EMCORE Corp (EMKR) 2005 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to your EMCORE fiscal 2005 first-quarter 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 today's presentation. If you would like to view the Webcast, you may do so by logging on to EMCORE.com.

I would now like to turn the floor over to your host, Victor Allgeier. Sir, the floor is yours.

Thank you, and good morning everyone. Yesterday after the close of markets, EMCORE released its fiscal 2005 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 Ruben F. Richards, Jr., President and Chief Executive Officer; Tom Werthan, Vice President and Chief Financial Officer and Dave Hess, Vice President of Finance. Tom will review the financial results and Reuben will discuss business highlights before we open the call up 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 risk 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. Today, we are reviewing our first quarter of fiscal 2005 and I will began with a review of our operating results for the quarter.

Revenues for the quarter totaled 27 million and that was at the high end of our expectations. The 27 million represented a 16 percent year-over-year increase, and as 6 percent sequential increase. Revenues were fueled by continuing demand in our Fiber Optic product line, specifically our 10 gigabit products, led by the LX4 modules. And let me review revenues by product line.

Electronic Material revenues of 1.8 million was down 30 percent sequentially from the previous quarter total of 2.6 million. There was softness in the wireless market for our device structures, and in addition, a GM order expected was not received. However, it was received this quarter, and will ship. On the positive side, activity in gallium nitride related work increased. So we are expecting revenues to rebound to at least fourth quarter levels this quarter.

Satellite Communications revenues were 7.5 million, representing a 10 percent decrease from the previous quarter total of 8.3 million. This decrease was expected, but we do expect revenues to increase modestly this quarter.

In the Fiber Optic Group, CATV revenues decreased 4 percent sequentially to 7.7 million. We do expect revenues to increase this quarter, predominantly from some unexpected orders for FTTx applications.

Other fiber revenues predominantly related to 10-gig products came in at 10 million, representing a 51 percent increase from the prior quarter. Revenues for this quarter for the group will remain level; however, module revenues will increase while component revenues will decrease somewhat.

So our expectations for the quarter are for revenues to come in between 29 and 30 million.

Gross margins for the quarter were 2.1 million, or 8 percent, and this is double the 1 million or 4 percent we recorded last quarter. Margins for the quarter were unfavorably affected by our Wireless Product Group, which recorded slightly negative margins during the quarter. We do not absorb enough overhead to generate positive margins at this revenue level, but as I indicated a moment ago, revenues for this group will increase back to at least fourth quarter levels in the March quarter.

Gross margins are expected to increase again in the March quarter as we have made substantial progress on product yields and outsourcing. In addition, during the quarter, we have consolidated our Lombard, Illinois facility, providing additional savings.

Operating expenses for the quarter were essentially flat with last quarter; however, SG&A increased while R&D decreased. The SG&A increase is the result of increased auditing fees and expenses associated with Sarbanes-Oxley, which we must be compliant by our fiscal year-end or September 30 of 2005.

Research and development decreased driven by more focused R&D efforts and the completion of some projects.

Operating loss for the quarter was 8.5 million, a decrease of 1 million from the 9.5 million recorded in the prior quarter. Below the line interest expense was flat sequentially and totaled approximately $1 million. GELcore, our joint venture with GE, reported record profits of 760,000 and our share, or 49 percent, amounted to 372,000.

Net loss for the quarter totaled 9.1 million, an improvement of 1.7 million, or 19 percent, sequentially. We expect continued improvement during the March quarter.

The loss before interest, taxes, depreciation, amortization and other non-cash items was 4.6 million, an improvement of almost 2 million sequentially. Next quarter, we expect significant improvement in adjusted EBITDA results.

Backlog during the quarter also increased up to approximately 6 million from 28 million as of September 30 to 34 million at December 31, with Fiber Optics accounting for most of the increase.

So to summarize, pleased with the revenue performance, gross margins are heading in the right direction, backlog is up and we are concentrating on yields and outsourcing. And with that, let me turn the call over to Reuben for an operational and product update.

Thank you, Tom, and good morning, everybody. I am going to begin with some general comments on the financial, operational and strategic aspects of the December quarter, and then move to a product line and market trend discussion and conclude with an update on the Company's objectives of hitting EBITDA breakeven.

As Tom pointed out, revenues for the quarter were at the top end of guidance, 27 million, representing an improvement of 17 percent from a year ago and 6 percent from the previous quarter. More importantly, new bookings increased 19 percent and we have raised revenue guidance for this quarter to 29 to 30 million. And as Tom pointed out, revenue improvement is being driven largely by demand in the Fiber Optic segment.

