EMCORE Corp (EMKR) 2009 Q3 法說會逐字稿

Good day and welcome to the Emcore Corporation Third Quarter Fiscal 2009 Earnings Conference Call. As a reminder today's conference is being recorded. At this time, I would like to turn the conference over to Victor Allgeier of the TTC Group. Please go ahead, sir.

Thank you and good evening, everyone. Today, after the close of market, Emcore released its fiscal 2009 third quarter and nine month results. By now you should have received a copy of the press Release. If you have not received a 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 to questions.

Before we begin, we would like to remind you some of the comments made during the conference call and some 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'll 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 third quarter and first nine month operating results, review our backlog numbers and conclude with an overview of our liquidity and balance sheet improvements.

Starting with the third quarter operating results, revenue for the fiscal second quarter totaled $38.5 million which was a decrease of $4.8 million or 11% when compared to the immediately preceding fiscal second quarter. On a segment basis our Photovoltaic business accounted for $16.1 million or 42% of the Company's total revenue for the quarter which represents an increase of $1.2 million or 8% from $14.9 million reported in the immediately preceding quarter with the increase due primarily to strong demand for our satellite solar power products. The Photovoltaic segment continues to account for increasing percentage of the Company's total revenue rising from 24% in the fourth quarter of fiscal 08 to 42% in the most recent quarter. Our Fiber Optics segment accounted for $22.4 million or 58% of the Company's total revenue for the quarter which represents a decrease of $6 million or 21% from $28.4 million reported in the immediately preceding quarter with a decline in revenue concentrated primarily in the Telecom and cable TV product lines. With respect to gross profit, after excluding certain adjustments as set fourth in the non-GAAP tables that are included in the earnings press release the third quarter consolidated non-GAAP gross profit totaled $5.9 million which represents a $4.5 million improvement from the $1.4 million reported in the preceding quarter with the corresponding non-GAAP gross margin increasing from 3.3% to 15.3%. On a GAAP basis, the consolidated gross loss for the quarter was $2.4 million, an improvement of $4.6 million from a $7 million gross loss reported in the preceding quarter. During the quarter we recorded approximately $6.4 million in non-cash losses on inventory purchase commitments and $1.9 million in non-cash inventory reserve adjustments in our Fiber Optics segment both of which adversely impacted gross profit and margins on a consolidated basis.

On a segment basis the third quarter non-GAAP gross margin for the Photovoltaics business was a record 33.9%, which represents a significant improvement from the 20.5% gross margin reported in the immediately preceding quarter with the improvement due primarily to increased sales of higher margin satellite solar power products along with improved manufacturing yields of certain satellite solar panel contracts. The third quarter marks the second consecutive quarter in which non-GAAP Photovoltaics gross margins have improved and when compared to the prior year third quarter, gross margins have increased by over 30%. On a GAAP basis, in the third quarter Photovoltaic gross margin mirrored the non-GAAP gross margin at 33.9%, which compares to a negative 24.7% GAAP gross margin in the preceding second quarter. The third quarter Fiber Optics non-GAAP gross margin was 1.8% which represents an improvement from a negative 5.7% gross margin reported in the immediately preceding quarter with the improvement due primarily to higher margins in our Broadband product lines. On a GAAP basis the third quarter Fiber Optics gross margin was negative 35.2% which is a decrease from a negative 11.7% gross margin reported in the preceding quarter with the decline due primarily to the non-cash losses recorded on inventory purchase agreements, non-cash inventory valuation write downs and unabsorbed overhead expenses, the result of lower revenue levels.

Now on to operating expenses. Sales, general, and administrative expenses for the third quarter totaled $10.9 million which is a decrease of $1.1 million or 9% from the $12 million reported in the preceding quarter. Research and development expenses for the third quarter totaled $5.7 million, a decrease of $1.2 million or 18% from $6.9 million reported in the preceding quarter. As a result of the Company's ongoing cost reduction initiatives, SG&A expenses declined sequentially in each of the last two quarters while R&D expenses had declined in each of the last four fiscal quarters.

