EMCORE Corp (EMKR) 2008 Q3 法說會逐字稿

Good morning, ladies and gentlemen. My name is Kelly and I will be your conference facilitator today. At this time I would like to welcome you to the Emcore Corporation third quarter fiscal 2008 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. (OPERATOR INSTRUCTIONS) As a reminder, this call is being recorded. Listeners can also log in to www.emcore.com to access the webcast. Thank you. It is now my pleasure to turn the call over to your host, Mr. Victor Allgeier, of TTC Group. Sir, you may begin your conference.

Thank you. Good morning, everyone. Yesterday after the close of markets, Emcore released its fiscal 2008 third quarter and nine month results. By now you should have received a copy of the press release. If you have not received the release, please call our office at 646-290-6400. With us today from Emcore are Reuben F. Richards Jr., Executive Chairman; Dr. Hong Hou, President and Chief Executive 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 questions. Before we begin, we would like to remind you that some of the comments made during the conversation 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.

Thank you, Vic. Good morning. We have accomplished a lot since the last call, but before I report on the highlights of the quarter, let me start with the review of the quarter three financial results, and then afterwards I will pass it to Hong, who will provide his operational update. Starting with the P&L, consolidated revenue for the quarter was $75.5 million. This represents a revenue increase of 70% when compared to last year and also a revenue increase of 34% when compared to last quarter. Consolidated revenue for the nine months ended June 30 exceeded $178 million, which represents an increase of 46% when compared to last year. Both of our operating segments posted significant increases in quarterly revenue when compared year over year and the prior quarter.

On a segment basis, fiberoptics revenue totaled $53.6 million. That's a 94% increase when compared to last year and a 43% increase compared to the last quarter. For the nine months ended June 30th, fiberoptics revenue increased 58% when compared to last year, exceeding $125 million. The increase in fiberoptics revenue was primarily due to our recent acquisition of Intel's optical platform division. For competitive reasons, we are not planning to disclose revenue from the acquisition. However, we can report that revenue exceeded internal expectations for the quarter. Demand for our legacy datacom products increased 144% year over year and 46% over last quarter, and this division -- headquartered in Albuquerque, New Mexico -- posted its highest quarterly revenue performance in the company's history.

Photovoltaics revenue for the quarter totaled $21.9 million. That's a 30% increase when compared to last year and an 18% increase in revenue when compared to last quarter. For the nine months ended June 30, Photovoltaics revenue increased 23% when compared to last year, exceeding $53 million. The increase in quarterly revenue was due to our introduction of new concentrated photovoltaics or CPV products for commercial and utility scale applications. For competitive reasons, we are not planning to disclose CPV related revenue. However, revenue was up significantly last quarter. Also, as discussed in the last call, satellite-related revenues which include government service related revenue, declined in the quarter as expected. Hong will provide an update on the [trust] with CPV filler market and the long-term purchase agreement previously announced.

Moving on to gross profit and margins, on a consolidated basis, gross margin for the quarter improved to 18% when compared to the prior quarter. However, this represents a decrease from 22% gross margin as reported last year. Consolidated gross margin for the nine months ended June 30 was 17%, just slightly lower than last year. Fiberoptics gross margins for 2008 were 27% for the quarter and 25% year-to-date. This is the best consolidated gross margin performance for this segment in the company's history. The increase in fiberoptics gross margins was primarily due to increased revenue, lower manufacturing cost incurred at our China manufacturing facility, and the implementation of certain cost reduction initiatives, including facility consolidation.

Photovoltaics gross margin 2008 were negative 3% for the quarter and negative 2% year to date. This represents a decrease in gross margin as reported in the prior year, but an improvement from negative 12% as reported last quarter. During the quarter, our Photovoltaics division increased manufacturing capacity for CPV components. However, equipment uptime was below planned. Therefore, production volume wasn't enough to completely absorb all overhead costs. Also during the quarter, the division recorded a loss of $1.8 million on CPV system projects due to higher expected freight and insulation costs. The recording of contract losses in advance of revenue recognition puts that loss behind us, and depending on revenue product mix this should improve Photovoltaics' gross margins in the current quarter.

Moving on, operating expenses for the quarter exceeded $25 million, of which over $7.2 million was related to the Intel acquisition. As discussed last quarter, as part of the acquisition, we incurred charges from Intel for transitional services which total $3.2 million in additional OpEx for the quarter. The good news is that certain areas of the integration are ahead of schedule, and we expect Intel's TSA changes to decrease over 50% in the current quarter, with termination sometime around September 30th. Excluding Intel's TSA charges, operating expenses for the quarter would have totalled only $22 million.

Operating loss for the quarter totaled $11.6 million which represents a significant decrease when compared to last year and last quarter. When you exclude the Intel PSA charges, operating loss for the quarter totaled only $8.4 million. For the three months ended June 30th, net loss totaled $7.7 million or a loss of $0.10 per share. For the year, net loss totaled $39.6 million or a loss of $0.62 per share. This represents a significant decrease in that loss when compared year over year in the last quarter. Excluding Intel's TSA charges and stock-based compensation expense, net loss for the quarter totaled approximately $2.8 million or a loss of only $0.04 per share.

