EMCORE Corp (EMKR) 2011 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Emcore Corporation Second Quarter Fiscal 2011 Earnings Conference Call. (Operator Instructions.) 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 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 market 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 statements.

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 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 10K and its quarterly reports on Form 10Q.

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 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, Vick, and good afternoon everyone. Today, I am going to focus my discussion on our second fiscal quarter operating results and our balance sheet. Consolidated revenue for our second fiscal quarter totaled $47.2 million, which is a decrease of $4.9 million or 9% over the previous quarter. This was in line with our prior guidance of $46 million to $49 million in revenue.

On a segment basis, our Photovoltaics business accounted for $17.2 million or 36% of the Company's total revenue. This represents $3.5 million or a 17% decline from the record revenue for this segment in the prior quarter. The decrease in revenue was primarily driven by some large orders that we fulfilled in Q1 in our Space Solar Powered Generation products. We believe that the Space Solar business will continue to experience a year-over-year growth, although our revenues in any given quarter are a little lumpy.

The Fiber Optics segment accounted for $30 million or 64% of the Company's total revenue. This represents a decrease of roughly $1.4 million or 4.5% from the prior quarter with the decrease primarily driven by lower sales of our legacy products and a decline with an Asian customer.

As we noted last quarter, we are continuing to move into the end of life stage on a few products. We expect to see another $2 million to $3 million reduction in these products from this evolution.

In Q2, we experienced solid results in our Cable TV business. In addition, our Tunable Laser business also saw some significant increases in business levels, specifically at 40G and 100G flavors. Hong will discuss this in more detail later in the call.

Consolidated gross margin decreased to 22.4% from 24.3% in the prior quarter, primarily from a deterioration in the Photovoltaic margins, driven by a reduction in revenue. On a segment basis, Photovoltaic gross margin was 32.2%, which is a decrease from 33% reported in the prior quarter.

Fiber Optics gross margin was 18%, a 0.4 percentage point reduction from the prior quarter, primarily due to lower revenues and a $1.2 million inventory reserve related to the end of life legacy products, which was partially offset by a better per-product margins.

The Telecom and Datacom division is experiencing a product mix shift as customers begin to move towards newer technology platforms. We believe that this evolution will cause margins in this division to improve when our new products begin to ramp in the latter part of this year. As we increase capacity, we will see certain startup costs, including NREs and capital expenses, as we move these new products into full production.

Operating expenses, excluding the award from the litigation settlement, increased $1.9 million from the prior quarter to $17.4 million, primarily due to higher head count-related costs and stock comp FAS123R expenses. The litigation settlement gain of $2.6 million was recognized as the funds were received in the second quarter.

The March quarter was the first quarter that the Company recognized any income statement-related activity associated with our Solar CPV joint venture, Suncore. For the quarter, we had a loss of $0.6 million. We expect those losses to continue at slightly lower levels for the next few quarters until the facility is up and running. Hong will discuss the Suncore strategy and opportunity in more detail.

On a GAAP basis, the consolidated net loss for the fourth quarter was $5.2 million, a deterioration of $1.6 million from the prior quarter. Our GAAP net loss per share was $0.06 versus $0.04 in the preceding 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 a loss of $2.3 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. We've also exclude the $2.6 million litigation settlement gain, due to its one-time nature.

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 March 31, 2011, the Company had a consolidated order backlog of approximately $50.5 million, which is a $7 million or 12% decrease in the prior quarter. On a segment basis, Photovoltaics order backlog totaled roughly $26 million, a 27% decrease.

Fiber Optics order backlog totaled $24 million, an increase of 14% 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 in the 40G and 100G markets.

It's important to note that since March 31, the Company has seen strong bookings in both Photovoltaics and Fiber Optics. On the Photovoltaics side, as we announced today, the Company has signed a contract agreement with Loral that is the second largest in the Company's history.

Moving on to the balance sheet, during the three months ended March 31, the Company's cash and cash equivalents and restricted cash balance decreased by $8 million to $17 million, primarily driven by being significantly backend loaded on shipments, the paydown of payables and our joint venture contribution of $4 million, which was partially offset by the $2.6 million receipt for the litigation settlement.

DSOs deteriorated to 73 days within our targeted range of 67 to 73. We also saw a slight improvement in our inventory turns to 4.5 times.

Let me address our progress towards improving our liquidity. We have been aggressively managing working capital and have generated positive cash flow over the past 12 months through our operational improvements. Last week, we signed agreements for the sale of Emcore stock for approximately $9.6 million in proceeds. This was conducted through a private placement of an aggregate of 4.4 million shares, which represents 4.9% of the total number of shares outstanding. The sale was priced at $2.19 per share.

