EMCORE Corp (EMKR) 2003 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the EMCORE fiscal 2003 earnings results conference call. At this time, all participants have been placed on a listen-only mode and the floor will be opened for your questions following the presentation.

It is now my pleasure to turn the floor over to Victor Allgeier, TTC Group. Sir, the floor is yours.

Good morning, everyone. Yesterday, after the close of markets, Emcore released its fiscal 2003 fourth-quarter and year-end results. By now, you should've 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 Tom 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 filings with the SEC.

I will now turn the call over to Tom.

Good morning to everyone and thank you for joining us today as we review the fourth fiscal quarter of 2003. While we are reporting on the quarter that ended on September 30th, we are a vastly changed and more focused company as of two weeks ago really because of the sale of our MOCVD equipment product line. As a result, this call will really be more forward-looking in our comments than historical, due to the sale.

I'll let everyone know we will also be filing an 8-K early next week that will pro forma our results for fiscal year 2003 as if we had sold the division on Day One of the fiscal year. That will be early next week.

The first item I'd like to address this morning is a reconciliation of our earnings per share to First Call estimates. The worth, as recorded, was 37 cents; First Call was at 24 cents, and we did have some year-end adjustments that we made.

Starting with the cost of goods sold, we recorded a non-recurring 1.4 million charge relating to inventory markdown on a lower-of-cost or market calculation. Without this charge, gross margins would have been 18 percent, which is really flat with last quarter on a slightly lower revenue base. That accounted for about 4 cents of EPS.

In SG&A, we took about a $440,000 bad debt expense related to the TurboDisc division. We did not transfer this receivable to the buyer of TurboDisc since it was determined that the receivable would unlikely be collected. That was about a penny a share. This is also why SG&A increased sequentially by about $0.5 million from last quarter.

On R&D, we recorded a $2 million charge related to fiber products that we've decided to discontinue research on, and that is about a 5 cent per share charge. This is also the bulk of the 2.2 million increase in R&D from last quarter.

Also during the quarter, we invested approximately 1 million on the LX4 fiber-optic data communications transceiver module. This was complemented by our acquisition of Molex's 10 Gigabit Ethernet transceiver business in October. Reuben will discuss that an a lot more detail a little bit further on in the call.

So, our non-GAAP reconciliation amounts to 10 cents per share, reducing the loss to 27 cents versus the First Call estimates of 24 cents.

Let me review the P&L for a few moments. Revenue came in at 30 million; this is up 19 percent from the prior year and (indiscernible) 7 percent sequentially.

Let me review the performance by product category. First, on the systems side, revenues were slightly under $13 million; that's a 15 percent decline from last quarter and obviously, the sale of the business was closed on November 1st.

On the RF Materials, revenues came in at about 2.7 million and that was essentially flat with last quarter.

On the fiber-optic side, on the (indiscernible), which I would call traditional fiber for Emcore, revenues were about 1.3 million and that was down about 58 percent from last quarter.

On the Ortel side, or predominantly the CATV side, revenues were 8.2 million, and that was up modestly from last quarter about 1 percent.

Finally on the photovoltaic side, revenues came in at about 4.9 million and that was up 61 percent from last quarter.

Again, the gross margins for the quarter were 13 percent; this is a decrease of five points from last quarter. However, the adjustment I referred to a moment ago on the lower cost of market write-down accounted for that decrease. As I mentioned, without that charge, gross margins would have been flat with last quarter, again, on slightly lower revenue.

From operating expenses, again, SG&A -- they did increase $500,000, or about 6 percent in the quarter, from 7.7 to about 9.1 million. However, the increase is related to the bad debt expense I referred to a moment ago.

On the R&D side, again, we did increase 2.2 million from last quarter's 5.5 million. Again, the increase was attributable to the discontinuation of certain R&D projects mentioned in my EPS reconciliation, as well as the LX4 development.

Interest expense of 1.9 million was essentially flat with last quarter. Again, that represents the interest on our subordinated debentures due in May of '06.

