EMCORE Corp (EMKR) 2005 Q4 法說會逐字稿

Good morning. My name is Toni and I will be your conference facilitator today. At this time, I would like to welcome everyone to the EMCORE fiscal and fourth quarter 2005 results conference call. All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question and answer period. [OPERATOR INSTRUCTIONS]. You can also access this webcast by logging onto www.EMCORE.com. As a reminder, this call is being recorded. Thank you.

It is now my pleasure to turn the floor over to your host, Victor Allgeier. Sir, you may begin your conference.

Thank you, and good morning, everyone. Yesterday after the close of markets, EMCORE released its fiscal 2005 fourth quarter and year-end 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 CEO; and Tom Werthan, Vice President and Chief Financial Officer. Tom will review the financial results and business [inaudible] 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.

Thank you, Vic, and good morning to everyone.

Today we are reviewing our fourth fiscal quarter of 2005, along with our year-end results. Last week we issued a preliminary earnings press release, and there were no changes from last week until today. With that, let me review our operating results for the quarter.

Revenues for the quarter totalled $37 million, and this represents a 45% year-over-year increase and an 11% sequential increase. Revenues increased in all three of our operating segments and backlog also increased in all three of our operating segments. And let me review revenues by product line.

Electronic Materials were $3.5 million, which represents a 35% year-over-year increase as well as a 6% sequential increase. Bookings remained positive and we anticipate modest revenue gains for this segment in our first quarter.

Photovoltaic revenues were $9.3 million, an increase of 12% year-over-year and 6% sequentially. Again, strong bookings should result in increased revenues for this group in our fiscal 2006 first quarter.

Finally, Fiber Optic revenues, which include both our 10-gig and CATV product lines, came in at 24.1 million, representing an increase of 65% year-over-year and 14% sequentially. Revenues in this operating segment are also expected to increase in the first quarter.

Combined with strong bookings, our revenue expectations for Q1 of fiscal '06 are 39 million.

Gross margins for the quarter were 18%, representing a 14% point increase from a year ago, but a 2 percentage point decrease from last quarter. Approximately $3 million of revenues related to a Photovoltaic contract had low gross margin, and this will continue again into the December quarter.

Our first price decrease to Cisco since LX4 shipments began in June 2004 also impacted gross margins, even though unit volumes increased. However, a redesign will lower costs to restore gross margins to previous levels. We do anticipate a modest increase in gross margins in our first quarter of fiscal 2006.

Before I review operating expenses, let me refresh everyone's memory on what transpired during the June quarter because of the impact in our fourth quarter. As you may recall, in the June quarter we incurred $1.8 million of charges in connection with the announced closing of our City of Industry Photovoltaics facility and a relocation to a state-of-the-art fully-automated Albuquerque facility. We classified this expense as restructuring and severance costs. At that time, we anticipated and we did announce that we would be spending an additional $1 million during the fourth quarter of fiscal '05 and the first quarter of fiscal '06 in connection with the closing of this facility and transitioning operations to New Mexico.

In August of 2005 we announced the receipt of a contract valued in excess of $8 million and had delayed the closing of this facility for approximately one year. As a result, until the facility closes, the Company no longer classifies these expenses as restructuring charges, but will include them in selling, general, and administrative expenses. During the fourth quarter, we incurred about $684,000 of the City of Industry-related charges.

One final comment on relocation to Albuquerque. We anticipate approximately $3 million in annual savings.

So, operating expenses in the fourth quarter, net of the City of Industry-related charges, remained flat when compared to the previous quarter. Year-over-year, operating expenses, net of City of Industry-related charges, increased approximately $700,000. R&D increased $1.7 million, while SG&A decreased $1 million. For the year ending September 30, '05, operating expenses, net of City of Industry charges, decreased by approximately $5 million.

Below the line interest expense of $936,000 was essentially flat, both year-over-year and sequentially. GELcore returned to profitability during the quarter. Recall that GELcore lost money in the March and June quarters, solely due to the relocation of manufacturing activities from Canada to Mexico. Our portion of GELcore's income was approximately $600,000, which includes a favorable adjustment related to taxes. With the relocation behind them, GELcore will continue to be income positive.

