EMCORE Corp (EMKR) 2003 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the EMCORE Corporation's first-quarter 2003 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 difficulty hearing the conference, please press star zero for operator assistance at any time. I would like to remind everyone that this call is being recorded and is being webcast at www.emcore.com. I will now turn the conference to Mr. Victor Al-Gurair (ph) of TTC (ph). Please go ahead, sir.

Thank you, and good morning, everyone. Yesterday after the close of markets, EMCORE released its fiscal 2003 first-quarter results. By now you should have received a copy of the press release. If you have not received a release, call our office at 212-227-0997. With us today from EMCORE are Reuben F. Richards, Jr., president and Chief Executive Officer, and Thomas Werthan, Chief Financial Officer. Tom will review the financial results and Reuben 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 will now turn the call over to Tom.

Thanks, Vick, and good morning to everyone and thank you for joining us as we review our first quarter of fiscal '03.

Let me start with revenues. Revenues for the quarter came in at just over 23 million. This is up 21% from the prior year, and down 8% sequentially and let me review the revenue performance by product category. In the RF materials and sensors, revenues came in at $2.1 million, that's down 64% year over year and down 40% quarter over quarter. On fiber optics, which includes everything from VCSEL dye all the way to the transponder modules, revenues came in at $2.3 million. That's up 72% year over year and down 17% sequentially.

Photovoltaics, which is our solar cell operation came in at $5.1 million. That's up 171% year over year and down 35% sequentially. And finally, on our systems business, revenues came in at $13.8 million, which is up 34% year over year and 22% sequentially.

The gross margins for the quarter were 10%. This is down from 13% last quarter. Lower revenues certainly impacted margins, as well as the commercial release of several fiber optic products that had the effect of reducing R&D costs but impacting gross margins and I'll touch a little bit more on that later.

In terms of operating expenses, our cost-cutting measures, you know, that we have implemented throughout the past 18 months are truly showing up in our results right now. Last quarter, SG&A expenses totaled $5.2 million, but as I mentioned in our last conference call, that included a year-end reversal of some over-accruals of about 900,000, so absent that reversal, SG&A last quarter would have been 6.1 million. This quarter, SG&A came in at 5.8 million -- 5.8 million, so a savings of about 300K or 5%. Year over year, SG&A decreased 1 point 2 million or 17%.

R&D expenses decreased about 4 million, or 50% sequentially, and 8 million, or 75%, year over year. In addition to the elimination of non-revenue producing R&D projects, there are substantially less R&D costs being incurred in our fiber products -- fiber optic product line, as we have released new components and modules for commercial use. Therefore, any costs associated with these products are now categorized in cost of sales.

As I previously mentioned, this is -- as well, as low volume shipments was a factor in our decreased gross margin. We have now decreased quarterly operating expenses from a high of about $23 million a little over a year ago to 9.35 million in the current quarter which you add back the gain on the bonds, and this represents annual savings in excess of $50 million.

So we feel real good about where we are from an operating expense standpoint. Our next challenge is to improve our gross margins, and we are spending considerable time addressing this issue. A central theme is to work with our vendors to lower our material costs, since that is the highest component of our cost of sales. As I briefly mentioned, included in operating expenses during the quarter was a gain of 6.6 million on the retirement of a portion of our convertible did debentures. We did purchase about $13 million of face value of bonds during the quarter, for about 6-and-a-half million dollars. Just to be clear, the aforementioned savings in operating expenses is net of this gain.

Let me review the other items in the other expense category. Interest expense was about 1.8 million. That's essentially flat with last quarter and this is the debt service on our convertible bonds. GELcore, our joint venture with GE lighting, decreased their loss by about 140K sequentially, to $571,000. GELcore just completed their third year of operations. They are on a calendar year basis. Revenues have grown each year, with '02 coming in around $44 million, and they also foresee growth in 2003.

The net loss for the quarter was 2.9 million, or 8 cents per share, as compared to a net loss of 14 million, or 39 cents per share in the prior quarter, and a loss of 31 million, or 85 cents per share in the prior year. Excluding the gain on the debt, loss would have been 9.5 million or 26 cents per share.

