EMCORE Corp (EMKR) 2007 Q3 法說會逐字稿

Good morning, ladies and gentlemen. My name is name is Moon and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Emcore Corporation third quarter fiscal 2007 earnings conference call. All lines have been placed on mute to prevent any background noise. (OPERATOR INSTRUCTIONS). And 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 market closed, Emcore released its fiscal 2007 third 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; Dr. 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 remind you that some of the comments made during the conference call and some of the responses to your questions by management may contain forward-looking statements that are subject to risks and uncertainties as described in Emcore's earnings press release and filings with the SEC.

I will now turn the call over to Adam.

Thanks, Vic, and good morning to everybody. Today, we are reviewing the results of our third quarter ended June 30, 2007. I will also provide some financial guidance for fiscal 2008 and our fourth quarter just ended September 30.

As previously announced, we are engaged in a voluntary review of our historical stock option granting practices. We believe we have determined the appropriate measurement dates for all misdated stock option grants and have determined the accounting impact for those grants. We have concluded our accounting and financial review, and the additional stock-based compensation charge remains unchanged as reported back in November of 2006. The unaudited results in yesterday's announcement include charges and expenses related to our restatement of prior-period financials.

Also, just as a reminder, Emcore sold its Electronic Materials and Device Division in the fourth quarter of fiscal 2006. All financial information in fiscal 2006 that relates to this division has been excluded from operations for comparison of financial performance.

Moving onto consolidated revenue, consolidated revenue for the third quarter ended June 30 was $44.5 million. This represents an increase of $8.2 million, or 23% from last year, and an increase of $4.7 million, or 12% from last quarter. Consolidated revenue for the nine months ended June 30 exceeded $123 million. This represents an increase of almost $15 million, or 14% last year. Both of our operating segments posted revenue increases when compared quarter over quarter and year over year.

Fiber Optics revenue for the three months ended June 30 totaled $27.6 million. Now this represents an increase of $1.6 million, or 6% from last year, and an increase of $1.4 million, or 5%, from last quarter. For the nine months ended June 30, Fiber Optics revenue increased over $2 million, or 3%, when compared to the prior year, exceeding $79 million. Our Fiber Optics division continues experience significant customer demand for its cable TV products, a trend that is expected to continue in fiscal 2008. Also, despite higher revenue for this division, revenue from our legacy products that serve our digital Fiber Optics sector continued to be lower than last year due to customer inventory management and increased competition. The good news is, in the fourth quarter ended September 30, we experienced a recovery of revenue from this product portfolio and expect revenue in fiscal 2008 to return to historical levels based on sales of new product launches that Reuben and Hong will elaborate on during their operational update.

Photovoltaics revenue for the three months ended June 30 totaled $16.9 million. This represents a 63% increase in revenue, or $6.6 million when compared to last year. This also represents a 24% increase in revenue, or $3.3 million from last quarter. For the nine months ended June 30, Photovoltaics revenue increased $12.5 million, or 40%, when compared to the prior year to $43.9 million. Our Photovoltaics division continues to experience increased demand for its space and terrestrial solar cells, solar panels and government-related contracts. As a percentage of total consolidated revenue, Photovoltaics revenue for the nine-month period increased from 29% in fiscal 2006 to 36% in fiscal 2007.

Also in September, our Photovoltaics division received notice that our interim U.S. government billing rates were approved, which resulted in additional revenues of approximately $400,000 for the first half of fiscal 2007. Had we been current with our quarterly reports, revenues in the fourth quarter would have exceeded $47 million.

Backlog at June 30 and September 30, 2007, was approximately $120 million. Reporting backlog by segment and starting with the Photovoltaics division, backlog at September 30, 2007, was approximately $100 million. Please note that our Photovoltaics backlog does not include any orders for Concentrated Photovoltaics, or CPV systems, from our new Emcore Solar Power division since these contracts have yet to have been finalized. Approximately $37 million of the Photovoltaics-related backlog relates to orders for terrestrial solar cells and receivers. These orders are expected to be shipped entirely by December 2008.

Approximately $63 million of the Photovoltaics backlog relates to orders for satellite-related solar cells and panels and government research contracts. Of this amount, approximately $38 million is expected to be shipped in fiscal 2008. The remaining portion, or $25 million, relates to a long-term solar cell supply agreement that we have with a large satellite manufacturing company with shipments scheduled for several years. Consistently with the industry, our government contracts are subject to cancellation and oftentimes get restructured into completely different programs. We adjust our backlog when these events occur, and as of today, we don't expect any events to impact our fiscal 2008 revenue guidance.

Regarding Fiber Optics backlog, a majority of our Fiber Optics products typically ship within the same quarter, when the purchase order is received. Therefore, our Fiber Optics backlog of $20 million at September 30, 2007, is not necessarily indicative of additional or actual revenue or the level of orders for any subsequent since the period.