Net loss, excluding the aforementioned City of Industry-related charges, amounts to $3.9 million or a loss of $0.08 per share. This compares to a net loss, excluding City of Industry-related charges, of $9.9 million a year ago or $0.21 per share.

The net loss of $4.6 million in the quarter results in a loss per share of $0.10. A year ago, the net loss was $10.8 million or $0.23 per share.

Cash at September 30 was $40.2 million, representing an increase of $3.6 million during the quarter and cash provided by operations on our statement of cash flows exceeded $5 million, the first time we have had a positive number in over two years. Backlog at September 30, as I mentioned previously, was up, increased to $40.2 million, an increase of $5.9 million or 17% since June. This is our highest backlog since we sold our equipment division two years ago. Backlog in all three operating segments increased. Not included in this backlog is a substantial Photovoltaics contract that Reuben will elaborate on.

So, to summarize, we are pleased with the revenue trends and have increased our revenue forecast to $39 million in the December quarter. Backlog has increased, and we expect another increase this quarter as early bookings have been strong. Gross margins were impacted during the quarter, but we feel we can obtain a modest rebound this quarter.

Cash increased by almost $4 million during the quarter to just over $40 million, and earlier this week we completed a bond transaction, whereby we retired $14.4 million of our bonds due in six months by exchanging them for $16.6 million of bonds due in May, 2011. The bonds that we issued are identical to the current May 2011 bonds that are outstanding. This reduces the outstanding balance of our May 2006 bonds down to $1.5 million. Simply put, we did not feel comfortable dispersing almost 1/3 of our cash six months from now to redeem these bonds. So in addition to extending the maturity and eliminating essentially all of our short-term debt, we also enhanced our liquidity position by establishing a $20 million bank line during the quarter.

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

Thank you, Tom. Good morning, everybody.

I'm going to begin with an overview, brief overview, of the Company's performance for fiscal year 2005, then move to a discussion on the financial/operational/strategic aspects of the September quarter, our last fiscal quarter, including a product line and market trend discussion, and finally close with some comments on fiscal Q1, the December quarter and expectations for fiscal 2006.

For fiscal 2005, EMCORE closed its books with revenues increasing 37% to $127.6 million versus our original revenue guidance at the beginning of the year of an increase of 20 to 30%. All three product segments contributed to revenue growth with our RF division increasing 9%, Fiber Optics increasing almost 48%, and our Satcom Photovoltaics group increasing 30%.

We are very well positioned in each one of our product markets and we continue to see improvement in the fundamentals of our industry segments, as evidence by the 17% improvement in backlog in the quarter ending September. And based on early Q1, 2006 bookings, we will see another sequential increase in backlog at the end of the December quarter.

Operationally, the Company was able to improve its manufacturing efficiency throughout the year, driving gross margins from 8% in the December quarter of '05 to a high of 20% in Q3 ending at 18% in Q4. Driving improved profitability while increasing revenues continues to remain a core objective of the Company, and we expect to reduce the material component of our cost of goods by $10 million in fiscal year 2006.

Lastly, we have achieved the milestone of having all of the Company's high-volume systems and sub-systems products at contract manufacturers in Asia, thus reducing our labor costs while retaining manufacturing control of the key optical elements and the cost as a percentage of our cost of goods.

The Company achieved its profitability targets by achieving EBITDA positive in the March quarter, one quarter earlier than forecast, and improving its profitability throughout the next two quarters. We see continued improvements in profitability through 2006 and expect to achieve EBITDA net income positive by year end.

Strategically, we made a number of significant product line acquisitions, such as the JDSU's CATV and FTTx products that have given the Company a dominant position in both the CATV and FTTx markets.

With regard to fourth quarter, the fourth quarter revenues were $37 million, representing a 45% increase year-over-year and an 11% increase from Q3 and significantly higher than the 34 to $35 million revenue guidance issued on the Q3 conference call. While all product segments showed increased revenues, the Fiber Optics division grew 15% quarter-over-quarter to $24.2 million, representing 65% of the Company's revenues.

