EMCORE Corp (EMKR) 2006 Q3 法說會逐字稿

Good morning ladies and gentlemen. My name is Adam and welcome to today's conference from EMCORE Corporation, third quarter fiscal 2006 earning conference. [OPERATOR INSTRUCTIONS] Listeners can also log on to www.emcore.com to access the webcast. Thank you.

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

Thank you and good morning everyone. Yesterday after the close of markets EMCORE released its fiscal 2006 third quarter and nine month results. By now you should have receive a copy of the press release. If you have not received a release please call our office at (646)290-6400. With us today from EMCORE are Reuben F. Richards, Jr., President and Chief Executive Officer, and Tom Werthan, VP 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 third fiscal quarter which is the three months ending June 30th, 2006. And before I begin the financial review let me just take a few minutes to review the sale of our Electronic Materials and Device Division. On July 19th we did announce the sale of this division to IQE, plc, a U.K. company with headquarters and operations in Cardiff, Whales, and Bethlehem, Pennsylvania. IQE will continue to operate as the EMCORE Somerset, New Jersey locations, and all employees of EMD will become employees of IQE. The purchase price is 16 million and EMCORE will receive 13 million on closing scheduled for mid-August, and 750,000 per quarter for the next four quarters at 7.5% interest. The reason for the announcement and delayed closing was that IQE had to secure financing for the purchase.

Because they are a U.K. company they need shareholder approval for a financing and the use of proceeds must be specific. This general meeting of shareholders and the closing of the IQE fund raising is scheduled for mid-August and closing will take place simultaneously. IQE informs us that their book over to Describe and approval should be granted. However in the event that the deal falls through for any reason, IQE is liable to EMCORE for a $7,000 brake fee of which we have previously received $200,000. The sale of EMD will generate a profit for EMCORE of between 7 and $9 million, and Ruben will review the strategic rationale for selling EMD during his operational review.

Revenues for the quarter totaled $42 million, and this represents a 26% year-over-year increase an 2% sequential increase. Revenues increased in all three of our operating segments, both year-over-year and sequentially and let me review the revenues by product line. Revenues for the Electronic and Materials Division were 5.6 million, representing a 70% year-over-year increase an12% sequential increase. Again, driving revenue growth is the 1 billion units of projected cell phone demand, coupled with the [bi-fed] structure we introduced about one year ago. For the next quarter we expect revenues for this division to be approximately 2.5 to 3 million which represents ownership of this asset for approximately half of the fourth quarter.

Photovoltaic revenues were 10.4 million, representing an 18% year-over-year increase and an increase of 1% sequentially. Despite the small sequential increase we are still very confident of the division growing by approximately 30% this year and 25 to 35% next year. During the quarter we completed the shut down of our city of industry Photovoltaic's facility with the relocation to Albuquerque so our Photovoltaic's operation is now entirely located in New Mexico.

Fiber Optic revenues were 26 million, representing an increase of 23% year-over-year and about 1% quarter-over-quarter. We expect revenues in this division to increase next quarter by 7 to 10%. Our revenue expectations for Q4 of fiscal 2006 are 40 million from continuing operations, meaning it does not include EMD. So on an apples-to-apples basis would you add approximately 6 million per EMD, although we will only own the assets for half the quarter. Backlog increased to 53 million which is an increase of 4 million sequentially and 13 million since the beginning of the fiscal year.

Gross margin for the quarter ended June 30th were 21% or flat with last quarter, and included $300,000 of stock-based compensation expense. And let me review the gross margins by division. In EMD, the gross margins increased by 1.4% to 17.6% driven by higher revenues which increased overhead absorption. Photovoltaics increased 5.1 percentage points to 19.3%. Further gross margin increases are expected in the fourth quarter and finally Fiber Optics decreased 2.8 points to 22%.

The decrease is primarily attributable to a couple of product mix related factors. First on the FTTx GPON transceiver, revenues increased from slightly under 1 million to just under 2 million this quarter, that's the good news. But the gross margin for this product this quarter were [dimminus] affecting the divisions average. Second there was an increase in volume on our digital component products and these products have a lower margin than our modules.

