EMCORE Corp (EMKR) 2011 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Emcore Corporation third quarter fiscal 2011 earnings conference. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will be given at that time.

As a reminder, today's call is being recorded. At this time, I would like to turn the conference over to Vic 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 21E 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 it's business. Such forward-looking statements include, in particular, projections about Emcore's future results, statements about it's plans, strategies, business prospects, changes in trends in it's business and the markets in which they operate. Management cautions that these forward-looking statements relate to future events or it's future financial performance, and are subject to business, economic and other risks and uncertainties, both known and unknown, and may cause actual results, levels of activity, performance or achievements of it's business or it's 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 in Emcore's business that are addressed in it's filing with the US Securities and Exchange Commission, that are available on the SEC's website at located at www.SEC.gov, including the sections entitled Risk Factors in it's annual report on Form 10-K and it's 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 or to changes in it's 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'll now turn the call over to Mark.

Thank you, Vic, and good afternoon, everyone. Today I'm going to focus my discussion on our third fiscal quarter operating results and our balance sheet.

Consolidated revenue for our third fiscal quarter totaled $49.5 million, which is an increase of $2.3 million or 5% over the previous quarter. This was in line with our prior guidance of $48 million to $50 million in revenue.

On a segment basis, our Photovoltaics business accounted for $16.2 million, or 32% of the Company's total revenue. This represents $1 million, or a 6% decline from the revenue for this segment in the prior quarter. The decrease in revenue was in line with our prior expectations for our space solar products business. We believe that the space solar business will continue to experience year-over-year growth, although our revenues in any given quarter may be a bit lumpy. With the higher bookings levels we saw this quarter, we believe that this business will grow over the next couple of quarters.

The Fiber Optics segment accounted for $33.3 million, or 67% of the Company's total revenue. This represents an increase of roughly $3.2 million or 10% from the prior quarter, with the increased primarily driven by higher sales of our tunable products and broadband business, partially offset by a reduction in our legacy products.

As we noted last quarter, we are continuing to move into the end of life stage on a few product lines. We expect to see another $1 million to $1.5 million reduction in these products, from this evolution over the next quarter or two. Hong will discuss this trend in more detail later in the call.

Consolidated gross margin decreased to 19.1% from 22.4% in the prior quarter, primarily attributable to a significant deterioration in our Photovoltaic margin. On a segment basis, Photovoltaic gross margin was 18.6%, which is a sizable decrease from the 30.2% reported in the prior quarter. This is primarily due to three factors.

First, higher departmental expenses, as we geared up for a significant ramp in our business. This is primarily a one-time related charges, and we should expect these to be back to normal levels this quarter.

Number two, a [ute] excursion issued at the beginning of the quarter, that increased our scrap metals. We consider this to be an unusual expense.

Number three, higher start up expenses on new products launched into manufacture -- manufacturing during the period. It is important to note, that we believe that these new products help further differentiate our product line, due to better performance, improved quality, and higher eventual gross margins.

In the fourth quarter, we believe that our margins will improve for this segment. We look forward to updating you in the future on our progress, in terms of improvements in our gross margin.

Fiber Optics gross margin was 19.4%, and 1.4 percentage point improvement from the prior quarter, primarily due to higher revenue. The Telcom and Datacom division is experiencing a product mix shift, as customers 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 calendar 2011. As we increase capacity, and move these new products into full production, we will see an increase in certain start up costs, including NREs and capital expenses.

Operating expenses, excluding the litigation settlement loss in Q3 and litigation settlement gain in Q2, increased $1.9 million from the prior quarter to $19.2 million, primarily due to higher R&D investments, in both our Fiber and Solar segments, and higher stock comp FAS 123(R) expenses. The higher solar investments will relate to the Soliant acquisition, and the higher Fiber Optics investments relate to the tunable XLP product.

We believe the investment level will remain flat, and slightly decline in the next quarter. Our solar CPV joint venture, Suncore, had a loss of $0.3 million for Q3. We expect those losses to increase slightly until the facility is up and running and producing product in volume. Hong will discuss the Suncore strategy and opportunity in more detail.

On a GAAP basis, the consolidated net loss for the third quarter was $11.1 million, a deterioration of $5.9 million from the prior quarter. Of the quarter-to-quarter variance, $4 million related to the change in legal settlement amount. Our GAAP net loss per share was $0.12, versus $0.06 in the preceding quarter. Our non-GAAP adjusted EBITDA, after excluding certain adjustments, all of which are set forth in the non-GAAP tables included in today's release, was the loss of $3.2 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.

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 June 30, the Company had a consolidated order backlog of approximately $66.2 million, which is roughly a $16 million increase or 31% from the prior quarter.

