EMCORE Corp (EMKR) 2006 Q1 法說會逐字稿

Good morning, ladies and gentlemen. My name is Elsa and I will be your conference facilitator today. At this time, I would like to welcome everyone to the EMCORE First Quarter Fiscal 2006 Earnings Conference Call.

[OPERATOR INSTRUCTIONS]

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

Thank you, and good morning everyone. Yesterday after the close of markets, EMCORE released its fiscal 2006 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 Reuben F. Richards, Jr., President and Chief Executive Officer; and 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 Vic, and good morning to everyone. Today we are reviewing our first fiscal quarter of 2006, which is the period ending on December 31, 2005. Before I review the results, let me just mention that we did close two acquisitions during the quarter, which Reuben will elaborate on, however, the P&L impact of the acquisitions in terms of both revenues and expenses were de minimus since they closed fairly late in the quarter. And with that, let me review revenues.

Revenues for the quarter totaled 39.9 million. This is a 48% year-over-year increase and an 8% sequential increase. Revenues increased in all three of our operating segments, both year-over-year and sequentially and let me review revenues by our product line. Electronic Materials and Devices revenues were $4.1 million. This is a 128% year-over-year increase and an 18% sequential increase. Bookings remain positive and we anticipate further revenue gains for this segment in our second quarter.

PhotoVoltaic revenues were 10.7 million, an increase of 44% year-over-year and 15% sequentially. Revenue should increase modestly this quarter. Finally in our Fiber Optic revenues division, which include both our 10-gig and CATV product lines, revenues were 25 million, representing an increase of 42% year-over-year and 4% sequentially. Revenues in this operating segment are expected to increase in Q2 as well.

Combined with strong bookings, our revenue expectations for our second quarter of fiscal '06 are between 41 and 42 million. Bookings were strong, particularly multi-year contracts in our PhotoVoltaic Group. Based on known shipments releases for these contracts, backlog increased to approximately 44 million, and I do believe we will see additional shipment release dates throughout fiscal '06.

Gross margins for the quarter were 18%, representing a 10% point increase from a year ago and a modest 36 basis point increase from last quarter. As happened last quarter, approximately $3 million of revenues related to a PhotoVoltaic contract had virtually no gross margin. Additionally, the PhotoVoltaic's product mix was unfavorable, resulting in lower margins for the group. Gross margins for the PhotoVoltaics Group came in at 8%, and this is a decrease from 14% last quarter. We do expect a significant rebound in the second quarter gross margins for this division.

Gross profit for Electronic Materials and Devices were 12%, which was flat quarter-over-quarter. And finally, the gross margins on our Fiber Optic division were 23%, an increase from last quarter's 20%, and that's despite a price decrease to some customers. We do expect gross margins for the company to improve in the second quarter.

Operating expenses in the first quarter were 12 million, and that includes 1.1 million of stock compensation expense. During the quarter, we implemented FAS 123(R), and the 1.1 million represents the cost of expensing both stock options and shares issued through our employee stock purchase plan. Also included in operating expenses were approximately $200,000 of idle facility charges related to the anticipated closing of our City of Industry PhotoVoltaics plant later this year.

Finally, there was approximately $400,000 of Sarbanes-Oxley 404 compliance costs incurred during the first quarter. We successfully completed our first year of SOX 404 compliance in December 2005, so these charges will decrease significantly going forward. As a result, SG&A increased both sequentially and year-over-year, while R&D decreased both sequentially and year-over-year.

The reported operating loss was 4.9 million. Excluding the stock compensation expense of 1.1 million, the operating loss was 3.7 million. This is an improvement of $0.5 million sequentially and approximately $5 million year-over-year. Below the line, the net interest expense was about $1 million, essentially flat both sequentially and year-over-year.

During the quarter, to review, we did exchange about 14.4 million of our subordinated notes due in May of this year for similar notes due in May of 2011. The net effect of the exchange resulted in a non-cash loss of 1.1 million. GELcore, our joint venture with GE Lighting provided about $550,000 of income, and we also recognized our portion of Velox's net loss, which amounted to 182,000.

