EMCORE Corp (EMKR) 2003 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the EMCORE third quarter 2003 earnings conference call. (CALLER INSTRUCTIONS) It is now my pleasure to hand the floor over to your host, Mr. Victor Allgeier. Sir, you may begin.

Thank you. And good morning everyone. Yesterday after the close of markets EMCORE released its fiscal 2003 third quarter and nine-month results. By now you should have received a copy of the press release. If you have not receive 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, Tom Werthan, Vice President and Chief Financial Officer, and David Hess, Vice President of Finance. 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 and filings with the SEC. I will now turn the call over to Tom.

Thanks Vic. And good morning to everyone. And thanks for joining us today as we review our third fiscal quarter of 2003. Revenue for the quarter came in at 32.2 million; and this is up 16 percent from the second quarter, and also 59 percent year-over-year.

And let me review the revenue performance by product categories. First in materials, from the wireless and sensor side, revenues were 2.8 million. That is down 41 percent year-over-year; however, that is up 40 percent from the 2 million we reported in the March quarter. Fiber optics, which is really two categories. I will give you the traditional product line for us which includes our VCSEL line as, well as the Ortel break out on the acquisition in January. On the traditional product line revenues came in at 3 million. And that is up 21 percent year-over-year, and also 16 percent sequentially from the 2.6 million that we reported in the March quarter. As far as Ortel, revenues came in at 8.2 million. There is no comparison year-over-year. However, that is up 15 percent from the 7.1 million reported in the second quarter.

On satellite communications, revenues came in at 3 million. That is flat year-over-year. However, that is down 42 percent from the 5 million we reported last quarter. On the satellite communications we did expect to deliver on three contracts that were pushed out, totaling a little more than $3 million. This will most likely ship in either this quarter or Q1 of fiscal '04. And finally, on the equipment side, revenues came in at 15.1 million. That is up 53 percent from the 9.9 million reported last year, and also up 41 percent from the 10.8 million reported last quarter.

In terms of gross margins, gross margins for the quarter were 18 percent. This is an increase of 8 percentage points or 80 percent from last quarter. Systems margins were in the low 30s, a modest increase over the previous quarter, while materials margins turned slightly positive in the quarter. And that is the primary reason for the increase in gross margins. Margins on a non-GAAP basis, meaning if I eliminate the depreciation included in the calculation, margins for systems and materials would increase to 36 and 28 percent respectively.

On operating expenses, selling, general and administration expenses increased $300,000 or 3 percent from the Q2 7.4 million to 7.7 million in the current quarter. The increase is entirely related to the acquisition of Ortel earlier this year. Just to remind everyone, this was our first full quarter with the Ortel asset. Year-over-year, SG&A increased 1.1 million or 17 percent. And again, the increase is entirely attributable to the Ortel acquisition.

R&D expenses were flat at 5.4 million for the quarter. We do have significant new products in the pipeline that Reuben will elaborate on later in the call. Year-over-year R&D decreased almost $4 million or 41 percent. Interest expense was 1.7 million, and that was essentially flat both sequentially and year-over-year. Our joint venture with GE Lighting and GELcore basically broke even in the quarter. We reported a $33,000 loss. The break even is significantly ahead of schedule, however, the loss will increase modestly next quarter as GELcore ramps up some sales and marketing activities. The net loss was 9.2 million or 25 cents per share. And they are no reconciling items between GAAP and non-GAAP reporting.

Let me discuss the balance sheet for a few moments. Cash and equivalents at the end of June were 38 million, representing a decrease of about 5.7 million since March. 81 percent of that cash usage was related to two items. The first being the semiannual interest payment on our subordinated debt totaling 4.1 million, and capital expenditures, which amounted to about $500,000. So not including interest or CapEx, cash used in operations was about 1.1 million.

The changes in components of working capital were quite minor on the current asset side. They increased a total of $400,000, while current liabilities decreased about 1.4 million. Capital expenditures, as I mentioned, came in at about 500,000, and that will stay at that level for the foreseeable future. Depreciation and amortization amounted to $5 million, however, total non-cash charges amounted to $5.8 million.

Let me turn to backlog. Backlog at June 30th totaled 47 million, and this is a decrease of about 5 million since March 31st. Materials backlog was down about 4 of those 5 million from 22.6 to about 18.8 million. And the decrease in materials backlog is attributable to Ortel and the wireless side.

Regarding Ortel, the backlog is down simply because we have committed to much shorter books to ship times to our customers. So as a result, the purchase orders we receive our smaller letter and just cut more frequently. However, in return for the shorter lead times our customers are now committed to providing forecasts, all of which have increased. And Ortel is on track to achieve their revenues for the quarter.

Systems backlog, increased 1 million from 29.2 to 28.2. However, bookings were 12.1 million for systems shipments of 11.8, or a book to bill of slightly over 1 to 1. However, we did have a cancellation in the quarter which effectively reduced the book to bill to about .91 to 1.

During the quarter system average selling prices were 1.44 million. That is flat with last quarter. And on one other note, we did receive a multiple system order, but have only placed two of the five systems in backlog, since three of those systems stretch out beyond 12 months, and we cut off our backlog calculation at 12 months.

