EMCORE Corp (EMKR) 2006 Q4 法說會逐字稿

At this time, I would like to welcome everyone to the EMCORE Corporation preliminary fourth quarter fiscal 2006 earnings conference call. [OPERATOR INSTRUCTIONS] As a reminder, this call is being recorded. 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 may begin your conference.

Thank you and good morning, everyone. Yesterday after the close of market, EMCORE released preliminary unaudited fiscal 2006 fourth quarter and year end results. By now, you should have received a copy of the 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., Chief Executive Officer; Hong Hou, President and Chief Operating Officer; and Tom Werthan, Vice President and Chief Financial Officer. Tom will review financial results and Reuben and Hong will discuss business highlights before we open the call up to questions. Before we begin we would like to remind you that some of the comments made during this 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, Vick, and good morning to everybody. Today we are reviewing our fourth fiscal quarter of 2006, which is the three months ending September 30, of 2006 and we'll have some comments on Q1 and Q2 as well. Before I begin the financial review, let me take a few minutes to review the status of our NASDAQ determination letter. On December 18, 2006, the Company received a NASDAQ status determination letter stating that the Company is not in compliance with the filing requirements of continued listing. The notice, which the Company did expect, was issued as a result of the Company's failure to file its annual report on Form 10-K for the year ended September 30, 2006, with the SEC by the required filing date of December 14, 2006. The Company had previously filed a Form 12B-25 with the SEC indicating that the Company would be unable to file its Form 10-K by the original filing deadline due to the Company's ongoing review of its prior stock option grants. We have requested a hearing before the NASDAQ listing qualifications panel to review the status determination letter and request continued listing. The hearing request was granted and was scheduled to occur on February 15, 2007. Under NASDAQ marketplace rules, the Company's request for a hearing automatically stayed the delisting of the Company's common stock, pending the issuance of a written determination by the NASDAQ listing qualifications panel. And obviously we are working to file our 10-K as soon as possible.

With that, let me turn to the quarter. Just a reminder, during the fourth quarter of fiscal '06, we did sell our Electronic Materials and Device division. As a result, all revenues and expenses related to this division have been excluded from continuing operations and included in income from discontinued operations. This was also done for fiscal year 2005 to make comparisons more meaningful. The gain on the sale of this division was approximately $7.6 million. And with that, let me review revenues.

Revenues for the quarter totalled $35.4 million. This represents a 6% year-over-year increase, but a 3% sequential decrease. As previously announced, the shortfall in revenues related to a delay in receiving export licenses related to our Photovoltaic satellite division. Photovoltaic revenues were $7.3 million in the fourth quarter compared to $9.3 million a year ago and $10.4 million in the previous quarter. As previously mentioned, the export licenses were received in October, and as a result, Photovoltaic revenues will be at record levels for Q1 of fiscal '07. Revenues for the first quarter are estimated at $12.5 million.

Fiber Optic revenues were 28 million in the fourth quarter as compared to 24.2 million a year ago and $26 million in the previous quarter. The increase in Fiber Optic revenues was primarily related to the Company's digital Fiber Optic product line, whereas the cable TV and video product line was relatively flat with the previous quarter. For the fourth quarter of fiscal year '07, revenues are estimated at 25.5 million, representing a sequential decrease of approximately 10%. Unlike the fourth quarter, the CATV video product line was quite robust, and we expect this to continue. However, our digital Fiber Optic product line was lower than expected and Reuben will elaborate this during his operational update.

So our revenue expectations for Q2 of fiscal 2007 ending March 31, are in the range of 38 to $40 million. Fiscal '06 total revenues were $143.5 million versus $115.4 million in fiscal '05, representing an increase of $28.1 million or a 24% growth rate. The estimated revenues would have been north of $160 million had Electronic Materials and Devices been included. Backlog at September 30, was approximately 48 million, an increase of approximately 14 million since the beginning of the fiscal year, and again that's after backing out Electronic Materials and Devices backlog. Gross margins for the quarter ended September 30, were 12% and for the fiscal year ended September 30, were 18%. As previously announced, gross margins were impacted during the quarter due to the revenue shortfall in our Photovoltaics division. This division has high fixed overhead and a revenue rate of just over $7 million simply does not absorb enough overhead. As a result, Photovoltaic gross margins fell to 7% for the quarter and this is down 12 percentage points from the previous quarter. So you can see how lower revenues really affect our gross margins.

