EMCORE Corp (EMKR) 2004 Q2 法說會逐字稿

Good morning and welcome to the EMCORE fiscal 2004 second 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. Following that we will be providing a webcast. If any participant wants to follow on the Web, you may log on to .net. It is now my pleasure to introduce your host Mr. Victor Allgeier. Sir, the floor is yours.

Thank you, and good morning everyone. Yesterday, after the close of market EMCORE released its fiscal 2004 second quarter and six months 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 Rueben F. Richards Jr., President and Chief Executive Officer; Tom Werthan, Vice President and Chief Financial Officer and Dave Haas, Vice President of Finance. Tom will review the financial results and Rueben 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.

Thank you Victor and good morning to everyone, and thank you for joining us as we review our second fiscal quarter of 2004. I guess everyone is aware, during the quarter we did complete our debt exchange regarding the $162m of our subordinated debentures and later in this call I will review that transaction. And just to remind everyone during the quarter ended December 31, 2003 we did sell our TurboDisc Equipment Division but this is the first full quarter without the asset. All revenues that I refer to both in the quarter and historical information have been restated in accordance with Generally Accepted Accounting Principles to eliminate any revenues in order that the comparison is on an apples-to-apples basis. And with that let me review our operating results for the quarter. Revenues for the quarter came in at $23.2m that represents an increase of 36% year-over-year and we were flat sequentially. And let me review the results by product line. On electronic materials, revenues were $2.9m that is a 48% increase year-over-year and we were down 6% sequentially.

On Fiber Optics, Cable TV, broadband product group, we came in at $14.2m that is also a 46% increase year-over-year but we were down 9% sequentially. And finally on Photovoltaics, we came in at $6.1m that is a 17% increase year-over-year and a 35% increase sequentially. The decreases in Fiber Optics and electronic materials were offset by increases in Photovoltaic revenues. I will say that we did anticipate revenues to be higher than the $23.2m reported, this shortfall was in our fiber optics broadband product group, which as I previously indicated was down 9% sequentially. We did expect to generate about $2m on a new product in our fiber group, but had to incorporate some design changes, which prevented us from shipping the volume we anticipated. Those changes are now going to final test and product shipment should commence shortly, generating revenues in this third fiscal quarter. Gross margins of 12% were down from the first quarter's margins of 14%. Revenues did show slight improvement, however, the product mix change, which affected our gross margin. The Photovoltaics' revenue increase of $900,000 sequentially or 17% did impact our gross margin, since gross profits for Photovoltaics are lower than fiber optic broadband products. Year-over-year margins increased to 17 percentage points or $3.5m. An year ago we had negative gross margins of 5% compared to 12% in the current quarter.

In accordance with GAAP, operating expenses include the $12.3m gain on the early extinguishment of debt. Selling, General and Administrative Expenses in the quarter amounted to $5.6m, which represents an increase of around $150,000 or less than 3% when compared to last year and about $300,000 or 6% higher than last quarter. Research and development for the quarter amounted to $5.7m, an increase of $1.5m from last year, but a decrease of about $300,000 or 5% sequentially. All in all total operating expenses, not including the gain on retirement of the debt, remained flat from last quarter. Operating income in the quarter was $3.6m, excluding the gain on the debt retirement, which is a non-GAAP presentation. The operating loss was $8.7m and this compares favorably from a $10.6m loss recorded a year ago. Sequentially the operating loss increased by $500,000 and that was entirely attributable to the decrease in the gross margins from 14% to 12% because of the product mix that I referred to earlier. Below operating expenses, interest expense decreased by about $250,000 year-over-year and almost $400,000 sequentially and that resulted due to the restructuring of our debt and our increased cash position from the sale of our TurboDisc Equipment Division. GELcore is a joint venture with GE was profitable from operations, however it did report a small loss in Canadian factories and manufacturing operations are in Canada and we do incur cash leak out there. We also incurred a loss from discontinued operations of about $350,000 and that did relate to the sale of the capital equipment division during the first quarter, which were residual, expense is not recorded in the quarter and represent the final accounting regarding the sale of TurboDisc, however, one down we do expect to receive the earn out as indicated in the purchase agreement signed last November.