There was no warrant coverage or any other brokerage fees involved with the transaction. The sale of the shares, under the Common Stock Private Placement, will be registered pursuant to an S-1 registration statement to be filed with the SEC. Net proceeds from this sale will primarily be used for capital expenditures and increases in working capital necessary to support the growth in the Tunable XFP product line, which Hong will discuss in detail. The private placement, in combination with our line of credit with Wells Fargo and our improved operating performance over the last year, has substantially improved the Company's liquidity position.

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

Thanks, Mark. Good afternoon, everyone. As Mark discussed in detail, we achieved a consolidated revenues of $47.2 million in the March quarter within the guidance range of $46 million to $49 million. While the revenue in our March quarter saw an expected sequence of decline compared to the prior quarter, we planted a seed for strong revenue growth [and] further operational improvement in the second half of the calendar year.

Our revenue in the Fiber Optics segment for the March quarter was slightly over $30 million, which represents a $1.4 million sequential decline compared to the December quarter. The decline in the March quarter is primarily due to lower revenue with a certain Asian customer and a discontinuance of some of our legacy products.

Our book-to-bill for the Fiber Optics segment in the March quarter was approximately [1.1] with a significant increased in our Tunable Telecom products. As a result, the order backlog for the Fiber Optics segment increased $2.9 million or almost 14% from the prior quarter. Because of the significant investment in new products, we're seeing some very positive [tracks] in the Fiber Optic business. Hence, we expect revenue from the Fiber Optics to increase by 10% this quarter.

Let me discuss the market dynamics and our position in the Broadband Fiber Optics business. We continued to experienced robust demand for Cable TV equipment in the March quarter. Based on our discussions with the [major] of MSOs, we expect that their CapEx spending on scalable infrastructure (inaudible) will continue to increase. Customers are today asking for new solutions to help them harvest additional bandwidth through the new transmitter receiver equipment on their existing hybrid fibre-coaxial infrastructure.

The full band quadrature amplitude modulation transmitters, or QUAM transmitters, continues to be a leading solution for this application. The demand for this product line has increased dramatically over the past year. Our vertically-integrated structure from semiconductor lasers and detector chips to transmitter subsystems serves us well, and the Laser spec for the QUAM transmitters is so stringent that Emcore is, today, the only vendor shipping in commercial volumes.

We have leveraged our expertise in technologies of the two broadband solutions, Cable TV and Fiber-to-the-Home, to design products for the last mile Fiber Optics solutions in the traditional HFC network. RFOG, our radio frequency over a glass fiber utilizing passive optical network transceivers and the switching with DOCSIS in Cable TV provide increased bandwidth from [note] to end users.

We have been working very closely with our customers on this solution and made our first significant shipment in the March quarter. In addition, our backlog and visibility is improving as we hit the pavement. To summarize, our broadband Fiber Optics products and business continues to be strong. New products introduced within the past year account for a significant portion of our current revenue, and this new product, in turn, provide Emcore with a competitive advantage. Our lead over our competitors is widening, and we continue to expand our customer base with new product solutions.

Let me discuss our Telecom Fiber Optics business. The revenue from the Tunable Laser and ITLA sales in the 40 and 100 gigabit applications continues to increase significantly. Compared to the same time last year, revenue from this product line had more than doubled and the bookings at their highest level. The external cavity laser platform allows us to optimize certain electro-optical properties separately compared to an integrated DFB laser, giving us superior attributes for the lasers such as narrow bandwidth, spectral purity and the high output power.

Our full band Tunable external cavity lasers have become the laser of choice for the 40 gig and the 100 gig market for coherent applications. We believe that we are the market leader in Tunable Lasers for 40 gig and 100 gig transponders using coherent detections.

On our next generation development efforts with Tunable Lasers, Emcore is now the leader in the micro-ITLA MSA market for future small form factor 40 gig and 100 gig transponder applications. The micro-ITLA will maintain the same performance as the current version but reduce the form factor and the power consumption significantly. This development program will reinforce our leadership position in the (inaudible) coherent market.

On the Tunable XFP front, our TOSE assemblies and Tunable XFP products are being shipped to many major telecom customers for qualification. Two of the leading customers in this space have finished the system verification test and the qualification using a few of our XFP products to replace 310 Tunable transponders. It continues to be our primary target to cannibalize the roughly $300 million per year market of Tunable transponders.

Our product line in the -- our production line in the Bay Area serves to improve the production process and reviews the assembly and test times as we view the high volume production line at our overseas contract manufacturer. The performance distribution of our product has improved as our process control matures. [Ample] power of the Tunable XFP devices is very important to replace 310 transponders in (inaudible) and [longhaul] applications.

