EMCORE Corp (EMKR) 2010 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by.

Welcome to the Emcore Corporation fourth quarter fiscal 2010 earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions) This conference is being recorded today, Tuesday, December 21, 2010, and a webcast of the call will also be available at www.Emcore.com.

At this time, I would like to turn the conference over to Victor Allgeier of TTC Group. Please go ahead.

Thank you, and good afternoon, everyone.

Before we begin, we would like to remind you that the information provided herein may include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21 of the Exchange Act of 1934. These forward-looking statements are largely based on Emcore's current expectations and projections about future events and financial trends affecting the financial condition of its business. Such forward-looking statements include, in particular, projections about Emcore's future results, statements about its plans, strategies, business prospects, changes in trends in its business, and the markets in which they operate. Management cautions that these forward-looking statements relate to future events or its future financial performance and are subject to business, economic, and other risks and uncertainties, both known and unknown, that may cause actual results, levels of activity, performance or achievements of its business or its industry to be materially different from those expressed or implied by any forward-looking statement. Neither management nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We caution you not to rely on these statements without also considering the risks and uncertainties associated with these statements and Emcore's business that are addressed in its filings with the US Securities and Exchange Commission that are available on the SEC's website, located at www.SEC.gov, including the sections entitled risk factors in its annual report on Form 10-K and its quarterly report on Form 10-Q. Emcore assumes no obligation to update any forward-looking statement to conform such statements to actual results or to change in its expectations, except as required by applicable law or regulation.

With us today from Emcore are Dr. Hong Hou, President and Chief Executive Officer, and Mark Weinswig, Chief Financial Officer. Mark will review the financial results, and Hong will discuss business highlights before we open the call up to questions.

I will now turn the call over to Mark.

Thank you, Vic, and good afternoon, everyone.

Before we begin our review of the quarterly results, I would like to express how excited I am to be at Emcore. Emcore is a dynamic company with tremendous potential and a great team, and I look forward to contributing to its future success.

Now let me turn to the highlights of our fourth fiscal quarter operating results. Consolidated revenue for our fourth fiscal quarter totaled $54.1 million, which is an increase of $7.5 million, or 16% over the previous quarter. On a segment basis, our Photovoltaics business accounted for $19.7 million, or 36% of the Company's total revenue, which represents an increase of $4.5 million, or 30% from the prior quarter. The increase in revenue was primarily driven by our space solar power generation products. The Fiber Optics segment accounted for $34.4 million or 64% of the Company's total revenue, which represents an increase of roughly $3 million or 9% from the prior quarter, with the increase primarily driven by higher sales of ITLA, active optical cables and CATV products. We are pleased with our results, especially considering the fact that this includes the effect of the ITC ruling on our Parallel Optics Device product. Hong will discuss this in more detail later on in the call.

Consolidated gross margins fell to 23.6%, from 27.5% in the prior quarter. On a segment basis, Photovoltaic gross margin was 29.3%, which is a decrease from 30.7% reported in the prior quarter, primarily due to higher manufacturing expenses and certain contract losses, partially offset by leverage from higher volume. Fiberoptics gross margin was 20.4%, a 5.5 percentage point reduction from the prior quarter, primarily due to an unfavorable mix shift and higher material costs. The Company's Fiber Optics division is beginning to experience a product mix shift as customers migrate to its newer technology platform. We believe that this will cause margins in the Fiber Optics division to be under pressure until our new products begin to ramp in the latter part of this year.

Operating expenses fell $6.6 million from the prior quarter to $14.6 million, primarily due to charges realized in the third quarter for the establishment of a bad debt reserve for a solar customer and the Tangshan joint venture termination fee. On a GAAP basis, the consolidated net loss for the fourth quarter was $0.9 million, an improvement of $8.3 million from a net loss of $9.2 million in the prior quarter. On a non-GAAP operating loss basis, after excluding certain adjustments such as certain corporate legal expenses associated with patent litigation, the provision for doubtful accounts established for a solar customer and the Tangshan termination fee, all of which are set forth in the non-GAAP tables, was $1.9 million, which represents an almost $1 million improvement over the preceding quarter. Our GAAP net loss per share was $0.01 versus $0.11 in the prior quarter.

On a year-over-year basis, fiscal year 2010 showed significant improvement in our financial operating performance in almost all categories. Revenues increased by 8%, with increases in both segments. Gross margins improved over 30 percentage points, to 26.5%, and our operating loss fell 85%, to $21.4 million. As we have discussed in prior periods, we are very happy with our year-over-year improvement.