Let me spend a few moments on the balance sheet. Cash and cash equivalents at the end of the quarter were 74 million, and this represents a decrease of 10 million during the quarter. However, non-operating expenditures during the quarter amounted to $9 million, or 90% of the decrease, and consisted of the buyback of the bonds for 6-and-a-half million, a 2 million capital call for GELcore, and about a half a million dollars on capital expenditures. We also paid our semiannual interest payment on our bonds, which totaled about 4.4 million. So not including balance sheet items and interest expense, we jeep rated cash in the quarter.

If you'll look at our statement of cash flows, cash used in operations was just over 1 million, a significant improvement since last quarter. One other note on our cash balances. Everything in cash or cash equivalents is exactly that. It's cash or short-term paper, all triple-A rated. Accounts receivables decreased by almost $5 million. We obviously had a strong quarter on collections. Inventory also further decreased 3.5 must million to 27-and-a-half million. That's down from $50 million about a year ago.

Capital expenditures, as I mentioned, were just under 500K and that's expected to stay at that level for the foreseeable future. Depreciation and amortization totaled just under $5.5 million. Backlog at 12/31 because 43 million, with systems representing 26 million and materials at 17 million. The book-to-bill for equipment was slightly over 1 at 1.05 to 1.

Let me just spend a moment on the Agere acquisition before turning the call over to Reuben. As we announced two weeks ago, we did purchase Agere's west coast optical business, formerly known as Ortel, for $25 million. Ortel, as the division will be referred to, had revenues of approximately $54 million for the fiscal year ended September 30th, 2002, and is projected to have revenues between 30 and $40 million for the fiscal year ending September 30th, '03. Since the closing was in late January, EMCORE will recognize the final eight months of Ortel's results in our consolidated statements. As far as guidance for our second quarter ending March 31st, we are providing a range of revenues between 26 and 30 million.

In summary, we feel very good about the results we've had in reducing our operating expenses and our operating cash burn. We every focusing on our gross margins, particularly on the material cost side. We are still operating at about 20% of capacity, so we do have un-absorbed overhead that does affect gross margins, but we've had some keen interest on some subleases that will modestly lower this burden. And we are certainly excited about the Agere acquisition. And with that, I will turn the call over to Reuben.

Thank you, Tom. Good morning, everybody. I'm going to begin by summarizing the quarter, then addressing individually the product lines, and then a discussion in more depth on the recent acquisitions. Revenues for the quarter, net guidance given the last quarter call with continued strength in both capital equipment and in fiber optics. Earnings per share of a loss of 8 cents was 20 cents a share better than forecasted. Operational improvements resulted in positive cash flows for the quarter, and these improvements on the cost side will continue. They put us -- the company in a position to redeem some of its convertible notes, which will improve the P&L going forward, and we were able to redeem these notes at a 34% yield to maturity which we felt was an effective use of our cash.

Finally, as we've noted, we acquired two assets in Ortel and Alvesta, which had combined revenues in calendar year '02 of over 60 million. But more importantly, it moves EMCORE into the CATV, cable television, gigabit Ethernet, Fibre Channel and metro access markets. Further, these acquisitions broaden the company's product lines to both analog and digital, short-reach through metro access, and chips all the way through transponders. And it puts EMCORE in the top five companies in the U.S. in terms of active components, with over $60 million annually.

Finally, as Tom noted, we are guiding revenues to 26 to $30 million for the current quarter, from 23 to 28 in previous quarters. On a product-by-product commentary, TurboDisc, the system business, continues to show strength, with a 22% revenue increase quarter over quarter to 14 million. The large area of gallium nitride LED systems continue to gain market share and bookings during the quarter were better than 1 to 1, so that this revenue stream will be sustainable over the next several quarters.

In sat com, revenues were down to 5 million, down sequentially, reflecting delays in programs that the company has won. And while EMCORE has been awarded significant numbers of new contracts, production starts are being pushed out 1 to 2 quarters, and revenues for the current quarter with expected to be flat.

In fiber optics, revenues were up sequentially, slightly, quarter over quarter to 2-and-a-half to 3 million. More importantly, we saw the order intake improve dramatically in the last month. The company currently has orders at the chip through the module level sufficient to meet projections for this quarter, with still two months remaining in the March fiscal quarter.