The [recent autopower] distribution of our Tunable XFP transceivers has been centered around +3dBm. In addition, we believe our products lead the pack in performance in many areas, such as zero chirp, full band tunability and so on. We expect to ship our first $1 million revenue from this product [line] in the June quarter.

As you can expect, we are closely monitoring the progress of this product within the market, given the enormous opportunity. Our ability to deliver both the high performance longer range application, along with the lower performance requirements for the [metro] market, places us in a unique position to support our market segments and enhancing our opportunity for the long-term.

While there are still some risks, I feel confident that we have a robust plan in place to overcome obstacles. Today, we are focusing on executing the production (inaudible), and I'm happy to report that our plan to ship this product in high volume with a capacity up to 15,000 parts per quarter in the second half of the 2011 is on track.

Another interesting market [niche] and the strength of the Emcore is in Parallel Optics, where we supply both Active Cables and [plottable] modules for high speed interconnection from 40 gig to 150 gigabit per second solutions. Today, the Active Optical cable are used primarily in the high performance computing clusters, replacing heavy and rigid electrical cables.

In this product area, we're a leading supplier with over 100,000 units shipped to date. The revenue from this product line, however, has been lumpy, due to its nature of the primary use in supercomputer and the program specific. In order to expand the total addressable market, we have a plan in place to expand Active Optical cables to computer server and the Ethernet applications.

Another Parallel Optics-based product opportunity for Emcore is our new module product, 12x10 gigabit per second CXC transmitter and receiver modules for high end [core] router [in the] enterprise applications. We are currently providing samples to two leading customers, and our first commercial shipments are expected in early 2012.

In our current product portfolio, there are some products which are either approaching the end of their lifecycle or our cost is no longer competitive. This product currently make up about $2 million to $3 million in revenues for the Company. We saw a further decrease in revenues and have therefore taken inventory reserves of approximately $1.2 million in the March quarter.

On a positive note, we expect future revenues from the new products will be more than enough to offset the decline of the legacy product, and the gross margin is expected to improve due to a better product mix.

Let me move on to give you an update on our Solar Photovoltaic business. As we discussed in the December quarter conference call, the revenue in our Space Photovoltaics business experienced a sequential decline in the March quarter due to the completion of a few major programs over the last couple quarters after we delivered record revenues in both September and December quarters.

The demand in Satellite Solar Power products continues to be very robust. As we announced today, we entered into another long-term purchase agreement with Space Systems/Loral to provide high efficiency solar cells. This is the second largest contract in terms of a dollar amount in the history of the Company.

In addition, we have received substantial orders from our international customers recently. As a result, our backlogs for Space Solar Cells, Solar Panel product have increased significantly since we closed the March quarter.

We continue to make strides in improving our Solar Cell performance for applications in both space and Terrestrial systems. We have achieved 34.3% conversion efficiency from a large area Four Junction inverted metamorphic, our IMM Solar Cells for AM0 that is a space illuminations [condition].

Concurrently, our similar Triple Junction IMM design for CPV application has reached a 43.5% conversion efficiency, and there's 300X concentration. The improvement of Solar Cell conversion efficiency has served as a chief avenue to reduce the overall system cost for our end customers. We have established the manufacturing infrastructure for IMM Solar Cells over the past year, and we are confident that this advanced product will enter into volume production phase in the near future.

Let me give you an update on our CPV joint venture and the recent developments of the Terrestrial CPV business. Our CPV joint venture with San'an Optoelectronics in China, called Suncore Photovoltaic, received its business license and all relevant regulatory approvals in March 2011. In -- I'm sorry, in January 2011. We broke ground and started construction of the facility in Huainan City of China in February, with its plans to be capable of producing 200 megawatts CPV modules per annum.

The facility construction is on schedule. We expect the JV's manufacturing line to be up and running for producing CPV components and systems in September 2011. While the new facility is in construction, the Emcore and Suncore teams have been working very closely over the past several months to transfer the Gen-III CPV system manufacturing processes to Suncore's temporary facility in (inaudible) China. The process transfer and the training are almost complete. The Gen-III systems made in China have successfully gained its certification last week issued by China's Qualification Center. With that, our Gen-III products are officially qualified for the Chinese [trade] for solar market.

During the March quarter, we made our first capital contribution of $4 million to the joint venture. We expect to make the remaining $8 million capital contribution in the next couple quarters, of which $4 million will be covered by the licensing fee to be paid by San'an to Emcore.

With the capital contribution from the shareholders and the significant cash and land grants from the city that Suncore has received from the Huainan City, the joint venture has a very strong balance sheet to execute its business plan for a facility [build out] capital equipment purchase and the initial working capital to cover the production in its current backlog.