Operationally, gross margins for the period doubled due to improve to yields on lower cost structure from continuing to outsource to contract manufacturing the company's high-volume products. We expect to see further improvement in gross margins in this quarter, as well as throughout the year.

As we indicated in the press release, we made a strategic decision during the December quarter to further lower the Company's cost structure by spinning off or eliminating certain non-core product development projects representing approximately $700,000 to $800,000 a quarter from the P&L. Specifically, this product is a gallium nitride Schottky diode used in 200 to 600 volt power conversion applications in consumer electronics. And while this is a very good products technology in terms of its performance and its cost versus existing silicon-based products, the Company made a decision not to spend an additional 6 to 8 million to build a new distribution capability that really has nothing to do with the rest of the Company's product line.

In the product line discussion, on the RF and Wireless side, revenues here represented the biggest disappointment for the quarter, coming in at 1.8, which was 40 percent below plan, and down 30 percent sequentially due to weakness in year-end (ph) demand for the transistors. The operational impact to the revenue shortfall was $850,000 below plan on EBITDA for the quarter.

On the bright side, the book-to-bill for the quarter for the RF business was 1.3 to 1. 80 percent of the new orders are for gallium nitride-based products and the new generation HBT. We expect revenues in Q2, the current quarter, to improve to historic levels of approximately 3 million with a product mix more heavily weighted to both the GaN field effect transistors and the new generation HBT.

In Fiber Optics, consolidated revenues increased 25 percent sequentially and 15 percent year-over-year. The single largest revenue increase came from EMCORE's 10-gigabit Ethernet product line, which grew 50 percent quarter-over-quarter to approximately 10 million.

In January, we announced that EMCORE had shipped over 10,000 units since July. The significance of this is that the technology is being very widely applied and demand continues to be strong from Cisco as customers upgrade their LAN capability to 10-gig.

The same is true for the 10-gig OC-192 transceivers, where shipments to Cisco, Sycamore, IBM are expected to be consistent throughout the end of this quarter and into the June quarter.

Operationally, the Fiber Optics division was able, specifically on the LX4, to reduce its cost of goods sold on the 10-gigabit Ethernet product line by 20 to 25 percent for better yields and lower material cost. We expect this operational improvement to continue this quarter, as the transfer to contract manufacturing in Asia is completed.

In the CATV business, revenues were flat quarter-over-quarter, but gross margins were ahead of plan due do product mix. We expect revenue growth in both the March and June quarters based on products -- based on new products, which we introduced towards the end of the December quarter, such as the 16- and 32- channel Kwan (ph) transmitters based on a new external cavity (ph) laser, as well as a range of PON transceiver products that incorporate digital diagnostics and a video receiver that operates at 2.6 GHz, specifically targeted for the Japanese market.

In the quarter, the Company invested $1 million in K2 Optronics, which is a VC-backed startup formed to develop a new generation of packaged laser modules. The first products began shipping in December to our CATV customers. We expect this laser to be a low-cost solution for both the CATV and fiber-to-the-home market.

Lastly, in fiber-to-the-home, the Company had guided off the previous conference call that we felt video deployment on FTTH would occur in the second half of 2005. Positive developments have occurred in this market segment, and we have received orders to produce EMCORE's video transceivers and PON transceivers for delivery beginning this quarter, and have begun shipment to customers. So we are seeing a pull-in of demand on fiber-to-the-home. And we are seeing at least initial indications are that beyond this quarter, beyond the March quarter, through June, demand is increasing both the U.S. and Asia. Overall, digital Fiber Optics is fully booked for this quarter on a revenue bases and Cable Television is about 75 percent booked for the quarter after one month.

In Satcom, revenues were down slightly from the previous quarter to 7.5 million, but 65 percent ahead of a year ago. The division recorded its second consecutive EBITDA-positive quarter based on improved line yields. In general, the market trends in Satcom have improved slightly with several more satellites scheduled for the high-definition television markets. Launches in overall industry continue to be dominated by government programs.

Revenues from the quarter came from Boeing, Dutch Space (ph), the Indian Space Research Organization, Northrop Grumman and Lockheed Martin. The Q2 outlook for revenues is flat or up slightly.