Gross margins declined 2% from the prior quarter to 18%. As Tom cited earlier, among the factors impacting margins, during the quarter EMCORE was awarded a major solar cell development and production program. The initial phases of this long-term cost reimbursable contract are focused on technology development and manufacturing optimization. Establishment of a volume production capacity for this product is being performed by EMCORE at reduced margins in order to minimize program ramp-up cost for our customer. We expect to realize standard product gross margins during 2006.

The size of the program should exceed $40 million over the next two years. This is probably the largest single program that EMCORE has ever been awarded in any product line.

Operationally, the Company remains EBITDA positive, and during the quarter, operating activities generated in excess of $5 million, boosting cash on the balance sheet to over $40 million.

Backlog increased 17% to $40 million. The Company raised revenue guidance to $39 million for the December quarter from 37.5, and recently we announced the exchange of 14.4 million in 2006 notes for 2011 notes, and this is the issue that Tom discussed, improving the Company's liquidity in capital resources.

In terms of our product line discussion, Fiber Optics revenues of $24.2 million was an increase of 15% quarter-over-quarter and 66% year-over-year, representing 65% of the Company's revenues. In the Digital Product lines, that's the 10-gigabit Ethernet, revenues were up 10% quarter-over-quarter, despite a decrease, a price decrease to Cisco on substantially higher unit shipments. Unit shipments were 20% higher than the prior quarter, and we are experiencing increased unit demand this quarter versus the September quarter. We have purchase orders through mid-Q2, meaning through mid the March quarter of '06, and visibility on unit volumes through the end of Q2. EMCORE remains the sole supplier to Cisco on LX4.

Further, in 10-gigabit Ethernet, we We expect the X2 form factor of LX4 -- this is a new, smaller form factor-- to commence commercial shipments during the March quarter, and between the LX4 XENPAK, which is our current flagship, and the X2 form factors, EMCORE expects to be shipping to Cisco's GSBU, DBSU, and ISBU in 2006. Unit volumes will continue to be driven not only by organic growth in the 10-gigabit Ethernet market, but the fact that we are diversifying across three Cisco platforms.

During the quarter, two new non-Cisco customers have made first customer shipments with LX4, and we expect a third this quarter, thus diversifying our customer base on this product line in 10-gigabit Ethernet.

In components and sub-assemblies, this is the storage area networks, revenues were above planned, driven by 10-gig demand from Intel, Agilent, JDSU, and Finisar, and we expect revenues this quarter also to be ahead of plan this.

On the analog side of the business -- this is cable television and fiber to the home -- revenues were up 20% quarter-over-quarter, driven by increased demand by both our CATV and FTTx customers. We continue to see system upgrades on the CATV side as a number of the MSOs plan network capability up to 1-gigahertz.

During the fourth quarter, we qualified the Company's PON transceiver product and began volume production ramping this quarter. We also saw increased demand from our other FTTx customers during the quarter and FTTx revenues represent a material portion of the increased revenue guidance for this quarter.

The fourth quarter also represented a period of substantial new product introductions, all of which have received production orders, including, as I said earlier, the PON transceiver. Also an MDU PON transceiver -- it's a multi dwelling unit PON transceiver -- for FTTx; a 32-channel QAM transmitter and a [LINMA] transceiver for cable television. We expect later this quarter to ship the Company's first GPON transceiver to its customers for evaluation for the GPON market, which we expect to develop in the second half of 2006.

We expect these new products to drive significant revenue growth opportunities for the Company in 2006. We recently announced the acquisition of Phasebridge, which was a very nice addition to the Company's speciality products for military and aerospace applications. Further, the technology and skill sets acquired will strengthen the Company's FTTx effort. Financially, Phasebridge's product line should contribute about $2 million in revenues in 2006 at an approximate 50% gross margin.

In the RF product lines, revenue increased 6% quarter-over-quarter and 12% year-over-year. During the quarter, we saw a significant increase in legacy products, such as InGaP HBTs and [inaudible] and the pricing has been stable. Near-term, we saw a decline in gallium nitride revenue with traditional customers like [RF&D]; however, it will be offset by increased demand from Japan -- [Fujitsu, Oki, Udina] -- later this quarter.