As Mark noted, this quarter we recognized the activity in the Income Statement related to Suncore. Going forward, we expect a loss from this joint venture to be less than $500,000 per quarter until Suncore begins shipping product in volume at the end of this calendar year.

Another significant development in the March quarter is that we acquired certain assets of Soliant Energy of Monrovia, California, on March 29. Soliant Energy was a leading supplier of CPV systems for commercial rooftop applications. Soliant's rooftop CPV system combined best of the breed module designs that offer a high energy density lightweight low profile and low cost solution.

The Soliant asset acquired by Emcore included an equipment inventory intellectual property and tooling for the rooftop solar energy production line. The acquisition was completed as a part of the assignment for the benefit of creditor's process, so we did not assume any liabilities of Soliant.

We have integrated [from Soliant] the R&D and the [parallel] production into our existing facilities located in Alhambra, California. The commercial manufacturing operation is expected to transfer to Emcore's low cost manufacturing joint venture, Suncore. Key members of the former Soliant team has joined Emcore to facilitate the integration, ongoing product development and the business development and customer support.

We are very pleased to add the Soliant solution to Emcore's Terrestrial CPV product portfolio. The addition of a rooftop CPV product line give the Emcore immediate access to the [reportedly] multi-billion dollar rooftop PV market and expanded the reach of Emcore's existing ground mount systems. Was very impressed with the capability of the Soliant team and, with the establishment of a CPV design and customer service center in Southern California, we will be able to develop business opportunities and serve our customer base in the most active region of the Solar installations.

This integration allows us to leverage Emcore's high efficiency Solar Cell technology and its low cost manufacturing infrastructure. We believe this combined team will allow us to accelerate delivery of most cost effective and highly reliable rooftop systems to the market.

The operating cost associated with this development effort will be roughly about $400,000 to $500,000 per quarter for the next few quarters as we finalize the design activities and build up our business development pipeline.

On another note, we are gearing up module assembly production activities for CPV solar power projects in New Mexico and Arizona that are expected to be fulfilled in the next several months. In addition, we are in discussion on a number of project opportunities for both ground-mounted and rooftop applications in the pipeline, and I look forward to discussing this with you in the future periods as finalize this project.

In summary, our robust business units of broadband fiber optics and Satellite Solar Photovoltaic continue to deliver excellent performance and provide a positive future outlook. We have made a great progress in the March quarter, setting the stage for the product portfolio upgrade within our Telecom enterprise Fiber Optics business as well as ramping up production capacity within our Solar CPV business.

On the revenue outlook for our third fiscal quarter, we expect consolidated revenue to be in a range of $48 million to $50 million. Our Fiber Optics segment revenue should represent a majority of the sequential revenue growth. In this quarter, we will continue to solidify our strong market positions in our more established Satellite Solar Photovoltaic and Broadband Fiber Optics businesses. At the same time, we are focusing on the capacity buildup of Tunable XFP production so that we will be well positioned for a significant revenue ramp-up in the second half of the year.

In addition, we will be beefing up our effort in business development and the project development for Terrestrial CPV. Overall, we'll continue setting a strong foundation in this quarter for our future growth and a profitability improvement.

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

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator instructions.) Edward Zabitsky, ACI Research.

I've got about 10 questions, so I'll ask a few of them and get back in queue. Wanted to know about the TXFP run rate -- the current run rate of production?

Yes, Ed. So, the TXFP production is going to be happening in two sites. One is in our production line in the Bay Area. And -- but, at -- the high volume line is going to be at our contract manufacturers overseas. Our Bay Area line is capable of producing 2,000 to 3,000 pieces per quarter, but majority of the 15,000 per quarter capacity is going to be at our contract manufacturer. (Multiple speakers.)

So, right now, the contract manufacturer line is not up and running yet, and we are getting all the equipment delivered and being hooked up. I think the majority of the equipment will be delivered within this quarter, but the line will not be up and running until next quarter.

Sure. I understand. So, in terms of your own production facility, where are you in that band?

We are able to produce few hundred units right now, and -- but, we are building up the entire infrastructure for components testing assembly as well. So, we get a multiple level of capacity ramp going on, and right now we are at a capacity only about a few hundred to 1,000 per quarter level.

Okay. And in terms of -- all right, is there going to be any knowledge transfer between you and the contract manufacturer? Is it up and running (multiple speakers) --?

Absolutely. So, we leveraging their engineering capability and have been working with them in the last three/four months already. So, they helping in our Newark/Bay Area facility and -- while designing the high throughput line but also helping us with the process engineering.