On a segment basis, Photovoltaics order backlog totaled $39.6 million, a 50% increase primarily associated with new contracts signed in the quarter, including the Loral contract signed in May. In addition, we also saw some significant international bookings in the quarter. Fiber Optics order backlog totaled $26.6 million, an increase of 10% from the prior quarter primarily driven by higher backlog in our broadband Fiber Optics division.

Moving on to the balance sheet, during the three months ended June 30, the Company's cash and cash equivalents balance increased to $21 million, primarily driven by the proceeds from the sale of equity. During the quarter, the Company completed it's investment in Suncore, with the $8 million investment. At this time, we do not expect any future investments to the Suncore joint venture. DSO's improved to 68 days, within our targeted range of 67 to 73 days. And we also saw a slight improvement in our inventory turns to 4.9 times.

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 fourth quarter.

Thanks, Mark. Good afternoon, everyone.

As Mark discussed in detail, we achieved consolidated revenues of $49.5 million in the June quarter, within the guidance range of $48 million to $50 million. This represents a 5% sequential increase.

Our revenue in the Fiber Optics segment for the June quarter was $33.3 million, representing a $3.3 million or 11% sequential increase compared to the March quarter. The increase in the June quarter revenue is primarily due to continuous strength in the 40 gigabit and 100 gigabit ITLA products, and our broadband business. The gross margin improved sequentially as well, and we expect the trend to continue.

Our bookings for the Fiber Optics segment in the June quarter was close to $36 million, making the book-to-bill ratio approximately 1.1, which is pretty impressive, given the macroeconomic environment. With the successful Telcordia qualification of our new tunable XLP product and strong backlog, we expect revenue from the Fiber Optics business in the current quarter to increase sequentially again. In addition, we are expecting strong bookings in our tunable XLP product line from Tier 1 customers.

Now let me discuss the market dynamics, and our position in each of our major business areas. Let me start with the broadband Fiber Optics business first.

We continue to experience -- above demand for cable TV equipment in the June quarter. Furthermore, we continue to expand product offerings to our current customer base. The new products, who are the most (inaudible) effective solutions to harvest additional bandwidth on the existing HFC infrastructure. The full band Quadrature Amplitude Modulation transmitters, or QAM transmitters continue to be the leading solution for this application.

Our vertically integrated structure, from semiconductor laser and detector chips, to transmitter subsystems serves us well. Demand for our RFOG product line, which stands for Radio Frequency Over Glass Fiber, in which provide a last-mile fiber optics solution, in the traditional hybrid fiber coxial network utilizing passive optical network transceivers, has been picking up significantly. This is becoming an increasingly viable solution to operate an HFC network to an all-optics solution.

In addition, the next generation DVI video transfer products we recently introduced, are starting to generate meaningful revenue and business focus with customers. This product line delivers approximately 50% of gross margin.

To summarize, our broadband Fiber Optics business continues to show strong results. New products introduced within the past year, account for a significant portion of the current revenue. And as new products, in terms of what (inaudible) with a competitive advantage.

Now let me discuss our telecom Fiber Optics business. The revenue from the tunable lasers and ITLA sales into 40 gig and 100 gigabit per second applications grew more than 20% quarter-over-quarter, and it reached a new record in the June quarter. We shipped volume products to a new Tier 1 customer this quarter, which contributed to the revenue growth for this product line. As we discussed in the past, our full band tunable external cavity laser-based products have become the laser of choice, for the 40 gigabit and 100 gigabit market for coherent systems.

In our tunable XLP product line, we made some significant strides. Our tunable XLP products have been shipped to more than 15 telco customers for qualifications. Customers are extremely impressed with the performance of our module, and are designing in our products as 300 pin tunable transponder replacement.

Despite the progress made on many fronts, we fell short of our $1 million revenue expectation in the June quarter, due to the timing of completing Telcordia qualifications, which was finished at the end of the quarter. Completing Telcordia's qualifications historically, has a major challenge for suppliers, and we believe that Emcore is one of the only two companies that have achieved this milestone for tunable XLP product so far. We are at the final stage, of the multiple customer qualifications after concluding our own product qual, and expect to secure more Tier 1 customer qualifications this quarter. We believe that the adoption of a higher performing tunable XLP for replacement of an incumbent 300 pin transponders is just starting, since the majority of tunable XLP products shipped to date have been for fixed wavelength XLP receivers.

Emcore is in an excellent position to address this premium market with a differentiated performance, and this has always been the cornerstone of our product strategy. We continue to believe that our designs are one of the few in the industry, which will be successful at cannabilizing the $300 million to $400 million market currently served by 300 pin transponders. As discussed in our last conference call, market demand for tunable XLP products is expected to grow at over 100% year-over-year over the next four years. As we look out over the next few quarters, we believe that the favorable market conditions will bode well for increased order activities in tunable XLP. And our new tunable XLP products should improve our overall operating performance as we exit this year, and enter into fiscal 2012.