Moving onto gross profit and margins, consolidated gross profit for the quarter ended June 30, 2007, totaled $9.8 million. This represents an increase of $2.2 million, or 29% from last year, and an increase of $2.6 million, or 37% from last quarter.

As a reminder, our March quarter included an inventory write-off of approximately $1.2 million related to excess and obsolete digital Fiber Optics components. Excluding this onetime charge, gross profit in the June quarter still increased $1.4 million, or 17%, when compared to the March quarter. Consolidated gross profit for the nine months ended June 30 totaled $22.4 million. This represents an increase of $600,000, or 3%, from last year.

Consolidated gross margin for the quarter ended June 30 was 22%. This represents a gross margin increase from both the 21% reported in the prior year and 18% reported in the prior quarter.

Reporting margins by segment -- Fiber Optics gross margins were 22% for the quarter and 19% for the nine months ended June 30. For the quarterly period, Fiber Optics gross margins remained unchanged when compared to last year and last quarter after excluding the onetime inventory charge.

Photovoltaics gross margins were 22% for the quarter and 17% for the nine months ended June 30. For the quarterly period, Photovoltaics gross margins increased from 19% gross margin as reported last year and from 21% gross margin reported last quarter. Photovoltaics achieve higher -- significantly higher gross margins due to increased revenues and improved product mix.

Operating expenses totaled $23.2 million for the quarter and $63.4 million for the nine months ended June 30. A significant portion of the quarter-over-quarter, an increase of $10.3 million, and year-over-year, an increase of $23.8 million in operating expenses, was due to the development costs incurred at our new Terrestrial Solar Power division, professional fees associated with our review of historical stock option grants, and severance and patent litigation-related expenses.

As disclosed in the non-GAAP tables included in yesterday's announcement, during the three and nine months ended June 30, operating expenses included approximately $2.2 million and $6.7 million, respectively, related to our new Solar Power division. As previously announced, Emcore's second-generation Concentrator Photovoltaic, or CPV system, is expected to move from development stage to production in the December quarter.

Operating expenses during the three and nine months ended June 30 also included approximately $3.9 million and $8.2 million of professional fees incurred from our review of historical stock option grants. These amounts also include the cost incurred associated with our derivative class-action lawsuits and our convertible debt consent to amend and waiver agreement with our bondholders that was completed in April 2007.

Severance and litigation-related expenses during the three and nine months ended June 30 was approximately $2.9 million and $6.3 million. A majority of the severance expense was related to our decision to close our New Jersey facility and relocate the company's headquarters to Albuquerque, New Mexico. The Company has also incurred significant legal expense associate with our litigation against Optium Corporation for patent infringement.

Stock-based compensation expense during the three and nine months ended June 30 totaled approximately $800,000, or $3.8 million in operating expenses. Excluding the expenses associated with our new Solar Power division, our review of historical stock option grants, the severance and legal-related expenses and stock-based compensation expense -- and I will refer to these expenses later as adjusted expenses -- adjusted operating expenses totaled $13.3 million for the quarter and $38.5 million for the nine months ended June 30. For the quarterly period, this represents an increase of $1.4 million in operating expenses from $11.9 million reported in the prior year. For the nine month period, this represents an increase of $1.9 million in operating expenses from $36.6 million reported in the prior year.

As a note, fiscal 2007 third quarter results included approximately $200,000 associated with our new manufacturing facility in Langfang, China, and approximately $400,000 of operating expense associated with our April 2007 acquisition of Opticomm Corporation.

Moving onto operating loss, operating loss totaled $13.4 million for the quarter and $41 million for the nine months ended June 30. Excluding adjusted expenses, our adjusted operating loss was for the three and nine months ended June 30, totaled $3.2 million and $15.1 million. For the quarterly period, this represents a decrease in operating loss of $700,000 when compared to the prior year. For the nine-month period, this represents an increase of $1.1 million in operating loss when compared to the prior year.

After the last earnings call, I was asked several times to provide EPS based on results of operations, excluding other miscellaneous income expenses. In yesterday's announcement, I provided this info in a non-GAAP that highlights a $0.02 per share improvement on a quarterly basis when compared to the prior year.

Our net loss totaled $14.5 million, or a $0.28 loss per share for the quarter, and $41.4 million or an $0.81 loss per share for the nine months ended June 30. Excluding adjusted expenses and discontinued operations, our adjusted net loss for the three months ended June 30 totaled $4.3 million, or an $0.08 loss per share, an improvement of $0.02 per share from the prior year. For the nine months ended June 30, our adjusted net loss totaled $15.5 million, or a $0.30 loss per share, an improvement of $0.08 per share from the prior year.

Moving on to a few more highlights, our Photovoltaics division, excluding our Terrestrial Solar Power division, posted positive earnings for the third quarter, enough to take this division into positive earnings for the entire nine-month period. On a GAAP reporting basis, our operating loss includes non-cash stock-based compensation expense of approximately $1 million a quarter. This charge also affects gross margins by approximately 1 percentage point. I have provided non-cash stock-based compensation charges in the non-GAAP tables in yesterday's announcement.