Now on to order backlog, which we define 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. At September 30, the Company had a consolidated order backlog of approximately $71.3 million, which is a $3.8 million increase, or 6% from the prior quarter. On a segment basis, Photovoltaics' order backlog totaled $53 million, a 25% increase, due to significant wins in our solar -- in our satellite business. Fiber Optics order backlog totaled $18.3 million, a reduction of 27% from the prior quarter, primarily driven by lower backlog in our Parallel Optics Device business.

Moving on to the balance sheet, during the three months ended September 30, the Company increased its cash and cash equivalents and restricted cash balance by over $6 million, primarily driven by higher advance payments. We also realized an improvement in our DSOs to 77 days and an increase in our inventory turns to 4.4 times. As we announced in November, the Company signed a new $35 million credit facility with Wells Fargo. This credit facility, which is subject to a certain borrowing basic restriction, will be used for working capital and general business purposes.

With that, I will turn the call over to Hong Hou, who will discuss the Company's strategic and operating initiatives, and provide revenue guidance for the first fiscal quarter.

Thanks, Mark. Good afternoon, everybody.

As Mark has discussed in detail, we achieved a significant improvement in financial results in the September quarter over the previous quarter. Our fiscal year 2010 operating performance also realized a strong (inaudible) over the prior year. Revenue was $54.1 million. Consolidated gross margin was 23.6%, and net loss was reduced to $885,000, $0.01 loss per share. The Company also generated $6.6 million in gross positive cash flow. Together with a to be recognized gain in a customer prepayment, the Company generated over $8 million free cash flow in the September quarter. We ended fiscal year 2010 with an almost 10% revenue increase compared to the fiscal year 2009. And more importantly, saw significant improvement in gross margins, to 26.5%. On the balance sheet, we exited fiscal year 2010 with $21.2 million cash, with net cash of nearly $11 million. Despite some challenges, we feel that the Company is on the right track and poised for a bright future.

First of all, let me address several significant events since our last conference call. In early October, Mark Weinswig joined us as our new CFO. Mark brings tremendous finance, accounting, and personal experience, as well as fiberoptic industry knowledge. Mark hit the ground running and has started implementing numerous initiatives in refining processes and procedures. We are excited about his addition to the executive team.

In early November, we established a line of credit facility with Wells Fargo. As Mark has discussed, recognizing the significant operations in the financial turnaround, Wells Fargo offered a credit line with a total availability of up to $35 million, and an interest rate at LIBOR plus 3%, subject to certain borrowing based metrics, this facility has significantly improved the Company's financial capability. We plan to utilize this facility for capital expansion and general working capital purposes, such as funding the construction phase of a future (inaudible) solar project.

In the last conference call, we discussed in detail the CPV, our concentrator photovoltaic joint venture we established. Just to refresh your memory, on July 30, 2010, Emcore entered into an agreement for the establishment and operation of a joint venture with San'an Optoelectronics in China for the purpose of engaging in the development, manufacturing, and distribution of CPV receivers, modules, and systems for our terrestrial solar power applications. Emcore owns 40% and San'an owns 60% of the joint venture, named Suncore. Emcore's Senior Vice President, Dr. Charlie Wong, serves as General Manager of the joint venture. The main objective of this joint venture is to manufacture Emcore-designed CPV components and systems at low cost and in high volume. Furthermore, (inaudible) will aggressively develop solar project opportunities in China's emerging market for solar renewable energy. China is viewed as one of the most promising markets for the CPV solar power. China is projected to add one gigawatt solar renewable power per year after 2012, and it is expected to boost its installed capacity of solar generation more than 60 volts, to 20 gigawatts by 2020.

Early this month, we entered into a new agreement with Huainan City in China in San'an Optoelectronics. In return for our joint venture, Suncore being located in Huainan City, Suncore will receive tremendous economic incentive, which includes land grant of 263 acres for establishing Suncore's manufacturing operations, and a $75 million cash grant to fund manufacturing equipment purchases. Furthermore, Suncore will receive a $0.21 rebate for every watt of the CPV product manufactured and sold in China for the first thousand megawatts. This financial incentive will accelerate the commercialization of Emcore's CPV technology and production ramp. We believe that this investment by Huainan and the establishment of Suncore's low cost manufacturing base will enable our CPV technology to become a cost effective solution for commercial and power utility applications. This important development allows Emcore to leverage the financial capability of its joint venture partner and the government incentive offered in China. The end result is that Emcore can establish operations capacity and its capability, and launches the CPV business with a very manageable investment.

