EMCORE Corp (EMKR) 2002 Q4 法說會逐字稿

Good morning Ladies and gentlemen, thank you for standing by.

Welcome to the EMCORE Corporation fiscal 2002 fourth quarter and year end and earnings results conference call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions.

If anyone has any difficulties during the conference or requires assistance from an operator, please press the star key followed by 0 at any time. Also, to access the webcast for conference -- this conference, please log into www.EMCORE.com. Again, that's www.EMCORE.com.

I would like to advise everyone that this conference call being recorded and would now like to turn the conference over to Mr. Victor Allgeier of TTC Group. Please go ahead, sir.

Thank you, and good morning, everyone.

Yesterday, after the close of markets EMCORE released its fiscal 2002 fourth quarter and year end results. By now, you should have received a copy of the press release. If you have not received a release, please call our office at 212-227-0997.

With us today from EMCORE are Reuben F. Richards, Jr., President and Chief Executive Officer and Thom Werthan, Vice President and Chief Financial Officer. Tom will review the financial results and Ruben will discuss business highlights before we open the call up to your questions.

Before we begin, we would like to remind you that some of the comments made during the conference call and some of the responses to your questions by management may contain forward-looking statements that are subject to risks and uncertainties as described in EMCORE's earnings press release and filings with the SEC. I'll now turn the call over to Tom.

Thanks, Vic, good morning to everyone.

Thank you for joining us today as we review our fourth fiscal quarter.

Let me start with revenues. Revenues for the quarter came in at $25.3 million, and this is up 25% sequentially from the $20.3 million in the third quarter.

Let me review revenue performance by-product. In RF materials, revenues were $3.4 million, which is down 28% sequentially from the third quarter, fiber-optic products were $2.7 million, whish is up 7% sequentially from the third quarter. Photovoltaic products were at $7.8 million, that is up 155% from the third quarter, and our systems business came in at $11.3 million, which is up 14% sequentially from the third quarter.

Gross margins, um, one more comment on revenues because of our acquisition of TechStar and in accordance with generally accepted accounting principles, we adopted the percentage of completion methodology for long-term contracts only on the solar panel business. These represent contracts generally longer one than one year in duration and for which we do receive progress payments.

Gross margins increased to 13.5% from 12.5% last quarter, a modest increase but the best performance during fiscal 2002. Again, the primary reason for low gross margins is the unabsorbed overhead for major expansions efforts the last couple of years. Again, just to reiterate, we are operating at about 20% of our capacity.

Let me move on to operating expenses. The cost-cutting measures implemented throughout the year are truly showing up in our results. In terms of SG&A, expenses were down sequentially by $1.3 million or 20% to $5.2 million.

Part of the savings involved reducing some over accruals made throughout the year, but even absent those reductions, they were still a very significant half a million dollars sequentially. R&D expenses were also down sequentially by $1.4 million or 15% to $8 million. Most of these savings are the results of deferral or elimination of nonrevenue producing R&D efforts.

During the quarter, we recorded a charge for severance pay in connection with the reduction of workforce in July. That charge of $782,000 is a one-time expense and listed on the impairment and restructuring line under operating expenses.

Absent the one-time charge, operating expenses decreased a total of $2.7 million or 17% sequentially. Operating loss was $10.6 million or $9.8 million excluding one-time severance charges, sequentially this is an improvement of $3.6 million or 27%.

Let me review the items in the other expense category. Interest expense was $1.7 million, down approximately $25,000 sequentially. This is obviously the debt service on our, um, $175 million convertible bonds, GELCORE, our joint venture with GE Lighting decreased their loss by $50,000 sequentially down to $709,000.

GELCORE is completing their third year of operations. Revenues have grown from $18 million in their start-up year to $35 million last year to an expected $44 million in calendar '02 and they also foresee significant growth in 2003.

The other expenses of $1.1 million represent one-time charges related to writeoffs of investments. About $800,000 of that $1.1 million relates to the residual value we had on our books of the Uniroyal stock we are holding. The other $300,000 relates to investment we made a while back in the company involved in the 40 gig modulator market. With the telecom industry mired in the swamp we did write that investment down to zero. So, again, these were one-time charges.

