EMCORE Corp (EMKR) 2009 Q2 法說會逐字稿

Good day, and welcome to the EMCORE Corporation second quarter fiscal 2009 earnings conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Victor Allgeier of the TTC Group. Please go ahead, sir.

Thank you, and good day, everyone. Today after the close of markets, EMCORE released its fiscal 2009 second quarter and six months 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 Dr. Hong Hou, President and Chief Executive Officer; and John Markovich, Chief Financial Officer. John will review the financial results 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 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 Securities and Exchange Commission. I will now turn the call over to John.

Thank you, Vic, and good afternoon, everyone. Thank you for taking the time to participate in our call this afternoon. I will start by providing you with some highlights of our fiscal second quarter and first half operating results, highlight several significant improvements to the balance sheet, review our backlog metrics, and wrap up by addressing our expense reduction and liquidity initiatives. Consolidated revenue for the fiscal second quarter totaled $43.3 million, a decrease of $13 million or 23% when compared with prior year second quarter revenue of 56.3 million, and a decrease of $10.8 million or 20% when compared to the immediately preceding fiscal first quarter.

On a segment basis, our Fiberoptics segment accounted for 28.4 million or 66% of the Company's total revenue for the quarter, which represents a $9.2 million or 25% decrease from 37.6 million reported in the prior year period, and a $10.8 million or 28% decrease when compared to revenue of 39.2 million in the immediately preceding quarter. The year-over-year and sequential quarterly decline in revenue was due primarily to a broad based decline in our customer demand and continue pressure on product pricing, a function of the unfavorable economic environment that we are operating in. Our Photovoltaic segment accounted for 14.9 million or 34% of the Company's total revenue for the quarter, which represents a $3.8 million or 20% decrease from 18.6 million reported in the prior year period, and essentially flat when compared to the preceding quarterly revenue.

Moving on to gross profit and margins, after excluding inventory and warranty reserve adjustments as set forth in the non-GAAP tables contained in the earnings press release, second quarter consolidated gross profit on a non-GAAP basis was 2.1 million, translating to a gross margin of 4.8%. On a GAAP basis, the second quarter consolidated loss was $7 million, which represents a $13.6 million decrease from 6.6 million in gross profit reported in the prior year period, a decrease of 8.6 million when compared to the $1.6 million gross profit reported in the preceding quarter. On a segment basis, second quarter non-GAAP gross margin for the Fiberoptics segment was a negative 3.9% and a positive 20% for the Photovoltaic segment.

On a GAAP basis, second quarter Fiberoptics gross margin was negative 11.7% compared with a positive 24% gross margin in the prior year period and a negative 1.1% margin in the preceding quarter, with the decrease in gross margin entirely due to inventory valuation write-downs totaling $2.2 million associated with the transition to lower cost, more competitive design platforms, a general decline in average selling prices and unabsorbed overhead expenses associated with the decline in revenue. Second quarter Photovoltaic gross margin on a GAAP basis was negative 24.7%, which is a decrease from a positive 12.8% gross margin in the prior period and 13.6% when compared to the immediately preceding quarter.

The decline in Photovoltaic's gross margin was due primarily to inventory write-downs of approximately 5.6 million associated with the earlier versions of both CPV components of systems, as they'll become obsolete due to the introduction of newer high performance product platforms, and product warranty accruals associated with our CPV products. After excluding certain non-cash and other adjustments detailed in the non-GAAP tables, the second quarter non-GAAP consolidated operating loss was 14.1 million. That compares with a non-GAAP consolidated operating loss of 8.6 million in the year earlier period. On a GAAP basis, the consolidated operating loss was 25.9 million, an increase of 12.9 million from 13 million reported in the same period last year and a decrease of 26.6 million from the $52.5 million operating loss reported in the preceding quarter that included a $33.8 million non-cash charge associated with the impairment of goodwill and intangible assets.

After excluding certain non-cash and other adjustments, the second quarter non-GAAP consolidated net loss was 14.3 million compared with a non-GAAP net loss of 8.7 million in the prior year period. On a GAAP basis, the second quarter consolidated net loss totaled 23.7 million or $0.30 per share compared to a net loss of 17.5 million or $0.27 per share reported in the prior year period. Moving on to the balance sheet, during the quarter, the Company made significant progress in strengthening the balance sheet and improving its management of working capital, which has been a major focus of the entire Company over the last two quarters.

