Supply Chain Use Case Getting Ahead of the Trade- Supply ...

Supply Chain Use Case

Getting Ahead of the Trade- Supply Chain and

Inventory Build Signals

On April 9, 2018 Emcore Corp. (EMKR US) reported preliminary FY18 (Sep) Q2 revenue of

$18 million to $19 million, below earlier guidance of $21 million to $23 million and Street

consensus estimates of $21.75 million. The shortfall was attributed to a significant demand

shortfall from one major customer. Emcore stock dropped as much as 12% intraday.

"Impact of a major CATV customer working through a large inventory accumulation was

greater than anticipated, resulting in lower than expected revenues from the customer during

the quarter."

Source: Emcore Press Release

Using SPLC relationships and fundamental data, we can find which of Emcore's customers

are working through inventory builds.

Emcore Supply Chain via SPLC<GO>

Source: Bloomberg Data, Company Reports

Both Cisco and Arris had inventory builds of 50% year-over-year. Because CommScope had

a decline in YoY inventory YoY, the analysis is narrowed to CSCO and ARRS.

Cisco had attributed a significant percentage of its inventory build to raw materials, which

appears to be memory purchases:

"..what we're trying to do is I'm trying to buy as much inventory as I can ahead, right? So I've

increased my inventory by a couple of 100 million for buying memory ahead but it's still a

constrained market."

Source: Kelly Kramer, Cisco VP/CFO, NASDAQ Investor Conference December 5, 2017

Arris has some raw material build, but not of the same magnitude as Cisco. And when

reading through Arris transcripts, there is a clear desire to reduce inventory:

"Our working capital is higher than we like at the moment, in particular, inventory, and we're

going to work hard in 2018 to reduce it"

Source: ARRS US 2017 Q4 Conference Call

From here, we can identify Arris as the likely culprit contributing to weak demand for

Emcore. Turn the analysis over to the supplier side of Arris, MaxLinear is the most exposed

supplier of the group, reporting 25% of its annual revenue from Arris.

Arris International PLC Supply Chain via SPLC<GO>

Source: Bloomberg Data, Company Reports

MaxLinear (MXL US) reported earnings after the close on May 8th, one month after the

preliminary results from Emcore. MXL posted revenue of $110.8M, below $112M guidance

and Street consensus. The shares plunged by as much as 26% the day following the

earnings release.

The negative signals for the MXL quarter were given twice before the release- on Emcore's

preliminary results announced on April 9 and within its official release on May 3 when the

company reiterated the negative impact felt from the "major CATV customer" inventory build.

The stock price in MXL was relatively flat over that time, it did not feel the effects of the

signal.

Timeline of Events

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