Net loss came in at $14.2 million or 39 cents per share; however, excluding the one-time charges of severance and investment writedowns, the net loss was $12.3 million or 33 cents per share.

Let me spend a few minutes on the balance sheet before I turn the call over to Reuben. Cash and cash equivalent at September 30th were $84.2 million, this represents a decrease of $4.9 million since June.

If you look at our statement of cash flows, EBITDA came in at about $6.5 million. This represents a significant improvement over last quarter when EBITDA was about $10 million. One other note on cash, everything in cash and cash equivalence is exactly that. It's either cash or investments in 7, 21, or 30-day paper, all AAA rated.

A/R did increase by $3.9 million. Again, in the quarter we shifted about 65% of our revenues in the last month of the quarter resulting in the increase in A/R.

Inventory decreased by one million. We, like many other companies are not buying any components on speculation of the order anymore. We must have a customer PO in hand before we order inventory. The only exceptions are some long-lead items in equipment line and then, only on parts we know we are going to utilize.

Capital equipment purchases for the quarter were under $1million and depreciation and amortization totaled about $5 million.

Backlog at September 30th came in at $45 million with systems representing $26 million and materials, 19, a few comments on the backlog. It doesn't include service and spare parts, which run about $10 million per year.

The book-to-bill for equipment in Q4 was 1 for 1, however, we booked over $5 million in October alone.

As of today, we have booked on our equipment line, we have booked or have known business, um, equal to all of our fiscal '02 revenues on the equipment line. So we do expect significant growth in '03 on our equipment product line.

In summary, we're certainly pleased that expenses have decreased substantially to achieve our EPS targets. Our focus remains on cost cutting, cash conservation and revenue enhancement. Our outlook for the first quarter ending December 31, again, will be in the range of $23 to $28 million and with that, I will now turn the call over to Ruben for an operational update. Ruben.

Thank you, Tom, good morning, everyone.

I think I'm going to begin with some corporate highlights and then go product by product in terms of our, um, outlook.

I think in general we're pleased with the quarter. $25.3 million was the highest revenue quarter for the fiscal year 2002.

We saw significant revenue increases in both materials and in systems. Materials were up 34%, um, sequentially. Systems were up 14%.

We saw a margin improvement, operating expenses declined almost 20% quarter over quarter and 42% year over year and net income as a result was 3 cents a share better than we had forecast. Also, net cash usage was less than $5 million, which was also on target.

As Tom pointed out, we're going to maintain revenue guidance for the December quarter of $23 to $28 million, same as last quarter. Furthermore, we have made some organizational changes at EMCORE to strengthen operations management.

In the past quarter, we hired two individuals to be general managers, one in Albuquerque, one in New Jersey. Scott Massey, who had been President and Chief Operating Officer at IQE, which is a material foundery in Pennsylvania will run Albuquerque, and Bruce Nonamaker, who had been Vice President of Operations at Alpha, now Sky Works, is the GM in New Jersey.

We still feel that there are opportunities to further reduce the company's cost structure, particularly in our materials costs and these two guys were both very manufacturing oriented. And while we have seen and continue to see improvement in our cost structure as exhibited by our quarterly financials, um, we are reflecting a -- an additional priority not only to get, as we said in the press release, that we will be cash neutral from operations in fiscal year '03. The internal objects are to generate cash from operations for fiscal '03.

In TurboDisk, our system's business was the most severely impacted over the past year due to the event of 9/11 in and general economic outlook. However, over each of those past quarters, our system sales were up 14% quarter over quarter and this strength in our systems business has always been a precursor to a pickup in other business lines.

Given the strength of our backlog, um, and the orders that we booked in October, we feel that revenues will continue to increase 15% quarter over quarter for at least the next two quarters. In the system's business, 80% of the sales were for LEDs, and we continue to see strength in that market in Europe, the U.S., and in Asia. As we said in the last conference call, the major LED producers, um, in the industry have all standardized on the EMCORE large area gallium nitride platform called GanZilla.