Demand is being driven across the board by Fibre Channel, as well as optical networking companies. In RF, this was the slowest revenue quarter of the year, reflecting seasonal adjustments to our customers' inventory levels. Revenues for the current quarter will be substantially above those experienced in December. As Tom pointed out, in GELcore, it had the highest revenue period in its history, and the deployment of its product line is going very smoothly.

With regard to the two acquisitions, as I said earlier, this moves us very strongly into the CATV business. This is a business that is -- did about $35 million worth of revenues just in CATV last year, but really represents a market leader with brand name recognition who was a sole provider to many of the leading companies across the board in CATV, telecom access, and in satcom. As I said, the acquisition moves us into the top 5 companies in the country in terms of active components.

The market space that these guys compete in, that the products have a dominant market share, is projected to grow at a compound annual growth rate of greater than 30%. This growth rate is being driven by new services being offered by the cable companies which are Video-On-Demand, cable telephony, and cable modem or Internet services. These new services are requiring increased bandwidth, which is resulting in infrastructure buildout.

Further, the acquisition of Ortel gives us a path to additional market opportunities with FTTX, which is fiber to the 'X', fiber to the home, wherever, which is a market that we're going to be participating in with the regional Bell operating companies, where the company makes diplexers and triplexers as well as video cards for passive optical networks and may well result as a backbone for wi-fi.

The asset is completely synergistic with EMCORE and enables access to the emerging demand for XFP (ph), this is the 10 gigabit application which had been on EMCORE's product road map for some time. They have extensive RF experience for analog circuit design and analysis, and this asset will allow us to move from the very short reach to the short reach to the intermediate intermediate reach market applications.

From a finance standpoint, synergies with existing fiber, we expect to be able to drive 7 to $8 million a year in cost savings and improvement in the P&L based on this revenue number over the next 12 months. They have a dominant position with their customers in many cases are sole source for a number of products, and in a growing market where there is still an infrastructure buildout, this looks to be a very attractive opportunity. And with that, I will close my comments and open it to questions.

Thank you. One moment, please. Ladies and gentlemen, we will now conduct the question-and-answer session. If you have a question, please press the star, followed by the 1, on your touch-tone phone. You'll hear a three-tone prompt acknowledging your request. Your questions will be pulled in the order that they are received. If you would like to decline from the polling process, please press star followed by the 2. Please ensure you lift the handset if you're using a speakerphone before impressing any keys. Your first question comes from Brett Hodess from Merrill Lynch. Please go ahead.

Hi. This is Samir Desai in for Brett. Can you hear me okay?

Yeah.

Yeah.

Okay. Great. First question is, on the backlog number you gave, the order number I kind of back-calculated from that, it looked like it was up pretty strongly. Was it in the 20 million range, was that the number you got?

I'm sorry, I didn't quite -- you faded out there.

I'm sorry. I said based on the backlog of 43 million, it looks as though the orders were up in the quarter, in the 20 million range. Is that about right?

Bear with me one second. Bookings for -- that's right. In total, were about 19-and-a-half million.

Okay.

And that's a little under 13 million for systems and about 7 million for materials.

Okay. And on the materials bookings, was that predominantly fiber optic or what was the -- kind of the breakout there?

One moment. Some -- you know, a little longer range on photovoltaics. The contracts certainly spread out longer on the photovoltaics. On the fiber optics side and on the RF side, you know, the purchase orders we're getting, as we mentioned over the last couple months are really kind of month to month.

Okay. That sounds good. I guess what I was trying to get at is next quarter you've got basically up revenue growth and I was -- from the comments like Reuben talked about, it sounds like the growth is coming from largely RF in the quarter. Is that -- is that about right, or fiber optics --

That would really be fiber optics because of the Ortel acquisition. You'll have revenues from them and that's going to be part of our fiber optics group.

Yes. I would also add, you know, along those lines, in January, which is not reflected in this backlog number, we -- we received enough purchase orders for the quarter to hit our budgeted numbers just for fiber optics. So it's a little misleading trying to connect that to the December backlog.