As Tom pointed out, GELcore finished the year with approximately 70 million in revenues and recorded its highest quarterly net profit to date of almost $760,000 after-tax. Outlook for calendar year 2005 continues to be robust, with revenues increasing 30 percent to the $90 to $100 million range, driven by demand in transportation, signage, and commercial and industrial lighting.

On the subject of operational profitability, because of the improved revenue outlook, operational breakeven on an EBITDA basis will be achieved with an average quarterly revenue level of 30 million, gross margins at 15 percent and operating expenses at 9.5 million of quarter.

In closing, we're optimistic EMCORE can continue to drive revenue and profitability based on its current product portfolio and new product pipeline and we expect to announce additional products between now and OFC in March. We're on schedule to achieve EBITDA breakeven this quarter and move to profitability in subsequent quarters.

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

(OPERATOR INSTRUCTIONS) John Harmon, Needham & Co.

A couple of questions, please, I guess. First of all, regarding your LX4 line, I think in prior quarters, you were capacity constrained. Do you have enough capacity online, or is it limited by your move limited to contract manufacturers?

John, we are bumping up against capacity limitations probably until March when the module will be fully outsourced to the CM's, in which case we will probably be able to just about double capacity. We are still slightly below Cisco's requirement for shipment -- at least, the requirements in the December quarter. We are on track for transferring to contract manufacturers. The front-end process is in Asia as we speak and this month, the Board should end up at the CM. And by the end of the month -- by the end of the quarter, excuse me -- we will be on track to substantially improve unit volume shipments.

We are continuing to be focused on reducing the cost of goods per module. But at the moment, we are still pretty close to capacity.

Okay, thank you. And you mentioned also you got a surprise order in the quarter for fiber-to-the-premises. Was that the PON transponders you were talking about, or something else?

Those were for the video receivers.

Video receivers?

The PON -- that was the order that we received last quarter. We have received orders this quarter for the PON transceiver.

And this R&D program that you're exiting, these transistors -- does that take effect immediately in Q2?

You will either see it spun off, in which case, it will be just a surgical removal from the P&L of those costs, or you will see it in discontinued operations.

But in Q2?

In Q2.

Finally, in the target model you gave, was of 30 million revenue, which, just to confirm, is at the high side of your Q2 guidance, correct?

Yes.

Ramesh Mishra (ph), CE Unterberg Towbin.

On your orders from the fiber-to-the-home, was that from Asia-based customers, or was that from U.S.-based customers?

Both.

Both? And what kind of visibility are you getting for the rest of the year? I guess these are just initial orders. Is the pipeline beginning to fill in for the rest of the year?

You know, certainly the pipeline is filling up for this quarter. And I would say that the PON transceivers, particularly for the Japanese market, are starting to -- you know, will populate more of the June quarter. So it's building, it's building slowly, but it's building steadily.

Okay, and in regards to this backlog that you have built up, you have said that it is mostly for the LX4. Do you have orders going out for beyond the next two quarters?

Beyond the June quarter?

Yes.

No. Right now, our orders are through June.

With the exception of Photovoltaics, most of the backlog is shippable within 3 or 4 months.

And on the photovoltaics side, you said that most of the business is coming in from the military side and government side. What's happening on the commercial side? You mentioned briefly a little bit about a more -- high-definition TV related launches. Can you talk a little more about that?

Yes. There are some interesting dynamics going on in the satellite market. Recently, a high-definition service provider called VOOM announced that it was going to launch 5 more satellites. Now, VOOM was then, shortly after the announcement, VOOM was acquired by EchoStar. And as far as we know, those satellites are still on plan. But there are a number of financial players coming in through into the satellite market. Intelsat was just acquired by Zeus Holdings, which is a European-based LBO group and we are continuing to see sort of investment in this sector on the commercial side, which, quite honestly, we have not seen in the past, I don't know, 2 or 3 years, at least.

So I think that we are cautiously optimistic that the commercial side is showing some signs of life beyond the existence of flip-in (ph) and for the last few years. The government continues to -- the U.S. Government -- continues to be the largest owner/operator of satellites in the world and those programs continue to move on. Many of those are multi-year programs. So once you are designed in -- and I won't call it an annuity, but it is a long-term, very predictable revenue event.

Then on the operating side, you mentioned that you had consolidated one of the facilities. Could you repeat that?

Our Lombard, Illinois facility was a result of the Corona acquisition about a year ago. That has now been consolidated into the Molex Group that is also in Illinois.

In Downers Grove.

Got it.