Net income was $1.8m or $0.04 per share. If we exclude the gain on the extinguishment of debt and the discontinuing operations, which again is a non-GAAP presentation, net lose would have been $10.2m or $0.24 per share. And this compares favorably with a loss of $0.35 per share last year and a loss of $0.26 last quarter. Let me turn to the balance sheet, most notably the cash, where we made a pretty good progress on reducing the cash usage. Cash and equivalents at March 31 totaled $70.5m representing a net decrease in the quarter of $70.9m, and let me review the cash usage during the quarter. As I just mentioned, the decrease was $70.9m. We should add to that the $1.1m that we did receive on stock options that were exercised, which gives us $9m to account for. On the dispersion side, we would dispose $2m for interest related to the bond retirement, about $1.9m for capital equipment that we purchased during the quarter, $1.5m on expenses for the TurboDisc transaction that we paid in January, although that transaction obviously closed in the December quarter, and also $2m for expenses relating to the exchange offer. These amounts totaled $7.4m leaving us with an operational cash burn of $1.6m not including changes in working capital component. This represents a decrease from last quarter of approximately $5m. Working capital also increased by about $1.3m from December to -- just under $80m. Depreciation and amortization in the quarter totaled $3.8m.

Let me turn to backlog for a moment. Backlog at March 31 was $35.2m representing an increase of about a $0.5m from December. Orders received amounted to 24.4m, while shipments were $23.2m and book-to-bill of 1.05 to 1. Let me close by spending a few moments reviewing our exchange offer. During February, we successfully completed the exchange offer greater than 90% of our May 2006, 5% convertible bonds we tendered. The exchange was the total consideration of $900 comprised of two components and now it is $550 for consideration of new bonds and $350 in common stock. As a result, the total debt was reduced by about $66m, and our debt now stands at $96m with $80m of that due in May 2011 and $16m due in May of 2006, which represents the bonds that were not tendered. Interest expense was then reduced by $3.3m annually and the new converging price on the bonds we just issued is at $8.06. And upon conversion, the interest expense will be reduced to less than $1m a year. We did issued 7.7m new shares to the bondholders, worth 16% of our expanding stock. And this exchange coupled with the sale of our equipment division has put the company on very stable footing, greatly improving our balance sheet, and looking ahead to the June quarter, we expect revenues of $25m and with that I'd like to turn the call over to Reuben.

Thank you Tom. Good morning everybody. I will begin this with some general comments of the financial, operational, strategic goals for the March quarter and then move to our product line discussion. The strategic goals for the quarter ending March 30th, were improving the long-term viability of the company's balance sheet is number one. Two, execution on the company's product strategy and penetration in new markets and customers. Three, improving yields and manufacturing profitability to position the company to generate positive cash flow from operations by fiscal Q4. On all four goals we were able to make significant progress. In improving the company's balance sheet as Tom pointed out, we successfully completed our exchange offer. The net results were a debt reduction of $66m, interest expense reduction by $3.5m annually, and extending the maturity of the notes until 2011. On product strategy and penetration in new markets and customers, we were able to capture Boeing's 702 programs with our most advanced selling solar panels. This is a significant achievement since Boeing has an internal capacity capability. We announced product qualification and customer shipments in three digital fiber optic products that operate at 10 Gigabit over copper, single or multi-mode fiber. These products are part of the growing portfolio of the company's 10 Gig product line for the 10 Gig Ethernet, LAN, WAN, and Fiber Channel Markets. These products generate design wins at Cisco, at IBM, at HP, at Network Appliances, and at Intel during the quarter.