Operating expenses for the quarter were 13.3 million, essentially flat with the previous quarter after the elimination in the previous quarter of a non-recurring charge of 2.7 million. However, the current quarter includes $600,000 of final restructuring charges related to the shut down of our city of industry California Photovoltaics plant. Without this charge operating expenses would have decreased 600 K. Operating expenses for the quarter included $700,000 related to stock compensation expense. Also included in operating expenses were approximately $900,000 of costs related to the three acquisitions we completed early this year, and this represents a decrease of about 300,000 from the previous quarter.

With the sale of EMD and the consolidation of our Photovoltaics to New Mexico, substantial savings will be realized o that our operating expenses should trend towards 11 million per quarter as full savings are realized. The operating loss of 4.7 million and included 1 million of stock compensation expense and the $600,000 of facility shut down costs. Net of these items the operating loss was 3.1 million or $0.06 per share, this compares to an operating loss of 3.6 million or $0.07 per share in the previous quarter after deducting similar expenses. So the operating loss improved by about $0.5 million sequentially.

Below the line net interest expense was 1.1 million, related to our convertible subordinated debt and GELcore, our joint venture with G.E. lighting posted a loss in the quarter. Our share of the loss was $129,000. We did expect GELcore to return to marginal profitability in the quarter but they came up a little bit short. The net loss was 5.9 million after excluding the stock-based compensation of 1 million and the 600,000 of facility shut down cost, the loss was 4.3 million or $0.08 per share, and this is an improvement of 1 million from the previous quarter after deducting similar expenses.

Let me turn to the balance sheet for a moment. Cash at the end of June was 25.3 million, a decrease of 8.6 million from March. Adjusted EBITDA was a positive $200,000 meaning the cash usage came from other than operations. The cash usage consisted of $2.5 million on our semi-annual interest payment, almost $2 million for capital equipment related to the Albuquerque build out of the Photovoltaic facility, 1.4 million related to the maturity of the Company's 2006 convertible bonds that were due in May, and the balance accounted for in unfavorable working capital components.

As for fiscal 2007, we expect revenues from continuing operations, meaning without EMD, to increase 20 to 30%. This growth of 20 to 30% does not include any terrestrial sale of revenues. We are confident of success of winning some of the [filler] projects we had bid on, so it is likely the bookings next year will be substantial. However the revenues we recognized on these bookings will be spread out over 12 to 36 months.

Let me summarize the quarter briefly before turning the call over to Reuben. Revenues increased but not to the level we expected. Acquisition revenues were 2.3 million, an increase of 0.5million from the previous quarter but about 0.5 million shy of expectations. Gross margins were flat and we expected a two percentage point increase to the 23% level. Photovoltaics gross margin increase nicely by 5--due to the afore mentioned product mix issues on FTTx and components. Acquisitions gross margins were at 27%, slightly below expectations but we expect improvements each quarter.

Operating expenses were flat, however we did incur the final charges related to the shut down of $600,000. The relocation shut down is complete so this charge will not be repeated this quarter. The net loss related to the three acquisitions decreased to $300,000 and should be very close to break even next quarter. In addition with the sale of EMD, our operating expenses should be reduced by approximately $3 million annually.

So net/net our bottom line continued to improved and we'll see further improvements this quarter, but our challenge remains in the gross margin area. As FTTx becomes a more significant portion of our revenues, gross margins may be impacted. However, LX4 X2 shipments begin this quarter and further improvement in Photovoltaics will help to offset this. As a result we believe our gross margins for Q4 will be in the 24 to 26% range. And with that let me turn the call over to Ruben for an operational and product review.

Thank you Tom. Good morning everybody. I'm going to begin with a brief overview of the financials for two different operational aspects of the June quarter, then discuss some of the key business developments, market trends that are continuing to drive growth and improve profitability for the current quarter and for the rest of the year.