What we are seeing now is orders coming in from midmarket suppliers which are now installing the large area GaN systems, and we feel that there will be significant follow-on orders. Further, we believe we're gaining market share in the large area gallium nitride market. ASPs for this product have improved from 1.3 to 1.4 million a unit and currently, we are winning three out of every five purchase orders.

In satellite communications, um, revenues were up more than 200% from the previous quarter to $8 million and the revenues came from a diversified customer base including two satellite integrators in North America, two in Europe, one in Asia. The applications included IP backbone, broadcast TV and radio and remote sensing.

The outlook for new bookings is stable with program wins in Japan, Europe, and several North American programs. And in advanced products, EMCORE will ship its 28% advanced triple junction solar cell with a monolythic diode for space calls this quarter. The new product incorporates patents acquired in the TechStar acquisition and gives us a significant intellectual property advantage in this market space.

This is a product targeted for the European market and we expect commercial production to commence in the first half of 2003.

In the wireless business, revenues were approximately $3 million down lightly from the previous quarter. Motorola continues to be 80% of the business.

InGaP, materials continue to grow in CDMA and TDMA applications but have yet to compete at the GSM level which remains greater than 50% of the total market.

InGaP continues to be the highest new design priority at the major producers in North America. [abut] power amplifiers and while EMCORE's engaged with each one of these major PA suppliers, meaning we're qualed and ready to ramp production, revenue growth would be a function of our customers getting new design wins.

Now, products in wireless during the quarter. EMCORE shipped it's first gallium nitride field effect transistors to DARPA under the $4 million contract signed earlier this year. The application is in avionics, SAC com, and automotive and the other markets that are particularly attractive. Unlike our HBT and [P-hat] business, these are fully fabbed devices, um, which move EMCORE up, the value added product chain.

In fiber optics, revenues increased 20% quarter over quarter to $3 million from the June quarter. Sales were particularly strong in storage area network applications where EMCORE has a dominant market share of the 2 1/2 gig market. We see this sales trend continuing into the current quarter.

The module business, the transceiver and transponders, saw increases in shipments during the quarter and currently, the module business in both the VSR, E192, and optical backplane markets, have substantial new orders and revenues will be significantly up this quarter.

This is a marketplace where we do not see substantial increased end-market demand. However, the number of viable vendors has diminished dramatically from 6 to 8 to probably 2, maybe 3 viable vendors and the existing, um, volumes are now being shared over a smaller base. This is seeing significant new orders this quarter, which we are ramping up to -- and will ship, um, all the way through the end of the March quarter.

In GELCORE, revenues are projected to increase over 30% over the next 12 months. LED demand seems to have increased dramatically due, mostly, to the fact that average selling unit prices have declined creating more opportunities for system providers to incorporate LEDs.

Areas for growth continue to be cell phones, backlighting for LCD monitors, automotive, channel letters and signals.

And with that, I will turn it over for Q&A.

Thank you. Ladies and gentlemen, we will now conduct a question and answer session. If you have a question, please press the star key followed by the one on your touch-tone phone. You will hear a three-tone prompt acknowledging your request. Your questions will be pulled in the order they're received.

If you would like to decline from the polling process, press the star key followed by the two. Please ask that you lift the handset if you are using a speaker phone before pressing any keys.

One moment, please for the first question. The first question is from Sameer Desai from Merrill Lynch. Please go ahead with your question.

Tom, quick question on the backlog. I missed that, what was that again?

Back log is 45, Sameer. And that breaks down between systems and materials of 26 and 19. That's as of September 30th. We did book over 5 million in October on just systems alone.

Okay, so that backlog, I want to make sure my calculations right, would that give a bookings estimate or net bookings estimate of 13 million, is that right? Or is that --?

Net bookings would be -- yeah, about 12. Because some of the stuff we ship during the quarter is not in our backlog, like the service and spare parts.

Right, okay, and were there cancellations in that net bookings number or -- ?

No cancellations and actually, no cancellations so far as well as calendar '02.

Okay. The 12 million is a gross number?