Some very good news -- we're excited that to announce that GELcore, our joint venture with GE Lighting, is now profitable. We recorded a profit of $107,000 in the quarter. That profit is a little bit ahead of schedule and should continue and also, GELcore has also not required any capital infusion now for over a year.

The net loss was 13.9 million, or 37 cents per share. I have mentioned three reconciling items between GAAP and non-GAAP reporting accounting that represents 10 cents of the 13 cent difference from the First Call estimates.

Let me turn to the balance sheet for a moment before turning the call over to Reuben. Cash and cash equivalents at the end of September were 28.4 million, representing a decrease of about 9.5 million since June. Let me review that cast decrease for everyone. 1.4 million was for capital expenditures. Cash collections were significantly less than the previous quarters, primarily as of TurboDisc division (sic). However, I will state that October collections were very strong and accounted for the shortfall.

Customer deposits on new equipment orders were also significantly down and as a result, collections were less than revenues by about 5 million. This was partially offset by inventory reductions of almost 2 million, leaving about 4.8 million that was used operations.

Depreciation and amortization amounted to about 4.7 million.

Let me move onto the backlog. Backlog at September 30th was just under $52 million. This is an increase of about $4.5 million, or 10 percent, since June 30th. System backlog accounted for 18.4 million and that obviously was transferred to the buyer of the TurboDisc division.

The real good news is our Materials backlog did increase 14.3 million, or 76 percent, to 33.1 million from 18.8 million at June 30th.

Bookings in the quarter totaled just over $31 million while shipments were about 17 million.

So, to summarize, with the sale of the equipment business, Emcore is now completely focused on communications and with projected fiscal year '04 revenues in the 90 to $100 million range, we will be one of the top five domestic suppliers of compound semiconductor-based products.

Our bookings and backlog increased significantly in the quarter, providing confidence that our markets are rebounding. The 60 million cash received at closing strengthens our balance sheet. Today, we have approximately 86 million of cash and cash equivalents in the bank.

As for guidance, we will go out one quarter. Next quarter, we should see revenues in the 21 to 23 million range. Just comparing Materials to Materials, since TurboDisc is no longer owned by Emcore, that represents an increase of about 25 percent sequentially.

The first quarter will contain one month of TurboDisc operations and since, historically, much of the TurboDisc revenues are shipped in the last month, our first quarter will now be representative of how Emcore will look thereafter, particularly from a cash burn standpoint. That will be classified as discontinued operations in the quarter.

As expected, with the sale of TurboDisc, we are addressing organizational issues. Our projected breakeven, from an EBITDA basis beginning in the third quarter, is approximately $30 million, a figure we are working hard to decrease in the coming months.

With that, let me turn the call over to Reuben to discuss the TurboDisc sale as well as Emcore's operational aspects, going forward.

Thank you, Tom, and good morning, everybody. I will begin with an overview of the financial, operational and strategic aspects on the recent divestiture of Emcore's capital equipment business and then move to a product-by-product.

To begin with, there were several factors that influenced the decision to sell the capital equipment business. First and foremost, strategically, the equipment business was no longer a centerpiece to Emcore's direction as a company, either from a technical or a financial viewpoint, given how Emcore's device business and the outlook for Emcore's device business has grown.

Historically, ownership of the TurboDisc production technology was a competitive advantage, as new materials and devices were being developed for the communications market. These markets have matured and Emcore's competitive position and product strategy has been established within its device market. While we sold the reactor business, Emcore retains the technology-base, the intellectual property and know-how developed within the reactor business that gave Emcore a consistent advantage in our ongoing business through improving reactor configurations and processes.

Given the revenue growth from continued operations this quarter and significant increases in backlog that Tom outlined, management felt strongly that Emcore could replace the revenues and profitability of the equipment business in fiscal year '04 through both increased demand on existing products and new market opportunities. As Tom cited, revenues are expected to increase 33 percent to 90 to 100 million in fiscal year '04.