Just to refresh everyone's memory, we spun out Velox last spring, as the company focused on gallium nitride diodes and needs to account for our investment under the equity method, which is the same as the GELcore joint venture. However, we will only account for Velox under the equity method through the end of the March quarter, and thereafter under the cost method in which we will not record any results of Velox in our financial statements.

The reported net loss was 6.5 million or $0.14 a share. The net loss excluding the stock compensation expense, the loss on the bond exchange, Velox and idle facility charges, amounted to 4 million or $0.08 per share.

Cash at December 31 was 33.5 million, which represents a decrease of 6.6 million in the quarter. We paid our semiannual interest payment on our convertible subordinated notes amounting to 2.5 million. We also spent about $0.5 million on the Force acquisition and $0.5 million on capital expenditures. The entire remainder of the cash decrease of 3.1 million, represents unfavorable changes in working capital components and that is expected to reverse itself during this quarter.

So to summarize, our revenues were higher than expected, gross margins increased in our Fiber Optic division, but as I mentioned, they decreased in PhotoVoltaics by 6 points. And we do expect a nice rebound in their gross margins this quarter. Revenues are expected to increase and order activity remains healthy.

And with that, let me turn the call over to Reuben for a product, operational and strategic acquisition review.

Thank you, Tom. Good morning, everybody. I'm going to begin with a brief overview of the financial ,operational and strategic aspects of the December quarter, then discuss some of the trends that led to the company's raising its fiscal year 2006 revenue guidance, and then close with what we expect to achieve over the next three quarters in terms of improving gross margins and overall profitability on an operating and an EPS level.

As Tom pointed out, for the December quarter revenues increased 48% year-over-year and 8% from the prior quarter. All three of the company's operating segments, RF, Fiber and PhotoVoltaic posted revenue increases both sequentially and year-over-year. Backlog was up for the quarter. Backlog was up for the quarter with significant new contracts extending over two years, and we expect further increases in backlog this quarter.

Gross margins improved 36 basis points, just over 18%, and were -- however, were negatively impacted by the zero gross margin business on the $40 million PhotoVoltaic contract that the company was awarded in the September quarter, which we highlighted on the last conference call.

The December quarter is the last quarter where EMCORE will experience the zero gross margin of this contract. As a result, we expect significant gross margin improvement this quarter, as the PhotoVoltaic Division enters the production phase of the contract. In terms of a product line discussion, in Fiber Optics, revenues increased 41% year-over-year and 4% from the prior quarter. Gross margins improved more than 20%, from 19 to 23, from the September quarter, despite a price increase to Cisco on the company's LX4 product line.

Fiber Optics represented 64% of the company's total revenue, and we were able to achieve this gross margin improvement on the basis of our cost of goods reduction that is in line with the projected 10-million overall company materials reduction that we have been talking about, since the beginning of the year.

In the digital product lines, 10-gigabit Ethernet products remained strong, as EMCORE remains the sole source to Cisco on LX4. We are booked on unit shipments beyond the end of the March quarter and have visibility through June. Further, we expect the S2 forms factor of LX4 to commence commercial shipments to Cisco this quarter. During the December quarter, three new LX4 customers began shipping, and we expect our product mix there and ASPs to be favorably impacted.

In components and subassemblies for Storage Area Networks, revenues were above plan for December, and we expect continued improvement this quarter. In new market opportunities for components, EMCORE has made significant progress in finalizing its design for a new entry in the optical mouse, that is a consumer electronics and computer application, and we are currently engaged with the leading OEMs in that market to qualify as a primary supplier.

On the analog side of the business, primarily cable television and fiber-to-the-home, we began shipments of the company's PON transceiver and continued the volume ramp throughout this quarter. We are running at a rate of about 3,000 components a week, which is still below the capacity required to meet our existing purchase orders, which have been increased over the quarter. We expect to reach our target capacity of 5,000 parts per week by the end of the March quarter and fulfill these outstanding purchase orders.