Fiber Optic gross margins were 15%, a decrease from the 22% of last quarter. Again, the CATV video product line impacted gross margins with unfavorable product mix, and unfavorable labor and material variances. Basically, we built to a subassembly level in order to ship products in a timely fashion. And in the fourth quarter, product had to be reworked from high power to lower power modules in order to meet the requirements of our customers. So not only was product mix unfavorable, this also resulted in substantial additional material and labor costs. For the first quarter of '07, we expect gross margins to rebound to approximately the 20% level. Operating expenses for the quarter were $17.3 million and were affected by several items.

We incurred a one-time impairment charge of $2.2 million related to the write-down of Corona Optical Systems assets, an acquisition we had made several years ago. In addition, we incurred $900,000 of expenses in connection with the options investigation, and finally, approximately $950,000 of operating expenses related to our new Terrestrial Solar product division. While this expense will continue, we feel it's important to highlight the amount to accurately compare period over period expenses. Net of these aforementioned costs, OpEx would have been $12.5 million, an increase of $600,000 sequentially.

Operating expenses for the quarter included approximately $700,000 related to stock compensation expense. Total stock compensation expense for fiscal 2006 amounted to approximately $4 million, with $3 million charged to operating expenses and $1 million charged to cost of goods sold. However, as previously announced, the Company expects to incur additional non-cash stock-based compensation charges related to past stock option grants. The operating loss for the fourth quarter was $13 million. Excluding the aforementioned impairment, terrestrial solar power, stock-based compensation, and stock option investigation expenses, the operating loss would have been $7.9 million, and this compares to an operating loss of $4.1 million in the prior year and $4 million sequentially after deducting similar expenses.

Below the line, net interest expense was $900,000, slightly lower than the previous quarter. Interest expense is expected to decrease substantially in the first quarter of 2007. The Company also recorded a gain on the sale of GELcore of approximately $85.5 million and that is net of taxes of $1.9 million. We also recorded a gain on the disposition of our Electronic Materials and Device division, as I previously mentioned of approximately $7.6 million. These gains resulted in fourth quarter profit of $78.1 million. Excluding these gains and the aforementioned expenses, the Company would have incurred a net loss of approximately $8.9 million as compared to $5.1 million in the previous year, after deducting similar expenses. For the year ended September 30, 2006, net income amounted to $58.7 million, again, after deducting the gains and the similar expenses, the Company would have incurred a net loss of $23.5 million, versus a net loss of $24.3 million a year earlier.

Let me turn to the balance sheet for a moment. Cash at the end of September was $125 million. An increase of approximately $100 million during the quarter. The increase is attributable to the $100 million received on the sale of GELcore and the $13 million received on the sale of Electronic Materials and Devices.

Let me recap the $13 million of cash usage during the quarter. You go back to our non-GAAP table, the cash net loss from operations was approximately $8 million, and that's including the add back of approximately $3 million of depreciation and amortization. Capital equipment expenses was approximately $5 million totaling your $13 million. Working capital changes amounted to 0.

During the first quarter, we also invested approximately $18 million for approximately a 30% equity position in WorldWater and Power, a NASDAQ-listed company with the symbol WWAT. This investment complements our own Photovoltaic efforts, and Reuben will also discuss this during his operational update.

Let me summarize the quarter and comment on Q1 and Q2 before turning the call over to Reuben. Revenues were obviously disappointing due to the export license. This alone impacted gross margins, but coupled with the unfavorable product mix and labor and material variances at our Ortel division, gross margins fell to 12%. We do expect a healthy rebound of gross margins in Q1. Fiber Optic, as well as Photovoltaic revenues and gross margins for Q1 will both increase. For the fourth quarter revenue expectations are approximately $38 million, with gross margins increasing from 12% in the first quarter to 18 to 20% in Q1. Revenue guidance for our quarter ending March 31, 2007 is in the range of 38 to $40 million.