In June 2008 we announced the sale of preferred stocks of WorldWater and Solar Technologies. And this sale took place through two closings, one for 1 million shares plus warrants which closed in June and the other in July. In the June quarter, the net gain on a sale of WorldWater stock totaled $3.7 million or $0.05 earning per share. The July 2008 transaction will be reflected in the September quarter end results. Cash proceeds from the sale totaled $13.1 million, which almost represents our entire cash investment that we made in WorldWater back in November 2006. Emcore still holds approximately 60% of its initial investment in WorldWater which totals $11 million on our balance sheet original cost of $0.27 per share price. Our balance sheet does not reflect market value of the WorldWater investment which totals approximately $20 million.

Now turning to the balance sheet. At June 30th cash, cash equivalents, long term investments, and restricted cash totaled $23.5 million. During the quarter, we spent over $5.5 million on capital expenditures. For the year, capital expenditures totaled over $15 million, which was primarily spent on CPV components and system businesses equipment. Cash was also used to pay for Intel's TSA charges and we made an investment in Lightron Fiberoptics Devices, a contract manufacturer based in South Korea. Increases in working capital, specifically AR inventory as well as increases in fixed assets, goodwill, and intangible assets all related to our Intel acquisition.

Moving on to order backlog. As of June 30th, 2008, Emcore had an order backlog of $109 million, a decrease from $158 million as reported last quarter. As mentioned in our earnings release, management was informed by Green and Gold Energy last month that it was engaged in negotiations relating to the sale of its business through an asset sale and they could not commit to making any further purchases. So as a result, our Photovoltaics division has canceled production spots reserved for Green and Gold Energy and has adjusted the quarter end backlog accordingly. As of June 30th, 2008, total CPV-related backlog totaled $53 million. Our backlog does not include previously announced [terrestrial] solar power agreements in Canada, South Korea and the US since contract terms, production requirements and delivery dates are still being worked out. Backlog also does not include recently announced orders after June 30th.

Now before I turn the call over to Hong, I just want to summarize some financial accomplishments for the quarter. On a GAAP basis Emcore had its best quarterly P&L since December 2006 even after you exclude the nonoperating gain from the sale of WorldWater stock. Depreciation and amortization expense totaled $4.3 million for the quarter. As a percentage of revenue, our operating expenses for the quarter dropped to less than 34% of revenue and this includes $3.2 million in Intel TSA charges. Excluding these nonrecurring charges, OpEx dropped to less than 30% of revenue. This is a huge accomplishment, since historically our OpEx has been as high as 50% of revenues. With the significant increase in revenue we have accomplished over the past few quarters, we have controlled our operating costs, which is positioning Emcore towards profitability in 2009.

Financial performance at our fiberoptics divisions exceeded internal expectations. On a pro forma basis, excluding Intel's TSA charges, our fiberoptics segment was net income positive. When you exclude stock based compensation expense, our fiberoptics divisions located in Albuquerque and Alhambra individually achieved positive EBITDA results in the same quarter for the first time in the company's history. Although Photovoltaics' gross margin were affected by unabsorbed overhead, our satellite and CPV component business still posted positive EBITDA results after excluding noncash stock based compensation expense. We also have good news regarding our auction rate securities. During the quarter, $2.3 million of our auction rates securities were redeemed at par value, leaving only $3 million left in restricted ARCs to deal with.

Finally in closing, profitability is still the main objective of Emcore management, and we expect continued improvement in our financials in quarter 4. With that, let me turn over the call to Hong for his operational update.

Thank you, Adam. Good morning, everybody. First, let me start with an executive summary. Q3 financials. Revenue was $75.5 million. That represents a 34% quarter over quarter growth. This growth is largely due to the new business acquired from Intel during the quarter and the growth of internal CPV and parallel optic transreceiver businesses.

Consolidated gross margin was 18%, with fiberoptics at 27% and Photovoltaics as negative 3%. Operating expenses increased to over $25 million from the previous quarter, due to the transition service charges for the acquired telecom and enterprise businesses from Intel. Operating loss was approximately $11 million, of which about half was due to the initial commercial deployment of the CPV system, an accelerated effort for next generation cost to reduce system development. The other half is attributable to Intel TSA charges. However, we did achieve positive earnings net of nonrecurring acquisition related expenses in our fiberoptics segments and are greatly encouraged by the broader acceptance of CPV technology and products. In spite of the short term cost of the CPV system, the net EPS guidance of negative $0.04 per share. We have improved our operations dramatically and developed a much better path of the business growth and profitability. Specifically, while the transition service charges will disappear as we complete the transition and the fiberoptics business will generate positive EPS, the company's focus is on the [exclusion] of emerging CPV business, where we have made a number of strategic moves.

