EMCORE Corp (EMKR) 2004 Q3 法說會逐字稿

Good morning ladies and gentlemen. Welcome to the EMCORE third quarter fiscal year 2004 earnings conference call. At this time, all participants have been placed on a listen-only mode and the floor will be open for questions following the presentation. Also, you may listen to the webcast by logging on to www.emcore.com. It is now my pleasure to turn 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 2004 third quarter and nine-month results. By now, you should have received a copy of the press release; if you have not received the 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 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 our third fiscal quarter of 2004. Just to remind everyone, during the first quarter of this fiscal year, we did sell our TurboDisc division, so while revenues I refer to both in the quarter and historically have been stated in accordance with GAAP to eliminate any TurboDisc revenues in order that the comparison be more meaningful to everybody. With that, let me review our operating results for the quarter. Revenues for the quarter came in at $21.2m, which represents an increase of 25% year-over-year but a decrease of 8% sequentially. Year-to-date revenues totaled $67.5m and that represents an increase of 56% where $24.3m when compared to last year, and let me review the product line results.

On Electronic Materials, revenues came in at $2.6m, that's a 7% decrease year-over-year and 12% sequential decrease. Fiber Optics including our cable TV product lines came in at $11.9m, that's a 6% increase year-over-year and a 16% decrease sequentially. And finally, our Photovoltaics revenues came in at $6.8m, that's a 123% increase year-over-year and 11% sequentially. During the quarter, as we indicated in our press release, we did anticipate shipping our new transceiver products. That product is not shipped because of contaminated materials, specifically we send our lasers out for packaging and contaminated parts related to issues closed failures during our final test procedures and we decided not to ship the finished modules. We believe the materials and packaging issues are resolved and product shipments did commence the week of July 12. There is a strong demand on this product from our customer and we are working diligently to ramp production and meet their shipping request.

Gross margins of 2% were down from last quarter's margins of 12% and a few issues impacted gross margin, one obviously was lower revenues, we absorbed less overhead which impacts gross margins. The volumes decreased on our die and array fiber optic lines and these product lines are very volume driven. Essentially fab and labor costs remained pretty static, so the decrease in volume negatively affects our gross margins, but these volumes will increase this quarter. And finally, product mix was unfavorable during the quarter. Photovoltaics revenues, as I mentioned, increased to 11% and that represented 31% of our revenues and since this is our lowest gross margin product, it negatively affects our margins.

Operating expenses for the quarter totaled $12.3m, a sequential increase of $900,000. The increase was all related to R&D, as the SG&A was essentially flat. Included in research and development this quarter was a charge of $1.3m related to the contaminated parts I referred to just moments ago and indicated in our press release. Net of this charge related to the contaminated parts, R&D would have declined by about $400,000. Separately, we have identified opportunities in our cost structure and believe we can eliminate an additional $1.5m per quarter over the next three to six months.

The operating loss for the quarter was $11.8m, an increase of $3.2m sequentially, the gross margin impact of $2.3m coupled with the $900,000 increase in R&D did account for the increase. The lower operating expenses, interest expense decreased by $823,000 year-over-year and about $0.5m sequentially and that was due to the restructuring of our debt which reduced our debt by about $65m, the result of the exchange we offered back in February. GELcore as a joint venture with General Electric Lighting enjoyed their most profitable quarter and our portion of GELcore's income amounted to about $350,000. Net loss for the quarter was about $12.5m or $0.27 per share. This compares to a loss of $9.2m or $0.25 per share a year ago, and a profit of $1.8m or $0.04 per share sequentially. Last quarter did include in net gain on the extinguishment of debt and discontinued operations in the amount of about $12m, excluding this gain, which is a non-GAAP presentation net loss last quarter would have been $10.2m or $0.24 per share. Let me turn to the balance sheet.

