Enablence Technologies Inc. (ENA) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to Enablance' Fourth Quarter and Full Year Fiscal 2026 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Nicole Pensman with the Blueshirt Group. Please go ahead.

Good afternoon, and thank you for joining us to discuss Enablance's fourth quarter fiscal 2026 results. With me on the call are Enablance's CEO, Todd Haugen; and CFO, Steve Cohn. The press release announcing our financial results for the fourth quarter of fiscal 2026 was issued earlier today and is posted to our Investor Relations website. Before we begin, I'll remind everyone that certain statements we make on today's call are forward looking, including statements related to our guidance for fiscal year 2027, market opportunity, growth prospects, production and capacity expansion impact of AI and demand for plc optical chips. These forward-looking statements are subject to known and unknown risks and uncertainties, which could cause actual results to differ materially from those anticipated by these statements. Additionally, these statements apply only as of today, and we undertake no obligation to update them in the future. For a detailed description of the risks and uncertainties, please refer to our earnings press release. Finally, unless otherwise noted, we will be discussing results based on IFRS accounting standards on today's call. Now let me turn the call over to Todd for an overview of the quarter and updates on Enablence's business. Tom?

Thank you, Nicole. And thanks, everyone, for joining us today. I'm very excited to be here this afternoon on our first ever earnings call. The goal of our call today is provided with details around our fourth quarter results, offer perspective on our fiscal '27 guidance and give you some insights into the underlying drivers of the growth inflection Enablence is seening today. We have a really unique opportunity in front of us, and we want to make sure that our segment and vision for the future resonates with the investment community. Let's start with our fourth quarter results. We generated $2.9 million U.S. revenue in Q4. That represents a growth of 38% year-over-year. Gross margin was 8%, an improvement of 36% year-over-year our second and second quarter of positive gross margin. We finished the fiscal year at a run rate of 375 wafer starts per week, hitting the target we outlined in March of this year. I am very pleased with the growth and progress that our team delivered this year, and we are just getting started. Many of you are likely new to Enablence. And so I'd like to take time on this call to explain how we got here and why we are confidently optimistic about the future, starting with a 30,000-foot view Enablence is a vertically integrated U.S.-based provider of PLC optical chips and assemblies that are increasingly critical to AI infrastructure in North America and around the world. We focus on 3 lines of business: optical communications, sensing and compute. The company was founded in 2004, started trading in July of 2006, and our first production facility opened in Fremont, California in 2008, through the purchase of a key supplier and devices. We have invested more than 2 decades in R&D in our optical component technology, and we've built a customer base and partner network that includes dozens of blue-chip enterprises, including many of the largest names leading today's AI revolution. While our goal has always been to deliver highly performance differentiated ships to our customers, in the last 5 years, we've been able to refine our technology, demonstrating our technical superiority in the market. our customers recognize our differentiation and has been a key driver of demand acceleration recently. Today, we find ourselves squarely in a sweet spot as a supplier of a critical building block of AI infrastructure. enables produces the PLC optical chips are in a multitrillion-dollar AI data center build-outs. And while we have a technology and products to address the explosive demand the market is experiencing for these optical chips, and all is currently capacity strength. Customer demand for our chips meaningfully exceeds our current production capacity and our manufacturing output is completely sold out through the end of fiscal '17. -- core component of our growth story is launching a second production facility in Q3 of fiscal 2017 to meet the explosive market demand. But before I get into all the details around our capacity expansion road map, let me first double-click on the macro backdrop that's positioned us for success today. The AI revolution is clearly the biggest tailwind here. The infrastructure build-out to support -- today's AI super cycle is estimated to total $7 trillion in investments. This figure comes from a Mackenzie report that was delivered more than 2 years ago. the spend on data centers is going to continue through 2030 at a minimum at nearly 1% of global GDP in a $7 trillion figure was intended to represent the ceiling of possible investment. However, by January 2026, market reality suggest that the $7 trillion figure is a conservative floor on the global AI infrastructure -- and the reality is this figure could be significantly higher. Our plc optical chips are critical in networking sensing and compute infrastructure, which is the foundation that enables the AI revolution. We've played a role in providing communication chips for data centers and networking, but now copper reaches its limitations. Optics is key in enabling customers to handle computing requirements of modern data centers. And this has opened up huge opportunities for us to expand beyond communications into compute, which is optics inside the chassis and sensing for robotics and self-driving cars and the like. Looking at the data center networking piece alone, there's been a structural shift away from copper to optical chips. Copper is inefficient at 200G per lane and limited to runs of only a meter in length at 400G per lane. Hyperscale data centers are increasingly rely on compact, power-efficient optical solutions to overcome silicon and thermal limitations, while OEMs push for lower energy performance and higher port density. This dynamic is making hybrid photonic integration and specialty PLC architectures a critical enabler for the next generation of data and AI. This is exactly what's driving surgeon demand for optical chips, in the data center and is reflected in the dollars being invested