First let me address the strategic initiatives in divesting the RF transistor business in New Jersey which allows the Company to consolidate operations, lower the Company's base costs or operating expenses, and improve profitability. Specifically, the strategic initiative behind the divestiture of the RF transistor business was that it was not a fit with the Company's direction of offering its customers more highly integrated value added product. The transistor business was viewed by customers as a commodity where we had very little ability to drive pricing or gross margins. While we had developed some technology leading devices such as the [inaudible] for use in Wi-Fi and WiMAX applications, we were still subject to commodity like pricing. Subsequently profitability was based on inventory turns and volume throughput.

Financially the sale of the transistor business allows the Company to reduce its base cost or operating expenses by 3 million annually and further reduce corporate expenses annually upon consolidation of the corporate functions into New Mexico or California. Gross margins are expected to improve quarterly because the RF transistor margins have historically been substantially below corporate average.

Finally as in any divestiture we felt that the revenues loss would be replaced within 12 months, and as Tom pointed out we are forecasting a 20 to 30% increase in revenues from continuing operations for 2007. Not including terrestrial Photovoltaics to approximately 180 to 190 million.

For the June quarter, revenues of 42 million increased 23% year-over-year and 2% quarter-over-quarter, while nine month revenues increased to 123 million which is a 36% year-over-year growth rate which is in line with our guidance at the beginning of the year. Gross margins for the June quarter were flat with the prior quarter on higher than projected cost of goods and Fiber-to-the-home for setup costs incurred, for setup costs to increase volume production and these costs will be non-recurring.

Revenues for the September quarter are expected to increase to 43 million including a 10% increase quarter-over-quarter in Fiber Optic revenues due to the launch of the X2 LX4. And gross margins are expected to improve as Tom point out to 24 to 26. Further we had a tremendous booking period in the June quarter and backlog in June increased from 49 to 53 million. In a product line discussion in Photovoltaics several key developments took place during the June quarter in Photovoltaics.

Financially revenues increased 18% year-over-year to 10.4 million and gross margins expanded from 14 to almost 20% from the prior quarter-- from 14 to 20%. Despite the improved performance we were short on contract revenues of 7 to $800,000 which is stricter a timing issue. And we expect to make that up in this quarter.

In terms of major business developments during the quarter, two-fold. In satellite EMCORE received notification that an existing contract, one that we have talked about over the past several calls, would be extended for two additional years and increased in dollar value by $36 million to a total contract value of 76 million. We expect normal product related gross margins on the remainder of this contract. In addition, during the quarter we booked two satellite programs valued at approximately 8.5 to $9 million. In terrestrial Photovoltaics we have received authorization to begin production on solar cells for European concentrator Photovoltaic system, and have received commercial orders for two other leading concentrate or PV companies in Asia and in Europe.

Further in the March quarter conference call we had indicated that we had bid on 40 megawatts worth of installations with 50% of those projects to be deployed in 2007. One of the programs EMCORE has bid on, our customer has been notified that they have been selected for approximately 6 to 8 megawatts of power. Terms and conditions and the final contract are being negotiated over the next couple of months.

Lastly EMCORE has entered into a joint development agreement with Sandia National labs to develop a second generation concentrator Photovoltaic system capable of $2/watt, compared to the current $5/watt systems. Completion of the design, development and prototype installation of this system is expected in 2007. In Fiber Optics, revenues were 26 million, an increase of 23% year-over-year, 1% quarter-over-quarter. Gross margins contracted to 22% from 25 on higher than planned cost of goods in the FTTx product line. We expect Fiber to rebound significantly this quarter to 28 to 29 million with a corresponding increase in gross margins as we have fixed the cost side of FTTx.

On FTTx GPON volume unit volume more than doubled in June from the March quarter and orders for the September quarter are up 20% over the previous quarter. In the June quarter we solved the capacity bottleneck and we were able to meet customer expectations on shipments. However, on the cost side ramp up costs were higher than planned. Normal gross margins for this product are in the 15 to 20% but because of the ramp up charges to catch up on our orders, the profitability for the quarter was less than anticipated. The cost overruns have been contained and we should see the normal gross margins on this product line going forward.