On the company's manufacturing profitability, we achieved significant yield improvement at both satellite, Satcom, and fiber products that reduced the cash burn from operation as Tom pointed about by $5m to a total of $1.6m used in operations. We expect the manufacturing productivity gains to continue through the second half of this year. Finally it remains EMCORE's goal to achieve cash flow profitability from operations by Q4 driven by revenue from the new product portfolio, gains in market share at fiber and satellite as well as wireless, and supported by our improved manufacturing efficiencies. On a product line discussion in fiber optics, revenue from the March quarter were up 46% versus Q2 a year ago, but down slightly from the December quarter to $14.2m. The decline was basically a timing issue as we made some design changes for manufacturability which Tom outlined, which caused to ship lower volumes during the quarter. We will make up those volumes in the second half of the year. That product is now shipping in volume. The impact on the quarter was between $1.5m and $2m, and we expect to make up those revenues. Fiber overall is on track with budget for the first half of the year and we expect to achieve budget in the second half based on both existing products and the newly released products that are gaining market share. In fiber to the home, we continue to see volumes on Video Cards.

Market demand has been driven largely by the municipalities rather than the RBOCs at this point, whom we expect to begin placing orders later in the year. In wireless, revenues were up 48% versus last year to down 13% from the December quarter, gross margins improved to 36% on improved manufacturing efficiencies and raw material cost reductions. We have a number of opportunities under negotiation to improve volumes through this side in the second half of the year around EMCORE's E-mode device. In Satcom, revenues were up 17% from last year and 35% from the December quarter to $6.1m. Operational losses were cutting this division by 65% and the book-to-bill remain strong at 1.5 to 1. We expect to see improved revenues and profitability quarter-over-quarter for the rest of the year as the market rebounds, and we've received orders from both Boeing, Lockheed Martin, Loral, and European satellite constellation that make a part of our backlog. At GELcore, we continue to be operationally profitable and account explained net income was a lot due to Canadian taxes, but revenues continue to ramp up nicely and we're on plan to increase revenues by about 25% to 30% this year.

In summary, while revenues trended to the lower end of expectations due to timing issues, market demand remains very robust. Manufacturing productivity improved and the new product acceptance in customer systems exceeded target. Backlog increased, which is significant because two-thirds of our business is now has a book-to-ship rate of less than 30 days, so growth in backlog is the significant sign for future revenue because it tends to be our longer-cycle businesses. Consequently, we raised revenue expectations and are on track for positive cash flow by the end of the September quarter. Now, with that I will turn it over to the operator for Q&A.

Thank you. The floor is now open to questions. If you have a question, please press star one on your touchtone phone. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. We do ask that while you pose your question that you pick up your handset to ensure proper sound quality. Our first question is coming from Chris Versace of FBR.

Good morning gentlemen.

Hi Chris.

Just one or two quick questions. The first is really centered on the wireless business. Can you talk about some of the opportunities you have not only in the handsets base potentially in wireless LAN and kind of talk to us - sequentially as to why you guys were not down anywhere near the amount that the overall handset industry was.

Yes. Let me target our market share a little bit. I think in a number of our products, Chris, we have been able to go all the way out characterize it as gain market share, there were number of PA manufacturers who got in the last quarter, have rebid their volumes, and I think EMCORE probably extended its market reach on a lot of these new current tracks. Also, as I pointed out, on the wireless side, we are currently in negotiations with at least two companies that are in the PA and switch side of the business to capture significant amount of product line from those two companies. These are two companies that we don't ship a lot to right now. But it is part of what I'll call, a more global supply agreement, because we do ship them fiber optic products, so the -- so they are gaining some leverage on a purchasing basis and we are extending our product roster, we are optimistic that we are going to be able to capture that business. And the second is that I think that you are seeing a broader acceptance of the electronically enhanced pHEMT to what's known as the E-mode device. Our exposure in the wireless LAN side of the business, again, is still developing and we sell the customers who subsequently sell to Intel and to other major players in wireless LAN, and I would tell you, I think, that this is a very price-sensitive market a this point and I think it will continue to, probably, be so, but we are starting to see initial in terms of volumes on some of those design wins.

