EMCORE Corp (EMKR) 2007 Q1 法說會逐字稿

Good morning ladies and gentlemen. My name is Adam Strickland and I will be your conference facilitator for today. At this time, I would like to welcome everyone to the Emcore Corporation First Quarter Fiscal 2007 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. Following the speakers' remarks, there will be a question and answer period. If you would like to ask a question at that time, please press the * key followed by the 1 key on your touchtone phone. If you would like to remove yourself from the questioning queue, you can press *2 and as a reminder, this call is being recorded. Listeners can log on to www.emcore.com -- that's e-m-c-o-r-e.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 markets, Emcore released its fiscal 2007 first quarter 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., Chief Executive Officer, Hong Hou, President and Chief Operating Officer, and Adam Gushard, Interim Chief Financial Officer. Adam will review the financial results and Reuben and Hong 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'll now turn the call over to Adam.

Thanks, Vic and good morning to everyone. Today we're reviewing our first quarter of fiscal '07 ended December 31, 2006. I will also provide some financial guidance on our second quarter ended March 31, 2007. As previously mentioned, Emcore has withdrawn reliance upon its historical financial statements because previously reported operating costs did not correctly reflect non-cash stock based compensation expense and related tax expense associated with certain stock option grants.

The preliminary unaudited results included in this announcement do not include charges and expenses that may be required due to any restatement for the prior period. Also, just as a reminder, Emcore made a strategic decision to more narrowly focus its operations in the two areas that represented the best opportunity for the company to grow its business in terms of both revenue and profitability, that being fiber optics and photovoltaics. With that being said, Emcore sold its Electronic Materials and Device division in the fourth quarter of fiscal '06. As a result, all revenues and expenses related to this division have been excluded from continuing operations. The gain on the sale of this division totaled approximately $7.6 million which was recognized in the last fiscal year.

Moving on to the quarter, consolidated revenues for the quarter ended December 31, 2006 totaled $38.5 million. This was slightly higher than guidance previously provided. This represents a revenue increase of 8% year over year and 9% sequentially. Prior year revenues from continuing operations were $35.7 million. Revenues reported in the prior quarter totaled $35.4 million.

Both of the company's operating segments posted revenue increases when compared year over year. On a segment basis, fiber optics revenues for the first quarter of fiscal '07 were $25.3 million. This represents an increase in revenue from $25 million reported last year but a decrease in revenue from $28 million reported in the prior quarter. As we discussed on the last earnings call, the 10% decrease in fiber optics revenues from the prior quarter was due to customer inventory management related to our digital fiber optics products which continues into the second quarter. We expect a recovery of these revenues to occur for new product launches and other initiatives as Reuben will elaborate on during his operational update.

Emcore experienced a significant increase in customer demand for its cable TV products during the quarter ended December 31, 2006. We expect this trend to continue throughout fiscal '07.

Photovoltaics revenues for the first quarter of fiscal '07 were $13.2 million. That was higher than guidance provided on the last earnings call. This represents a revenue increase of 23%, from $10.3 million reported last year and a 79% sequential increase from $7.3 million reported in the prior quarter. As previously discussed, our photovoltaic division experienced a delay in receipt of expert licenses that resulted in a revenue shortfall during the fourth quarter of fiscal '06. In the first quarter of fiscal '07, the company received the expert licenses and the delayed orders were shipped to our customers. Total consolidated revenue for the second quarter ended March 31, 2007 was approximately $40 million which represents a 10% increase year over year and a 3% increase sequentially.

Moving on to backlog, backlog as of December 31, 2006 was approximately $53 million. This represents an increase of over 10% when compared to backlog at September 30, 2006 of $48 million. Consistent with prior periods, a majority of the backlog relates to our photovoltaics division. Now backlog at March 31, 2007 was approximately $119 million. This represents an increase of approximately 125% when compared to Quarter one. This is good guidance pointing to more revenue growth for the company. Of the $119 million backlog, approximately $51 million is expected to be shipped within the next 12 months.

Consolidated gross profit for the quarter ended December 31, 2006 totaled $6.1 million. This represents a 4% decrease from $6.4 million reported in the prior year and a 44% sequential increase from $4.3 million reported in the prior quarter. Consolidated gross margin for the quarter ended December 31, 2006 was 16% which represents a decrease from the 18% gross margin reported in the prior year but a significant increase from the 12% gross margin reported in the prior quarter.

On a segment basis, fiber optics gross margins were 21% as of December 31, 2006. Fiber optics gross margins decreased from 23% as reported in the prior year but increased from 14% as reported in the prior quarter. The year over year decrease in fiber optics gross margins was negatively impacted by unabsorbed fixed overhead due to reduced digital fiber optics revenue. The sequential increase in fiber optics gross margins is primarily due to increased sales of higher margin cable TV components and systems, offset by the unabsorbed overhead just mentioned.

Now photovoltaics gross margin was 7% as of December 31, 2006 which remained relatively unchanged when compared to prior year and prior quarter. Photovoltaics achieved lower than expected gross margin due to a push out of higher margin solar panel contacts into Quarter two and lower production yield due to variability encountered with the quality of certain raw materials. Photovoltaics gross margin for the second quarter ended March 31, 2007 is approximately 20% due to improved product mix.

Moving on -- operating expenses for the quarter ended December 31, 2006 totaled $18.7 million. This represents a 70% increase from the $11 million reported in the prior year and a 4% sequential increase from the $18 million reported in the prior quarter. Now a significant portion of the year over year increase in the operating expenses is due to expenses incurred associated with our fiscal '06 acquisitions which were Phasebridge, Force, and K2 Optronics and also our new terrestrial solar power division and expenses incurred on our review of historical stock option grants. During the quarter ended December 31, 2006, research and development expenses included approximately $2 million related to the terrestrial solar power division. R&D expenses increased in the second quarter as Emcore works to complete the second generation of its solar power concentrator system and prepares for the transfer of system development to production in the September quarter.