On GPON Verizon's selection of tell labs, Alcatel and Motorola positions EMCORE well as GPON rolls out in 2007. And more significantly we have brought on a second contract manufacturer in Asia to handle both BPON and GPON volumes at a lower cost than our existing CM. We continue to project gross margin improvement in this product line. For 10 gig, market demand and total unit volumes for 10 gig increased again in June over March. However, revenues were flat quarter-over-quarter as Cisco has brought on a second vendor. We expect a significant increase in 10 gig revenues of 20 to 25% quarter-over-quarter as commercial production of X2 begins this quarter. In general Cisco projects that X2 will be a bigger revenue stream than the current LX4 by mid-2007.

In the component and sub-assembly for the storage area and network market demand continues to be strong particularly at 10 gig and 4 gig, an optical [inaudible] shipments began in volume this quarter for two customers. On the video side the CATV markets remains solid as demands around EMCORE's 1 gigahertz products are showing significant traction as cable MSO's are upgrading their network to provide more bandwidth for video, voice and data.

The acquisition of Force K2 and Phasebridge showed significant improvement in revenues and in gross margins and are more in line with our original expectations and we expect sequential growth of both revenue and gross margins on the acquisition this quarter. GELcore improved in operational performance quarter-over-quarter with a marginal loss of -- In many-- in closing, in many respects the June quarter was a transition quarter.

The sale of EMD, and the city of industry closure, the ramp up of new product platforms in Fiber-to-the-home and X2 and 10 gig that will form the basis of revenue growth going forward, we felt that the quarter could have been better on both revenues, gross profits. We had an opportunity to hit the high end of guidance but due to poor timing on contract revenues and higher start up costs in FTTx to catch up with orders, we hit the low end of guidance.

We are however on track this quarter for a substantial increase in revenues and gross margins from continuing operations to achieve our stated EPS goals of profitability this quarter. Longer term, with satellite Photovoltaic building a substantial long term backlog and terrestrial Photovoltaic gaining a substantial level of commitments and revenues, the Company is in great shape to continue its 20 to 30% growth rates year-over-year from continuing operations through 2007 and beyond. With that I will turn it over to the Operator for Q&A.

[OPERATOR INSTRUCTIONS] Our first question comes from Ramesh Misra with C. E. Unterberg.

Good morning, Reuben and Tom. First of all on the terrestrial Photo side I know you have been working with Sharp for some time. I wanted to get an update in that regard, when do you anticipate beginning shipping or if shipments have already begun?

Ramesh, we shipped to Sharp in the June quarter. We will ship to Sharp again. It's not what we would call commercial revenues yet. They are still developing their system. I think they have line-of-sight on some projects, particularly in Europe. And I would guess commercial finalization of commercial terms and commercial production systems would be kind of calendar Q4 this year.

Okay, in terms of that 6 to 8 megawatts of terrestrial solar business that your customer has won, can you provide a sense what have kind of revenues that might amount to?

Sure. I think in general the concentrator Photovoltaic systems, the expectation is that it is on the order of $5 a watt.

$5 a watt, so---

That could be the entire project at-- in that size is probably $30 million.

Okay. All right. Then switching gears on to the Fiber-to-the-homesite can you talk about your competitive position on the emerging GPON standard?

To be honest with you, I think, let me back up for a second, the GPON specs from Verizon have been moving around a little bit recently. Verizon wants this mocha standard incorporated into GPON which is multimedia over cable. They want a couple of other levels of functionality. I would expect the specs for GPON -- and by the way the EMCORE part meets all of those, they're all [Boca] cable--capable and so on. I think the specs will be finalized, qualification will be finalized towards the end of this quarter.

And the roll-out of GPON is, I don't know, probably late in calendar Q4 but not that high in volumes. I think it's really in '07 and '08 kind of product line for Verizon but is a, it's a much more advanced architecture. It provides 2.4 gigabits down links versus the BPON which is 622 and 155 up links. So it's a significant step up in Verizon's architectural capability and bandwidth delivery, and I understand their enthusiasm about it but I would say it's sort of calendar Q4 or after that.

