EMCORE Corp (EMKR) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, thank you for standing by. Welcome to the Emcore Corporation 2010 first quarter fiscal 2011 earnings conference call. During today's presentation, all party will be in a listen only mode. (Operator Instructions) This conference is being recorded today, Thursday, February 3 of 2011. I would now like to turn the conference over to our host, Mr. Victor Allgeier, with TTC Group. Please go ahead, sir.

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 27-A of the Securities Exchange Securities Act of 1933, and section 21-E 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 and 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 achievement 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 statement.

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 Securities and Exchange Commission, that are available on the SEC's website, www.sec.gov, including the sections entitled "Risk Factors" in its annual report on Form 10-K, and its quarterly reports on Form 10-Q.

Emcore assumes no obligation to update any forward-looking statements to conform such statements to actual results, or to changes in its expectations, except as required by applicable law or regulation. With us today from Emcore are Dr. Hong Hao, 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. Today I'm going to focus my discussion on our first fiscal quarter operating results. Consolidated revenue for our first fiscal quarter totaled $52.1 million, which is a decrease of $2 million, or 4% from the prior quarter. This was in line with our prior guidance of $50 million to $53 million in revenue. On a segment basis, our Photovoltaics business accounted for $20.3 million, or 39% of the company's total revenue. Quarter to quarter, the business increased $0.6 million, or 3% from the prior quarter.

Increase in revenue is primarily driven by our Space Solar Powered Generation products. It is important to note that this quarter's Satellite Photovoltaics results were a record for Emcore. The Fiber Optics segment accounted for $31.8 million, or 61% of the company's total revenue. This represents a decrease of roughly $2.6 million, or 8% for the prior quarter, with the decrease primarily driven by lower sales of our digital products.

As we noted last quarter, the ITC ruling on our Parallel Optics Device products has had a negative impact on our overall results. In addition, in Q4, we had some large super computer-related connector cable orders which fell in the first quarter. The Active Cables business is lumpy, and based on specific build ops. We expect this product line to increase from its current levels in future periods. We continue to experience improvements in our Cable TV business, where we're seeing further traction from customers. In addition, our Tunable Laser business also saw some significant increases in business levels. Hong will discuss these and other details later in the call.

Consolidated gross margins increased to 24.3% from 23.6% in the prior quarter, primarily from an improvement in the Photovoltaics margins. On a segment basis, Photovoltaics gross margin was 33.1%, which is an increase from the 29.3% reported in the prior quarter. This was primarily due to leverage from higher volume in a positive mix. Fiber Optics gross margin was 18.7%, a 1.7% reduction from the prior quarter, primarily due to an unfavorable mix shift and higher material costs associated with our Telecom and Datacom Fiber Optics business.

The Telecom and Datacom division has experienced a product mix shift as customers begin to move toward newer technology platforms. We believe that this evolution will cause margins in this division to be under pressure until our new products begin to ramp in the latter part of this year. As we increase capacity, we will also see certain start-up costs associated with NREs and the manufacturing expansion, as these products move into full production.

Operating expenses increased $0.9 million from the prior quarter to $15.5 million, primarily due to some benefits realized in Q4 that we do not expect to continue in future periods. On a GAAP basis, the consolidated net loss for the fourth quarter was $3.6 million, a deterioration of $2.8 million from the prior quarter.

Our non-GAAP adjusted EBITDA, after excluding certain adjustments, all which are set forth in the non-GAAP tables included in today's release, was $0.6 million. Please note that we have included additional information regarding depreciation, amortization, stock comp, and other items in today's release to provide further clarity on our results. Our GAAP net loss per share was $0.04 versus $0.01 in the prior quarter.

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 December 31, the company had a consolidated order backlog of approximately $57.3 million, which is a $14 million or 20% decrease in the prior quarter. On a segment basis, Photovoltaics' order backlog totaled $36 million, a 32% decrease due to certain contracts that are now complete. Fiber Optics' order backlog totaled $21.2 million, an increase of 15% from the prior quarter. Primarily driven by higher backlog in our Tunable Laser business. Our Tunable Laser business continues to gain strong traction with customers due to its performance and our penetration in the 40G and 100G market.

Moving on to the balance sheet, during the three months ended December 31, the company's cash and cash equivalent and restricted cash balance increased over $25 million, primarily driven by improved working capital management. DSOs improved to 70 days, which is a very respectable figure. We also saw a slight improvement in our inventory turns to 4.5 times.