Moving on and we will address the strategic opportunities and trends that are affecting our businesses. Let me first discuss our business in the fiberoptics area. We successfully completed the transition of the telecom business acquisition. This product line represents fastest growing sector of the telecom component and subsystem business in the current [agile] communication network design. The market demand is healthy and the customers are satisfied with the continuation of the supply and better customer service provided by Emcore. Many new products in the pipeline, including low cost version of the 10 gigabit tunable transponders. (inaudible) 40 gig bit transresponders will be introduced before the year end. This sets a solid foundation for Emcore to grow its telecom business through comprehensive product offering and broad customer base. Finally, we achieved a goal of the profitability of this product line in the first month under Emcore's management.

In April we successfully closed the acquisition of Intel's enterprise storage interconnect cable business. The integration of the enterprise business is progressing well. As predicted, we have to discontinue nonprofitable product lines in this area, such as SFP receivers to a broader market. The connect cable market based on parallel optic transceivers is a game changer for high performance computing. Recently, we have gained better visibility of demand through customers' focus and purchase orders. In new products, including SFP plus transceivers 10 gigabit per channel connect cables will further strengthen our position in this product line. We expect to achieve earnings profitability from the enterprise and connect cable businesses after the completion of the TSA.

As Adam said, talked about -- our business from the internally developed product continues to experience a very rapid growth. The parallel optical transceivers used for backbone interconnect is the main driver. The demand have increased significantly from Cisco for the new switch and router platform CRS 1. After the restructuring a year ago, Emcore's datacom business has turned the corner and delivered our 15% to 20% revenue growth sequentially in the last four quarters, with the last quarter drilling 144% year over year. With the addition of the enterprise products from this acquisition, we have the most complete product portfolio to a major customer using 10 gigabit Ethernet [carriers].

The demand for (inaudible) products including LX 4, SR, and LR modules has been increasing. We are very happy that our [exclusive] on the high quality on time delivery and competitive pricing along with an enhanced portfolio is being recognized by the major customer with an increased market share. This will help create future business opportunities.

The market conditions for our cable TV broadband fiberoptics business has rebounded from the first quarter as well. Recent earnings announcements from cable market service operators show strong operating results and indications that they will be accelerating CapEx spending. Discussions with our direct customers, mainly equipment EOMs during recent quarterly business reviews confirm that the fundamentals that their markets remain very strong. Additionally, we are extending our product offering to our customers. The March quarter was below expectations, but some of our customers have been working off inventory build based on their early overoptimism of market demands. Upon completing this inventory consumption in the past couple quarters, demand has started to pick up. We continue to expect a stronger second half of the year.

In the area of [parallel] optical network transreceivers for fiber to the home applications, we have been very selective in booking business because of the significant margin pressure. As a result, the revenue for FTTx [kung] receivers for the June quarter was lower than the prior quarter. Although those business contributes a positive contribution margin, the lower FTTx volumes helped improve gross margin percentages.

The business [sector] in video transport segments are growing nicely in achieving record revenues in Q3. We expect this trend to continue.

Both revenue and gross margin in our fiberoptics segments have increased from the previous quarter significantly. Revenue increased from $37.6 million to $53.6 million and the gross margin improved from 24% to 27% sequentially. The increase in fiberoptics gross margin, as Adam talked about, was primarily due to increases in revenue, our China manufacturing in the cost reduction initiatives, and improved efficiencies driven by facility consolidation. The restructuring efforts originally completed in our broadband optical division will further improve gross margin in the future. This sector achieved positive earnings net of the nonrecurring portion of the costs related to the acquisition.

The TSA work for enterprise business is expected to complete by August to early September timeframe, and additional TSA charges are expected to be reduced significantly to less than $1.5 million in the current quarter. The acquisition of Intel fiberoptics business strengthened Emcore's position in fiberoptics component in subsystem area. With an added and existing product portfolio, Emcore is poised as a major player in the broadband, telecom, enterprise, and high performance computing markets with comprehensive product portfolio, leading products in technology, vertically integrated and low cost manufacturing infrastructure. We are optimistic that this segment of the business will deliver sustainable and profitable growth in the future.

Now let me discuss the solar photovoltaic side of our business. First, the satellite business. As we discussed in the previous conference call, we experienced a lower demand on space solar cell, solar panel products due to customers' programs delays. Business in the June quarter was primarily solar cell supply to a key aerospace customer. The margin was very challenging based on the firm fixed price contract signed in 2005. We are [drawing] down the contract balance significantly -- in going forward we are negotiating long-term supply agreements with two major aerospace companies, which represent more than $70 million commitment over three years. We expect this contract to go forward in the second half of the year and the product pricing in the contracts will be based on the market pricing of the raw materials and commodities. In the meantime, Emcore's space product offering higher performance, outstanding reliability and heritage and competitive pricing than our competition are qualified by almost every aerospace company in the world for applications in different space orbits. It is reported that 15 commercial satellite programs has been awarded year-to-date. We expect a significant growth of the space business going forward. In the government programs front, Emcore products at baseline in a number of new satellite programs. Some of the programs have been awarded and some of them are delayed due to congressional funding. We expect to receive some new program wins in the second half of the year. In summary, we expect the satellite business to rebound in the second half of 2008.