Okay. And then, anything your technology has, you know, really been InGaP-based, anything new on the AlGaAs front?

No. We continue to just campaign the InGaP both in HBT and our pHEMT level.

We don't offer anything on the AlGaAs side.

Right. I just was wondering if there has been a change in strategy there or not?

No. We think there is more market share and customer penetration that we can achieve based on the InGap designs.

Okay great. And I appreciate you guys letting me know I am not the only fool who forget to mute his cell phone. Thanks a lot guys.

Thank you. Once again, to ask a question, please press star one on your touchtone phones. Our next question is coming from Chang of Sam Technology.

Good morning Reuben, good morning Tom.

Good morning.

Can you comment on the order momentum in your three product areas?

Okay. In Satcom, I think this is probably the third quarter in a row where our book-to-bill has been greater than 1.5 to 1, and I think it is due to a couple of different market drivers. One is, I think, the commercial satellite business is a little bit more robust than it has been in the last couple of years; you know, two years ago, there were approximately three satellite awards, in this past year there were 17, this year so far there has been 19, so we are seeing a general market rebound in Satcom and we tend to be the market leader in terms of product performance which has the significant economic impact on satellite launch economics. On the wireless side, as I said, we are seeing new customers interested in the InGap and particularly the E-mode device that really no one else in the market currently campaigns but EMCORE and so with that gaining acceptance we are also using our relationship. On the wireline side, the fiber side to drive some of those relationships and a broad product penetration in December the larger OEM company. Wireless I think in general tends to be a very price sensitive market. We had been successful in reducing our material cost, both on a purchasing and on a production level because yields is -- trying to adapt. So we've been able to improve profitability there, which allows us more flexibility on new accounts. So that trending overall but largely in the wireless side I would tell you that I think revenue growth in that business will come at market share expansion, not because overall market is growing. In the fiber side, EMCORE's strategy has always been around the 10 Gigabit Ethernet applications and you know, our view there is that it is 10-Gig over, it couples 10-Gig over a singlemode or multimode, that is what the XENPAK designs are all about on whatever launch distance, transmission distances are required, you know we are seeing -- we were first to market with an LX4 model. We are seeing a lot of attraction around that. And I think in general, we are pretty bullish on how fast the 10-Gig market is growing. I think if you look at industry projections there, they are probably, you know most people think that 10-Gig has grown 60% to 70% year-over-year. So it is a fairly dynamic market, where we have what we perceive to be a market and a product lead in that space. I would also say and on the fiber side there is a -- particularly from the very large server companies, server, radar guys that people are coming to market with big servers and these components are sort of ideally suited for that market space. And that is driving a lot of activity at this point too.

Okay. For the -- that might -- are you the current market leader also in the fiber optic, are you the current market leader?

You know in a number of the 10-Gig product lines I can tell you we are the -- for the CX4, which is the 10-Gig over copper I think we are at this point the only company that has a product that meets all the IEEE stakes. The SmartLink, which connects to the CX4 and with a fiber optic cable that connect radar to radar or a switch to switch. Again I think we are the only company in the market who has that product strategy and on this impact side there are a number of companies that offer LR, long reach, ER extended reach or for short reach applications, but I think on the LX4 side I think we are -- we have a market lead of -- I am not exactly sure what the period would be we call it six months.

Can you comment on the efforts of varying the wirelinks and the fiber optic? I know you are on TV side as various --

I am sorry. Could you say that again?

The market -- the book-to-bill ratio for the wireless and also for the fiber optic --

Yes. On the wireless side that ends up being, what I will call a turns business, which means our book-to-ship is probably five days from receiving order. So if the backlog is not a very significant number there because we are going to be -- whatever order we get, we are going to be shipping within that month or certainly within that quarter. So that wireless is probably again it is a very short cycle business. On the Satcom side that is a very long cycle business and book-to-ship is probably anywhere from three to six months. Depending on launched schedules. So -- and Fiber tends to be sort of book-to-ship over two to four weeks. So you're looking at -- when I said earlier that the significance about increasing backlog for EMCORE is that two-thirds of our business is our short-cycle businesses and one of them is a long-cycle business. So we can see an increase in backlog, particularly because we can -- the book-to-ship cycle is short on the other one, on wireless. And on Fiber that's a significant development for the company.

