EMCORE Corp (EMKR) 2004 Q1 法說會逐字稿

Good morning, and welcome to the EMCORE Fiscal 2004 First Quarter Earnings Teleconference. At this time, all parties have been placed on a listen-only mode and the floor will be opened for your questions following the presentation. EMCORE will be providing a webcast for this teleconference. If you are to follow on the web, you can log on to www.emcore.com and now it is now my pleasure to turn the call 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 2004 first quarter results. By now, you should have received a copy of the press release. If you have not received a release, please call our office at 212-227-0997. With us today from EMCORE are Reuben F. Richards Jr., President and Chief Executive Officer; Tom Werthan, Vice President and Chief Financial Officer; and Dave Hess (ph.), 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 release and filings with the SEC. I will now turn the call over to Tom.

Thanks Vic, and good morning to everyone and thank you for joining us as we review the first fiscal quarter of ’04. As I believe everyone knows, during the quarter ending December 31, we did sell our TurboDisc equipments division to Veeco Instruments. So today we are a vastly different company focusing exclusively on compound semiconductor components and subsystems for the broadband and wireless communications markets. On our last call on November 13, we reviewed the transaction which I [reviewed] in today and particularly had affected our results in the first quarter. I will also compare our first quarter results both sequentially and year-over-year, not including TurboDisc which is been required to file as discontinued operations [inaudible]. In addition to our operating results, read the terms of our tender offer regarding at the Board meeting debentures which commenced on January 21.

And with that let me review our operating results for the quarter. Revenue for the quarter came in at $23.1m, which represents an increase of 146% year-over-year and 36% sequentially. The 23m drop in quarterly revenues in this segment and let me review prior [drawn] results. For Photovoltaics, revenues came in at $4.5m that’s down 11% sequentially and I'm sorry -- 7% sequentially and 11% year-over-year. Wireless, our [off] revenues came in at $3.1m or just 16% sequentially and 54% year-over-year and broadband, including fiber optics and cable TV came in at $15.5m that’s up almost 600% year-over-year and also 63% sequentially. So despite the decrease in Photovoltaics, we still increased revenues by 146% and 36% year-over-year and sequentially respectively. Gross margin profits improved during the quarter, year-over-year margins increased 42% or $5.8m. A year ago we had negative growth margins on our Materials business of 28% compared to 14% in the current quarter. The margins were 14% in this quarter also doubled from the previous quarter’s margin of 7%.

Improvements were a combination of a number of things, one is, higher revenues, improved product mix, improved yield from our continued efforts on operational efficiencies.

Operating expenses decreased to $1m or about 8% to 11.4m sequentially. R&D remained flat and SG&A decreased to $1m or 16% to $5.3m. Again the continuation of cost cutting measure contributed to the decrease. The operating loss also decreased 3m this quarter to 8.2m from 11.2m, the result of improved margins and a decrease in SG&A. Although, operating expenses, interest expense decreased marginally by $50,000 due to the cash we received on the sale of TurboDisc, GELcore our joint-venture with GE also improved operations. GELcore revenues for '03 were approximately 54m that’s up about 26% from a year ago. Our portion of GELcore’s December quarterly net income more than double from 107,000 last quarter to 267,000 this quarter and compares to a loss of almost $600,000 a year earlier. GELcore’s net income is their second consecutive quarterly profit and they also had not [required] capital infusion for well over a year.

The loss from continuing operations was 9.8m or 26 cents per share compared to 30m or 35 cents per share last quarter, an improvement of 9 cents per share or about 26%. The low order income on P&L statement, we accounted for the disposition of TurboDisc. Again to brief everyone, we sold our [MOCVD] division to Veeco in a transaction value about $80m.Till [June], we received 60m cash closing and we will be entitled for 50% of end revenues in excess of 40m in both calendar years 2004 and 2005 cash of 20m. Given the trailing 12 months revenue figures, we strongly believe that majority if not all of [inaudible] are received. Again, the reason for the sale will manifold and in more particularly, the cost prices very attractive to us, the cash we received in closing was about 10 times of EBITDA. The strategic advantage of maintaining TurboDisc has been diminished. We received a very favorable long-term supply agreement on the transaction. We do look in terms of [mitigating] intellectual properties. We are now more focused company, [easiest way] to communicate and understand, and arguably most importantly we felt we could replace our revenue within 12-15 months. Regarding the fact, third point, we clearly are well on our way to accomplishing this revenue replacement. Lastly just to review the credit revenues of $130m with almost half of that coming from the TurboDisc product line. In the current quarter, we generated a little over $23m, so even with modest growth in revenues there will not be a significant decrease in annual revenues and by our fourth fiscal quarter we should out there above last year’s annual run rate. So, the accounting for the sale is represented by two line items, one, discontinued operation and the other is to give any disposition, but first where discontinue operation represents the short period during the quarter in which we owned TurboDisc and the second represents the booking on the sale and that came about to about $80m.

