EMCORE Corp (EMKR) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Emcore Corporation's fourth quarter fiscal 2009 earnings conference call. One note, that today's call is being recorded. At the end of today's presentation, there will be a question-and-answer session. Instructions will be given on how you can queue up for your questions at that time. 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 day, everyone. Today after the close of markets, Emcore released its fiscal 2009 fourth quarter and year-end 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 open 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 the 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 fourth quarter and fiscal year operating results, review our backlog numbers and conclude with an overview of our cash flow, balance sheet and liquidity improvements. Consolidated revenue for the fiscal fourth quarter totaled $40.5 million, an increase of $2 million or 5.3% from $38.5 million reported in the immediately preceding fiscal third quarter ended in June.

On a segment basis, our photovoltaics business accounted for $16.4 million or 40% of the company's total revenue for the quarter which represents an increase of approximately $300,000 or 2% from $16.1 million reported in the immediately preceding quarter with the increase due primarily to strong demand for our terrestrial concentrated photovoltaic products. The photovoltaic segment continues to account for an increasing percentage of the company's total revenue, rising from 24% in the fourth quarter of fiscal '08 to 40% in the most recent fourth quarter. Our fiber optics segment accounted for $24.2 million, or 60% of the company's total revenue for the quarter, which represents an increase of $1.7 million or 8% from $22.4 million reported in the immediately preceding quarter with the increase in revenue concentrated primarily in the broadband divisions CATV product lines.

Moving on to gross profit and margins, on a GAAP basis, the consolidated gross profit for the fourth quarter was $4.1 million, an improvement of $6.5 million from a $2.4 million gross loss reported in the immediately preceding quarter and a $500,000 gross loss reported in the year earlier period. This $4.1 million consolidated gross profit represents the company's best GAAP gross profit performance since the third quarter of fiscal 2008. After excluding certain adjustments as set fourth in the non-GAAP tables that are included in the earnings press release, the fourth quarter consolidated non-GAAP gross profit totaled $4.9 million.

On a segment basis, the fourth quarter photovoltaic GAAP gross margin was 28.5%, a decrease from a record 33.9% gross margin reported in the immediately preceding quarter with the decrease due primarily to product mix and one-time yield excursion for certain products. On a non-GAAP basis the fourth quarter photovoltaics gross margin was 10.6%, a decrease from a record 33.9% non-GAAP gross margin reported in the preceding quarter with the decrease due primarily to the sale during the fourth quarter of $2.9 million in previously reserve legacy CPV terrestrial products. The fourth quarter fiber optics non-GAAP gross margin was 13% which represents a significant increase from a 1.9% 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 fourth quarter fiber optics grow margin was negative 2.5% which was a significant improvement from a negative 35.2% gross margin reported in the preceding quarter with the improvement due primarily to a lower loss being recorded on firm inventory purchase commitments and lower inventory excess and obsolescence charges when compared to the preceding quarter.

During the quarter, the fiber optics segment recorded approximately $2 million in non-cash losses on firm inventory purchase commitments and $2 million in non-cash inventory reserve adjustments, both of which adversely impacted gross profit and margins. On a GAAP basis, the consolidated net loss for the fourth quarter was $13.5 million, a $31.8 million improvement from the net loss of $45.3 million reported in the preceding quarter. After excluding certain non-cash and other adjustments as set fourth in the non-GAAP tables, the fourth quarter consolidated non-GAAP net loss was $9.1 million compared to a $7.3 million non-GAAP net loss reported in the preceding quarter. On a GAAP basis, the fourth quarter net loss per share was $0.17, which is an improvement of $0.40 per share from a $0.57 net loss per share reported in the preceding quarter. On a non-GAAP basis, the fourth quarter net loss was $0.11 per share which represents an increase of $0.02 per share from a 9% net loss per share reported in the preceding quarter.

