EMCORE Corp (EMKR) 2006 Q2 法說會逐字稿

Good morning ladies and gentlemen, my name is [Nia] and I’ll be your conference facilitator today. At this time I would like to welcome everyone to the EMCORE second quarter fiscal 2006 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] As a reminder, this call is being recorded. Listeners can also log into www.emcore.com to access the web cast. 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 2006 second quarter and six month results. By now you should have received a copy of the press release. If you have not received the release, please call our office at 646-290-6400. 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 Vic, and good morning to everybody. Today we are reviewing our second fiscal quarter of 2006, and this is the three month period ending March 31 of ’06.

Revenues for the quarter came in at $41.2 million, and this represents a 35% year-over-year increase, as well as a 3% sequential increase. Revenues increased in all three of our operating segments year-over-year, sequentially Fiber Optics and Electronic Materials and Devices did increase, while Photovoltaic experienced a marginal decrease of 4%. Let me review revenues by the product lines.

Revenues for Electronic Materials were just over $5 million, representing a 41% year-over-year increase and a 21% sequential increase. Driving the revenue growth is the 1 billion unit demand in projected cell phone demand. For the next quarter we do expect revenues to increase approximately 10% to 12% in this division.

Photovoltaic revenues were $10.3 million, representing a 31% year-over-year increase, and a decrease of 4% sequentially. Despite the sequential decrease, we are still very confident of the division growing by approximately 35% this year and next, not including terrestrial products that Reuben will discuss in his presentation. Bookings remained strong in the March quarter, boosting our confidence level on revenue projections. Next quarter we expect revenues to increase in this division by about 5% to 10%. One more comment about Photovoltaic, we do expect to complete the shutdown of our City of Industry facility in California, with relocation to our Albuquerque facility over the summer.

Fiber Optic revenues were $25.9 million, representing an increase of 36% year-over-year, and 3% quarter-over-quarter. We expect revenues in this division to increase next quarter by approximately 5%.

Combined with strong bookings our revenue expectations for Q3 of fiscal 2006 are $42 million to $44 million. Bookings were strong particularly in our satellite Photovoltaics group. Backlog increased to about $49 million, which is an increase of $5 million sequentially, and $9 million since the beginning of the fiscal year.

Turning to gross margins, gross margins for the quarter ended March 31 were 21%, representing a 4 percentage point increase sequentially. Gross margins increased by $1.9 million to $8.7 million. All three divisions experienced gross margin increase. Electronic Materials and Devices’ gross margins increased by 6.3 percentage points to 16.2% driven by volumes. Photovoltaics increased 7.1 percentage points to 14.2, and Fiber Optics increased 2.2 points to 24.8%.

Operating expenses for the quarter were $16 million, an increase of $4.3 million sequentially, and the increase was essentially attributable to two areas. The first was a $2.7 million one time charge relating to loan forgiveness, the second involved approximately $1.3 million in operating expenses related to the three acquisitions completed during the past quarter.

Let me spend a moment on the acquisitions. To refresh everyone’s memory, we purchased Phasebridge, Force and K2 Optronics all within 90 days, and they are all part of our ORTEL division, adding to the complexities normally experienced regarding the integration of one acquisition. The acquisitions provided $1.8 million in revenues for the quarter at a 24% gross margin. With the operating expenses of $1.3 million, the loss from the acquisitions totaled $1.1 million or about $0.02 per share. As we complete the integration of the three businesses, we expect revenues to increase, along with positive contributions to earnings per share.

The operating loss was $7.3 million, and included the $2.7 million of loan forgiveness and $933,000 of stock compensation expense. Net of these items, the operating loss was $3.7 million or $0.07 per share, and this compares to a loss of $0.08 per share in both the previous quarter and one year ago results.

Below the line interest expense was $1.1 million related to our convertible subordinated debt. We do have approximately $1.3 million maturing this month, that will leave us with about $95 million of convertible debt, all due in May 2011, and all convertible at $8.06 per share. Our share of Velox’s net loss was $150,000 and effective this quarter we expect to change to the cost method of accounting for our investment in Velox. Therefore going forward we will not record any of Velox’s financial statements in our results.

GELcore, our joint venture with GE Lighting, posted a loss of just under $400,000, and this compares to a profit of about $.5 million in the prior quarter. This $900,000 swing contributed about $0.02 to our EPS loss. GELcore revenues were approximately $17 million, and gross margins were in line with historicals, however operating expenses increased due to new product introductions and staffing and marketing, and in the sales area. We do expect GELcore to return to profitability in the June quarter, however, it will be below the level of last quarter’s $.05 million.

Also included below the line was the second and final earn out payment from the sale of our Equipment Division to Veeco Instruments in November of 2003. We received a payment of $2 million during the quarter, bringing the total earn out payment to $15.3 million or about 76% of the potential full earn out of $20 million.