Okay. Yeah. I guess that -- I guess that's another question I was trying to get at. Of the revenue guidance you provided, let's see, based on the run rate of Ortel, that looks like -- I mean, is that -- is that basically the reason why the revenues are up? Is the core business of Ortel flat? Is that about right?

Yeah. It -- right now, we're -- what has -- what will be contributed by the Ortel asset is, you know, we sort of have a range at this point. We don't know what was shipped in January, prior to closing. Those books haven't really closed yet. The-- the guidance on the revenues is driven principally by strength in the capital equipment and fiber. The -- we think the other businesses -- RF will be up, sat com will be flat.

Right.

Okay. Great. And I guess on the financial impact in terms of the cost structure and the margins, that's another question. Both -- I wanted to get a feeling for how you felt gross margins and operating expenses might track through the year, based on, you know, your comments, Tom, on lower lowering the materials costs as well as the impact of the Ortel acquisition. It's -- I don't think you've talked about the impact of the Ortel acquisition in the financial --

Yeah. From an operating standpoint, Samir, we feel real good, you know, about the progress we've made and we should track the rest of the year. I will add that, though, on the Ortel acquisition, they have about 200 employees, give or take, so there will be some impact. The savings Reuben referred to is over a 12-month period, and probably will not begin for about 4 or 6 months. So you'll see a little uptick on --

Okay.

-- operating expenses over the next four to six months and then you'll start to see substantial savings, particularly on the cost of sales side.

Okay. Do you have any sense right now, if you can give us any sense, what the -- where the net margins are?

For next quarter, I -- you know, I think you'll see a modest uptick but it's not going to be anything dramatic.

Okay.

I will tell you that the Ortel gross margins are -- are higher than probably -- probably substantially higher than our existing materials gross margins.

Right.

Okay. That's helpful. And on the -- on the operating expenses end, do you think they'll be a little bit higher in the current quarter because of the Ortel acquisition?

Yes. Because they do have, as we mentioned, 200 people. Most -- you know, a lot of them are in manufacturing but they do have a marketing and sales organization, as well as some general and administration folks.

Okay. Great. And the last question is regarding the solar cell program, can you give me a little color on what's causing some of the delays there and how comfortable you feel with the timing now of some of that business coming in?

Yeah. You know, I think that, you know -- and I'll give you an example. One of the big satellite integrators that we have a -- I'll call it a 5 to $7 million program with was intended originally -- it's a government program. It was intended to start in December. They've pushed it out to January. We're obviously in February right now. We think it's going to start, you know, either the end of this quarter or beginning of April. But that is -- it's kind of symptomatic of what's going on in -- in the -- in the space. There is -- what they're doing is, you know, capital is tight for the satellite integrators, and they are shortening the times where they have to -- shortening the lead times where they have to deploy that capital with subcontractors like EMCORE. So historically, where we have seen kind of delivery periods that would be 12 months before satellite launch, those periods are getting contracted.

Okay. Okay. Great. Thanks a lot.

Your next question comes from Chris Versace (ph) from FBR. Please go ahead, sir.

Good morning, guys.

Good morning.

Good morning, Chris.

Just a couple questions. I notice, you know, you pointed out in your comments that R&D, you know, plummeted sequentially and I'm just wondering for the core EMCORE business, how sustainable is that, you know, really reduced level?

Pretty sustainable, Chris. Remember, we've released a lot of products now, so a lot of projects have been completed and, therefore, those expenditures will no longer show up in R&D. So I'm pretty comfortable that we can sustain, you know, similar levels going forward.

Yeah. One of the reasons that gross margins were flat this quarter versus being -- seeing any kind of significant improvement was, you know, these products were released during the December quarter. They then become cost of savings --

Correct.

-- and at the initial volumes that they start shipping at, you don't start seeing margin improvement until the unit shipments get up. So it goes out of R&D to above the line in terms of cost of sales. But I guess what I'm wondering is that 3.6, you know, call it 3 to 4 million a quarter, something like that, you know t sounds like in your core business over there will be new products developed, so on and so forth, and you guys are comfortable with that level, kind of sustaining those new innovations?