Now let me turn the discussion to the terrestrial solar power business. The product we are offering include concentrated Photovoltaics of components and systems. The executive management team of Emcore just conducted a two-week tour to major CPV markets and customers in the world. The objective of this tour was to gain a firsthand understanding of the solar market, our position of CPV products and technology, along with our customers' status on their business demand. This information will help us in defining an effective business strategy and operation plan. We have toured the key market in Spain, Portugal, Italy, UAE, Australia, Korea, China and of course some of the key customers in the US. We have witnessed a tremendous progress of our customer base in developing products and the market acceptance. Emcore's CPV components and system are considered to be the best in class. We are very happy to see that our products are well received and are positioned extremely strong.

The solar parts developers in many markets have experienced a limitation of the other competing Photovoltaics technology and product. CPV provides a unique solution with its higher conversion module efficiency, high [land] use efficiency, lower installation costs, and superior temperature coefficient for operations in the hot temperature. Most importantly, more and more people believe that CPV will provide the lowest cost for ultimate power generation in selected markets. We firmly believe that CPV will become a viable solution to gain a significant portion of the solar Photovoltaics market and Emcore will be the first company to benefit from the ramp of CPV business.

Most of all, component customers are finishing their product qualification and started initial deployment. Developers of solar farms are excited about the potential of this technology being the most cost competitive for their project. However, due to the lack of heritage, it is very important for the developers and the investors to gain a complete understanding of the power generation with the particular solar resources in their locations. So we have more than 15 companies who have committed some small scale, namely 25 to 200-kilowatt solar project installation, to gain the understanding of the product performance and limitation and to derive an accurate assessment of operations and maintenance costs. We see the near term opportunities of the system's scale to multiple smaller projects in multiple markets by our component customers. We expect that this phase lasts for six months but we are confident that initial installation will yield significant demand for the CPV system product from developers. The ramp of this business will likely happen after the successful initial evaluation.

From this trip, we have observed our component customers fall into three different categories. The first, large cap, well funded energy companies with substantial resources. Seconds, well capitalized startups with solid designs and products and early [tracking] of the marketplace. The third category and less well founded startups, our observation is some of them will succeed and some of them will not. Our strategy, however, is not to focus on any particular customer, but to develop a broader customer penetration, so that we can always benefit from the CPV ramp-up no matter who wins and in what market. We recognize that many of the CPV customers do have less credit history than our aerospace customers. We have implemented different terms including advanced deposits, letters credit and even prepayment before the product's shipment to different customers.

So based on the fact finding of this trip in a [risen] development of our customer base I want to proactively address the controversy regarding the CPV backlog, particularly with the Green and Gold Energy of Australia. Recently, the company -- Emcore received a notice from Green and Gold Energy that it was engaged in a negotiation relating to the sale of its business. The result not (inaudible) making any further purchase entered approximately $79 million of CPV-related purchase orders. The acquirer has indicated that they intend to negotiate a new purchase agreement with Emcore upon confirmation of the transaction.

As a result, we have decided to cancel the production slot reserved for Green and Gold Energy, and to reflect this event we have adjusted quarter end backlog accordingly. The numbers Adam gave earlier did not include the Green and Gold order. At the conclusion of their strategic transaction, we will renegotiate a supply agreement. They have taken and paid for the products shipped to date. We are working with their licensee directly to establish a supply agreement.

In the meantime we have been broadening and diversifying the CPV customer base. In the last three months, we have booked more than $50 million new purchase orders from six different companies addressing the North American, Spanish, and Korean markets for applications of US utility companies and commercial [use]. The new purchase orders are mostly with the feature of advanced deposit and/or establishment of letter of credit.

CSO for CPV products is substantially shorter than that of the company's overall business. We believe that risks of the accounts receivables is negligible. The current CPV component backlog is approximately $62 million -- that's to date -- if which $32 million is scheduled for shipment in the next 12 months. We continue to improve the performance of multi junction solar cells. Recently, we have achieved a new record performance on convergent efficiency for satellite applications with an inverted metamorphic solar cell technology. It is anticipated that the efficiency level in the 42% to 45% range will be achieved when adapted for use and 500 to 1500 concentrated illumination. We expect to commercialize this technology for both space and terrestrial applications in 2009. This achievement, in conjunction with the National Renewable Energy Laboratory and the US Army Research Laboratory has been recognized for the prestige R&D 100 Award.

With investment in solar cell components, we have viewed a capacity of approximately 450 megawatt [cells to receivers and our 1000x] concentrations. We have three receiver lines fully up and running in Albuquerque, and the fourth line installed in Emcore China will be operational before the end of August. We believe this capacity will be able to serve the market demand for the next 12 months. Therefore the CapEx spending will slowdown significantly.

As for the CPV systems, we have done a good job in designing for performance and reliability. All Gen 2 CPV systems have been operating [on fund] since January. Generated electricity and [seeing to] the Emcore building in Albuquerque have been performing to and above the design targets. In the meantime, many CE and UL certification tests were performed on the systems. We expect to finish our reliability and compliance tests in this quarter.