Now moving on to the fiscal year results. Revenue for the fiscal year ended September 30, 2009 total $176.4 million compared to $239.3 million in the prior year. On a segment basis, annual revenue for our photovoltaics segment totaled $62.2 million compared to $68 million in the prior year while annual revenue for the fiber optics segment totaled $114.1 million compared to $171.3 million in the prior year. On a GAAP basis, the fiscal 2009 consolidated gross loss totaled $3.8 million compared to a gross profit of $29.9 million in the prior year. On a segment basis, annual photovoltaic GAAP gross margins improved from a negative 8.3% to a positive 13.6% while the fiber optics GAAP gross margins decline from 20.7% in fiscal '08 to a negative 10.7% in fiscal '09. After excluding certain adjustments as set fourth in the non-GAAP tables, the company's non-GAAP net loss totaled $42.6 million compared to $31.7 million in the prior year. On a GAAP basis, the company's fiscal '09 net loss totaled $136.1 million which includes $74.1 million of non-cash impairment in inventory reserve charges, compared to a net loss of $80.9 million in fiscal '08. This represents a net loss per share of $1.72 in fiscal '09 compared to a net loss per share in fiscal '08 of $1.20.

Now I'll move on to backlog. As of September 30, 2009, the company had a consolidated order backlog of approximately $62.6 million which is a $13 million or 26% increase from a $49.6 million order backlog reported as of the end of the June quarter. On a segment basis, the quarter end photovoltaics order backlog totaled $47.7 million an $11.5 million or 32% increase from $36.2 million reported as of the end of the preceding quarter. This increase in order backlog was fairly broad based among numerous customers and programs. Since the beginning of this calendar year, Emcore has received over $120 million in firm orders and purchase commitments for satellite solar products and service contracts, many of which are multi-year in duration. The quarter end fiber optics order backlog totaled $14.9 million, a $1.5 million or 11% increase from $13.4 million reported as of the end of the preceding quarter with particular strengthen in our broadband product lines which experienced a 25% quarter-to-quarter improvement in order backlog. The fourth quarter is the second consecutive quarter wherein the company's order backlog for both of our operating segments, photovoltaics and fiber optics increased. 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 onto cash flow. During the quarter, we continue to make significant progress in improving the company's liquidity and strengthening the balance sheet. For the fourth quarter, the company generated approximately $900,000 in cash from operations due to the combination of a lower cash operating loss and the continuation of improved working capital management. The fourth quarter represents the second consecutive quarter that the company has been cash flow positive from operations and the third consecutive quarter that the company has generated cash from reductions in both inventories and accounts receivable. Over the last three quarters, we have generated nearly $40 million in cash from improvements in our inventory turns and collection of accounts receivable.

For the fiscal year ended September 30, the company generated $32.4 million in cash from lowering both inventory and accounts receivable levels while paying down over $27 million in accounts payable obligations. Although we have made significant progress in monetizing our inventories over the course of the last year, much of this improvement has been at the expense of lower average selling prices and corresponding lower gross margins. To contrast the degree to which our operating performance, financial condition and business outlook has improved from the first half of fiscal '09 to the second half, I highlight the following: From a cash flow perspective, in the first half of fiscal '09, we consumed $30.6 million in cash from operations. In the second half of the year, we generated $1 million in cash from operations. From a backlog perspective, as of the end of the first half of the year, our consolidated order backlog totaled $30.8 million and was somewhat concentrated amongst large customers. At the end of the second half of the year, our consolidated order backlog totaled $62.6 million which represents over 100% improvement, which is very broad based among a large number of customers and programs.

Moving on to balance sheet and liquidity. As of September 30, our cash, cash equivalents and restricted cash totaled approximately $15.5 million which represents a $5.7 million or 59% increase from $9.8 million as of the end of the preceding quarter and networking capital totaled $37.5 million. In addition to generating positive cash flow from operations over the last two quarters, the company continues to maintain a $14 million credit facility with Banc of America that we are in full compliance with, and immediately subsequent to the end of the fourth quarter, we closed a two year, $25 million committed equity line of credit with the commerce court small cap value fund. I'll provide some highlights of how this equity line of credit works.