On another note, I'm sure everyone has read about Loral filing a bankruptcy. Loral has been, as everyone knows, quite a good customer for EMCORE, but our exposure on this is under $200,000. As part of their bankruptcy and sales of satellites to Intelsat, they will be awarded a new satellite build, and we do anticipate being part of that build cycle. We have been in contact with their management and we believe they will emerge from this bankruptcy a stronger more focused company.

To summarize, we were pretty satisfied on our progress as illustrated by the quarterly results. Operating expenses have been reduced. We continue to spend a lot of effort to increase gross margins. And margins did increase this quarter quite substantially. As for guidance, we're providing a range of 32 to 34 million for Q2 -- I'm sorry, for Q4. The Agere/Ortel acquisition is proceeding well. The revenue contribution from them of over 8 million was higher than 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. As Tom pointed out, revenues for the quarter of 32.2 came within the guidance for the quarter, an increase of 16 percent over last quarter and almost 50 percent ahead of last year. Earnings per share was a loss of 25 cents, which was 2 cents better than forecast. And the June quarter revenues of 32.2 were the highest for EMCORE in almost two years.

Highlights in the quarter were operationally gross margins improved 80 percent through the substantially reduced book to ship cycles and improved yield. Specifically, EMCORE has reduced book to ship cycles on both the CATV and fiber-optic products from 8 to 10 weeks to approximately 2 to 4 weeks, and a gun systems from 6 months to just under 4 months. This cycle time reductions improved profitability, the product lines, and the Company's competitiveness in its end markets. And we were able to achieve all of these without substantial increases in inventory.

On the last quarter's conference call, we indicated an aggressive cost-cutting program targeting a 20 percent reduction in cost of goods sold. And through year-end we have made substantial progress towards that objective. Given the increase in unit orders, which are up substantially, due to our improved delivery capability for fiber-optic and the CATV business, the sustained order flow for systems over previous quarters, as Tom pointed out, we're maintaining revenue guidance of 32 to 34 million for the September quarter, with some potential upside to this revenue level in the December quarter, as new products in CATV and fiber-optic markets begin to get deployed, specifically in passive optical networks and legacy fibers, which will I will get into on the products specific discussion.

In satellite communications, as Tom pointed out, revenues for the quarter were 3.1 million, down 2 million from the previous quarter due to a delay in shipping three government programs, one of which has already been shipped this quarter. Because revenues for the quarter were lowered than anticipate, the book to bill for the quarter exceeds 2 to 1. Mix of government to commercial business is 4 to 1, up from 2 to 1 in the previous quarter. And the outlook for this business is steady over the long-term. However, there may be some revenue variability as we saw in the June quarter because of potential program timing on government satellite.

We still see several large three or more commercial programs scheduled to be awarded by year-end. As Tom pointed out, the Intelsat, GeoSatellite as part of the Loral deal where EMCORE has been supplier on past programs. In the systems business revenues increased 41 percent to 15.2 million. The systems market continues to be dominated by demand for gallium nitride LEDs for signals, automotive and backlighting applications. Shipments during the quarter were consistent with last quarter in terms of application distribution, 80 percent were gallium nitride LEDs and 20 percent was consumer electronics. The book to bill was flat with last quarter, all were production levels systems. The ASPs remain flat with previous quarters. And the GaNzilla, the large area Gan (ph) system continues to dominate market share in this space.

In terms of new products, recently we introduced a new optical control technology for the gallium nitride application trademarked, RealTemp. The optical control unit reduces operating costs per run, improves repeatability run to run and achieves higher die performance through better process control. The technology is retrofittable to the nearly 2 to 250 gallium nitride systems in the field. We have not included this in revenue projections, although we do expect to get revenue traction in the second half of this year.

In fiber-optics, revenues were up 16 percent sequentially to 11.2 million. And we were able to expand our customer base significantly, particularly in the storage, the CATV and datacom enterprise applications. Revenue expansion in the second half of the year will be driven by increased volumes in CATV, 10 gigabit application and the deployment by the regional Bell Operating Companies, or RBOCs of passive optical networks or PONs. This is basically a competitive response in competition for the customer with the cable providers.

Specifically, in terms of new products products in this product sector, we have for new products coming out in the second half of the year. Two course WDM transponders, and one -- a third product, an optical link to replace copper that we're in partnership with Fujitsu on, and for the fiber to the user application for passive optical networks for the RBOCs, and integrated triplexer and video card. We expect revenue traction to pick up on these four products in the last six months of this calendar year.

Our materials revenues increased 40 percent to almost 3 million. And while still small relative to other product lines, the RF products generated cash during the quarter due to better yields and cost control. The outlook remains stable at the current revenue rate for the rest of the year.

As Tom pointed out, GELcore recorded its first operating profit since inception. It is on track with revenues for calendar year 2003 of between 50 and 70 million. And we continue to seek design wins and market share increases across all product lines as the Company makes better penetration in signal and channel letter applications.

In closing, you know we're pleased with the quarter from a financial performance standpoint, from an operating standpoint. The revenue outlook is stable. We're well-positioned for the second half of the year with new products to drive growth. And we hope to continue to see profitability improvements as we improve productivity per employee through the balance of the year. Thank you. I will turn it over for questions.