A few steps we are presently taking to improve operating performance. We are transferring a fair amount of our manufacturing to China, which ultimately will save us approximately $11 per hour in labor costs, and will enable better customer support and engagement in China. There is a high priority focus of engineering on cost reductions and quality improvements. Fiber optics division is focusing on bringing higher gross margin products to market, particularly in the video and Satcom specialty markets. Photovoltaics will begin selling higher gross margin terrestrial solar cells this quarter. And with the move of our corporate headquarters to Albuquerque, there will be some cost savings in New Jersey. With that, let me turn the call over to Reuben for an operational update.

Thank you, Tom. Good morning, everybody. I'm going to begin with a brief overview of the September quarter, and then discuss some of the key business development and market trends impacting the Company's operations. The September quarter marked an important transition for EMCORE as we made a strategic decision to more narrowly focus our business efforts on the two areas that represented the best opportunity for the Company to grow its business in terms of both revenue and profitability being Fiber Optics and Photovoltaic. The proceeds of $116 million from the sale of our 49% interest in GELcore and the Electronic Materials division gives the Company one of the strongest balance sheets to the industry. It improves profitability and has allowed the Company to aggressively pursue our strategic initiatives, which I will address in the product line discussion.

Revenues for the September quarter, as Tom pointed out, were $35.4 million, negatively impacted by the delay in receiving three international satellite program export licenses, totaling approximately 4 to 5 million. These licenses were received early in Q1, 2007, and were shipped during the December quarter. A fourth export license covering a $2.5 million international program was also received during Q1, but was moved to the current quarter for shipment. Consequently, revenues for Photovoltaics went from 7.3 in September to 12.5 in December and is expected to be in the 12 to $13 million range for March.

Fiber Optics in the September quarter grew 10% quarter over quarter to $28 million due to a 20% increase quarter over quarter in 10 gigabit ethernet revenues. Video or cable television revenues were flat with the prior quarter. However, in the December quarter, cable television saw a 15% increase in revenues with demand accelerating through the current quarter where they are 75% booked for the quarter ending March representing the highest starting backlog for a quarter in three years for the cable television business.

10 gig revenues for December were down sequentially due to inventory adjustments at both the contract manufacturer for Cisco, but more significantly a decline in the demand at the Company's storage area network customers due to inventory adjustments. The 10 gigabit ethernet business has rebounded from the December quarter to prior levels for this quarter. However, component demand for the storage area network optical subassemblies is not expected to pick up again until late in the current quarter. Gross margins for the quarter were 12% reflecting the issues that Tom cited. Gross margins improved dramatically in December, back to historic levels and we expect solid improvement this quarter over the December quarter.

From the strategic initiative standpoint, there have been a number of significant developments at the Company since the September quarter. In Photovoltaic, the Company made a strategic investment in WorldWater and Power by investing $18 million for 31% interest, 26% fully diluted WorldWater. WorldWater is leading seller energy systems company, offering both distributed energy systems as well as grid tide solar systems. The investment in WorldWater represents a significant shift in corporate strategy with regard to the terrestrial PV market. With WorldWater, EMCORE becomes a completely vertically integrated company by being able to offer solar cells through turnkey solutions to the terrestrial PV markets, as opposed to being simply a component or panel supplier. Further, EMCORE and WorldWater entered a three-year supply agreement for 26.5 megawatts valued at about $100 million. Deliveries begin this year, expected to be about $7.5 million in the second half of the calendar year.

More recently, and maybe more significantly, EMCORE entered into an additional supply contract with a non-U.S. solar company. The contract runs through 2011 and we have received the initial purchase order for 2007 for 13 megawatts of solar cells, representing for the fiscal year $5.5 million worth of revenue. Production has already begun in Albuquerque and shipments will begin this quarter. Gross margins on this business are expected to be higher than the satellite PV business at a sell level. We are in the final stages in negotiating two other contracts that we expect this quarter that will also impact 2007 revenues for terrestrial Photovoltaics. Lastly, during the December quarter, we received a $40 million contract for Satellite Photovoltaics through 2009, which is currently in production.