The major improvements to the balance sheet that reflect that these efforts are beginning to yield results include: A $9.2 million or 60% reduction in the amount of bank debt outstanding; a $2 million improvement in the net of bank debt cash position; a $15.3 million or 19% reduction in consolidated gross inventory levels that included declines in both Fiberoptic and Photovoltaic inventory levels. This represents the first decline in our inventory levels on a sequential quarterly basis in several years; and lastly, a $17.6 million or 39% reduction in the amount of accounts payable outstanding. I'll now move on to highlighting the fiscal first half operating results.

Consolidated revenue for the first half of fiscal '09 totaled $97.3 million, a decrease of 5.8 million or only 6% when compared with prior year first half revenue of $103.1 million. On a segment basis, the Fiberoptic segment accounted for 67.6 million or 69% of the Company's total revenue for the first half, which represents a $4 million or 6% decrease from $71.6 million reported in the prior year period, with the decline due primarily to a significant drop in demand from our customers due to the current economic environment, as well as continued pressure on product pricing. Our Photovoltaic segment accounted for 29.8 million or 31% of the Company's total revenue for the first half, which represents a 1.8 million or 6% decrease from 31.5 million reported in the prior year period, with the decline in revenue due primarily to lower revenue from government service contracts and certain CPV products, offset by increased revenue in our satellite solar product lines.

With respect to gross profit, after excluding inventory and warranty reserve adjustments, our first half consolidated gross profit on a non-GAAP basis was $9.2 million, which represents a gross margin of 9.4%. On a GAAP basis, the first half consolidated gross loss was 5.4 million, which represents a $22.2 million decrease from 16.8 million reported in the prior year period. On a segment basis, the first half non-GAAP gross margin for the Fiberoptics segment was 4.9%, and on a GAAP basis the first half Fiberoptics gross margin was a negative 5.6% compared with a positive 23.8% margin in the prior year period, with the decrease in gross margin due primarily to the items that I highlighted earlier in the quarterly gross margin summary.

First half Photovoltaic gross margin on a non-GAAP basis was 19.7% and on a GAAP basis was negative 5.5%, which is a decrease from a negative .9% gross margin reported in the same period last year, again due primarily to the items that I highlighted earlier. After excluding certain non-cash and other adjustments, the first half non-GAAP consolidated operating loss was $25.2 million compared with 15.6 million in the prior year period. On a GAAP basis, the first half consolidated operating loss totaled 78.3 million that includes a $33.8 million non-cash charge related to the impairment of goodwill and intangible assets. Net of certain non-cash and other adjustments, the second half non-GAAP consolidated net loss was 25.5 million, which compares with a $16.6 million non-GAAP net loss for the year earlier period; and on a GAAP basis, the first half consolidated net loss totaled 77.2 million or $0.99 per share compared to a net loss of 31.9 million or $0.44 per share reported in the prior year period.

Now on to backlog. As of March 31st, EMCORE had an order backlog of approximately $30.7 million, which is comprised of 19.8 million in Photovoltaic's backlog and $10.9 million in Fiberoptics backlog. We define order backlog as purchase orders or supply agreements that have been accepted by the Company with expected product delivery or services to be performed within the next 12 months. Now moving on to liquidity matters, as of March 31st, our cash, cash equivalent and restricted cash position totaled approximately 11.6 million. Working capital totaled 57.5 million, and loans outstanding -- our loan and security agreement with Banc of America -- totaled 6.2 million.

Recently, we amended the terms of our credit facility with Banc of America that waiver the fall of certain financial covenants, adjusted certain covenants for future periods, increased the amount of eligible accounts receivable available under the borrowing base formula, increased the interest rate and fees and loans and letters of credit and decreased the maximum loan availability to $14 million. These adjustments to the borrowing base formula and the calculation of eligible accounts receivable were intended to provide the Company with additional borrowing capacity. As a result of the continuation of very unfavorable economic conditions in combination with adverse credit market conditions, the Company has continued to take steps to lower costs and conserve and generate cash. Over the last two fiscal quarters, we have implemented a series of measures intended to align our cost structure with lower revenues, including several reductions in the workforce, the temporary furloughing of employees, salary reductions, the elimination of executive employee merit increases and the elimination or reduction of certain discretionary expenses.

