EMCORE Corp (EMKR) 2003 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Emcore second quarter 2003 earnings teleconference. At this time, all participants have been placed on a listen-only mode and the floor will be opened for questions following the presentation. If at any point during the presentation, you wish to register a question, you may do so by pressing the numbers one followed by four on your touchtone phone. It is now my pleasure to introduce your host, Mr. Victor Allgeier. Please go ahead sir.

Thank you and good morning everyone. Yesterday, after the close of markets Emcore released its fiscal 2003 second quarter and six month results. By now, you should have received a copy of the press release, if you have not received our 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 Thomas G. Werthan, Vice President and 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 fillings with the SEC. I will now turn the call over to Tom.

Thanks Vick, and good morning to everybody. Thanks for joining us today as we review our second quarter. Revenues for the quarter came in at just under $28m and this is up 19% from our first quarter and 20% year-over-year, and let me review the revenue performance by products. First on systems, revenues came in just under a $11m that stands 22% sequentially, but up a 148% year-over-year despite the fact that we were down sequentially, we will experience a pretty healthy increase in Q3 as our backlog has increased pretty dramatically. I will review that in a little more detail latter on in the presentation when I discuss backlog. On RF materials and sensors, revenues were $2m, that is down 2% sequentially and 63% year-over-year. On fiber optics, which now includes ORTEL, but to keep it apples-to-apples our previous fiber optic products came in at $2.6m, that is up 12% sequentially. And ORTEL as we indicated in the press release, contributed about $7.1m in revenues, which was in line with our expectations. Finally on Photovoltaics, revenues were $5.2m, that's up 3% sequentially and down 52% year-over-year, primarily because last year at this time we had a large Boeing contract that fell in the quarter. So, revenues on the whole were just under $28m, again a 19% increase sequentially and 20% year-over-year.

As far as gross margins for the quarter, they were 10%, that was up a couple of basis points from last quarter again the fact that we are operating at a 20% capacity remains the biggest impact on gross margins. Systems margins are in the mid 30s while materials overall are slightly negative. But on a non-GAAP basis, meaning a cash basis, if you eliminate the depreciation charges found in our cost of goods sold gross margins for systems and materials would be 37% and 15% respectively. We did have some poor yield in our Photovoltaics product line this quarter that also impacted some gross margins. SG&A expenses increased from $5.8m in Q1 to $7.4m in the current quarter. The increase over the $1.6m is entirely related to the acquisition of ORTEL in January. Year-over-year, SG&A decreased $2.1m or 22%. And again to give an apples-to-apples to comparison non-GAAP disclosure, eliminating ORTEL from SG&A the decrease year-over-year was $3.7m or about 37%.

R&D expenses increased from $3.6m in the first quarter to $5.4m in the current quarter or an increase of $1.8m. Again ORTEL's R&D amounted to about $1.1m or 61% of this increase, the remaining increase of about $700,000 relates to our acquisition of Alvesta earlier in the year and the fiber optic projects they are working on as low as some Photovoltaics projects. Year-over-year, R&D decreased $6.2m or 53% and again for non-GAAP disclosure just making it apples-to-apples by not including ORTEL, R&D decreased by $7.3m or about 63%. Below the line interest expense was flat sequentially and year-over-year at about $1.7m, the loss in GELcore, our joint venture with GE Lighting was $731,000, that's an increase sequentially of about a $160,000, but a decrease of a $120,000 year-over-year. The increase in the loss is attributable to lower revenues in GELcore's first quarter. However, their backlog has increased and those revenues should increase nicely in the coming quarters. The net loss a $12.5m or $0.34 per share. ORTEL's contribution in the quarter as previously mentioned was $7.1m in revenues and that contributed to our loss of about $0.04. Again, from a non-GAAP disclosure, not including ORTEL to give apples-to-apples, our loss per share would have been about $0.29.

Let me move to the balance sheet, cash and cash equivalents at the end of March were just under $44m, that is a decrease of about $30m since December 31. Cash usage for the ORTEL acquisition was about $26.2m and the capital expenditures amounted to just under $0.5m. So cash used in operations was about $3.5m, much of that was due to changes in working capital. For instance, accounts receivable did increase about $1.8m and inventory increased about $2.5m, while other current assets increased $1.2m. Accounts payable and accrued expenses increased about $4m. Virtually all of these increases in working capital component were due to the acquisition of ORTEL that took place during the quarter. The prepaid expenses was not related to ORTEL that was actually a result of our renewal of our directors and officers liability insurance policy. We did experience about a 60% increase in premium, which is probably a little below current market rates. But that did represent a significant cash outlay in the quarter.