The net loss was $6.9 million after excluding stock based compensation of over $900,000 and the loan forgiveness of $2.7 million, and the earn out received on the sale of the Equipment Division of $2 million, the loss was $5.3 million or $0.11 per share. Excluding GELcore’s loss of 397 reduces the loss to $0.10 per share, the same as the prior quarter and the prior year after deducting similar expenses.

Let me turn to the balance sheet for a moment. Cash at the end of March was $33.9 million, a marginal decrease of $300,000 from December. Adjusted EBITDA, meaning the inclusion of non-cash and one time items, totaled about $.5 million, representing an increase over the prior quarter of about $800,000, and the prior year of $300,000.

Let me summarize the quarter before turning the call over to Reuben. From a revenue standpoint we were within our guidance, but quite frankly we’re disappointed we didn’t exceed guidance. We had the bookings and the purchase orders, but revenues were affected by lower than anticipated fiber to the home product shipments. From a gross margin standpoint we experienced increases in all three of our divisions, and overall margins increased 4 percentage points to 21%, so we are on track to achieve our 26% target by year end.

We completed three acquisitions and feel very strongly about the potential of the three businesses we acquired. We did experience some integration issues leading to higher operating costs than anticipated, but these should be reduced as we complete the integrations. Revenues will also increase from these businesses, and we now have the most complete vertically integrated broadband product line in the industry.

From a backlog standpoint bookings were strong, particularly in our Photovoltaics group. We also have bids out on substantial terrestrial photovoltaic system level opportunities, and have made initial shipments of solar cells to several companies. Backlog stands at about $49 million, again up $9 million since September, and $5 million sequentially.

GELcore results were a disappointment, but we believe that with the increased sales and marketing personnel, and new product introductions, they can achieve their projected growth this year to approximately $100 million, and be back to last quarter’s profitability run rate by the September quarter. With that, let me turn the call over to Reuben for an operational and product review.

Thank you Tom, and good morning everybody. I’m going to begin with a brief overview of the financial operationals, strategic aspects of the March quarter, then discuss some of the market trends that are continuing to drive revenue growth and improve profitability for both the current quarter and the rest of the year, allowing EMCORE to achieve its financial goals for 2006 of EPS positive in September.

For the March quarter revenues increased 35% year-over-year, 3.2% from the prior quarter. For the first half of ’06 EMCORE revenues increased 41% over the prior year with all three reporting segments, RF, Fiber and Photovoltaics showing significant revenue and profitability. Operationally, as Tom pointed out, we did what we said we were going to do. Revenues were within guidance, gross margins were on target. But for the GELcore loss we’d have hit our EPS targets. We have raised our estimates for the June quarter to $42 million to $44 million, and are raising our revenue expectations above current street estimates to $46 million to $48 million for September for reasons which I will get into in the balance of the call.

Backlog for the quarter was driven by a greater than two to one book to bill at Photovoltaics. Gross margins improved to 21% from 17% in the prior quarter, reflecting improved profitability at all three operating segments, and we expect continued improvement in gross margins across all product lines for both the June and September quarters. In terms of product line discussions, Fiber Optic revenues increased 36% year-over-year, and between 3% and 4% from the prior quarter. Gross margins, more significantly, improved to 25% from 23% the prior quarter. Fiber Optics represented 64% of the company’s total revenue. We continue to see gross margin improvement through reduction of material pricing in cost of goods through improving yields and processes.

In the digital product line for 10 gigabit Ethernet applications, these products and market demand remain extremely strong. During the March quarter we shipped the highest LX4 unit volume since the product was launched, increased revenues in LX4 were driven by increased volumes as Cisco as well as increased volumes to 3Com, [Walway], Extreme and Foundry, as the first full quarter of shipments to non-Cisco customers. We expect sequential unit volume increases over both the June and September quarters, with a substantial increase in September, due to the launch of the X2 10 gigabit Ethernet product line at Cisco. Current estimates on X2 volumes beginning in the September quarter will run at 50% of the current LX4 volumes, ramping through the balance of calendar year ’06 and ’07. What that translates into is that we expect a 25% increase in 10 gigabit revenues in September over the prior quarter, over the current quarter that we’re in now, due to the X2 launch.

For components and subassemblies for storage area networks, revenues were above plan for March, and we continue to expect revenue growth this quarter, driven by demand for both 4 gig and 10 gig. In terms of new market opportunities, such as the optical mouse, we are finishing qualification with the leading OEMs in this market, and expect production to begin in fiscal Q4, and in September.