On April 9, 2007, we entered into a consent to amendment and waiver with certain holders of our convertible notes to resolve an alleged bond default event. We increase the interest rate on our notes from 5% to 5.5% and the conversion price was decreased from $8.09 to $7.01. We also redeemed 11.4 million of our notes. The redemption of our bonds, amongst other things, prevented dilution of our shareholders' holdings by approximately 1.6 million shares. It also reduced our annual interest expense by approximately $570,000 and it reflects our confidence in Emcore's performance in fiscal 2008.

As a result of this transaction, Emcore accelerated costs being amortized over the life of the redeemed notes and recognized the loss of approximately $600,000 in the third quarter. As a reminder, our convertible notes are redeemable should Emcore's common stock price reach $12.09 per share for 20 out of the 30 consecutive business days.

On the acquisition front, as previously announced, Emcore acquired privately-held Opticomm Corporation of San Diego, California, in April 2007. We anticipate this transaction will provide approximately $7 million in revenue in calendar 2007, of which $3 million has already occurred. Opticomm is operationally profitable.

As a reminder, in November 2006, Emcore invested $13.5 million for a 27% equity interest in WorldWater & Solar Technologies Corporation, a NASDAQ-listed company using the symbol WWAT.OB. WorldWater is a solar energies company offering both distributed energy systems as well as grid-type solar systems. Our investment in WorldWater, which resides on our balance sheet at an original cost of approximately $13.9 million, was valued based on a $0.27 per share price. Now our balance sheet does not reflect the significant appreciation in equity value based on their current stock price.

In accordance with accounting guidance, although our investment in WorldWater gives us the ability to exercise significant influence over the operating and financial policies of WorldWater, since the investment in preferred stock does not qualify as an in-substance common stock, the equity method of accounting is not appropriate. Therefore, we were recording the investment in WorldWater under the cost method of accounting, which means no quarterly P&L adjustments. The accounting for this investment is subject to change depending on the types of transactions we enter into together in fiscal 2008.

Turning to the balance sheet, cash and cash equivalents and marketable securities at June 30, 2007, totaled $48.3 million, a decrease of $28.9 million from the prior quarter. The decrease was primarily due to the partial redemption and semiannual interest payment on our convert notes that total $13.8 million, the payment of professional fees incurred associated with our review of historical stock option grants, the $4 million purchase price of Opticomm Corporation, severance and legal costs associate with our patent infringement lawsuits against Optium Corporation, and various increases in net working capital requirements, including our investment in our new China manufacturing facility. Capital expenditures totaled $2.1 million for the quarter and $4.8 million for the nine months ended June 30.

Before I turn the call over to Reuben for his update on operations, I would just like to provide a financial update on our fourth quarter results just ended September 30 and some guidance for fiscal 2008. Our books for the fourth quarter aren't closed yet, but prelim results are in. Total consolidated revenue for the fourth quarter ended September 30 is expected to be approximately $47 million. Fiber Optics revenue for the quarter totaled $31 million, and Photovoltaics revenue should be approximately $16 million. This represents a revenue increase of over 31% year over year and a 4% increase when compared to the June quarter.

As I mentioned earlier, we also experienced a recovery of revenue from our legacy digital Fiber Optics products in September quarter.

I don't have results for margins yet, but -- since we are still compiling our fourth quarter results, but our gross margins fluctuate depending on revenue product mix and inventory adjustments. I do expect improvement to gross margins in both the Fiber Optics and Photovoltaics divisions when compared to the third quarter results. Again, this is just based on my preliminary review.

Our Photovoltaics division, excluding the Terrestrial Solar Power division, is expected to be net income positive again in the fourth quarter. Looking out for fiscal 2008, as discussed, backlog remains significant, which supports projected revenue growth for the Company. Because of the order backlog, we are more confident regarding our financial performance for fiscal 2008. With recent advances in solar cell efficiencies, we expect order backlog to remain strong.

In quarter one ended December 31, 2007, Fiber Optics revenue is expected to increase to $32 million and Photovoltaics revenue is expected to increase to $17 million for a total of $49 million. Our fiscal 2008 revenue guidance for the year is estimated at $210 million to $230 million.

Focusing on bottom-line profitability, we continue to take steps to increase gross margin and improve overall operating performance. In 2008, as revenue is earned on products developed by our new Terrestrial Solar Power division, labor and operating expenses will be offset by revenue earned by this business unit and expenses will shift from R&D to COGs. This should significantly lower OpEx as a percentage of revenue in fiscal 2008 when compared to current financials.

After our last earnings call, we announced the consolidation of our North American Fiber Optics engineering and design centers. Emcore's engineering facilities in Virginia, Illinois and northern California are being consolidated into larger sites in Albuquerque, New Mexico, and Alhambra, California. The design centers in Virginia and northern California have been closed and the design center in Illinois will be closed before the end of this month. Our operations also continue to be focused on material cost reduction through supply change management, engineering cost reductions and quality improvements. As I mentioned before, in May 2007 we announced the commencement of product shipments from our recently opened low-cost manufacturing facility in China. We plan to consolidate the manufacturing of cost-sensitive optoelectronic devices to our new China facility to lower labor and overall manufacturing cost, which will improve Fiber Optics gross margins in fiscal 2008.