Further, our concerns regarding the MOCVD market were that revenues in this business would be flat in the near-term -- meaning two or three years -- due to overcapacity, used systems coming on the market and the competitive nature of pricing in the marketplace, where commercial terms have deteriorated, requiring greater working capital commitments. We felt that it would be a better use of resources to use the cash generated in the sale of this asset to bolster the Company's balance sheet and better position the Company to take advantage of product markets that are growing in excess of 30 percent a year.

The financial aspects of the transaction are as follows -- it's a total transaction value of up to $80 million with $60 million cash at closing and 20 million in aggregate future payments, calculated annually and paid 50 cents for every dollar over 40 million in revenues for the next two years; the transaction equates to approximately let 11.3 times the trailing 12 months EBITDA. Consequently, the sale of this asset generated significantly more cash than the prospects of owning what would have been a non-strategic asset for the next ten years. Additionally, as part of the transaction, Emcore entered into an equipment supply agreement with Veeco that lasts for five years, where Emcore will receive advantageous pricing and support.

Operationally, as Tom pointed out, we have restructured the business through consolidation and reduction of overhead and we reduced the breakeven for the Company where we expect to reach EBITDA breakeven by fiscal third quarter, which is June, and operating income by the fourth quarter, meaning September.

On a product-by-product outlook, fourth-quarter bookings were almost 32 million, an increase of 76 percent over prior-quarter bookings, increasing backlog to 33 million. We are seeing order strength across all product lines.

In our fiber-optics business in Ortel, the book-to-bill for the fourth quarter was 1.6 to 1, or we booked 14 million in additional purchase orders. Unit volumes on existing products increased 30 percent in the quarter and we're seeing this trend continue into the March quarter, creating better manufacturing efficiencies. End demand from the cable OEMs is growing quarter-over-quarter, and we are diversifying our customer base.

Secondly, product shift is moving towards higher-power products, which have better gross margins for the Company. Further, we are well positioned among the suppliers to the RBOCs, the Regional Bell Operating Companies, for the fiber to the user buildout, which we expect to start before the calendar year. This is a business whose revenue contribution for the nine months ending September 30th was approximately 23 million. Fiscal year '04 revenue outlook is approximately 45 million, so we're seeing a significant increase in the business in this product sector.

On the digital side of fiber-optics, during the quarter, Emcore acquired the 10 Gigabit ethernet module business of Molex to expand the Company's existing 10 Gigabit product portfolio. During the quarter, Emcore received purchase orders in excess of $11 million for 10 Gigabit ethernet-based products.

As Tom pointed out also, we have streamlined the digital side of the business. We discontinued one product line and transferred resources in support of the product lines where we're getting these substantial new purchase orders.

In wireless, revenues continued to trend positively with handset growth and functionality driving demand for (indiscernible) based products. Revenues are expected to grow in fiscal '04 from 8 million in '03 to 12 to 15 million and '04.

In satellite communications, we've seen a significant rebound in the satellite markets with a number of new commercial satellite launches increasing from a number which was less than 10 in 2003 to a planned launch schedule of over 15 in fiscal year '04. Emcore is optimistic with regard to winning a substantial share of these new satellites, as many of the new awards are with our existing customer base with whom we have long-term supply contracts.

During the quarter, we booked an additional 6 million in the September quarter with same bookings trending for this quarter.

As Tom pointed out, in GELcore, the revenue continues to trend upwards. Fourth-quarter net income was positive, ahead of schedule; cash flow is ahead of schedule; and new product launches, at a consumer level through retailers like Wal-Mart, look very promising.

With that, I will turn it over to the Q&A.

Thank you. The floor is now open for questions. (OPERATOR INSTRUCTIONS). Jeffrey Lampin (ph) of Table Rock (ph).

I just had a question about what the Company's going to look like on a cash burn basis after the sale is completed and sort of where you see cash bottoming out, going forward.