The construction of Solar Park in Extremadura, Spain is complete. We are in the process of connecting to the grid. This project gave us an opportunity to develop a complete process and procedure for commercial installations, [which were] also sold as CPV systems to four other pilot programs in the market of Spain, UAE, China, and Korea. All these products were manufactured in our [shelter] facility in Mexico. The high cost of shipping, (inaudible) and overseas installation of this product make this operational model prohibitive for a long run. As a matter of fact, more than half of this quarter's operation loss is due to the CPV system business.

Recognizing that, we are negotiating a strategic agreement with an international conglomerate. This partnership had a clear synergy between the two companies. It is almost a perfect match for the solar business value chain. Emcore will continue to improve the performance and cost of CPV solar cells in systems, Emcore manufacturers CPV systems. Emcore can leverage our partner's sourcing power and international operations to manufacture CPV systems in a more cost effective manner and near the site of large scale deployment. Our partner can be assured with a reliable and most cost effective CPV system supply for the construction of solar parks, and only operating [manual]. We will be implementing this strategy in Spanish, Korean, Chinese, and Middle Eastern markets.

And for the product cost, the Gen-2 was designed for performance reliability, and time to market. We have identified many areas for cost reductions through a new design, Gen-3. The cost target for Gen-3 product is $1.75 per watt. Even considering the price erosion of the solar modules in the coming years, we still expect a Gen-3 product to be extremely competitive.

Our strategy going forward is to use the current generation product to develop market acceptance by selling the product to different customers in different markets. In the meantime, we accelerate the Gen-3 development and product introductions for large scale projects. The Gen-3 project is scheduled to be transferred to production by April 2009. The successful introduction of Gen-3 products will be a key enabler to our CPV system business.

As for the capacity of CPV systems, we currently have a capacity of approximately 10 to 12 megawatts through the manufacturing shelter in Mexico. This capacity and manufacturing location is adequate to serve the initial needs of [pilot] deployment throughout the world. When demands ramp up, we will establish local manufacturing in different markets through either wholly owned subsidiaries, joint ventures and contract manufacturer arrangements. Our facility in Mexico will then be utilized to serve the North American market primarily.

Now let me give you an update on our business development effort of CPV systems. Working with a partner, we are shortlisted on utility park project by a public utility company in southern California, for an aggregated opportunity of 110 megawatts. The [final] selection award will be made before the end of the year. The Pod Generating Group in Canada has secured project financing with a large European bank. They also got initial commitments on tax equity financing, but they are in the process of finalizing terms and pricing. We expect the project to commence in the December quarter. We're developing multiple small to mid-sized projects, opportunities aggressively in many markets. We expect to install 5 to 20-megawatt of CPV systems in our fiscal year 2009.

As you know, the solar power business is still very policy driven, as the new feed-in tariff in Spain is finalized and the investment tax credit in the US is extended. The demand and the installation will be accelerated. Because of the dynamic nature of this business, our revenue on the solar business can be highly variable. It is very difficult to provide a revenue forecast for this segment at this stage. However, our strategy and operation plan is very clear. As discussed by Adam, the revenue for our Photovoltaics business improved from $18.6 million to $21.9 million sequentially, an 18% increase. The growth of the solar revenue is attributable to our emerging business in CPV component and systems. Gross margin is improving as well. We do recognize that there is still a lot to do in this business segment. It is my commitment to focus my effort in this area in the next couple of quarters.

In summary, our fiberoptics business is robust. We are addressing the business sectors where the rapid growth is. The business will have an over 20% year over year growth. This segment can be a standalone profitable business going forward, barring significant adverse market development. The space CPV sector is also regaining strength. We are expanding our customer base and application scope of this product. The commercial satellite business will have a growth of more than 10% year over year and the government business tends to be lumpy, depending on factors out of our control. But we are baselined in many very large government programs. The CPV business will be in the market development phase for the next six months. With the successful deployment of many pilot programs, our CPV business will finally take off with fast growth in profitability. We will provide more detailed guidance once we gain a better visibility on timing. With that, I will turn it over to Q&A.

At this time we will open the floor for questions. (OPERATOR INSTRUCTIONS) Our first question comes from John Lau with Jefferies & Company.

Thank you. You talked extensively about the volatility in the CPV business. I know it is difficult to forecast, but for our modeling purposes, if you were to -- now that you've eliminated the Green and Gold backlog orders from your backlog and also conservatively taking a look at the lower end -- the most conservative method of what you believe the CPV revenues are going to be -- can you give us an idea of what your next quarter revenue should be in the range of?

John, I would love to, but at this point it is still a few moving parts in there. For example, the system side. We are building according to our operations plan. Before the end of the quarter, if we book the orders we are chasing after, we will be able to recognize a revenue based on the percentage of completion, but at this point we just don't know the timing yet. As for components, some of the customers in other (inaudible) would demand a prepayment. We are making the product but will not be shipping a recognizing revenue before they make a payment for the prepayment. For these reasons, at this point it is hard for me to give you a number you can take home. As we gain better understanding and visibility, we will give you an update.