And finally in closing, the review of our historical stock option grants has proven to be a complicated, time-consuming and expensive process. We announced this morning that we received an extension from the NASDAQ to get our delinquent annual and quarterly reports filed with the SEC by December 4. We also mentioned in that release we still expect to become compliant with the SEC and the NASDAQ sometime this month. Once we are clear of the nonoperating SG&A charges associated with the stock option restatement, we should be approximately two to third quarters away from profitability.

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

Thank you, Adam. Good morning, everybody. I'm going to focus on general market trends and operational efficiencies that are supporting the Company's target of EPS profitability, and then move to a product line discussion.

Clearly, over the last several quarters, revenue trends have been very positive. We have a lot of visibility on revenues. We have a substantial backlog. And the revenue trends for the Company are across all reporting segments, both Fiber Optics and Photovoltaics, growing $40 million in March to $44 million in June, $47 million in September, $49 million in December. And we expect the revenue trend to accelerate in calendar 2008 once the CPV systems begin shipping in volume, and I will get into that in a moment.

The June quarter represents the first quarter where we start to see the tangible benefits of the cost initiatives that were put in place earlier in the year; specifically, the transition of products to the Company's China facility and the improvements in gross margins in Fiber Optics, which began in the June quarter and which are accelerating through September, where the margins continue to improve. Secondly, the reduction in OpEx resulted in $13.3 million for the quarter from continuing operations, very close to the 2008 target, and down $2 million from the prior quarter. We expect continued operating improvements in September and as well as December, and expecting to reach positive EPS mid 2008.

With regard to product line discussions, we continue to see revenue expansion and profitability improvements in the broadband sector in June with further growth experienced in September. Demand continues to be robust into the December quarter, where we are 70% booked on significant revenue growth in that product segment. We see growth in all segments of the broadband sector. Cable television is robust on continued network upgrades, and specifically fiber to the home, FTTx demand, has increased dramatically, and the Company has increased its market share in this is space on the basis of quality and delivery improvements resulting from the transfer of these products to China for manufacturing. The lower cost infrastructure in China, the increased volume capacity, has improved profitability in this segment and the Company's backlog on orders increased in September and is at the highest level we have experienced for fiber to the home going into the December quarter. We expect FTTx revenues to double in 2008 versus 2007.

In datacom telecom markets, the June quarter saw some improvement over March, but remained below levels of a year ago. The September quarter saw, as Adam referenced earlier, a nice rebound in the business, particularly in the 10G sector as customer inventory issues that had impacted the prior three quarters improved significantly. We expect to see continued improvement in the 10G market through December.

Overall, the September quarter saw a 12% increase quarter over quarter in revenues for Fiber Optics, driven by demand in broadband as well as 10G over the June quarter, and we expect comparable increases in the December quarter.

In Photovoltaics, at Adam cited, the satellite business continues to be net income positive for the June, September and fiscal year periods, and we continue to win new programs at both the commercial and government level. The most significant development during the quarter came from the Terrestrial Solar side of the market where we made significant advancements in solar cell technology to bring the efficiency of our market-leading solar cell to 39%. The significance of this is that it results in a 15% reduction in the cost per watt and on the operating cost per kilowatt hour. On a business development level, we were awarded a $24 million contract for solar cells to be delivered in fiscal '08. That order from GGE has since been expanded to include receivers, increasing the value of the purchase order to $30 million to $35 million.

At a CPV systems level, construction on the first 1.5 MW CPV system begins in November, and we're developing a substantial pipeline of CPV systems business to follow on this initial order with another 3 MW expected to start production in the December quarter.

In summary, we are seeing a lot of traction across the product lines from a revenue standpoint. We have seen the tangible results from a cost reduction and profitability perspective and at an operating level, once we are clear of the nonoperating expenses incurred with the review of historical stock option grants, we should be, as at Adam referred, two to three quarters from EPS profitability. We have indicated that we should be current in our filings this month and look forward to moving beyond this issue.

With that, I will open it up to Q&A.

(OPERATOR INSTRUCTIONS). John Lau, Jeffries & Company.

Congratulations for the robust outlook of the business. This is (inaudible), I'm dialing in for John Lau. I have a question for you, first off. In terms of the Australian contract, you just mentioned that now you are making more transceivers than the cells. So the question is, going forward, is that going to be the industry trend?

Yes. I think very definitely, I think the trend we are seeing is that a lot of our CPV customers have had or find it more efficient for their businesses to buy receivers from us. The receiver is basically a high-power thermal package. It is coupled very directly into the performance of the cell for other companies, system-level companies, to design their own receivers. It's a lot of engineering work, a fair amount of cost, and tough for them to produce. So I think the trend in the industry and what we're seeing is a migration from customers who originally conceived buying just bare cells and packaging themselves to one in which we are supplying the fully integrated receiver to go into their modules. And I think we are getting -- gaining a lot of traction around that as a product standpoint, including interactions with some of the biggest players in the industry.