Right.

Okay and, um, in terms of in terms of your forecast for, um, December quarter, um, it seems to me that the gross margins, are they still going to stay around this level, maybe in the 13 1/2%?

Yeah, they might, you know, inch up a little bit but nothing significant.

Okay, do you expect savings on the operating side as well? I think you mentioned on the press release. Can you give us any?

We expect further savings in R&D.

GNA, um, you may not see that because we did reverse some accruals during the year that I mentioned. So the savings, the net savings in the fourth quarter were about a half million dollars.

You will see a little bit of an improvement not including the accruals that we reversed.

Okay, that sounds good. In terms of your forecast for, um, some of the -- your by-product segments in Q1, my guess is with the strong quarter and solar cells and the September quarter, is that expected to be down because that business tends to be lumpy?

It should be relatively flat this quarter.

Okay.

Systems will be up, um, photovoltaics should be somewhat flat, um, and the other two should be around the same thing also.

Okay, great and, um, last question. On the solar cell side, seems like, historically, you know, maybe about a year ago or so, you have been pretty concentrated there, sounds like your customer base has broadened out.

First, that a correct statement and, second, is that largely due to the recent acquisition of TechStar or is something else going on there?

Clearly this is the acquisition of TechStar.

If you go back when we were a stand alone, we were limited in our customer base because we only supplied the solar cells.

Satellite integrators want to buy panels fully integrated. By acquiring Techtsar, it gave us that vertical integration and opened up a whole new range of customers for us

Okay, great, thanks a lot.

We now have a question from Tracy Suchiguchi from Prudential Securities. Please go ahead with your question.

Hi, um, I think that Tom, you mentioned, [inaudible] about the slightly increased ASPs in the systems business, and I was wondering, I think that, um, trying to put a fair amount of pricing pressure on in that business. I was wondering if you could talk about any kind of market share dynamics that are occurring? I know that business --

Tracy, I think that, one, the increase in ASPs reflect largely, um, the higher concentration of the GaNzilla system, the large area GaN systems. And, as I said in my comments, we're winning, sort of, 3 out of every 5 submissions and while there are other products which are lower ASPs, you know, we -- as we gain market share in the space, I think you will see pricing firm up, um, on an average unit selling price over the next couple of quarters.

Let me just add that, when Reuben referred to ASPs, the 1.4, that was really for all of '02.

If you look at our backlog as of September 30th, our average selling price is actually approaching 1.6. And again, that's the larger area production systems. You know, the size of chamber is basically going from 180 millimeters to 400 or 450 millimeters.

Okay, um, and then also, can you talk about the typical linearity in the December quarter, is it usually pretty front end loaded? The holidays and all that?

I don't think the holidays have anything to do with that.

For reasons, all customers on our equipment side have to come to New Jersey to inspect their equipment before we ship it, um, so, you're right.

Hopefully they'll show up before the holiday period, um, but, you know, for whatever reasons we tend to ship a lot in the last month of the quarter.

Okay. All right, great, thank you.

we now have a question from Brett Hotis from Merrill Lynch. Please go ahead go with the equipment.

The question on the equipment side, Tom.

The strength that you have seen so far is about 80% LED.

Do you have a feeling, um, from your customers at this stage of the game how far they are along in the next technology transition on LEDs to the, I guess it's the blue and white and what not, LEDs and, therefore, how much visibility do you get on the equipment side continuing to grow in orders?

Yeah, you know, Bret, I just returned from Asia a couple of weeks ago. And in Japan, Korea and, Taiwan, I think the general view is that demand right now is 2X capacity.

Now, what is happening is you will see a big ramp in shipments from EMCORE on the GaNzilla. One of the reasons for the ramp in unit volume is that the, as I said earlier, that the N systems manufacturer are populating more LEDs per, you know, if it's a cell phone per handset, they're getting into notebook computers as backlighting, they're doing -- there is just -- automotive is using more LED, so unit volume is up. But ASPs are down between 20 and 30% a year for where, you know, the big volume market is, which is two to three milliwatts.