As a result of the [inaudible], net income for the quarter was $8.1m or 29 cents per basic share and 20 cents per diluted share and this compared favorably with a net loss of about $14m in the previous quarter or 37 cents per share loss.

Let me turn to the balance sheet for a couple of moments. Cash and cash equivalents at 12-31 totaled $78.4m, representing about $50m increase from September 30 and let me review the cash flow for the quarter. Not including changes in our working capital components which were about $2m and favorable, cash used in operations was about $5.5m. We used about $14m cash for the quarter and interest in balance sheet items accounted for about at 8.5 of it, the difference of 5.5 was the operations.

Based on the improved margins and reduced operating expenses, our plan is to achieve cash flow breakeven from operations for fourth fiscal quarter. When the balance sheet items requiring cash flows -- during the quarter we completed the acquisition of Molex -- Molex Incorporated 10 Gigabit Ethernet transceiver business in which we paid slightly more than $1m cash on closing, and Reuben will discuss this transaction during his review. Working capital increased to just under $90m, an increase of about 33m from September, and the working capital ratio increased to 4.5:1 from 3.1:1, primarily the result of the sale of TurboDisc. Depreciation and amortization totaled about 4.1m.

Let me review the backlog for a moment, backlog at 12-31 totaled 34.7m, that’s an increase of 1.6m from September. Orders received amount to 24.7m were [offset] to 23.1 with book-to-bill slightly over 1 to 1.

Let me spend a few moments on the exchange offer before turning the call over to Reuben. We called another $152m or 5% convertible securities debt at [the very best thing that] they do in May of ’06. With the amount of debt limit, financial [credibility, for either result], on 12-24, we did file an EMCORE registration statement with the SEC contemplating this exchange offer.

On January 21, we commenced the tender offer. The tender offer must stay up in for 20 business days, unless modified and is scheduled to expire February 18 and the tender as follows - for every $1,000 bond outstanding we are offering 900 hours of consideration and the consideration is comprised of two components, 550 hours would be a new senior convertible note and the 75% coupon however the maturity has been pushed out 5 years to middle of ‘011. The conversion price has been set at $8.06 and the bonds are callable under certain circumstances at $12.09. The other component is $350 of EMCORE common stock. The pricing period was the 5-day average beginning 8 days prior to the tender offer expirations, the 350-hour issuance in common stock will be running into a maximum issuance of 10.5m shares. Couple of other salient features include a minimum of 85% participation of the bondholders and no holder can exceed more than 20% of EMCORE's outstanding common stock. So from the pro forma perspective, assuming a 100% participation, our debt will be reduced from $162m-$89m, our annual interest expense will be reduced from $8.1m-$4.4m or about $3.7m of savings per year. The bondholders will own about 18% of the company on closing and approximately 34% assuming invariance. Again, the references I just made to the debt, the interest, and the ownership assumes 100% participation by bondholders. This transaction will put the company on very stable footing and with revenue base of between $90-100m will make EMCORE one of the top five suppliers of compound semiconductor based products. Looking out to the March quarter, we expect revenues to exceed this quarter’s revenues and it will be in the $24-25m range, and with that I would like to turn the call over to Reuben.

Good morning everyone in the [inaudible]. I will begin with some general comments on the financial operation and strategic aspects to the December quarter, and then move to our product line and market trend discussion. I think over all we are pleased with the December quarter, which is characterized by improvement at all financial and operational levels and put the company ahead of this 2004. Physical claims or revenues are on target for operational breakeven by Q4. During the quarter we experienced the stronger sequential revenue growth in our communications product in over three years, exceeding the guidance that we had given on the last quarterly call and consequently we are raising Q2 revenue guidance from a range of $24-26m.