in data center interconnect, which is now the #2 spending category in data center build-outs, and it represents 15% of the total CapEx, up from 6% historically. There's clearly a critical need for PLC chips across data centers globally. Enablence proven itself as an established supplier with Tier 1 customers having sold and deployed over 20 million chips to date. Our relationships across the industry include blue-chip enterprises spanning AI communication sensing and compute and many of the multinational organizations, you are recognized as enterprises leading the AI revolution. Our technology is trusted in similar to the most critical NAV infrastructure build-outs around the world. Looking beyond data center interconnect, our plc optical chips have applications across robotics, telecommunications infrastructure, LIDAR for autonomous vehicles, aerospace, defense, noninvasive medical engaging and arrange better applications. While AM communications infrastructure drives the majority of revenue today, we see significant growth in these adjacent areas as well. For example, our PLC chips for FMCW, LiDAR sensors support the growing demand for a wide range of advanced industrial application where high precision is critical to ensuring advanced automation. For example, Automotive, robots and industrial automation all require the most precise navigation and obstacle detection capabilities in robotics, enhanced operational and reliability and dynamic environment is critical. Most importantly, in automotive, you'll see based FMCW-Liner provides real-time accurate velocity awareness that can be a matter of saving lives. In addition to our expansion -- our continued growth in these adjacent areas, I'm excited to talk about our success moving up the value chain from PLC wafers into component assemblies and optical engines. This positions us really well for the longer-term opportunity we see in front of us and our plan to expand beyond assemblies and optical engines into modules and OCS systems in fiscal '27 and '28. This gives us an opportunity to unlock multiflow revenue expansion on a per unit basis, while meeting direct customer demand, particularly in Europe and North America. This movement up the value chain expands our addressable market by 7x and so is a huge opportunity for us. While the AI revolution is proven to be a tailwind for many across the ecosystem, enables us also benefiting from our geopolitically advantageous supply chain structure. In August, we announced the completion of our advanced optical manufacturing facility in Vietnam, which we developed in partnership with ShunYun Technologies, better known as SYT. Our supply chain now integrates chip design in Ottawa, wafer fabrication, specialized assembly, packaging and test in our fab in Fremont, California, and advanced of volume packaging and assembly in SYT's facility in Vietnam. The launch of our facility Vietnam now makes enables the only noncaptive PLC fab in North America, offering a completely China supply chain. And this is already driving significant interest in North America. Our specific model is ideal for particularly for North America, cloud hyperscalers and Tier 1 optical module makers. We're looking to mitigate exposure to geopolitical risk, which is an ongoing threat in today's global environment. We're proud of what we've achieved and the momentum we've had with customers, particularly given our relative scale. Our traction in the market is clearly indicative of the differentiated technology we're offering our customers the success of today's high-performance AI data centers is becoming dependent on how quickly and efficiently data can move not solely on compute capacity alone. Chips are powering the critical bridge between scale up compute density, scale-out cluster performance and the scale across optical networks, creating better outcomes for our customers. We're turning now to the discussion around capacity and our expansion opportunity. Fiscal '22 was the beginning of a turning point for Enablence. The year I joined, we timed our focus to future chip cycles, including 800G, 1.6 LiDAR and compute products and formally established a production goal of 100 wafers per week by the end of that year. By fiscal '24, we began acquiring key customers and had secured demand for over 500 wafers per week, exceeding our 125 wafer per week capacity. Fiscal '24 was the beginning of our inflection point. We invested in the new equipment and infrastructure that would eventually allow us to exceed 1,000 wafer week production by the end of Q2 fiscal '20. We are on track for that objective, and we expect this output generated over $2.5 million of revenue per month. And most importantly, -- we've demonstrated that customer demand for our chip is unwavering across a diverse customer base. As I've mentioned, our capacity is sold out with committed contracts through the end of fiscal '27 and any new capacity coming on board will translate to immediate high-margin revenue uplift. Looking ahead, we see 3 key levers for further expansion. Our first area of focus is increasing output capacity in both our Fremont fab and our manufacturing facility in Vietnam. We began producing qualified samples in August, our Vietnam facility, which were delivered to key customers for evaluation. One key area of focus for us is shifting production from 200-millimeter wafers shifting production from 150-millimeter wafers to 200-millimeter wafers in our Fremont fab. The efficiency gained from this transition, 200-millimeter rivers have 90% more chips per wafer and will drive a 25% uplift in gross margin. And we expect to begin production of 200-millimeter wafers in the first half of fiscal '28 and are targeting output of 1,000 wafers a week by the end of calendar '28. Third, we see an opportunity to expand into adjacent markets. As we discussed earlier, specifically optical compute and LIDAR. We have customers today that are live in production and continuing to ramp their monthly demand. And we think these markets are in the early stages of harnessing the power of PLC optical chips. We see these markets as a longer-term expansion for Enablence, growing throughout fiscal '28, '29 and '30. I'm very pleased with what we accomplished in fiscal '26 and believe we are extremely well positioned to execute on our growth plan as we look into fiscal '27 and beyond. With that, I'd like to turn over our call to our CFO, Steve Cohn, and discuss our financial results. Steve?