We have started transferring the manufacturing processes to Suncore over the last four months. The key management is in place, and about 70 operators have been trained and certified in manufacturing Emcore designed CPV receivers and modules. Currently they are producing products for a San'an -- associated San'an projects for a two-megawatt CPV system.

The joint venture company is securing various regulatory approvals and pursuing its business registrations with banks, customs, tax, import/export, and foreign currency exchange infrastructures. It is expected to complete the business registration in Huainan City early 2011, and start the construction and set up of the manufacturing line shortly after. Some purchase orders for long lead equipment has already been placed, so as to meet our aggressive start-up time line. We expect Suncore manufacturing and production to start in September, 2011. The immediate demand for this new production capacity is 15 megawatts, with 12 megawatts sourced by San'an and three megawatts sourced by Emcore.

It is important to mention that the CPV solar cells will continue to be manufactured in our Albuquerque facility using our patented technology. Suncore will serve as Emcore's primary low-cost, high-volume manufacturing base for its CPV receivers, incorporating Emcore's solar cells and in providing business development in China. This transaction has been reviewed by our government and we do not believe there's any government contingency for the establishment of this joint venture. With the JV taking the on the execution of manufacturing as well as the business development in China, Emcore can focus on continued development of next-generation CPV products and solar business development in North America and Europe.

Now, let me give you an update on our products and business development activities in the terrestrial solar power area. On the business development front, our strategy in this market segment continues to be a provider of technology and hardware to project developers and the power plant owner-operators. In the initial stage of this technology introduction, we'll likely develop the projects first for the utility companies and work on selling them to operators at a later date. During the September quarter, Emcore signed a power purchase agreement with Tucson Electric Power, or TEP, for a one-megawatt power plant to be built in the technology park of the University of Arizona. In addition, we have secured approval from all major regulatory commissions to build a two-megawatt power plant for PNM, our local power utility company in New Mexico, distributed generation program in Albuquerque. The power generated will be directly connected to our facility. In addition to the benefits of netting out the cost of our power consumption, we will be receiving payment for renewable energy credit. We expect to complete both of these projects in the next 18 months. Furthermore, we are aggressively developing some smaller size projects. We believe the success in projects will lead to some major follow-on opportunities. One strategic objective in fiscal year 2011 is to develop and extend partnerships with owner-operators. both domestically and internationally to drive deployment of our terrestrial CPV system.

On the product development front, we continue to make excellent progress on the development of the Inverted Metamorphic Multi-junction, or IMM, solar cells for terrestrial CPV applications. We expect that single-junction IMM to reach efficiency of 42%, under a 1,000 times concentration, in production by the end of 2011, and quadruple-junction IMM, with an efficiency close to 45%, and at 1,000 X concentration, by the end of 2012. Concurrently, we are formulating design concepts of improved CPV system performance by optimizing the optical chain. This will lead to a further cost reduction. In summary, we feel that we have put the right strategy in place to launch our industry-leading CPV design to commercialization, and ramp up the business.

Now let me discuss our satellite solar power photovoltaic business. The overall satellite solar power market remains very strong, and our customers that operate in this market have been very successful in securing new satellite awards. In Q4, we achieved record revenue of $19.2 million for this business. In fiscal year 2010, we booked orders totaling $64 million and expect to maintain or exceed this level in fiscal year 2011. Moreover, we've placed a great deal of emphasis in developing new government program opportunities, and have identified a healthy pipeline of new orders that will significantly complement our existing commercial business.

Designing and manufacturing highly reliable, safe solar power components continues to be our hallmark. We maintain an excellent track record of no failures, with our products powering 75 separate [unorbit] spacecraft to date. We are proud to have been recognized by all four major US aerospace companies with excellence awards. We were originally awarded two major interplanetary programs by NASA with total contract value approaching $20 million. A record-setting IMM [safe] solar cells, with commercial efficiency of nearly 34% under today's conditions, continues to generate a great deal of interest for government programs. The successful completion of DARPA's Fast Access Spacecraft Testbed Phase II program has significantly increased the visibility and recognition of Emcore's IMM technology among different government space agencies. We expect that our products and technology solutions will be integrated into many future advanced programs.