The CATV market remained stable with consistent quarter-over-quarter revenue growth driven by new products that improve the broadband capabilities of the cable networks. In the last 45 days, the company has closed the acquisition of three small companies on very favorable financial terms. Each of these companies represents the technology platform that not only complements our existing product lines, but creates new product opportunities as well.

As a result, EMCORE has the most complete array of products in the major video transmission markets of any company in the United States, encompassing cable television, fiber-to-the-home, and mobile video. Specifically, the Force acquisition enables video transport over four different networks that is wireless, IP, SONET, and HFC, by providing technology that converts video to analog, digital or RF formats or vice-versa. We are particularly excited about the mobile video market to provide streaming video to wireless handsets and PDAs, and we feel that this is a $25 million to $30 million product line within two years.

The acquisition of Phasebridge moves EMCORE closer to the customer with a system level solution. These systems are based on RF over fiber technology, and currently being deployed within the aerospace and government markets.

And more recently, the acquisition of K2 impacted EMCORE by expanding our markets and improving profitability on existing product lines. This technology allows EMCORE to compete in the ultra long haul markets in both fiber channel and storage area networks, as well as the SONET based OC-48 ultra long haul markets. Further, on EMCORE's analog CATV products, these technologies allows us to reduce our cost of goods by more than 20%. Expectation for fiber optics in the current quarters for both revenue growth, and sequential improvement in gross margins.

In PhotoVoltaics, revenues were up 44% year-over-year, and represent the highest revenue level for this division since its inception. Despite the revenue increase, gross margins declined from 14% in September to 8%. The reason for the decline in the gross margins was that the initial phase of the cost reimbursable contract that we announced last quarter entered its final phase, and we expect gross margins in this quarter to return to normal product margins in excess of 20%.

During the quarter, EMCORE announced the receipt of a contract in excess of $20 million for satellite photovoltaics that runs over 18 months. This contract and the value of the other contracts received over the last 90 days is in excess of $70 million in new orders. In terrestrial Photovoltaics, EMCORE has transferred it's 36% efficient terrestrial PhotoVoltaic cell to production. We received our first commercial order for terrestrial PhotoVoltaic cells, which will be shipped this quarter, one quarter ahead of the guidance that we had given the Street on previous calls.

We are finalizing commercial terms with several other terrestrial concentrator companies, and it appears that revenues for terrestrial applications will begin to ramp in earnest next quarter. We have added additional reactor capacity to support the terrestrial PhotoVoltaic business, and will be capable of producing up to 50 megawatts at today's capacity.

In the RF product lines, we saw 128% year-over-year increase and an 18% increase in revenues from the prior quarter. The largest revenue driver for this division in 2006 will be the newly introduced [inaudible] or combinational structures, which integrate both HBT and pHEMT into a single device which is more efficient, smaller in size and more integrated from a power control perspective. This new device allows EMCORE to expand its markets outside the traditional handset market into Wi-Fi, WiMAX and infrastructure applications.

GELcore continued its record of profitability since the transfer -- the second quarter of profitability since the transfer of work from Canada to Mexico. And while the transfer of work had some impact on revenues, the company was able to hit its target operating profits for the year. We are expecting renewed revenue growth in 2006 of approximately 30%.

In closing, for this quarter and subsequent quarters, we expect significant improvement in gross margins as fiber and RF continue to grow and expand their gross margins, and PhotoVoltaic returns to their normal product gross margins. Our operational targets for fiscal year 2006 remains EBIT positive for the June quarter and EPS positive in September of this year, and we feel that with the revenue outlook and gross margin improvement we will achieve these goals.

Overall, we have raised the current -- this is the existing quarter we're in right now -- revenue expectations from 39 million to 41 million to 42 million based on the strength across all product lines, and full year revenues from guidance of 20% to 30% increase to 25% to 35% year-over-year increase. We look to continue to expand gross margins by reducing the material component in cost of goods, improving yields, and on the basis of product mix, and we expect a significant improvement in gross margins quarter-over-quarter.

With that, I'll turn it over for Q&A.

Thank you. This floor is now open for questions.

