EMCORE Corp (EMKR) 2005 Q2 法說會逐字稿

Good morning and welcome to the Emcore fiscal 2005 second quarter and six-month 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.

We would also like to announce that listeners can log onto www.Emcore.com to access the webcast.

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 2005 second quarter and six-month 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. 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, Rick, and good morning, everyone. Today, we are reviewing our second fiscal quarter of 2005; and I'll start with a review of our operating results for the quarter.

Revenues for the quarter totaled just over 30 million at 30.4 million -- slightly above the high end of our expectations. The 30.4 million represented a 31% year-over-year increase and also a 13% sequential increase. Revenues increased in all three of our operating segments, both sequentially and year-over-year. And let me review the revenues by product line.

Electronic materials and devices, the revenues were 3.5 million. That is essentially double the revenues from last quarter and also up 23% from last year's 2.9 million.

A last time buy from General Motors contributed about $1 million to revenues this quarter. However, again, gallium nitride related work continues to increase; and we expect revenues to remain level in the upcoming quarter.

Satellite communications or photovoltaics came in at 7.8 million. That's a 5% increase from the previous quarter and also a 20% -- 28% increase from last year's 6.1 million. Again for the coming quarter we expect a modest increase in photovoltaic revenues.

In our Fiber Optic Group, revenues were 19 million representing an 8% increase from the previous quarter and also a 34% increase from last year's 14.2 million. And again we expect revenues to increase this quarter. So based on those comments, revenues for Q3 should be in the $30 to $32 million range.

Gross margins for the quarter were 5.5 million, or 18%, and this represents a 10 percentage point jump from last quarter's 8% gross margin. Higher revenues, progress on product yields, improvements on building materials as well as outsourcing all contributed to the increased margins.

Operating expenses for the quarter were 9.2 million, which represents a decrease of 1.4 million or 13% sequentially. Year-over-year operating expenses decreased by 2.2 million or 19%. Within operating expenses sales and general administration expenses decreased approximately $100,000 sequentially and also 700,000 year-over-year. Research development expenses decreased 1 million sequentially and 1.7 million year-over-year.

This translated to an operating loss for the quarter of 3.7 million and this is quite significant compared to depreciation and amortization totals 3.8 million. Therefore adding back D&A would actually give you a basically breakeven or slight profit.

A lot of the line interest expense was flat and totaled about $1 million. GELcore, our joint venture with GE, reported a loss for the quarter and our portion of that is just under $300,000. GELcore's loss was the first (indiscernible) in over a year and was really attributable to some timing delay on revenues, and also expenses associated with the transfer of work from Canada to Mexico that was announced last month.

During the quarter we received a payment of 13.1 million from Viggo (ph) and this was the first year earn out from the sale of our capital equipment division back in November of '03. I'm sorry -- 13.2 million. Net income for the quarter totaled 7.6 million, an improvement of 16.7 million sequentially. If you back out the gain from the (indiscernible) the net loss would have been 4.9 million and that compares to a net loss of 9.1 million from last quarter to almost a $5 million improvement.

Loss per share from continuing operations was $0.10 versus a loss of $0.19 last quarter. Earnings per share from the discontinued operations meaning the earnouts we received was $0.26 per share. Therefore, net income came in at $0.16 per share.

Income before interest, taxes, depreciation, amortization and other non-cash items -- better known as EBITDA -- was about $133,000. And this represents an improvement of 4.7 million sequentially.

We had targeted breakeven EBITDA in the June quarter and we're happy to report we achieve this one quarter early. In April, we spun off a product technology that was focused on gallium nitride based power, electronic devices. The new company is called Velox Semiconductor Corp. and Reuben is going to address the technology aspect of the transaction. From a financial viewpoint, Velox raised $6 million from three VC partnerships.

Emcore contributed intellectual property equipment and also we transferred five employees to Velox. Before that we maintained an approximate 20% equity interest in the new company. We also estimate that operational savings will be approximately 1.2 million per year because of the formation of Velox.

Also during the quarter we announced the consolidation of our City of Industries' photovoltaic plant into New Mexico. With anticipated savings of about 3 million per year after shutdown costs of approximately 2 million.