The largest revenue driver for this division in 2006 will be combinational structures. Those are transistors integrating both HBTs and pHEMTs into a single device which is more efficient, smaller in size, and it has integrated power control.

The revenue outlook for Q1, 2006 will be at the high end of its 3 to $4 million range.

In Satcom, Photovoltaics revenues increased 6% quarter over quarter and 12% year-over-year. Gross margins for the division were obviously impacted by the $40 million program we described earlier. However, bookings in the September quarter as well as early in this quarter are exceptionally strong, with orders from every major satellite contractors. Fab yields continue to be above plan and we continue to see interest in the Company's terrestrial Photovoltaics product line and we expect initial deployment of this technology in 2006.

As Tom pointed out earlier on GELcore, GELcore returned to profitability in September, having completed its manufacturing move to Mexico. Calendar year 2006, operating budgets were recently submitted with revenue growth in excess of 30% and 36% of revenues are expected from new products.

With regard to Q1, 2006, the current quarter, obviously we have raised our revenue guidance for the quarter. We will show a nice sequential increase in revenues. Margins will still be impacted by the $40 million satellite program. However, cost reduction programs in Fiber Optics are in place and should impact the quarter positively on LX4 shipments. And the quarter will show a modest increase in gross margins. Bookings remain strong in all of the product segments, and particularly in Satcom and Photovoltaics.

For 2006, we will give the same guidance for 2006 as we did in '05 of revenue expansion of 20 to 30%. This revenue growth is based entirely on existing products and existing markets. We expect quarter-over-quarter improvements in EBITDA and expect to achieve EBIT-positive and EPS by year-end.

Cost of goods improvement will come through the Company's plan of taking out $10 million in cost of goods and material in terms of -- materials consumption, and this will be achieved through yield improvement, lower cost designs, and better purchasing economics on higher unit volumes.

And on that basis, I will turn it over to the conference call for Q and A.

Thank you. [OPERATOR INSTRUCTIONS]. Our first question is coming from Jed Dorsheimer of Adams Harkness. Please go ahead.

Thanks. Hi, guys, and congratulations on a great quarter.

Thanks.

Just a few questions here, as you did a great job sort of outlining what's going on. Are there any other sizable -- you know, looking at this Photovoltaic contract that's spread over the two years, are there any other contracts that are similar in size that are on the horizon here? Or any other color that you may be able to provide on the stuff that you are working on but have not closed at this point?

Yes. Leaving the $40 million program aside, there are a number of -- I would call multiple geosynchronous satellite programs that EMCORE has been baselined on with the prime contractors in this space. Now, those programs haven't been awarded yet, but being base-lined, you know, these are -- I would call them four or five satellite programs, and you're talking about sort of $8 to $10 million per satellite. So there are those size programs out there that we are in the middle of.

Great. And just -- I'm on the road, so I apologize if you've already mentioned this, but with respect to the LX4, one, I guess at Cisco, did the ASP drop below $1,000 or could you give any color on where the ASP is now there? And then, two, have you already started shipping to [Terrasis, and 3Com, Wawei] and some of the others that you were in qualification with?

Just on ASPs, without being specific, they're just slightly under a thousand.

All right.

And on the other customers, without naming names, you'll see them announce their FCS publicly, probably pretty soon.

Got it. And so, without announcing names and looking at the others that you were qualified, I think there were maybe four or five of them, are you already shipping to -- out of those four or five, is it like two that you're -- have you already starting shipping any of those products, or can you give any color without violating what your customer or --

Yes, I would say we're shipping kind of pre-production volumes to these guys right now, Jed. I think commercial release happens after this quarter, meaning in sort of the January or March time frame is when we'll ramp up on those volumes.

Great. So as I look at it here with sort of record backlog, a decent amount of things on the horizon, it really -- revenues really don't seem to be an issue, even at the higher end of your range here for next year. Looking at the gross margins a little bit, is it mostly a contributions story to start to see the leverage? Or is it -- do you have any specific initiatives in place to really drive that margin expansion? Thanks.