During the quarter, we performed an evaluation of our Fiber Optics assets for impairment as required by Statement of Financial Accounting Standard Number 144. As a result of this evaluation, we determined that an impairment existed and recorded a $27 million non-cash charge by writing down certain long lived assets to estimated fair value which was determined based upon a combination of guideline public company comparison and discounted estimated future cash flows. Current economic and financial market conditions had a significant adverse impact on our assessment of the fair value of certain of these assets. The magnitude of the impairment charge was due to the effect of recent declines in the market values of comparable public companies debt and equity securities in combination with the current slowdown in product orders and lower product pricing that was exacerbated by relatively high discount rates used in estimating fair values.

After excluding certain non-cash and other adjustments as set fourth in the non-GAAP tables, the third quarter consolidated non-GAAP net loss was $7.3 million which represents a $7.4 million or 50% improvement from the $14.7 million non-GAAP net loss reported in the preceding quarter. On a GAAP basis the third quarter consolidated net loss, which includes the $27 million non-cash impairment charge was $45.4 million which represents an increase of $21.6 million from a net loss of $23.7 million reported in the preceding quarter. On a per share basis the third quarter non-GAAP net loss per share was $0.09 an improvement of $0.10 per share from a per share net loss of $0.19 reported in the preceding quarter. On a GAAP basis the third quarter net loss per share was $0.57, an increase of $0.27 per share from a $0.30 net loss per share reported in the preceding quarter. On a consolidated basis the Company generated positive cash flow from operations during the third quarter due to the combination of the lower cash operating loss and the continuation of improved working capital management. In addition our Photovoltaic segment also generated positive cash flow from operations.

Now I'll move on to the nine month results. Consolidated revenue for the nine months ended June 30 totaled $135.8 million which represents a decrease of $42.9 million or 24% from $178.7 million reported in the same period last year. On a segment basis the Photovoltaics business accounted for $45.8 million or 34% of the Company's total revenue for the first nine months of the fiscal year which represents a decrease of $7.6 million or 14% from $53.4 million reported in the prior year period with the Photovoltaics segment accounted for 30% of the Company's consolidated revenue.

Our Fiber Optics segment accounted for $90 million or 66% of the Company's total revenue for the first nine months of the fiscal year which represents a $35.2 million decrease from $125.2 million reported in the same period last year. After excluding certain adjustments as set fourth in the non-GAAP tables, the nine month consolidated non-GAAP gross profit was $14.5 million which compares to $36.8 million gross profit reported in the same period last year. On a GAAP basis the nine month consolidated gross loss was $7.8 million which represents a decrease of $38.2 million from a $30.4 million gross profit reported in the prior year period.

On a segment basis the nine month Photovoltaics non-GAAP gross margin was 23.2%, which represents an increase from 10% reported in the same period last year and on a GAAP basis the nine month Photovoltaics gross margin was 8.3%, which represents an increase from a negative 1.9% gross margin reported in the same period last year. The nine month non-GAAP gross margin for the Fiber Optics segment was 4.3% compared with a 25.4% gross margin reported in the same period in the prior year. On a GAAP basis the nine month Fiber Optics gross margin was negative 13% compared to a positive 25.1% gross margin reported in the prior year period. After excluding certain non-cash and other adjustments as set fourth in the non-GAAP tables, the nine month non-GAAP consolidated net loss was $33.1 million, which compares to a $22.9 million net loss reported in the same period last year. On a GAAP basis the nine month consolidated net loss which includes $60.8 million in non-cash impairment charges was $122.5 million, which compares with a $39.6 million net loss reported in the same period last year.

Now on to backlog. As of June 30, the Company had a consolidated order backlog of $49.6 million which represents an $18.9 million or 62% increase over the $30.7 million order backlog that was reported as of the end of the preceding second quarter. On a segment basis the quarter end Photovoltaics order backlog total $36.2 million, which represents a $16.4 million or 83% increase from the $19.8 million order backlog reported as the end of the preceding quarter. During the quarter, we entered into a number of significant multi-year satellite supply agreements with customers such as Space Systems Laurel, Boeing Corporation, NASA and the Air Force Research Laboratory. Since the beginning of the calendar year we have received over $100 million in firm orders and purchase agreements for satellite solar products and service contracts. The quarter end Fiber Optics order backlog totaled $13.4 million which is a $2.5 million or 23% increase from a $10.9 million order backlog reported as of the end of the preceding quarter with the increase being fairly broad-based across multiple product lines. Our order backlog is defined as purchase orders or supply agreements accepted by the Company with expected product delivery and/or services to be performed within the next 12 months.