With respect to measures taken to conserve and generate cash, we have sold our non-core minority ownership positions in EnTech Solar and (Inaudible) Corporation, significantly lowered our quarterly capital expenditures and substantially improved the management of our working capital. During the fiscal second quarter, on a consolidated basis we generated $7.8 million in cash from improved working capital management; and for the quarter, our satellite business generated positive cash flow from operations. In addition, for the last two months of the quarter, our Fiberoptics business segment generated positive cash flow from operations.

And lastly, we achieved improved payment terms during the quarter with several of our key suppliers. In addition to the previously mentioned operating initiatives, the Company continues to pursue and evaluate a number of capital raising alternatives, including debt or equity financing, product joint venture opportunities, and the potential sale of certain assets. With that, I will turn the call over to Hong for his operational update.

Thanks, John. Good afternoon, everybody. First of all, let me summarize the Q2 financials. Q2 revenue was $43.3 million, representing approximately a 20% sequential decline, of which the revenue from the Solar business was flat, while the revenue from the Fiberoptics business declined about 27%. Demand for the Fiberoptics product in the previous quarter continued to be soft. As our new, low-cost updated functionality design for various telecom product platforms are qualified by customers, we aggressively liquidated the older version products. This effort lead to the pressure on the gross margins. Within our Photovoltaic segment, the satellite power business was strong; but the command for CPV products was soft, as the customers started migrating to different form factor solar cells.

This new product requests deviate from our standard offering, as they designed our next generation CPV (inaudible) concentrator photovoltaic systems; and as a result, have written off substantial CPV component inventory, negatively impacting the gross margin with these non-cash charges. We expect that this inventory adjustment will set a clean baseline to major operating components going forward. Now let me address the market and business environment and our strategy in the various sectors of our business. Let me first discuss our business in the Fiberoptics area. Although we have -- the Company has a product portfolio in Fiberoptics components and subsystems, the demand in the previous quarter was soft across all product lines as a result of the industrywide slowdown related to the economic downturn. For our broadband Fiberoptics business, the revenue within the cable TV product lines for the second quarter declined sequentially.

Capital spending by the US cable service providers remained constrained in the March quarter, and our customers have been managing down their inventories. The good news is that we have qualified and started shipping three new product platforms last quarter. The revenue from this new broadcasting and the QAM transmission products will start generating revenue this current quarter. The booking activity for the end of March quarter started to pick up. We are hopeful that this sector of our business hasn't reached the bottom and that demand will improve as the customers replenish depleted inventory levels. And we are one of the only two qualified suppliers to the -- telephone service providers for Fiber-to-the-Home Triplexer palm-based infrastructure (inaudible).

We continue to leverage our expertise in unique skillsets within cable TV and Fiber-to-the-Home and achieved multiple design wins in a radiofrequency overclass our (Inaudible) product line. We started sampling -- customized the components to multiple customers last quarter. We believe that this product line will be the future trend of (inaudible) deployment for cable TV network, where fiber will be brought all the way to the home or business. Another exciting development on the product front is the demonstration of integrated fiber optical gyroscope in our Specialty Photonics area. With our unique capability of ultrastable lithium-niobate based face modulator, together with our engineering partners, we have developed and demonstrated a complete drop in gyroscope for existing gyros, but with much improved performance and a lower cost. The application for this gyroscopes is primarily for tactical missile guidance and represents a large potential market.

For the telecom business, we finished the product transition in qualification with all major customers for updated design of external cavity laser-based tunable laser modules, integrated tunable laser assemblies and tunable transponders. This updated product platform provide better product performance margin in the high yield; therefore, low cost. However, we have significant inventory of a previous (inaudible) products to work through. We had to offer incentives to move this inventory before they become obsolete. While this focused effort impacted average selling prices and the gross margin, it reduced the inventory and generated positive cash flow in the Fiberoptics segment for February and March. We continue to invest in our telecom business.

We are leveraging the differentiating capability of our ECL technology in the vertically integrated infrastructure to focus our engineering resources in the development of tunable XFP products and the applications of our ECLs for next generation 40 and 100 gigabit applications. At the Optical Fiber Communications Conference this March, we demonstrated new full band tunable XLP products. Our tunable XLP -- or TXLP product is capable of replacing fixed wavelength (inaudible) division multiplexing XLPs, as well as high performance tunable 300-pin transponders. Empowered by EMCORE's field-proven tunable ECL technology, the TXLP provides excellent optical performance while tuning across more than 90 channels on the 50 gigahertz ITU grid. The TXLP can be optimized for low power consumption to comply with existing XLP designs, or for high optical performance to meet the requirement of existing 300-pin designs.