Today we are producing the tunable XLP modules in our facility in the Bay area, meeting the targeted yield and throughput requirement. Concurrently, a second line is being built at our contract manufacturers overseas. We expect to finish our process integration, and (inaudible), and be in (inaudible) production in the current quarter.

We have been developing parallel optics-based 12 by 10 gigabit per second CXP transmitters and receiver modules for a high end core router and enterprise applications. During the June quarter, Emcore was selected by a leading Datacom system integrator for this next-generation optical products, which include both active optical cable, and a pluggable module for high-speed interconnect, from 40 gigabit per second to 150 gigabit per second aggregated bandwidth dilution. Our first commercial shipments are expected in early 2012.

Another parallel optic product is active cable. Today the active optical cables are used primarily in the high performance computing clusters, replacing heavy and rigid electrical cables. In this product area, we're the leading supplier with Emcore active cable products, connecting four out of the top six TOSA supercomputers in the world, including the number one and number two process supercomputers.

The revenue from this product line, however, has been lumpy due to its nature of primary use in supercomputers. In addition to expense, the total addressable market, we have developed an application to expand active optical cables through computer servers and ethernet. And we expect substantial revenue from this application to start before the end of the year.

As noted a few quarters ago, within our current product portfolio, there are some products which are either approaching the end of their lifecycle, or we are no longer competitive in cost. We have largely completed the product transition, and our current levels of end of life products is about $1 million to $1.5 million in revenue. We believe that revenues from these new products will offset the decline of the legacy products in the future periods. And now gross margins will improve, due to a better product mix.

Now let me move on, to give you an update on our solar Photovoltaic business. As we have discussed previously, the revenue in our space Photovoltaics business can be somewhat lumpy due to the program timing. In the June quarter, we experienced an expected sequential decline of about a $1 million. However, we have secured at a healthy level of purchase orders, and a multi-year supply contract of $111 million over the past 12 months.

The backlog for delivery within the next 12 months, increased sequentially from $25 million to $29.6 million. As a result of strong bookings, we expect the revenue to grow on an annual basis into 2011 as well. Our cumulative annual [growth] rate of the space business since 2004, has been over 15% year-over-year. The result is even more impressive when you consider that the majority of this growth rate was achieved through gains in market share. We expect this market to continue to grow at a 5% to 10% year-over-year, and although it could grow the business at a higher level by taking additional share, especially in government application.

One key way that we are differentiating ourselves is by our technical superiority. In the June quarter, we've made strides in improving our solar cell performance, for applications in both space and terrestrial (inaudible) systems. We have achieved in a new world record performance, measured on a four junction inverted metamorphic, our IMM space solar cells, with a conversion efficiency in excess of 36%, in their displacing elimination conditions. A flavor of this design was successfully deployed to orbit (inaudible) on the final mission of the space shuttle program last month. Concurrently, a similar three junction IMM design for CTV application has reached a 43.5% conversion efficiency and a 300 X concentration, matching the world record reported a couple of months ago.

The improvement of solar cell conversion efficiency is the key to reducing the overall system cost for our customers. We have established manufacturing infrastructure for IMM solar cells over the past year, and we are confident that this advanced product will enter into [welding] production phase in the near future. Last quarter also marked a major shift in the solar product mix, where our customers transitioned to the latest and most advanced designs, for both space and terrestrial products.

As a result in the June quarter, we saw a record high product mix on the production floor. This transition resulted in higher than anticipated material and labor costs, and lower overall yield for the June quarter.

In the June quarter, we also incurred higher costs in labor and lower overhead absorption due to hiring, redeploying and training of the new workforce, in anticipation and preparation of significant (inaudible) revenues in the following quarters. This significant business shift and their impact on labor and material costs adversely impacted the margin in the June quarter. However, the product transition is complete, and we expect that gross margin will improve significantly in the current quarter, and be accompanied by a substantial increase in space [CPV] revenue, as we ramp up to meet the growing needs of some of our satellite customers.

Now let me give you an update on the recent developments of our terrestrial CPV business, and our CPV joint venture. Early in the June quarter, we successfully completed third party testing, certification, and listing of our GEN-III CPV modules to IEC, UL, CEC, as well as OSHA and NRTL standards. The test results confirm that our GEN-III CPV module fully satisfied the product safety performance. This is a significant achievement. Our CPV module is among the first to fully comply with all sections of most current industry standards and requirements. This certification and listing should provide additional confidence to our customer base, in the performance and the reliability of our CPV product.

]Regarding CPV product [comps] in capacity of CPV joint venture, Suncore photovoltaic is in the construction phase of the facility in the Huainan city of China, which is a plant to be capable of producing 200 megawat CPV modules per annum. The facility construction is on schedule. We expect a joint venture manufacturing lines to be up and running for producing CPV components and systems by the end of October 2011.