So, then, when the line's up and running, we'll be sending a lot of engineers from our Bay Area and within the Company, all different sites, to the contract manufacturer to support the production ramp [and] the process transfer.

Okay. So, I'm not sure if caught it. I -- did you say you expect $1 million in revenue in the June quarter?

Yes. We expect to ship about $1 million revenue from the Tunable XFP in the June quarter.

Fantastic. And you -- I think you mentioned two wins. Can you characterize the size of these customers, please?

They are probably all within the top five -- they both are in the top five Telecom equipment manufacturers. So, they are significant to us.

Sounds significant to me. Good. And one (laughter) more question, and then I'll give up the floor for a bit. You mentioned that 40G to 100G revenue doubled year-over-year. What, roughly, was that level, please?

Right now, it's still below $10 million that are -- the backlog build ups very quickly, so we expect that trend is to continue -- the momentum to continue almost in the same pace.

So, when you say below $10 million, is it closer to $5 million? Closer to $10 million?

It's about $7 million to $8 million. Right in the middle --.

Great.

[Which] is $5 million to $10 million.

Thank you very much. That's very helpful. I'll let someone else --.

Thank you.

Ask some questions.

(Operator instructions.) Alex Henderson, Miller Tabak.

I didn't catch -- did you give a Solar guidance on the revenues?

Alex, we did not give a separate Solar guidance. But, we gave the overall revenue guidance --.

I can back it out, but it sounds like the Solar's essentially flat, if I'm up $3 million or so from Optics.

Right. It -- flattish and -- yes, that's a pretty good assumption.

Well, I'm a little confused, then. I thought you were implying that you had a, quote, substantial order in April and implying a strength in orders there. Is that a -- could you help me out with the lead time on -- from the time those orders come in to shipment? Just so I can get some clarity on it?

Right. The backlog, Alex, we report, is for the backlog to be shipped within 12 months. And then, the long-term purchase agreement we just entered into with the Space System Loral is to be delivered in the next couple years. So, the good thing [for the] Space Solar business is that we have a very good visibility for next 12 months, even beyond, but it's not all of them are to be shipped in the next quarter or two.

Okay. I mean, reasonable to think that some of that international kicks in in the back half and gives you some visibility to get to the upper end of the -- sort of the $16 million to $18 million run rate band?

Right. Right. As Mark described in his part, we still expect year-over-year growth for revenue in the space Photovoltaics. But between quarters, it's a little bit lumpy and program specific. As we talked before, one Satellite program represent about $3 million revenue to us. So, it can fall into any quarter.

Got it.

But, yes, for the June quarter, we expect, for Solar side, for the revenue to be a little flat.

The ITLA business in the quarter, can you tell us what the quarter-to-quarter growth from that business was?

Yes. So, we talked about the same period last year. The revenue was about half, and the quarter-over-quarter growth [was] 25%, 30%.

25% to 30%? Thanks. And is it reasonable to think that the ITLA and growth in the Tunable XFP are the primary drivers for the sequential growth into the June quarter?

Yes. That's a good assumption.

And so, the phase-out of older products -- you suggest that was, what, $2 million to $3 million left in the March quarter? Are we looking at that to decline another $1 million or so, sequentially, into the June quarter?

Probably another $1 million. A little bit more than that. And I think, as we talked about -- but, from the inventory side, we -- the exposure is very minimal after the $1.2 million reserve on the raw material. So, for the legacy product, we have more -- like in a monetizing the inventory mode. We apparently will not be replenishing the inventory to continue this product line with a zero -- very minimal gross margin.

Right. So, the -- we've been thinking about a couple of million dollars worth of write-offs left in the inventory write-down through the end of the year. Is that too much after -- that's June, September, December quarter?

Yes. Alex, over the last couple quarters, we've been averaging a little bit more of -- between $1 million to $1.5 million per quarter in basically excess and obsolete charges.

Right.

In the Optics business, we typically will have some that, depending on customer demand changes over periods -- but the normalized level of that should be less than $0.5 million a year. So, we hope that, within the next quarter or two, we'll be back down to our normal levels.

I got it. Okay. Just one last question. Can you give us a sense of what the assumption is for the Cable portion of the business going into the June quarter?

The June quarter -- I think, in general, that business is pretty strong in the March quarter. In the June quarter, we expect to be similar strength and [namely] pretty flat or minimal growth. But, the majority of the growth in the Fiber Optics is going to be in the 40 gig to 100 gig ITLA and Tunable XFP, as we talked about. June quarter will be having the first $1 million revenue shipped. That's our expectation. So, the growth is in the Telecom product.

[Steven Coffler], [Conbrito].