For the foreseeable future, yes. There is some R&D that Ortel is obviously spending Chris which will now show up in our P&L.

And any sense of as to what the AST friends are in the business, you know, are they flattish in the quarter, ticking up a little bit?

Hang on a second. If you look at our bookings for the quarter, the average selling price was a little over a million five, so the ASPs are going up but remember we're shipping much, much larger production systems.

Right. And just to recap, is all the demand there from LED?

Virtually -- pretty much. A lot is gallium nitride, which will be LEDs, potentially lasers, you know, blue lasers. But a lot gallium nitride.

Okay.

And that is -- that is largely -- we're seeing, Chris, some -- some market demand at the consumer electronics for DVD lacers. CD-ROM applications. Out of -- out of Asia. And that makes up some of the -- some of the application profile. But it's still predominantly LEDs.

Okay. And then just two other ones real quick. Any sense -- I know you guys said best revenue ever out of GELcore. Any sense what their break-even level is in terms of revenue?

They are projecting break-even in this calendar Q3, Chris.

Okay.

We don't -- we wouldn't release quarterly numbers because they just don't want us to do that.

That's fine, that's fine. But you do expect it in the calendar third quarter, you said?

Yes. But, you know, they lost a half a million dollars on -- on this quarter, so that the revenues don't have -- one million, excuse me, so the revenues don't have to be a lot higher than where they are.

Okay. And then the cash, you know, at the end of the quarter, ballpark number, is going to be around, you know, 50 million. What's your comfort level kind of running that business, you know, the business with that kind of cash on the books over the next, you know, couple -- you know, next several quarters, I guess.

I think Chris, you know, let me answer it this way: We felt very comfortable about buying back some of our bonds and we would not have done that if we didn't feel comfortable.

Okay. Do you think we might see that happen again in the next couple quarters?

It's possibly. Our board has authorized us to take a hard look at it and if we feel the price is right, you know, we are price-sensitive. We will partake, and so long as, you know, we continue on this -- on the path that we're on, and the businesses are generating cash, you know, that -- that -- we're open to doing that.

Great. Thanks a lot.

Your next question comes from J.D. Aboushar (ph) from Pacific Edge Investment. Please go ahead.

Yeah. My question was you said the combined run rate of Alvesta and Ortel was 50 million a year?

Last year, J.D.

Okay. So what -- you sort of forecast the run rate for this year for the combined companies?

Yeah. Between 35 and 40.

For the combined ones?

Yeah.

Okay. So we should see -- since you've closed it partway through the quarter, what is the contribution this quarter from the two companies?

Our revenues on the acquisition, J.D., in the March quarter will be between, you know, 4 and about 6-and-a-half million.

Okay. And the Ortel, the company I remember years ago sort of competed in the same space as the harmonics and scientific (inaudible) infrastructure side. Is that still the business they're in?

J.D., those were their customers. You know, it's going to be Scientific Atlanta, Harmonics (ph), Secor (ph), Motorola. Those are the -- that's the customer base.

That's right. They're further up -- further up the food chain.

Yeah.

Great. Thank you very much.

Okay.

Your next question comes from Ching Chou from Foreign Technology Research. Please go ahead sir.

Yeah. Just one clarification. What's the capital expenditure for December quarter and what's your expectation going forward?

Yeah. The capital expenditures, Ching, in the quarter were slightly under half a million dollars, and I don't see any substantial increase in that at all. You know, we've been at that level for, you know, over a year now.

Okay.

What I would call sustaining capex.

And your cash used last quarter actually is only $1 million, right?

That's correct.

Okay. Thanks.

All right.

Your next question comes from Lenny Brecken (ph) from Brecken (ph) Capital. Please go ahead.

Hi, guys. Can you just remind us what the system sales -- you know, the visibility going into the next quarter or two is, given what all -- you know, all the demand is in cell phone land?

Right. The -- our visibility, Lenny, is, you know, typically the book to ship on this business is -- is kind of 4 to 6 months.

Len, you said on the systems business but then you said -- you mention -- you referred to cell phone land.

Is that what you're inferring?

Productions, you know, demand keeps on increasing on the -- at the end demand level for LED, so I'm just trying to figure out how that translates into equipment sales.