In addition, general and administrative expenses during the quarter included approximately $1.9 million related to our review of historical stock option grants. Now excluding expenses associated with our new terrestrial solar power division, non-cash stock based compensation expense of $1.5 million and the review of historical stock option grants, operating expenses for the quarter ended December 31, 2006 totaled $13.3 million which was an increase of approximately $300,000.000 from the prior quarter after you exclude similar charges. Also as a reminder, as discussed last quarter, Emcore recorded a $2.2 million one time non-cash impairment charge related to the breakdown of intangible assets of Corona Optical Systems, an acquisition that we made several years ago.

Our operating loss for the quarter ended December 31, 2006 totaled $12.6 million. Excluding our terrestrial solar power division and stock based compensation expense and expenses incurred relating to the review of historical stock option grants, our operation loss for the first quarter totaled $6.9 million which was an improvement or decrease of $1.5 million from the prior quarter after excluding similar expenses.

Now below the line, Emcore had net interest income of approximately $400,000.00. Interest expense on the convertible notes was offset by interest income earned on cash received from the sale of our GELcore joint venture and our Electronic Materials and Device division. The proceeds from the sale of these two assets have allowed the company to aggressively pursue strategic initiatives that will be discussed by Reuben later in his presentation.

Excluding expenses associated with the new terrestrial solar power division, non-cash stock based compensation expense and the review of historical stock option grants, net loss for the quarter ended December 31, 2006 totaled $6.5 million or $0.13 loss per basic share. This represents and improvement or sequential decrease of $3.2 million when compared to the adjusted net loss of $9.7 million from the prior quarter. On a GAAP reporting basis, net loss for the quarter ended December 31, 2006 totaled $12.2 million or a $0.24 loss per basic share.

Turning to the balance sheet, cash and marketable securities at December 31, 2006 totaled approximately $88 million which represents a decrease of just under $37 million from the prior quarter. The decrease was the result of our $13.5 million cash investment in WorldWater & Power Corporation and a $2.4 million semi-annual interest payment on our subordinated notes. Now during the quarter, over $1.2 million was spent on capital equipment purchases and the remaining decrease was predominately due to the following -- the payment of taxes associated with the income earned on the sale of our GELcore joint venture, the payment of legal and accounting fees incurred related to our review of historical stock option grants, legal costs associated with our patent infringement lawsuits against Optium Corporation and certain other unfavorable working capital changes, primarily related to accounts receivable.

Now our AR balance at December 31 was much higher than forecasted since a significant portion of the quarter's revenues occurred in the final weeks of December 2006. As I just mentioned, during the quarter Emcore invested $13.5 million and received approximately 27% equity interest in WorldWater & Power Corporation, a NASDAQ listed company using the symbol WWAT.OB. I should mention here that our investment in WorldWater has valued -- was valued based on a $0.27 per share price. WorldWater is a solar energy systems company offering both distributed energy systems as well as grid type solar systems. The investment in WorldWater represents a significant shift in corporate strategy with regard to the terrestrial solar power market. With WorldWater, Emcore takes a big step towards becoming a vertically integrated company by being able to offer solar cells through turnkey solutions to the terrestrial solar power market as opposed to just being simply a component or panel supplier. In April 2007, Emcore announced that subject to finalizing certain agreements, Emcore would commit to two more investments in WorldWater, totaling $7 million. These investments are expected to occur shortly.

On the acquisition front, Emcore announced on April 13, 2007 that it purchased Opticom Corporation. The acquisition -- that is located in San Diego, California. The acquisition included its fiber optic, video, audio, and data networking equipment businesses, technologies, and intellectual property. Emcore paid $4 million in cash as initial consideration for all the shares of Opticom. Emcore also agreed to an additional earn out payment based on Opticom's 2007 revenues. Management anticipates that this transaction will provide approximately $7 million of revenue for calendar 2007, of which $3 million should occur in our fiscal '07. Upon integration, Opticom is expected to be operationally profitable. In 2006, Opticom generated revenues of $6.3 million and had positive net income.

Now before I turn the call to Reuben for his update on operations, in summary, Quarter one revenue of $38.5 million was within our estimated range. Quarter two revenue was approximately $40 million. Demand for our cable TV and photovoltaics products continues to significantly increase to the point where we are reviewing internal capacity forecast and potential cap-ex spending requirements. Focusing on the bottom line profitability, we continue to take steps towards improving operational performance. We also expect our satellite operations to be EBIT positive for the second quarter. We are in the process of getting an internal China manufacturing site up and running to achieve both labor and gross margin improvements. Our operations continue to be focused on engineering cost reductions and quality improvements and corporate headquarters has been moved to Albuquerque, New Mexico. This summer we expect to move completely out of the New Jersey facility. And finally in closing, we have been working diligently to prepare our restated financial statements and we will file our 2006 Form 10K and Form 10Q with the SEC as soon as reasonably practicable.

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

Thanks Adam, good job. Because there have been a number of corporate or strategic developments since the last conference call, I'm going to address the corporate issues before moving on to the discussion of market trends and operational factors affecting the company business-wise.

Among the corporate issues in the last three months, the company was able to resolve its issue with bondholders in which we were able to negotiate a transaction that we felt was in the best interest of the company's various constituencies. The principle economic terms of the transaction result in no dilution to shareholders, a reduction of long term debt from 96 to $85 million with a 50 basis point increase in the coupon. This resolution reflects management's confidence in the business going forward by improving our debt structure on the balance sheet.