Backlog during the quarter was flat and remains at about $34 million or a book to bill ratio of about 1 to 1. Cash at March 31 was 44.5 million and this is an increase of 6.2 million from December. Capital expenditures totaled 1.5 million for the quarter. Unfavorable changes in working capital accounted for almost 4 million of cash usage. So not including the changes in working capital cash use in operations was really just over $1 million.

For the summarized view, we're certainly pleased with the quarter. We are heading in the right direction. Just a couple of notable metrics to take note of, if you look at the last three quarters -- gross margins have improved from 4% in September to 8% in December to 18% in March. EBITDA, for the last three quarters, we had negative 6.5 million in September. That improved to negative 4.7 million in December and we were actually positive this quarter and in addition, operating expenses are also decreasing.

With that let me turn the call over to Reuben for an operational and product update.

Thank you, Tom, and good morning, everybody. I'm going to begin with some general comments on the financial, operational, and strategic aspects of the March quarter and then move to a product line in market trend discussion. Some of this information Tom has covered but I want to point out that the financial results for the March quarter is really the accumulation of efforts done by the operating team, really, since the beginning of last summer.

Revenues for the quarter clearly were above guidance at 30.4 million -- representing a 13% increase from the prior quarter and an improvement of 31% year-over-year. Gross margins improved from 8% last quarter to 18% on improved yields, lower material and labor costs as part of cost of goods sold. Interesting to note that cost of goods sold remained flat for the quarter from Q1, while revenues increased 13%.

Based on improved gross margins and lower operating cost the Company achieved positive EBITDA one quarter ahead of forecast, as Tom pointed out. Emcore's operating management has done a terrific job in executing against the operating plan and we expect continued progress throughout the balance of the year.

During the quarter, Emcore successfully spun out the gallium nitride power conversion technology. This is a product -- while it is based in gallium nitride materials is a 200 to 600 AC to DC power switching device into a new company called Velox Semiconductor where Emcore will retain a 20% stake.

The spinout will save Emcore conservatively $1.2 million annually. The corporate drivers behind the divestiture behind the spinoff were, 1, it was going to require an additional $6 million to finish development and build out of the distribution system. And we did not see the return in terms of building a distribution system that was separate and distinct from any other product that Emcore manufactures. The technology that was spun out was separate and distinct from our gallium nitride (indiscernible) products. They are used in high-temperature and high frequency applications and is completely segregated (ph).

So there is -- it will not in any way impact one of the more profitable and fastest growing product lines at Emcore.

As Tom pointed out we received 50.2 million from VICO (ph) as part of the sale of the Company capital equipment division and this was the first of a two-year $20 million contingent payment agreement. The remaining 6.8 million may be paid in Q1 of 2006.

Lastly, operationally in satellite communications, we announced the closure of our City of Industry paneling facility and transferred the panel operations to Albuquerque. We expect cost savings of 3 million annually and expect the transfer to be completed by end of summer.

Further during the quarter, Emcore introduced six new products in the high-speed data transfer -- CATV, Fiber to the Home, and terrestrial solar cell market which will be addressed in the product line discussion.

Revenue guidance for the current quarter, Q3, is being increased from the 29 to 30 million of last quarter to 30 to 32 million. Backlog is unchanged from last quarter and operating target for Q3 are continued margin improvement through lower cost of goods achieved through the transfer of additional high-volume fiber optic products to contract manufacturers and further reduction in operating expenses resulting in EBITDA improvement quarter over quarter.

While defined by product line and fiber optics revenues increased 34% from a year ago, 10% from the prior quarter to 19 million or 63% of total Company revenue. In a product segment breakdown revenues for 10 gigabit products were up substantially while revenues for 1 to 4 gig did (indiscernible) and optical self-assemblies were down quarter-over-quarter.

In local area networks in the 10 gigabit product line, overall, LX4 demand and revenues exceeded plan and that product line is booked through July. Cost of goods were reduced 20% during the quarter and 40% over the the last six months. Further cost of goods reductions will be achieved during the current quarter as customers finish qualification on parts from contract manufacturers.

From a market perspective, we continue to see strength in the 10 gigahertz market. It is projected to grow at 100% per year for the next several years.

Cisco remains as a 10 gigabit market driver with new customers coming online. Emcore remains the only qualified vendor for both the LX4 and CX4 at Cisco.