Moving on to liquidity and the balance sheet, during the quarter we continue to make progress in improving the companies liquidity and strengthening the balance sheet. On a consolidated basis we generated positive cash flow from operations during the quarter as well as positive free cash flow, that is net of capital expenditures. This is the first quarter in several years that the Company has achieved positive cash flow from operations in a fiscal quarter and over the last three quarters our cash flow numbers have improved dramatically from a cash burn of $21.1 million and $9.5 million in the December and March quarters respectively to the achievement of positive cash flow in the June quarter. As we have highlighted in our last two earnings conference calls we have placed tremendous organizational effort on improving our working capital management and these efforts are beginning to result in some meaningful numbers. Over the last two quarters we generated $15.9 million from the reduction in inventory levels and $15.4 million from the collection of accounts receivable while at the same time lowering accounts payable obligations by $23.6 million. In addition over the last two quarters, we have reduced the amount of debt outstanding under our line of credit with Bank of America by over $10 million, from $15.4 million at the end of December to just under $5 million at the end of the third quarter and we are in full compliance with the financial covenants associated with the Bank of America Credit Facility. We exited the quarter with cash, cash equivalents and restricted cash of approximately $9.9 million and networking capital of $45.3 million.

In addition to continuing to focus on improving profitability and managing our working capital, we continue to pursue and evaluate a number of capital raising alternatives including debt and/or equity financings, product joint venture opportunities, and the potential separation or divestiture of certain portions of the business. Subsequent to the end of the third quarter, we filed an S3 Registration Statement with the Securities and Exchange Commission which has become effective that provides for up to $50 million in debt and/or equity securities.

With that I will turn the call over to Hong for his operational and strategic update.

Thanks, Jim. Good afternoon, everybody. First of all let me summarize the Q3 financials and John has presented many numbers. Q3 revenue was $38.5 million representing approximately an 11% sequential decline of which the revenue from the solar business was up by 8% sequentially while the revenue from the Fiber Optics business declined by slightly over 20% sequentially. On a non-GAAP basis, the gross margin improved from 3.3% in the March quarter to 15.3% in the June quarter and the net loss reduced from $14.7 million in the March quarter to $7.3 million in the June quarter. We achieved record profitability last quarter in the Photovoltaics segment with 33.9% of gross margin and we have received over $100 million in firm orders and purchase agreements in the last seven months for a space power of businesses and we have achieved some major file stones on our terrestrial concentrate or of Photovoltaics our CPV business as well. The Fiber Optics business continued to be soft; however, we feel that we have reached the bottom of the cycle last quarter and the book-to-bill ratio has improved substantially. Especially for our Broadband products of our Fiber Optics business, the book-to-bill ratio improved to 1.3 in the last quarter.

Working capital management continued to be the priority for the quarter and monetization of excess inventory while hurting gross margins did contribute in cash to our balance sheet. Now I will address the operations and marketing conditions and our strategy in the various sector of our business. For our Broadband Fiber Optics business, the revenue within the cable TV product lines for the third quarter declined sequentially; however, it is clear that the demand is starting to come back and for the first time in the last five quarters our book-to-bill ratio has been greater than one and reached approximately 1.3 last quarter. In a recent report released early August by Comcast, they reported that a capital spending for the operate and scalable infrastructure categories will increase 170 to 300% in the second half of the year 2009 compared to the first half. Throughout the last couple quarters the inventory throughout the entire supply chain has gone down to minimum levels and the demand is coming back quite strongly. In the June quarter, we have achieved several very important design wins in the multi-year contract awards for our Satcom and Specialty business.

The newly designed Fiber-Optic Gyroscope demonstrated excellent performance in the system test. This product primarily for technical missle guidance applications represents a substantial new market opportunity for us. With a Broad customer penetration, a very comprehensive product portfolio, strong intellectual property position, and several new products introduced during the last couple quarters, we now expect a very robust growth in our Broadband business with the right working capital level and the cost structure in place, our operations focus for this business sector is to aggressively participate in the upturn of the business opportunity and optimize the profitability and the positive cash flow. For the Telecom business, demand continues to be pretty soft, a primary focus has been to manage down the inventory. We continue to expect the pressure on gross margins in this area as we had to offer incentives to move the inventory before it becomes obsolete, especially the previous version design product.