Cash and cash equivalents at June 30 totaled $58m representing a net decrease from March 31 of $12.5m, and let me review our cash usage during the quarter. As mentioned, the decrease was $12.5m and disbursements for non-operating items totaled about $5m leaving an operational cash burn of about $7.8m. The non-operating items consisted of our interest on our Subordinated Debentures of $1.8m, $1.7m on capital equipment expenditures, and $1.3m for the acquisition of Corona Optical Systems, which took place in the quarter. Unfavorable changes in working capital contributed to the decrease. Working capital component changes were about $3m unfavorable, an increase in accounts receivable of about $3m account for most of this. Accounts receivables did increase predominantly because we shipped greater than 60% of our revenues during the last month in the quarter. Depreciation and amortization totaled $3.7m. Backlog at June 30 totaled $38.2m, that's an increase of almost $3m since March. Orders received amounted to 24.2 while shipments were 21.2 or a book-to-bill of 1.13 to 1. In summary, we are certainly disappointed with the ramp down on our new 10 Gig transceiver but we are now shipping and ramping production. As mentioned we've identified about $1.5m in quarterly savings, which depending on product mix will reduce our EBITDA to about $28m per quarter. Looking ahead to the September quarter, we expect revenues to increase about 20% to $25m range. And with that, I'd like to turn the call over to Ruben.

Thanks Tom. I'm going to begin with some general commentary, and then move to some specific strategic and market discussions and then a product line review. Clearly, the most visible aspect of the June quarter was the supply chain problem, which caused EMCORE to hold scheduled shipments of its 10 Gigabit Ethernet Transceiver and it resulted in a $4m revenue shortfall for that product line as well as a $1.3m charge pending returns to the vendors. And while it was a disappointment from a revenue standpoint, the Company had anticipated that fiber optic revenues for the June quarter would have increased 13% over the previous quarter to $16m based on purchase orders on hand and customer shipments schedule. However, the Company did all the right things in response to this issue by holding shipments and working with our vendor and our customer to achieve an optimal outcome. We have made organizational and process changes and feel along with our customer and our vendor that these issues are resolved and we began volume shipments on a weekly basis beginning July 12. On other issues, the Company was able to make progress on a number of strategic initiatives. The priorities for the June quarter were one, execution of the Company's product strategy, particularly around 10 Gigabit Ethernet where EMCORE enjoys a substantial market position and product demand for EMCORE's products which operated 10 Gig over copper multimode or single-mode fiber is substantial. Secondly, to improve operational efficiencies in manufacturing profitability, to generate positive cash flow from operations.

On the 10-Gig market, this is a market space where EMCORE is seeing substantial demand for its products from 10 Gigabit through OC-192 transceivers. We recently received and these numbers are not included in backlog because they don't fall within the quarter, $6m in purchase orders through the balance of calendar year '04. This is a significant increase over forecast demand for these products and calendar year '05 forecast from the three customers that we have qualified these products, which indicate a served available market or SAM of over $50m. And while there is no guarantee of what percentage of that market EMCORE will get, we are currently the primary vendor to these three customers on the OC-192 links. On the 10 Gigabit Ethernet market, EMCORE continues to be the only qualified source on this modules, and we expect to deliver over $10m which is what we have in backlog and currently in handed purchase orders over the next two quarters on these modules. On improving profitability, the June quarter does not reflect well towards this goal, but we have addressed those issues and expect a significant rebound in terms of financial performance in this September quarter. We have identified approximately $1.5m a quarter in cost savings, much of this through consolidation of shared services at different locations within EMCORE. We expect these saving to be realized over this quarter and next quarter. And as Tom pointed out, we have substantially reduced our cash breakeven from a revenue standpoint.

On our product line discussion, revenues in satellite communications -- revenues continue to grow quarter-over-quarter improving an 11% from the previous quarter. We expect to see a 10% to 15% sequential growth in revenues in the September quarter. The book-to-bill was significant at 1.9 to 1 improving backlog - over $20m. New orders are split 70-30 government and commercial. Further, operational link line yields improved by 9%. In Satcom, we have seen a substantially operational turn around in this business from losing approximately $4m reported just three quarters ago to effectively breakeven, and we expect this operation to generate cash in this current quarter. With regard to new product opportunities, we are seeing tremendous interest in EMCORE's terrestrial solar cell and concentrators technology from both domestic and foreign customers and while it is still early in the market development of this technology, it looks as if there will be some commercial revenues in fiscal year '05 on a terrestrial basis.

In Fiber Optics for the reasons discussed earlier, revenues were below plan at little under $12m. On the digital side of the business, the book-to-bill was 1.5 to 1, which even if adjusted for revenue shortfall will still be better than 1.2 to 1 in terms of the book-to-bill. On the 10 Gigabit OC-192 market, this is a market which has ceded up dramatically in the last three months, and we have three customers where we are the primary vendor, and as I said earlier have issued approximately $6m on purchase orders to be filled between now and the end of the calendar year with substantial follow-on orders thereafter.