This product, as categorized by a prominent research analyst as the Holy Grail of the telecom communications industry and highly embraced by a leading telco power service provider, has generated tremendous interest from service providers, equipment OEMs and component and subsystem suppliers. We are in the process of partnership evaluation and finalization to help accelerate the time to market of this product with the objective of leapfrogging our competition. For datacom product lines, the demand in the last quarter was soft, as customers working off their inventory. However, we started seeing much more active bookings in the last couple months as the inventory has bled off. The demand for our connect cable product line, which are active cables with electrical connectors based on parallel optical transceivers on both end of the fiber cables, tends to be lumpy. Last quarter represented a slow period of demand. However, our new product, a QAD data (inaudible) cable offering an aggregated bandwidth of 40 gigabit per second is near completion for qualification.

As the transmission bandwidth over cables increases, it becomes more and more advantageous and cost effective to replace the copper cable with fiber. Our competitive position for this product line is further strengthened by the award of a patent for active optical cable technology. This new patent with broad claims covers all fiberoptics active cable applications and it's believed to be fundamental to current and future market segments and platforms related to the data communications link. There are already a number of discussions on possible licensing arrangements with other companies who are planning -- or who are planning to participate in this product space. Now let me discuss the Solar Photovoltaic side of our business. First, the satellite power business. Our satellite solar power product lines experienced an increase in revenue on a year-over-year and sequential basis. This product line has generated positive cash from operations for the March quarter.

We believe that profitability of this product line is sustainable, as the selling prices have increased across several regional long term purchase agreements, and the costs have decreased through engineering improvements and improved supply chain management. The visibility within our satellite business continues to improve through the end of this year. In addition to a long term purchase agreement we signed in the latter part of last year with a major aerospace company, we have reached a new purchase agreement with another major existing customer for their future demand, totaling approximately $70 million. We will begin shipping product against this new purchase agreement this current quarter. We expect to be the sole or primary supplier of space solar cells and solar panels for three out of the four major aerospace companies in the US. Furthermore, we are making significant headway into some major European aerospace customers. We expect our enabling product performance offer to buy our most advanced triple-junction solar cells, ZTJ, and the initial world record results and advanced product roadmap of inverted metamorphic multi-junction, or IMM, solar cells will eventually overcome the local geopolitical advantages of European solar cell suppliers to European aerospace companies.

This would result in substantial revenue growth through the extension of our customer base. We continue to make a great progress in the technology advancement and product commercialization of IMM technology. After demonstrating record conversion efficiency of 33.7% of AM0, the space illuminating condition with the quadruple junction IMM solar cell design, we have made tremendous progress in improving the manufacturing process. A recent technology review by a number of government funding agencies indicated that we are significantly ahead of our closest competition. The unique combination of high efficiency and outer lightweight of the IMM solar cells will enable disruptive new applications for (inaudible) high flying aircraft for communication and reconnaissance applications. We expect major program wins in the next couple of months.

It is anticipated that efficiency levels of approximately 45% could be achieved when we adapt this design platform for use in a 500 to 1,500-X concentrated illumination for terrestrial applications. We expect to commercialize this technology through applications for space power first, and then for terrestrial applications by the end of 2009. Now let me turn the discussion to terrestrial solar power business. The products we are offering include a concentrator photovoltaics components and system. We continue to be the leading supplier of CPV components, including solar cells and packaged solar cell receivers,and we continued to expand our customer base in the March quarter. Due to the slow demand of the solar modules and price reductions of competing technologies, most CPV component customers are redesigning their CPV systems for a cost reduction. They are requesting more customized designs, including product form factors to better match with their optical and mechanical designs.

Their new designs and requests deviate from a standard product offering; as a result, we expect that the standard form factor product will be consumed relatively slowly. We have reserved all the CPV components currently in inventory. Our strategy continues to focus on the development of broad customer penetration. We are happy to see some customers pushing forward for large scale deployment. We expect sales of the CPV components to pick up in the second half of the year. We have the capacity to serve the needs up to 250-megawatt. Therefore, we do not anticipate the need for additional CapEx spending for this line of business in the next couple of years. As for CPV systems, we received three orders in the past quarter from US and European customers. We expect to improve customers' confidence and build more heritage with this emerging CPV technology.