Okay.

Nothing earlier than that.

Okay. And then finally on the 10 gigabit side, Reuben, well you said you expect Cisco revenues to be up 22 to 25% in September. Can you talk about your traction with nonCisco customers?

Sure. NonCisco customers, last quarter [Three Com] was a customer, [Wileye] was a customer, Extreme was a customer. Of those companies I think [Three Com] is probably the farthest advanced and highest volumes of that group. They continue to be a little over -- somewhere between 10 and 20% of the Cisco volumes.

Okay. So by year end, what kind of splits do you see between Cisco and the other guys?

Yes, Cisco is a much bigger, Ramesh, and I think what we're comfortable saying is I think that the other three players will probably be at the low end and it may change quarter-over-quarter but at the low end it's 10% of Cisco's volumes, at the high end it's 20, but I don't think it's more than that.

Okay, alright. Thanks very much Reuben.

Thank you. Our next question comes from Jed Dorsheimer with Canaccord Adams.

Hi. Thanks and just a few questions. Congratulations on the first design win in the terrestrial Photovoltaic.

Thanks.

I guess maybe digging into some of the outstanding bids in a little bit more depth, the $5 per watt strikes us as--is a little bit higher than we had expected and congratulations on sort of that price point. Is that for the full system install or is that just the concentrator and the sell?

That's installed, Jed.

All right. So from a margin perspective I would assume that there's some pass through revenues. Do we expect that that will be able to meet the average PV type margins?

Yes, I think right now when you talk about an average PV margins I think with the increased pricing on polly silicon I'm not sure that a polly silicon or silicon solar cell itself installation that the market isn't higher than $5 a watt right now in those applications. They've seen significant price increases. So on an apples-to-apples basis I think the economics right now there's a window here where concentrator Photovoltaics, by the way that's presubsidy. So post subsidy they may be, the cost per watt the on silicon may be lower. But it's on an apples-to-apples basis, I think the economic right now for grid type utility systems is in the favor of gallium arsenide.

Great. And so there's a remaining 30 to 33 megawatt's of bids that you currently have, and how many customers--or has that increased and how many customers is that spread over?

That was--let's see, that was -- how many projects, six? Six projects on, all located in the Southwest. All we think sort of as we said half of that number would be kind of '07 deployable. The rest we weren't sure on timing and in most cases we won't-- this was frankly earlier than we thought.

And in some of these other contracts that you have the bids could you talk about the competitive landscape? Are you up against Evergreen and [Sun] in some of these other-- is for the wins here that may be decided in the fall? And then as a follow up, the 7 megawatt win, is this large enough to really set a precedence to help you get some of these other wins?

I think it's, the const--the first to market with a concentrator Photovoltaic system is going to set an industry standard and I think that's important. As far as competitors on the other projects, I am sure that these other companies are in competing and I am sure that there are alternatives to Photovoltaics in competing on some of them. So it's not-- these are not uncontested from that standpoint.

And last question and I'll pass it on. The GELcore, is that strategic to EMCORE's vision?

No. Look, it's strategic to our vision. Certainly we had a strategic objective when we formed GELcore to develop solid state lighting as an industry in commercial and industrial lighting applications. GELcore has done very well but I think GELcore is pretty much a stand alone company. I'm not sure that EMCORE brings a lot to GELcore any more. I'm not sure G.E. brings a lot to GELcore any more. But it's--yes they've done a terrific job in creating a franchise but longer term you should expect, or near term, you should expect us to direct our resources to businesses that we own and operate. So from that standpoint we've said you should expect, we've been saying it for I don't know how many months now but we've been saying we--you should expect us to monetize the GELcore investment in a reasonably, in a reasonable time frame.

Great. I will pass it on and let somebody else ask some questions. Thanks.

Thank you, our next question comes from John Lau with Jeffries Incorporated.

Great thank you. Reuben in terms of your Fiber-to-the-home cost ramp up that you saw in the June quarter, you mentioned on the call that that is probably not going to be recurring and you wanted-- you alluded to a second contract manufacturing. I was wondering if you can talk a little bit more about that. Thank you.