As we announced previously, in November, the company signed a new $35 million credit facility with Wells Fargo. The credit facility which is subject to certain borrowing base restrictions, will be used for working capital and general business purposes. Our net cash provided by operating activities was $3.9 million, and is a key highlight of our fiscal results. With that, I'll turn the call over to Hong, who will discuss the company's strategic and operating initiatives, and provide revenue guidance for the second quarter.

Thank you, Mark. Good afternoon everyone. Mark has discussed in detail about our financial results of the last quarter. We achieved consolidated revenue for the December quarter of $52.1 million, which is within the guided range of $50 million to $53 million. On a non-GAAP basis, the adjusted EBITDA, as described in today's release, was positive $0.6 million. In addition, the Company generated $3.9 million positive cash from the operations, and ended the quarter with a cash, cash equivalents, and restricted cash balance of $25.4 million.

Now, let me discuss the details behind our Q1 financial results, as well as an outlook and opportunities in our businesses. Our revenue in the Fiber Optics segment for the December quarter, as Mark discussed, was $31.8 million. Which represents a $2.6 million sequential decline compared to the September quarter. Over the past year, we have experienced a significant quarter-over-quarter revenue growth, and expansion of gross margin. The decline in the December quarter is the first in a while and it's primarily due to the reduction in shipments of parallel optical modules related to the ITC order. We believe this business will have future growth over the next few quarters as we begin to deliver our new solutions to customers.

Our book-to-bill for the December quarter was higher than one, with a significant increase in Attunable Telecom products. The backlog for the Fiber Optics segment increased $2.8 million, up 15% from the prior quarter. Now, let me discuss the market dynamics and our position in the Broadband Fiber Optics business. We continued to experience a robust increase in demand for cable TV equipment in the December quarter. The deployment of Telco's Fiber-To-The-Home infrastructure, and the new service offering of Telco's is forcing the cable TV multi-service operators to upgrade their infrastructure.

One solution is a use of full band quadrature amplitude and modulation transmitters, or QUAM transmitters, which the (inaudible) demand amplitude digital services will specialize in high definition channels, video on demand, Voice over IP and high speed Internet access. This new transmission architecture based on full band QUAM transmission not only increases the transmission capacity, but also significantly reduces the operating expenses of the MSO. As a result, the demand for this product line has increased dramatically. Our vertically integrated structure from laser and detector chips to transmitter subsystems serves us well, as the laser specs for the QUAM transmitters are so stringent that they're not currently available from any other vendors.

As we continue to introduce new products to the market, we believe our technology leadership in this area is widening. Another area of potential growth in Cable TV is the solutions for the last mile. In the traditional hybrid fibre-coaxial network, coaxial cables are used to deliver signals between no and end users. RFOG, or radio frequency over glass fiber utilizing passive optical network transceivers, and a switch in architecture with DOCSIS in cable TV provides increased bandwidth from those to end users. We've been working very closely with our customers on this solution. And expect meaningful shipments to begin in this quarter.

Based on our discussions with a major MSOs, their CapEx spending on the scaleable infrastructure and upgrades will continue to increase. As a result, we're very excited about our growth prospect in this market. Now, let me discuss our Telecom Fiber Optics business. The revenue from this product line has nearly doubled over the past 4, 5 quarters. Primarily driven by the Tunable laser and ITLA sales into 40 gigabits and 100 gigabits application. Due to the excellent attributes of narrow bandwidth, spectrum purity and high output power, our full band Tunable external cavity lasers have become the laser of choice for the 40 gigabit per second market.

We believe our market share is significantly greater than 50% for coherent detection systems. We're working with all Tier 1 OEMs for their 40 gigabit coherent laser needs. On the Tunable FT front, as we reported in our last conference call, our Tulsa assemblies and TXFP products are being shipped to major Telco customers for qualifications. This product has generated significant customer tracking, and our customers have been extremely impressed with the performance of our Tunable XFP modules, and our designing in our products of a 300-PIN Tunable transponder replacement. We believe that our design is one of the few in the industry which can be used to cannibalize the multi-hundred million dollar market currently served by 300-PIN transponders.

Today we are shipping this small volume to full-scale orders to multiple Tier 1 OEMs, and aggressively ramping up the manufacturing capacity to accommodate the significant market demands. We expect to ship this product in volume in the second half of the 2011. According to a recent industry research report, the demand for Tunable XFP product will grow at nearly 120% year-over-year in the next four years. The market risk is very minimal and our focus is on the capacity ramp.