Capital expenditures for the quarter, as I mentioned, came in at under 500,000 and that has been at that level for about four or five quarters now and is expected to stay at near this level in the foreseeable future. Depreciation and amortization amounted to $5m. However, total non cash charges in the P&L amounted to about $6.6m. Backlog at March 31 was $52m, this is an increase of $9m or 21% since December 31. It's also our first increase in backlog in six quarters, so hopefully we are below the flatness in the market now. Materials backlog increased from about $18m to $23m and that increase is attributable to ORTEL. Systems backlog increased from about $25m to a little over $29m. The book-to-bill persistence in the quarter was 1.46 to 1. Bookings were just under $13m, whereas systems shipment of about $9m.

During the quarter, 8 systems with ASPs or average selling prices of about 1.440m were booked. And with systems backlog where it is we are virtually assured of a 60% increase in systems revenues for fiscal year 2003 as compared to fiscal 2002. To summarize, operating expenses have been reduced dramatically. We are spending a lot of efforts to increase our gross margins. Next quarter, we should see revenues in the $32m to $34m range, that's a 20% increase from this quarter and that should help us on the gross margin side. Agere/ORTEL acquisition is proceeding well. The revenue contribution of just over $7m was in line with our expectations. The integration is proceeding nicely and with that let me turn the call over to Reuben to discuss this and other highlights.

Thanks Tom. Good morning everybody. I am just going to go through some of the highlights from the quarter and then address each product segment individually. As Tom pointed out, revenues for the quarter were $27.7m and that came in at the upper end of guidance for the quarter which had been sort of $26m, $28m. Obviously 19% increase over Q1. Additionally, this was the highest revenue quarter that the company has experienced in over a year. And given the quarter's strong revenue performance, the 20% increase in backlog to over $52m, we are raising revenue guidance for Q3 20% to $32 to $34m from this quarter.

During the quarter, the company closed the acquisition of the ORTEL division of Agere for a little over $26m. The ORTEL acquisition significantly broadens Emcore's product lines to both analog and digital short and long wave market shipped through transponders. Further, this expands our product markets to not only enterprise in metro access, but to cable television and position the company to be a leading supplier in the emerging Fiber to the user or FTTX markets. ORTEL specifically for the last 10 weeks of the quarter after closing ORTEL's revenue came in at $7.1m, in line with expectations. Gross margins came in at slightly above budget, and improved over the quarter as we initiated aggressive cost cutting programs. These programs will continue for the balance of the year and we have targeted a 20% decrease in cost of goods sold.

More significant has been ORTEL's ability to expand its business with new and existing customers and we have begun to penetrate new markets like China with some success. Further, developing markets such as FTTX are beginning to be deployed by the Regional Bell Operating Company. In Satcom, revenues for the quarter were $5.25m up slightly quarter-over-quarter. More significantly the book-to-bill was 1.6 to 1. So, we are building some significant backlog in that business. The mix of government to commercial business was a ratio of 2 to 1 and while the outlook is steady for this business, we are seeing a number of commercial programs, very large scale commercial programs, being lined up to be awarded towards year-end. And, we feel the company is well positioned to capture those programs.

In turbo-disk as Tom pointed out, the capital equipment market continues to be dominated by gallium nitride LED. Shipments during the quarter were about 80%, LED related 20% consumer electronics. The book-to-bill during the quarter was 1.5 to 1 and these were all production level systems. Target revenues for this product line of $55m to $60m are booked, so there is some upside of revenue forecast for the year. AFPs remains steady, gross margins improved, cash flow improved, and all of the financial performance metrics are trending in the right direction. We continue to see the large scale gallium nitride system GaNzilla expand market share in the gallium nitride market and currently are being awarded about 7 out of 10 and in the production system space.

In Fiber Optics revenues were up 10% sequentially, the outlook for the third quarter is up significantly with revenue increase of greater than 33%, driven by new products being deployed by our customer base incorporating the VSR and OC-192 as well as the Quad-link products. In RF, revenues doubled from the December quarter, but are still small relative to Emcore's other product lines. The outlook for the RF business continues to trend between $1.5m to $2m a quarter in the order rate remains steady. GELcore as Tom pointed out, calendar year '03 target revenues were between $60m and $70m, up from $45 in calendar year '02. Backlog in the March quarter are on track with our projections. And we continue to see design wins and market share increases across all product lines. It signals channel letters and light engines. We expect that GELcore will start to generate EPS as we cross over the $16m a quarter revenue level. And with that, I will open it up for questions.