On the analog, or video side of the business, that’s cable television and FTTX fiber to home, revenues were flat for the quarter with cable television decreasing due to product mix, fewer high power laser transmitters were ordered during the quarter. That trend seems to be reversing this quarter. Fiber to the home increased sequentially, but in fiber to the home were unit demand continues to increase quarter-over-quarter by 30%, we continue to see increasing purchase orders in this sector. We experienced production bottlenecks for the quarter, limiting capacity and resulting in EMCORE shipping about 50% of the purchase orders in hand. These bottlenecks have since been resolved, I have been, myself, to the contract manufacturer three times in the last four months, as we expect to get current on these purchase orders by the end of the June quarter. Production delays in FTTX cost EMCORE about $1 million in revenues during the quarter.

As Tom pointed out, in the past four months EMCORE has acquired three small companies whose product lines allow EMCORE to offer the most complete video transmission products in the industry, encompassing cable television, fiber to the home, mobile video, military markets, and these technologies enable video transport over four different networks, wireless, IP, a hybrid fiber co-ax, SONET, and so on.

While the company incurred integration expenses of $1.5 million during the quarter, related to the consolidation of operations and integration of production of these products, we expect these costs to decline sequentially and we remain optimistic that these technologies will drive increasing revenue growth and profitability from this quarter on. Our current revenue forecast for the acquisitions is $10 million to $11 million over the next 12 months.

In Photovoltaics, as Tom pointed out, revenues for the quarter were 10.2%, up 31% year-over-year, but down slightly from the prior quarter. Gross margins improved to 14%, from 7% the prior quarter, doubling the gross margins, reflecting the transition from the initial phase of the $40 million Black contract to the production phase. Margins, while doubling quarter-over-quarter, were negative impacted by a substrate contamination issue, which has been resolved. We expect significant margin improvement again this quarter. Our margin expectations for Photovoltaics are to be in the mid 20%s this quarter, up from 14%.

New bookings for the quarter were over $20 million, reflecting both new satellite system orders as well as the full release to production of the $40 million contract through 2007.

In terrestrial Photovoltaics during the quarter EMCORE received commercial orders for terrestrial Photovoltaics and shipped to five different solar cell concentrator companies, including the largest two companies in this sector. We are finalizing commercial terms with these two companies as well as others and it appears that revenues for terrestrial applications that are solar cell level will begin to ramp at the end of this quarter.

Perhaps more significantly, at the module and system level, EMCORE has bids out on approximately 40 megawatts worth of installations. Included in that total are four projects ranging in scale from one megawatt to 19 megawatts and these contracts, these installations, are fully funded. A couple are government related; a couple are utility related and these contracts are expected to be awarded in 2006, probably starting next quarter, for installation in 2007. We have smaller projects that will be deployed in late 2006, but the majority of these revenues will be 2007.

These projects are targeted deploying solar cell concentrator technologies, both reflective and refractive platforms. And it establishes gallium arsenide as a viable, renewable energy platform at particularly attractive economics compared to rising silicon costs. All of the projects are located in the southwestern part of the United States. Globally, the market outside of the U.S. remains very strong, specifically China and India. These represent substantially larger markets and we are negotiating strategic alliances in both of those countries.

In RF, revenues, year-over-year, increased 42% and 22% sequentially, while margins improved from 10% to 16%. We are expecting further revenue growth and margin improvement this quarter driven by significant market acceleration around the combinational structure to our [bifats], as they’re known, as well as increased demand for HBT.

During the quarter, we had more demand than capacity for the product lines at free scale and [anadigics] and in January, EMCORE increased its reactor capacity to meet this demand and expects the new reactor to contribute in revenues this quarter. Bookings for the June quarter were in excess of $6 million. We saw material cost reductions through improved process engineering of about $250,000 for the quarter, which ought to improve sequentially for June. We expect EMD to be EBIT positive this quarter.

GELcore, as Tom pointed out, incurred a loss during the quarter due to increased operating expenses as they added staff in product marketing and sales to support new product introductions during the year. We continue to expect revenues for 2006 to exceed $100 million and GELcore should return to profitability this quarter.

In closing, the outlook for continued and sustainable growth in revenues is very strong. Consequently, we’ve raised revenue estimates to $42 million to $44 million for the June quarter, and expect substantial revenue increase in September, of $46 million to $48 million. Revenues at all three operating segments are expected to increase. We expect continued gross margin improvements, driven by expanding revenues as well as material cost reductions. We are very excited about the market acceptance and demand for the Company’s terrestrial Photovoltaic products and systems and feel that that the TPV market will accelerate the Company’s growth and profitability from 2007 and beyond. And with that, I will turn it over to questions.

[OPERATOR INSTRUCTIONS]

Your first question is coming from John Lau, of Jeffries.

Yes, Hi Reuben, Tom. I have two questions. The first is I want to feel more comfortable with regards to the manufacturing issues that have impacted Fiber-to-the-Home products. I was wondering if you can give us a little bit more clarity on the current status and how you’re going to be catching up with regards to those demands for this quarter and, I have a follow up.