Consequently, in order to maintain gross margins, producers need to scale production or substantially reduce their cost of dye, and the only way to do that is go to a larger area of gallium nitride systems. So, what we think is going to happen is, that the entire, um, production base in gallium nitride systems will transition over to the large area again, systems, over the next 12 to 18 months.

So it's sort of a double whammy of a technology change and unit demand but an obsolescence rate in the install base?

I think obsolesce sense probably a good way to look at it. Unit demand is up, ASPs are down, and in order to compete, you need to go to a larger area production system.

And then, the winning the 3 of the 5, um, systems as you're winning today. um, are, um, -- In this segment specifically, is it still 3to, you know, 5 out of 5 or is the ratio higher given the large area capability of your system versus competitors.

What happened initially, Brett, was - and these were publicly announced.

We sell multiple systems into, um, Luma Lance, which is the [Agelent -Phillips] joint venture. We sold multiple systems to the largest producer in Europe and multi systems to other North American producers, um, and basically I think the trend is they're standardizing their production base on that.

Then generally what happens is the, um, the middle market producers, um, the smaller producers start populating their production base with this. Um, right now as far as I know, um, the EMCORE system large area ones are the only ones that are actually producing products at this point on large area GaN systems.

Okay, just a final question to be clear on this, um, from a cash-flow standpoint, looks to me like you're break even, given the cost reductions or what not, is maybe just slightly above where the current revenue run rate is. So, maybe in the high 20s toward 30 million. Is that about right?

About 30 million, Bret, and we will be cash flow break even from operation so, you know, we're striving to get there.

Okay.

We're also moving to increase, lower our material costing, which are a big percentage of our cost of sales on, you know, so we're working on, in tier one, striving revenues and reducing costs at the same time. So, I think today it sits at the number that Tom said, we're looking to get that lower.

Just a final question on that. If you look -- Tom had noted a 20, over all the companies at about 20% capacity utilization. Could you give us a little bit of a feel for how that is across the product area? "Cause obviously equipment sounds like it's probably a lot higher than that. But then, some of the materials sound like it might even be lower than that.

If we go back to the expansion of two years ago when we spent $80 million, in essence out of our 4 or 12 walls, we could probably ship a half a billion-dollars.

Last year, we did 130 million in equipment alone, um, so even though equipment has -- is growing significantly, we're still under capacity. Probably the biggest area is probably in the RF section area where we're under capacity. But all four product lines are, you know, not operating at full capacity.

Yeah. Thank you.

We now have a question from JD Abacharr from Pacific Edge Investment Management. Please go ahead request with your question.

Thank you for taking my call.

Tom, could you walk through the break-even point again. Because, I thought I heard you say your EBITDA was minus 6 1/2 million and so we put interest on top of that, your actual cash flow from operations was minus, somewhere around 8 million?

JD, you're not coming through too clearly, but I'm gathering from a few words I heard, it's about EBITDA and cash break even, et cetera.

If you go to our statement cash flows, I know we didn't include that in our press release, and you go down through everything except your changes in working capital, we were at about a negative 6 million, or a little over 5 1/2 million.

Okay, so what would then be the incremental gross margin do you think? Because obviously your low utilization understates your true gross margin, so what is your incremental gross margin on, you know, additional revenue above this point?

Well, one, it depends on where those revenues come from, you know, which product line it comes from.

Okay.

But, you know, anything over 25 million, you know, we should start seeing, you know, really pretty descent increases in our gross margin. I don't want to give you a specific number, but, over 25, you will start seeing increases.

Remember, if you go back to a year ago in the, you know, 40 to 50 million run rate or gross margins historically have always been in the low 40%.

Got you. Okay.

From the shipments and you're taking share in LEDs being sort of the LED equipment being the bright spot, what do you feel the capacity situation is? I know demand outstrips supply now, but where do you see sort of the ramping of LED, um, supply now and over the next six months based on your visibility into the new system sales?

Um, JD, I think that, again, if you look at -- remember the GaNzilla system is a system that has 3X capacity.

Okay.