[OPERATOR INSTRUCTIONS]

Our first question is coming from John Lau with Jefferies & Company. Please go ahead.

Hi, Reuben and Tom.

Hi..

I had a question for you with regards to your cable TV business. It looks like the business is very strong, but you mentioned that you are actually constrained against the demand that they wanted you to do, is that correct? And wanted for you to give us a little bit of an update on the qualification of the parts. And I have a follow-up on that. Thank you.

Sure. In fiber the home, John, this is a price sensitive market. And as we announced, we got a purchase order from our customer in the September quarter of approximately $7 million. We have been ramping up to meet that demand, but because yields are such a big driver in profitability, our ramp has been what I'll call methodical with an eye to maintaining profitability in this business.

So we have not shipped as, to the full extent of the purchase orders we have. We're ramping sequentially, every week improves the unit volume ramp. But we're making sure that this happens on a profitable basis. The profitability of this business is paramount in terms of priority to us.

We are shipping the PON Transceiver. We expect to be able to reduce cost of goods for this product quarter-over-quarter as we reach our targeted production area. But so far, everything we ship, no failures, and so, no returns. And I think the customer is pretty happy.

So it's fair to say to characterize that all the qualification efforts that you have done, you have zero failures right now, and you can ship more than you can right now and the customer is willing to take that product?

Yes.

Great. And is that forecast going up for you over the course of the last month or two from the customer?

Yes. The forecast has been increased twice, I would say, in the last 30 days.

Great. And I do have a follow-up with regards to the terrestrial. You mentioned that it was a quarter earlier, and that you have already gotten the contract for terrestrial applications and that there will be revenue in Q2.

There will be revenue this quarter for terrestrial photovoltaics that is ahead of our expectation. We were not -- and I think what we said on previous phone calls is that we expected production to start in the June quarter or towards the end of the June quarter. And while the revenues are not tens of millions of dollars at this point, the fact that the product has been released to production is that there are commercial orders is ahead of plan and expectation on our part.

When do you think you'll be able to give us some visibility as to the products and the customers that you are working on in that critical area?

I think we will have wrapped up the commercial negotiations with a number of customers. And this is -- in the past and probably should have mentioned this on the call. In the past couple of months, the number of commercial interactions that we have had with system suppliers for concentrators, for grid type utility systems has been substantial.

There are three companies that we are currently engaged with right now that we think have a real commercial impact and volume requirements. One which we're pretty much done on the commercial terms, and we expect to resolve -- finish finalizing negotiations with the other two, this quarter. So I think of the end of this quarter on our next conference call, we will be able to give the street visibility on what the volumes will be for this fiscal year and '07 as well.

Great. Thank you, very much.

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

Hi, good morning.

Good morning, John.

I guess, my first question is trying to reconcile your Q2 guidance with the acquisitions you've made. In other words, if I add up your last three acquisitions I get about 15 million of annual revenue, so about 4 million a quarter, which makes your guidance kind of conservative. Is it after taking control of these businesses you are going to take a step back and look at the product lines before you start factoring them into your guidance or, are you expecting something else in your core business?

No. I think you're right on the first comment is, that I think we're being conservative. I think what we want to make sure is that there will be contribution to this quarter. We want to make sure that post integration that everything hits on where we expect it to hit and you will see us, I think, ramp guidance as we go forward and we execute on that interaction and customer engagement. So, I think we are taking a conservative approach. We don't want to over-promise on what these additions are going to do, but we do think that we'll get to the level that you are talking about.

Okay. Thank you. Just a couple more. What are your expectations on a payment from [BECO] this year?

Yes. It's a little bit unclear. We do feel there will be a payment, we do not feel that will the $6.8 million [cap] payment that we could receive on the $20 million payout. But there will be a payment we just don't know how much yet.

Okay. And you kind of touched on this in the last question, this $70 million of backlog you have in solar cells, sort of what's the rough time line when this ships? I mean it doesn't seem to be in your guidance at all for this year.