The second corporate development is the ramp up of production at Emcore's China facility outside of Beijing. Production volumes start in May, this May, and ramp to $4 million a quarter by year end. We expect gross margin improvements of the products transferred to 3% per product. The company has a three phase transition of products to the Beijing facility. The first phase is to transfer package components, optical subassemblies. The second is new products and fiber to the premise portfolio. The third is the legacy products like LX4. We expect to be at full production, $10 million a quarter, by year end 2008 and the China facility is a key component in Emcore's return to profitability which I will address later.

In terms of strategic acquisitions, Adam touched on a couple of the key ones but I'm going to expand a little bit here. In November, the company entered a strategic development, investment, and supply agreement with WorldWater & Power which, as Adam described, is a solar energy systems company offering both distributed energy systems as well as grid type systems. Emcore has invested, or committed to invest, approximately $20 million for a 33% stake in WorldWater. The supply agreement entered into by WorldWater and Emcore is to deliver to WorldWater 26.5 megawatts over three years, for total revenues of approximately $100 million. The investment and strategic alliances signals the shift in Emcore's terrestrial PV strategy to provide solar energy solutions to customers as well as terrestrial PV products such as solar cells. WorldWater expects 2007 revenues of between 30 and $35 million, up from $17 million in 2006 and Emcore's delivery of the first concentrator PV system is expected in calendar year Q4, the December quarter.

Further, recently Emcore expanded its entry into the fiber optic, video, and data networking equipment business. This is a vertical integration to a box level through the acquisition of Opticom corporation for $4 million. 2006 revenues for Opticom were $6 million. Calendar '07 revenues are expected to be in the $7 million range and the Opticom platform is widely regarded as one of the most versatile networking and video transport platforms in the video over fiber marketplace. As background, video over IP is one of the fastest growing markets in the fiber optics industry and it is an addressable market and that means that a market with which we can approach with this product line of about $200 million this year. This platform allows Emcore to provide its customers with network level solutions enabling telcos or CATV service providers or other service providers, solutions in the surveillance video over IP applications such as Triple-Play. Opticom also will contribute to Emcore's profitability at both a gross margin and a net income level.

In summary, these are important developments in enabling management to continue to drive revenue growth at the company but more importantly, to improve profitability as we target objectives that will allow Emcore to reach operating profitability and earnings per share. With regard to achieving operational profitability, beyond the corporate charges that Adam outlined in his presentation that we are incurring at a legal and an accounting level, on a business unit level during the March quarter, the photovoltaic business saw substantial rebound in profitability to become EBIT positive. During the same period, the broadband business was EBITDA positive and will be EBIT positive this quarter making two of the three -- two of the company's three product lines achieving profitability targets that we had set for it for this year on an operating basis, with the third business line, the 10 Gigabit business impacted by inventory issues that Adam outlined requiring two quarters to achieve this milestone.

On a consolidated operations basis including corporate charges, the company will be EBITDA positive for the second half. That's Q3 and 4 of 2007. Product mix is improving and is driving an improved gross margin and profitability level and the path to profitability in the 10 Gb product is being driven by new products over the next two quarters.

In summary, we have incurred a substantial level of non-operating expenses in the near term. However, the integrity, competitiveness, and operational profitability of the business lines have improved substantially over the past two quarters. We feel that the opportunity to improve the two business lines and photovoltaics and broadband that are profitable, we feel that there are opportunities there and have clear understanding of the requirements to make the 10 Gb business profitable again over the next quarters.

In terms of a product line discussion, the broadband business which is defined as the cable television, the video over fiber -- the mobile video product line, is going to experience 30 to 40% year over year growth for 2007. The business drivers are a dramatic increase in capital spending by the cable television service providers that impact both short term and long term competitive issues. In terms of short term capital spend, the Comcast and Time Warner acquisition of the Adelphia networks and upgrade of those assets is driving near term revenues. Longer term demand -- that is a two to three year horizon -- the service providers, cable TV service providers, upgrade of their networks to one gigahertz to supply more bandwidth and provide more commercial services in competition with the telcos, it is driving additional capital spend. Third factor is that the build-out of new cable television networks in eastern Europe is substantial and as a figure of merit, Emcore's revenues from European sales in '06 was about 5%. This year, they're up to about 30%. As a result, we have had a number of customers come in to us, doubling or tripling unit volumes through the balance of this year and we have increased capacity 20% in the past quarter for broadband products.

Lastly, on the broadband side, we have solidified our businesses in the rapidly growing markets of mobile video and video over IP through the recent acquisition of Opticom. In the 10 Gb business, the 10 Gb business had a tough first half of 2007 with customers cutting back inventory levels. In some cases, our largest customer cut inventory levels from 12 weeks down to four which impacted the March quarter through February. For the second half, growth and profitability will be driven by new products launched at OFC in March, specifically and the ones that we're getting the most interest around, are the 10 Gb small form factor tunable transceiver, the XFP and the 10 Gb SFP plus LRM and LR modules as well as a return to normal production rates for the company's legacy 10 Gb products such as LX4, will drive the path to profitability over the next two quarters.

In photovoltaics, the current backlog of government and commercial satellite business is $105 million. Revenues will see sequential growth throughout the next several quarters as well as improvement in gross margins as we saw from the December to March period where margins expanded from 7% to approximately 20%. That coupled with the product mix of the terrestrial business which is now in production, we expect to see continued profitability and as I said earlier, this is a business that hit operating income positive in the March quarter and we expect to be able to expand on that.