Um, two of the existing systems, so if you look at something that is going to completely obsolete the existing production base, you know, there are 200 EMCORE GaN systems out there right now, so, um, you know, you're looking at -- just in the EMCORE customer base, you're looking at 70 systems.

And that's just a changeover - the technology changeover.

Demand, unit demand is up also so it's, again, we think that the capacity and demand crossover point is -- is probably, you know, on a short side, 12-month, long side, 18.

Got you. What just, sort of a figure, what is a rough LED output for GaNzilla per day? I mean obviously that depends on yields and all of that stuff but --

21 wafers. I -- you know what, I don't know what the gross cycle is, um, we can try and get that for you.

Yeah, but if you -- if you did -- if you were operating on a 7 by 24 basis, chances are you would do four runs a day.

I don't know how many dye on a two-inch basis. It depends -- depends on whether you're doing sapphire or silicon carbide.

Right.

It's going to be very customer specific.

Got you. But four rounds a day is a round number?

Yeah.

But 2 inch -- I'm sorry, 21 two inch wafers in GaNzilla?

Yeah.

Great, thank you very much.

Ladies and gentlemen, if there are any additional questions at this time, please press the star key followed by the one.

As a reminder, if you're using a speaker phone, please lift the handset before pressing any keys.

We have a question from Michael Masdeu from CS First Boston. Please go ahead with your questions.

Hi, this is Natalie Wright in for Michael Masdeu.

One, you talked about orders in the systems business so far during the quarter, is there any way you can give us some insight into how the material business orders are going?

Um, for the quarter -- yeah, materials, Natalie, is a month-to-month issue right now, it's not even a shorter life cycle than that week to week.

To book the ship cycle on some of our materials is under seven days. So, for Motorola on the wireless side, or Agelent and a couple other customers on the the fiber side, it's not a lot of visibility.

We know we have, you know, on the fibre channel storage area network side, we have probably 80% of the market from the bear dye to the package dye to the optical subassembly, um, and so bookings in the month of October were not very strong but, you know, probably averaged about 1 or 2 million.

Okay. And then, um, have you seen any changes in the competitive dynamic within the HBT business, um, we have heard of additional companies coming to market and then actually , um, larger component manufacturers actually qualifying additional customers. Can you talk about that?

Yeah, I think that, um, you know, the trend in the industry, Natalie, is to try and, um, you know, work with suppliers who end up looking like a one-stop shop.

People don't want to manage, you know, more than two or three vendor relationships at any one customer, um, and I think that, um, by and large, you know, the major producers in the PA business, the RFMDs, the Sky Works, et cetera, are, um, they don't view the same suppliers necessarily being good at AlGaP that might be good at InGaP. And so, I would have to say that, um, with one exception may be out of Asia, you know, most of the InGaP HPTs are going to come from either [Copen] or ourselves.

Great. Last quarter you mentioned how you had a 2 million TurboDisk purchase delay and were expecting that to ship during the September quarter.

Yes.

Was that shipped?

Yes.

Okay, great. Thank you, no further questions.

We have a question from Chris Versage from FBR. Please go ahead with your question.

Hi, guys, this is Brandon Sap for Chris Versage. When, um, you -- I think Tom, you said that you're going to be cash-flow break even for fiscal '03, um, you can say when we might expect the turn to cash flow positive then in the fiscal '03?

Yeah, by the third quarter, Brandon, we should be generating cash flow from operations or about, you know, crossover line, fourth quarter we should be fine.

Okay, great. Um, and then also with the interest expense out there, do you have any plans to repurchase debts?

Um, you know, I think it's something that we have looked at, um, we are very price sensitive with regard to doing that but it is, um, you know, something we would consider given the right pricing.

Okay, um, then also I know you mentioned that, um, you're starting to, I guess, GELCOR is starting to earn more revenues and, therefore, is reducing its loss position, but do you have any plans to monetize your position in GELCORE?

Um, you know, anytime your -- you're looking at, um, a, um, -- an increase in revenues year over year of 30%, obviously if it -- it becomes, you know, a very attractive asset from a financial viewpoint. We think that the future value of GELCORE will continue to increase, um, and if we were to do anything like monetize it, it would have to reflect some -- some aspect of that future value.