As Tom pointed out, during the period, we also acquired Corona Optical Systems. This expands EMCORE's customer base among tier 1 customers and gives EMCORE a very efficient ultra small form factor optical platform for high-density switches in both the telecom and Ethernet markets. Latest 12 months revenues for Corona were $2.9m; the forecast going forward is approximately $4m. In the analog side of the business for cable television, the net revenue expectations and strategically we were able to expand market share in China, which is one of the fastest growing markets for laser modules from about 25% to 50%. We were able to penetrate new platforms at existing customers with new product, and we expect a revenue ramp sequentially this quarter from last based on these new design wins.

In general, in Fiber Optics, we continue to move products to contract manufacturer in Asia as they reach critical mass in terms of unit volumes. And as a result, we expect to see improved gross margins as we hit these volume targets. On the RF side of the business, revenues were flat but met expectations. The strategy here has been to take market share from some of the weaker competitors in the market space. During the quarter, we were selected as ANADIGICS' primary vendor across a broad array of products including GSM, CDMA, and wireless-LAN applications. New products in the RF side, we began, during the quarter, the shipment of pre-production volumes. These are early stage volumes of gallium nitride based field-effect transistors for high power and switch application. We expect this product line to be a significant revenue contributor in fiscal year '05. GELcore once again turned in a profitable quarter as Tom pointed out - one of the best quarters since its inception and is on target to hit at $70m to $75m in revenues this year. New platforms with applications in transportation signage display and commercial refrigeration are driving revenue growth. The outlook for conventional lighting applications remains strong with product schedule for calendar year '05 deployment.

In closing, the Company is well positioned to rebound from the experience of the June quarter with a lower cost structure, sequential revenue growth of over 20%, and substantially improved operational profitability in the September quarter. And with operator, I will turn it over to Q&A.

Thank you sir. The floor is now open for questions. If you do have a question, please press star one on your touchtone phone. If at any point your questions have been answered, you may remove yourself from the queue by pressing the pound key. We do ask that when you pose your question that you please pick up the handset to provide optimum sound quality. Once again, that is star one to ask a question. Our first question has come from Pierre Maccagno of Needham & Company.

Hi, Tom and Reuben.

Hi Pierre.

Can you tell us now what is breakeven for operation on the stand for EPS, the breakeven revenue, and also the savings. Is it going to be mostly R&D or SG&A or equally divided among them?

Pre-divided on the cost savings, Pierre will come from SG&A, R&D, as well as cost of goods sold. The breakeven from an EBITDA standpoint is depending on product mix, and we think it's going be heavily favored towards much higher gross margin products, specifically what Reuben mentioned on the OC-192 product line and 10 gigabit transceiver line, the LX4 products. We can get them to about a 28m run rate for EBITDA and our depreciation and amortization in that is about 3.9m. Other non-cash items in the PL are about 0.50m on that. So, 4.4m on G&A on a 28m run rate given optimal product mix.

And for the EPS?

I think we are somewhat higher than that, with the D&A and the other, you should be at around 32 to 33m.

Okay. And lastly, the recent acquisition of the Corona, last quarter was $2.9m and going forward $4m. Correct?

It is $2.9m with trailing 12 months and the $4m is the estimate for the next 12 months.

Okay, and right now is that accretive?

We are out about a breakeven right now.

Okay.

Hoping that they ramp a little faster because they are in with some tier 1customers that have indicated product pull.

And that's breakeven EPS?

Correct.

Okay, thank you.

Thank you. Our next question is coming from Alan Wargaski of CIBC World Markets.

Hi, gentlemen. When you sold the TurboDisc business, there is a provision that Veeco got to some additional payments to you for I guess a two and half year revenues, their one half of TurboDisc revenues over $40m each year for the next two years. And Veeco has been putting up some very good numbers in that area with some excellent orders in backlog going through their conference call. Could you give us a little bit of color on that please?

Good. We still operate in the same building, so we are pretty familiar with their operations. Right now it looks like, we are pretty comfortable that we will see between $12m and $15m come next January from Veeco on the , which would leave, you know, a maximum of $5m to $8m the following year. It is possible that it will be higher than that, but right now it's looking between $12m and $15m.

And that's paid in cash to you on the first of the year?

It's actually their option whether its stock or cash, but they have indicated it would be cash.

Okay, thank you.

As a reminder, ladies and gentlemen, to ask a question, please press star one on your touchtone phone at this time. Once again, that is star one to ask a question. Our next question is coming from Tom of State of Wisconsin.