Great. I'm going to come back to CPV for a second, but I want to follow up on the other piece of business. Do you anticipate that the -- at least on the fiberoptics side where you have a little bit more visibility on, do you anticipate that that will grow quarter over quarter?

Absolutely. The fiberoptics side is very different in nature. We are pretty confident to say we will be having about 10% quarter over quarter.

Wow. That's 10% quarter over quarter. I'm going to come back to CPV and I know there are a lot of questions about it. I'm just going to hit it straight on. In terms of your CPV business, I notice your receivable days went down. So my question is, for your receivables being collected -- are they being collected on time for the CPV and are all the terms and conditions such as deposits you mention and down payments all set for next quarter's business?

Yes. So we -- because the terms we use, as I said, the advance payment, advance deposit, the letters of credit and prepayment, all of this made out DSO for the CPV area way better than the average corporate. For example, 60 days of DSO, the corporate average is about 82 days.

So in terms of your collection for the CPV business, you're collecting them better than the corporate average and around 60 days then?

Yes.

Let me let someone else get a question in and I will come back to you. Thank you.

Thank you.

Our next question comes from John Harmon with Needham & Company.

Good morning. First question, if you're not in a position to give guidance for your Photovoltaics business next quarter, it sounds like you're not going to stand by your goal of hitting profitability next quarter or -- or are you?

No, John. We stand by hitting the profitability no matter what the revenue is for the CPV side.

Fantastic. Second question I was wondering if you could just break down -- maybe I missed it, Photovoltaics revenues, by components and systems? And talk about the one thing you mentioned in your press relation, something about an equipment up-time issue?

The breakdown of the revenue between the different segments, we decided not to do it for the competitive reason. As for the equipment uptime, the solar cell receiver lines, we -- in April and May the one of the wire bonder equipment up-time was not very good, because of the customized automation and June will start running full toot. So that issue is behind us.

So does that mean you have pent up some backlog going into this quarter? Or were you able to satisfy all the orders that came in?

Yes. We are able to satisfy the orders which came in. But in June timeframe, almost we have to go with allocation mode.

Thank you.

Our next question comes from Ramesh Misra with Collins Stewart.

Good morning, gentlemen. First question regarding Green and Gold. Hong, have you been in discussions with the acquirer at this point?

Yes. Our team went to Australia and sat down with acquirer and developed a very clear understanding that the process is still ongoing. And we don't know exactly the timing for the transaction, but as soon as that is consummated, they will be coming over here and negotiating a new supply agreement.

Okay. Now in general, Hong, in many such situations the acquirer inherits the contract of the preceding entity. So I want to get a sense of so why are you negating that entirely? Is it a conscious decision of being extremely conservative at this point or is there something else? Why is this acquirer acquiring Green and Gold? I mean, is the strategy still to pursue CPV and terrestrial CPV or is something changing?

I guess -- we don't know exact details, but I can speculate there are two things going on. One is they are changing their business model and also changing control. The business model they are changing from a licensing to manufacturing. So they will not have to consolidate the demand from their licensees, the [E2S], the purchase order. They are encouraging their licensees to work with us directly. So we have done some of that. So that's why -- the purchase order they placed early on doesn't really fit in the current business model. The second reason -- I believe the transaction they are negotiating is an asset purchase, asset sale. They may now take the liability. So we just want to wipe the slate clean and go forward. If they have a demand, we will negotiate a new supply agreement. If they don't, we will have enough demand from other customers.

Okay. Now, off that $79 million backlog I know you have already been in discussions with all of the licensees of Green and Gold. Can you give us some sort of an estimate of how much of that was for internal Green and Gold consumption or to its own customers or -- and how much of it was followed through from their licensees?

Ramesh, I don't know the exact distribution of their internal needs or their licensee needs. We announced one of their licensees established a direct purchase agreement from us. ES Systems.

Got it. When is the installation of the systems, the CPV systems at the research center, [CLM] in Spain going to be completed and when does operational data start getting published?

Yes. Right now it is in the process of being connected. We are getting permit and before that we clearly were not operating and measuring the performance tied to the grid. And once we get them operating before the end of September, the current feed-in regime will still apply. I believe shortly after that we will be able to get operational data. But we have been using like a power generator to test the [clutchers] and testing the performance. Actually the performance, on individual systems are above our design target. We don't have it tied to the grid data yet.

Hong, just to get a clarification on this. So you had a project over there at Extremadura and also the research center.

Yes, the ISFOC. The hardware shifted before the end of June and the installation has not started yet.

That was for about 300 kilowatts, right?

Yes.

Got it. Data for that, when do you expect -- because that will be publicly available data, right?

Yes. And we visited ISFOC during this trip and their plan is installation in commissioning done before the end of November. Which is delaying the process, but we stand ready.

Got it. Okay. Then a final question you've got to forgive me for trying -- but can you put a floor on your PV revenue? I money, I know it is difficult to give a range, but is there a certain minimum number that you are 100% comfortable with?

When I have that visibility, I will let you know. At this point I will not provide a floor. I will not provide a ceiling either.

Okay. All right. I'll stop there. Thanks.

Thank you.