Okay. And then just, um, in terms of your operating -- optic operating expenses, do you have any targets for fiscal '03?

I'm sorry, you're -- say that again?

For operating expenses, do you have targeting that you could give us for fiscal year '03?

I think Brandon to answer that not specifically but generally, if you look at our expenses this quarter --

Just stick with the run rate from the fourth quarter?

Yeah, you will see them come down in fiscal '03.

Okay, great. Thanks a lot, guys.

We now have a question from Deiter Webber from Morgan Stanley. Please go ahead with your question.

Hi there, good morning. A couple of quick questions here in, terms of our clients actually for the equipment, do you have any new clients added to your customerr list over the fourth quarter?

I'm sorry, do we have any new customers?

Yeah, if you sort of -- yeah. Just added a new client over the fourth quarter or the revenue that you incurred over the fourth quarter from existing customer base?

Hold on, let us check on that.

Yeah, there are several new customers. They don't look -- I don't think they have systems from us in the past. Pretty much over in Asia.

Right, so all of the -- sorry, all of the 11.3 million in system revenue went to new clients.

No, that is not accurate. There were some new clients but there are also repeat clients.

And -- any sort of a number you could give us in terms of how many new clients you might have added?

Hold on. I don't have who we actually shipped to in the fourth quarter.

Okay.

The financials --

Okay, no, fair enough. Just sort of a follow-up question in terms of clarification.

A point that I have, probably didn't get correctly at the beginning, the guidance for the next two quarters is for increase of 15% for the system business, and I wondered if that was for the first order or revenue number or for either of them?

Revenue number.

Okay, thank you very much then.

I can't specifically answer your first question, but to look at the geographic breakdown of what we shipped was, um, about half went to Asia, um, the other half went to Europe and the application breakdown as Reuben mentioned, you know, about 80% were for blue-green GAN systems, one, solar cell and the rest were red, orange, and yellow applications.

Thank you very much then.

We now have a question from Chang Chu from Foreign Technology Research. Please go ahead with your question.

Good morning, Reuben. Good morning, Tom.

Good morning, Chang.

[inaudible] a sales increase, when you think may we go break even?

If you look at their business plan in Q3 of next year and remember, they're on the calendar-year basis so the September quarter they will be break even, if not, slightly profitable.

Okay, and before '03, fiscal '03, what is your capital expenditure plan?

For next year, again, capital expenditures will be diminimus spending. This quarter we spent under a million, so we're planning on about four million next year in total.

Okay, um, for the gross margin, can you give us some idea, you know, where you are in terms of systems, materials or the four, three lines of the material.

I'm not sure I understood the question.

The gross margin part. How much is in the system's business?

We don't really disclose that, um, but systems are, you know, are running pretty healthy now. With the increase selling price, you know, if you look at our backlog I mentioned, our average selling price is approaching 1.6 million, um, that is beneficial.

Okay. You know, um, looks like we just use some, your historic number, looks like, I say, if your system business is in the 30% gross margin, which means your material side was, right now was maybe on the gross margin side, looks like either break even or slightly loss in monies, is that right, am I right in the ballpark?

P&L basis, that's right, although most of the appropriation take -- depreciation takes place in our materials business.

Okay, okay. Also for the new system, um, the GaNzilla system, how much total you ship right now?

How much -- I'm sorry, on the GaNzilla, how much what?

How many -- how many system you shipped?

With the installed base?

Right.

Um, --

I think 20.

It's in the mid-20s.

The mid -- you sell for this quarter is that older systems or the new systems?

in the --

in the September-- [ Indiscernible ]

We just reported, um, there were, as I mentioned about 80% were for GaN LEDs. If not, possibly for blue lasers, um.

The other applications were solar cells or red, orange, yellow LEDs or DVDs.

Uh-huh. The one for the blue LED that's for the newer system.

Yeah, they were all newers. They were all GaNzillas.

Okay. Thanks a lot.

Right.

Yeah.