(OPERATOR INSTRUCTIONS). Jeffrey Laffin (ph), Cable Rock (ph).

Could you just walk through some of the working capital trends for the quarter? It looked like payables were down and DSO's were down. Just wondering what caused that and if it's sustainable.

Jeff, if you look at our cash, the EBITDA was about 4.6 million. Changes in working capital were about 5 million, accounting for about 10 million of the decrease. The other 3 million came from an investment in K2 that Reuben mentioned during his discussion. CapEx was about 1.2 million and the Molex purchase price was about 1.2 million also and that will decrease substantially going forward. There is only about 400,000 left on the total of 1.50 million (indiscernible).

On the changes in working capital, accounts payable and accruals decreased significantly, and that is primarily the result of the fact that now that we are doing a lot of outsourcing with a couple of vendors, our universe of vendors has decreased dramatically. So instead of dealing with many, many vendors, we are now dealing with one or two vendors and our terms are a lot more stringent since they are shipping to us virtually every week. So the decrease you see was really a change from many vendors to a few vendors. You will not see that dramatic a decrease going forward.

And on the receivables side -- receivables were flat, and obviously, revenues were up, come DSO's came down. Is that sustainable, or is it reversible?

I think on the receivables side and inventory side, you'll see it pretty stable. I don't think you'll see wide fluctuations at all.

So we would expect to see working capital this quarter becoming a lot more neutral?

That's correct, yes. You know, I think payables might go down a little bit more, but I think receivables and inventory should be somewhat flat.

Eddie Woo, CIBC World Markets.

Regarding your move to contract manufacturing, how quickly can the CM ramp up for product?

Yes, I think we are talking about, if we're shipping 6 to 800 units a week, I think you can probably increase that to the -- 12 to 1500 a week.

Okay, and this is over the course of the quarter?

That will occur, yes, over the course of a quarter.

Okay. And also, you highlighted really for the first time your FTTx effort on the call today. Can you comment as to who your end customers might be, and your roadmap for FTTx for the entire company, on both the Telecom and the cable side?

Okay. There is a very long answer to that question answer to that question, but I will try to give you the shortest version of it. Customers in North America would be Alcatel for SBC, which is really fiber-to-the-curb. And in the Verizon food chain, it would be AFC/Motorola group -- different products and different applications. And Japan, the end customer is NTT; our direct customer is Sumitomo Electric.

What we are selling into -- just in reverse order -- what we are selling into the Japanese markets are two components, one of which is a new product, which is the video receiver operating at 2.6 gigahertz. Basically, the architecture in Japan is that there will be a video ONU, which is sort of what our core competency is almost, I guess, per home, per apartment, per whatever dwelling it is. So we expect that to launch on up to, I don't know, starting really this quarter and next. You know, I think initial purchase indications are sort of like 10,000 units.

The second part is on the transmit side, where we have developed what we call a ULC -- the universal LaserCard -- which is -- there is a digital and an analog component of that. And that is the transmit end of that system.

In the U.S. market, we are selling the video receiver video cards and an integrated PON transceiver, which is a triplexer and a video card. And right now, depending on how you view the market, Verizon is a really fiber-to-the-home. And eventually, while that is a VPON, which is an ATM-based standard, that will, we think, migrate to a GE PON, a Gigabit Ethernet PON, since they have the fiber that goes to the home. We expect that to happen sometime next year and we are positioned with the digital products when that starts launching.

On the SBC side, that's really fiber-to-the-curb and it's really still more of an RF -- a video overlay architecture. And that is what our existing video receivers go into, as well as the analog PON transceivers.

So the activity you're hearing on the SBC side is now more RF overlay rather than IPTV?

Yes. Still, yes. You know, IPTV -- while we think it's possible that -- certainly, we think Verizon is going to go that direction. I think SBC is probably not there quite yet. And I would tell you, I think -- IPTV is as much an Asian phenomenon -- much more than Asian phenomenon deployment right now than it is in North America.

Yes, it seems that SBC is probably realizing that they need to come to grips with the lack of bandwidth with their solutions, so RF may make more sense over time.

On the OLT side, the OLT product that you're developing -- will that be targeted towards the Japanese market initially, or (multiple speakers)?

Yes. We will have -- initial revenues will be this quarter. It will get to be serious revenue levels in June.

Randy Luffman (ph), Imperial Capital.