Moving on, let me discuss the significant developments in the fiberoptics business. First, on telecom products, the revenue from this product line almost doubled throughout the past year, primarily driven by the Tunable Laser sales into 40 and 100 gigabit per second applications. Due to the excellent attributes of (inaudible), along with (inaudible) purity and high output power, our program's tunable external parity lasers have become the laser of choice for 40 and 100 gigabit per second (inaudible), with an estimated market share of 70% for the coherent system. We are supplying to five Tier One OEMs in the US, Europe, and Asia for their 40 and 100-gigabit coherent programs. This customer base is expanding, as well. Emcore has taken a leadership position within the industry, regarding the tunable laser multi-source agreement, or MSA, and is now the editor of micro IP LA MSA agreement for future small form factor 40 and 100-gigabit per second transponder applications.

On the tunable XFP front, as we reported in our last conference call, all internal game chip and modulator components have been fully developed and integrated into the TOSA assembly, and the tunable XFP product was shipped to major telecom customers for qualification. This product has generated significant customer attraction, with sales to five Tier One OEM's in Europe, and in Asia and North America, as well. Right now we are in the process of finalizing new designs in programs and ramping up for volume production, and we expect that this product will continue -- will contribute to our revenue substantially in the second half of the fiscal year 2011.

Another highlight is Emcore's connect cable product. This Active Optical Cable, utilizing high-speed parallel optic transceivers imbedded in the connectors to perform electrical to optical, and optical to electrical conversion. They are used primarily in the high-performance computing clusters, replacing heavy and rigid electric cables. As a leading supplier, Emcore has shipped over 100,000 units of CDR and the QDR cables to date. Our QDR cables are connecting the world's fastest super-computer.

Our new products includes recently demonstrated four by 14 gigabit per second XDR, and 12 by 10 gigabit per second CXP active cables products for high-speed inter-connect market. Our parallel optics device products have been a major source of revenue and profit to our fiberoptics business. However, the International Trade Commission, or ITC, limited (inaudible) in cease and desist order, related to (inaudible) have had an adverse impact to our business in the near term. We have filed an appeal in federal circuit court against ITC's determination. While we are rigorously defending the allegation, the Company has formulated and implemented a product redesign that eliminates the impact of (inaudible) infringement and (inaudible) cease and desist orders issued by the ITC. We have finished the qualification with some customers and achieved market share allocations. Although we may see a short-term weakness from this product line, we expect that it will be able to recover over the fiscal year.

Our broadband fiberoptics business continues to experience a robust growth. Our full band quad transmitter products enable the cable TV service providers a more effective approach to expand bandwidth over the hybrid fiber co-axial transmission infrastructure, to compete with the telco's fiber to the premises installation. As a result, the demand on this product has increased dramatically. As we introduce this new product to the market, our technology leadership over our competitors is widening. Judging from the announced CapEx spending plans on scalable infrastructure and upgrades of the cable TV service providers, we believe that our broadband fiberoptic business will continue to grow throughout the year 2011. With a great turn around in fiscal year 2010, we are preparing to build long-term strength for our business going forward.

Now let me discuss our strategy and plan for our fiscal year 2011. For the past several years, the Company has engaged in the design and deployment of CPV systems for commercial and utility-scale solar power applications . We believe that our current Gen 3 CPV system design is superior in performance, and is competitive in cost to silicon solar power modules, for example, when deployed in the regions with a high solar (inaudible). We also believe that our CPV systems business has a potential to generate significant revenue growth for the Company. Our CPV systems business will require a substantial amount of capital to establish the high volume, low cost manufacturing infrastructure, and to fund working capital needs as this business develops. As a result, the Company had in the past pursued several strategic opportunities toward separating companies, Photovoltaics and Fiber Optics businesses, to raise capital for our CPV systems business. In addition, the Company has also been pursuing strategic -- strategies specifically related to the CPV systems business.

The commitment we received from San'an joint venture, related to the cash, working capital loan, and the achievement of a land and cash grant, as well as the various incentives and subsidies from Huinan City should provide Suncore with adequate working capital to establish a new high volume, low cost manufacturing facility for our CPV systems business. As a result, the financial burden related to the launch of the Company's new Gen 3 CPV system design should be greatly reduced. Due to our leading technology position, intellectual property, broad customer base, and our [cost] competitive fulfillment infrastructure, we have been profitable in the business areas of space solar power generation, and broadband fiberoptics. The visibility and outlook in this area remain robust, which should provide a solid foundation for the Company to invest and aggressively pursue growth opportunities in both our terrestrial solar power and telecom/datacom fiberoptics business. Therefore, at this time, the Company will continue to own, operate, grow, and improve the operational results of both companies, Photovoltaics and Fiberoptics businesses, in the near term.