We now have a question from Robert Jowarski from Jefferies and Company. Please go ahead with your question.

Good morning, may have said that. What was the depreciation and amortization during the quarter?

Just around 5 million.

What was the guidance for next quarter?

It will be about 5 million a quarter. Remember, though, in the quarter we did have, you know, noncash writedown of the investments of 1.2 million and also about 800,000 on our severance.

Okay, and what was the share count at the end of the quarter?

36,708.

Okay, great. Thanks a lot.

Okay.

We now have a question from Fin Gimah from Wachovia Securities. Please go ahead with your question.

Hey, Tom. How you doing?

Good, how are you?

Food. What do you guys, giving the operating cash flow break even this fiscal year where do you see cash balances bottoming here?

um, in the -- in our third quarter. In our third fiscal quarter.

Okay, so probably somewhere in the range of 75 to 80 million, is that about right?

Yeah, we're at 84 million now, um, you know, let's go through our fix.

We have currently with our, all of our debt outstanding - our debts services about $9 million, I mentioned we'll spend about $4 million on CAP-X, and we have, um, probably an investment in GELCORE to be made in the next 12 months of $2 to $4 million. So, you're at $13 to $15 million in basically non-P&L cash expenditures, so hopefully we'll bottom, you know, no lower than $65 to $70 million.

Okay, thanks, Tom.

We now have a question from Pierre McCagnol from Needham & Company. Please go ahead with your question.

Hi, Tom, could you tell us a little about the cost savings that, um, the GaNzilla offers to your customer, versus the previous systems that you show.

You know, I'll throw out a figure, but, Pierre, it depends entirely on their yield and how they run their process on it, but in general, um, what we see is sort of a, um, 40% cost savings in cost per dye.

Okay. Great, thanks.

Ladies and gentlemen, if there are any additional questions at this time, please press the star key followed by the one.

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We have a question from Annette Webber, a private investor. Please go ahead with your question.

Good morning, just one question on the incoming orders on the systems segment. Am I right in assuming they were $5 million in the fourth quarter? And secondly, how many systems have you shipped in the fourth quarter? And the third question relates to the gross margins of your two segments, could you possibly brake that down between materials and systems, please?

The 5 million number net referred to what we booked only in October. We booked a total of about $8.3 million in the fourth quarter and we shipped about $8.3 million in systems, not including service and spare parts, which brought equipment revenues to a little over $11 million.

All right.

The book-to-bill in Q4 was 1 for 1.

Right now in the month of October, we booked a little over 5 million on the systems business. And I think your last question was gross profit margins between the two segments, we don't break that out, but a previous question, um, kind of indicated that gross margins are okay on systems but not that healthy on materials; however, most of the -- that's on a P&L business. Most of the depreciation applies to our materials business.

Okay. And the numbers of systems you have shipped in the quarter?

In the fourth quarter, we shipped six systems.

Uh-huh.

At ASPs of about 1 million 4.

Okay. Thank you.

We have a follow-up question from JD Abacharr from Pacific Edge Investment. Please go ahead.

Sorry about that, guys. I was looking through my notes from last quarter and I thought the backlog and systems at the end of last quarter was 32 million.

I was showing 26, JD, I'm not sure.

Okay, what was the total backlog. I probably have my numbers wrong, was 59 million for last quarter?

56 million.

56 million.

Right.

Okay, great. That was my mistake. Sorry about that.

Okay.

Mr. Richards, there are no further questions at this time. Please continue.

Well, thank you, everybody, as we said earlier, I think we're pleased with the quarter, we're pleased with the trend in operations and in, um, in our product bookings.

We -- we think that, you know, we're going -- we think that we're going to raise the bar from an operating performance standpoint to cash generations on mid-'03 from operations. And obviously, we said earlier, we'll be cash neutral on the year, so in general, I think we're poised to um, take advantage of any upturns in the business, um, we have the market-leading technology in each of our product segments and, um, um, with a little help from the market, um, we'll be in great shape over the next 12 months thank you.

Ladies and gentlemen, this concludes your conference call for today. Thank you for participating. Please disconnect your lines.