In fiber optics, while the component business was down, interest in new 10 gigabit ethernet products is robust with a new OC192 10 gig product, Cisco expected to ramp -- at Cisco is expected to ramp this quarter, and two new 10 gig products to be released this quarter will be showcased at OFC, and we're very excited about that. Further, as Tom cited, we initiated in the September quarter a transition of production of fiber optic products to a facility in China. We expect significant labor improvement in terms of cost and in gross margin and we expect to transfer over the next few years initially components and then the transceiver business.

Finally, by naming Dr. Hong Hou as Chief Operating Officer we have made some significant management changes that will improve both operational profitability and new product time to market. In closing, the Terrestrial Photovoltaic business and indeed the satellite business made good progress during the quarter. We are optimistic about additional contracts coming to play for 2007, but more importantly, we have set up significant revenue opportunities for the Terrestrial Photovoltaic business for both '07, '08, and '09 with significant ramps in each year.

And lastly, in fiber, progress on the new products, transition of the products to China for manufacturing efficiency and lower cost both will have significant impact on the profitability of the Company from the March quarter onward. And with that, I will turn it over to Q&A.

[OPERATOR INSTRUCTIONS] Our first comes from John Lau with Jefferies.

Good morning, Reuben.

Hey.

I may have missed it. I apologize. But I was wondering if you can go over your comments with regard to terrestrial solar cell shipment. You mentioned that you had a contract and that you were going to ship this quarter. I was wondering if you can give us a little bit more detail as to the products you're shipping there? And I have a follow-up. Thank you.

Sure. John, we entered a five-year contract, supply contract, with a non-U.S. solar system company, a substantial one. That I guess, the total amount of the contract over five years is about $100 million in solar cells. We received the initial purchase order for 2007, which is 13 megawatts, that portion, which will fall into the fiscal year, is about $5.5 million, and we began production -- and this is a ramp-up -- but we began production and we'll have revenues -- we began production last week, and we will have terrestrial solar cell revenues this quarter ramping out through the balance of the year.

And is that on the -- you mentioned, actually, two different things that I wanted some clarification on. You mentioned that -- are these solar cells?

These are solar cells.

Okay. If you didn't focus on your comments on -- in your investment in WorldWater, that's actually taking you in a different direction. I wanted to ask you more about that. That's taking you in a completely vertically integrated direction?

Yes.

Are you still going to be making cells?

I think with a you're going to see, John, is it's likely that the business will diverge into two revenue streams. This contract through 2011 for Terrestrial Photovoltaics will be one revenue stream, and that will be Fab-based. The other -- and I expect this, that most of the other revenue will be at a systems level through WorldWater over time. That doesn't mean we won't sell panels to other integrators, but we find that a turn-key solution, one, broadens the market opportunity for us in both grid tide and utility opportunities, as well as improving the gross margin outlook. So it's either going to be a Fab-based product, meaning the solar cell, or a solutions-based product, meaning the system. And I think -- so it's going to be one end of the product integration strategy or the other. And I don't think we're going to be selling much in the middle.

Okay. And then one final question is, in terms of your investment in WorldWater, what type of development projects and interest are you seeing in the concentrated designs for WorldWater?

Sure. WorldWater has a -- has what we regard to be a pretty prolific business model. Fundamentally, they have the ability to go to, for instance, a water district and offer, in exchange for a long-term power purchase agreement, they can offer a turnkey solution to the water district at rates which are below the prevailing utility rates that that water district would pay. Those projects get bundled and financed so that you never have a middle man in this, and consequently, the profits go to both the end user and to the systems provider. So again, that expands the market opportunity. It makes you more cost effective, and as EMCORE continues to improve the efficiency from our current product, the efficiency of the solar cell, that will continue to drive more and more of the economics at a systems level and expand the market.

Great. Thank you.

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

Hi, guys. A couple questions, if I could. Reuben, I guess to start, I may have missed, this but I was wondering the contract for 6 megawatts at the system level in the U.S., I was wondering if you could talk about what the issues are on crossing the Ts and dotting the Is and why that hasn't been announced yet?

Yes. We are struggling with terms and conditions. That is what we will stand up to from a warranty standpoint. Whether it's acceptable from a business standpoint to guarantee cash flows, or just as acceptable to guarantee product performance. So it's a fundamental business issue that we're trying to work through.