Another question for Adam. Did you mention the CapEx spending for fiscal '08? I am sorry if I missed it.

Yes, we really didn't mention that at all. We mentioned that we spent about $2.1 million for the quarter. CapEx spending typically is about $1 million to $3 million a quarter for us.

Jed Dorsheimer, Canaccord Adams.

Just two quick questions here. Reuben, as you talk about the return to profitability, what revenue run rate -- I assume it's not much more than where you are. It seems as if a lot is coming from the OpEx side. But what revenue run rate are you factoring they EPS breakeven at?

I think we are at about 55% to maybe 57%, which we ought to reach in about two quarters.

And then on the guidance of the $210 million to the $230 million, I was wondering if you could, one, talk about what assumptions are baked into sort of the lower end versus the higher end. And then also, what are you assuming for Terrestrial Photovoltaic in that component?

Sure. I think that basically from a -- I will reverse-engineer this for you -- I think in satellite, we are seeing kind of a $55 million number in '07 move to -- we will call it $60 million, $65 million. I think the Terrestrial number there is $35 million to $40 million. I think that the Fiber Optics is $130 million, $135 million, something like that. So I think that we are looking at 90 to -- I guess in summary, $90 million to $100 million in PV, and $125 million to $135 million in Fiber.

And then one last question. Sounds like, just given the timing on the Terrestrial PV to actually get these systems installed, that $35 million to $40 million, would that likely imply a -- would those be just the beginnings of larger contracts, so it's really a fiscal 2009 type story?

I think that the pipeline that we're currently negotiating right now, and this is -- while some of it's North American, most of it is Europe, the -- it is certainly kind of more back-end loaded. We are going to begin construction this quarter, mid this quarter, on the first CPV systems. The number and the volume of business ramps up over the course of the year. So the second -- it's more heavily weighted to the second half than the front half. So, yes, and it will continue on into 2009.

And then, sorry, one last question, just on the [TPV] side. It's a newer technology for a lot of the power purchase providers and other installers. Can you give us any feedback as far as the discussions that you are having and the acceptance to the concentrating technology? And has there been a shift in the market between the view of the technology? And if so, what was the biggest catalyst to cause that shift in mind share?

I think there are a couple of things. One is, we as a Company have spent a great deal of time over the last three to six months working with project finance lenders, private equity sources, insurance companies, utilities, construction companies, getting them comfortable with -- you know, it was a lot of missionary work. I think we are just about there from a general acceptance in those various constituencies. All of those have a big play in the deployment of a new technology. In other words, they have to have the confidence that the technology will perform, that the people deploying the technology will perform, that it's reliable, etc.

Once you get them comfortable on all of those issues, it still comes down to a cost per watt and the cost per kilowatt hour, which is more likely what the utilities, where the grid operators are interested in. So again, we have done a lot of spadework getting the financial communities and the utilities, both the generating and the distribution side of utilities, comfortable with this. And some of it also comes from the fact that there are now, I think as the technology has developed as the efficiency of the cell has improved, and we talked about the 39% cell, but we expect to be launching a 40% cell before year-end. A lot of it has to come with improvement in the technology and the number of CPV systems at providers out there. There are some very good companies, most of which we are selling cells or receivers to that have done a terrific job in doing the same thing that we are doing in terms of developing the market.

Great. I will jump back in the queue. Thank you.

John Harmon, Needham & Co.

Reuben, If I understand this correctly, backlog went from $120 million to $100 million, but it looks like the Photovoltaic part stayed about the same. Is that correct? Or if not, just tell me what changed in backlog, please.

Backlog remained the same for the June and September quarter -- $120 million.

And don't forget, we shipped whatever it was we shipped in those periods, too. So --.

Thank you. And I was wondering if you had the breakdown -- you mentioned $800,000 in operating expenses -- if you had a further breakdown of stock compensation expense.

All the stock compensation expense is broken out in the press release and the non-GAAP tables. So I break it out for the three months and the nine months, and for not only just the operating expenses, but the operating loss, and then the total net loss, which will include some of the stock-based compensation on a discontinued op basis.

What I mean is, how much falls in SG&A and R&D?

Sure. The breakout there typically is -- about $250,000 is usually in the COGS number, with the remaining being split in the operating expenses, more heavily loaded on the SG&A side versus R&D.

Thank you. Someone asked about a revenue target for positive EPS. You discussed an operating expense target, but you have not given one, or you did not give one. What kind of expenses are you looking at?

I think we're looking at revenues of $55 million to $57 million, and I think an OpEx number pre-123(R), of about $13.5 million?

$13.5 million (multiple speakers).