Our next question comes from Jed Dorsheimer with Canaccord Adams.

Hi, Hong. First question, on the $32 million backlog -- did you give a split between cells, receivers and systems?

That's all the components backlog.

All right. Great. And then in terms of guidance, I assume at this point just with the moving parts and the lack of visibility the $470 million to $475 million for I think fiscal '09 -- that's off the table at this point, correct?

We will have to -- Jed, I think the moving parts is really in the CPV area. Right now there is no -- Spanish feed-in tariff has not been finalized. With ITC, in the US it has not been extended. A number of programs we are engaging which we thought was going to be finalized very quickly and it is a little delayed. So we don't know exactly the timing, but I think we will know the timing once we gain more visibility. We will update you. But we have some strategic relationship in the development and in the negotiation and finalization. So [tempering] a big opportunity to our revenue and the huge impact to our CPV business -- because this is very important agreement we just at this point can't tell where the timing is going to be and the impact to the revenue. So I would rather just not provide a guidance with any certainty.

I understand. I guess the reason for the question is it sounds with this reset here you are taking -- I guess you're taking the liberty to reassess the business, get better visibility and then you'll be providing some further guidance for both this year and for next year. Is that the right way to look at it?

Absolutely.

All right.

I think -- we did a tour of the two weeks we still need to do some more study on their project, opportunity and timing. So as I said, next six months pretty much more a market development phase. So I think with these six months to gain visibility, but we need a little bit more time to provide a guidance.

All right. Maybe just more strategic question for you on the systems business because it looks like there are two suppliers of cells and receivers pretty much to the market. You and Spectra Labs. On the systems business, it becomes a much wider scope of competitors in the marketplace. And if we look at this particular quarter, help me understand. It looks as if with the Extremadura and ISFOC you would have done around $5 million in system sales by our calculations. The loss that was -- that you took there, I'm just wondering the strategic rationale for being in the systems versus just selling the cells and receivers.

In the systems -- certainly our core competency is the design and manufacturing CPV components and systems, but we have to develop a process and procedures for the installation and operation and maintenance. So in the future we are not planning to really be shifting our center of gravity into the owning, operating side of the CPV solar parts, or EPC side of the solar parts, but it is our responsibility to develop a very robust process. We can hand it over to our partners for installation. So this in many ways is a path finding effort and we have developed a very robust process through this commercial installation.

Great. I appreciate the update. Thank you.

Thank you.

Our next question comes from Sam Dubinsky with Oppenheimer.

A couple of quick housekeeping questions. You said you had 400 megawatts of component capacity coming online or most of that is already online, with extra coming online I think from the China production facility. Can you maybe just discuss how much CPV capacity you have today?

Yes. Sam, between the solar cells and the receiver assembly, when the fourth line is up and running the capacity, the flow is pretty much balanced. That gives us a 250-megawatt capacity and they are 1000x concentration.

2250 megawatt of component capacity?

Yes.

What about CPV, the actual system capacity?

The system capacity right now in the shelter facility in Mexico is about 10 to 12 megawatts.

Okay.

As we are developing this strategic agreement, or this international conglomerate, as we are working with our partner on the southern California utility projects in Pod Engineering, any of those projects materialize, we need to increase our capacity at a system level pretty quickly. Fortunately, we had the experience to set up the new capacity and extend the capacity within two months. That's what we did. Initial capacity was done in Albuquerque. Then we got a process successful to transfer over to Mexico in 2.5 months, including renting the space and remodeling of the facility.

Okay. In terms of this global partnership, can you maybe just discuss how that would be structured? Would they be making the CPV systems? Would you be splitting the revenue? Would you just be selling the components? Would you just discuss how it would be structured?

Because of their international presence and for the area they already have the facility and manufacturing infrastructure, they will be manufacturing the system. They can be our contract manufacturer. They are totally flexible. But the synergy is very clear and they don't have solar cell capability. They are not designers. But they have a huge power in sourcing raw material commodity. As I said, they have the international presence. In some areas they have -- their manufacturing facility. In some areas they only have sales offices. In those cases they only have sales offices or branches, we will be establishing our own manufacturing facility.

Conglomerate space where headquarters are?

I'm not going to be able to provide that information.

Okay. In terms of Green and Gold Energy, would you consider their buyer to be credible? Have you heard of their buyer or is it a relatively unknown? And then I have couple of last follow-up questions.

I think at this point, it is too early to tell, because we don't want to get into the middle of commenting their credibility. Certainly we have our understanding and assessment, but I don't want to openly comment on their --

But is Green and Gold being sought after by known entity? Would most people recognize the name or is it a relatively unknown person looking at Green and Gold?

It is not going to be an international conglomerate.

Okay. Then on your OpEx front, can you just discuss how much OpEx over the next couple quarters?

The OpEx, Q3 was over $25 million, of which there was $3.2 million with the TSA -- nonrecurring part of the TSA. So I think going forward we probably at $21.5 million to $22 million per quarter.

Is that going to be consistent or should we think about ramping over time if solar starts accelerating?