I think you're right in your assessment, Jed, that we don't feel that revenues are an issue, as I've said in part of the call, all of the 20 to 30% guidance is really based on existing products, existing markets. Obviously, there are a whole bunch of new products that are -- have recently been released, and you may be right in terms of the revenue guidance, that that's, that may be a conservative approach. But it's -- clearly, the quarter, near-term, we're impacted on a gross margin basis by the cost-based revenues for satellite. I will tell you that once products start shipping at normal product revenues, you'll see substantial margin contribution driven through the P&L. It is a priority that we reduce materials as a percentage of our cost-to-goods, and that number is targeted at 10 million, and it's not a long shot on that.

A couple other things, Jed. There are four or five categories that we are working on in no particular order. Cycle time is important to us. And what that means is reducing the growth times on some of our products to increase through-put. The bill of materials from a vendor cost standpoint reduction. Yields are always important. Outsourcing from a labor standpoint is important, and then some redesigns on some product to lower costs as well.

So a combination of all those things, plus what Reuben mentioned, should improve gross margins going forward.

Great. Nice job, again, in really turning this thing around, guys.

Thanks.

Thank you. Our next question is coming from John Harmon of Needham & Co. Please go ahead.

Hi, good morning. Good job in the quarter. A few questions, please.

Tom, could you tell us what gross margins would have been if you hadn't taken on this lower-margin satellite business, just so we can get a feel for the improvement in your core business?

Yes. There were a couple of factors, John, that affected the gross margins this quarter. We named the two most significant, and that's the price decrease to Cisco as well as the $3 million on the government contract. The $3 million probably added about a point -- or took away about a point -- from gross margins, and the other decrease was the Cisco price decrease.

Okay.

In other words, sort of flat with last quarter.

Flat is the best way to look at it. Okay.

And you also said there was a tax adjustment on GELcore. What would GELcore have earned for you, minus this adjustment?

They actually would have earned the same amount throughout the cumulative period. The tax adjustment goes back a couple of quarters that we were not aware of, so we added book at this quarter, and it was around 400K in total adjustment.

Got it. And last one, please. I think you said before, you expected to ship 7 million worth of PON transceivers this calendar year. It looks like it's a bit delayed. Was it just getting started? Or is that number pushed out over a couple quarters?

We've got to go through all of the logistics and production ramp, and we began that last quarter, and it's just, it's a step function in generating unit volumes, and we're on that ramp; we're on schedule. I think we're in pretty good shape there.

Okay. If I could do one more. Looking out a couple quarters, what percentage of your LX4 volume could be customers other than Cisco?

I think 20 to 30.

Great. Thank you very much.

Thanks.

Thank you. Our next question is coming from John Lau of Jefferies. Please go ahead.

Thanks. Hi, Reuben and Tom.

Hey, John.

I have two questions for you. On the major solar contract, you mentioned that the front end of it is the development costs had lower gross margin. Is that more of a pass-through on the setup cost?

And second point is that -- is there also any risk post the setup charges for the remaining order or is that more of a milestone goal before you start to ship the solar cells? And I have a follow-up. Thank you.

Yes. You know, beyond what we read to you, you know, the nature and scope of the work being performed in this program, we can't be any more specific about it than that. So we're not allowed to disclose any additional information. All I'll tell you is that the technology involved is an existing product.

Okay. So this is based upon your existing solar cells, the technology that you're already shipping?

Yes.

Okay. And second of all, as a follow-up, can you give us a little bit more about some of the new developments in the terrestrial solar cell market? You mentioned one of them in your press release on the car, the solar car team. What other terrestrial applications can you give us a little more color on?

Essentially, right now we've got a couple of paths to market. We have been in qualification with Sharp in Japan. Sharp, as you may know, is probably the largest photovoltaic producer in the world, who sees an application for the concentrator technology, the gallium arsenide-based solar cell with the concentrator technology in certain sort of MDU applications in Japan. That is a product which -- we're cautiously optimistic about it and expect to see shipments in early '06. When we forecast revenues for '06 guidance, it doesn't include any terrestrial photovoltaics. We just simply don't know what the adoption rate on this technology is going to be, but I'll tell you, we're very optimistic about it.