Operationally, the key elements of Emcore's strategy include, number one, (inaudible) terrestrial solar power business through aggressive business development. The establishment of Suncore joint venture with San'an addresses the Company's key strategy of commercializing its CPV system design using a low cost, high volume manufacturing facility, while also providing an opportunity for the Company to penetrate China's emerging renewable energy market. Through Suncore, we expect our Gen 3 CPV terrestrial solar power system to provide a competitive cost (inaudible) energy option for commercial and utility-scale projects in certain geographical regions. In order to drive deployment of a stretch of CPV components and systems, the Company will continue to develop and expand partnerships with major companies, both domestically and internationally. We will accelerate the development of high efficiency terrestrial concentrator solar cells and CPV systems, including the use of Inverted Metamorphic technology, to further reduce the cost of CPV systems through improved power output. We expect to develop our older backlog of CPV project opportunities in the fiscal year 2011 to support the business growth in the following year.

Number two, accelerate the fiberoptics business growth through new products and customer expansion. The Company has demonstrated several new products and platforms in its fiberoptics business segment, which has originally generated significant customer interest. New products such as the tunable (inaudible) transceivers, IP LA, and the micro IP LA for 10, 40, and 100 gigabit per second transponders, 10 and 14 gigabit per second per channel parallel optical modules and active cables, and the full band CATV quad transmitters represent our leadership position in the industry. The Company is committed to investing the necessary capital to establish high volume manufacturing capacity to accelerate the launch of these new products. Successful launch of these products represents significant opportunities of the revenue growth in our fiberoptics segment. Concurrently, we will continue our strong momentum of expanding penetration to several world leading communication equipment manufacturers by offering an enhanced product portfolio, industry leading customer service and technical support, and other fulfillment at a competitive cost. Through our extensive technical resources, established vertical integration and low-cost manufacturing infrastructure, we're well positioned to leverage these resources through increased revenue and market share.

Number three, leverage our infrastructure and technology through increased revenue growth. Over the past several years, the Company has invested a significant amount of capital to establish state of the art manufacturing fulfillment capacities, and technical expertise in areas such as semiconductor device fabrication, and solar panel manufacturing and testing. These infrastructures are critical to support our current business. The improved utilization should further lower our fixed cost per unit and enable some additional revenue growth opportunities. We believe that we can achieve critical revenue growth by leverage our existing capabilities in a number of areas. Our video transport business offers the leverage of customer recognition in the distribution network, which we have established through both internal development efforts and a recent acquisition. With more strategic focus, we expect the revenue from this business to increase in the future periods. Furthermore, some of the advanced technologies in our specialty photonic area and phased photovoltaic technology area can enable new capabilities and technology solutions specifically designed for the defense and the government sectors. We will continue to further solidify new business opportunities and view the program within this area.

Number four, reduced product and business costs and the improved profitability. We'll continue to drive cost reductions throughout the organization. The low-cost manufacturing strategy in our solar photovoltaic segment is well established. We expect to extend our low cost fiberoptics manufacturing use and structure in fiscal year 2011. We'll continue to focus our efforts on product lines that are strategic and is capable of achieving desired revenue and profitability growth. Our current corporate structure and management strategy should reduce corporate expenses and overhead costs in 2011. We'll continue the strong fiscal discipline established during the last economic downturn and continue to improve the financial performance of our operations.

Now, let me turn to our guidance for the first quarter of the fiscal year 2011, and ending by December 31. We expect a consolidated revenue to be in the range from $50 million to $53 million. This slight decrease sequentially is primarily driven by a decrease in our fiberoptics business, and this should be a short-terrible effect. The key reason is the result of the ITC ruling, as we have discussed.

So with that, I will turn it over to

Thank you, sir. (Operator Instructions)

And we do have a question from the line of Michael Intrator with Natsource. Please go ahead.

Thank you. (inaudible)

Hello, Michael. We can't hear you.

Sorry.

Hello?

I wonder if you could be a bit more specific on (inaudible) costs in light of the fact that there's going to be a decreased revenue, and how that's going to impact profitability in the next quarter.

Michael, we give guidance on the revenue, and we actually -- the slight decline exclusively, totally due to the decline -- temporary decline in the revenue in the parallel optical devices, and we are not giving the guidance on the profitability, at this point.

Thank you.

I'm showing that there are no further questions at this time. I will turn it back over to Emcore for any closing remarks.

Well, thank you very much for participating. We look forward to talking to you next quarter, and happy holidays. Bye.

Ladies and gentlemen, this concludes the conference call. You may now disconnect. Thank you for your participation.