On the Solar JV, Hong you were saying that you -- it sounded like you were indicating volume shipments of product some time around the end of this current calendar year and that that stage of the losses from the JV should go to pretty negligible level.

So, my question is, are there firm commitments from any customer to the JV? Or was there any kind of commitments about consumption regardless of where it was going? I'm just trying to understand where the confidence comes from that the JV gets to basically breakeven for Emcore by then? I wasn't expecting that to happen so fast.

Yes. So, the JV is producing the products in their temporary facility in (inaudible) right now. But, it would -- did not expect the -- running at this volume without automation for the module assembly to be very cost competitive. That's why we incur our fair share of the loss of the joint venture.

But, the permanent facility is being built right now, and construction will be done by mid-July, and production will start in September of this year. Currently, the joint venture had a firm backlog, about $5 million to be delivered in the early part of -- before early -- before the mid of 2007. And they have a [test line] of another $10 million to be -- 10 megawatts to be finalized in the next month or so.

So, to answer your questions, yes, they do have firm backlog, which is 5 megawatt immediately, and we also need our joint venture to deliver -- that manufacturing deliver the CPV components for about 2.5 megawatt after backlog we have for the project in New Mexico and Arizona.

So, they will be manufacturing other key components and get them [queued] up and send it over to the US, and we do the final box build here. That way, from a current cost model, we will get the most competitive -- cost competitive product.

Okay.

So, they are in the situation. They build -- they have a capacity utilization expectation.

Okay. Just this follow-up on that. I'm not sure about all the elements of the JV, especially San'an's part of it. Is San'an consuming? Are they committed to themselves taking actual cells for their use or resale? Is that how it's going to work?

No, San'an Optoelectronics -- it's the largest LED manufacturer. So, through the formation of the joint venture with Emcore, they basically [stamped] out a effort on the Photovoltaic side. But, [at a] joint venture, Suncore has two business objectives. One is, of course, to do high volume/low cost manufacturer. The second is aggressively developing the business in primarily Chinese Solar Photovoltaic market. So, they have been pretty successful so far in getting the firm order of 5 megawatt and get another 10 megawatt coming in very shortly.

Okay. Are they allowed to -- are those orders allowed to be canceled? Meaning is there any kind of take or pay to the JV? What -- when you call them firm -- if you could just describe it a little better?

Yes, the firm -- they signed a power purchase agreement. They have the firm delivery date. They have prepayment for it. And remember, before the formation of the joint venture, San'an has manufactured and installed 1 megawatt already. So, that's up and running with this customer, and they have seen the performance of Gen-III installation in the last, what, four/five months already. So, this is not new to them. They know the product, they know the performance, they know what to expect and the economics of it.

So, for the last megawatt, [you'll] get paid, and now it's really -- we do not expect they will be changing their plan, because they already got the permitting and financing for it.

Okay. One last question on that, and I'll leave it. It doesn't sound like there's any reason to expect losses from the JV, say, beyond Q -- calendar Q1 of 2012. Is that correct?

Yes. You are correct. And I think the joint venture -- we absolutely expect our cost model to be -- the cost to be competitive compared to the sales price. And as you know, the regional government provided cash grant for capital expenditures. The depreciation cost is very low, the working capital is covered, and we have our internal transfer cost for Solar Cell. That's also to be very competitive.

From a current expectation from the first calendar quarter 2012, this joint venture should be break even or generating slight profit.

Great. Good luck with it.

Edward Zabitsky, ACI Research.

I wanted to make Mark work for a little bit. On the gross margin side, embedded in the gross margin in the 18% gross margin, I think you said there was a $1.4 million inventory charge?

Yes. $1.2 million.

$1.2 million? My apologies.

Yes.

So, without it, you would've had a 22% gross margin?

If we exclude that amount, yes.

Okay. Just trying to understand. So, actually, even in spite of the revenue decline in your Fiber Optic business, you actually have better growth margins?

Well, I -- just to be fair, in the last quarter in our Q1 period, the December quarter, we also had an E&O charge that was actually slightly higher. So --.

Oh, okay.

To be fair, that -- it would've also been close to about 4 to 5 percentage points of margin deterioration from the E&O charge in the last quarter.

Right. Take us through -- I mean, in the past, you've said that the gross margin should rise with the (inaudible) and the TXFPs gaining momentum and gaining greater share of your business. When do you think we're going to see that?

Well, I mean, we haven't given any guidance on margins, but what we would say is a couple things. First of all, as we mentioned a few minutes ago, we don't believe that these high E&O charges we've had will continue. There will always be E&O in this area, but we've been having a significantly higher amount due to the end of life of some of these products.