We have also connected the 50-kilowatt Gen-II CPV systems in our solar test field near our facility in Albuquerque to the utility power grid. We are generating electricity to a nanometer of consumption. In addition, we're receiving renewable energy credit from the distributed generation program of the utility company. As we work through this process of permitting and interconnect, we are planning to expand our business through more installations for this program. This may well be the avenue of near term revenue for our CPV systems. We continue to work with strategic partners to bid on utility scale projects, and continue site readiness study in development for land parcels near our facility and a major power switch station. With a close proximity to our shop-- to the -- our power station to Sandia National Labs is the ideal location to build a pallet solar power plant. However, we are seeing challenges in financing large scale projects of emerging technology in the current credit market. We have been working with a couple of lobbying firms trying to access additional government incentives. For instance, DOE's loan guarantee program to help promote this promising technology.

In addition, there are a number of funding programs we are actively developing to advance and deploy emerging CPV technology. We also are working with a number of municipalities to develop a distributed solar power with the aid of their allocated stimulus money. The development of our Gen-III's CPV systems product is progressing well. The demonstration system of Gen-III is up and running in our solar test field. It looks that we can achieve module efficiency of 30% at a cost which would be very competitive with a future price of the silicon and thin-film products. We expect the production of Gen-III's products to begin in the second half of 2009. Now let me discuss the management's focus in this challenging economic environment. Cost reductions and liquidity are clearly the focus of the management team, as John discussed. We have undertaken numerous cost cutting initiatives over the last couple quarters, including reduction in workforce, temporary furloughing of the employees, salary reductions, and elimination of merit increases and bonuses. While it is painful to implement, we have been positive impact to our cost structure.

In the past quarter, we have been managing our inventory very closely. We aggressively monetize excess and obsolete inventories. As a result, our inventory levels have reduced by $15.3 million or nearly 20%, and and the inventory quality has improved substantially. We generated cash in the Fiberoptics area the second half of the quarter. Considering the current level of our business, we still have significant inventory to work through. We'll continue to closely manage working capital in product cost reductions. The effective monetization of the inventories will help us with a liquidity position, and the gross margin improvement will be realized after we manage through this on-hand inventory. With the cost reduction initiatives, the inventory monetization along with the increased borrowing base, as discussed by John, from the amended credit line with Banc of America, we expect to have enough liquidity to ride through this economic downturn if the situation does not deterioration.

On the financing front, we continued to pursue and evaluate a number of capital raising alternatives, including debt or equity financing, product joint venture opportunities and the potential sale of certain assets. We expect to finalize a definitive agreement within this quarter. In summary, the decline in demand that we experienced in the Fiberoptics segment over the last several quarters continue into the second quarter of our fiscal year. However, the other activity begins to pick up toward the end of the quarter, indicating that industry conditions might be stabilizing. The Fiberoptic segment generated positive cash flow from operations during the last two months of the quarter. Despite the recent soft demand in the Fiberoptics sector, we have continued to invest in developing new leading edge products. During the quarter, we announced the introduction of industry -- the first full bent tunable XLT optical transceiver product at the OFC conference, where it was extremely well received.

In the Photovoltaic segment, we continue to see very favorable trend in our satellite business and are making solid progress in the development of Gen-III CPV terrestrial solar power system with a very competitive cost structure. During the quarter, our satellite business generated positive cash flow from operations; and over the last several months, we signed several contracts and expect to sign a significant multi-year supply agreement with a major aerospace company in this month. On the terrestrial side, we've received three additional purchase orders of CPV systems last quarter. With the performance advantage of the IMM technology and the introduction of Gen-III CPV systems in the second half of this year, we're aggressively developing solar utility opportunities with our strategic partner. With that, I will turn it over to Q&A.

Thank you. (Operator Instructions). Our first question will come from Bill Choi from Jefferies & Company.

Thanks, guys. How are you?

Hi, Bill.

Just a few questions. First, on the Fiberoptics turning cash flow positive here in the last two months, can you talk about what the gross margins sort of look like and what will be key to keeping that to a more positive cash flow in the current quarter? Is it largely just the orders coming back, or are there some additional actions that you're taking specifically on that decision? And I have a couple of more questions.

A significant contributor towards the business being positive cash flow for the last two months, Bill, was the management of the working capital. So most of that contribution was from changes in the balance sheet.