Thank you. The floor is now opened for questions. If you do have a question, please press the numbers one, followed by four on your touchtone phone at this time. If at any point, your question has been answered, you may remove yourself from the queue by pressing the pound key. We do ask, if you are on a speakerphone that you please pick up your handset before posing your question to provide optimum sound quality. Once again that is one followed by four to register your question at this time. Once again ladies and gentlemen, if you do have a question please press the numbers one followed by a four on your touch tone phone at this time. Thank you, our first question is coming from Pierre Maccagno of Needham & Company. Please go ahead with your questions.

Hi, Reuben and Tom.

Good Morning.

Good Morning.

Could you give us some further information about geographically how were the gallium nitride systems sold?

Sure. As the question in case everyone couldn't hear it, a little more information on geographically where the gallium nitride systems are being sold. Let me address turbo disk equipment in general. The bookings in Q2, as I mentioned were about eight systems at an average selling price of $1.440m. The breakdown is basically 75% are for GaN-related activities. The other two were actually for DVD or commercial use. In the breakdown, it's about 50/50 Asia, I am sorry --. About 50% United States and then the remaining is Asia and Europe.

Okay. Do you see any possibility of penetrating Japan?

The DVD systems are going into Japan.

There was a gallium nitride shipment into Japan as well. That was a shipment this quarter.

Okay.

Not a booking.

Okay.

There was a shipment this quarter that went into Japan, yes that is right.

Okay.

Right.

And any comments on the competition with Hrom (ph)?

No. I mean. I think we are very happy with where we are in terms of the number of product wins we are getting. We think we have a substantial majority of the production systems as I said. I think, fierce task of winning seven out ten in terms of RFQ’s. So, I think we are pretty optimistic for our market share and penetration in that markets.

One other comment on that. As every one probably knows, the competition sells more than traditional MOCVD systems, they sell a lot of other types of equipment. A little difficult to tell what their breakout is. They just had a $20m quarter. So, my guess is, we were ahead them in terms of bookings and revenues in this quarter.

Okay. And finally regarding your forecast for $32m to $33m next quarter, how much of that would be ORTEL?

ORTEL should be in the $7m to $8m range as I mentioned, equipment will increase dramatically. Equipment should be about 50% of our revenue next quarter.

Okay. Great, thanks.

Thank you. Our next question is coming from Chris Versace of FBR. Please go ahead with your questions.

Good morning guys.

Hi.

Just a couple of questions. Now you guys have had ORTEL for a little while, is there any change in the way you guys saw the business originally and the way you are going to integrate it? Any kind of synergies with R&D, anything you can share with us?

Yes. Of course, there were, just in terms of synergies, in areas that we will be able to have cost savings. ORTEL had a number of R&D projects that were identical to or comparable to some of the digital products that Emcore had under development. So, there's probably $1m, somewhere -- over $1m, maybe as high as $1.5m in R&D cost savings. Obviously, there is some SG&A savings, as well, on consolidation. We have moved ORTEL out of what was a substantially larger facility in Urbandale, California, back to its original production site in Alhambra, that represents cost savings that we will recognize over subsequent quarters. In addition, I think we are getting some purchasing synergies and the 20% cost-to-sales reductions that we outlined, I think are very achievable over the course of the year. Yeah, there are significant cost savings. We expect this asset to generate cash in the near term and they are more importantly, we are gaining and broadening all our product breadth with both existing customers and new customers. So, that's driving revenue opportunities. We were able to achieve that over the last couple of months. Those revenues will start to show up, kind of end of this current quarter, but more significantly in subsequent quarters.

Okay and then just two quick questions. Tom, what was the gross margin for Emcore overall, ex ORTEL in the quarter?

Yes. ORTEL's gross margins, Chris, are about 17% for this quarter. So, the revenues were $7.1m.

Okay, I'll figure it out. And just one other one. On the bookings for the systems business, what's the pricing like in the backlog?

The backlog as of 03/31, the ASP is actually higher than it is for the bookings this quarter. The ASP is almost $1.6m, average in our backlog -- $1,590m.

Great. Great. Thanks a lot.

Thank you, as a reminder, if you wish to register a question, you may do so by pressing the numbers one followed by four on your touchtone phone. Our next question is coming from Ashish Kishore (ph) of UBS. Please go ahead with your question.

Yes. Thank you. Could you also provide some cash flow guidance of what you see for the next couple of quarters off the revenue base?