Sure. Our capacity limitations at our contract manufacture were driven sort of twofold. The first is competition for resources. They are CM in Asia has a major customer in the Japanese Fiber-to-the-Home market and we were competing for resources with that customer and we think we’ve prevailed in terms of significant increases in the resource allocation. That appears to have untracked a lot of the bottleneck issues from a production capacity standpoint.

And then the second issue was just probably a second order issue, which was a yield at the optical sub-assembly test. Again, that was a bottleneck issue and we ordered more equipment. That has since been installed last quarter to free up unit volumes there.

As I said on the call, I took three trips to Asia over the last four months, all of which were targeted at addressing the capacity limitations we had at the CM and those, we feel very confident have been resolved.

Great and the follow up question is that you were telling us a little more about the 40 megawatts of bids that you have out. I was wondering if you could give us more color as to the programs and how comfortable you feel with the funding for the programs themselves. And then, more importantly, your comfort level in participation in that, given that you are in gallium arsenide, and some commentary with regards to what’s happening in the silicon area as it affects your bidding process for those products. Thank you.

Sure. As I think I said on the call, all of these projects are located in the southwest. Part of the power generation side of the market requires that - on the commercial side - that utilities consume – that 5% of the energy generated is a renewable source. That percentage increases to 10% over the next five years. So, clearly renewable energy is a priority for utility production in that region.

So, two of the projects, one eight megawatts and the other about 13 megawatts, are both utility related and are completely funded. The requirement’s on the utilities and the contract will be awarded, most probably next quarter, early next quarter. But the requirement, from a regulatory standpoint, is that this renewable energy capability that we’re talking about, be installed in 2007. They have to have the energy come out of the installation and as part of their regulatory issues it has to be up and operating in ’07.

On the other two, those are both, I’ll call them government related, projects. And they are both fully funded through their respective organizations. Those run - actually, there are several but they run – you know there’s one that’s 18 megawatts. There’s one that’s as small as one megawatt. But there are several of them. They are going into military installations, I guess, is the best way to put it, in the southwest.

So, there’s a very high degree of confidence about the funding availability and the requirements and the incentives for these contracts to be left and installed on a timely basis.

And Reuben, I just want to follow up and press you a little more. With regards to the current poly-silicon shortages and things like that, how you believe the way your competitive bidding process and your positioning with regards to winning these contracts.

You know, I think first of all, these are all sort of significant power requirements. So I think their belief is that the gallium arsenide technology base is more scaleable in that regard, in concentrator technologies. I think, in addition, the silicon pricing has made it a little more expensive. These are projects which are generally priced at the $3.00 per watt level, poly-crystal and silicon prices. I don’t follow it that much, but they moved from the $40.00 to $50.00 range to the $120.00 range, which is a significant increase in the cost per watt.

So this is won because it generates substantially more electricity in this particular application and because other alternatives are getting more pricey. These are the approaches that, in all of these cases, have targeted concentrator solar cells.

Great, that sounds good. Thank you very much.

Thank you. Your next question is coming from John Harmon, of Needham and Company.

Hi, good morning. I have a couple of questions. Can you hear me?

Yes.

OK, great. It sounds like you didn’t reiterate your target of being EBIT positive in the June quarter. Is that correct? But you say you’re still on track for EPS positive in September?

Yes, let me address that, John. You know if you run down – let’s run down the P&L and go through category by category. From a revenue standpoint this should not be a problem. As Reuben mentioned, we’re in the $46 million to $48 million range. Gross margins, we’re very encouraged by the performance this quarter and we’re on track to be at 26% by year-end. So, when you do the math, you know, your gross margins at that revenue level will be over $12 million.

The Op Ex this quarter was $16 million, but it did include several unusual items. You know, the loan forgiveness is a one-time deal. Stock option expensing is pro forma, so we reduced that. And the acquisition operating expense was about $1.3 million and that should be cut substantially by September. So with those - projected Op Ex down to about $11.7 million - you’ll have operating income.

Below the line, your interest will be about $1 million and GELcore, you know, we believe they’ll be on track for that plus or minus $100 million in revenues. So they should contribute more than the profit they contributed last quarter, which was about $500,000, making us, you know, slightly positive on net income.

OK, thanks. GELcore, what is it that made them unprofitable? And, do you think they can perhaps sustain profitability going forward?

We do. I think, if you look at their revenues and their gross margins, they were in line historically with what they have been. So, there was no unusual activity there. They really beefed up sales and marketing expenses, both from a personnel standpoint and a new product introduction just spending more on expenses in anticipation of increased revenues. They probably held out a little bit too long, but as we mentioned, they do expect to go from $72 million in revenues last year to the plus or minus $100 million this year, and at those revenue levels they can sustain profitability.

OK, thank you. On fiber to the home, if you do have a capacity constraint that limits your ability to ship, does that mean your competitor grabs that kind of market share, and do you get it back in the subsequent quarter when you’re able to ship? How does that play out?

