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13 May 2019

Emcore’s quarterly revenue grows 16.7% year-on-year to $21.7m

For its fiscal second-quarter 2019 (ended 31 March), 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 $21.7m, down 9.4% on $24m last quarter but up 16.7% on $18.6m a year ago.

Broadband products fell from 72% of total revenue last quarter to 65% as typical winter seasonal softness was seen in cable TV (which fell from 62% to 49% of total revenue). Conversely, non-CATV broadband products (Satcom video & wireless) were strong, with Satcom growing 33% quarter-on-quarter and 227% year-on-year (boosted by the shipment of several large projects).

Chip product sales fell back from 18% of total revenue last quarter to 16%, but this was due mainly to a combination of a strong preceding quarter and the impact of Chinese New Year. Year-on-year revenue growth is 20%, driven by a combination of both legacy 2.5G GPON (Gigabit passive optical network) products for the Chinese market as well as non-GPON-related products.

Navigation products rose from 10% of total revenue last quarter to 19%, with revenue growing 66% quarter-on-quarter and doubling year-on-year.

“We saw strong sequential growth, driven largely by our navigation product,” notes president & CEO Jeff Rittichier. “We continued to deliver on our revenue diversification initiatives,” he adds.

On a non-GAAP basis, gross margin was 27.3%, level with a year ago and up from 24.7% last quarter, due to the seasonally lower volumes being outweighed by cost improvements.

“Decreased volumes did cause under-absorption, which depressed gross margins by 560 basis points below our standard margin,” says Rittichier. “However, we eliminated the overwhelming majority of costs associated with transitioning [from legacy distributed feedback (DFB) products] to the L-EML [linear externally modulated lasers] technology [which had been a headwind in prior quarters],” he adds. “With transition cost behind us, the only thing that prevents us from returning to more historically normalized margin is cable TV volume.”

Operating expenses have hence been cut slightly from $11.6m last quarter to $11.3m, with an increase in R&D spending from $4m to $4.3m being outweighed by a reduction in selling, general & administrative (SG&A) spending from $7.6m to $7m, despite Emcore continuing to incur similar litigation expense of $2.6-2.7m.

Pre-tax loss from operations has been cut from $2.4m ($0.09 per diluted share) last quarter to $2m ($0.07 per diluted share), which is also a slight improvement on $2.1m ($0.08 per diluted share) a year ago.

Capital expenditure (CapEx) was $3.6m (up from $2.8m last quarter) as the firm continues to invest in the upgrade of its wafer fab and in modernizing its campus. Depreciation was steady at $1.6m. During the quarter cash and cash equivalents hence fell by $6.7m from $57.3m to $50.6m.

CapEx will remain at an elevated level, before falling back at some point next year. “Emcore’s fab was built when it was Nortel in the late 1980s and some of the pieces of equipment are still running…  The original reactors here were installed 20-25 years ago and, because of that, when you go to put new reactors in, all of the building issues, safety systems that were grandfathered now have to be completely upgraded,” notes Rittichier. “There’s the cost of the equipment and then there’s the facilitation expense,” he adds. “We have two reactors coming in. One is complete and in checkout; the second one is close behind it. Those are $1.6m a piece; a significant amount of that has already been paid as typically you get to this stage, you’re at sort of 10% final acceptance payments.”

For fiscal third-quarter 2019 (to end-June), Emcore expects revenue of $21-23m, which reflects CATV orders returning to normal late in the quarter along with Chip and Navigation products being roughly steady. Again, the firm expects Chips to have strong double-digit growth year-on-year and Navigation to roughly double year-on-year (putting this product line on track to double its full-year revenue once again from fiscal 2018 to fiscal 2019).

Satcom backlog remains strong into fiscal Q3 and includes the program to modernize air traffic control towers with Emcore technology. Also, Emcore continues to make progress on its new Wireless product initiatives within the DAS and 5G market segments, with production revenue likely to be a late fiscal 2019 to 2020 event when 5G deployments move beyond trial phases, believes Rittichier.

Regarding Chips, new product initiatives remain on track, with various phases of sampling occurring on a variety of 25G parts for the data center and more advanced components for the telecom markets. “As these new products are released into the market and begin to generate production volume level, we expect to see an even greater shift in mix to non-GPON products in the quarters ahead, which will have a positive impact on margins,” believes Rittichier.

“Over the past several quarters we faced cost headwinds resulting from faster-than-expected ramp up in our L-EML product line and its associated accounting impacts,” notes Rittichier. “As of the end of the second quarter, we have worked through these issues and expect gross margins to increase as volume returns. In addition, as we look out over the next few quarters, we expect to see further improvements in gross margin as we increase profit contribution from new chip products and see significant yield improvements in our manufacturing processes and extended supply chain, which will translate into improvements in final product cost,” he adds. “In particular, L-EML yields continue to improve across the board, and at this point we expect those product costs to achieve their targets.”

“The only thing that stands in the way of return to profitability is cable TV product volume. CATV is a notoriously cyclical business and the key to developing guidance is understanding the MSOs spending environment, which typically becomes clear right around this time every year,” notes Rittichier. “Emcore’s market share is nearly 70% in the downstream optical component market, so our CATV revenue generally follows the infrastructure CapEx spend of the MSOs. Recent announcements by one of the major MSOs provided some important visibility and show that the Q1 CATV MSO CapEx was at nearly a 5-year low in first-quarter calendar 2019. This MSO went on to point out that he expected spending to increase over the year, but that their whole fiscal year 2019 infrastructure CapEx would be lower than fiscal year 2018. Therefore, we should expect to see an uptick in CATV starting at the tail end of Emcore’s current fiscal quarter progressing through the end of calendar year 2019,” he adds.

“Regarding our campus upgrade initiatives, those remain on track and are already helping us become more efficient as we free up space in the cramped Alhambra campus,” says Rittichier. “These efforts will free up 20,000ft2 of floor space and allow us to finally group our personnel logically. Our upgraded fiber-optic gyroscope (FOG) manufacturing space should be completed in the current quarter and new Navigation laboratory space build out will start after that,” he adds.

Regarding the ongoing litigation, Emcore has now entered the post-hearing phase with respect to a majority of the claim, so it expects the litigation costs to decline significantly in fiscal Q3.

See related items:

Emcore’s quarterly revenue falls 4.9% to $24m

Emcore quarterly revenue rebounds by 42.5%, driven by larger-than-expected cable TV orders

Emcore’s inventory correction from main CATV customer offset by revenue growth from other customers in Q2

Emcore’s quarterly revenue falls 22% after larger-than-expected inventory correction from main broadband CATV customer

Tags: Emcore InP

Visit: www.emcore.com

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