(CALLER INSTRUCTIONS) Brett Hodess of Merrill Lynch.

A couple of questions. First, could you repeat the total backlog number, I didn't quite catch it?

Brett, the backlog was 47 million, of which systems is 28.2, and the difference is -- the remainder is materials.

And then second, given the ongoing cost reduction program through year-end, can you give us some kind of idea, if you're essentially flat on revenue range again for this quarter, how much more progress we might see in the margins this quarter? And then once you hit -- if you hit the cost reduction goal by year-end, what the breakeven level would be at that point?

With guidance being in the same range as the June quarter, we would anticipate margins in the same range. OpEx, you know, might be down modestly, but I would emphasize the word modestly.

Okay. And then what is the breakeven revenue level would be if you hit the cost reduction goals by year-end?

Brett, go on to your next question and I will answer that in a moment.

Okay. And then the other question I have is more on the sort of the product side. I think what I heard you say was systems is pretty stable at this current run rate at this point?

That's correct.

And then that is going to continue to be driven by the gallium nitride LED applications?

Yes. Most of the booking this quarter are all gallium nitride related.

And then on the other side, it sounds like the growth -- really the growth part for the second half really is in the optical area where you have the new products, and some of the cable and the PONs applications. Are those -- are you are being forecasted orders for those businesses or are those products that your customers still have to introduce into the marketplace?

Brett, on the optical side, particularly on the RBOC deployment of the passive optical networks, you know it has been fairly well publicized that a consortium of the Regional Bell Operating Companies has put out a RFQ which they expect to down select sometime towards the end of September. Shipments start in the calendar Q4. EMCORE is pretty well-positioned, not only from a product but from a patent standpoint on a number of components that most of the bidding groups are using. So you know I am not sure if it is going to be -- they were talking about 1 million units in terms of shipment that they're asking for quotations for. It may be -- you know, it could be half that number. But in either event, with pretty much all of the bidding groups for this business we have some dollar content. And they are serious, at least by all indications, of getting this deployed in '04.

So you're going to benefit even though there is this competition between the RBOCs and the cable guys. You're going to benefit with most of the groups if they win on the RBOC side, and you're still going to benefit on the cable side. So you're going to do okay either way, whichever group seems to be gaining share?

That's correct.

Brett Hodess Good.

Brett, to get back to you on your previous question. From an operating breakeven standpoint, revenues need to be in a 40 million range. But just remember there is about 5 million depreciation in that number, so EBITDA is certainly less. From a net net standpoint, revenues have to be around 45 to 47 million.

Pierre Maccagno of Needham & Company.

Reuben, could you give a little bit more color on the systems, like how many systems were sold? How many of them are booked during the quarter? And some breakdown -- geographic breakdown?

Sure, on the shipments for the quarter there were four systems Fordan (ph), one or two --- I'm sorry, six systems on Fordan, although they were breaking out really between large area production and some R&D machines. One for thermo Photovoltaics and one system for DVDs. On the bookings, there were all Fordan.

And how many were...?

Our breakout the shipments, five units when into the U.S., two into Japan, one into Taiwan. And the bookings were two in Taiwan, two in Germany, to in the U.S., and two in Korea.

J.V. Abuchar (ph) of Pacific Edge Investment.

On the PONs potential, is that coming out of the traditional EMCORE fiber-optic business, or is that coming through the Ortel acquisition?

Part of each. Really the patent portfolio IP is coming out of Ortel, and one of the components is coming out of Ortel. The integrated package would be a contribution from both sides.

And I know it is tough to say depending on which, I guess, bidding group wins, but on a sort of per household deployment level, what is sort of the range of the revenue opportunity?

Well, you know without getting talking about our pricing to customers, you could look at a -- on PONs in '04 you could look at a sort of a low of 10 million, and maybe you know a high of 40. I don't think the 40 is going to be realistic, but somewhere in the middle.

For '04? Great that helps out. Thank you very much.

Robert Jaworsky (ph) of Jefferies & Co.

Do you have cash burn guidance for the next couple of quarters?

As we mentioned, the target is to get to cash flow breakeven from operations. In the last couple quarters we have a very good progress. Most of the cash we're spending is on our interest or on CapEx, although interest is certainly heavily weighted there. This quarter it was about 1.1 million from operations, which is better than last two quarters. And we should be in that range based on the 32 to 34 million guidance on revenues.

(CALLER INSTRUCTIONS) I am showing no further questions in the queue at this time. I would like to turn the floor back over to Mr. Reuben Richards.

Well, thank you everybody. As I said earlier we're pleased with the quarter. We're pleased with the progress that we have made in terms of improving profitability and increasing gross margin through cost reduction and yield improvement above the line. We are also optimistic about how we're positioned with products coming out at year-end, and what '04 looks like. So we're continuing to make progress as a Company in a market which is very competitive, and we're pleased with the results. So thank you very much.

Thank you, ladies and gentlemen. This does conclude today's teleconference. You may disconnect your lines at this time. And have a wonderful day.