Going back to the cash burn, I was wondering if you guys could talk about what you guys see cash burn shaping up for the rest of the year. You mentioned EBITDA breakeven next quarter, and in the press release, it mentioned the 15 to 17 million earnout payment from the equipment business. So I was wondering if you could discuss cash burn for the rest of the year, and also, if you have any plans to deal with the 16 million in debt coming due in '06?

Yes, we do expect between 15 and 17 million from the earnout on the term of this sale about a year ago. That should be here before the end of the March quarter. In terms of the cash burn going forward, our target -- and we were heading for it -- is EBITDA breakeven. So from operations, nothing. As I mentioned a few moments ago -- working capital changes will not be as severe this quarter as they were last quarter, when it was a little over 5 million.

Investment should be zero this quarter, acquisition should be zero this quarter, CapEx should be 1 million, 1.5 million. So the cash burn this quarter will be decreased substantially. And we expect -- once we achieve EBITDA breakeven, to stay there, if not improve, going forward.

Okay. And then also, this 15 to 17 million earnout payment -- is this the last payment, or do you expect another one next year?

No. We can earn up to $20 million. The way it works is we get 50 cents on every dollar of revenue above $40 million in calendar '04 and calendar '05. So let's assume we get 15 million this year. For us to earn the additional 5 million next year, the buyer would have to sell $50 million worth of equipment.

Okay.

They did about 70 million this year. So we think we will earn that next year.

Great. And also, any plans on the '06 debt?

To pay it when it's due in 2006.

Michael Fitzgibbons, Fulcrum Investment Management.

A couple of questions. Number one, on the fiber-to-the-premises side, I see that BellSouth came out this morning and selected Alcatel and Redback platforms for their next-generation broadband network, and I think specifically, the Alcatel 7330 DSLAM. I was wondering if you guys are designed into that; and if so, which product?

I think we touched on that a little bit earlier. What we are selling to Alcatel -- and you know, we expected, I guess, BellSouth to select Alcatel. Certainly, Alcatel expected to get selected -- is that we've got the video receiver and the integrated PON video card triplex or the PON transceiver. Those are the two products we're selling into them.

Okay, great.

And the architecture for BellSouth will be -- I can't tell you it is identical to SBC's, but it will be very close.

Okay. On the RF and the wireless business, that still appears to be a bit of the drag on the business. Is there any further thoughts of divesting out of that or doing something with that business?

Well, yes -- I will tell you it has -- the RF business has two components, one of which we don't like, and one of which we do. The gallium nitride field effect transistors, which are used in base stations and high frequency, high-temperature applications, largely driven by HDTV, is a terrific marketplace. Our margins are great on that and operational profitability is pretty good there.

The RF side, the InGaP HBTs and enhancement mode pHEMTs are strictly a commodity item. It is just price -- some performance, and their profitability depends on volumes, and volume depends on price, so you are constantly in a dogfight with the Japanese and other North American providers there.

So we are hopeful that the RF side, the InGaP side, is going to respond positively. And if we get over -- I think our breakeven is 2.5 or 2.7 million, somewhere in there -- it actually generates cash. We're hoping that it's going to be sustainable at that level until the gallium nitride becomes a much bigger component and can drive profitability. That is what we are banking on, is that nitrides will substantially change product mix and profitability for that division.

One last question. On the 10-gig E side of the business, with the exclusive relationship with Cisco running up in the first quarter, can you give us any indication of other opportunities outside of Cisco going forward?

Yes. As you know, we are exclusive as we sit here today to Cisco. I think when the exclusivity falls away, there are a number of customers, and those include 3Com, Enteresis, Foundry, Extreme, Force 10, Huawei -- you know, I'm sure that there are others that I have left off, but those are the ones who we think probably get into the market very quickly. That is a lot of customers.

You know, the other thing that we are pretty optimistic about are the new products coming out of cable. So that's a -- we think that those are going to be positive developments from a revenue and profitability standpoint.

At this time, I am showing no further questions. I would like to turn the floor back over to Reuben Richards for any closing remarks.

Thank you, everybody. As a company, EMCORE continues to maintain its focus on our profitability, objectives, and both growing the top line on existing and product pipeline opportunities, as well as improving profitability and driving to the point were operations are generating cash. We expect that to happen later in the year and to start creating value again for our equity shareholders and improving the credit characteristics of the Company. We are entirely focused on that, and we expect to succeed at it.

So thank you very much for attending the call. We look forward to speaking with you next quarter.

Thank you. That does include today's teleconference. You may disconnect your lines at this time, and have a wonderful day.