In terrestrial photovoltaics, in addition to the $100 million systems level contract with WorldWater over three years, the company has an additional five year contract with a European utility for $100 million to supply solar cells which we are currently ramping up production on. Fiscal year 2007 revenues under the cell contract -- under that cell contract -- will be $6 million. In addition, in the past several weeks, Emcore has received an initial purchase order as part of a multi-year agreement from an Asia Pacific customer and approximately $1.6 million of that initial purchase order will fall into the fiscal year, bringing photovoltaic terrestrial cell revenue to $7.5 million for fiscal 2007. Further, Emcore expects to deliver its first 1.5 megawatt concentrator photovoltaic system to WorldWater in calendar Q4.

From a technical development standpoint, Emcore published results on a 30.6% efficient cell for satellite applications, improving the efficiencies from our baseline 28.5% satellite cell. In addition, at a concentrator photovoltaic level for terrestrial applications, that cell is now rated at 37% efficiency, an improvement over the existing 35% cell. The effect of these developments will enable Emcore to continue to reduce the cost per watt on both satellite and terrestrial platforms. Lastly, in light of the current TPV terrestrial photovoltaic contract, and contracts currently under negotiations, we will be increasing capacity at our photovoltaic division by 25% by year end.

In conclusion, we feel the technologies, the products, and the local manufacturing environment to both grow existing profitable business and to improve the profitability quarter over quarter once we exit the period of non-operating corporate charges, we will be in -- once that happens, we will be within two quarters of being operationally profitable as a company and with that, I will turn it over to Q and A.

Thank you. At this time, we will open the floor for questions. If you would like to ask a question, please press the * key followed by the 1 key on your touchtone phone. Questions will be taken in the order in which they are received and if at any time you would like to remove yourself from the questioning queue, you can press *2.

Our first question comes from John Lau with Jeffries and Company.

Yes, hi Reuben. I wanted to focus in on some of the comments that you made especially on terrestrial photovoltaics. Now, your investment into WorldWater has given you a lot more access you said, to some of these contracts. Can you give us a little bit more visibility on what that contract you're shipping in the December quarter and more importantly, the efficiency and the cost per watt that you're going to be delivering to the customers for that terrestrial application? Thanks.

Sure. The contract with WorldWater currently envisions that in 2007 we ship 1.5 megawatts. The average cost per watt is -- and I don't have the figure in front of me -- but it's between four and $5.00 a watt at a CPV level. Call it, you know, call it $4.50. The contract then in '08 calls for ten megawatts, same kind of cost per watt -- and that's 2008 -- and in the third year, the contract is for 15 megawatts again at the same kind of pricing. So in short, you've got something like $7.5 million in system revenue in calendar '07. You've got something like 40 to $45 million in '08 and then something like $60 million in 2009 at sort of generically, $4.00 a watt pricing.

And Reuben, you -- is that on the system level as opposed to the numbers that we hear on the cell basis? Is that the differential for what we see?

Yes, that is a turnkey. That is a system. That's with the concentrator modules and a panel on the system with a tracker. It's a -- it will be a turnkey for Fluor.

And just to focus in on that cost level again on the cell basis. Is this competitive with many of the silicon based solutions that you have here and can you address as you increase that efficiency what the projected growth path is versus the silicon application and what constraints can you see on the silicon side that would change that dynamic?

I think right now the silicon -- just to compare and contrast the two technologies -- we take $4.50 a watt on this initial generation of systems. I think silicon is probably $5.50 to $6.00 a watt from a pricing standpoint so a substantial economic advantage with concentrator photovoltaics.

And just to circle back and my final question -- have you seen anything in terms of the supply for the silicon cells versus the gallium arsenide which would change that dynamic in the near future?

We follow the silicon market a little bit but I think that they -- the silicon market -- some of the initial silicon markets that had driven some of the feeding frenzy and kind of robust pricing that the silicon guys were seeing such as Germany have cooled a little bit. I think the subsidies in Germany have been lowered and that's lowered demand to pay a small piece so I think their pricing has come down but it's still not at this level.

Okay, great and so -- and then flowing through the, your contract through WorldWater, do you believe they are continuing to gain traction on the design and field comfort level on their visibility of their business going not only for this year but into next year?

You know, I think they've announced a number of what I'll call substantial projects. That's a matter of public record. I think they have a fairly robust pipeline of projects that they feel very positive about is the best way I can express it.

Great, thanks. I'll turn it over, thank you.

Thank you. Our next question comes from Ramesh Misra with CE Unterberg.

Good morning, guys. Thanks for taking my questions. My first question is in regards to your cap-ex plans for this year and if you can give an estimate of what is has been so far and where do you see it going in '08?

Sure. On the broadband side where I talked about expanding capacity by 20% last quarter -- what was the cap-ex number?

$1.5 million.

That was a $1.5 million spend last quarter. I would call that above plan, meaning we didn't -- when we put our original budget together for the year, I don't think we anticipated that the CATV and broadband business was going to end up being as robust as it has turned out to be and that's great news that we're expanding capacity. The volumes lower our costs. They improve gross margins. It's -- they absorb more overhead. So, it helps the profitability. I will tell you that I think that 20% increase in production capacity at the broadband level is going to be absorbed pretty quickly and we will probably be expanding in the same kind of number, 1.5 million, before year end.

On the photovoltaics side, where we talked about expanding capacity for the terrestrial contracts by 25%, what that really means is probably adding a couple of reactors, MOCVD reactors, at a -- so to increase cell production. The cell contracts that -- you know, we have signed one with the Asia Pacific company and second with a European utility -- are pretty substantial in subsequent years and that capacity is -- our 50 megawatts worth of capacity is going to be absorbed relatively quickly and we need to bring on additional capacity so the cost of sort of two additional MOCVD systems would be $3 million.