Further, we have -- we are engaged in discussions with a European company to build the full concentrator module for the European market in a number of contracts they have. So again, a couple paths to market.

The technical approach, interestingly enough, was just the recommended approach by -- at the Western Governors Association a month ago. They did a study on technical approaches, and their recommendation was the concentrator technology, and so we are seeing interest from the sort of seven western states in this as an approach. But that's a longer -- that's probably a longer market opportunity, further out in terms of market opportunity.

Okay. But in terms of -- in circling back to my first question, Reuben, all of the milestones for the large solar contract, are you pretty comfortable with the technology that you have on all of the goals that you need to meet to get to that next stage?

Yes.

Okay. All right, thank you.

Thank you. Our next question is coming from Ramesh Misra of C.E. Unterberg. Please go ahead.

Good morning, Tom and Reuben.

First, a question on the contract manufacturers for the LX4. How much of your production for the full LX4 module is coming from there, and what kind of gross margin benefit did you enjoy last quarter on account of that and where do you see that in the next few quarters?

70%, 75% of our production is coming from the CM. I think -- what kind of margin?

Yes, the labor savings, Ramesh, on the outsourcing, you really save on labor, and that was nice savings; however, as we mentioned, it was offset by the price decrease.

It's probably a 40% savings on labor.

Okay. So 70 to 75% is the fully-completed LX4 module, right? We are not talking about sub-sections going into that?

No.

Okay. In regards to the new Photovoltaic contract, I know you're probably limited on how much you can say, but you mentioned something about establishment of a production line. How is that different-- I mean, is that basically adding new capacity? Is that a slight difference in the approach or the technology? What does all that entail?

Again, I've got to be very careful about what I say with regard to this. I'll say what I said earlier: the nature and scope of the work being performed of this effort is subject to strict confidentiality obligations. There is nothing in this program that EMCORE is doing which would be any further capital-intensive or difficult to achieve than our normal operations. If that helps you.

Okay. Not quite, but I guess I'll take that.

In ramping up your focus on the terrestrials side, are there any significant changes, again, on the manufacturing side, that you would need to do to pursue terrestrial at a greater level of business?

No, it's the same technology. We would probably build out of some additional processing capability, but it's not a lot of money.

Okay. And then finally, Reuben, on Phasebridge, on the press release you didn't talk about any of the financial details. Are you -- can you talk a little bit about that and what kind of new technologies are you getting that would benefit your FTTx effort?

Sure. A couple of different things. The existing products that are, I would say, commercially released or i.e., subject to revenues are things like fiber optic gyros that are going into the military and aerospace market. As I said, they're sort of about $2 million worth of product revenues there at approximately a 50% gross margin.

The skill sets that we get in the Phasebridge acquisition, it's a very highly talented crew, and largely, as it applies to FTTx, their skill sets are highly pointed at RF over fiber technology, and since that is the video transmission platform for FTTx, they're going to be put on PON development, particularly G-PON development.

Okay. Thanks very much, guys, and congratulations.

Thank you.

Thank you. Our next question is coming from Derek Wenger of Jefferies and Company. Please go ahead.

Yes. Three questions; two financial. Capital expenditures for the quarter, and what is the outlook for next fiscal year? And then depreciation and amortization for the quarter. And lastly, can the $20 million bank line be used to buy back the 11 converts or are there any restrictions on that?

No, no restrictions on the bank line, used for any purpose we deem that is significant. Can you review your questions?

Yes, the capital expenditures for the fourth quarter and the outlook for fiscal year nine '06 and the depreciation and amortization for the quarter?

Sure. Capital expenditures during the quarter were a little under $2 million. We anticipate about $6 million for '06, and D&A for the quarter was about $3.7 million. There were some other non-cash charges, but depreciation and amortization was $3.7 million.

Okay, and in terms of the buyback of the converts, there are no restrictions on that, that line is not drawn at all?

No.

Okay, thank you.

Thank you. Our next question is coming from [Marcello Drazillo of Jarata Capital]. Please go ahead.