The first quarter will not be represented as I indicated. There are going to be discontinued operations in the first quarter, as well as severance costs on the sale of TurboDisc; approximately 25 people were not transferred and Emcore picked up the severance for those employees.

Thereafter, Jeff, as we streamline more, we're scheduled to get the contract manufacturing outsourcing in February of next year with certain product lines.

As I mentioned, from an EBITDA standpoint, about 30 to 31 million in revenues will get us positive on that note.

Where do you see cash sort of bottoming out?

From operations, it won't be significant. You know, obviously, one item that we're looking at -- we still understand that even with the cash infusion on the balance sheet, we still feel our debt is a little too high for this company and we're looking at alternatives right now. So, from operations, it won't be significant, but if acquisitions are done or if the debt restructuring takes place, that might require the use of cash. I just don't want to pinpoint how much we would use or what we would that for.

Brett Hodess of Merrill Lynch.

I'm sorry, but I missed it right at the beginning. Can you talk a little bit about the gross margin structure as we roll through -- on the materials business -- as we roll through the next couple of quarters and move towards that EBITDA-breakeven point in the third quarter?

In case someone didn't hear, it's gross margins as we roll forward. I think one thing, in listening to some of our competitors' conference calls, they've been very reluctant to break out gross margins on a per-product line basis, so I'm going to be a little careful here.

Right now, Ortel's product line is performing very well from a gross margin standpoint. That has a chance to get somewhat better as they go through some more contract manufacturing.

The wireless side, we are running substantially ahead of where we were this past year. This last quarter, we were in about the 20 percent range on wireless -- a little bit higher, but we had a couple of significant work -- small amounts of significant, high gross margin shipments, so 20 to 25 percent there.

In New Mexico, where we have our photovoltaics and fiber-optics, you know, they have, historically the last year or so, been zero or close to zero in gross margins, but that's improving as we streamline some operations and combine some fabs and rent out some of the excess cleanroom space. So, that should go positive. They do have the most amount of depreciation at Emcore, which does affect us. If you back out depreciation, yes, they are in the 20 percent range or so.

It sounds like blended average then. We may be looking at something staying here in the low to midteens near term but improving as we move forward in the next few quarters?

I would agree with that. I think, by the third fiscal quarter, we're targeting around 28 to 30 percent.

Robert Girorwsky (ph) of Jefferies & Company.

Good morning. I missed your analysis of $9.8 million of cash burn. Could you repeat this?

The question was on the cash burn, the analysis. We mentioned we did go through 9.5 million of cash burn; 1.4 was for capital expenditures. Cash collections in the quarter, as compared to previous quarters, were significantly less, particularly -- as I mentioned -- at the TurboDisc division. However, that rebounded significantly in October, although all those receivables are now transferred to the buyer.

The customers' deposits on new orders were also very low in the quarter, which impacted cash. So the cash collections, as a result, were about $5 million less than revenues. This was partially offset, on the working capital side, by inventory reductions of about 1.7 million. So, we used about 4.8 million in operations.

So you have about 3.3 left. Where did this go? Because you have 1.4 on CapEx, 4.8 on operations and you burned 9.5.

The cash collections on receivables were 5 million less than revenues, so that's a use of cash, but that was offset by about 1.7 million of inventory reductions.

Okay. I know that next quarter is not representative of what's going to happen afterwards but nevertheless, what cash burn do you expect this quarter?

Again, you know, it's going to be in an unusual quarter only because of the severance costs and these discontinued operations. I can tell you that as of today, we have 86 million in the bank and if you looking at our ending cash of 28 -- 5 plus the 60 we received on the sale of TurboDisc -- that's about 88, so we have burned through 2 million in about half the quarter. We do have a semi-annual interest payment on our bonds though, which will be about $4.4 million next week.

Finally, how will CapEx be affected by this transaction? You said that you have the special agreement with Veeco. Is it going to be more expensive to buy from Veeco than from (indiscernible)?