And not only that, Ramesh -- this is Hong Hou. We not only have increased capacity for the solar cell manufacturing all the way from the wafer (inaudible) capability for MOCVD but also some evaporators and part of the (inaudible) to max the throughput on the wafer processing level but also we will be establishing new capability to manufacture the receivers, receiver package for terrestrial solar cells. So we are ready to go to production later this fiscal year and early '08 with terrestrial systems. The proto cap-ex for the PV is expected to be six to $7 million.

For the back end?

MOCVD.

Right, okay.

So six to $7 million for all photovoltaics in fiscal '07 plus about $1.5 million on the -- sorry, about $2 million on the broadband side.

The cap-ex initially is going to be at the MOCVD level and then we'll add it at the back end so it's not just -- it's -- we've only got six months, two quarters, left in fiscal '07. A lot of this will fall into '08.

I see, okay. Shifting gears a little bit on to the 10 Gigabit side, besides for the inventory adjustments, have there been any pricing changes? What are pricing trends overall over there?

I think on that 10 Gb business Ramesh, we plan for sort of a two to 3% ASP reduction per quarter and I think it's been more lumpy than that but it's -- meaning you may go a quarter without any change and then you'll get a 5% reduction, but on average, the two to 3% a quarter is a pretty good way to plan for it.

Okay. In regards to your announcement of the LRM product, I know you've said that you are the only SFP plus solution out there. Well, some of the other competitors have also made similar claims. Can you kind of help us contrast between your solution and the others?

I'll let Hong take that one.

Ramesh, I think there are many announcements. Many companies announced the LRM product. My understanding, most of them is in X2 form factor so I think we are one of the first ones to announce the LRM available in SFP Plus form factor.

Okay.

This is beyond X2. This is the new form factor that Cisco is basing its platforms on which will start production in year end but probably commercial you know, end of -- (inaudible) end of '08.

Okay. In regards -- I missed your commentary about the multi-year terrestrial contract from the Asia Pacific customer. I got the part that you have, you're expecting about $1.5 million in revenues in '07. What's the overall term of that contract and the total revenue in dollars?

You know, at this point, we're covered by an NDA, Ramesh, and I can't give you those details. I will tell you it is as -- it is larger than our existing five year contract with the Spanish group.

I see, and how large was -- how large was that? Wait, that was $100 million over five years? Is that correct?

Yeah.

Got it, okay, and is this also over five years or three years?

No, it's longer.

I see, okay. Okay, I think that covers my questions for now. Thanks very much, guys.

Thank you.

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

Hi, good morning everybody.

Hi, John.

First question, I believe you gave the March quarter gross margins for photovoltaics but you didn't give it for fiber optics.

That's right. We're still reviewing our second quarter results and as you know, gross margins fluctuate depending on revenue, product mix, and inventory adjustment so as mentioned, gross margin for the photovoltaics division approximated 20% and that's an increase from the 7% gross margin in Quarter one.

Fiber optics gross margins should be in line with historical levels and again, this is preliminary, unaudited, at this point.

Okay, fine. About LX4s, where do you see your products being in the life cycle? I mean, I guess -- I hate the sports metaphor but what inning is LX4 in its lifetime and when do you see volumes start to decline in favor of other form factors?

Let's see. You know, the product migration in 10 Gb is from -- it's the LX4 in XENPAK, then LX4 and then X2. Then it goes to SFP plus and SFP plus will be the platform for Cisco for all new boxes. But it's not backwards integrate-able so it doesn't, and Hong could give you the technical reasons why it's not backwards integrate-able into existing install base but it's -- you know, so, eventually the new box shipment business will probably by 2010 will go away for LX4 and be replaced by SFP plus. On the -- however, the legacy business, the install base, particularly in the (inaudible) of 6K, you know that can go on five to seven years.

Okay, are you shipping a large share of -- so under the umbrella of LX4s, are you shipping a large share of X2 versus XENPAK form factors currently?

We see, not today because it was a re-spin, but I think X2 is going to be a bigger business at Cisco than the XENPAK by year end this year.

John, this is Hong. We are shifting some of the XENPAK platform to X2 so if we have let's say, the lifecycle for LX4's XENPAK is probably in the slope of declining.

Probably peaked already.

Yes.

Okay.

By the way, in our budgets, our forecasts, we don't show LX4's XENPAK being anything more than flat year over year.

Thanks. You know, you talked about buying a couple MOCVD reactors, or probably building them. Do you have the space in Albuquerque? How much capacity do you have there?

John, we have space in Albuquerque without significant modifications. Our current infrastructure can support four additional slots of MOCVD so we have the capacity and space to do that.

Have you ever told anyone how many reactors you have operating -- running today?

Adding four reactors will be about 60, 70% increase in the current production capacity.

We have reactors that were used for development. We had two reactors and I think we've got --

We have five in production.

Five in production.

And two in development.

Yeah, so we'll add two more anyway before year end.

Okay, thank you. I understand you were -- the opening of your China facility I think was last week. Was that just finishing the building? I mean, you're talking about staging production of various products through the remainder of the calendar year.

That's right. John, as Reuben elaborated, we're going to be having three phases and last week were the first -- well, Monday, this past Monday they opened the facility so we'll be having some critical optical subassembly products which is really time sensitive for getting into the qualification cycle, being produced first. Then we'll be moving on to other products on the plan.

Thank you and then just finally, just a quick accounting question. Your stake in WorldWater, are you going to be reporting that separately when you do start putting out full financials?

