EMCORE Corp (EMKR) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Emcore Corporation fourth-quarter fiscal year 2011 earnings conference. At this time, all participants are in a listen-only mode. Later, we'll 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'd like to turn the call 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 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 our expectations and projections about future events and financial trends affecting the financial condition of our business. Such forward-looking statements include, in particular, projections about our future results, statements about our plans, strategies, business prospects, changes in trends in our business, and the markets in which we operate.

Management cautions that these forward-looking statements relate to future events on our 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 our business or our 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 our business, that are addressed in our filings with the US Securities and Exchange Commission, that are available on the SEC's website located at www.SEC.gov, including the sections entitled Risk Factors in our Annual Report on Form 10-K and our Quarterly Reports on Form 10-Q. We assume no obligation to update any forward-looking statements to conform such statements to actual results, or to changes in our 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 and happy holidays, everyone. Today, I'm going to focus my discussion on our forth fiscal quarter operating results and our balance sheet. In addition, I will update you on the initiatives we have undertaken since September 30th. Please note that the effect of the flooding of our contract manufacturer's facility in Thailand is not reflected in our Q4 results. Hong will discuss the impact of the flood later in the call.

Consolidated revenue for our fourth fiscal quarter totaled $52.1 million, which is an increase of $2.6 million or 5% over the previous quarter. This was in line with our prior guidance of $51 million to $55 million in revenue. On a segment basis, our Photovoltaics business accounted for $21.2 million, or 41% of the Company's total revenue. This represents a $5 million or 31% increase from the revenue for this segment in the prior quarter, and was an all-time high for the space solar 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 as illustrated with our significant increase in Q4.

The Fiber Optics segment accounted for $30.9 million or 59% of the Company's total revenue. This represents a decrease of roughly $2.3 million or 7% from the prior quarter, with the decrease primarily driven by lower sales of our broadband business and our end-of-life products. The key accomplishment in the quarter was hitting revenue of $9 million from our Tunable Laser product. Consolidated gross margin was flat at 19% from the prior quarter, primarily attributed to a significant improvement in our Solar division, partially offset by a decrease in our Fiber division.

On a segment basis, Photovoltaic gross margins increased to 21%, and was driven to a return by the 30% gross margin level for our Satellite Solar business. This was due to higher revenues, partially offset by lower margins from the Terrestrial Solar business. In the first quarter, we believe that our margins should improve for this segment. Fiber Optics gross margin was 18%, a 1.4 percentage point decrease from the prior quarter, primarily due to lower revenues and excess and obsolete expenses. Operating expenses, excluding the impairment loss and litigation settlements, decreased $2.8 million from the prior quarter to $16.4 million, primarily due to lower R&D expenses in both our Fiber and Solar segments and lower stock comp FAS 123-R expenses.

We recorded an impairment loss of $8 million in the quarter related to our Fiber Optics segment. Our Solar-CPV joint venture, Suncore, had a loss of roughly $1 million for Q4. We expect those losses to decrease over time as Suncore begins producing product and volume. Hong will discuss the Suncore strategy and opportunity in more detail.

On a GAAP basis, the consolidated net loss for the fourth quarter was $14.3 million, a deterioration from $11.1 million, as reported in the prior quarter. Excluding the impairments and litigation settlements, the net loss fell $3 million quarter-to-quarter. Our GAAP net loss per share was $0.15 versus $0.12 in the preceding quarter. Our non-GAAP adjusted operating loss after excluding certain adjustments, all of which are set forth in the non-GAAP tables included in today's release was a loss of $1.4 million, an improvement of $2.3 million from prior quarter. 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. As we continue to analyze the impact of the flood on our Fiber Optics business, we will only be providing our Solar backlog at this time. At September 30th, the Company had a Solar order backlog of approximately $43.5 million.