We have sort of the balance of the purchase orders that we did not ship for the March quarter which will go into this quarter on top of this production rate. So it’s going to be probably all we can do to get a quarter and a half worth of production out. So you’re seeing a big step up in unit volumes and in revenue for this quarter. I would say in September you will see us get a lot more aggressive with regard to market share, John, and we feel that we’ve got our cost structure in line to drive more market share and unit volumes. So it’s not likely to happen in the June quarter, but I think we will be very aggressive beyond that.

Thank you, and finally, could you give us a ballpark estimate, maybe dollars per megawatt or the best of all case scenario, if you won every single contract, what the revenue opportunity could be for terrestrial [inaudible]?

There are two revenue streams here, one is the module and system level, which is the 40 megawatt applications, the other is we have – there are two major customers for solar cells, there are many more than that in total that we shipped to in the past quarter. My guess is that TPV revenues, when you look at timing issues and the fact that we’re on a September year end, sort of the high end on revenues next year would be sort of $60 million, I think the low end is probably $30 million.

That would be sales and systems added together?

Yes.

And then when you move out of City of Industry California that’s got to give you a bit of a margin boost, right?

Yes, that is correct.

The cost of moving is about $3 million, the annual savings is $3 million, so the payback is about a year and then we will certainly get margin improvements.

So we’re expecting a $3 million a year cost savings post closing.

OK great, thank you very much.

Thank you. Your next question is coming from Jed Doshima of [Kennicore Adams].

Hi, thanks. A lot of questions have been answered already, but I was wondering if we could maybe dig into the solar business a little bit deeper. Reuben, as you look at the 40 megawatts that you’re currently bidding on, could you give us an idea of the landscape on the commercial as well as the military as far as how much is out there and I think that you have capacity of around 50 megawatts currently; are there any plans to increase your capacity? Then I have a follow up.

Jed, when you look at just the projects we’re currently engaged in, particularly in the southwest, in one form or another and again that encompasses sort of 40 megawatt and our capacity in this space is 50. We also think that the markets of China and particular India, where we’re fairly far progressed in developing an industrial relationship with a company there who is really – this is their core competency, it’s one of the major industrial companies there, that we, in fact, probably will add capacity some time later next year. Because we think China alone is a market equal to what we’re currently looking at in the U.S. Excuse me, India is a market alone that would equal the U.S. near-term and be much larger longer term, and China as well probably equivalent. So I think that the expectation is that sometime in ’07 we will add additional capacity.

If you just did – if you looked at it and said, “OK $3 a watt on 40 megawatts, that’s $120 million a year in business”. Given the fact that some of this will be pulled in, I think we’ve got at least 20 megawatts of the 40 that we bid on is likely to happen earlier rather than later, and the other 20 is probably going to be on time, maybe slightly delayed. So you’re looking at – which is why I sort of cancelled the revenue expectations of 30 to 60 for terrestrial. Plus the satellite side of the business has been booking new orders hand over fist. March was a very strong booking period, over $20 million in new orders, and that’s on top of the orders that we’ve been getting over the last six months. So we’re seeing a big satellite increase, and then on top of terrestrial photovoltaic. So there’s probably a requirement at photovoltaics to increase capacity for the entire business.

And on the terrestrial side, the chips are very small because you’re using the concentrating technology, so to basically double your capacity what would that require from a Cap Ex perspective?

Each one of these concentrator companies has a slightly different footprint in terms of configuration of the cell, and generically we’ll give you some data on it.

Generically when we order additional MOCVD reactors, Jed, there’s probably a six month delivery cycle, and each reactor is capable of providing about 20 megawatts per reactor.

Great, that’s very helpful. Reuben, on the 40 megawatts in particular that you currently have the bids, since two of them are commercial and two are military, is there any difference between the margin structure in both of those? In other words, the Black contract I think, in the satellite, had some up front cost associated with it, is the military side of those two contracts similar to that, or is it similar to the commercial and should we expect sort of same margins across all of that 40 megawatt?

It is strictly commercial and you should expect normal product gross margins.

All right, great. That’s all for me right now.

Thank you. Your next question is coming from Ramesh Misra of CE Unterberg.

Good morning guys. On the solar terrestrial side, are there any other [inaudible] companies bidding for that?

On the terrestrial side, on the nearest term one I think we’re sort of hard wired on that one. Some of the ones that – I would say on two of them there may be competing bids, but they’d be getting cells from us, so even if we lost them we will have some revenue content across the board I would guess.

OK and then of course the regular silicon guys are trying to get that as well.

Actually I do not think that the regular silicon guys are in this.

I see, so this is something that you could be getting – I guess within a few months you’ll be getting really, really great visibility on, right?

Yes, as I said we’re very excited about this.