Yes. No, you'll remember off the last quarters call, John, we had hit some capacity bottlenecks at our contract manufacturer in Asia. And that we were not meeting customer shipments and that was off the March call. In the June quarter we-- I guess we made the investment with our CM to double capacity and that came at some sort of higher than expected ramp up costs. We were able in June to catch up to our delinquent deliveries, if you want to--that may be a harsh term.

And we expect unit volumes will be up again this quarter, and we expect kind of the normal product gross margins on this product going forward. So we had to -- it was painful getting capacity up to the level of, that we needed to be viewed as a credible supplier; reliable credible supplier. So we made those investments. We think FTTx particularly the GPON is going to be a sweet spot for us and it's a long-term business. So we need to get the cost structure right. We need to get obviously, we want to be best in class from a performance standpoint but we, this is a price sensitive market and we need to make sure that we have all of the things right in terms of yield and capacity and volume capabilities. So that was part of the investment last quarter.

Great. And following or follow-up question on the terrestrial, you mentioned that you are having a design win over in the 7 watt-- 7 megawatt category. Is that the, just to be clear, is that the traditional concentrator sell design, that's not the helio side, is it?

No, that's traditional. And by the way let me make it clear it's our customers design win. We haven't signed any contracts although we expect it to have those discussions over the next couple of months. But we are clearly in good shape with regard to this. So, Tom the heliostat design, which is capable of that $2/ watt performance capability is what we are developing with Sandia. Sandia has 25 years of experience in solar design and they in fact have a heliostat up and operating. It's not for Photovoltaics but they have a heliostat design up and operating on--at the labs now. So it's a matter of knowing what they know about the heliostat design and converting it to VP capability. So we think these are the right guys to be partners with.

This has the potential to lower the cost of the solar implementation significantly? And where do you--how, where do you believe the pricing for the silicon equivalent is right now, Reuben?

Where do I think silicon pricing is?

Yes. Competitively against the gallium arsenide which you said was about $5 per watt and that's-- I assume that's fully implemented with tracking and everything, right?

That's all up.

I don't know where, I think on an apples-to-apples basis because of as I said the raw material cost increases for the silicon guys I'm sure that their cost per watt has been escalating, on a presubsidy basis. So to the user, is it less than $5 a watt? It might be. But installed it's probably equal to or at least or possibly higher than gallium arsenide at this point.

And then one final housekeeping question for Tom. Tom, you mentioned your guidance for the current-- for the September quarter was gross margins of 24 to 26%?

Right.

And I'm sorry the revenue guidance was?

It's 40 million from continuing operations, meaning without EMD.

Okay.

We owned EMD for approximately half the quarter. Those revenues should come in between-- should come in around $3 million.

Okay. So that's a total of 43 with half the EMD quarter in there?

Correct.

Great. Thank you.

Thank you. Our next question comes from John Harmon with Needham and Company.

Hello, good morning.

Hi John.

A few questions please, I guess first of all a couple quarters back you were talking about your goal of hitting operating profitability in the fourth quarter. I don't believe you mentioned it today. Is it still a goal? And if you can still get there does that include the assumptions of divesting your materials business?

Yes, John, I think in my closing remarks I did say that we felt we were still well positioned to hit our stated EPS goals. But I think, and Tom can walk you through the model, but I think we, we are still-- and then things need to go the way they should go for the quarter, we've got a very good shot at it.

John, I think if you-- if we take the high end of our gross margin range we get there, at the low ends we are going to fall a little bit short, but we're pretty confident we can reach that high end.

Okay. Thank you. And referring back to the prior question, just when you report your quarter are you going to report EMD as a discontinued operation or keep it in there for as long as you've owned it?

You keep it in there for as long you own it but then we will end up restating to make everything on an apples-to-apples comparison. So as we go forward we'll eliminate the past revenues from the EMD so that there's a better comparison.