Okay, thank you.

Thank you. Once again, as a reminder, to ask a question, please press star one. Our next question is coming from Jeff Smith of Deep Hayden .

Hi. Could you comment on how you're feeling now about your mix of business, whether or not you see any changes through product acquisitions or divestitures? And also on your capital structure, whether you think you now have the right mix of debt-to-equity and whether your cash reserves are sufficient?

Yes, let me take the second part, Jeff. On our capital structure, we feel very comfortable on the improvements that we've made. I think you can always improve further, but right now we feel very good that our debt is under a $100m and reduced by over $65m. Our cash balances are sufficient. We have nice liquidity there, so we feel pretty good about that. Jeff, you repeat the first part of your question?

Maybe, following on the side on the cash, I mean how do you see using that? Do you keep that in reserve, are you looking to do more acquisitions, are you looking to the divest of any products?

Yes, I think that we're - Jeff, we're pretty comfortable with our product strategy right now. We've been -- we had a really good quarter in March in terms of getting new products out and getting customer design wins and customer acceptance around some of these things. There are -- when you look at our product roster, they tend to be high value-added types of products, meaning they are not really an assay or commodity based items. I think, for us to extend into or acquire other product lines, you really have to -- we would be making a sort of the strategic departure from what has historically been our approach to the market which is a high value-added product line to an MSA based product line, which is more commodity driven, it's much more price sensitive and I'm not saying that that's bad, I'm just saying that that would be a departure from what our strategy has been to- date. We think, in the near-term there are market share opportunities that we can drive towards to grow revenues and at the point, if we reach the point, thinking that we've saturated our market opportunities based on these products, we would signal or I think, telegraph switching our approach to product lines if we were going to go after something that was more commodity based. At this point, we don't see anything currently on the horizon.

All right, thanks.

Thank you. Our next question is coming from Pierre Maccagno of Needham.

Hi, Reuben and Tom.

Hi, Pierre.

Can you talk a little bit more about this trend about the amount of, starting to take some strength, just a little bit of color there? Do you think there is some migration that power amplifiers are going through from HPC?

I think, in the E-mode devices and this is a really simplistic explanation, but it has -- it is a hybrid between an HBT and a pHEMT. It has, sort of the performance characteristics and output of an HBT with a power of polar linearity of the pHEMT, meaning power efficiency and it -- We had originally developed an EMCORE product line with Motorola some years ago under a joint agreement. Here there were some aspects about that arrangement which didn't allow us to really work too much with other companies, I think with that. The approach to the market there has changed and I think that there are other people in the switching TA business where we are now, in a position to start driving that more than we have been in the past.

So that Motorola want to be outsourcing more and more of their chip manufacturing, and how would that affect you?

Well, we had -- right now, Motorola is one of our big customers. So, on a number of different levels at both wireless and in broadband. And my sense is that they make a make or buy decision on almost every sort of key component in their architecture. But, I think probably more and more recently, it's been a buy decision. So, if that means outsourcing, yes, I think the trend is probably going to go in that direction.

Okay, thank you.

Thank you. There appear to be no further questions. I'll now turn the call back over to Mr. Reuben Richards.

Thank you everybody again. And as I said in summary, we've got significant manufacturing productivity improvements during the quarter, a terrific deployment of new products, which are gaining customer acceptance in WAP into their new generations of systems. The backlog increases were noteworthy and we have raised revenue expectations. We are very optimistic I think about how the business looks in the second half of the year for us. So, thank you very much.

Thank you. This does conclude this morning's teleconference. You can disconnect your lines and enjoy your day.