We are leading supplier for active optical cables utilizing high speed transceivers embedded in the connectors to perform E/O and O/E conversions. These are used primarily in high performance computing clusters, replacing heavy and rigid electrical cables. According to a recent market research report by Lighthouse, the sales of active cables in the last several years were over 285,000 units. And projected annual growth rate nearly 60%. As a leading supplier, Emcore has shipped over 100,000 units of double data rate and a quad data rate of cable to date.

We'll be introducing new products soon, which include recently demonstrated four lane by 12 gigabit per channel FDR, and 12 line ten gigabit per channel CXC modules and active optical cables for high speed interconnect markets. However, the sales in this recent product line are quite lumpy, and the product is program-specific. For example, in the prior quarter, our sales were low, but we are well positioned to increase the future sales of active cable for new programs. Now, let me move on to discuss our financial results of our Solar Power business segment, and discuss the business climate going forward.

Our Space Photovoltaics business delivered record revenue in the December quarter. The satellite solar power market continues to have a very bright future. Our reliability heritage provides a competitive advantage from most of the commercial programs, and the superior performance of our Solar Cell products has been a key enabler for many new interplanetary missions that we have been awarded recently. As we mentioned previously, the Company's looking to expand its business into government programs. On that end, we were notified recently that we have achieved preliminary facility security clearance as a trusted supplier for government, the government programs.

This clearance will ultimately position Emcore to take on and perform government defense work in the near future. The total addressable market at the Space Solar Panel level is reportedly $400 million, of which $250 million is in a commercial space area, and the $150 million is in the defense programs. The business unit Defense area represents a new market to pursue in the expansion of our addressable market opportunity.

On a sequential basis, revenue in the March quarter will decline for Photovoltaics due to the completion of a few major programs over the last couple of quarters, and the program delay from the international customer for a new program. While the 12 months backlog decreased sequentially as well, we're confident that business fundamentals are still very strong. For example, already in the past month, after we closed at Q4 -- Q1 December quarter, we have added a couple program wins into our backlog, and have seen additional significant booking opportunities in the very near future. So it's more a timing issue, we'll view the backlog this quarter.

Now, let me give you a update on the, our CPV joint venture and the recent development of our Terrestrial CPV business. As we discussed last quarter, we entered into a joint venture agreement with San'an Optoelectronics in China. The JV entity, Suncore, is making significant progress. A couple weeks ago, Suncore received its business license and their relevant regulatory approvals to set up a manufacturing operation in Huainan City of China. We plan to break ground for the new manufacturing facility later this month, and expect the JV's manufacturing line to be up and running for producing CPV components and systems in September of 2011.

The current backlog for CPV systems at Suncore is 15 megawatts. With an establishment of Suncore, we expect to make capital contribution to the JV this quarter, as per the contract. The total cash outlay for the company is $3.5 million, to fulfill our capital contribution obligation for the 40% of the $30 million initial registered capital requirement. There will be a receivement an $8.5 million consultant fee paid by San'an. So, $3.5 million plus $8.5 million, that will give us a total of $12 million capital contribution to the JV.

With a commitment we have received related to the cash working capital loans, land and the cash grants as well as various incentives and subsidies from Huainan City, we believe Suncore will have necessary capital to establish a state-of-the-art, high volume, low cost manufacturing facility for CPV systems. At this time, we do not expect any further capital requirements beyond the $12 million from Emcore. With the JV taking on the task of manufacturing as well as business development in China market, Emcore can now focus its effort on development of a next generation CPV product, as well as Solar Business development activities in the North America and Europe.

We plan to complete two CPVs solar power project in New Mexico and Arizona, totaling three megawatts this calendar year using CPV components manufactured by Suncore. This year, we expect to expand our Solar project development capability as well. This will drive additional sales of our CPV product, and also remove margin stacking that distributors and the project developers. To that end, we are in the process of adding necessary skill set to expand our business development. In summary, we feel that our path is clear.

Among the four business units, the Space Photovoltaics and Broadband Fiber Optics divisions are market leaders and are generating significant positive cash. This operations for wide cash flows that we are investing in the areas where we have significant near-term and long-term growth opportunities. We are expanding our product portfolio in the Datacom/ Telecom business, and there be shepherding some Legacy products to the end of their lifecycle over the next couple of quarters. As we complete the introduction of these new products, we'll totally upgrade our Datacom/Telecom data portfolio for increased sales and the improved gross margin in the near future.