And if you take a look at our non-GAAP tables, we sort of get there -- once we get beyond these costs from the litigation and the severance, which we consider one time, and then the big number is the stock option restatement, you can see we are already at that 13. So if we get this behind us and we get the revenues increases, that's why we feel very confident in '08.

Thanks, and just one quick one finally. When is your Beijing facility expected to be up and running and qualified and shipping TOSAs and ROSAs?

We already have some products shipping from our Beijing facility. We finished the ISO certification and some customer on-site audit also finished in September. So we are already shipping three different products from the Beijing facility. And we are expecting two more product launches are shipping to the customers in volume in October.

And we are seeing, just as a general comment, we're seeing -- we had budgeted certain gross margin improvements, and we're seeing, I would say, substantially better than anticipated cost savings.

Michael Coady, B. Riley & Co.

Not to beat the backlog too much, but I just want to be clear on that. The Photovoltaic backlog is $100 million, which includes no CPV -- is that right?

That's right.

Okay. And then you said, Adam, that $63 million was related to satellite, and where was the other $37 million?

That was on the Terrestrial Solar cells and receivers.

I see. So the $24 million from Green and Gold was originally in the space-based, and now it has moved into Terrestrial because of the expansion to include receivers -- is that right?

Well, we're just breaking it out so you guys can get a flavor on our Solar and our satellite, and then the government side, and then the Terrestrial is just hot right now, so we want to -- we're announcing those and breaking out those numbers so you can see that. We expect a lot of growth in there too, so then you'll be able to see those numbers.

How much of the Green and Gold is included in the backlog?

It's all -- 100% of that is shippable in '08.

Thanks. And then moving to the Fiber Optics side, it sound like things are continuing to be robust and even picking up. On the FTTx side, shipping out of the Beijing facility, what do you expect the margins to be there?

Mid-teens.

That's it. Thanks a lot. Good luck.

Tim Savageaux, Merriman.

A couple of questions. First, regarding trends on the Fiber Optics side, you have been pretty clear that the cable piece of your business continues to act reasonably well. But as we look at the guidance for December into March, looking at $31 million going to $32 million, that does represent somewhat of a slowdown from the kind of double-digit sequential pace you have been putting up pretty consistently over the past several quarters. I don't know whether that's seasonality or how you would describe that, but I would ask for your commentary on trends across fiber and expressed in that guidance. That is one question.

Secondly, as we talk more about approaching breakeven and getting there within a couple of quarters, I wonder if you might be able to offer some commentary over the kind of medium-term where you expect the consolidated entity kind of operate from a target model standpoint, sort of gross and operating, once we get past breakeven.

A couple of comments. I mentioned earlier that we were 70% booked for the quarter on the broadband side, and that really represents 100% of the capacity for October and November. As you may know, there is a phenomenon that exists in cable television that towards the end of the November, month of November, the cable TV's MSOs come back with their year-end orders. Now what basically happens is that the service providers have capital budgets, which is either a spend it or lose it kind of scenario by year end. In other words, the capital budget is approved for next year. What is unspent in '07 doesn't roll over.

So basically, they come into the market and -- I'm not going to say dump it -- but they order a lot of parts in December. So out of the last five years that we've been in this business, we have seen significant upticks, well ahead of expectations, for the December quarter. We expect that to happen again this quarter, but we are not including that in the forecast. I don't think it's -- because we can't. We don't know what it is. In previous years, it has been $1 million to $2 million. In some years, it has been $1 million or less. But in any event, there is always something from a capital budget standpoint from the MSOs that is above and beyond sort of planned production levels for the quarter.

Now, we will be in a position to respond to that, whatever the number is, but at this point, it's impossible to forecast that. So I wouldn't call it serendipity, because we know it's going to happen, but you just don't know the magnitude of what it's going to be until we get towards -- I would say middle of the November period, and then we will have a better sense for what the upside in broadband is.

So, again, I think we have taken an approach that says, gee, we are going to forecast what we know.

So on the -- and I'm sorry -- on the breakeven model, I think we expect to finish the year -- I don't have the forecast in front of me, but we expect to finish the year with revenues -- what is it, Adam? -- $16 million in the September quarter, probably. We expect gross margins as we exit the fiscal year to be in the high 20s, I think 26%, maybe 27%. We expect OpEx to be at the 13.5% level. And so from an operational profitability, that's kind of the model we're anticipating.

And just -- those numbers don't include the non-cash stock-based charges, just so you guys know.

Right.

Ramesh Misra, Collins Stewart.

I guess from my perspective, the most dramatic change was your decline in OpEx. I think, Adam, you mentioned it was roughly about a $2 million sequential decline in OpEx. Can you quantify the reason for that sizable decline?

Sure. I think we have had a number of press releases, but as Adam said, and he can quantify the numbers, we are going from what is fundamentally nine sites at Emcore. And we have -- over the past couple of years, Emcore made five or six small acquisitions, all of which came with their own operating sites. We were able to get those products transferred to CMs, get the engineering support in a place where we can shut the facilities down. And we are in the process of doing that. So we have closed New Jersey, we have closed Illinois, we have closed Virginia, we have closed Santa Clara, and we have two more that will close towards the end of this quarter, maybe early January. But the total targeted OpEx savings on an annual basis is about $9 million.