And do you see this as a limiting factor as you look at the rollout of some of these other contracts, or are you having those same types of discussions with other power purchase providers, I guess, in the marketplace? Or do you look at this first one as sort of setting a precedent to how the other ones will go?

Every one is different. No two of these projects are alike. If it's a precedent, we don't want it to be a bad one. Right?

Fair enough. Then am I doing my math right here on the solar cell business? Are you getting about $2 per watt?

No. It's less than that. Let's see. It works out to be -- let's see. There are, per 4" wafer, there's 36 -- yes, this is at -- well, okay. Yes. At a bare die level of the cell--.

I'm sorry, you're getting $0.42 a watt, I'm sorry.

It's about -- it's a little higher higher than that, somewhere between $0.45 and $0.50.

All right. And then was wondering if you could, maybe Tom, if you could comment on some of the operational leverage as we look out? It looks as if gross margins and operating margins have sort of disappointed from where our targets were, and I was wondering if as we look out in fiscal 2007, what the points of leverage will be. How fast can you ramp down SG&A and R&D. If you could provide any color, that would be helpful?

Let's start at the top with gross margins, Jed. I think we've had some pressure put on us from a gross margin standpoint. with revenues lower than anticipated, obviously we are absorbing less overhead, which has an impact on gross margins. I don't think you'll have a repeat at the Ortel division of product on the shelf for the subassembly level. We're getting better forecasts from our customers. So that will not be repeated and their margins should go back to normal levels starting this quarter -- in the March quarter.

We have suffered some price erosion on selling prices, which also affect margins. We are now completely located in Albuquerque from the solar or Photovoltaic business standpoint. We will start seeing savings generated this quarter on that, so their margins should start improving as they fill the Fab. The solar cells -- the terrestrial solar cell sales will certainly help fill the fab and absorb any fixed overhead, which would allow your contribution margins to increase. What we've done with operating expenses, a couple of points. One is the options investigation, where I mentioned, in the fourth quarter we spent about $900,000. We will spend money, or have spent money in the first quarter of between 1.5 to $2 million, and that is likely to continue into the second quarter. So that will impact operating expenses.

We've highlighted the Terrestrial Solar Cell division, it's basically a start-up. They spent about $900,000 in the fourth quarter. Those expenses will continue. We will spend between 8 and $11 million in fiscal '07 on that division. In terms of the other items where we can save money, we are focusing -- you will save some money on the move out of New Jersey, although it won't be significant, but we can exit this building in about two months. There are some engineering projects going on that were redesigned, some of our projects. So we should get some benefits, but you will have some recurring expenses on the option investigations that will impact operating expenses.

Great, that's helpful. Then one last question for you, Tom. You mentioned that net interest expense should be lower. I was curious, is your -- due to your cash inflow, are you going to have a -- are you going to be break even, are you going to have net interest income, or are you going to actually have net interest expense in the first quarter?

Jed, in Q1, we should be at zero if not slightly positive. Our interest expense has been averaging about $1 million per quarter. With the money from GELcore came in around September 1, and the balance there is healthy and we are yielding approximately, slightly more than what we're paying out on our coupons and on our bonds.

Great. And congratulations, Hong, I look forward to working with you, and well deserved.

Thank you, Jed.

Thank you. Our next question comes from Michael Coady with B. Riley.

Thanks, good morning. Ran through a lot of the stuff pretty well, but I guess, could you talk a little bit about the -- you mentioned, Tom, 8 to 11.9 in total expense for the terrestrial initiative. What you think the gross margin, first of all, on the terrestrial is, how much higher it is than the space-based Photovoltaics, if you can take a blend from the solar cell and system level. And then also, what those expenses will be kind of on a run rate basis, or if those are primarily start-up expenses.