Second, we do see a -- much higher margins on our newer product lines in terms of our forecast. So, once those start to ramp up in higher volume, we do expect to have some -- we'll call it some margin improvement. So, those things should benefit the -- our business.

And then, finally, as Hong mentioned during his part of the call, we are expecting a 10% revenue decline -- an increase quarter-to-quarter in Fiber Optics. And as we have said before, we do expect our Fiber Optics business to continue to see good growth in future periods.

Okay. Very good. And on the Photovoltaic side, the gross margin decline -- was it purely volume related? Or was there something else as well --?

It was purely volume related. That business is operating very effectively and efficiently. It really was just that -- with the high variable margins that we make on those products, any type of revenue decline actually affects the gross margin line pretty significantly.

Okay. Loral -- what was the rough size of the contract that you received?

We haven't given any guidance or any specific figures. The only thing we are going to say is that it is worth tens of millions of dollars, and it is our second largest contract agreement that the Company has had in its history. It's a real win for the Company, and I think Hong wants to give a little bit more detail on some of the benefits of this contract.

Yes, so, this -- Ed, Loral was our first customer when we get into the Photovoltaic space in the Space side. And when we were new kid on the block, they were banking on us. And so far, we have been having a great relationship with them. We're the sole supplier to them. They are the largest commercial telecom manufacturer integrator in the world.

This will be our third long-term purchase agreement with them. And size-wise, they're the second largest one. So, the last one was from them as well.

Do you have 100% of Loral's business? And did you have 100% of Loral's business?

Yes we do.

Okay. So, that's constant?

Yes, absolutely. (Multiple speakers) have any other flavor. We have been serving them, and we were awarded for, what is it, excellence in supplier award three years in a row. So, that relationship goes very well.

What's changed with them in terms of their actual business flow that they're reflecting to you? Is it -- do they have some new wins? Aside from, obviously, renewing their relationship, do they have more business --?

Right.

Flowing through?

For the aerospace side, what they usually do is really negotiate the terms and conditions and quality assurance and product qualification testing plans up front. Then, you enter into a long-term agreement. Then they give a 12-month rolling forecast on the volume demand and -- which will be drawn through the long-term purchase agreement. So, we don't negotiate order by order like very often we experience in the Fiber Optics space.

So, we got a good visibility. We don't have to worry any competitors going in there for the next couple years. And we know exactly what the price is going to be, what the product flavor is going to be. And that helps us a lot in managing workforce and inventory and all of that.

So, that's really -- we got -- in a very good position. Loral is our customer. We are the sole supplier to them. Others, like Northrup Grumman, we announced before -- we are sole supplier to them for Solar Cell and Solar Panel needs. We have a long-term purchase agreement in place as well, and we are in a active discussion on a long-term purchase agreement arrangement with another major aerospace customer, even though we are, today, already a primary supplier to them.

Okay. Very good. I understand. And one more question related to the Parallel Optics, the 12x10, these -- this is, I guess, interesting news. Can you describe the application? Is it an interswitch kind of -- like, let's say between a router and a piece of optical transmission equipment? Is it in a data center? What kind of application are we looking at?

It's mostly in the Telecom central office between different Telecom [racks] and the core routers. It will be to replace the current product of 12x2.5 gigabit per channel or 12x5 gigabit per channel. So, the CXP product is going to be cannibalizing the current -- we call it the SDR or S-12, a Single Data Rate 12 [line], or [D-12], the Double Data Rate 12 [line].

For example, the large -- the enterprise equipment manufacturer, they said, in the future, product platform -- this will be the standard interconnect format. And we expect --.

Very good.

[They] will be taking (inaudible) product start in the early of 2012.

Okay. Can you help us understand the size of this market? The potential? I mean, obviously, there are market estimates for AOCs, but in terms of that specific application, how big could it be for you --?

Yes. It depends on which research report you read. We have seen anywhere projecting from $100 million to $180 million a year in -- by 2012 timeframe.

Okay. Very good. Thank you for all your help.

(Operator instructions.) Alex Henderson, Miller Tabak.

I seem to have dropped my line, there, in the middle of that question. So, I apologize for that.

Anyway, I was trying to ask what you thought the sequential growth would look like within the Cable piece alone, if you just looked at that segment?

Right. And that will be pretty much flat in the June quarter compared to the March quarter.

Okay. So, then, I'm a little perplexed at how I get a 10% growth rate sequentially? By my calculations, you get about $1.5 million out of the ITLA, about $1 million from -- well, a little less than $1 million from the Tunable XFP. What are the other pieces that are contributing to that growth? Is it Cable? Is it Parallel Optics sequentially? I mean, you've still got to offset the phase-out of some of those older products.