With the telecom and switching market, overall, the market demand and revenues for the quarter were slightly below plan but remained steady. Emcore and Agilent (ph) are regarded in this area as the only reliable vendors and Cisco and Sycamore (ph) are in production with IBM and expected to ramp this quarter. Dell Labs was down substantially last quarter but has come back this quarter with additional orders.

In the component and laser guide product line for storage area and network, the 10 gigabit market is well above plan. It should continue to grow in line with the module business driven by Datacom and ethernet applications. And nondata current applications meaning computer mounts optical mounts are gaining traction but are still in the prototype line.

We've made substantial progress during the quarter in new products. We introduced and extended (inaudible) LX4. The 10 gigabit transceiver over legacy fiber up to 40 kilometers, completing our 10 gigabits' XENPAK platform that now operates at 10 gigabits from zero to 4400 -- over legacy fiber. We introduced the X2 form factor of the LX4 for use in desktop router applications. Emcore has received its first purchase (technical difficulty) this product from Cisco.

On a component level the 10 gig optical subassembly for OC 192 and fiber channel application continued its growth, quarter-over-quarter.

In the CATV and Fiber to the Home markets, revenues were on plan, up from Q1 and flat with a year ago. The CATV OEM business was very stable with both Motorola and Scientific Atlanta with design wins on new platforms at (indiscernible) Aurora and Harmonic. Revenues for Q3 are expected to increase 8 to 10% based on new design wins and new product introductions announced during the quarter -- including a 32 channel PON transmitter for broadband and DPON and GPON components for fibers at home.

Market developments in CATV and SCTA include the Time Warner upgrade at many of its systems to 1 gigabit which will substantially increase demand for Emcore's 1310 product line.

Second market development is the qualification of the Company's PON transceiver with Verizon who is currently going through a design change qualification, is expected to be completed this quarter for shipments commencing in September and December. We have since the beginning of the fiscal year maintained that Emcore at least revenues from the RBOCs on video deployment would occur in the second half of 2005; and this is on schedule.

In our RF business there is a significant rebound from tier 1. The operating team did a terrific job on margin improvement. Revenues were up 95% from the December quarter and 23% year-over-year. Revenue growth was driven by a tripling of gallium nitride based revenues for high frequency and high temperature applications and a onetime buy from General motors for engine timing centers.

As a general comment, we're seeing an industry transition for traditional gallium arsenide (indiscernible) companies are investigating (indiscernible) technology as a replacement for silicon LDMOS or gallium arsenide in high-power applications and the company Emcore currently has engagements with free scale (indiscernible) in developing and producing chips -- excuse me, transistors for them. In the more mature markets of established technologies such as the MGAP (ph) HPT pricing has been stable with our customers getting some good design wins starting this quarter.

The revenue outlook for the RS business is, as Tom pointed out, stable and has between $3 and $4 million a quarter going out the next several quarters.

In Satcom revenues were up 28% year-over-year and 5% from Q1 and operationally it was an outstanding quarter for yields and productivity. Fab yields are now trading solidly above plan. Market scenarios are looking stronger for Q3 with orders from the (indiscernible) Lockheed Martin, Northrop Grumman and General Dynamics.

Finally the closure of the City of Industry's (indiscernible) transfer or the (indiscernible) panel business will save in excess (technical difficulty) million annually and is expected be completed by midsummer.

Forecast for revenues in Satcom for Q3 will be above Q2, probably increasing 5 to 6%.

GELCore as Tom pointed out, incurred its first net loss in two years based largely on a revenue and timing if you were regarding shipments to New York Department of Transportation. Gross margins and operating margins for the quarter were ahead of plan and the Company expects to recover the revenue shortfall this quarter. During the quarter GELcore closed its Quebec manufacturing operation and laid off approximately 400 employees and transferred production to Acuna, Mexico. Beyond transfer costs, this move is expected to save over 30% on labor costs.

Revenues for the calendar year '05 are on track for 90 million.

In closing, for the quarter and beyond, we see continued operational improvement through (indiscernible) cost of goods at an operating expense level. Steady revenue growth from both existing product lines and newly introduced and qualified products in our customer (indiscernible) that are being deployed in emerging and rapidly growing markets.

With that I will close my comments and open it for Q&A.