Hi. Thanks. I came on a little late, so sorry if you've already addressed this, but -- and most of my questions have been answered, but can you just give us a little color on what your plan is with your stake in GELcore and how close you are to monetizing that, if at all?

We'll give you sort of our standard answer on this, is that GELcore is a terrific asset. It's the market leader in a very dynamic market. It's grown 30% a year. It's net income and cash flow positive. I mean, it's a great company.

Having said all of that, I think what we have said publicly is we think that GELcore could grow even faster if it were a stand-alone company and taking it public would be our ideal route. Alternatively, if we were offered something along the lines of a comparable valuation to going public, we would probably sell our interest, and we expect within 12 or 18 months that something like that will happen.

Okay.

One of those options will occur.

I hear you. Thank you.

Thank you. Our next question is coming from Michael Coady of B. Riley. Please go ahead.

Thanks. Good morning, Tom and Reuben.

Good morning.

Looking at the gross margin impact by the Photovoltaic contract, can you talk about just the timing of the ramp of the revenue from the contract? And how [inaudible] gross margin?

Yes, the margins, Mike, will be impacted in this quarter as well by about the same extent, there's about $3 million. A little bit into March and then volume production begins really in late fiscal '06 for us.

Second half of fiscal '06.

Okay. So would you then back away or would you stick with kind of the low 20% gross margin by the end of the year?

No, no, no -- sorry.

We're still sticking to low 20% gross margins by June of '06.

Okay. Great. And then last question. If you could take a look at the OpEx expected for the December quarter and into fiscal '06, either including or stripping out expenses related to the [inaudible] City of Industry facility?

Yes, there will be some expenses relating to COI in the December quarter, but for the most part, SG&A should stay approximately where it is, maybe come down a little bit and R&D will decrease little bit.

Great. Thank you very much and nice job.

Thank you. As a reminder, the floor is still open for questions. [OPERATOR INSTRUCTIONS]

Our next question is a follow-up question coming from John Harmon of Needham & Co. Please go ahead.

Hi, thanks. Now that you've owned it for a quarter, I was wondering if you could talk a little bit about the business you bought from JDS Uniphase, the state of its integration, what product lines you may have cancelled, what additional opportunities there might be out there?

Yes. We just finished the complete integration probably just a few weeks ago. We have transferred the 15-50 XMOD products to [Fabbernet] and to Alhambra. We have exited in the Ewing facility in New Jersey this week and are moving into an EMCORE site on the East Coast, and what I would tell you about the integration is that there were-- we didn't outline them in the call, but there were a couple hundred thousand dollars worth of closure costs and transition costs related to the exit of the Ewing facility that you won't see next quarter. Those transition costs go away. I think that's in OpEx, isn't it, Tom?

Yes.

And so the integration has gone well. We're getting product now out of Alhambra, out of [Fabbernet], and some of the new products, particularly -- and one of the products I cited in my section of the beginning of the call is called a [LIN-MOD] which is a very high performance 1550 externally-modulated product, replacing the old 1550, and it's lower cost, higher performance, and we think that that's going to be a big revenue driver for us.

In addition, we also got a family of EDFAs, amplifiers that are used in fiber to the home applications, and we're driving that into our FTTx customers as we speak.

And what opportunities have you had to integrate some of your own sources into the products that you gained?

Oh, yes, we're --

Sorry, I just assumed that was a given. We're going to be integrating all of our own optical elements into these modules, so reducing cost-to-goods, increasing margins.

Great. Thank you.

Yes.

Thank you. At this time there appear to be no more questions. I would now like to turn the floor back to Reuben Richards for any further or closing remarks.

Thank you, everybody, for your time this morning. As we said, we are very bullish on the outlook for the Company, both on the top-line, we don't feel there's a lot of risk in revenue growth. We are highly focused and our operating team is dedicated to pulling out an additional $10 million in costs. Clearly, on the basis of some of the satellite orders, those margins ought to improve as we get into '06, as far as shipping product under a number of these contracts. So we expect GMs to improve, we expect OpEx to decline; we expect to hit our targets for '06 in terms of EBIT and net income positive.

And with that, I will close the conference call. Thank you very much.

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