I think each is different and just to deal with a majority of it, there's probably 10 million that will fall in place this calendar year. Of the 20 million that goes over I think 18 months. And of the 40 million, that goes over kind of 2.5 years, two to two and a half years. But we are already obviously two quarters into that.

So, I think that when we get with you off the call on the guidance we will probably -- it is not a straight line necessarily. Some of it, the $20 million purchase order we are producing against today, the 40 million really starts ramping this quarter and next, and then runs at rate. So, I think it's going to be a quarter or two quarters before you see the [run it] rate revenue on those contracts.

Just a little more flavor, John. On the $60 million of the orders, recall that our backlog is always recorded quite conservatively, meaning we only put into backlog, what we have a PO for and what's scheduled to ship in 12 months. So while we have these contracts and we have received contract release dates, only about 11 million of that is in our backlog.

So when we say, we expect sequential backlog increases it's because, one more quarter gets put into -- of higher revenues, gets put into backlog.

Sure. That helps a lot. Thank you, very much.

Thank you. Our next question is coming up from Ramesh Misra with CE Unterberg.

Good morning folks. Some clarifications first. Tom, what was the amount you spent on acquisitions during the quarter?

Acquisitions, there were two acquisitions that we actually made during the quarter.

Right.

First was Phasebridge that was for about $700,000 of stock. The second was, Force and that's the video transport market that Reuben described. The total there was 2.1 million of which $0.5 million was cash.

Okay. All right. And your 13 week backlog you said was 44 million?

44 million based on the shipment release date on some of those PhotoVoltaic contracts. Yes.

Whatever the current portion on it --

Right. Okay. Now on your operating expenses, was there an impact due to these acquisitions during the quarter?

Very minimal, as I mentioned in my opening comments, both revenue and expenses were pretty de minimus because they both took place fairly late in the quarter.

Okay. And do you expect OpEx to be impacted more meaningfully this quarter?

We do, but on the other hand, because we had about $400,000 of SOX 404 cost, and year one is now over, those costs will decrease significantly. The idle facility charges should also go down. And then, those decreases will be greater than the impact of the acquisitions. So, SG&A should come down a little bit next quarter.

Got it. And your City of Industry facility, how long do you expect it to be still open and when does the transition get completed?

That should remain open through the June, July timeframe. There is one more option date that the customer has, but we feel that we will close that in the -- around the summertime. And then make the move to Albuquerque.

Okay. Reuben, on the 50 megawatts of estimated capacity that you have, what kind of expense would be required to increase that, to say double that and what kind of timeframe would be involved in doubling that?

Sure. You know what, the biggest capacity constraint would be, sort of, the back end process or largely that will be the post epitaxial process, which would be the cell processing line. You know, the front-end capacity is pretty good. Front-end capacity requirements, we can add capacity take -- we can do it about every quarter, and so call it every four months you can bring on another reactor. The back end line, we will expand as we get the visibility on this. And we certainly have this space here, and it is not a big capital expenditure at this point. That's sort of the lowest cost capacity expansion. So we can add capacity very quickly, is what I'm saying.

So just to, kind of, get a gauge on how big terrestrial could be, in six months, 12 months, can you provide any kind of guidance over there?

I think we're going to give you that guidance on the next call, when we have a better sense from the customers what their commitments are. But it will be significant from where we are today, obviously.

Okay. And on a related subject, are you seeing or -- I wanted to get your take on the legislative subsidies provided in the state of California. How does that impact you, when does it impact you? Kind of more of a qualitative commentary in that regard, and that will be it. Thanks, very much.

Certainly, it's a positive development. I think that the legislation in California is more geared towards a consumer or a residential subsidy. However -- and that the residential market is one in which this technology -- we don't anticipate being in that market. Where we think we will be is in the commercial and grid tied utilities and industrial markets.

As part of the bill, there is certainly contemplated and there is a utility subsidy for renewable energy. Right now, they're doing environmental impact stuff on building, a substantial solar farm in the Mojave Desert, which interestingly enough is also facing environmental opposition. But we think that in general, the renewable energy credit market for domestically produced energy, via solar energy, is a substantial market. I would say the estimates right now are that by '08, it's kind of a $500 million a year market, and then growing substantially beyond that.