We continue to invest in our Telecom business, we are leveraging the differentiating capability of the external cavity laser technology and the vertically integrated infrastructure to focus our engineering resources in the development of tunable XFP products and applications of ECL's external lasers for Next Generation 40 and 100 gigabit per second applications. In the quarter, we provided evaluation samples to several key customers for both transceivers and TOSA product. (inaudible) the evaluation has been very positive. Initial target of the applications is to replace the 300-pin transponders for high-density and the low power applications in the central offices, as we establish high-volume manufacturing infrastructure, we'll broaden the market opportunities by going after the DWDM XFP market. Furthermore, the platform of the tunable TOSA packages will serve as the low cost platform for the 10 and 40 gigabit per second component. We've also made tremendous progress in developing internal game chip and modulator components for the mini packaged tunable TOSA, and the operations focus for this line of business is to continue monetizing the access inventory and work with partners closely to accelerate the time to market of the tunable XFP product with the objective of leapfrogging our competition.

For Datacom enterprise product lines, the demand for 10 gigabit per second transceivers was soft for the last quarter although it started picking up moderately toward the end of the quarter as our key customers are working off their inventories. The demand for parallel optical transmitters and receivers were healthy. Our new product, quad data rate cable -- active cable offering an aggregated bandwidth of 40 gigabit per second is fully qualified and 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 patent for the active cable, we believe this new patent of a broad and fundamental claim covers application for the active cable applications.

In Summary, we have seen a stabilization of our Enterprise and Datacom business. The upside of this business sector is the demand of parallel optical transceivers and active optical cables. The focus for this quarter is to maintain the market share and monetize the excess inventories. This may lead to the continued pressure on gross margins of this product.

Now let me discuss the Solar Photovoltaic side of our business. First, the satellite power business. Our satellite solar powered product lines considering to experience increase in revenue on a year-over-year on a sequential basis. Due to the improvement in engineering in the manufacturing processes, our manufacturing team has achieved the highest level of the yield. In addition, we have started shipping against the new purchase order in the June quarter to a major aerospace company which has a better margin. Along with a right product mix of higher margin solar panel products, we have achieved record level of profitability in the June quarter. And John gave the consolidated solar margin but here I wanted to single out the space power product and the gross margin was nearly 39% and the operating margin was 24.5%.

The booking activity of space business has been extremely strong. In the last seven months, we have booked over $100 million new orders from essentially every major aerospace Company in the US. In addition, we have the option to supply an additional $36 million with the same terms under the current contract. We believe that the profitability of this product line is sustainable and the selling price has increased across several recent long-term purchase agreements and the costs have decreased through engineering improvement and the improved supply chain management.

As of today we have successfully supported our customers with our solar cell and solar panel product for 64 separate space missions and I'm proud to report here that we have not experienced any [unnormal] performance deficiencies from our product. Through our technology leadership, excellent reliability track record, we have been expanding our customer base internationally. The recent grant through commercial jurisdiction by the US Government removed the barriers to export to friendly countries and provide leveled playing field against our competitors. As we've become the solo primary supplier of space solar cells and solar panels for most of our US Aerospace companies, we are making significant head way into some major European Aerospace customers. We expect to overcome the local geographical advantage of European solar cell suppliers to the local Aerospace companies in the near future. This should result in a significant revenue growth through the expense of our customer base. We continue to make great progress in technology advancement and product commercialization of inverted metamorphic multi-junction IMM solar cells. After demonstrating record conversion efficiency of 33.7% in AM Zero that is a space elimination condition with a quad triple junction IMM solar cell design we made tremendous progress in improving the manufacturing processes. We are currently working on the first commercial program with Boeing to commercialize the IMM solar panels for the fast access spacecraft test program which aims to develop the Next Generation ultra lightweight and the high power solar panels for future spacecraft and space stations. The same technology platform of IMM can be used for CPV terrestrial applications as we discussed earlier. It is anticipated efficient levels of approximately 45% could be achieved average design platform for end user a 500 to 1500 time concentrated elimination for terrestrial applications. Our strategy of technology and product development is to commercialize the IMM technologies through space programs first and then apply the same manufacturing process ask for terrestrial applications.