Thanks, Todd. I'm excited to be here today. I joined Enable in July of this year, and the excitement around the opportunity here is evident. It's been a great first few months of learning and ramping, and I look forward to watch ahead for Enablence. I'll start with a review of our Q4 and fiscal 2026 results before turning to 2027 guidance. Before I get into the results, I would note that all currency-based metrics shared are in U.S. dollars and all financial comparisons are year-over-year basis unless stated otherwise. We had a very good fourth quarter with results that met our guidance provided back in March, capping off an exceptional year of growth for Enablence. Our ability to ramp production at our Fremont fab enabled us to grow across all of our businesses. At the same time, our meaningful year-over-year improvement in gross margin reflects our ability to drive top line growth with minimal incremental overhead. We believe this demonstrates the inherent leverage in our model which will enable us to drive long-term shareholder value as we continue to scale. Moving on to the numbers. Revenue in the fourth quarter totaled $2.9 million, an increase of 38% year-over-year. Revenue growth was driven by our ongoing expansion in production capacity, and we finished Q4 at a run rate of 350 wafer starts per week. Gross margin was 8%, an improvement of 36 percentage points compared to Q4 last year. Q4 marked our second consecutive quarter of positive growth margin as the investments we made in equipment in fiscal '25 are driving leverage in our model. While we are continuing to invest in our capacity and production expansion, we expect gross margin will continue to improve as we scale. Operating loss of $2.9 million improved 8% compared to a loss of $3.1 million in Q4 of last year. Net loss was $6 million compared to a net loss of $5.8 million in Q4 last year. And to recap the full fiscal 2026 revenue grew 37% to $8.1 million. Gross margin for the year was negative 16%, an improvement of 24 percentage points compared to fiscal 2025. Operating loss was $12.7 million compared to a loss of $11.4 million last year, primarily driven by about $2 million in incremental R&D investments this year. Net loss was $22.5 million compared to a loss of $18.2 million in the prior year. The driver of this wider loss was approximately $6 million in higher taxes and interest expenses. We ended the fourth quarter with cash and cash equivalents of $4.1 million. It's important to note that we closed on a private placement in September, which added CAD 25 million to our cash position, net of fees, and is not reflected in this Q4 cash position. We intend to use the proceeds from that offering for capital expenditures to expand capacity and for general corporate purposes, including working capital. We will provide a more updated view on our current cash position at our Q1 earnings announcement. We currently have approximately $64 million in debt outstanding with no bank debt. As part of this total, we have about $25 million in outstanding convertible debt, which is comfortably in the money as of today's discussion. Before I get into our guidance for fiscal 2027, I want to provide some detail around the factors we are taking into consideration as we set our guidance. First, we are continuing to refine production in our Fremont fab, and we expect production to ramp to more than 1,000 wafers per week by the end of the first half of fiscal 2027 as we continue to increase efficiency. Second, as Todd has discussed, our capacity is sold out through the end of fiscal 2027, and production expansion is a critical piece of our growth story. Our assembly plant in Vietnam is production qualified and we expect our vertically integrated end-to-end supply chain to remain a competitive differentiator for us. With that backdrop, for the full year fiscal 2027 ending June 30, 2027, we expect revenue to be between $19 million and $21 million, representing nearly growth of 150% year-over-year at the midpoint. Gross margin is expected to be between 25% and 35%, an improvement of approximately 46% year-over-year. Additionally, we have begun to close our books for the first quarter of fiscal 2027, which ended September 30. For Q1, we expect a record quarter for Enablence. We estimate revenue in Q1 will total approximately $4 million an increase of almost 500% compared to Q1 last year. We appreciate you taking the time to join us on our call today and hope this has been a helpful introduction to the Enablence storage. We firmly believe that the future of AI and robotics will be driven by advanced optical solutions, and we are squarely positioned to benefit from these accelerating tailwinds in the years ahead. We look forward to watch on the horizon for enables. With that, Todd and I will take your questions. Operator?

[Operator Instructions] Your first question comes from Sebastien Naji with William Blair.