Well, certainly, when we build the machines -- the reactors for ourselves -- we charged ourselves cost. You know, we're not going to able to buy the machines for cost, but we do have favorable pricing from Veeco.

Should we be looking at CapEx? Last quarter was about 1.4; the previous quarter's was about $.5 million.

Correct. CapEx for fiscal '04 should be in about the $6 million range, of which I think there's one, possibly two MOCVD reactors scheduled.

I have just one more. How are you going to do the asset transfer? Because you have buildings in New Jersey where you also do your other manufacturing. Are they just taking the assets and moving them somewhere else, or are you going to share the building?

In case everyone didn't hear, the question was, what's happening with the asset transfer? In New Jersey here, we owed a 75,000 square foot manufacturing facility where we manufactured the TurboDisc reactors as well as produced the RF Materials and magnetic resistor sensors for GM.

As part of the sale, the buyer bought the building and we are subleasing about 25 percent of that building for our manufacturing of RF and MR sensors.

(OPERATOR INSTRUCTIONS). David Hager (ph) of Kennedy Capital.

Are you all able to give any sense of the revenue level in GELcore? Because, obviously, that business seems to be doing very well -- I think profitability ahead of your targets.

Yes, I think, just generically, they will end the calendar year with approximately $60 million in revenue.

Okay.

Just to benchmark, that's about a 30 to 35 percent increase over last year.

Should we be expecting -- before year-end -- any additional news in terms of where you and GE are going in the future with that business?

I'm sorry, you faded out on the first part of your question.

Okay, because my understanding that it was a five-year joint venture that expires at the end of the year. Should we anticipate hearing something before year-end in terms of the direction that you and GE are going to take with that?

Yes, will let me just sort of re-orient the facts. The joint venture has an indefinite lifetime. It is the soleplay for both Emcore and GE in solid-state lighting. What you are referring to it is there was a standstill on disposition of either our equity interest or theirs, which expires of the end of this year.

So, in the event that, you know, one party or the other desired to sell or buy the other one out, that discussion could occur now or with a third party after the first of the year.

Okay, thank you very much.

Eric Salzman (ph) of DKR Capital.

Good morning. If you look at your current product portfolio, are there any additional product line acquisitions or extensions that you think you need to be executing, either from a competitive standpoint or scale perspective, to continue to grow your revenues and also achieve the scale of 28 percent type gross margins?

You know, we are seeing, at this point, a substantial -- what I will call renewed interest in Emcore's existing product lines. We also have what is a very full, new product pipeline -- products that are now being deployed for which we have purchase orders in our end market.

We don't see, in the near term, any necessity to make acquisitions for product line extensions. Meaning, we have enough -- and we feel fairly strongly about this -- enough market demand for existing products, or products in the pipeline, that we can grow revenues by 33 percent this year over last. All we need to do is pay attention to profitability.

It's not an end market demand issue, and it's not an issue of adding additional functionality or value to the products. The market demand is there. We're going to be focused on execution for the next twelve months.

Is there any greater clarification you can give on an earlier comment about potentially addressing the debt on your balance sheet, either through using some of the new cash or another way?

Yes, you know what, we really don't want to -- we are looking at a number of options. I think we recognize, as a management, that 160 million is a debt load which is too high for a company of our size, either with TurboDisc or without it. You know, we will be addressing that issue. I'd rather not discuss what the options are, though.

There are no further questions at this time. I would like to turn the floor back to Reuben Richards for closing comments.

Thank you, everybody. Again, obviously, we are at a pivotal transition point with regard to the Company, moving forward. As a management, we have great confidence in our ability and in the markets to demand increasing product numbers from Emcore. We like our competitive position with regard to product performance and market share. We feel confident in the revenue increase year-over-year.

Our focus, moving forward, will be on our balance sheet and improving profitability week over week. With that, we expect a return to profitability on an operating-income basis in mid '04 and to continue to grow the Company from there. 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.