and sequentially (up by about 30%), rising from 60-65% last quarter of total revenue to 75-80%. "This strength and demand clearly demonstrates that the MSOs are making their planned shift to DOCSIS 3.1 fiber deployments," notes president & CEO Jeff Rittichier.

However, this growth was offset by revenue for chip-level device products falling by $1.8m from $4m last quarter (to 5-10% of total revenue) due to softness in the Gigabit passive optical network (GPON) market, resulting from a slowdown in purchasing from carriers within China and a result in inventory build-up in the supply chain. This has been caused by a delay in the release of a large tender for ONUs. The delay magnified the expected slowdown and was partially offset by growth in non-GPON business. "Despite the continued volatility in the GPON market, it remains incrementally beneficial to Emcore as it allows us to spread fixed manufacturing cost over a much larger number of devices, while laying the foundation for next-generation devices," says Rittichier.

"One can think of our GPON business as really just our initial offering in the merchant chip market as Emcore intends to become a broad supplier of chip-based products to the entire telecom industry, thereby optimizing our product mix between captive and merchant use and driving a higher blended margin for both our chip business and the company overall," says Rittichier.

On a non-GAAP basis, although down on 36.3% a year ago, gross margin has rebounded from 32.6% last quarter to 33.1%, driven by the improved efficiencies.

"Six sigma initiatives continue to be a contributing factor in driving operational improvements. Unfortunately these operational efficiencies were negatively impacted by lower chip pricing and lower material overhead absorption, partially related to the long-term inventory purchases," says chief financial officer Jikun Kim.

Total operating expense have fallen from $7.4m last quarter to $5.9m. The drop in sales, general & administrative (SG&A) expenses from $4.8m last quarter to $3.5m was driven by the $2.6m reimbursement of legal expenses related to the Sumitomo Electric Industries (SEI) arbitration agreement, offset by higher severance and other legal and equity compensation expenses. R&D investments fell by $0.2m from $2.6m last quarter to $2.4m due to normal variations in project expenses.

"Despite headwinds in the GPON market, we did a good job this quarter not only on top-line growth and product mix but through improved efficiencies in our manufacturing operations," says Rittichier. "We managed our operating expenses well and began the process of reducing our operations headcount as planned."

Pre-tax income from continuing operations was $0.6m, down from $2m a year ago but level with last quarter.

Capital expenditure (CapEx) was $1.8m (up from $1m last quarter) and depreciation was $615,000. During the quarter, cash and cash equivalents fell further, by $5.3m from $110m to $105m, driven mainly by increased inventory as well as accounts receivable offset by higher accounts payable balances.

On 29 July, Emcore paid a special dividend of $1.50 per share (totalling $39.2m) to shareholders of record as of 18 July (resulting in $85m of total cash returned to investors since June 2015).

Given the continued strength seen in cable TV and fiber-optic gyro markets, for fiscal fourth-quarter 2016 (ending 30 September), Emcore expects revenue to rise to $23-25m, with gross margin percentage in the mid-30s.

"Given our leadership position in the market and the significant investments we've made in CATV chip technology over the past few years, Emcore is enabling the shift to DOCSIS 3.1," says Rittichier. "Over the next year, as we roll out new products based on the LEML [linear externally modulated laser] and its derivatives, we expect those products will set the standard for both DOCSIS 3.1 and RF-over-glass [RFoG] deployments in downstream and the transmitter portions of the network," he adds. "Evidence of this can already be seen with our recently announced $4.7m purchase orders to supply R5 optical networking units to a major US supplier of network infrastructure for the cable TV market… these are expected to be shipped over the next quarter or two."
Emcore has now completed the transfer of all of its turnkey product transfers to external EMS (electronics manufacturing services) from its operation in Langfang City, Hebei, China, and is in the process of starting to install automated processes at its new Beijing facility. "One example of this is our new automated transmitter tuning process which has taken operator touch-time from 45 minutes per unit down to less than 5 minutes, improving both variable cost and return on assets," says Rittichier.

In total, the fiscal 2015 Greenbelt program identified $2.5m in cost savings that Emcore expects to realize in fiscal 2016. "We're expecting the fiscal 2016 Greenbelt program to create even more benefits for us in fiscal 2017," says Rittichier.

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Tags: Emcore InP

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