During the facility construction phase, the Emcore and Suncore teams have been working very closely over the past several months to transition to GEN-III CPV manufacturing processes to Suncore's temporary facility in Xiamen. The manufacturing process and training is predominately complete, and GEN-III systems made in China successfully obtained certification by China qualification center with the new generation -- with GEN-III product. With that our GEN-II product officially qualifies for Chinese terrestrial solar market.

During the June quarter, we also completed our entire $12 million capital contribution requirement to the joint venture. With the capital contribution from the shareholders, and a significant cash and land grants from -- that central received from Huainan city, the joint venture has a very strong balance sheet to execute it's business plan for facilities build out, capital equipment purchase, and the initial working capital to cover the production.

As we discussed last quarter, at the end of March, we acquired certain assets of Soliant Energy of Monrovia, California. Soliant Energy was a leading provider of CPV systems for commercial rooftop applications. The integration of the operations to our existing facility in Alhambra has been completed and successful. The addition of the rooftop CPV product line gives Emcore the immediate access to the multi-billion dollars of rooftop CPV market as reported by Greentech Media. (inaudible) and expanded recently an existing (inaudible) product offerings.

With the successful certification of IEC, UL, and CBC listing of our latest CPV module, combined with the establishment of a low cost manufacturing joint venture, positions Emcore to supply the most competitive and high-performance CPV systems in the industry. We believe that we have most of the critical pieces to be successful in the solar business, and our key focus moving forward is to establish strong capability to build the business pipeline.

On the revenue outlook for our fourth fiscal quarter, we expect consolidated revenue to be in a range of $51 million to $55 million, which represents a 3% to 11% sequential revenue increase. We expect the growth to be from both the Fiber Optic and Photovoltaic business segments. In the quarter, we will continue to solidify our strong market position in our more established (inaudible) Photovoltaic and broadband Fiber Optics businesses.

At the same time, we will focus on booking orders and capacity buildup of the tunable [XLP] production, so that we will be well-positioned for a significant ramp-up in demand. In addition, we will bolster our effort in business development and project development for our terrestrial CPV. Overall, we feel that in this quarter, we'll begin to illustrate our new product line up, and the results of our business strategy and strong execution.

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

Thank you, sir. Ladies and gentlemen, we'll now begin the question-and-answer session.(Operator Instructions).Our first question comes from the line of Edward Zabitsky with ACI Research. Please go ahead.

Good afternoon, guys.

Hi, Ed.

Hi, I wanted to ask first of all, on the newer type TXFP products what maximum distance you are quoting? And when you expect them to be available?

The distance of our product is 40 kilometers I believe that is our main specification. And I know for different customers they have different specific -- specifications we will be introducing a few derivatives based on our main design to address the different distance needs.

Okay and time frame?

They are 40 kilometer right now, is general availability, and a different derivatives is really achieve through performance spending, so it can be immediately available, it doesn't need additional development.

Okay. And on the TXFP again, are any of the OEMs looking at a wider tune ability as an important factor?

I believe our products, from the tune ability point of view is about the best. We offered the full band tune ability, that is really works well for most of our customers who are asking for that kind of specification. And we heard that common -- some of the products in the development phase by our friends in the same industry (Technical Difficulties).

(Technical difficulties -- no audio).Mr. Zabitsky, your line is now open again, sir. Can you please continue with your question?

Thanks very much. So, Hong, I believe you were just telling that -- me about [JVS's] actions or JVS's product in relation to wide band or wider tune ability for TXFP?

I did not talk about that specifically, but just in general terms. Our designs -- our product design enables our customers to achieve the full band tune ability, While we heard some comments from our customer base that some of the products that they are looking into can, provides partial tune ability or the C band. So I think it is from the tune ability side, your question addressed, will our product should be able to cover our customer requirements.

Sure, now is it, does it matter to them in the near term, is this a factor in the purchasing decision?

It's certainly -- they prefer a full band tune ability, and I think that certainly is a perk. I don't know if that is a determining factor, in our products is the only one being used or not.

Okay. And then the contract manufacturer, I'm wondering if the ramp is still on schedule?

Yes, largely. One assembly equipment was delayed for a couple of weeks, but as I said this quarter our expectation has been that in signing off our different process specifications, and getting the processes integrated and producing parts to Delta qualification, and inviting customers to come into do audits, from that perspective, we are still on schedule. We as I said, expect the long contract manufacturers to be ready for volume production in this quarter.

Okay, so, okay, that explains it. And could you give us a sense as to what was the driver for the higher cable revenue? You said something about the full band QAM product? Was that the main driver or what was -- what made it grow?