Okay. Thanks, very much.

[inaudible-technical difficulty] with Cannacord Adams. Please go ahead.

Hey, Reuben. Hey, Tom. Can you hear me?

Yes [better].

Hi. Sorry about that. Congratulations on getting into the terrestrial markets.

Yes, thank you.

A couple of questions on that item specifically. The concentrator technology, are you going to market with multiple partners? I know that you had mentioned the Spanish partner, have you also qualified a Japanese partner?

There are multiple partners right now. When we talked about the three customers, one is Japanese, one is Spanish, one is Asia-Pacific. And actually each has a slightly different approach to the concentrator technology. Two of them are 500X concentrators, one of them is 1000X.

So it's a slightly different [apps] engineering approach, but right now those look to be the biggest revenue opportunities. Although I will tell you there must be a half a dozen other companies out there who approached us and have asked for cells. So we're -- right now, there's probably more commercial engagement going on in our end markets than we anticipated.

Wow, that's great.

And so, we really are going to have to kind of winnow it down to choose which horses we want to ride.

Sure. Well, it's a great position to be in. I guess, in talking to the customers, is there more interest on -- well one, where are you coming in? I guess as you have a range of concentrator technologies at 1000, 500. On a cost per watt, compared to a polysilicon solution, where are you coming in, in relation?

The numbers we have seen so far are that on an installed basis, that means it's not - we're selling - if it's just a solar cell sale, it's about $3 or $4 a watt. On a fully installed basis, that means with the power management system, with the staffing, the construction, the tower, the concentrator and everything, probably fully installed and operating it is about $7 a watt.

I think based on -- as we look at our Product Technology where it is today at 36%, we have a path we believe to 40% over the next 24 months. On that level of efficiency and as you hit scale and production, we think you probably have a very good shot at $1.50 a watt.

Wow, that's great. Is a lot of the demand when you're talking to your customers, is that because of the enticement by that road map or, is it more on the limited supply from a polysilicon supplier? Is it constraint issues that have - causing the sale or, is that really the path to the $1.50 that's enticing them?

It's kind of both. I think to be honest with you. I think the polysilicon constraints opened the door to this technology approach, quite frankly. And we're stepping through the door as quickly as we can. It's a -- the situation is one of, we look at everything in these markets is cost per watt.

So it is -- if we didn't have a path to that kind of cost per function and if the technology weren't scalable, which it is scalable, I think, you would have a hard economic. And you have to look at the economic equation here without the subsidies. The subsidies are just on top of that. So we think it's both the constraint on polysilicon supply created the opportunity, but clearly, we have to perform a cost per watt basis.

Great. Last question on solar, I guess, you may have mentioned this, but geographically speaking, is this your first win? Is this concentrated? And also I guess as a follow-on -- is there any concentration with the commercial applications that you're talking to from a geographic perspective, i.e. Germany, rest of Europe, US, Australia?

It is -- let's see on concentration, it's pretty global. I would say the only real, sort of, the laggard in the -- geographically is the US. This is Spain, Japan, Asia. So, I think that from a geographical standpoint, it -- although, I have to tell you there are some utility systems, like El Paso Electric, that have put out RFQs that we have or we will be responding to shortly. So, the US market is starting to develop, but it's not as far down the path as some of the international markets. And I'm sorry -- the first part of the question was --?

No, you answered the question.

Okay.

Thank you. And just, I guess, two more last questions, I'm looking at some of the other parts of the businesses here. One, are you in -- have you been offered or approached by anyone to monetize the GELcore assets at this point in time or can you give any color there?

That's a little bit too direct of a question to give you a yes or no.

Our policy is not to comment on any mergers or acquisitions or like that.

Yes. I think, I''d prefer not to answer that question.

Fair enough. And then, Tom, just looking at the model here, I guess, with the solar business bouncing back and over 20% from a margin perspective, just doing the math here that should assume that you're going to have margins north of 22%. Unless, I'm missing something in that electronic and material devices division.