Let's start with the gross margins, Mike. On the terrestrial solar cells, fiscal 2007 will mostly be solar cells that Reuben mentioned at the Fab-based products. The margins should be between 28 and 32% or thereabouts, and we'll have more clarity once we start shipping and get a better handle on our yield. In terms of the expenses on the terrestrial solar division, they are very focused on the WorldWater investment and the next generation of product for WorldWater. As WorldWater mentioned in a press release yesterday, they did accomplish their revenue objective in '06 of about $17 million. We expect them to grow pretty well in '07, and we are really the next generation product for WorldWater, which would incorporate concentrated Photovoltaic modules into their installation applications. So the expenses in '07 are really in regards to pressing that product and getting that product ready for prime time.

Okay. And then the -- I want to, try and provide us too much detail, but just the total expectations relative to terrestrial and '07 from a revenue and expense standpoint?

Okay. Where we sit right now is about -- and again, I have to give this to you in a calendar year format. The 1.5 megawatts at a system level is about 7.5 million. The cell, current cell amount is 5.5, so that's 13 million in calendar '07. 5.5 clearly falls into it, what part of the 7.5 of it depends on how much we ship in from June to September. So we haven't really forecasted that yet until we get a little closer. The -- we do expect two more contracts from a solar cell standpoint, so the $13 million for calendar '07, we expect will increase a couple of million dollars and most of that will fall into '07, fiscal '07.

Okay. Fair enough. Thanks a lot.

Thank you. Our next comes from Ramesh Misra from C.E. Unterberg.

Good morning, guys. My first question is in regards to the Digital Fiber Optics business. Reuben, can you go into some more details about the LX4 and X2 business, how they progressed in the September quarter, and your expectations, and how were they in the December quarter as well?

Right. Let's see -- and I'll just repeat what I said on the initial comments. In the September quarter, we saw a 20% increase quarter over quarter in the 10 gig product line, okay? In December, digital fiber optics, again, which is almost all 10 gig, saw a sequential decline, largely for inventory adjustments, but mostly impacted by the storage area network, meaning not -- the component business. The 10 gig optical subassembly, transmit receive optical subassembly, as opposed to to the LX4. The impact on the 10 gig E components in the December quarter were mostly inventory adjustment issues impacted negatively by about 1.5 million, something like that. And that, we are told, is an inventory adjustment which they took from four weeks of inventory down to one for the quarter ending December, and they will go back up to normal inventory levels, which is about four weeks this quarter. So demand is for 10 gig E is back where it was in the September time frame.

Can you talk about the X2 ramp? I know you're expecting that part to become a pretty healthy chunk of your overall 10 gig E business, so where are we on that?

Yes. In the September quarter, again, it tracks exactly what I was saying. In the September quarter, X2 was up. December, it was down, so far this quarter, I don't have a breakout of LX4 versus X2, so I'm just lumping it into one revenue line.

Okay. Tom, can you talk about what your EMD revenues where in the quarter? Obviously that's a discontinued operation, but can you still talk about it?

Sure. Just for everyone's clarification, we sold the division basically on August 15, which would have been -- half the quarter would have expired by then. The revenues in those first 45 days were about $3.1 million. They actually did about $6.2 million for the quarter, so it was pretty linear. So had we had the benefit of those revenues, the $35.4 would have been $38.5 or so.

Got it. Your CapEx of $5 million in the quarter, what was that focused on and can you give us an idea of how CapEx would be trending? I know you mentioned the 8 to 11 million on the terrestrial solar side, but from an overall corporation--?

The $5 million was spread out fairly over the three product lines, Ramesh. But a lot of it, or about half of it went to the Terrestrial Solar division. They are installing in Albuquerque or have installed in Albuquerque quite a big solar cell system right outside of our building, and perhaps we'll put some pictures on the web as soon as it's complete, but it's almost complete, so we'll put some pictures up there. That was the bulk of their expenditures and some other test and measurement equipment throughout the other divisions. For fiscal '07 CapEx is estimated at about $8 million for the year.

Okay. And Hong and Reuben, maybe you can comment on the cable TV trends, obviously the slight slip in September, and where are you seeing strength in the backlog?

I'll let Hong do those.

Hi, Ramesh.

Hi.