The two year committed facility provides for the issuance of up to the greater of $25 million or 16 million shares of Emcore common stock if and when Emcore elects to utilize the facility. If the company elects to utilize this facility, the number and price of shares sold in each draw will be determined by a formula pursuant to which Emcore would issue shares to commerce court at a 5% discount to the volume weighted average price of Emcore's common stock over a 10 day measurement period. As set fourth in the formula that is incorporated in the stock purchase agreement we have filed with the SEC, the maximum amount of each draw or issuance is a function of the company's stock price at that point in time; however, the price based formula limits each draw to a minimum of approximately 500,000 shares and a maximum of not more than 2 million shares. The agreement provides for a maximum of 24 draws within a two year time frame and to date, we have not utilized this facility.

In addition, several weeks ago, the jury in our intellectual property trial against Optium Corporation found that all of our patents asserted against Optium were valid, that all claims asserted were infringed and that such infringement by Optium was willful where willfulness was claimed. The jury has awarded Emcore and JDS Uniphase monetary damages totaling approximately $3.4 million. Post-trial motions are currently pending including Emcore's request for enhanced damages and an injunction. Lastly, the company continues to pursue and evaluate other capital raising alternatives including product joint venture opportunities and the potential separation of certain portions of the company's business. For the current quarter ended December 31, we expect consolidated revenue to be in the range of $41 million to $43 million with sequential quarterly revenue increases expected in both the photovoltaics and fiber optics segments. With that, I will turn the call over to Hong for his operational and strategic update.

Thanks, Jim. Good afternoon, everybody. Jim had just given you the number in details, and let me provide some updates on our operations and the strategy. Fiscal year 2009 has been one of the most challenging years in the history of the company. We entered a year with the world turned upside down in economic turns. For the first half of the year, the demand for telecom and 10-gigabit ethernet components dropped significantly. We were stranded with massive amount of excess inventory and purchase committment liability in our fiber optics business. This created a huge liquidity challenger early in the year. With a product evolution, a new spec requirement, for example, a requirement for row house compliance before the end of 2009, we had to put a concerted effort together to monetize the inventory. Cash flow management became a key focus of the entire company. Today, I'm happy to report that with the various measures we took throughout the year, including headcount reductions, temporary reduction of salaries, reduction of capital expenditures and other discretionary spending, along with the substantial improvement in market conditions, especially in the space, photovoltaic and broadband fiber optics area, in this metric have all lead to a significant improvement in our operating results and liquidity. At this point, we feel that we can focus on the growth of our business instead of fighting for our survival.

Moving on, let me give you some operations update. Let me start with the fiber optics segment first. For our broadband fiber optics business, the revenue for the fourth quarter improved over 15% sequentially compared to the immediate preceding quarter. Product revenues relating to the cable TV business represent a majority of the increase. With the ability in the booking activity continue to improve with the recent customer demand trending towards the 2008 levels, this increase in demand is due primarily to the infrastructure upgrade and the new buildout to service small and mid sized businesses of multi-service operators. Based on the recent industry research report and customer feedback, we believe that this sector of business will continue to experience a robust growth throughout the next year.

During the last couple quarters, the inventory throughout the entire supply chain has bled down to a minimal level. This represents a challenge in fulfilling orders with a short lead time requirement. We are now focusing on longer term planning in the supplier management to reduce the lead times. In the fourth quarter, in addition to ramping up volumes, we signed a multi-year supply agreement with a leading equipment manufacturer and we introduced multiple new products, including the industry leading 48 channel palm transmitters for digital overlay over the cable TV hybrid fiber coaxial infrastructure. Since John touched upon it early on, in October 2009, the patent infringement allows us to win fight against Optium, currently part of Finissar, was trialed before a jury in the US District Court for the western district of Pennsylvania. The jury found that our patents asserted against Optium were valid, and all claims asserted were fringed and such infringement by Optium as willful. The jury awarded Emcore and JDS Uniphase, the co-plaintiff, monetary damage totaling approximately $3.4 million. The post-trial motions are currently pending including Emcore's request for enhanced damage and an injunction. The victory of this litigation significantly strengthens our market position in broadband fiber optics area.