What kind of pro forma gross margins are you seeing in the last two months, or did that not change materially?

Within the three months of the quarter, the first month that gross margin was the worst, and because of the unabsorbed overhead in the beginning there was a negative first month of the quarter. But in the second and third month, the gross margin was improving to the positive territory and continued to improvement. But as John said, the positive cash flow was primarily from the balance sheet, basically the monetization of the working capital and the inventory.

Bill, we did experience sequential month to month improvement over the course of the quarter at the gross margin line.

Got it. Are you able to talk about the range, at least for Q2, of where you think cash flow can go? I know a lot of it still depends on working capital, but some level of orders coming back -- maybe some stabilization in gross margins? Are you able to talk a range at all?

The guidance that we're providing, Bill, is limited to the top line in terms of the revenue.

But you have seen a trend. In the December quarter, we consumed roughly $22 million in cash. The last quarter, we consumed about $10 million cash. On top of that, we paid down significant liability on our account payable. The reduction on our account payable was almost $17 million. So going forward, it's hard to predict. We will give the guidance at this point only on the top line.

Okay. My final question, just in terms of capital raises the options of doing licensing agreements, et cetera, so various ways to try to raise cash here. I know it's a very difficult environment, but are you able to talk about at all the -- whether any of the delay is related to commercializing the Gen-III on CPVs? What are some of the challenges today, and how confident can we be about some kind of deal getting done in Q2? Thanks.

Yes. I think the financing capability -- financing activity -- is specifically targeted to apply for the worst case. As I talked about, the cost reduction initiatives -- the inventory monetization -- we have made a lot of progress, but we still have a long way to go. The current level of inventory is still way too high compared to the level of business, and together with the increase of our borrowing base, we think we would have enough cash to ride out this storm if the situation does not deteriorate. But what if continue to deteriorate? So for that reason, we continue to evaluate a number of our options for the capital raising just in case the situation doesn't improve.

Okay. Got it. Thank you.

Thank you, Bill..

Our next question will come from Jed Dorsheimer from Canaccord Adams.

Hi, thanks. A couple of questions. One, just guidance. I must have missed this. What is the guidance?

Hi, Jed. We guided in the press release, basically saying in the Fiberoptics revenue to decline moderately on a sequential basis and -- but our Photovoltaic revenue to improve by at least 10% from the second quarter.

All right. And just to -- is it just sort of moderately sort of a 5 to 10% range, or is it a 1 to 5? Any -- can you bracket any of that?

I think it's a probably 5 to 10% is safe to say.

All right. And then nice job on the cost control here, guys. Just curious on the Banc of America, John, the change in covenants, does that remove -- is there any subordination issues with that loan at this time? It sounds as if you're paying a higher rate and all the covenants have been removed. Is that the right way to look at that?

No. The covenants were reset on a go-forward basis.

All right.

So for the December and the March quarter the covenants that we were in breach of were waived, and the covenants have been reset for the next year.

All right.

And I don't understand your question, Jed, as it relates to subordination.

So would they have -- do they have subordination rights on this loan in terms of, I guess, any equipment or any hard assets of yours at this point ? Or -- it sounds like it's straight debt, so they probably

It's a senior secured credit facility.

Got you.

So it's secured by Company assets.

All right. Employees -- could you just help us walk through the reduction in the furloughing? What was the number of -- what were the number of employees employed, and what is it now?

Jed, you know, it depends on the starting point. We look at, we have -- before this storm happened, we have already transferred some product from the domestic manufacturing to the contract manufacture, so some of the headcount reductions were as a result of that; but in average, since September, we reduced the headcount by about 30%, and currently we have about 580 people on our payroll. So about 30% reduction, about 150 people on furlough. And so now we got about 150 -- 580 people for the entire Company.

And will you see additional OpEx benefits from that 150 furloughing next quarter, or have we already seen -- looks like OpEx excluding one-times ticked down about two million. Have we already seen the cost saving play out here?

Jed, we'll continue to see benefits from that for the June quarter.

For the June as well, all right. And I guess just a couple more and I'll jump back in the queue. The CPV systems, that is cash flow negative at this point -- that business?

Yes. The CPV system was. We have -- because of Gen-III, it is in the QAL phase, and we still have the inventory in Gen-II, so we're not going to continue to offer that version of products ongoing basis. So we reserved the inventory and also the increase the warranty approved. Other than that, the cost is really totally in their control right now.