So we talked to many customers in the broadband equipment manufacturing space. They were commenting that about two-thirds of their revenue, are from the domestic infrastructure upgrades, and about one-third of their revenue is from the overseas market. So I would say the driver is from two-fold, one it is the domestic's cable TV infrastructure operate, and the other one is the emerging market internationally.

Okay, very good. I have one question for Mark, on the photovoltaics gross margin. Obviously, it is a significant number, so could you tell us how much scrap there was in Q3, please?

Yes, it was a little bit less than about -- the excursion issue was a little bit less than $400,000 of loss for the quarter.

$400,000. Okay. And in terms of the yields, is it just part of the normal ramp that you are seeing lower yields?

That is normal. (technical difficulties) It actually was very interesting. Our yields were fairly high in April and May. And actually, in June, at the beginning of June we saw little bit of a reduction our yield. And for us, just a percentage point or two of production in yields, has a significant impact in our gross margin. So we ended the quarter actually getting back to our normal levels. So far in July, we are pleased to announce that our numbers are actually at or above our normal historical range. We feel very good, about where we are going into the quarter.

Good, good. So just to sum up, basically do you expect both sides of the business to grow this quarter, and gross margins to go up on both sides? Is that fair?

Well, on the -- definitely on the Photovoltaic side, we're seeing that -- on the -- with the end of life products that we have been talking about, that does cause a little bit of volatility in our margins. But overall, we believe that throughout this -- and going into next calendar year, we will see a nice significant increase in gross margins on both the fiber and Photovoltaic side.

And do you expect revenue for both groups to grow this quarter sequentially?

Yes, what Hong mentioned, is that we do expect to be flat or up with our optical revenues, and we do expect to see a fairly nice ramp in our Photovoltaic business.

Okay. I just wanted to confirm that. Thanks very much.

So the visibility and the outlook for Solar and Photovoltaic side, more firm. And the range we guided for revenue was largely, to have direct in the fiber optics area. So as Mark said, in the worst case it is probably flat, and we do expect sequential growth in the current quarter, from Fiber Optics side.

Okay. Thank you.

Thank you.

Thank you. Our next question comes from the line of Cobb Sadler with Catamount Advisors. Please go ahead.

Hi, guys. Thanks a lot for taking the question. I had another question on the tunable XFP in the applications. So you are primarily focusing on the 300 pin replacement opportunity, and not the fixed XFP, as I understand it. Is that correct?

Yes, I think the 15 or 16 customers that we sent samples to for our qualifications, as far as we understand most of them are targeting for the 300 pin replacement.

Got it. And I guess JDS is targeting the fixed XFP pretty heavily, so do you think you could be the largest supplier of 300 pin tunable replacement parts, or is it too early to say?

That has been our product strategy. So, I think from our experience so far, it is probably cannibalizing 300 pin transponder's, it takes a little bit of a longer time because they have to redesign their line cards. It is not the same form factor as your replacing fixed wavelengths of XFP, So but, yet ultimately I think our product strategy to cannibalizing 300 pin transponder market will really shine in that area, because our product performance.

Okay. And do you know if there is a third vendor that is through the Telcordia process, or materially through the Telcordia processor, or do you have that kind of visibility?

Not as far as we know, from the public announcement or from the customers comments.

Okay. And other 15 trials, tough question, what you think the hit rate might be? Would you expect to get the majority of those as customers, or would it be fewer than that?

Yes, so we, right now get allocated from two major customers so far. That means they've finished qualification -- of our product they finished qualification of our product integrated into their systems. And they have released for production, and we are getting share allocation. Our expectation is, before the end of this quarter, we are going to [drill] that number from four to five. But it among 15 to 16 customers we send our product for qualifications, there is a range of their progress. So again, as I said, our expectation is, four to five will reach to the finish line by the end of this quarter.

Okay. And when do you expect -- I guess your internal production capacity breaks out for tunable, is what, a $2 million, or $1.5 million a quarter? Is that correct? I guess, when do you expect to start using the content manufacturer?

I think for product shipment the majority of the products in the current quarter will be served to our Bay area manufacturing. But I think our expectation is to have customers sign off the production line on our contract manufacturers overseas, by the end of -- before the end of this quarter. And this we will be shipping the volume product to customers -- the majority of the product will be shipped from contract manufacturers in the December quarter.

Okay. And the $1 million target, I mean could you possibly do that in this quarter, in the September quarter?

The target is for the September quarter, yes.

Okay, that's the new target, got it. And then last question is on the parallel optics. Can you remind us how big of a business that was for you, a couple of years ago? And so --

I'm sorry, go ahead

And then also when do you think the Generation II awards will be made? And who do see, I guess it has been heavily [Adagio]. And then for Generation II, it sounds like there may be some other players involved like yourself and major networking vendors. SO when do you think those awards will be made?