For the telecom business, we have seen the improvement in demand for tunable transponders in components; however, the competition is still fierce. Our primary focus continues to be managing down the inventory while we transition to lower cost of platforms. The monetization of the existing inventory levels is a primary contribution to the pressure on the gross margin in the September quarter; however, we are making great progress in moving this inventory before it becomes obsolete. The tunable XFP has been largely acknowledged as the next generation standard for 10-gigabit per second transport. It provides high density in a low power advantage compared to the 300-pin transponder product. According to feedback from multiple customers, our product is the only one in the industry which meets the 300-pin transponder performance specifications while providing advantage of a lower power consumption in the high density to the customers.

We continue to invest in our telecom business. We are elaborating the depreciating capability of external cavity laser technology and vertically integrated infrastructures to focus our engineering resources in the development of tunable XFP products and applications of our ECL for next generations 40 and 100-gigabits per second application. In the last quarter, we fulfilled the first commercial TXFP order for a customer who is developing the first high density line card in the industry. The internally developed laser game chip in Mach-Zehnder modulators will be replacing the external supply to reduce the cost and to gain performance advantage.

During the final stage of the qualifications at a leading telecom equipment manufacturer of our 10-gigabit per second tunable Tulsa component products, the miniature package of the 10-gigabit at Tulsa based on ECL technology platform will serve as a low cost alternative as a key 10-gigabit and 40-gigabit per second component. In our datacom product lines, we have seen a significant rebound in demand for parallel optic transmitters and receivers. This product family utilizing (inaudible) and photodiode arrays provides aggregated bandwidth of 40- to 80-gigabit per second in one link. We were able to gain market share at our existing customers and finish the qualifications with another new customer in the last quarter. The booking activity has recently doubled. Our product offering of parallel optical devices also include active cables. Our new product, a quad data rate cable offering and aggregated bandwidth of 40 gigabit per second is fully qualified. At the transmission bandwidth our cables increases, it becomes more and more advantageous and cost effective to replace the copper cable with fiber.

Going forward, we will focus our business development and product development effort on several world leading (inaudible) equipment manufacturers. Our objective is to expand the business opportunities with the key accounts by offering an enhanced product portfolio, improved customer service and technical support, excellent fulfillment performance as well as competitive costs. With our extensive technical resources, established vertically integrated and low cost manufacturing infrastructure, we're well positioned to leverage our resources and infrastructure to expand our revenues through new product introductions and market share gains. We have invested substantially in research and development and product engineering over the past several years and develop a clear technology leadership position in many of our product areas. In fiscal year 2010, we'll continue to invest in R&D but we will be very selective in allocating our R&D resources to develop competitive technologies and products as a means to leap frogging our competitors. We'll focus our R&D in product engineering efforts to develop a broader range of products for a more focused customer base while at the same time cost reducing the existing product.

Now let me discuss the solar photovoltaic side of our business. And first, sublet power business. Even in this tough economic environment last year, our satellite solar power product line has experienced an increase in revenue on a year-over-year basis. More importantly, our profit has improved significantly due to the improvement in engineering and manufacturing processes. Our core competencies in this space photovoltaic area has been the design in the manufacturing of high efficiency multi-junction solar cells. We have been growing our business in this area to a significant expansion of the customer base over the last decade.