And why not shut that business down and so that you maintain your Fiberoptics and then the CPV cells, both for terrestrial and for the space division? I'm just curious what your thought process is of keeping this systems business running at a negative cash flow.

You're right. From a financial point of view, this snapshot -- this system is consuming cash, and because we still have to develop and finish the qualification of this Gen-III product and the component side -- you understand the long business will be profitable, and this profitability, as we discussed, will be sustainable. But the CPV system still representing a very significant upside going forward; so our strategy is not forcing the issue of deployment prematurely, but really take our time to leverage the IMM technology advantage and the Gen-III low cost focus to develop a disrupting system solution to the utility scale applications going forward. So certainly it's -- near term it's an investment, but we believe in the long run it's going to be paid back -- pay off.

Got you. And then just talking about the competitive environment, I mean we've seen poly fall from a spot in the above the 400 range to now at or below contracted levels of sort of 70-dollarish, which makes the traditional solar cells much more competitive in the marketplace. I know you had mentioned that you were short listed on some projects -- I think in the New Mexico area. I was wondering, how have -- how has the competitive position changed for you? And then just using that as sort of a litmus test, were you able to win or did that get awarded to another traditional solar cell provider?

Yes. So the silicon poly pricing continue to decline. We're watching that very closely, and really the hi-tech area that -- the competition is not only you keep your head down, develop a low cost product, but also you have to look at the competition. And what we have done for the Gen-III design principle is not only design the best our competitive dollar per watt, but also in the fully installed basis, because a CPV system design has a lot to do with the cost of installation. So we -- our goal of the Gen-III design is the most fully effective in the fully levelized cost of energy point of view; and we believe from the model we have done, even considering the poly pricing goes to 70 to 50, even to $35 per kilogram, we'll still be able to be very competitive on a fully installed basis.

Well, I guess maybe if you could -- because I'm sure others are wondering the same thing -- maybe if you could elaborate on that, because what we're seeing in the market is actually a sub-$5 install cost now for some -- for traditional solar cells; and maybe if you could help outline sort of where you believe -- what the metrics are for your CPV system to get it cost-competitive in the marketplace. And then also, given the unproven nature of the CPV cells, what type of discount do you need to offer to entice -- being that sort of first mover -- to go with a CPV system?

Yes, that's a very good question. Right now, our internal cost target for a system at the hot wire level is $1.65 per watt; and at a fully installed basis (inaudible) is at $2.70. So I think certainly we need to mark up some for the profit, and we believe at this level we will be very competitive -- cost competitive -- in some certain geographical area where that (inaudible) is high. And also, CPV advantage with develop a project will start to become more and more clear that a high energy density and the advantage of operating in the high temperature without whole lot of power degradation certainly offers an advantage compared to silicon module.

And so Hong, can you just throw a couple more metrics around that 2.70 number, because it sounds awfully compelling. What concentration is that at? What efficiency is the cell at? And is EMCORE standing behind it with a 20-year guarantee?

Yes. So the key design features of our Gen-III is from the optics point of view, it's a refractive design concentration ratio at 1,050 times, and it's more modular. It's not like Gen-II systems, so Gen-III systems can be installed -- two people just put -- mount the module on the tracker. It has a better thermal management, so the solar cell will be operating at a substantially lower temperature compared to Gen-II. The tracking technology we're going to be using (inaudible) instead of (inaudible) on a stick -- a pedestal type of -- it's still the two x's striking, but here we have tremendous advantage in cost and reducing the material consumption and improved the cost in the installation tremendously. So that's a -- that's just at a high level. In the solar cell technology, we're going to be -- with base line right now, it's about 40% triple-junction based CTV; but by the end of this year, we should be having available 42, 43% IMM based technology. As I've discussed, we have worked out -- made tremendous progress in the past quarter -- in manufacturability. So currently at a module level, after all the optical loss and tracking loss, everything, module efficiency is 30%. And we believe we can improve by another percentage or two by -- when we start using the IMM technology.

Great, thank you, and I'll jump back in the queue.

Thank you, Jed.

(Operator Instructions). And our next question will come from Sam Dubinsky with Oppenheimer.

Hey guys, couple of quick housekeeping questions. Could you just give some more color on your optics business segments? What percentage decline was in broadband, telecom and datacom? And I have a couple of follow-ups.