Sure. Got it, thank you. And then turning to your Fiber Optics business, could you talk about since GPON is more of a level playing field and certainly there is an incumbent there with very high market share, talk about what you think your [inaudible] have in BPON?

Sure. As you know we are -- we have a smaller market share in BPON. We did not want to be as aggressive from a pricing standpoint given this was our sort of first deployment of BPON and our EPS goals we didn't want to have to sacrifice margin to do that. On GPON we have the experience now on BPON production, we understand the issues a little bit better from a design and a manufacturing standpoint. And I will tell you I think that GPON, well much like BPON, will be a very price sensitive market. Market shares will be determined on the basis of pricing.

Okay and did you mention something about finding a new contract manufacturer, if your GPON trend-- ?

We are for additional volumes. On a second CM in Asia in what I'll call a lower cost environment than our current CM.

Okay. Thank you. And then finally what's the status of the competing technology in transceivers, electronic disbursement compensation? Has that turned into a viable alternative yet or what do you think the road map is for winning,--wins?

Sure [inaudible]. It's a --it's still very early and you're referring to LRM. It's still very early in the development of that technology. There's really one, maybe two vendors out there that really have it. And today the specs for LRM address a 200 meter market-- 200 meter capability in what is a 300 meter market. And whatever percentage of 300 meters 200 is, it's probably at least according what we've been told, less than half of the addressable market, the 300 is.

I don't believe -- then it's going to have to be competitive on price and on performance. And I don't -- we have been working with-- because it's in the 10 gig space and we're-- we view our core competency as being 10 gig. We have had LRM under development internally. We don't currently see -- and have been working with the chip vendors there. We don't see one where it has, yet has the head room that LX4 has in terms of its operating performance.

And from a cost standpoint, isn't enough of a compelling argument for the customers to switch. At some point a couple of years from now as Cisco goes to Boards which are all SFP or SFP plus related it will probably gain more traction but that's several years from now. So we don't see it as a near term or having much impact on us in '07.

Thanks. And finally one question about solar cells. How much -- by what factor do concentrators increasing on [inaudible] that gets into a solar cell, 1X, 2X, and what are the limits of gallium arsenide?

I'm sorry could you ask the question again in the beginning, you sort of broke up?

Sorry, so how much does a concentrator increase the amount of light coming into a solar cell and what are the limits of the technology?

I see. Each company, each concentrator PV company, John, has its own design and they range probably in terms of concentrators from 500 to 1,000 X concentration. And silicon I think, which also is capable in a concentrator system, probably less than 100 X. is, I think sort of state-of-the-art. So what the power differential -- I don't -- this is a very generic statement, but gallium arsinide produces sort of 3X the power on a per square centimeter basis.

And is this technology that Sandia has, is it just a better concentrator or is it something completely different?

It's a different -- ultimately the final design will be something called a heliostat, which is a [inaudible]-- going to give you the simplistic description. It's a tower of mirrors which reflects or concentrates the sun back on to panels which are stationery on the ground. It is a much lower cost design and just as effective.

That's helpful. Thank you very much.

Thank you. Our next question comes from Jeff Osborne, CIBC World.

Hi thanks very much. Two quick questions, most of the questions have been answered. I was just wondering at this point if you have any GPON design wins yet or if you've started shipping samples?

Jeff, we've been, on GPON we've been shipping samples since the March quarter.

Okay.

They number in the hundreds sort of per month. But it's, again as I've said the specs have changed, and I think final qualification on GPON vendors will occur sometime towards the end of this quarter.

Great. Could you also just update us if you any type of OLT strategy as opposed to paying at the lower margin home, if there's any strategy there?

Yes, we are, the answer is yes. And we are talking to those, those vendors who the companies who are going to be direct vendors into the Fiber-to-the-home space about letting us OEM the OLT for them.

The last question of the Fiber-to-home front, would GPON margins also be in that 15 to 20% range or would you expect the start up issues that you experience with BPON? It seems like Verizon's asking for aggressive pricing from everyone if ONT's are costing $250 for BPON, I've heard the pricing their looking for is 175, and if you folks are selling transceivers for 60, it just seems like somethings got to give?