Gross margins doubled from the previous quarter, and were ahead of our expectations of 10-12%. And as revenues increased in the current quarter we expect further margin improvement. While the December quarter ended with a [inaudible] goal of greater than 121, and new orders in the current quarter remain consistent with last quarter’s growth rate. Strategically, the December quarter was a period where we repositioned the company with respect to it's markets, it's products, and it's balance sheet. With all the capital equipment business will represent a fundamental shift in how we view our new product opportunity for our markets and competitive advantages. Historically, the ownership of the capital equipment -- the production technology was a competitive advantage. While new materials were being developed for the communications market. Those markets have matured, and our competitive position and product strategy has been established. While we sold the reactor business, EMCORE retains the technology base, the intellectual property, know-how, developed within the reactor business that gave EMCORE a consistent advantage in our ongoing business.

We felt that it would be a better use of resources to use the cash to the bolster the Company’s balance sheet and to better position the Company to take advantage of product markets that have grown greater than 30% a year, as demonstrated by the December quarter.

Given the revenue growth from the continued operations, which came in December quarter and significantly increases in [backlog]. Management felt that EMCORE could replace the revenues and profitability in the equipment business in fiscal '04 through increased demand on existing products and new market opportunities. As we said on the last conference call revenues are expected to increase over 33% to a $90-100m range in fiscal '04, and given the third quarter performance we are ahead of plan of achieving those revenues.

Consistent with the way we view the Company’s market opportunities. In October EMCORE acquired the 10 Gigabit Ethernet, product portfolios from Molex. EMCORE now has the most extensive transceiver product line for 10 Gigabit Ethernet in both single and multimode fiber applications. This market is expected to grow 66% through 2007. Further, we have introduced our license in number of new products all of which have been qualified by customers and they are currently being deployed in customer network. Currently, the 10 Gigabit Ethernet product family has the largest backlog for those -- of any product in the Company.

Lastly, as turn on Atlanta, in December we filed an exchange offer, which is now effective. We grew this offer, is in the best interest of bondholders, shareholders, and the Company. Tom discussed the detail of the synergy offer and we put it in the Company’s balance sheet. It’s management’s high priority along with improving operational profitability.

On a product-by-product basis. In fiber optics, revenues for the December quarter were $15.5m, an increase of 53% over the previous quarter based on strong demand in the cable television, 10 Gigabit Ethernet, and storage area network market. We expect revenues to grow sequentially in this quarter based on new design wins specifically in the [inaudible]. All product lines showed improved growth margins based on better manufacturing efficiencies and increased unit volumes. In fiber to user, we are well positioned among suppliers to the Regional Bell operating companies, and we are starting to see increased demand for both existing and next generation products. We expect this market to more fully develop in the second half of the year.

On an industry basis, we have seen some consolidation in the optical components of prior base over the past several months with some companies and had vertically integrated in order to capture chip production, and we would drive this as a very positive sign for revenues on our existing products with fewer competitors exist on a merchant level. In wireless revenues increased 15% quarter-over-quarter to 3.1m, it’s trending positively this quarter with increased demand for InGap based products. We are seeing increasing interest in new generation, have technologies such as [inaudible] and now are engaged with several customers and evaluating the materials.

In Satellite Communication, revenues were down about $200,000 from the previous quarter to 4.6m, however, new bookings were 7.4 or 1.6 to 1. Over 80% of the new bookings in the quarter were based on the Company's new integrated diode solar cell, which is patent protected. Revenue should improve sequentially this quarter. As Tom pointed out in GELcore revenues for the year finished at $54m or 26% year-over-year, net income doubled from the previous quarter to approximately $260,000, and this is a trend that we see continuing. And we continue to see revenue fraction at GELcore cross all this product lines with the number of new products and market launches slated for 2004 being enthusiastically received. And with that, I will close my comments and open for the Q&A.

Thank you. The floor is now open to questions. If you have a question please press the number “1” followed by “4” on your touchtone phone. If at any point your question is answered you may remove yourself from the queue by pressing the “#” key. Questions will be taken in the order they are received. We do activate to pose your question and please pickup your handset to provide the best sound quality. Please hold then we will go for questions. Once again, it’s "1" followed by a "4" for any questions at this time. Thank you. Our first question is coming from Robert Zakresky of Jefferies & Co.

Good morning. What was -- I have got some housekeeping questions. What was CAPEX in the quarter?

That was about $0.5m.

And what was gross interest expense?

$4.1m -- I'm sorry interest expense on the P&L was $1.8m, Robert. However, the cash component -- we had a semiannual interest paid on same $4.1m.

Okay. Do you know cash flow guidance for the next quarter?

I've said in my comments, I believe that we will improve sequentially throughout the year, and by the fourth quarter of this year we should be at a breakeven from operations from a cash flow standpoint.