Right. We're going to take a look at WorldWater's financial statements and we're treating that as an equity investment, John, so -- and we're going to be reporting their financials on a three month lag because of the timing of their reporting, similarly to what we did with out other equity investments that we had in the past.

Okay, great. Thank you very much.

Thanks.

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

Hi, thanks. A couple questions -- Reuben, on the cable TV business, congratulations on that growth by the way. I was wondering, is that greater than 50% of broadband revenues at this point in time?

Of fiber revenues you mean?

Yes.

Yeah, it is.

And the -- so that has, so that has actually taken a flip compared to last year, correct?

Absolutely. We've seen tremendous -- you know, the 10 Gb business had a -- you know, as I said, based on the inventory management issues that we saw in December that affected March, the first half in 10 Gb was impacted by that while the broadband side was exploding so yeah.

Alright, great, and I don't know if you or Hong want to comment on this, but it might be helpful. Could you describe the competitive landscape in cable TV in comparison to the fiber business and do you see any more entrants coming into the cable TV, or what barriers to entry I guess would be preventative of other competitors coming in to that particular market.

Jed, I would be happy to answer that question. On the cable TV side, as you know we represent a consolidated effort from the old effort of our town and (inaudible) cable TV business so we have consolidated intellectual property, technology, product performance and customer base so I would say today we serve the majority of the cable TV business customer base and we probably can say the major players by comfortable margins and we know there is another company, you know probably splitting business with us at one of the leading equipment manufacturers' place but in other places, I think we are either sole supplier or majority supplier.

By the way, along those lines, this is a company that we are currently in litigation with over their infringement of Emcore patents.

Alright.

And barrier to entry I think is pretty high. We are the only vertically integrated, all the way from lasers to systems -- those lasers are different from the digital lasers. They require a significant -- significantly linear performance and load distortion so we also have the patents to cover all the (inaudible) distortion technology and although in the area a number of companies express interest to get in but so far we are watching that very closely, but we haven't seen a significant entry from any other players yet.

Great, thank you. That's helpful. Just moving on to the terrestrial photovoltaic and then I'll pass it on. A couple questions here. First, Reuben, in the 2007 plans, I think this was for WorldWater, of the 7.5 megawatts in 2008 of the ten and then '09 of the 15. Will you be recognizing revenues on a percentage of completion and are those estimates, will those jobs be actually completed so you'll be able to book those revenues or just a little guidance there.

We have, consistent with our space business, Jed, when we are in panel builds for Lockheed Martin or for Boeing, we book revenues on the basis of percentage of completion and obviously get paid when we ship them. So there's a different between cash and P&L. My -- we haven't yet addressed the revenue recognition on that with our auditors but I think we will try and be consistent in our revenue recognition policies with our other businesses.

Alright, so I guess said another way, we will for sure see those in bookings. It's not certain whether or not it would flow into revenue given that timeframe that was laid out.

Well, for one thing I can assure you that there will be a difference between the billed and the cash side of it. On the bookings, you'll certainly see -- I think that's probably a fair statement, but I think again you'll kind of get a sense -- if the auditors are consistent on this position with regards to this, I think we'll see it booked on a percentage of completion so you'll see part of the revenues anyway in that fourth quarter, if not all.

Alright, great. Two additional questions on the CTV. The capacity expansion that you're going to be adding, Reuben, how much of that is going to be for systems and how much is going to be for cells? Could you give a breakdown?

The two MOCVD systems, or the 3 million approximately, is all cells, right? But those cells will be also used at a systems level as well but on the back end that Hong talked about, the evaporators, the lithography, all of that stuff -- you know, that's all cell related too. And then the floor capacity for the receivers and modules, what number is that Hong?

For the receivers and modules, probably about $2.5 million.

Okay, so it's probably 60/40.

Gotcha. I guess what I was trying to get at was maybe the -- I realize that for the MOCVD reactors, you'll be making all cells but in the sales process, I think your previous capacity was around 55 megawatts so I was --

Yep, 50 megawatts is right.

And as we look forward, this addition of a couple reactors would expand that capacity quite a bit so I'm wondering what -- if it was used for systems, but if it is used for cells to say, Asia's provider that will be using your cells in their system, I'm just trying to get the idea from a revenue contribution. Will it all be dedicated to systems? Will 25% be dedicated to cells?

Okay, I understand. I think when you look at, and let's just look at the contracts we have in hand, in '07 it's probably 50/50 between cells and systems on a revenue standpoint. In '08, it's probably 60/40, systems, and I think it's probably -- it's going to fluctuate between 60/40 and 70/30 probably.

Alright, and then last question -- to the extent that you can comment on this, when we look at the power purchase providers here in the U.S. that are starting to look at CPV technologies, can you comment on what their ability to raise funds has been when CPV has been part of the build plan? In other words, are you starting to see a change in momentum for concentrators to the extent that the purchase providers are having an easier time raising the capital for some of these farms that they're building?

Sure. You know what I think is the best way to address or answer your question, Jed, is as we sit here today in the U.S. markets, concentrator photovoltaics is still an emerging technology and is priced off those PPA agreements at a higher cost of capital than what I'll call legacy technologies. With the exception of, and where a lot of sort of the market acceptance is coming initially, is outside of the United States. Certainly Spain, certainly the Asia Pacific regions are embracing CPV more aggressively than they are in the States but that will flow through to the States over time.

Great, I'll pass it on. Thanks for the additional color.

Sure.

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

Thanks, good morning. This kind of should help the fiber optics margin going forward. You mentioned what you're expecting there. What about the photovoltaics and where that can go over the next few quarters and into '08?

