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8 December 2016

Emcore's quarterly revenue grows 14% to $25.6m, driven by CATV

For fiscal fourth-quarter 2016 (ended 30 September), 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 $25.6m (above the $23-25m guidance), up 14.4% on $22.4m last quarter and 11.3% on $23m a year ago. Revenue for full-year fiscal 2016 was $92m, up 12.6% on fiscal 2015's $81.7m, driven by continued strength in the cable TV (CATV) product line - which includes RF-over-glass (RFoG) products - offset by a decline in 2.5G GPON (Gigabit passive optical network)-related chip revenue.

Of fiscal Q4 revenue, cable TV comprised 80-85% (up from 75-80% last quarter), chip-level products 5-10%, SatCom and video 5-10%, and fiber-optic gyro 2.5-5%.

SatCom and Fiber Optic Gyro product lines delivered on plan, with flat to slight declines in revenue quarter-on-quarter.

Following the strong growth that began in fiscal Q3, cable TV revenue rose a further 23% quarter-to-quarter (up 49% year-on-year). "The continued strength in this market not only demonstrates the MSOs [multi-service operators] commitment to deploying DOCSIS 3.1 fiber deep networks, but also highlights Emcore's leadership position within the space," says president & CEO Jeff Rittichier. "Demand for our products based on LEML [linear externally modulated laser] technology continues to increase both for DOCSIS 3.1 and several new products that will be announced in the coming months," he adds.

Chip revenue remains relatively flat (on about $2.2m last quarter) as Emcore continues to de-emphasize its presence in the 2.5G GPON space. "We see continued weakness in the 2.5G market and intend to only supply our multi-generational customers with 2.5G GPON products as they begin to transition to 10G," says Rittichier. "Our other products have continued to grow pretty much in line with expectation. We have begun to make production shipments of 10G parts, albeit at low volumes," he adds. "We have a lot of development work going on in the fab this year and expect to fill devices in the wireless and data-center markets toward the end of 2017."

On a non-GAAP basis, full-year gross margin has fallen from 35.1% for 2015 to 33.6% for 2016. However, although still down on 41.1% a year ago, quarterly gross margin has rebounded further, from 33.1% last quarter to 35.6%, driven by improved operating efficiencies (following the lower 2.5G GPON chip pricing and lower material overhead absorption of fiscal Q3).

"Emcore is working to become a broad supplier of chip-level products to the entire telecom industry, thereby optimizing our product mix between captive and merchant use, which will drive higher blended margins both for the chip business and for the company overall," says Rittichier.

Operating expenses were $7.4m, up $1.5m on fiscal Q3's $5.9m (which had been positively impacted by the $2.6m reimbursement of legal expenses related to the arbitration agreement with Sumitomo Electric Industries, offset by higher severance charges) but cut from $8.2m a year ago. Full-year operating expenses have been cut by $5.2m from fiscal 2015's $33.2m to $28m for fiscal 2016, as Emcore continues to streamline operations and remove excess expenses from the business.

"A combination of strength in customer orders and improved manufacturing efficiency drove significant income generation in the fourth quarter and allowed us to finish the year strongly," says Rittichier.

Although still down slightly from $2.7m ($0.10 per diluted share) a year ago, pre-tax income from continuing operations was $2.6m ($0.10 per diluted share), up from $0.6m ($0.02 per diluted share) last quarter. Full year pre-tax income from continuing operations has risen from $4.2m ($0.14 per diluted share) for fiscal 2015 to $5.1m ($0.19 per diluted share) for fiscal 2016.

Capital expenditure (CapEx) was $1.3m in fiscal Q4, making $5.7m for the full year. Depreciation and amortization was about $750,000.

Also, on 29 July Emcore paid a special dividend of $1.50 per share ($39.2m) to shareholders of record as of 18 July.

Cash and cash equivalents have hence fallen further, by $41.1m from $105m a quarter ago to $63.9m.

"We have good visibility into demand at this time and see continued growth in DOCSIS 3.1 product deployments as well as growing momentum with our fiber-optic gyro and inertial measurement unit products," notes Rittichier.

Given the continued strength being seen in cable TV business, for fiscal first-quarter 2017 (ending 31 December 2016) Emcore expects revenue to rise to $28-30m, with gross margin of 34-36%.

"Although gross margin seems likely to remain range bound in the mid-30s over the next year, because of the impacts of the product mix, we believe that our continued focus on operational excellence will drive operating margins to roughly 12.5% on a non-GAAP basis in the next year or so and, with the benefit of additional volume, will get closer to 15% by the end of fiscal year 2018," says Rittichier. "This equates to 12.5-15% net operating margin target, nearly double the level achieved in our strong fourth quarter and at the higher end of the range in the broader optical component landscape," he adds.

"We are nearly complete with our 18 months effort to transform our manufacturing operations to hybrid EMS [electronics manufacturing services] model," says Rittichier. "This means the Emcore will only manufacture products which demonstrably add value over competing merchant EMS service," he adds.

"A key part of our strategy is to transform fixed expense to variable cost at every opportunity and ultimately reduce our breakeven point. This strategy has important implications for both our US and Chinese operations," continues Rittichier. "By the end of [fiscal] Q1, we will have outsourced our entire SatCom manufacturing process to the TAA-compliant EMS [electronics manufacturing services] operation. By the end of Q2, we expect to have completely moved out our assembly operations in Langfang, China to Emcore Asia, our new smaller automated facility inside the 5th Ring in Beijing."

"In China, we will reduced our total headcount by over 60% and our direct headcount by 75% even as manufacturing volumes continue to grow," says Rittichier. When complete this means that our assembly personnel will be 180% more efficient on a COGS per employee basis than we were when I joined in January 2015," he adds. These actions should lower Emcore's breakeven revenue point by $1-1.5m per quarter.

"Emcore is making substantial investments in the manufacturing technology for our Fiber Gyro and Inertial Measurement Unit product lines and will be retrofitting a building in Alhambra to optimize it for the needs of these products," says Rittichier. "The automation technology, which we develop at Emcore Asia located near Central Beijing, is going to be brought back to the US and upgraded to meet the needs of our navigation products. This will allow us to manufacture these militarily sensitive products cost effectively in the USA… We will exit the year with navigation products running at 10% of revenue and higher thereafter."

See related items:

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

Emcore appoints new chief financial officer

Emcore grows margin and income year-on-year despite seasonal drop in quarterly revenue

Emcore's quarterly revenue up 22% year-on-year to $22.5m

Emcore announces new CEO to replace Hou

Emcore's quarterly revenue rises 61% year-on-year to $23m

Emcore announces final results of $45m modified Dutch auction tender offer

Emcore completes sale of tunable laser and transceiver product lines for $17.5m

Emcore closes sale of Space Photovoltaics business to Veritas Capital affiliate for $150m

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