Okay, what would be the level of operating -- revenue levels for operating breakeven?

I am sorry.

The breakeven revenues -- operating breakeven revenues.

Right now the revenue structure, we add about $31m, however, there are other factors we have taken to reduce that amount, for instance during this quarter we are actually -- it has been [inaudible] for manufacturing overseas which still has our gross margins going forward.

And so what would be the gross margin that you’re assuming for breakeven revenues.

It should be around 24%.

Okay and also for, like what -- the end of this fiscal year -- what sort of gross margin, SG&A, R&D, and operating margin should we assume?

Again, I think you'll see sequential increase or sequential decreases in the operating expenses more modest than we saw this quarter because we haven’t had any breakeven from operations in Q4 somewhere around the 30 or slightly lower number then that in revenues.

Okay, thank you very much.

Thank you our next question is coming from Irvine Hirschman (ph.) at OH Investment.

Hi, congratulations on the progress. Can you go through the product line and kind of indicate what’s the [inaudible] that you didn’t have, burden -- the overhead burden. What is normalized gross margins feedback segment, and what type of rates you are going to provide range to understand and also could you review the competition within the 10 Gigabit Ethernet transceiver market?

Sure, yeah I’ll take the first part and Reuben will address the second part on 10 Gig side. We had to fund that the amount in the gross margins on a per-product line basis it's just too competitive, for instance in our Photovoltaics line, we only had one competitor out there and if break that out they can use that, you know against us or somehow on the [inaudible] side. So, we are going to go with gross margins on an overall basis but regarding the range of gross margins, on the Fiber Optic side they were much positive than they have been. We did have a pretty good product mix this quarter and then improvement on all four of our product lines this quarter.

Okay, [Reu] can you say which ones were more profitable or less profitable or may be if you kind of get to that as well?

You know, as I mentioned in the Fiber Optics group, certainly performed the best this quarter.

And it's a competition on the 10 Gigabit line?

Yeah, [inaudible] from the 10 Gig right now, I would have to say that in particular as far as the impact stays standard EMCORE probably has an 18-month lead on the market, and largely because over the past year and half even all those companies have got out of it, but I will tell you I think we will see competition come in particularly at the networking level, probably from companies like Infineon and our maybe some U.S. based providers.

If you see ’04 numbers of [core] private companies that claim to be sticking out or catering this market. Are you seeing them coming on stronger or it’s just a lot of noise?

[Inaudible] the answer to that it’s very difficult for a privately funded company to gain much traction and certainly on the [inaudible] that there would be the primary vendor at most of the [ops] in networking companies.

And then one follow-up if I may. In terms of the drivers on the 10 Gigabit side, is there a more natural network or is it more you are seeing -- more what I would call even within the enterprise per [seg]?

It is still enterprise.

Okay. Thank you so much.

Thank you. Once again, as a reminder its “1” followed by “4” if any questions at this time. Thank you.

Our first question is coming from Peter More (ph.)of [inaudible] Capital. Mr. [More] you line is live.

Excuse me, I was on mute. Good morning. I wonder if you can comment on how much you may buy from the business that you sold to Veeco going forward?

As I mentioned last quarter, they are probably going to be 1 or 2 [MSCB] system purchases in this fiscal year. That came additional obviously through the components that we will buy to [inaudible] our machines.

Right. Great, thank you very much.

Thank you. Once again as a reminder, it’s “1” followed by “4” if any questions at this time. Thank you. I’m showing no further questions at this time. I’ll now turn the call back over to Mr. Reuben Richards for any further or closing comments.

Thank you everybody and [inaudible]. I said in my opening remarks, we’re pleased with the December quarter. We saw improvement at all levels revenues, gross margins, and expenses all exceeded and performed better than we had planned. This is a trend now and we are continuing to see improvements this current quarter till we are actually ahead of our 2004 plan. Our revenue guidance for next quarter has been raised from the last quarter and we are seeing a lot of traction particularly on new products and in areas like the 10 Gigabit Ethernet markets where we have a -- would believe a significant market lead in terms of the competitive dynamics in the marketplace. We are cautiously optimistic and doubt that we will continue to see improvement at the revenue level quarter-over-quarter and continue to reduce our operating expenses so that again the target that as Tom pointed out and again we are on plan to stay even -- operational breakeven by [’04]. So with that I’ll close my comments and thank everybody.

Thank you. This does concludes this morning’s teleconference. You may disconnect your lines and have a wonderful day.