Yes. Here I would say 20% to 22% is a probably a good ballpark.

All right. Great. I'll pass it on. Thanks a lot, and congratulations on that foray into the terrestrial market again.

Thanks.

And our next question is coming from John Gruber with Gruber & McBaine. Please go ahead.

Yes. Switching gears, my question is on the Force acquisition. How much of that revenue you were talking about, potential 25 million is from the Holy Grail of TV to the cell phone? What role do they play there, and is that the bulk of the -- of that 25 million?

Sure. Today , John, this is a developing market and it's still very early, you know, we're selling into the QUALCOMM IP media flow infrastructure play, and revenues on a trailing 12 months for Force were about $5 million. Going forward, we think that that's going to be the largest component of growth for this sector, I mean for this asset, excuse me. But today, it's still a developing market. When we talk about the 25 million to 30 million, I'd say that a majority of that number is on the media conversion -- is on the aggregation side.

The aggregation side for --

For mobile video.

For mobile video. Okay. Thank you.

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

Thanks. Hi, Ruben and Tom.

Hi.

Good morning.

Just a quick -- I know you said pretty much you're going to go into more detail on the PhotoVoltaics contracts on the terrestrial side after the next quarter, but I'm just wondering if you're still looking at primarily selling solar cells to these other concentrator companies or, at what point will you might be looking at getting into the entire system side of the business?

Michael, I think that initially our products revenues will reflect largely cell or module products, ultimately you should expect to see us get into the entire panel system. But, over the next couple of quarters and for this calendar year, there will be cells and module. You should expect us to be at a more highly integrated system level in '07.

Okay. Thanks. And you've done a really nice job across the board. Just one question on the margins for the fiber optics side. Do you expect any sort of challenges with the introduction of X2, in terms of margin impact from that product?

I'm sorry, you kind of broke-up on the back half of the question.

Any margin impact from the introduction of X2?

No. You know, I think on -- it's going to be a --an equivalent cost to the XENPAK LX4, meaning it's a --

The ratio should be the same.

The ratio should be the same is I guess, what I'm saying.

Okay.

So, Just one further comment, Michael. Fiber optic gross margins did increased by about 3 percentage points this quarter. That's despite a price decrease. So, we are cautiously optimistic on maintaining that and increasing it, especially, since the [fab net] transfer is almost complete.

Okay. In that same vein, you had mentioned that some of the cost reduction initiatives really wouldn't be in full swing until the March quarter. So would you anticipate then, that as those things come into play that you could see even greater gross margin expansion in the fiber optics business?

I am comfortable with that 20 to 22% going forward for next quarter. And I think, you will see improvements each quarter on a step basis.

Okay. Thank you, very much.

Thank you. Our next question is coming from [Jeff Corfman] with Symmetry Peak. Please go ahead.

Good morning. I was wondering with all the expected growth you guys have coming, if you're intending to bolster the balance sheet with maybe an equity raise over the next year?

Yes. You know what, we don't -- right now, all, as Tom pointed out in his sector, we fixed all the balance sheet from a current maturities standpoint. That's all now long dated. Our capital expenditures are not overwhelming, pretty steady. We expect as we've said to be EBIT positive in June with increasing levels of profitability throughout the year. I don't think there is a -- we have between 30 million and 40 million -- $35 million and $40 million in cash. I don't see where we have a need for it.

Yes. I just have one caveat to that, is if we see the solar market is expanding rapidly and we need to do some expansion there, there may be a need for some cash for the investment.

Okay. Great. Thank you, very much.

Thank you. Our next question is coming from [Manoj Mathur] with Alexander.

Good morning. A couple of questions on terrestrial photovoltaics. I was hoping that you could help us quantify what exactly the difference is on an installed-basis between the efficiency that you would be able to reach using gallium arsenide on germanium wafers verses polysilicon? And second, given the tightness in polysilicon supply, what is the advantage in cost in using the materials you are using verses your competitors, and what's the trend going to be like going forward?