Now let me turn the discussions to the terrestrial solar powered business. The product again we are offering includes concentrated Photovoltaics of CPV components and systems. 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. Our Gen-III CPV systems have been installed and operating in the solar test field and operating behind our Albuquerque facility since earlier this year. The performance and operations has been excellent meeting all design expectations. We are finishing up the product qualification while designing tooling for a high volume manufacturing. The Gen-III product will be much more cost effective than the prior Gen-II design.

In the quarter we signed a formal agreement with a PNM of New Mexico to participate in PNM's large distributed solar power program. This 20 year agreement with Emcore consists of 114-kilowatt of solar power produced on site by our Gen-II and Gen-III CPV systems. This power is set into Emcore's buildings through approved renewable energy certificate meter, although over one megawatt of Emcore CPV systems have been deployed across eight locations throughout the world, this is the first distributed generation applications. Emcore CPV's systems is ideally suited because of their cost competitiveness and their high energy converting efficiency particularly in certain geographical areas such as the Southeast in the United States. Our industry leading CPV modules generate the highest level of the power per square meter and we look forward to pursuing additional distributed generation programs with PNM as well as other utility companies. The principal challenge is centered around our CPV business are twofold. The first, the competitiveness.

Due to the slow demand in industry overcapacity the selling price of competing technologies have eroded significantly over the last year and it looks like in this trend it will continue although at a slower pace. We have to have all product designs and manufactured costs competitively today and in the future. The second challenge is that the new technology is viewed at the risk rather than advantage in the current economic environment. We are often asked to provide performance heritage of utility side installations. Through our installations throughout the world and many more by other CPV system companies, CPV has been increasingly recognized as a viable alternative to the competing technologies due to its high efficiency, advanced product road map for higher performance and lower cost, and a lower cost for installations and the balance of systems, less capital demanding and easier to scale up for production. It is certainly a superior technology in the area with high direct normal readings.

In light of the current situation with the government policy, the financial market condition and the competitive landscape of the other solar technologies, we are revising our strategy for the CPV system business. As for our business proposition in the solar business value chain, we'll retain our competitive edge as the only vertically integrated CPV player by providing CPV solar cell components and systems. As the CPV system supplier will continue to develop market acceptance and industry recognition of the CPV systems through the development of smaller projects; however in the longer term the center piece of a new go to market strategy is to be the leading supplier of CPV systems and CPV modules which integrates our high efficiency solar cell receivers with a thousand times concentrated refractive optics. This strategy in contrary to the earlier one of being a solar project developer of EPC engineering procurement and construction suppliers, we'll develop and license our customers or partners and supply CPV modules in high volume. This will allow us to focus better our effort on our core competencies.

As for developing market acceptance and products cost competitiveness, we are aggressively pursuing a joint venture, a partnership opportunity in China to tap into their new favorable policy and renewable energies. We believe that we'll be positioned to serve a near-term opportunity to supply our Gen-III modules for an initial utility scale project. In the meantime, the joint venture serves as our centralized low cost manufacturing base for CPV modules. We'll develop several manufacturing partners for the tracker in a different continent so that the only components need to be shipped from long distance are the CPV modules. This will effectively reduce the shipping cost in the total cost structure significantly.

Now let me discuss the management focus in this challenging economic environment. Cost reductions and liquidity are clearly the focus of the management team and the cost cutting initiatives we have undertaken over the last couple quarters is a clear positive impact to our liquidity situation. As John discussed, we generated positive free cash flow from the last quarter and that was a significant improvement from about a $21.7 million burn in the December quarter and about $9.5 million burn in the March quarter. In the past quarter, we continue to make progress on monetizing excess and obsolete inventories. As a result our inventory level was reduced by approximately another $8 million or nearly 17%. Based on our internal inventory turn objectives, we believe that we still have approximately $10 million to $15 million in the inventory reduction opportunities and that consists primarily of raw materials in the area of enterprise and Telecom businesses. The effective monetization of this inventories will help our liquidity position and the gross margin improvement will be realized after we manage through this existing on hand inventory.

With that, I will turn it over to Q&A.

(Operator Instructions.) We'll go first to Bill Choi with Jefferies & Company.