Reuben, so I think this $9 million annual decline is yet to happen, right? (multiple speakers) what happened in June.

I think -- well, no, because we do have -- we closed Virginia in June. So some of the closure expenses were there.

What contributed to the June quarter in a significant way for the operating expenses reduction is really the corporate headquarter move from New Jersey to Albuquerque and some of the key officers left, and we had most of the key positions promoted internally. So that really accounts for the significant reduction of operating expenses for the June quarter. As Reuben mentioned, that the other initiatives for closing down the remote engineering centers, we will continue to see the benefits on the operating cost reduction going into the September quarter.

That's right, I forgot to mention. We had, just as Hong cited, we had some corporate officers leave. We promoted people from internally to take those positions. So there was no increase in headcount, nominal increase in salary. So corporate salary reductions was about $1.5 million, just at that level.

I see, okay great. How much on the Terrestrial side do you expect revenues to be realized in the September and the December quarters?

Let's see -- there was a couple million in September. I think [in the] December quarter, the production on the -- what is now a $30 million to $35 million contract on receivers, production started October 1. I have forgotten off the top of my head what the forecast for the quarter is, though.

So the September quarter, as Reuben said, is about a couple million dollars at the component level. The December quarter we expect the component level revenue to be $4 million, plus-minus. The system level really depends on the revenue recognition, because some of the systems just being deployed and installed. So, hard to say.

By the way, when we talk about the $49 million for December there, we are -- there is now system revenue -- no, CPV system revenue recognition there. We're saying, you're just taking the position that we're building it, it's going to be installed. What percentage of the system we're going to recognize, we don't know. So we haven't included that in the forecast.

Got it. So, Reuben, you mentioned that the Green and Gold project got expanded by roughly another $10 million, so congratulations on that. Now, your overall backlog number for 2008 is roughly around that same number. So I wanted to get a sense of the other customers, specifically WorldWater, and I think you had some other terrestrial projects underway as well.

Right. Well, the first 1.5 MW goes to WorldWater for their projects. The remaining 3 MW that will start production in December go to Spain. I'm sorry, what was the rest of your question?

So the $37 million backlog, terrestrial backlog number --

That just represents sales in receivers. Remember, Adam said that the CPV systems are not included.

And I guess that 32, 35 extends through calendar '08, rather than just fiscal '08? Is that correct?

Yes, it goes through this -- all the terrestrial solar cells and receivers will be shipped through December 2008.

By the way, I think, starting probably next quarter, we'll articulate what -- separately, what CPV systems backlog is currently in production, I think just for clarity reasons.

I guess I was just confused between the fiscal year backlog and your new calendar '08 order from GGE.

Then switching gears a bit onto the datacom/telecom side, the FTTx business you said has come back dramatically. In the past, you have mentioned that margins over here have been somewhat soft. When do you expect that to become consistent with the rest of the fiber optics division, if at all?

I think you'll see a big improvement in December in gross margin from FTTx based on manufacturing in China. I think -- will they approach the broader CATV gross margins? Not until GPON really starts shipping -- becomes the dominant revenue line in FTTx. And that would be second half of '08.

And then finally, in regards to the 10G demand, you mentioned that visibility is not always great over there, but the strength that you have seen in September, I mean, do you see it extending through the early part of '08, or what is your visibility over there right now?

If you call the early part of '08 the December quarter, the answer is yes, I think so. We don't have visibility much beyond that.

Jon Gruber, Gruber & McBaine.

Reuben, on the financials, what's the hang-up here? We thought we would get them by the end of September. When are we going to get them now, and what is the big hang-up, the problem here?

I think I'll sort of stick with what we have said publicly, is that we've finished the finance and accounting aspect of it. There is just a process that you go through, it's a time line. We don't -- we try and respond to as quickly as possible, but it's a review process that is very thorough, and we don't -- I think we have given our sort of best estimates on when we think we are going to get finished. And I would tell you that -- and I think Adam would second this -- I think we are very close.

Just looking forward, I mean, we're closing the books now for the fourth quarter, the year end. I think internally, we've got the number down, and the reports are prepared and being reviewed. We are going to get back to our normal reporting schedule. So once we close out the September quarter and the year end, we will look to report those results the same as we did last year, around mid-November.

Mid-November you will report the September quarter?

That's right.

And year-end?

And year end.

And that get us back on track.

But I think you've got a pretty good sense of where it's coming out.

[Robert Clifford], private investor.

Gentlemen, you're doing a fine job. The question I have is -- are you going to start listing your stock on the European stock exchanges so it gets exposure over in Europe [to] investors?

That's kind of an interesting question. There have been a number of what I will call European investment banks that, given the Company's terrestrial solar exposure, have strongly recommended that we do something like that. I think, while we're really focused on getting current, getting all of this junk behind us, I think we'll take a look at that sometime after the '07 K and proxy get filed.