Congrats on hosting your first earnings call here. It's been great to see the capacity progress this year at both Fremont and then the new Vietnam site and it's nice to see you hitting your wafer output targets. As I think about the next target that you set up for yourself, I think you said 1,200 wafers per week, but please correct me if I didn't quite get that. Can you just maybe talk a little bit more about what needs to happen for you to get there over the next 12 months, 18 months? And is that going to be a linear ramp or a little bit more back-end loaded? And then I have a quick follow-up.

Yes. So there's 2 numbers that you're sort of completing there. One is the 1,000 wafer week target by the end of this calendar year. And the obstacles to getting to that are really just logistical. The equipment is all production qualified. And we're just working through getting some recipes, finally, production qualified as well. They have to be reliability tested and other things of that nature. And so in terms of where we stand there, we're currently at a $750 a week run rate, and we have peaked at over $900. And so I think we're on track for it. It will be a challenge. The predominant challenge is just change management inside the fab itself getting people used to operating at that higher case. Then we have the $1,200 number, the $1,200 number will be by the end of the fiscal year. This is due to optimizations in the fab and it will be relatively linear throughout the H2 of the fiscal as we refine individual recipes at various points in the fab.

Got it. Okay. Great. That's really helpful. And then just maybe for my follow-up, as we think about this fiscal 2027 guidance, any way to think about the mix between wafers and assemblies and then, in particular, maybe over kind of a multiyear period? I assume assembly should trend higher, but how to think about that mix shift?

Yes. So for fiscal '27, the mix is going to be predominantly wafers. So I think 85%, 90% wafers with a small amount of assemblies as we ramp into that assembly production. And as we look into fiscal '28, that rate starts to shift significantly. The current strategic plan is to allocate 20% of our capacity to that channel. That's -- the specific reason of using that target is an assembly sales for roughly $6 and chip sales for roughly $1. And so by allocating 20%, you get roughly doubling in revenue. And so at that point, we'll be in the 50-50 distribution between the 2. Whether or not we push beyond that is going to be evaluated at the time based upon market demand. If we see a lot of demand coming from North America and other places through our Vietnam facility, we will increase that ratio. Otherwise, we'll continue to manage it in a way that does not risk our existing customer base.

Your next question comes from Richard Shannon with Craig Hallum Group, LLC. Please unmute and ask your question.

All right. Great. Todd. And Steve, can you hear me? Just want to make sure.

Yes, indeed.

Yes.

Okay. Great. Sorry, I wasn't sure how -- I just see an unmute button here, but I think I figured it out. Well, thanks for let me ask a couple of questions. Congrats on the first earnings call here. I'd love to understand the dynamics here in gross margins. Obviously, we had 2 quarters in the positive, and you get a very nice gross margin guide for this coming -- this fiscal year, fiscal '27. Either one of you would love to understand the dynamics by which you get to this, how much of this is volume versus mix yield? Any other dynamics that helps you get to this in the company at you have in doing that.

Yes. So there are really 2 primary drivers. One is spreading our fixed costs over a materially larger product volume base. And so there is a huge amount of margin increase that comes from that. The second is that we are managing our product shift given that we are sold out of wafers, we have a wafer allocation process we go through that balances existing customers and existing contracts, which are inherently at a lower margin, they tend to have been established months or years previously versus newer customers and newer contracts, which are a higher margin. And so we manage that balance, and that's allowing us to capitalize on our pricing power that we're seeing in the market now. And as that pricing power as we are able to take advantage of that pricing power, we're seeing our ASP on a per wafer basis come up, and we'll continue to manage that increase, that pricing to increase throughout the remainder of fiscal '27.

Okay. Great. That's great detail. My second question is on customer diversification. I think you made a brief comment in your prepared remarks, Todd, about that. And given that you talked about fiscal '27 being fully booked, I'd love to get a sense of what that concentration diversification might look like? Or do we have a couple 2, 3 customers driving a majority or just any general characterization of what the level of concentration is I think most people can understand in the AI market here with communications and transceivers -- that's a reasonably concentrated market. So I think people are trying to compare and contrast your exposure to what the market is?

Yes. So I'll leave Steve to talk about the specific margin portion of the question you asked there, but let me touch on the diversification. Today, you're seeing a concentration amongst 3 customers. And Steve, I think, can talk specifically what the concentration is amongst those 3 customers. We have a much longer tail. And as I was saying, we're balancing our allocation, our product allocation, we're easing to balance across our high-volume existing customers and our emerging customers, with the intention to more balance that revenue out. As you see us step into the assemblies, those are really an entirely new customer set as we're taking out a -- for North American sales, we're taking a tier of the value chain out of the equation. And as a result, you're seeing -- you'll see more than a doubling of our key customers and value to occupy roughly half of our total revenue, the assembly customers and the key assembly customers and the key wafer customers. As far as the top 3, Steve, do you want to reflect on exactly what that concentration is?