Hello. This is Raoul [Conworker] calling in for Bill Choi. I just wanted to know, are you disclosing your cash flow from operations and free cash flow for the quarter?

I'm sorry, can you repeat your question?

What was your cash flow from operations for the quarter and free cash flow?

The cash from operations and free cash flow were in the $10 to $50,000 range. Positive.

Okay. And secondly, could you talk a little bit about when you are trying to divest part of your business, what would be your priorities how you are considering about in general liquidating some of your assets, which assets would be on the block first and which would be the second priority and things like that? Thank you.

Well we continue to evaluate all of the businesses as well as the assets associated with those businesses. We have not disclosed anything in particular because we have not made any decisions or entered any agreements with respect to any potential divestitures, so we can't provide you any specifics as it relates to what other than once we've made a decision and have entered an agreement with respect to any separation or divestiture we'll announce it accordingly.

Okay, and in this quarter, the satellite CPV business came back pretty strongly so was this just a snapback from an earlier depressed level so to speak or is this kind of the beginning of new levels of demand that you expect to be sustained over the next two to three quarters or even a couple of years?

Yes, thank you for the question. The strong demand in our space solar business is coming from two factors. First of all, the overall market demand is very healthy. It's increasing as well. The second is we are gaining market share, so this business had the advantage to be having a good visibility as I talked about in the last several months, we booked $102 million new orders plus $36 million additional options in there, and they give us visibility into the next two years instead of a couple quarters. So we expect as this business continues to do well in this level of profitability is sustainable.

Okay, and are you breaking out your Photovoltaic revenue along satellite and terrestrial?

Usually we don't, so the reason we single out the gross margin and that margin for the space business is an illustration of the new level, as I said the business and the profitability we are expecting going forward for that line of the product.

Okay, thanks a lot. Thanks a lot for answering my questions.

Thank you.

(Operator Instructions). We'll go next to Jed Dorsheimer with Canaccord Adams.

Hi, this is actually Josh Baribeau for Jed. Just a couple. You've done a great job so far in improving your operating expenses. Can you give us a little bit more color as to how much more quantitative improvements you can make, just trying to get a picture of what this model could look like or maybe put differently could you tell us awe little bit about your target model and what that looks like?

Josh, I think they referenced the starting point of the Q3 performance can be probably the baseline of your model and but that model will be applied to the solar business applicable to our Broadband business. As I said early on our Telecom and enterprise product lines for our Fiber Optics business will continue to experience the gross margin pressure because we still have about $10 to $15 million more inventory than we need. We have to monetize and manage through, so this will give us additional liquidity over the next couple quarters but the next couple of quarters operating model especially the gross margin for this line of business should not be used as a baseline. So John, do you want to talk for awhile?

Yes, the target for the Fiber Optics business although we can't put a time frame on it at this point is margins in the mid 20% range and in the Photovoltaic business, on a combined basis, margins in the mid 30% range. Again, subject to time frame.

And the operating expenses as we break out except one or two things, the non-recurring items are pretty much the level we wanted to maintain even when the business is coming back more strongly, so you can probably use the same type of operating expenses in your model.

Okay. And just lastly, I'm not sure if I missed this, could you give me a little bit of color about what your CapEx plans are, if any?

Yes, the CapEx plans the good news is that we don't have to spend much and we have invested pretty heavily in 2008 or 2007 Photovoltaic business and Fiber Optics business. I will say the total CapEx for a year will be less than $2 million.

For the remainder of the year or just for Q4 you mean or in total for one year going forward?

For the entire fiscal year.

For fiscal 2010 or fiscal '09?

Fiscal '09?

So only 2 million total?

Yes.

Okay, great. That's it for me. I'll pass it on.

Thank you.

We'll go next to Sam Dubinsky with Oppenheimer.

Hi guys. Just a couple quick ones. Your R& D has come down a decent amount this quarter. Could you just give us some color on what business segments you stopped investing in and I have a follow-up?

Yes, Sam. So I can go sector by sector. I'll space Photovoltaic business, we continue to invest in the IMM technology, we're probably putting more effort in investing and commercializing that technology than ever, but fortunately, that effort is leveraged by a number of commercial and government programs supported by DOD and NASA and some of the commercial programs as well, so our internal R&D spending is actually very limited, say probably less than 2% of the total revenue. Our CPV business R&D is still pretty healthy because we are in the final qualification space for our Gen 3 CPV systems and we are at about R&D at about $1.5 million per quarter level.