Yes, so to answer your first question, at a historic level a couple of years ago, before we had ITC ruling, the parallel optics revenue was at a $4 million to $5 million a quarter. So right now, that revenue from parallel optics dropped, to about $1 million to $1.5 million a quarter. And as I said that, we were (inaudible) selected as a supplier, to meeting Datacom customers, for supplying parallel optics next generation products. We believe, including us, two, three strong players are in the play. And the final product of qualifications is going to be before the end of this calendar year, and the volumes will be start picking up early in 2012.

Okay. Okay, got it. Sounds very good. Thank you very much.

(Operator Instructions).Our next question is from the line of Alex Henderson with Miller Tabak. Please go ahead.

Hi, guys.

Hi, Alex.

Hi, Alex.

So I just want to make sure I got the information straight. You are saying that the tunable XFP target for the September quarter is now $1 million?

Yes, because the delay in our customer are finishing the qualifications in utilizing in their systems. So we missed our target in the June quarter to achieve a $1 million revenue. And but we expect right now, in the September quarter, we will be able to reach that level.

Well I'm a little confused. Why would you be shifting an entire quarter, based on that timing of that Telcordia announcement? Telcordia announcement was certainly well within the window for, for full shipment this quarter. And if your production is up to the target, that you said in your base facility, you ought to be able to produce considerably more than $1 million.

Yes, you are right. It is not a problem that we don't have product, or we don't have qualified product. We have qualified product. We have the capacity, but our customers -- there is a timing issue. Before they finished their qualification, they wouldn't be buying the same flavor of product to any risk by, before they released to production. And that as of now, there is just two customers that have released to production, we should be seeing the demand, asking for us to ship the product to their production. And most of the others, they buy enough parts to finish the product qualifications, and integration at their level. But they are not ready to permit on-site volumes, because there product production schedule, they have to look at other components as well.

You did make comments in prior periods that quote, you are totally qualified that two customers that are waiting on capacity availability. And now you are telling me that you have capacity availability, but you're not able to ship to those customers, because they are not taking the product. That doesn't seem consistent with your past comments. Is there some reason why the customer are now less interested in taking quantities immediately?

Alex, you are right. And that is part of our confusion and our frustration as well. Before we finish the qualification, we were told that they are ready to go, our product is qualified. But when we finished our qualification, and they released to the production, it's taking them a little longer to run through the volume. So, again, I don't think we did an extensive look into the situation. I don't think we're losing our stuff. As the number two, I think we believe for 300 pin replacement applications, we are on the top spot in many places. I don't think that we lost that. It just seemed to take longer time for them to getting this new form factors integrated into their long card, and ramp to production.

What is the capacity availability at the base facility at full production?

So our facility in full production for the Bay area, would be 2000 to 3000 parts per quarter. And our contract manufacturer would be about 10,000 to 12,000 per quarter.

So you had said, that the 2,000 to 3,000 units per quarter run rate capacity would be completed by the end of the June quarter. Is that currently the case?

Yes, we have the capacity in the 2,000 and 3,000 pieces in place, in the Bay Area right now. And clearly, the contract manufacturer capacity is being built up, and we are not there, at the 10,000 to 12,000 yet

But you had said that you would be there, by the end of September. Is that still the target?

Yes.

Okay, so production is on the exact same slant that you had given at the end of last quarter, in terms of your target. The only thing that has shifted, is the willingness of the customers to take product in the window.

Right, and the timing --

And when they come on, is there any reason to believe that they won't come on in the larger volume than the near sampling volumes, that you were stuck with when you barely had capacity? I mean I'm a little surprises that they would come on at such a small amount, given the availability of the capacity. Usually the ramp up of those products is a little bit more discontinuous than that.

Right. I think we have talked about it a lot. And certainly, we were expecting a strong demand for this, after our qualifications, but it has been a little bit low, as I said. It may have something to do with that application, is the replacement of 300 pin transponder on the line side. And it probably is more disruptive for them to design and qualify on the line side, a different form factor product compared to a application for replacing fixed wavelengths tunable XLP, on the line side.

So you think it's a function of the redesign of the blade, that is taking a little longer than you anticipated?

That our understanding at this point.

All right. Just for the record, there are two other companies other than yourselves, that have publicly stated they have done completed Telcordia testing on their tunable XFP's So just for the record.

Okay.

Can you talk a little bit about your expectation for growth in the ITLA side. You are up better than your 15% to 20% growth target for the current quarter. You're going into the back half of the year. Obviously, that area is the fastest growing area in the optical segment. Is it reasonable to think that you could be producing another 15% to 20% growth quarterly into the back half?