20% as Adam cited earlier for the March quarter, I think. As we get to higher fab utilization, that drives a lot of profitability and I would think that once you get to sort of an 80% fab utilization rate which we ought to be at near kind of year end, my guess if you're in what, low 30% gross margins? (inaudible) product mix as it does with all of our others between kind of systems, panels, or cells but certainly fab utilization and absorbing those fixed costs is a big driver in profitability, or gross margins, from a P&L standpoint.

Okay thanks, and looking at being -- did you say that the fiber optics business was EBITDA in the March quarter?

Yeah.

Okay.

No, no, no -- broadband business was. Sorry.

Okay, and the company being EBITDA positive in the back half of the year, what would you be excluding from that in terms of (inaudible)backs?

All of these corporate charges that Adam walked through.

Okay, including the terrestrial photovoltaic development?

Yeah, that was again a charge which we've expensed but it was largely related to building the prototype concentrator system in the backyard in Albuquerque.

Okay, and does that go away at some point or is it pretty much --

Well, we're not going to build a lot of those.

Right.

And also Michael, when we turn the development into the production mode --

Then it all shifts.

Yeah, a lot of engineering resources is going to be allocated to support the production rather than just on the operating expenses.

And rather than take anymore fixed costs, we're expensing everything.

Gotcha, very bright outlook. Good luck. Thanks.

Thank you.

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

Good morning, guys. Can you hear me?

Yep.

Excellent. I think previously you had said there would be about 155 to $160 million for the fiscal year. I was just wondering if you could update us on that.

I think that's still -- we have reason to be optimistic, more optimistic, about the second half now that I think we've moved through some of the digital issues and inventory impacts and so on. Second half is going to be substantially better and -- but I think the 165 is still a good number.

Okay, and just on the return to EBITDA positive and gross margin expansion in fiber optics, I think you highlighted three products but I was a little bit confused. SFP plus you indicated wouldn't be commercialized until 2008. The tunable 300 pin small farm factor that you demonstrated at OFC, I didn't think was available this year and then I believe you mentioned more of a commoditized XFP 10 Gb. How are those going to drive gross margin expansion and offset potential (inaudible) home ramp in the back half?

Sure. There are a couple of products we didn't mention, one which we finished qual with Cisco for their core router called CRS1. That's an OC192 10 Gb part for optical back planes. Didn't mention it because we didn't announce it at OFC. It was previously announced and that will start a ramp -- that will start having revenues I believe this quarter and that's a -- you know, Cisco buys $30 million a year of that part and there are only two vendors. So, that's one element.

Is that something similar to what Big Bear Networks does in terms of router interconnects on the back plane, parallel optics?

This is Cisco's --

This is parallel optics for the back planes switching and routing.

Okay.

The CRS router is a -- you know, Cisco sells to ISP to route large volumes of telecom traffic off the LAN. So that's one and that will be a big near term driver.

That's a good gross margin business. How about the fiber to the home piece?

The fiber to the home piece -- and by the way, just let me finish the OFC parts. I think the tunable, there is substantial demand around and we're working out the supply chain issues. That's the usual qualm but that's why we're also saying those parts are going to take a couple quarters before they add significant revenues to us. So we're not saying it happens today. We've got other parts that add revenues in this quarter and next quarter. The -- and the fiber to the home piece continues to clip along at -- you know, Hong, maybe you want to describe the pricing and the environment -- but you know, that's a variable cost structure to us so we're, on average, we're doing 30,000 to 50,000 parts a quarter.

Jeff, you know the PON transceiver for FTTP still very margin challenged and again before we have the China manufacturing up and running for those products we will not be able to go very aggressive into the marketplace. But as product line, it's very important to us not only for what is has for the revenue P&L for the future but also for the cable TV side. You know, there are many different discussions for the future on network upgrades so we have a very comprehensive, high bandwidth platform but for the last mile deliver to through coaxial cable there are some talks even in the cable TV infrastructure, they may want to in the future go with the last mile with a fiber solution so FTTP the transceiver side maybe will be bridging the last mile for the cable TV infrastructure as well so for us, it's important for the near term revenue, it's important to maintain the complete technology portfolio for the future of the cable TV side. Once we have our cost structure and production infrastructure in place in China facility, we'll be able to lower our costs significantly and we'll be going very aggressive. So, as far as I know, we are still one of the only two qualified suppliers to the leading equipment supplier like Bell Labs.

That's on the B-PON side, right? Not G-PON which Verizon is moving to over the next couple months?

Right, that's the B-PON side. G-PON deployment has not been much in the U.S. yet.

But we're right in the mix on that.

Sure, and as you move to China, what do you think or what should we be modeling for gross margins because you mentioned optics gross margins going up about 300 basis points per product but if you're at a negative gross margin, I would imagine for this product currently, or break even, I would assume you have an internal hurdle rate of over 15% or 20% which is what your key competitor that you mentioned had a very difficult time achieving.

I think certainly we expect at least a 3 percentage point of a margin improvement to apply to this platform as well and further improvement upon that, we have many things in place to address that from the design point of view as well.

Okay, and Reuben, you mentioned something about X2 and the LR4 transition in response to John Harmon's question. I think you mentioned you had to re-spin it but you expected X2 to be ramping at the end of the year. Have you been qualified in for that product so far or are you mainly playing more the SFP cycle for 2008?

I think we think our presence in SFP is going to be a larger revenue stream for us than X2. X2 is crowded. We expect to be sort of one of three or four vendors at X2 so we think we've got an advantage at SFP plus. Now, it'll still be good business in the aggregate but it's a crowded market space right now.

I just have two more quick ones. You mentioned I believed it was 7.5 million for '07, terrestrial. I think on the last call you mentioned 13.

Yeah, that was on a combined basis.