Yeah. I think you're looking at pretty good visibility. Certainly this quarter and certainly the June quarter. And orders that that we're taking now are going into the September quarter.

Okay. Are you saying --

So visibility right now is -- is March and June.

Okay. I mean, are you seeing pull-ins or push-outs or --

No, we haven't seen -- we haven't had any cancellations since calendar '01, and really no push-outs at all.

Okay, guys. And, you know, who -- who do you -- how do you characterize the purchasers? Are they mainly Asian related or domestic or --

Yeah. I'd characterize it this way, Lenny: That the initial adopters of the large-area gallium nitride system were the major LED producers who have been taking shipment, you know, in the December quarters, and last September, this December quarter, this our current quarter, and the follow-on purchasers tend to be the -- fast followers tend to be more in Asia. So we are seeing a substantial volume demand from both Taiwan and China, as well as Japan.

Just a little further flavor on that, this is the whole company, Lenny, but for the first quarter, about 46% of our revenues were in the U.S., 31% was in Asia, and the remainder was in Europe. Compare that to all of '02, we had about 65% in the U.S., 18% in Asia, and the rest in Europe.

Thanks.

Your next question comes from Harold Braer (ph) from Sister (ph) and Associates. Please go ahead.

Hi. This will be a quick one. Regarding the Ortel acquisition, should we expect to see some of the smaller or (inaudible) -- hello?

Yeah --

Sorry, you broke up. Right after the Ortel acquisition.

Okay. Regarding the Ortel acquisition, should we expect to see some of the smaller or perhaps non-additive business lines being trimmed, such as the satellite communications or microwave or military?

I'm not sure what you mean by "trimmed."

Timed down from staff where those business lines being sold off.

No. I mean right now, you know, we're looking at an uptick in RF for the quarter. Sat com is flat. You know, we'll try and find additional operating synergies where we can. You know, they -- these tend to be generally high-margin businesses for us when they're running at rate. So, you know, there would be really no -- given our visibility, no reason to do that at the moment.

Harold, there are, you know, a lot of synergies between the product lines that we think, you know, we can make some economic benefits. But, again, on any sell-offs, it's -- you know, it wouldn't be correct and it's not our policy to comment on any acquisitions or divestitures.

Thanks very much.

You have a follow-up question from Ching Chou from Foreign Technology Research. Please go ahead.

Right. A follow-up. For the two acquisitions, Tom, where you see is the break-even there for revenue?

For Ortel, the break-even is about 35 million a year.

Uh-huh.

For Alvesta, much different. We -- what we acquired, really, with Alvesta -- and by the way, the purchase price on Alvesta was a quarter of a million dollars.

Uh-huh.

It's five employees, all their IP, so it's significantly lower, you know, break-even.

Yeah. I think, though, generally you should expect that the break-even there will be somewhere between 1-and-a-half and 3 million.

Yeah. Not high.

Uh-huh. For the total of the two is like $37 million, you will be break-even. Because you are -- you know, you are guiding like 35 to 40 million combined for these two, which means -- that's -- by the way, that's for calendar year '03 or for fiscal year '03 for that 35 to 40 million?

That's on a 12-month basis.

Ah, that's a 12 month basis.

The break-even, yeah. So we'll have eight or nine months of that.

Uh-huh. So which means (inaudible) they can break-even for the --

For the calendar year, that's correct, right. Not our fiscal year.

Okay. Okay. That's all --

They're not far from it, though.

Uh-huh. Okay. Thanks.

Ladies and gentlemen, if there are any additional questions at this time, please press the star followed by the 1. As a reminder, if you're using a speakerphone, please lift the handset before pressing any keys. Gentlemen, there are no further questions at this time. Please continue.

In closing, we feel that this quarter did a lot, moved the company forward with regard to positioning us in some -- what will be some very attractive markets with assets that have dominant technology and market share and customer relationships. We have gotten our cost structure in line with expectations and it continues to improve. As Tom pointed out, we are going to continue to work on improving gross margins and look to generate, you know, substantial cash flows in the future. With that, I will close the conference call. Thank you.

Thanks.

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your--- 0