In our terrestrial CPV business, we are ramping up to win new project opportunities with competitively priced product from our joint venture in China. The terrestrial solar opportunities should add to our revenue substantially over the next couple of years. On the revenue outlook for our second fiscal quarter, we expect consolidated revenue to be in the range of $46 million to $49 million. Our Fiber Optics segments revenue should be flat to about slight increase as our next generation Telecom products begin to ramp.

Our Photovoltaics segment will see a decline attributable to the completion of some large satellite orders in our prior quarters, and a delay of a new international program. In spite of this expected sequential decline in revenue, I hope that you get a sense that this is temporary and our business fundamentals are very solid. In this quarter we'll continue to solidify our strong market positions in a more established satellite, Photovoltaic and broadband fiber optic businesses. In the meantime we will be focusing on the capacity buildup of the Tunable XFP production so that we will be positioned for significant revenue ramp up in the second half of the year.

In addition we will be picking up our effort in business development and project development for terrestrial CPV. We will continue the same rigor for cost control and cost reduction with this effort we are setting a strong foundation for our future growth. With that, I'll turn it over to Q&A.

Thank you, sir, we'll now begin the question and answer session. (Operator Instructions) One moment please for our first question. And our first question is from the line of Peter Conway with Cox Investment Advisors, please go ahead.

Good afternoon gentlemen.

Hello Peter.

Say, I was wondering if you can just offer maybe a little bit more granularity on the Fiber Optics side, and the digital, and how would you would see the Tunable ramp play out. Would you expect a little bit more revenue this quarter, but then a more significant step up as we move into Q3, and Q4?

Yes. So Peter, we are ramping up the production capacity in two locations simultaneously, one is in our Newark facility in California. So that will be up and running and contributing to the revenue this quarter, even though it will not be significant. And then the second ramp we are doing right now is at our contract manufacturer in Thailand. And they are scheduled to be up and running by about mid-June. So the revenue contribution from that line, which is going to be significantly higher volume than Newark line, will be more in the September quarter.

Okay. So as you enter or exit the September quarter, maybe you can offer clarity on that. What kind of capacity would you have in place?

Yes. So right now, you know, we are still using the Newark line not only to produce parts, but also improving the process cycle time. We hope that we are building the capacity at about 5,000 per month level at a Fiber net, 5,000 to 10,000 per month. It really depends on the cycle time in processing and testing. So 5,000 per month is our target for the line in Thailand.

And that's by the end of September?

The line will be up and running by mid-June, but I think the revenue contribution will be in the September quarter.

Okay. Can you remind me what kind of ASPs generally the Tunable lasers carry?

So the Tunable XFP we are providing is primarily as a discuss targeting the replacement of 300-PIN transponders. In this day, 300-PIN transponders, as you probably know, the price is in the range of, $1,700 to $2,200 depending on specification. So we are slightly different in focus compared to an established vendor in this industry. They, as my understanding, as I understand, our targeting to replace the fixed wavelength speed of the DWDM XFPs. So for six to eight months, its probably typical AXP, it's in $1,000 range. Of course, the tunability will command a premium for pricing.

Okay. And what -- can you in any way characterize the demand or the reception that you're seeing from perspective customers at present? I mean, are they in a position to take whatever you can produce or, is that something you need to build towards?

Yes. Absolutely. We're in a very weird situation, kind of like over the years in the Fiber Optic industry, we are in a position, if we build, they will come. They will take everything we can build right now. Even when we have the capacity of 5,000 per month, based on the current projection, that's probably the only about half or 1/3 of their demand, so we're going to be having a third phase of capacity expansion plan, either at Cybernet or our facility in China.

Okay. And I suspect that has not gotten to the point where it is even 10% of Fiber Optics revenues at present, but when it does get to that point, or to a certain point, will you break out what your Tunable XFP revenues are?

Yes. We will.

Okay. Is that a correct assumption that it's not at that point, at present?

Right. We're not over 10% of the total Fiber Optics revenue mix from the Tunable XFP yet.

Okay. And as this is ramped in the June or the September quarter, would you characterize this as -- a margin that's better than average for the Fiber Optic product stock?

Absolutely, yes. That's, this is going to be one of the high margin product in our portfolio for Fiber Optics segment.

Okay. Great. Thanks a lot ,

Thank you, Peter

Thank you, and with that we'll turn the call back over to Hong for closing remarks.

Yes, I appreciate your participation in our call today. We look forward to seeing some of you in the Optical Fiber Conferences in Los Angeles the first week of March, talking to you next quarter. Thank you very much.

Ladies and gentlemen, this concludes the Emcore Corporation first quarter fiscal 2011 earnings conference call. Thank you for your participation. You may now disconnect.