Sure. And this will be just rudimentary in terms of the numbers, but generally [technical difficulty] our first generation is about a 36. I think polysilicon in the large part, while it is up to 20% at -- in some companies, most of the installed-base of polysilicon is in the teens, 12% to 14%.

And that's probably the bulk of the market. So what happens is you get sort of three times -- the ratio is sort of three times the electrical charge per square centimeter out of a gallium arsenide cell, versus a silicon cell. However, the gallium arsenide cell costs $150 a watt, whereas the silicon cell, call it $3 a watt.

So what happens is to get an equivalent cost per function or cost per watt, the gallium arsenide cells are put into what is called a concentrator system. And different companies have different concentrator technologies or systems and approaches. The most prevalent is a concentrator at 500x, which magnifies basically the sun's rays to 500 times their normal strength, up to 1000x. And so, that way you get -- the electrical charge becomes exponential under those systems. And so you get in a concentrator, you get the equivalent cost per watt of silicon. And as you improve the technology, you should see -- you lower the cost per watt.

And I will give you an example. When we first got into the satellite business in 1998 for a satellite photovoltaic, probably 80% of the market was silicon. Most of the satellites put up in the 70s, 80s, and 90s were silicon solar cells. On a cost per watt basis, we were able to get gallium arsenide competitive enough, where the advantages for using gallium arsenide displaced silicon in terms of performance, reliability, weight to launch. Some of those performance criteria aren't important in terrestrial applications. And when you look at the size of a concentrator system, it's substantial.

These are very large panels. They are not suitable in residential applications. They're not going to fit on rooftops. They require tracking systems, which means you have to -- because of the concentrator, you have to maintain a constant angle with the sun. And because of that, the markets that you're going after are largely grid-tied utilities, meaning electric companies or whatever other power generation companies. And that market gives them a benefit. One. they get renewable energy credits, which are a requirement of most states, for having this and it's at a reasonably comparable cost per kilowatt hour. So you have that.

The residential market, which is probably half the entire photovoltaic market, projected anyway, is not -- again, these systems are too bulky to really access that market, but in industrial applications like utilities or on the tops of, I don't know, a Wal-Mart where they want to generate and have renewable energy to peak shave or to reduce their cost per kilowatt hour. Those are the markets we're going after. And those are markets which require just more electrical generation per square centimeter than what silicon would provide.

Okay. One last question on the LX4 products. Outside of Cisco, how large do you view the addressable market, and have you seen anyone out there come up with a comparable product?

Cisco is 80% of the market. So the rest of the world, which I think we are pretty much engaged with right now, is another 20%. Now, the new X2 form factor opens up a whole another group of network infrastructure opportunities for us. So what LX4 XENPAK doesn't address, X2 will. So, you're growing the number of platforms that you are on. But Cisco is the dominant player in the local area network space. And the rest of the world is important to us, the other players in this market, but it's a much smaller segment.

And from a competitor standpoint, there will be a competitor in there. There is already a competitor in X2, not one that's currently one -- there may be one qualified in XENPAK, but it's not yet delivering. And again, we have pretty good visibility on the production build. So we know beyond the end of this quarter and at least projections through June, the numbers look pretty healthy.

Okay. Thanks, very much.

Thank you. There appear to be no further questions at this time. I'd like to turn the floor over to Mr. Richards for any further closing remarks.

Thank you. I think what we are particularly, optimistic about I think, with regard to the December quarter is one, the expansion of the gross margins in fiber optics, the acquisitions which were done cost effectively for - that enter into markets which play to our strengths and we feel like we can drive those products to revenue levels that were beyond what was projected.

The backlog in PhotoVoltaics, the access to the terrestrial market, which is starting to develop and heat up for us. The company at the moment is hitting on all cylinders. We expect after this initial cost reimbursable phase on the $40 million contract, PhotoVoltaic revenues return to normal levels. And we're optimistic about revenue growth. We feel the gross margins are going to fall in line with expectations to reach our profitability goals for 2006.

And with that, we'll close the call. Thank you, very much.

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