OK. Switching gears a little bit onto the 10 gig side, Reuben I think you said you’re looking for about a 25% bump up in revenues on the LX4 side on account of X2 alone, right?

Yes.

Now very roughly that looks like $4 million to $5 million or so jump, so I’m just wondering if your September guidance of $46 million to $48 million is that assuming some of the other divisions may potentially come down a little bit.

I’m sorry; you broke up on the last part.

You’re looking at about a $5 million jump or so on 10 gig in September, so with your current guidance of 46 to 48 in September does that suggest that some of the other divisions may be soft or may be down a little bit?

Ramesh I think what Reuben referred to is the X2 adding to revenues, and that’s not anticipated to start until mid fourth quarter.

But it will still – so we’re getting half a quarter of production and revenues are still going to increase 25% as a result of that.

OK so the run rate goes up 25% but on the full quarter basis it’s not 25%. The X2 is that going to be manufactured at Fabernet or is that going to be in Illinois?

Asia.

OK, in terms of the gross margin jump that you’ve seen on the fiber side, are you anticipating more cost efficiencies to be obtained on account of the Fabernet transition or is that pretty much coming toward a cap on that?

No, I think we see continued cost efficiencies there. You should expect quarter-over-quarter that our margins ought to continue to improve.

Ramesh further to add to that, I think you will see better improvement in margins from EMD and EPV. That being said, Fiber Optics is already the highest of the groups.

OK. On the acquisitions, I’m sorry I think I missed some of the numbers that you gave out Tom. The revenue contribution from those acquisitions in March was how much, and how much was the cost, and where will that go next quarter?

Revenues for the three acquisitions in the March quarter were $1.8 million, the gross margins were 24%, operating expenses were $1.3 million, and that produced a loss of about $1.1 million.

OK.

And that should be reduced this quarter. Revenues will go up, gross margins should go up somewhat, and operating expenses will come down slightly. So we should be reducing that loss significantly.

OK and then that ramp to that 10 to 11 annual run rate, is that jump going to happen pretty much in the June quarter, or is that going to be a little more gradual?

I think it’s going to be a little more gradual.

OK. All right guys, that covers most of my questions. Thanks very much.

Thank you. Your next question is coming from Marcello [Besio] of [Tridell] Capital.

Hi guys. Just again on the terrestrial solar opportunity, how do you kind of handicap what you’re bidding on, how are you looking at what your potential revenue out of the total bidding process is going to be? How are you looking at that pipeline and handicapping it? Then secondly, between the satellite business and the terrestrial business it sounds like you’re going to have, pretty shortly, $100 million in revenues in just the solar business and it’s a stand alone operation. Have you talked internally and maybe externally about spinning that business out, given that there are some other public companies that have similar revenue streams, and maybe not as big of an opportunity as you but a lot larger market cap than your total company. What are your thoughts on that? Thanks.

On the confidence level, we, near-term on probably, you know, 20 megawatts, we’re as confident as you can get. And, we’re still very confident on the balance.

But given timing issues, I think we’re being sort of fiscally responsible by saying $30 million to $60 million next year. Obviously, satellite’s going to be up substantially, year-over-year, in ’07. And yes, Phototaics will be on the order of $100 million in total revenues.

We, from a management standpoint, if spinning it out is in the interest of all shareholders when you take in all of the facts, if fiber continues to scale, fiber optics continues to scale the way it is and it can successfully stand on its own and PV can stand on its own, and you create more value for shareholders by doing that, then obviously that’s the answer. But, we’ll make that decision when we get there.

Thank you. Your next question is coming from Jack [Alfenderry], of [Kaia].

Hi guys. I want to get a better sense of what is, from a [strategic] point perspective, your objective with the terrestrial business? Do you want to be mainly module [inaudible] system, level type of provider, or focus mostly on providing the solar cells? And for each one of those opportunities, what is the total market opportunity, and, I guess, level of margins for those separate businesses, or separate approaches?

Sure. And you know, recognizing that they’re completely different business models, I think we’re where we feel our sweet spot is, at the module level. At the systems level, it’s likely we will partner on a project-by-project basis with some of the concentrator guys to do installation and electrical management and all of those issues.

So I think the – just at a solar cell level, you know, that’s a different model. That’s more fab oriented and fab economics are dictated by volumes through the fab.

So, clearly there will be some volume of just solar cells and there are some customers who are only interested in buying solar cells from us. But we feel that, in order to drive the market, in order to drive the technology, in order to make this a long-term sustainable business model, it’s the module level that we intend to really capitalize on.

Now, in terms of, I guess, the market opportunity for a modular full system [inaudible], what is the size that you foresee for the next few years?

You know, I think, at a module level, we are looking at a sort of $500 million a year market by 2010.

And that’s worldwide, or just we’re talking about the U.S.?

Probably worldwide.