Yes, so the tunable ITLA application is due to 40 and 100 gigabit's (inaudible) in the coherency side. We have experienced a very robust growth. In the last couple of years, we have doubled the revenue twice, kind of doubled the revenue in 2009 and doubled the revenue in 2010. And sequentially in the June quarter, we experienced that are then 20% of quarter-over-quarter growth. But in the September quarter right now, we expect at least at the same level as June. And we -- revenue guidance, we give a range, because we are a little cautious in listening to the equipment manufacturers and their outlook for the future. We feel a little uncertainty, but one thing we are pretty certain that we will be at least getting to the level of revenue in the June quarter.

I'm sorry, so you're telling me that the ITALY business, which is 40 gig, 100 gig, that your customers are saying that? Or are did you just listen to their conference calls? Because I haven't heard anybody tell me, that 40 gig, 100d gig market had slowed.

Right, I haven't heard that either. And that was more on the macro level, and what would cause us -- I do expect to grow sequentially -- is it 20% of 15%, it is hard to tell, but that at least, it is going to be a positive trend in the September quarter.

So has any of your customers come to you and said, gee, we've been taking product, and we are slowing our expectations down? Or is this just because you are reading the Wall Street Journal like the rest of us, and scared about the inactivity in Washington? (Laughter). So what is the data point that suggested some slowdown in that business?

Yes, so it is more the latter. It's not -- it's no specific customer came to us and said, hey look guys, I'm telling you we are slowing down. There is no single customer coming to us telling us that. We're just -- we're just cognizant of everything else.

And on the cable side, am I assuming that, that is fairly, sequentially flattish in your expectations, because that is the normal pattern?

Yes, the cable side is interesting. It does not exactly track the trend, in a traditional telecom side. And we have been experiencing a pretty robust growth in the first half of the year. And we are reading the equipment manufacturers, their CapEx plans, which is probably (inaudible) available. And looks like, they at least are holding the demand steady, for the areas that -- where they need our equipment, which is the operate and scalable infrastructure deployment. So the backlog actually discussed in the fiber optics area, we still see a sequential increase. And that is pretty encouraging, and most of the backlog increase was from the cable TV area. We expect a sequential growth in that product for the September quarter.

Okay. So one more question. On the phased out products, you made the comment that the costs -- in the -- for the gross margins in the third quarter calendar, your fiscal fourth, would be experiencing increased pressure as a result of phasing out of older products. Yet, my understanding is, that, that business is coming down pretty hard. I would think that, given that there is essentially no margin attached to it, that the elimination of a no margin product would help your margins, not hurt your margins. Is there some end of life scrapping assumptions going on there? What is the mechanics around that? That caused you to make a cautious comment on gross margin?

I probably confused you. Sequentially, our fiber optics consolidated gross margin increased by 1.5 percentage points.

I know, but it was the guidance, you made a negative comment on.

The guidance, we going forward, we only have exposure at the revenue level at about $1 million to $1.5 million per quarter from the legacy products. While we stop the legacy product, the gross margin is going to increase because of better product mix. You are absolutely right. Those products, while they contribute into revenue, and (inaudible) our negative gross margin. So we are not interested in continue the sales of those products at all, but we have to view a goodwill with a customer base, to gradually and gracefully in putting those products --

There is nothing new about that. And you made the comment relative to the first question set that was asked, that when asked about revenue growth and margin expansion, in both segments, you said, yes revenue growth in both segments. But we would expect margin expansion only in the solar. And I know I'm a little confused about why that would be the case. And when asked, when you responding to that, you had said, that the phased out products were weighing on the numbers in the September quarter. I don't understand why that would be the case, if they are half what they were in the June quarter, and in the September quarter?

Maybe I can clarify little bit. (technical difficulties) So we can actually expect, that as you probably know, to be pretty much to be out of the end of life products, early by the end of June. But we are still getting demand for some of these products, where we still have some inventory. So, right now, by the end of September, we thought it would be to zero. And right now, we are expecting to still have some revenue going forward into September quarter. And right now, how we're looking, there may be some of that will be actually tail off the beginning of October, November.

Well, that doesn't explain why it would hurt your margins though, it still is less than it was in the prior quarter. It should cause your margins to expand.

There is, but and the only other item that we still are working through, is we do have some inventory, that we still have, that we are basically buying, and we are looking to sell to customers. So obviously, there is some still associated with that this quarter. This quarter fell substantially, but it still is close to -- a little bit less than $0.5 million per quarter, that we actually have in the business.

Well, you are still not act answering the question, Mark. The question is pretty straightforward. Why did that cause a decline sequentially in the margins in the optical business?

Well, we -- I'm sorry, obviously, we never said that it would cause a decline -- (Multiple speakers).

In your response to the questions earlier asked, earlier on the call, the question was asked, point blank, do you expect revenue growth in margin expansion in both businesses? The answer was, yes, revenue growth in both businesses. Margin revenue growth in solar. But you declined to imply that there would be growth in margins, implying that it wouldn't grow, implies that it will probably decline be flat. And why would that be the case?