With the acquisition of Tecstar's solar panel capability in 2002 and expansion of solar panel capacity in Albuquerque in 2004, we have been able to service a broader customer base in recent years. In the last 11 months, we have booked over 122 million out of new orders with an option of additional 33 million orders to be fulfilled in the next three years. We are proud of our parentage in outstanding reliability record of supporting over 70 missions that have been launched and put in service in orbit with zero failures. The recent solar panel program award allow us to improve the utilization of our solar panel manufacturing facility, thereby lowering our fixed cost per unit and allowing our solar panel products to be more price competitive. This will in turn provide additional opportunities for the company to increase the market share for this product line. We believe that a profitability of our space photovoltaic business is sustainable, and the selling price has increased across several recent long term purchase agreements and cost has decreased, this through engineering improvement and improved supply chain management.

We continue to improve the performance of our multi-junction solar cell product. The first commercial program based on the advanced inverted metamorphic multi-junction or IMM design is Boeing's Fast Access Spacecraft Testbed program which aims to develop next generation ultra-lightweight and high powered solar panels for future space stations. This program will have to accelerate an introduction of IMM technology and the successful commercialization of this technology and product will enable a whole range of new program opportunities. We are investing significant resources to develop new programs and view the opportunities in this area, and this represents a very tenable upside to our current business. The same technology platform of IMM as is discussed can be used for CPV terrestrial applications. It is anticipated the efficiency levels of approximately 45% can be achieved when we adapt this design platform for use in the 500 to 1,500 times concentrated illumination for terrestrial applications. Our strategy of technology and product development is to commercialize the IMM technology through space programs first and then apply the same manufacturing process and infrastructure for our terrestrial applications.

Now let me turn to our terrestrial solar power business. The products we are offering, including concentrated photovoltaic of CPV components and systems. We're in the process of completing the product qualification and certification of our Gen-III CPV systems. The cost structure of this design is very competitive compared to the competing technologies, and we expect the competitiveness of this design will be further enhanced once we ramp to higher production volumes. In the last quarter, we were awarded three demonstration programs in the Middle East and in the US. These orders will be fulfilled with our newly designed Gen-III products. We currently are ramping up the manufacturing capacity in our China facility to package the solar cells and manufacture to CPV modules.

Given the fact that business opportunity of utilities scales solar power projects in the US has been slow, we are focusing on development, developing business opportunities and addressing the solar power opportunity in the emerging market, for instance in China. We expect our Gen-III CPV terrestrial solar power systems to provide a competitive cost of energy for commercial and utility scale projects in certain geographic regions. And for developing market acceptance and product cost competitiveness, we are aggressively pursuing joint venture partnership opportunities in China to tap into the country's new (inaudible) policy on renewable energies. We believe that we will be positioned to serve a relatively near term opportunity to supply our Gen-III module for an initial utility scale projects. We have implemented a new market strategy which allow us to focus on our traditional competencies in technological innovation, systems design in engineering, while retaining our unique competitive advantage at the only vertically integrated CPV manufacturer. We'll continue to develop and pursue partnerships in other ventures with the major companies, both domestically and internationally, to drive the deployment of our terrestrial CPV components and systems. We're committed to a successful launch of our Gen-III CPV products and business in the second half of Fiscal 2010.

Now let me discuss management's focus, operationally and strategically. Operationally, as John has discussed, during the fourth quarter, the company generated $900,000 in positive cash from operations due to the combination of lower cash operating loss and the continuation of improved working capital management. This represents the second consecutive quarter that the company has been cash flow positive from operations and the third consecutive quarter that the company has generated cash from reductions in both inventories and accounts receivable.

By now it is pretty safe to say that the company has survived through this economic storm,. While it has been tough for every company in our industry, there are tremendous business opportunities as well. We'll turn our business development effort from defensive mode, namely protecting our market share, to offensive, namely gaining market share. We have commenced engagement with multiple leading telecom equipment manufacturers at a commercial engineering and executive levels. Currently, we're in the process of developing and qualifying non-products for a leading telecom equipment manufacturer and we are very encouraged that great progress has been made in two of the nine products will be qualified by the end of this year. As our Gen-III CPV system is qualified, we're kicking into high gear for solidifying some substantial business opportunities in China. In the meantime, we need to continue the culture of these relentless cost reductions for our products and business. While we are ramping up the production activity in revenue, we'll continue to pay close attention to the working capital management.