Yes. I think if you look at the last couple of quarters or six months to date, from operations, we have almost been exactly breakeven. We do have capital expenditures of about $0.5m for the quarter, give or take, $100,000 or so. We have been below $500,000 in the last three or four quarters. We do have our interest expense on our bonds, but from cash flow from operations, we should be very close to breakeven. As gross margins improve, as revenues increase that will help that a lot. We should burn, from a cash burn basis, the interest obviously is below the line, so not included in the operations as is capital expenditures.

So, the cash, I guess, costs are maybe a couple million lower from here before you can see it in being more steady state?

That's a fair comment.

And in terms of, I guess, more qualitatively the environment for semi equipment CapEx from your customers. Are you seeing any kind of material improvement over the last few weeks? That's a pretty strong book-to-bill that you are showing within that segment.

Yes, I think that all of the systems that we are shipping are all production related. We are in the process with a number of customers, negotiating multiple tool orders of the GaNzilla tools. We think that that is a business that we can continue to drive from a revenue growth standpoint. We are going to be introducing some new production technologies to further enhance yield and cost effective operation -- subsequent generations of existing technologies in the next few weeks, which we think will also drive revenue growth. So, we look very closely at the end LED market and obviously, where LEDs are growing and everything from signage to lighting applications to cell phone adoption, as well as back lighting for other applications like LCD and TFT screens. This market growth appears to be sustainable.

And just in terms of, I guess, what a steady state gross margin that you envision across the divisions, what is the model say with regards to that?

Yes, Ashish, I think from an overall perspective, as you go back to a couple of years ago we were in the $45m to $50m run rate per quarter, always in the low 40% range -- the low 40s in terms of gross margins. There has been, obviously, price pressure on the components business throughout every one of our product lines and we are operating, as I mentioned at 20% capacity. As revenues go up, the gross margins will go up. I think we need to be in the 40 to 45 range quarterly run rate to get to about 30% gross margin.

Okay. Great. Thank you.

Thank you, our next question is coming from Kevin Dannon (ph) of LC Capital (ph). Please go ahead with your question.

Yes. Hi. Good morning. I was wondering if you can just provide a quick break down of the purchase price allocation from ORTEL?

Sure. The total price was $25m, it was about $1.2m in expenses, so that's why said $26.2. Inventory was about $5m on the allocation. Property, plant and equipment, which is really equipment, was about $9m and the rest was goodwill and a couple of million for intellectual property.

Okay. Great. That’s my entire question. Thank you very much.

Thank you. Our next question is coming from Chang Ku (ph) of Foreign Technology Research. Please go ahead with your question.

Yeah. Good morning.

Good morning.

You have, I think, a very nice progress in terms of performance. I do need some comment about your material side [Inaudible] TV, what do you see, what's the dynamics over there?

I am sorry. Could you repeat the question? You said --

Photovoltaic TV business, and also the FP, this 3/5 (ph) FP business?

Sure. As we said on the call, the Photovoltaic business did about 5, little over $5m last quarter. But more significantly the book-to-bill was 1.6 to 1. We booked almost $9m in new programs. The mix there continues to trend towards government programs, and in fact the new bookings are sort of 2 to 1 in favor of government programs. The interesting thing about the government programs is they tend to be smaller contracts, they tend to be less time sensitive. So, the start program while we will be able to tell you within a quarter or two when we are going to start shipping are not as exact as some of the commercial programs. But having said that, there are three or four large commercial programs and you have to recognize that the commercial program market has been largely in contraction for the past year. But we are seeing 3-4 programs, which we think we’re well positioned to capture latter in the year.

But, this is a business that will continue to run at plus or minus $6m a quarter until the commercial programs get deployed. But, we expect that that is not all that far out. And on the FP business, what we've seen is on the RF products, again, this is a significant decline and has $1.5m for last quarter, the significant decline year-over-year. We are seeing our customer base still work off some inventory last quarter, we don't have a lot of visibility, sort of the book-to-ship in that product line is 30 days. So, we don't get a lot of visibility from our customers with regard to long-term purchase orders, but it appears to be steady at this rate. I think they are getting better yields with the materials is one of the reasons.

Okay. Thanks.

Thank you. At this time, we are no showing no further questions in the queue. I'd like to turn the floor back over to Mr. Richards for any additional or closing comments.

Thank you everybody for joining us this morning. I think we are pleased with the quarter, we have seen a significant contribution from ORTEL to the revenue base, both in the March quarter and going forward. What is perhaps more significant and telling for Emcore's business in subsequent quarters is the significant increase in backlog quarter-over-quarter. Again this largely reflects strength in the capital equipment business and market penetration that we continue to make there. So, we think it is a good quarter. We think subsequent quarters look to improve from here and thank you for joining us today.

Ladies and gentlemen thank you. This does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.