On a combined, okay. And then, could you just detail the raw material problem that impacted the photovoltaics margin this quarter?

That was -- we had some quality issues on substrates, germanium substrates, for our PV production and we had some -- we had production commitments we had to make with kind of less than optimal specs on some of the substrates and that impacted overall yields which increased our costs. We think we have a path out of that.

Great, thank you.

Thank you. Our next question comes from Tim Savageaux from Merriman.

Hi, good morning.

Good morning.

I have a couple of questions. What I'm going to do is, and bear with me here -- a lot of moving parts, first call, but to try and reconcile your, a lot of the anecdotal commentary that you've given on both the top line and the gross margin with the guidance that you've given. And just starting for the year, referencing the most recent question of $165 million, then that would assume kind of flat revenue from the high end of your range for the June quarter which again, I think is pretty well out of sync with some of the very positive commentary with regard to the cable optics business with regard to what's happening in both satellite and in terrestrial PV so it seems like that guidance range should be coming up unless you're really meaning to guide flat despite commentary suggesting continued sequential growth throughout the year on the photovoltaics and the broadband side. So is something really horrendous happening on the digital fiber optics so or are we just being conservative here I guess is my question.

I think -- let me put it this way. I think internally, we are far more optimistic about what we will do as revenues for Q3 and Q4 than our guidance would indicate. I think it just -- you know, we -- I don't know. We have just gotten ultra conservative in the numbers that we put out there and we just feel like it's a, there is no percentage in trying to -- you know, if we really felt like we were going to do 44, 45 next quarter, there is no point in saying that until we post the numbers.

I think you're going to do 45. Okay, well let's move -- quickly on the top line still, you talked about 7.5 million in terrestrial. I think there was some discussion in the past on what's calendar versus what's fiscal. I think you said fiscal. Was there any in Q1 or is there expected to be -- well, sorry. Is there any in March or is there expected to be any in June or when does that terrestrial start to hit --

I'm sorry. It's a good point. The difference between terrestrial and calendar -- obviously the fiscal year ends September 30th and the numbers I gave you for cell production are fiscal so obviously there is additional cell production in the December quarter. The systems level revenues we expect to recognize in Q1 '08 which is the December '07 quarter. So, there is just a sequence on -- what we wanted to do was to point out that that's the -- December quarter is when the first shipments go. There will be cell revenue on top of that for Q1 '08 but in '07, fiscal '07, over the course of the year the number is 7.5 and it's just all cells.

Got it. And one more to finish up the top line and then I'll move to gross margins. Last call you talked about, you gave a number with regard to sequential growth in cable. I believe it was around 15% or so. If you could just sort of reflect on that, is that sort of what happened in March and as you look toward June, I wonder if you could talk to sort of the similar expectation. You did talk about 30 to 40% growth for the year but can you sort of update or comment on that 15% sequential growth number?

I think the number for sequential was somewhere between ten and 15% quarter over quarter -- about 12 I thought.

Yeah, the broadband side (inaudible) cable TV, the video transport in FTTX, so the cable side of the revenue (inaudible) quarter over quarter was 15%.

Oh, okay. Yeah, alright, yeah, then it was 15%. I'm sorry, your question, Tim?

Looking forward into June, do you have any commentary on if that trajectory is similar?

I think the sequential increase is probably greater than 15%.

Okay, great and that kind of brings me to the gross margin question because given that the cable TV commentary -- you talked about PV coming back to 20 in March. That would suggest fiber optics flat to down on the margin front which again is kind of inconsistent with cable getting stronger which is your highest margin business so I wonder if you could speak to what's going on there and what you might see moving forward as well into June from a margin perspective, again given what I would gather would be an upward pull on your gross margins from that cable strength. It's at least not reflected in what you're talking about for March.

Right. On the cable side, frankly the broadband product lines as you sort of correctly surmised, is the highest gross margins within the company. So as the concentration of revenues shifts to more and more cable TV revenues, you're going to see fiber optic expansion, margins expand, quarter over quarter. So, the broadband margins are well above corporate average is probably the best way to describe it. They are offset somewhat by the unabsorbed overhead of the digital side when those revenues have been impacted negatively in the December and March quarters. Moving forward, as the product mix continues to shift to more cable TV, you're going to -- fiber optic reporting segment is going to continue to expand margins.

And finally, on the digital side, would you expect March to have been the trough quarter there?

You know, I certainly hope so, yeah.

Okay, well thanks. I appreciate it, guys.

Thank you.

Thank you. Our final question is from Michael Cody with B. Riley.

Thanks. I meant to ask previously -- the backlog you said jumped to $119 million. Could you break that down, please?

Sure. On the photovoltaic side, as Reuben mentioned, we're looking at about $105 million, okay? And then on the fiber side, it's the remaining difference.

Okay, and is fiber optic backlog typically much -- you know, that much lower than the photovoltaics based on the term and could you talk about whether you can break that down any further between cable and digital?

Just typically the terms of trade are -- you know, our purchase orders, those are more terms businesses, Michael, so you're looking at best count on P.O.s, going out 40 days although I must say I think the broadband business has got visibility a lot longer than that.

Okay, great. Thanks, guys.

We have no further questions at this time.

Thank you everybody. In conclusion, just to reiterate the comments earlier, the PV business obviously transitioned into a positive operating income. The broadband, we expect a positive operating income this quarter. We have a little work to do on the 10 Gb side to recover from the first half but we know the things that we need to do and we're executing on that and as I said, we expect from a profitability standpoint, within two quarters of us getting out of these corporate charges, we will be able to report a P&L which reflects positive operating income as a company.

So with that, I thank everybody for your attendance.