Yes. September, we experienced some difficulties in the cable TV product line, primarily due to the poor visibility into the market demand in terms of power and product mix. We were operating in a boundary condition off of minimizing E&O inventory and short lead times. So we were inventorying the wrong product and as a result of that, we have to spend a significant amount of material and labor to get them converted into the product mix that customers need [Inaudible]. We have since seen a great rebound off that sector, really the market demand has increased dramatically and as Reuben said early, we got a better visibility for this quarter ending March 31. We're already 70% booked, 75% booked. So we also have changed our forecast and the production planning process in getting the inventory at the subassembly level rather than finished product level. So the demand is going to be increasing and also gross margins s already increasing.

Okay. And then finally, to wrap up, can you talk qualitatively about both the Fiber-to-the-home and IPTV-related initiatives? Where do you see that in the new fiscal year? Thanks very much.

Yes, the Fiber-to-the-home, the '06 was a first significant year of deployment. The telecom service providers and the indication from the customer base is that '07 calendar year, the demand is going to increase by about 50 to 100%. And in that product line, if you know, we have multiple design wins at the O&U level, at the BPON and GPON transceiver level. But a challenge for that is really the price erosion due to the competition, so we have to get a structure in place in order to be more aggressively go to the marketplace and get more market share.

Okay. All right. Thanks very much, guys.

Thank you. Our next question comes from [Mike Simanski] with MS Investments.

Hi, guys, a couple questions. One, if you have any guesstimate as to when you might be filing the 10-Q? And then also, any fallout on corporate debt from it, debt being accelerated, that type of thing?

Yes. We are working diligently, obviously, to file our 10-K as soon as possible. Obviously we can't file our 10-Q until our 10-K is filed. On the corporate debt side, just to bring everyone up to date, we do have about $96 million of convertible subordinated debt outstanding. That is due in May of '011 at 5%. We are late in our 10-K filing, but we have not heard anything from our debt holders on that.

And can you give us any sort of guidance as to when the 10-K might -- may be filed? This quarter or--?

It's really hard to say. I can tell you that we're working diligently with all the parties involved. From our standpoint, the sooner the better. But I just hesitate to give a date.

Okay. I suspect this, the Q1 conference call will probably be delayed as well?

We're contemplating that now, but I think a lot of companies with the same kind of issues are holding their conference calls as regularly scheduled, and I think we are likely to do the same.

Okay, thank you.

Thank you. Our next question comes from [Frank Riveno] with [Inaudible].

Hi, guys. Basically a two-part question regarding your investment in WorldWater. Analysts seem to be very pleased with the $18 million investment that you guys made. What I was wondering after reading some of their recent press releases is the success of your venture with WorldWater at all contingent upon their successful completion of their acquisition of ENTECH, and if so or if not, what synergies or potential competitive advantages do you see with the combined EMCORE/ENTECH/WorldWater product?

Sure. Let me start addressing your question by just, for people who don't know what ENTECH is. ENTECH has a land technology to concentrate silicon solar cells to be used in -- well, it's actually used in space. It's also used in terrestrial applications. It is a technology which is currently unsung and it is, we think, near term the advantages that it represents for an EMCORE and WorldWater consortium is that it represents a systems-level solution to the marketplace that can incorporate either a silicon-based panel or a gallium arsenide-based panel, and the name of the game here is reducing the cost per watt and concentrated silicon is a step in that direction, and then the gallium arsenide concentrator technology is the next step. So it advances the ball, and any time you reduce the cost per watt, it expands the market opportunities and revenue growth. So the technologies are absolutely complementary and both will be used to drive the business forward. So we think it's a nice move.

Okay, just a follow-up to that. If WorldWater is not successful in their acquisition of ENTECH, which based upon the press release, you would be led to believe that they will be, how realistic is the $100 million in orders that you guys have laid out that you'd be receiving from WorldWater. How close to realistic is that if they in fact, don't partner up with ENTECH?

Well, I think they're separate issues. We don't need to have or have WorldWater have ENTECH to make the EMCORE concentrator PV successful. That's completely a separate issue. It more reflects on business that I think ENTECH -- I mean, WorldWater has bid at a cost per watt that they envision ENTECH providing them.

Okay. Great. Thank you very much.

Thank you. [OPERATOR INSTRUCTIONS] Our next comes from Jeff Osborne with CIBC.