Right. When the solar accelerated, OpEx will be increasing. We need more growth on the ground to cover the different markets.

Back to solar side. On the production hiccup this quarter, what guarantees that another production hiccup won't occur? What have the primary issue with the equipment that we won't see this issue going forward? If this issue did not happen, what would gross margin have been in the solar business?

We didn't do that. I can answer the first question. The issues come around for this new capability we are developing -- so in a way that's anyone going through this area. It will go through the same learning curve. So it is similar to the last quarter. The Q2 is equipment uptime for the customized automation. Because it is not standard off the shelf capability and some of the customization was not done very nicely. So when you start exercising the equipment for 7/24 operations and they start showing up. Those issues are behind us.

My last question is in regards to your capacity, given all the subsidy risk. I know you guys mentioned caution. Do you think your factories will be underutilized over the next quarter or so? Is that what you are building your model to? Or do you think you're pretty much going to match capacity at this point?

We are running right now full capacity but we don't know. Again, depends on the few moving parts.

Okay. Thank you, guys. Appreciate it.

Sam, this is Adam. Just on the OpEx number. When Hong was saying $21 million -- right now we are still going through the final purchase price allocations from those acquisitions from Intel. So depending on how the fixed assets and IP all fall out, we could have more non cash amortization of IP. So on an EBITDA basis it won't affect anything and it is not cash going out the door, but that could bring OpEx to around $23 million number on the quarterly base?

Pro forma should be $21.5 million to $22 million?

When you back out the non-cash stuff, I think that's fair.

Thank you.

Our next question comes from John Lau with Jefferies and Company.

I wanted to follow back with you. I think it's great that you are now focusing more on a strategic partner model for your manufacturing. I have a follow-up question. For your strategic partner, will they be one global exclusive or will it be several based upon the regional system demand -- flexibility to establish regional manufacturing and I have a follow-up? Thank you.

The current free market, they are not trying to tie us up for exclusivity, but they do want to have the most cost effective supply and they have multiple country presence. One company will probably be addressing three out of the five marketplaces we are targeting.

Okay. The follow-up is that when do you -- when do you think those agreements will be done?

I think we are targeting to get it complete this quarter.

Okay. And then when you diminish your system installs, will your costs go down now that you're not -- you're shifting over from a lot of the pilot system productions yourself over to your strategic partner? And I guess the corollary of that question is -- once that strategic partner is up and running and really leveraging on their expertise, can you then use their products on to implement some of your big system contracts that you're talking about in the US?

Absolutely. Absolutely. This is a cost competitive. But from our experience, the shipping costs can be pretty significant. So we wouldn't want to ship from Spain back to the US for the installation in the US. But as I said, really, the beauty for the CPV system installation is not capital demanding. For example, we set up a 10 to 12-megawatt of the capacity in Mexico and only spent less than $2 million in less than three months. So once we finalize and materialize some of the bigger program opportunities, we can ramp up the capacity very quickly. And does not need a whole lot of CapEx to do that either.

But if it makes sense on the regional basis of where your large contracts are, you could still -- that strategic partner could be a contract manufacturer to you still?

Definitely. [Despite] aspects of the strategic synergy where we are negotiating, including the contract manufacturer. They do for our programs.

Great. Thank you.

Thank you.

Our next question comes from John Harmon with Needham & Company.

My question -- I was wondering if the recent developments in your Photovoltaics business change the timing or your intention to take that -- to spin that business off and maybe you could give us a status update as to how the accounting is going?

Yes, John. We -- no, that will not change our timing for that and so we have the board authorization to start a planning and operational aspect. And we are still on schedule to complete this work by the year end of 2008 and depending on the capital market planning to have the solar IPO in the mid-2009.

Great. Good luck with that. Thank you.

At this time we have reached the end of the question portion of the call. I would now like to turn the floor back over to management for any closing comments.

Thank you very much. We are very pleased to have achieved the improved operating results in the company's fiberoptics divisions, achieving positive earnings net of nonrecurring transition service charges. Our fiberoptics divisions have a very robust and new product pipeline with a number of high growth opportunities and we look forward to continued earnings growth over the next few quarters. In [sunlight]Photovoltaics we experienced a gap in demand for the June quarter. We expect a significant rebound in the satellite-related revenues over the next few quarters. In the area of CPV business, although we were adversely affected by the equipment uptime, the company still achieved a significant revenue improvement in its terrestrial CPV product lines. Demand continues to be significant as this company continues to sign long-term CPV-related supply agreements with a much more diverse customer base for both [land-based] and commercial rooftop applications in different marketplaces.

There is some uncertainty of the incentives and subsidy in some of our end solar power markets. We are seeing increased market acceptance and continued growth in terrestrial CPV business. We are extremely confident on our position in this emerging market. We committed to our profitability targets and expect continued progress towards the goal in the following quarter. When I talked to John Harmon, as for the strategic plan of separating the fiberoptics and solar Photovoltaics business, continue the planning and operational aspects, we are on schedule to complete this work by the end of this 2008 and plan for solar IPO in mid-2009.

Thank you very much for your attention today. We look forward to the next call.

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