No, I don't think we'll be at 60. I'm not even sure we'll be at 50.

Okay. And the last question on the X2 front, has Cisco qualified two suppliers for that yet?

Yes, there will be another vendor as well as EMCORE.

Great. Thank you very much.

[OPERATOR INSTRUCTIONS] And our next comes from Michael Coady with B. Riley.

Thanks, hi Reuben, hi Tom.

Hi.

Good morning.

Just a clarification, please, on Cisco's comments regarding the increase in volume of the X2, or as X2 comes out. Is that directed at EMCORE or that'll be their take overall.

I think take overall. I think we will have the larger market share in X2 but on-- I think they're thinking that unit volumes and revenues for X2 will be bigger than the LX4, because it'll be in multiple platforms by mid '07.

Okay. So the bigger revenue stream than the X4 in mid '07, that--again that's overall and not necessarily --?

Yes, that's overall.

Okay. Then just to, I don't want to harp on the GPON pricing issues too much but just a question. What are your priorities in terms of maintaining gross margin versus trying to gain market share, the GPON space?

You know, that's a great question and I think we are-- I think that we have a cost structure for GPON where we're going to be a lot more competitive than--we'll lose money to gain market share. That I can commit to you.

Okay. And do you have an insight into your competitors cost basis?

I don't, no.

Okay. And then, Tom, I guess this questions probably for you, the-- looking for some nice savings from the shut down in the city of industry and the new facility in Albuquerque being fully up and running, what about savings expected from EMD?

Yes, as I mentioned, Mike, we should save about 3 million annually once EMD is sold, and that's a combination of SG&A and R&D that EMD was incurring as well as the savings of some corporate charges that were allocated to EMD.

Okay I'm sorry, I thought that was for the Albuquerque facility.

Actually it's also for Albuquerque.

It is for both? Okay.

And I think it'll 3 million once we're up and fully running.

Got you. Alright thanks a lot guys.

Yes. just along those lines, Michael, we have made a, obviously the optics business is a-- is something of a cost sensitive market so we're making sure our base costs are as tight as we can get them.

Got you. Thank you.

Thank you and we again have Ramesh Misra with C. E. Unterberg.

Hi, guys, I think I might have missed this. In terms of LX4 pricing can you tell us where they were last quarter and where are they trending into the future and also our gross margins on X2 comparable to that for the LX4? Thanks.

Pricing was flat quarter-over-quarter, and we expect X2 margins to be the same as LX4.

And where do you see LX4 pricing over the next few quarters?

Next few quarters, I don't see any change this quarter. In December I guess flat at this point. But I think it is a reasonable expectation that over time you will continue to see price reductions. We spent a lot of time, in fact every quarter pulling additional costs out of LX4. The generic target internally from a Management standpoint is try and pull 25 to $50 a unit out every quarter. So sometimes you have bigger steps in that objective and sometimes you have smaller ones, but it's on average we expect over the course of a year to be, to reduce costs $100 a unit.

Okay. So basically despite the second source coming up for LX4 pricing is holding steady in the current quarter at least?

So far.

Okay. Alright. Thanks.

Thank you. There are no further questions at this time. I will turn the floor back over to Mr. Richards for closing remarks.

Thank you everybody, for your attention today. And as I said the June quarter in many senses was a transition quarter and the final closure of city of industry, the transfer of the panel business to Albuquerque, and there's the build out ought to be finished on that facility and production beginning this month. That saves us 3 million annually.

The sale of EMD, again lowering our cost base, the launch of new platforms and growth in 10 gig and Fiber-to-the-home I think, again have lowered the cost base, refooted and reenergized sort of the revenue outlook for the Company for the year coming forward, and we're in great shape to continue what has been a three or four year run on a 20 to 30% revenue growth year-over-year. So I think we are happy about how we repositioned the Company, and I think we are set to launch on sort of the next phase of EMCORE's growth which is continuous and sustainable EPS growth over time. So thank you for your attention.

Ladies and gentlemen, this concludes today's conference call.