Jack, I will add that you could probably read five surveys and they vary greatly on how big the markets are.

The system levels, by the way, the system level revenues on $500 million at a module level are probably over $1 billion.

In terms of, I guess, the technology that you guys have entirely in what you, I guess, need for the module level, are there any components that you may need to add to the company so that you’re vertically integrated? Or, at this point do you feel like you have all the components?

No, I think that sort of the key to all of this is the cell. Then, there are clearly - in the module there is some thermal management. There are some secondary optics and stuff like that, but those are all capabilities that we have in house. So, no, I don’t think we need to do anything more there.

OK, thanks a lot.

Thank you. Your next question is coming from Jeff Osborne, of CIBC World Markets.

Good morning guys. I just want to follow up on the capacity additions for solar. How much do one of those reactors cost, that could add 20 megawatts of capacity?

$1.5 million.

OK. And, did you comment what Cisco was as a percentage of revenue? I missed that if you did.

We did not. They were over 10%. That will be in our Q that we’ll file next week.

OK. Could you also just comment on two things. On the LX4, has Cisco introduced line cards that are X2 compatible to date? Or, are those expected to come out closer to September? And then, also just provide what your view is on LX4 vs. [LRM], looking forward. I think some RHK data had recently come out suggesting that the LX4 market would peak in ’07. I am just curious what your view on that is.

Let’s see; have they provided line cards? Yes, they’ve had first customer shipment.

About peaking in ’07, again, not according to what we’re seeing, from a demand standpoint. Clearly, LX4 is increasing nicely, quarter-over-quarter. X2 is starting to ramp up. There is a third form factor, after X2, which we expect to be a player in. But, the 10-Gigabit Ethernet market, and I would look at it more in terms of 10- Gig E growth is going to continue to be sort of a 50% compound annual growth rate.

Jeff, I think, from a cost standpoint, for probably the next 24 months, LX4 will be a better economic purchase than RM.

That doesn’t mean that there won’t be competing technologies for the 10-Gig E space, but I think, we’ve spent a lot of time getting ready for competition in this space. I think we have a strong position to defend our market share, maintain or grow the market share.

Great and what do you think the X2 margins are, just relative to moving those abroad, vs. the [Moex] facility on the LX4 side? Are they comparable, higher?

I think they’ll be comparable.

OK. And then lastly, can you just provide an update on the [GPON] market and how you’re positioned there, with the transition expected to happen towards the end of the year? Are there any trial shipments to date, etc.?

Oh yes, I mean, we have shipped, you know, short of hundreds, to each customer. That would be Motorola, Alcatel, Tel Labs. Gee, I’m sure there are other guys we’ve shipped to, but it’s pretty much everybody in the industry.

OK. Back on the line card question, is the last question I have. For the pre-production shipments that you were sending; are those for the 6500, or are those more for the wiring [closet], 3500, 4500 boxes from Cisco?

For X2, you’re asking?

Correct.

That’s for the 4K and 3K.

The 4K.

Yes, the X2 and LX4, the 6K, are non-competitive. They’re going into different line cards.

OK, that’s what I thought. I just wanted to double check. Great, thank you.

Thank you. [OPERATOR INSTRUCTIONS]

Your next question is coming from Michael Coady, of B. Riley.

Good morning, Reuben and Tom. I’ve gone through everything pretty thoroughly. Is there any difference on the margins of the terrestrial vs. the space-based solar cell, given the [amp] price and sensitivity of the threshold market?

No. Again, these are all, you know, our fab costs are largely fixed costs. The material components are the same and we are expecting sustained gross margins. There’s no difference in yield.

That’s 35%, year-over-year growth and Photovoltaics, excluding – I mean, I can kind of back into the numbers, given what we’ve talked about. But you said space-based is about a 35% grower in ’07?

Yes.

Yes.

OK. And then on the fiber-optics side, you mentioned you expect margin improvements but at a slower rate than the other divisions. Given everything you know, with the additional costs you could take out, and then, you know, volume increases, but also getting more aggressive on pricing to take market share and GPON coming out, where do you sort of see the fiber-optics margin peaking?

I think over the next 12 to 15 months, Michael, to get us through the end of ’07. You know we’re at 25% this quarter. The target is to get to about 32% as we exit ’07.

Could you talk about the other divisions in terms of the same kind of dynamics?

Photovoltaics should increase quarter-over-quarter and that should happen for the next several quarters, really driven predominantly by filling the fab capacity, once our move is complete, from City of Industry to Albuquerque. Everything will be under one roof and the volumes will go up dramatically, increasing our contribution margins quite dramatically.

Thank you. We have a follow up question, coming from Jed Doshima, of Kinnicore Adams.