Sam, we do not break up into that level of granularity. But overall, the Fiberoptics sequentially dropped by about 27% in revenue compared to last quarter.

You mentioned the weakness was broadbased. Does that mean one segment weaker than the others, or all they all pretty much just down?

It's pretty much all sectors. I hate to say this. That's in a way to -- we said -- (inaudible) -- it's almost saying it's really the industry phenomena. And in many areas, we're the leading provider, sole sourced. If there's demand from our customers, we should be seeing orders. But we did not see (inaudible) strong orders. So it's pretty much across the board. But by saying that, toward the latter part of the quarter, especially in March, the booking activities really start increasing pretty substantially compared to before. So I think we maybe -- the market might have bottomed out and we may be on our way climbing out from this trough.

Okay. And also, did you mention what terrestrial solar revenue was this quarter? I know you mentioned what solar was in whole, but how much was the terrestrial CPV?

We did not break down for -- between the terrestrial and space. But the majority of the solar revenue was from the space side.

Okay. And then, I know you didn't give gross margin guidance for next quarter, but will gross margins be up next quarter, or how should we think about that? And if we could just have an absolute OpEx dollar to work from for the June quarter -- could you just maybe give us an OpEx number for Q3 pro forma?

I can address your margin question. The margins this quarter on a GAAP basis were very adversely impacted by the inventory and warranty accruals. So we're expecting a sequential improvement in our margins on a sequential quarterly basis. I can't quantify it for you. And OpEx should be relatively in the range and possibly slightly down on a sequential basis, principally due to the impact -- continued favorable impact of the employment furlough.

I mean, is that like a -- (inaudible) have all these sort-of one-time charges in here. Is that like a 15 or $16 million number, something like that?

I can't quantify that for you.

Okay, how about this one? How should be think about gross margin in each of your business segments once you burn through all this sort-of high cost inventory you have stockpiled? So what's the target optics gross margin? I mean, historically they've never really been this low. How should we think about that on the recovery?

I think, Sam, you can think about it this way. In the solar side, the space -- the steady space after this clean up -- should be at about 25%. And in the solar side, the margin will be complicated by the mix between the CPV product, especially the system level, compared with the space and component business. Then on the Fiberoptics side, our broadband side, the gross margin has always been in about 26 to 31% range. I think after the inventory adjustment, should be to -- close to the historic level if the topline can carry enough fixed costs. And the wild card is still in the datacom, telecom area where we have a lot of inventory to work off. We've made a lot of progress on the older version products, but we still have some inventory in there. And those inventory -- we wanted to provide incentives to get them out, because we have newer version, lower cost, higher performance products waiting on the deck, but we need to work out this inventory first. So that will be adversely impacting gross margin, and that's kind of -- make it a little bit difficult to give you a clear answer on that.

Okay. I guess my question is on the optics side. If you're sort of participating in more aggressive pricing in the industry to clear through internal inventory and generate cash, I mean, are the products that you're selling, are those being deployed yet? Or are those sort of sitting in customers' hubs?

Yes, those deployed. It was deployed. I think the customers, none of them are using this time to build up the inventory. I mean, we have seen that -- another customer had a comment -- if they don't have demand, even you offer very strong incentive, they wouldn't buy it.

Okay. And then lastly on the strategic alternatives front, are there any businesses that you want to exit today or that you think you can stall if you needed the cash? Can you just talk about sort of strategically where you can prune further if you had to?

We, at this point, explore all different options and what is the best for the shareholders, and what is the least interruptive to our business, and that's the general guideline for it. But we wanted to first solve our present issues through our personal solutions; namely like what we did monetizing the inventory, getting very close working management, cost reduction side. So the strategic side, it's really need to improve the shareholders' value.

Okay. Thank you, very much.

Thank you, Sam.

(Operator Instructions).

Well, no more question. Let me just make some closing remarks, and repeat the Q3 focus and guidance. For the fiscal third quarter, management will continue to focus on cost reduction and the liquidity management. We expect our Fiberoptics revenues to decline moderately, quantifying that as 5 to 10% on a sequential basis; and our Photovoltaic revenue to improve by at least 10% from the second quarter. In addition, we expect the satellite business to be profitable on an ongoing basis due to the increased revenue, improved product pricing and lower costs derived through engineering projects and the more effective supply chain management. I want to thank you very much for your attention today, and we look forward to the next call.