(OPERATOR INSTRUCTIONS) Ramesh Mishra with Unterberg.

Congratulations. Tom, my first question was in regards to traction on the X2 form factor for the LX4. If I remember correctly you are free to sell that to customers other than Cisco. So can you talk about what is happening over there and your engagement with other customers?

Sure. On X2 it's still in the -- what I'll call application engineering stage, product development stage. At least as far as Cisco is concerned if they expect call (ph) to be finished in the next couple of months -- prototypes next quarter. You are not going to really see commercial production until the last calendar quarter and first quarter of '06. I think pretty much everybody else is on the same schedule. And that would be kind of an IBM and a (indiscernible) kind of marketplace as well as Fujitsu and a couple of others.

In regards to your backlog being flat quarter-over-quarter, can you provide a breakdown in terms of the key different product areas?

A general comment, we don't breakout backlogs but backlog is probably more indicative of our long cycle business than it is the short cycle business there. Remember our book to ship on fiber optic products two to four weeks. On the RF product is -- I don't know -- within a week and the only long cycle business which represents other than the longer-term commitment on the LX4 is really indicative of what (indiscernible) is and because we expected what we booked during the quarter, we expect to ship in the quarter in the other products.

In terms of your manufacturing partner in Thailand when do you expect qualification of product from that facility?

It started in beginning, we transferred to product last quarter. They began producing at the beginning of this quarter and we expect it could be 30, 60, 90. If (technical difficulty) Cisco

(technical difficulty)

So all the revenues heretofore have been purely from production from (indiscernible)?

That's correct. On the LX4 that's right. Our CM in Thailand is producing other products for us.

John Harmon with Needham.

Back to the topic of the LX4. Do you expect another source to emerge in the September quarter timeframe and how do think marketshare could fall out?

There's sort of two answers to that. Every quarter, we expect a competitor next quarter. That's the way it's been since last summer. So we are -- our focus has really been in reducing cost of goods that we improved gross margins whatever the competitive environment is. The -- it's hard to say. Every quarter there's been a new company that is the new competitor (indiscernible) and there's a new one this quarter. So I wouldn't want to give you an opinion about whether there will be one next quarter. We are ready for them if they are. We will start, as said earlier in the call we are booked through July. Cisco's year end is July. We will be engaging with Cisco on a pricing and volume discussion in beginning sort of middle or end of this (inaudible) for business beyond that.

The reason I was asking is my understanding was that you might be one of the early suppliers you were guaranteed (indiscernible) a sole source for a certain amount of time and I was just wondering how that would change after the end of June?

I think from a revenue standpoint it's likely there will be no chance. You have to remember this is a marketplace where volumes are increasing 100%, year-over-year. So volume growth we expect to be double what they were in '05. So even if we go from 100% of the business to 75 or even 60 from the revenue base will still be higher than a year ago.

Thank you. Let me ask a question about your cable TV fiber optics business. Your competitor's business is publicly for sale. Is that a business you look at buying or have you been able to steal some market share during the disruption?

Yes, I don't think we are really in a position to comment on that.

Can you talk about marketshare?

Marketshare. I think we are probably two times the size they are. I think their strength is in the 1350 business where they also manufacture the lithium (indiscernible) modulators. That's a big component. That cost of goods. And I think they are competitive in that product line. I think we dominate in the 1310 business and, certainly, at the module level. So it's a -- I think they're very good in one aspect of the business. Probably not as competitive in the other.

(indiscernible) questions for Tom. R&D expense stepped down sequentially. Was that due to the ending of certain programs and is this a good steady-state level?

It is due to the ending of certain programs, John, and it is likely to go down further because of the Velox spinoff. The guys that were working for us were obviously charged R&D. So now that they are in Velox, we will save those dollars.

So most of those call savings comes straight out of R&D?

Certainly from the employee (indiscernible) -- yes.

And you talked about increases in working capital in the quarter. What, specifically, what happened to receivables in the quarter?

Receivables did go up by about 4 million. We entered the quarter with AR at about 21 million. We ended the quarter with AR at about 25 million. That is obviously a use of cash in your cash flow statement. We do it expect (indiscernible) in this quarter. Because collections were a little bit under where our revenues were last quarter. That will go back up.