Hi, thanks. I forgot to ask and I’ll be quick, but I’m just curious. Reuben, one of those two major customers, I assume one to be a cell, or someone who is looking to purchase cells from you. Do you expect to have a contract in place in this current quarter? And then also, was that in that $30 million to $60 million expectation for the terrestrial solar business? Thanks.

You know, we’re meeting with them next week. So, we’re hopeful that we’ll get it done this quarter, yes. And, is that in the guidelines for next year? I would say, just sort of being risk averse, there’s probably some line item there for that, yes.

Well, I guess maybe, and I understand your rationale for being somewhat cautious or conservative here, but, if you’re not really competing against many of the traditional silicon guys on some of those, you know, on a good portion of that 40 megawatt type bids that are out there and those are for sort of system level, what do you think that the cell sales could get to for you? Or, are you going to purposely limit what you would be selling in the cell area, due to capacity?

Well, first of all, we’re going to use the cells in whatever generates the highest ASPs for us. That’s probably in a module level, so that answers that part of the question.

The other thing is, you know, the volumes for the other guys, it could be - on the low end, it could be $1 million a month. On the high end, it could be $2 million a month. But the revenue opportunities and the way to drive the business, we think, is at a module level and we will certainly support our customers and commit whatever capacity we need to, to insure their success.

So, if that means being more aggressive on ramping up capacity then we’ll do that to grow the market.

Great. Thanks for the clarity in all the questions; thanks.

Thank you. We have another follow up question coming from John Lau of Jefferies.

Yes, hi Reuben. I want to follow along that thought because you did say something very interesting that has a longer-term market implication.

Gallium arsenide technology is being bid on these very, very large commercial applications, whereas the silicon is not as visibly being quoted there. Can you tell us, what are the dynamics, the technical dynamics that – maybe is it because higher powered density in the cells are reliable? What is it that’s actually - you’re porting over from your satellite cells down to these commercial cells that makes it a differentiating factor for these high-power applications? Thank you.

Well, it’s always cost per watt, John, that’s one. The second is what’s the total power output? And the third is, is it scaleable? And probably, in these applications, in commercial and industrial, you know – look, silicon is very capable and so on but because of the poly crystalline shortages right now, the install cost looks higher. The gallium arsenide generates sort of 3X the total power per square centimeter and it’s scalable from a product technology standpoint.

Maybe silicon is, but very clearly EMCORE has a path to scaling its technology from 36% today to 38% next year, to 40%. And then as you know, and we’ve announced, we have DARPA funding to get to 50% efficiencies. Clearly the government is subscribing that this is a product approach that is scalable to drive economics, and you’ll probably see us announce a couple of partnerships with regard to doing this. Ultimately our target to a little over $1.00, $1.50 a watt and we think we can get there through improved efficiencies on gallium arsenide cells and some development on the concentrator side.

So again to have a long term sustainable business model you’ve got to be able to hit the cost per function over time where it becomes, without subsidies, an economic proposal, and we think gallium arsenide can do that.

So in terms of the energy efficiency, you mentioned 36%, you still have a long runway toward the goals of even higher energy efficiency through the gallium arsenide materials that you do have then.

Absolutely.

OK, thank you.

Thank you, and as your final follow up question, it’s coming from Jack Alfenderry of Kaia.

Reuben I had a question about the GPON market, you mentioned that you intend to get more aggressive with this market around the September quarter, and I’m wondering to what extent is that related to the fact of the rollout or the acceptance of the GPON and your position in that market?

I think we feel the GPON is a more complex product, it’s right in our wheelhouse, if you look at all of our fiber optic products they’re highly engineered, all of the 10 gigabit Ethernet stuff and the PON transceivers, this is something that we feel that we have a path, a cost base and a path to get very aggressive on from a pricing standpoint. So I think you’ll see us get more aggressive on BPON but very aggressive on GPON.

And your cost advantage is that related to some of the acquisitions you made last year?

Yes, and the fact that we produce our own optics, which is a big component of cost of goods.

I see. Thanks a lot guys.

Thank you. Now I’d like to turn the floor back over to Reuben Richards for any closing remarks.

Thank you everybody for your time on the call. As I said, in closing, for the March quarter we think operationally we did what we said we would do. Clearly we were a little light on the revenue side, but we think we can make that up this quarter. I’m pretty sure we’ll make that up this quarter. Guidance of 42 to 44 and raising Street estimates for the September quarter to 46 to 48 I think is underlying a confidence level we have in our Fiber Optic and Photovoltaic businesses as well as the RF to continue to drive revenue growth and profitability for the company. We are well positioned and are very excited about the market acceptance and demand for the company’s terrestrial products, and I feel that that is a long term market for us and will drive growth from ’07 and beyond.

So again we look forward to continued revenue growth and increased profitability as we move quarter-over-quarter and tapping these new markets with our product technologies. Thank you very much.

Thank you. This concludes today’s EMCORE second quarter fiscal 2006 conference call. You may now disconnect.