Now let me discuss our strategic focus. Certainly, we have improved our liquidity position significantly. The board and the management still believes that due to significant differences in operating strategy between the company's fiber optics and photovoltaic businesses, they will provide greater value to shareholders if we were operated as two separate business entities. While the management has instituted a series of initiatives aimed at conserving and generating cash going forward, we are aggressively pursuing strategic alternatives for separating the two operating segments through joint venture in recapitalization opportunities. We expect to have further updates on the status of this initiative in the relatively near future.

As for the business outlook, we are gaining a much better visibility on our business as demonstrated by the 26% increase of the 12 month shippable order backlog, and we expect the consolidated revenue to be in a range of $41 million to $43 million for the December quarter with increases in both of our operating segments and substantial increases for the quarters afterwards. With that, we'll turn it over to Q&A.

Thank you. (Operator Instructions). We'll go first to Sam Dubinsky with Oppenheimer.

Hey guys, I've got a couple quick ones. How much of your revenue this quarter was from terrestrial solar, and what percentage of your solar backlog is from terrestrial?

Approximately $3 million in the quarter was from terrestrial solar and we don't break the backlog down in PV between terrestrial and space. But suffice to say the bulk of that is space.

The bulk of that is space, okay. And how should we think about pro forma gross margins going forward?

I can provide you a model on an annual basis, Sam. In our broadband business, we expect margins to be in the low 30% range throughout the year, margins in our EVP fiber optics business gradually expanding to low 20% by the end of the year. In our PV business, on the space side, margins that are fairly consistent throughout the year in the high 20s to low 30s, and on the terrestrial side, since we're still in a development mode and relatively low revenue base, negligible margins for the balance for most of this year.

Okay. And could you disclose what your cost per watt is on terrestrial CPV for next gen systems and what ASP you need to price your terrestrial systems at to be competitive versus crystalline technologies?

Sam, so our design target for the Gen-III systems is at $1.60 per watt for cost and of course, the price will be determined based on the competitive landscape and I think at $1.60 per watt, we can have a pretty nice margin.

Okay, what's the cost per kilowatt hour if you were to sell, let's say where current crystalline pricing is for some of the Chinese competitors around $2 per watt?

That's a CPV, as you know, it's more sensitive to the solar resources.

Yes.

So translate into dollar per kilowatt hours will depend on the solar resources for the area where the installation is going to be happening. So it is going to be case-by-case, but it's fair to say for the area where the direct normal reading is high, CPV does provide a significant cost advantage compared to the competing technology like silicon or thin film.

That was great. Thank you guys, and good luck with everything.

Next we'll hear from [Michael Trader] with Net Force Asset Management.

Thank you. Wondered if you could discuss the R&D budget expectations for 2010 and maybe split it out by product?

John, do you want to take that?

We don't break that out other than it's a fairly significant amount in terms of that amount of dollars that's associated with the photovoltaic business and that on the fiber side, but we're not breaking out the 2010 budget to that level.

So Michael, probably what we will give you is in general for our fiber optics business, 2010 and going forward, we like to have the R&D spending less than 15% of the total revenue. So for example,, our target is 13.5%. For photovoltaic sectors, the space business, because of the leverage of our government research contract and we are spending roughly about 3% of total revenue in keeping up with a leading position of a technology and for the terrestrial as we launched the Gen-III product, our R&D and engineering budget is going to be significantly reduced because a lot of resources will be reallocated to support the product engineering. So for the terrestrial solar side, the total budget for the 2010 allocation will be less than $4 million.

Thank you.

(Operator Instructions). There are no further questions at this time. I'll turn the conference back over to management if they have any closing or additional comments.

Well, thank you, very much, for your attention today and we look forward to talking to you next call. Thank you.

Ladies and gentlemen, that does conclude today's conference. We thank you for your participation. You may now disconnect.