Good morning. Just had a question on the supply chain issues. You said that our vendor supply contaminated material that caused the revenue shortfall. What about any recourse to the vendor to try to recover losses as a result of this. Are you pursuing that?

Yes, Tom as we mentioned it earlier, there we took a $1.3m charge during the quarter, tending returns to our supplier. You will see us recover, I would say most of that going forward. I don't know if it will all be this quarter or it will be over two quarters. It will probably end up showing out there is a reduction of cost of goods.

Okay, so the $1.3m charge is in the cost of goods sold in this quarter?

No, (multiple speakers) it is actually in R&D.

It is in R&D?

Actually the recovery will also be R&D.

Okay, all right thank you. And well by my calculation in your own estimate, you are unlikely to be profitable in the next quarter even with 20% and 25% revenue increase or positive on a cash flow basis. Well, what other actions can you take in order to get to profitability?

Tom, that continues to be the company's, as I said in my comment, we have two priorities. One was getting these new product technologies deployed and ramping with customers. The second is to reduce our cost structure at manufacturing, improve manufacturing efficiencies to drive profitability. We had forecasted positive cash flow from operations for the current quarter, being the quarter that we are in today. Before this supply chain issue, I would tell you I think we are just one quarter delayed, and by the December quarter, we should get that profitability, cash flow profitability from operations.

Okay. And much of that comes from not only revenues increasing, but also cost takeouts, consolidation of facilities?

Yes.

Okay. Can you elaborate little more on what kind of actions you plan on taking to reduce your costs?

We have identified approximately $1.5m a quarter in cost savings. A number of those savings, and Tom, just want to outline the dollar numbers, but they come out of a couple of projects in R&D, which we are going to discontinue as well as consolidation of shared services between consolidating locations.

That's right. The other thing Tom is that we process of outsourcing a lot of our components over to Asia. As that transfers more and more, we will save money, because right now as we ramp up production, we are really carrying extra overhead in our manufacturing facilities until the transition is complete. And that is going further each quarter, so we should be complete in the next three months. Across the board SG&A, R&D as well as manufacturing cost.

Thank you very much.

Thank you. Our next question is coming from Jeffrey of Tuxedo RD .

Good morning gentlemen. Could you clarify for me, I wasn't sure if I heard you correctly discuss the commercial availability in GELcore for riding in calendar '05, is that what I heard you say?

Yes. We have their products currently in development, which we expect to release, I would call it year end, the December, January, call it the January time frame for commercial lighting applications.

And is there any provision in terms of revenue goals, where GE has the options, but can exercise this option to purchase their minority position?

No.

Okay. Great.

There are no put or call provisions or buyout provisions at any time in this joint venture.

Right. Thank you very much.

Thank you. Our next question is a follow-up, comes from Colin Wagesky of CIBC World Markets.

I have two questions. First is, do you plan to do anything with the stock right now as far as any kind of buybacks, even if it's a small buyback, that please?

Yes. Currently -- and again we have this discussion every quarter with the Board. As we said here today, the next Board meeting will be in the first week in September. We will have that discussion again, and make a decision at that time. But as we should hear today, there is not a provision, that's buyback stock. Although it is something we talk about frequently.

Okay. And my second question is, and I apologize if I missed this early on the call. Did you go over any of the estimates for GELcore revenues or income for the remainder of the year?

Not income, but calendar year '04 is plus or minus $70m. And it is net income positive as comps had been -- net income was about $700,000 last quarter. We expect it to be net income positive on an ongoing basis.

Okay. And are you any closer to make any decision as to a final disposition about JV?

Yes. We continue to look at the strategic alternatives, we continue to have discussions with General Electric, how best to grow this business, and the strategic importance of GELcore to the market in terms of LED lighting, but we don't have a resolution.

Okay. Thank you.

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

Thank you everybody for attending the Q3 conference call. I think, while from a financial standpoint, it wasn't what we expected, certainly I think the company has emerged from the quarter a stronger company and more cost effective and productive company. The demand for products, particularly on the fiber optics side continues to outpace expectations, and we continue to gain market share on a number of fronts. So, we are very pleased about the business prospects. I want to emphasize that we are very cognizant that we need to drive to profitability; we are doing that as quickly as we can, and obviously the June quarter was a speed bump in that direction, but we are still dedicated to getting that done this year. So, we look forward to you in the next conference call. Thank you.

Thank you. This does conclude today's teleconference. You may now disconnect your lines at this time. Have a great day. Thank you.