John Gruber, Gruber McBain (ph).

On the fibron curve in home projects when do you expect them to kick in and have you had any major wins here -- how do you see that?

I will stick with publicly available information. I think it's well-known that Verizon has gone through a redesign. I think they debugged some of the stuff they were doing on video deployment over the past year. And we are in the process of having met all their specs and now just finishing up the quality (ph) issues. We would expect shipments to commence next quarter, ramp up through December and run at rate in '06.

Then on the other side at FBC (ph), we've really been (indiscernible) since well we started in -- I guess we started in December. We had a shipment in March. And I think we will have a shipment this quarter.

It is running at a pretty (technical difficulty) state, but it's not -- it hasn't -- doesn't look like, again, it looks like it will pick up in the second half but it's too early to estimate what that revenue will be.

So could the incremental be Verizon and (indiscernible) in September and December be substantial or minor?

I think they would be material.

(OPERATOR INSTRUCTIONS)

Last quarter when we talked about GELcore you mentioned that you were in no rush to monetize that result. I was just wondering if you can give us an update on what your current thinking is there? Or have things changed?

No. No change. During the March quarter Wal-Mart came in and purchased 100% of their white LED production for the year. So the revenue forecast, operating profits, everything else are very solid at this point. We're very happy with what they're going to do. There will be some costs incurred in transferring from Québec to Mexico but that's all very positive for the business.

So they said, it increases in value every day. The product underdevelopment which are in the pipeline directed at general lighting application, white light applications are all on track and are doing very well. So we're very pleased with it.

Switching over to your satellite business, can you tell us if that business was profitable or not? Your comments implied that it was but I wanted to make sure.

Yes it was.

Do you foresee future losses there on a quarterly basis or do you think you are now seeing enough pickup what you can stay with some degree of confidence that we are not going to see big cash losses there going forward?

I think as long as the revenues stay where they are on Satcom, we will be fine.

And what's your longer-term thinking there? It doesn't seem to fit the rest of your businesses?

You know what I think? We get asked that a lot but I think our view is that while it is not -- it's not a marketplace that has the same kind of growth dynamics as, say, fiber does. It is still a market and a product line where we are widely regarded as the market leader and, I think, the product technology leader. I think it's an area where we can get operations to be a very good cash generator.

Joann McDonald with Compound (indiscernible) .

You're doing really good. I have a question about the Velox spinoff. What was your, essentially, rationale for spinning that off? And I presume that's out of the epi wafer foundry in Somerset. And where will it be located and what's your vision on it?

Joann, the reason that I said earlier on the call were simply -- now it's a good product technology. It's very competitive versus silicon in the 200 to 600 volts AC to DC switching application. And it has the capable (ph) of being a zero recovery diode which is a significant performance advantage to this device.

It is based in New Jersey. They will sublet space (technical difficulty) for at least two years and the reason that we decided to get out of it is this is a product which we have had under development for probably two years. And while it is close to being a commercial product and as we got closer in the market and got more and more engaged in discussions with the customer base, it became really clear that in order -- having a great technology is one thing. Making a business out of it is another and in order to make a business out of it, we were going to have to hire a substantial headcount and be able to build a distribution system. And it would've been a distribution system that had nothing to do with the balance of what Emcore does as a company. So you -- adding all that overhead and all the infrastructure for a single product line and when you look at it, it just didn't make any sense.

We had -- we were able to get a very effective CEO in Tom Herl (ph) to come in and run this. He's got a lot of experience in the area. And it is better off getting the capital requirements being in a Company on its own. Focused on the market of power conversion.

And by maintaining a 20% equity. That's our kicker.

And you didn't have to put any other capital other than equipment in.

(MULTIPLE SPEAKERS)

Excellent choice for Tom Herl. Stay on track. Good.

At this time I am showing no further questions, Mr. Richards.

Okay, as I said earlier, in closing for this quarter we see steady revenue growth from both existing product lines, demand for existing product lines. Some new customers upping spending in our existing segment. A lot of traction around new products. And we will continue to drive operational improvement through cost of goods reduction as well as lower operating expenses; and we look forward to continuing improvement in Q3 over Q2. Thank you very much.

Thank you. This does conclude this morning's teleconference. Please disconnect your lines at this time and have a great day.