So why don't we clarify then that comment, Alex, since you brought up. And that's a good point. We expect our margins to be flat to up next quarter. The only things we had mentioned, that our revenue would be flat to up next quarter. So that would then lead our margins to also be, flat to up.

Well, wouldn't the decline in that business, from June quarter to the September quarter still positively impact the margins? And since, the products that are coming on are higher margins, shouldn't that positively impact margins?

I mean, Alex, we sure do hope so. And that is what we are definitely going for that. But that's the guidance -- that's the guidance that we are giving out today.

Okay. Thank you very much.

And Alex, we are not expecting the margin for Fiber to go down. And it is really -- the worst case, it is flat, and it should be going up. There is no reason, for it to be not.

Thank you. Our next question is a follow up question from Edward Zabitsky with ACI Research. Please go ahead.

Thanks very much. Excuse me -- I wanted to ask a little more, just on the reasons for caution out there. One is, of course the inventory, and another is China. Now with inventories, it appears that the areas that have the most inventory, are areas where you guys just didn't play in the last few cycles. You haven't really been in the telecom market in a big way, since X 2, at least as far as transceivers go, and its impact. So I'm wondering if, you think maybe that protected -- buffering you from the inventory cycle that is going on, number one? Number two, I understand that you have limited exposure to telecom in China. I'm wondering if you could just comment on that? And number three, would be -- do you see growth for broadband in China, with the latest broadband initiative?

Okay. So, you're absolutely right, Ed. We do not have as a broad product portfolio, as the industry leaders in this area. So we did not see as broad an impact to the demand, from the reported inventory issues in a China slowdown. So that's why, we probably on a different trajectory, compared to our friends in the same area. While you see most of the companies probably experiencing a revenue decline and guided down sequentially, we have achieved better than 10% sequential growth in the June quarter, and we expect to continue to grow in the September quarter. And that is the very reason, that we do not have exposure on as broad a product, which was saying that, it had revenue impact -- an inventory impact. And also I think another reason is the R&D investment in our product lines in the last few years, starts paying dividends, that we have that continued strength, because the majority -- well, a lot of the revenue, a high percentage of revenue is from the new product.

As for say, revenue from China, the mix has been very slow -- was very low in the past, less than 10% of our revenue from China. And going forward, we have a couple of customers have jumped onto the top ten list, the Chinese customers. So we certainly gaining more traction in China, and deriving more revenue from the Chinese market. We are growing in that market.

Would that be telecom or broadband?

In both, one is the broadband customer, one is the telecom customer. So the broadband, actually we have been seeing a very healthy growth. And the broadband product we sell to China is primarily through our distributor. And I think this year, we will be achieving about 20% growth compared to last year. So the broadband, we have more of at play at component level than the packaged lasers and packaged receivers (inaudible) and that helps.

Okay, is there, it just seems, obviously you're not going to give guidance for the December quarter at this point. But with the TXFP ramp, and assuming that, that occurs in that quarter, late in this quarter and going into the December quarter, shouldn't we see another good -- another very good revenue quarter from both sides of the business?

I think from this point, I'm not going to give a number, and say how much revenue we are going to be for the December quarter from the tunable XLP. But I definitely expect the trend will be positive, because we are getting more and more customers to the finish line of the products qualifications and the validations. As that happens in most of the places, we are in the number two slots, in a couple places, we are in the number one slot, so I think that is going to be materialized. In the end, it is going to be materialized more and more over time.

Is there any chance that you will do significantly better in the tunable XLP this season in this quarter? Is there any evidence, any suggestions that those line cards are out market right now, and that maybe there will be some pull in the near future?

There is always a chance, but we thought for the June quarters, we would be able -- they would come -- they come a little slow. So I am just a little cautious, to be more optimistic than I am right now, on the September revenue from tunable XLP.

Right. But there is nothing telling you now to get really excited in the short term about that revenue, but nothing telling you that it's impossible at this point?

Exactly. Yes.

Okay. Great. Thanks very much.

Thank you.

Thank you. And at this time, there are no further questions. I would like to turn the conference back to management for any closing remarks.

Great. Well, thank you for dialing in today, We apologize for the technical difficulties. Just for your information, we will be presenting at the Morgan Keegan technology conference on Tuesday, August 9 at 4.25 PM in New York City, in the New York Palace Hotel. And we will also be presenting at the Citi Technology conference on Thursday, September 8 at 1.35 PM in the Hilton New York Hotel, in New York City as well. We look forward to speaking to you soon. Thank you again.

Thank you, sir. Ladies and gentlemen, this does conclude the Emcore Corporation third quarter fiscal 2011 earnings conference call. Thank you very much for your participation. You may now disconnect.