This week's Business Week Magazine has a 6-page special article on solar's day in the sun, and basically the article says that Photovoltaics are too expensive and they recommend going to strictly concentrating the solar light on the steam -- to generate steam and water pipes in order to generate electricity. Isn't your current ratio of conversion less expensive and certainly competitive?

Yes. I think that we got into this business because we felt we had a product technology roadmap that -- where we could continue -- increase the photovoltaic efficiency up to 45% by 2010. I think we are probably the only photovoltaic technology that can sort of achieve that kind of efficiency improvement. Based on that and based on certain volumes, we think we can be competitive with what I will call legacy forms of energy generation, with or without government subsidies. So we feel -- we got into this business because we felt we had that capability.

(OPERATOR INSTRUCTIONS). [Scott Saerly], [Esquire] Technology.

Just a couple of quick questions on the Terrestrial Solar side in terms of what your capacity is when you are looking both at the cell side and the systems side in terms of calendar '08. There have been some concerns expressed in the marketplace that, right now, at least what you have publicly talked about has been focused within a couple of customers, specifically WorldWater and Green and Gold. To the extent possible, could you give us some insight into what is going on in terms of distribution with other systems integrators and other players out there to give more of a broad-based view in terms of how you're attacking the market? Thanks.

I will answer your first question on the capacity of the concentrator PV weight quota capacity with reference to 500-x concentration. Of course, if you use a higher concentration, the capacity can be different. For example, Green and Gold Energy, they use in their system design 1100-x concentration. So the numbers we give out will be a multiple by 2.2, or doubled.

Right now, at a processing wafer fab level, we are building the capacity until the end the 2008 for 200 MW. Again, this 200 MW is for 500-x concentration. Right now, the bottleneck is at testing. The testing is probably the easiest one to increase in terms of the lead time for the equipment and the capital expenditure to increase the capacity. Currently, we have about a 50 MW capacity throughout the whole line. By the end of October, that capacity will increase to 100 MW by the end of 2008, will be 200 MW. Again, if you use 1100-x as a concentration, that capacity doubles.

In terms of breadth and depth of customers, we have announced the ones that obviously have signed long-term deals, which include Spanish OEM [Gisa Photon], Green and Gold, WorldWater, etc. So there are three long-term contracts that we're currently executing against.

Broader than that, there are probably -- I don't know, 20 CPV system companies that we are shipping either solar cells or receivers to for their systems. And I would include that probably the largest players in the industry as they look to develop their own CPV systems. So I think people are pretty bullish on the approach of concentrator systems. I think that our ability to provide them receivers as well as just cells is an enabling aspect to what we do for the industry. And I think that what you're going to see is later on this quarter, I think the diversity of the customer base will, once we announce those, will go a long way to sort of addressing your issues.

And one more question, Reuben. You addressed it a little bit earlier, just in terms of bringing together some of the financial aspects of underwriting some of these systems with insurers and utilities. When will we get some of the milestones out there? When will you be able to talk more definitively about that, that these projects are financeable and it's basically a done deal? Thank you.

Sure. I would have to say that I think they're financeable now. We have received commitments, nothing we want to talk about publicly yet, not until we have a broader context. But we have financing commitments from institutions on CPV systems. And it's -- so it has started. And they are not insignificant commitments. So we are confident.

Ramesh Misra, Collins Stewart.

Just one quick question in regards to pricing trends for the LX4 and also the FTTx, if you could provide qualitative.

Sure. I'm just going to give you kind of generic numbers. I don't want to talk specifically about ASPs. But on LX4, something around 700 a unit. On FTTx, somewhere around 50.

How much down is it from the beginning of the year, or from a quarter ago?

From a year ago? From a quarter ago, pretty flat from a quarter ago. Year ago, I've forgotten what it was a year ago.

It's about 10% to 15% reduction year over year (multiple speakers). And recently, Ramesh, it has not really eroded in price for those two product lines.

Yes, we haven't seen much in the way of price erosion recently now -- knock on wood -- but the discussions with customers have been more around capacity availability than pricing.

(OPERATOR INSTRUCTIONS). There are no more question that this time. I would now like to turn the floor back over to Mr. Richards for closing remarks.

Thank you, everybody, for your attendance this morning. Just to cover a couple of issues -- clearly, the revenue trends are very positive. We think the guidance is conservative, and if things go right, could be -- certainly be higher than we have indicated. The cost structure -- we have done the things that we needed to do to get the infrastructure costs in line with our profitability targets, and I think we are ahead of schedule on those issues. So as you can see from the June and what will be the September quarters, so we are comfortable with where our infrastructure costs are. Revenue trends continue to accelerate. We've got a pipeline of business we are going to be executing on second half this quarter and into '08. So we are bullish on the Company's future and in our competitive position in the market. So thank you very much.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect your lines. Have a wonderful day.