The Fiber Optics side and we are more selective in choosing the projects and prioritize the development projects in more sequential manners rather than going several projects all together, so the Broadband is very healthy. We're in a leading position. We have introduced a few new products and we have a couple more in the pipeline and we'll be redeploying resources in the new business area, for example, I talked about a Fiber Optics Gyros but again, the Datacom business because our customer base, they do not have a lot of engineering resources available to qualify the new product we're developing so we have five total programs under development so the current level of R&D spending at the same level we plan to go forward.

Okay. And then you mentioned the normalize gross profit is at the mid 20% range. To get that rate does that mean you have to exit our business and that certain businesses struggling just won't come back to what they've historically been?

The Fiber Optics is two sectors. One the Broadband sector has actually never been very bad. We expect to be the high 20s and low 30s gross margin and Telecom and Datacom side I just can't tell at this point and we are as I said operations focus is not to optimize the gross margin but is really more managing the inventory to the acceptable level so that we'll get to the normal pace of the business.

Okay but once you burn through this high cost inventory does that mean the plunge of business will go back to a more normalized gross margin rate or is there still issues with utilization or pricing pressure we should think about?

I would say the Datacom, Telecom business when we burst through the high cost inventories it will get into the low 20s and yes, I will continue to expect the price erosion and price pressure but we are working very hard on a cost reduction with our suppliers and with the manufacturing partners as well. We hope we can keep up the same pace at the price erosion.

Okay, and then forgive me if I missed this but can you give an update on your Gen 3 system ASP targets?

The ASP for the systems is slightly over $2 per watt, as our price target, our costs clearly is lower than that.

Okay and what's the cost target, was that in the past I think you mentioned like $1.75 per watt?

It's $1.60.

Does that benefit from commodity prices coming down or what percentage is things like steel that we need to start tracking?

That's a very very good question. That's certainly benefited from the drop in a commodity price but as I said early on, we are shifting our go to market strategy more by providing or adding most of the value. It's hard to markup 20% to 30% on the steel, but we supply the modules and license to partners so they can source the manual frames in module structures locally close to the site of installation and wanted to push that part of the cost along with the revenue over to our customer side.

And my last question is at a $2 per watt ASP, is this viewed as competitive in the market anymore? When you talk to your customers is there the same level of interest there was if a quarter ago and do you still expect this business to ramp to some extent in 2010 or is it more a longer term ramp?

I think it's probably in the second half of the 2010. When we talk to our customers, they still have a lot of interest for CPV, especially for the advantage I talked about higher efficiency, the rode map to get at the more cost effective and people also understand you just simply cannot compare apples to oranges in the ASP because for example, the thin film with 6% conversion efficiency, the cost for metal frames in harnessing in the balance of the systems is much higher than the CPVs, so right now we are talking more to the customers on level cost of energy rather than just the cost of the systems.

What's the level cost of energy in the most variable region?

You talk about that and there's several factors that come in play. We are unfortunately the only one piece of the puzzle including the capital cost, the land cost, the solar condition and everything else so I can't give you an answer just yet.

Thank you guys. I appreciate the visibility.

Thank you, Sam.

That does conclude our question and answer session. I'd now like to turn the call back over to Dr. Hou for any additional or closing remarks.

Well thank you very much. With that I would like to make some remarks for the Q4 focus and guidance. For the fiscal Q4, management will continue to focus on cost reduction and liquidity management. We expect the consolidated revenue for the fourth quarter to be in the range of $38 to $42 million due to the growth of Photovoltaic and Broadband Fiber Optics businesses. We expect the Photovoltaic business will continue to be profitable and our Broadband sector of the Fiber Optics business should turn into the operational profitability during the September quarter. We'll continue to see margin pressure for our Telecom and Enterprise businesses as the demand in this business sectors are coming back more slowly and our priority in managing that business is monetizing the inventories to generate cash rather than optimizing the gross profit margins. The management team feel strongly that we have got the issues under control. We expect to generate positive cash flow from operations this quarter as well. Thank you very much for your attention today and we look forward to the next call.

That does conclude today's call. We do appreciate everyone's participation.