Yes, we're going to see, in general, sequential decline of the legacy products, which will be good for us. We will be having $1 million TXFP shipped. We will have sequentially increase in revenue of Tunable ITLA.

And I think in another area we're going to have some really good growth in the June quarter is video transport product, which is [at the] part of the Broadband business portfolio. But, when we wanted -- if we, say, single out the Cable TV-related product revenue, the June quarter is going to be flat compared to the March quarter. But, video transport product will have a pretty good growth. So, that will (multiple speakers) --.

I'm sorry. Isn't the video transport product in the Cable piece?

It's managed by the same business unit, and -- but, application-wise, the video transport product is [already] all different broadband infrastructure. It can be Cable TV, can be telecom and can be private network as well.

So, from -- it depend on which level of granularity we were talking about, but yes, if you say just Emcore Broadband business unit will have some growth, and the growth was coming from the video transport product.

Is it reasonable to think that that, combined, would be up about $1 million sequentially, then?

Yes, I think the Fiber Optics side, in total, we're going to be having about $3 million growth quarter-over-quarter.

Yes. No, I was just talking about the Cable piece within the Optical segment. The Cable piece --.

Yes.

The video piece combined. That's about $1 million increase?

Yes.

Okay. That's what I was looking for. And now that you're seeing your volumes going in the other direction, can you talk a little bit about how much of a push or pull that has on the optical sector margins? I mean, I know you don't want to give specific guidance to the margin number, but can you give us some sense of, as the zero -- near-zero margin older products phase out and as these new products are ramping, you've got a lot of push and pull there.

Can you give us a sense of whether you think margins would sequentially improve more than typical? Or typical seasonal improvement from -- to the June quarter? How do we think about it?

Yes, Alex, there's a few things. First of all, on the product mix side, as you mentioned, with our end of life products, with the very, very low margins kind of moving away and these other newer products taking over, we will see a margin boost from that in addition to the revenue increases that we're expecting. But, in addition to all those things, we are also really focusing a lot on some benefits in terms of cost reductions that we've been implementing.

So, typically, in Fiber Optics land, we typically expect to have 25% to 35% gross margins as kind of a target range. So, we're obviously below that number. We've not mentioned when we expect to meet those levels, but our goal is to be at those levels, and we're working very hard to make sure that we're there in the next few quarters.

Okay. And then, the Parallel Optics -- that's not going to show sequential growth in the near term? That's a -- those products are just being launched? I assume that that's a -- more into the September/December timeframe when they start to ramp?

The Parallel probably -- the revenue will start ramping up early 2012 -- calendar 2012 when the CXPs will start shipping this product in volume.

Okay. So, Cable, Parallel Optics and other are pretty much flattish, then?

Yes. [It] is sort of lumpy. And for the computer cluster applications, it's too program specific. So, it's [lumpy] around -- between different quarters. And -- as I mentioned in the script. And we do have a plan to broadening applications to go into the data center, and -- but, that requires a pretty substantial cost reduction when working with our partner doing that.

When that happened, the Active Cable can have a new and expanded total addressable market, and then that revenue will grow more rapidly. But, at --.

Okay.

This current application level, we expect the cable revenues to be about the same quarter-over-quarter.

One last detail, and then I'll see the floor again. The Terrestrial investment that's not included in the space that would separate out from the Space portion of Solar, can you give me a rough sense of how much that was in the March quarter? And what you think it might look like going forward into the June quarter?

Yes. For Terrestrial, you (inaudible) internal. I mean, it's internal [effort], not [through] the joint venture.

Yes.

Yes, okay. So, yes, as we talked before, it's -- the internal Terrestrial Solar effort for product development and business development roughly about $5 million, $6 million a year total cost. Of course, the acquisition of Soliant will be adding some cost initially, as I'd mentioned, about $400,000 to $500,000 a quarter. But, after a couple quarters, we should be able to have revenue from the rooftop system to offset that.

So, I guess it's running somewhere between $1 million, $1.5 million a quarter currently? And you expect it to step up towards $1.5 million? Is that the right way --?

Yes.

To think about it?

That's right.

Okay.

That will be it. Yes.

Thank you.

Thank you. And that's all the time we have for questions today. At this time, I'd like to turn the conference back to management for closing remarks.

Great. Thank you very much for participating in today's call. Just one last thing. We will be presenting at the Twelfth Annual B. Riley Conference on Wednesday, May 25. We hope to see you there. Thank you.

Yes, thank you for your time today, and we look forward to talking to you soon.

Ladies and gentlemen, this concludes the Emcore Corporation Second Quarter Fiscal 2011 Earnings Conference Call. Thank you for your participation. You may now disconnect.