Good morning, guys. I was wondering if you could just help me out on the terrestrial PV expenses of 8 to $10 million. If you're signing five-year contracts and longer, why would you back that out for non-GAAP purposes?

Jeff, as I mentioned when I was talking about the quarter, we only did it because it didn't exist last year, and we wanted to get an apples to apples comparison.

Okay. Could you just let us know, too, what the gross margin would be in 2Q? I think you said 18 to 20 for the first quarter?

I would expect a modest increase in gross margins in Q2 to about the 20 to 21% range.

Okay. And then just looking on your website, you already have the slides posted for the Needham conference, which I'll be attending later this week, and you give some full-year '07 estimates of 155 to $165 million in revenue at 8 to 15% growth. I was just trying to reconcile those numbers, and I assume that incorporates the satellite pushouts in there, so it seems like your Fiber Optics revenue would be materially down in FY '07. Am I looking at that wrong?

No, we think fiber optics will be up about 15%, satellite will be up same thing.

Okay, and when you incorporate terrestrial, I'm just having a hard time, if both of those are 15--?

Yes, I'm sorry, what it does not include is $7.5 million on the panel basis for WorldWater. We just don't know how much of that's going to get included in the fiscal year. Remember, the fiscal year was September. So we're due to start shipping in the second half of the year, meaning the June to September time frame, but how much of that falls in there, and if we're a month or two late, we don't want to have 7.5 million sitting in the September quarter that won't materialize until the -- or part will materialize in the December quarter. So the only thing you see in terrestrial PV would be the solar cell stuff, and that's only through the September period. So it only incorporates, what, nine months worth of production.

Jeff, just to recap. Total revenues in '06 were about $143.5 million, of which about $105 million were Fiber Optics, that will increase next year, as Reuben just mentioned. And our Photovoltaics revenues, predominantly all satellite were about $39 million, and that will also increase next year.

Okay. And then the three pushouts plus the fourth that you mentioned, that should be all rectified in the March and June quarter?

By the end of March, yes.

So your satellite will be front end loaded?

I think it will be somewhat linear. You've seen 12.5 for this quarter. Pretty linear for the year.

Okay. I think just the last two quick ones, do you have a depreciation number for the quarter? And then I was just wondering, also, if you could just update us on what your break even model would be?

Yes. Depreciation for the quarter was about $3 million, this is the fourth quarter.

Correct.

And from a -- let me do it from a EBITDA standpoint, and then I'll follow-up with a break even model. But at a gross margin of 22%, we can generate positive EBITDA, and again, some of the initiatives underway are the China move, the acquisitions, revenues are higher, gross margins, filling the Fab with terrestrial solar cells and laser masts or mites. So with revenues at about 42 million at a 22% gross margin, that gives you about a $9.2 million gross profit, OpEx of about $12.6 million. Add back the depreciation of about $3 million per quarter, plus the FASB 123R stock compensation expense of about $1 million gets you to slightly positive EBITDA, and that is exclusive of the ramp-up in our terrestrial solar products, which I mentioned will be about 8 to $11 million.

And that's all in the G&A line I assume?

Now, that's all going to be in your R&D line.

R&D. Okay.

Or most of it will be in the R&D line.

Okey-dokey. Thank you.

Thank you. At this time, our questioning queue is empty. So Mr. Richards, I turn the call back over to you.

Thank you, everybody, for your attention. In closing, as I said, we have made terrific progress in terms of the terrestrial business. It looks like we have about $13 million booked for the calendar year on terrestrial, I think more to come. And for '08, we're looking at the -- based on just the contracts in hand, we're looking at sort of the $40 million range for '08. And obviously, the commitment's go out three to five years on terrestrial PV, so we do think now we have the business space for a significant revenue line for the Company and it's PV technology going forward. I think that's been established. I think with the China strategy, we'll continue to be cost competitive as we take costs out of the Fiber-to-the-home product lines as well as our more traditional 10 gig and video transport products. So we expect to make nice progress. I welcome Hong as Chief Operating Officer. He has had a lot of experience in a number of different product units and a great track record. So we're looking forward to working with him and continuing to drive value to shareholders. Thank you.