Moving on to the balance sheet, at the end of September, the Company's cash and cash equivalents and restricted cash balance was $16 million. DSOs improved to 60 days, better than our targeted range, and we did see a slight improvement in our inventory turns to five times. In order to improve our financial position, the Company has moved quickly since September 30th, to make some significant improvements. First of all, in November, we implemented various cost reductions, including salary and discretionary spending cuts. We believe that those actions have reduced the Company's cost structure significantly for the time being. The salary reductions are a temporary measure that reduces the cash burn while we are rebuilding our Fiber Optics production infrastructure.

Second, we are working with our key suppliers to expedite the building of our manufacturing line, which Hong will be discussing later. As part of those measures, we have extended payment terms on our payables to provide us with additional flexibility over the next 12 months. In addition, our manufacturing partner will also assist in financing the rebuild of our manufacturing lines at their facility. This will help us finance the CapEx needs while we wait for payment of our insurance proceeds. Third, we've also signed agreements with certain customers, to receive pre-payments for future shipments. This allows us to replenish the inventory and fund other working capital requirements.

Fourth, we amended our line of credit with Wells Fargo to increase the amount the Company can borrow under the agreement. This gives the Company up to $14 million of additional liquidity and borrowing base than otherwise expected. And finally, we are working with our insurance carrier and our contract manufacturers' insurance carriers to receive proceeds from the flood. Regarding the insurance coverage, Emcore had business interruption insurance through its own carrier. We expect to receive $5 million by January for those claims.

In addition, our contract manufacturer has insurance coverage related to consigned inventory and equipment. We are working with them to finalize the claim, and begin receiving proceeds. While the amounts and timing of those receipts are uncertain, we are working to maximize our recoveries. We believe that these measures significantly improve our financial strength and we are confident that we can recover from this crisis caused by the flooding in Thailand with regained business focus, and in a good financial position.

In terms of our SEC 10-K filing we expect to file the 10-K by the December 29th deadline. With that I will turn the call over to Hong, who will discuss the impact of the flood in Thailand, the Company's strategic and operating initiatives, and provide revenue guidance for the first fiscal quarter.

Thanks, Mark. Good afternoon, everyone. As Mark discussed in detail, we achieved consolidated revenues of $52.1 million in the September quarter, within the guidance range. This represents a 5% sequential increase.

Our revenue in the Fiber Optics segment for the September quarter was $30.9 million, representing a 7% sequential decline compared to the June quarter. This was primarily due to the revenue decline from legacy and broadband products. The revenue in the Solar Photovoltaic segments for the September quarter was a record high of $21.2 million, which represents a 31% increase compared to the immediate preceding quarter. The consolidated gross margin for the Solar segment was 21%, which represents an increase from the 18.6% reported in the June quarter. During the quarter, we recorded the program losses for some CPV projects. The gross margin for the Space Photovoltaic business reached 30%, showing a significant recovery from the challenges of the June quarter.

Now, let me discuss the market dynamics and our position in each of our major business areas. First, I will start with the Solar Photovoltaic business segment. As we have discussed previously, the revenue in our Space Photovoltaic business can be somewhat lumpy, due to the uneven timing of program awards and product deliveries. We experienced a significant increase in revenue in the September quarter, due primarily to the increased demand from key customers. In the quarter, we were able to secure several key contracts for commercial and government projects. As a result, the 12-month backlog for the Solar business increased approximately 10% from $39.6 million in the June quarter to $43.5 million, with the increase being solely from the Space Photovoltaic business.

The business outlook in Space Photovoltaics continued to be very robust, and we expect to receive several additional large commercial awards in 2012. We have seen strong momentum and traction with the government and defense programs as well, which we expect to be an area of growth for us. We are happy to report that in the September quarter, our product yields returned to normal levels, and our gross margins increased to 30%. We expect to maintain these high margin levels going forward.

In addition, several customers for Terrestrial CPV Solar sales will be ramping up their demand in the next couple quarters. Our wafer production volume is now close to record high levels. To address this increase in demand, we are adding equipment in the fab to increase manufacturing capacity over the next couple quarters. Our margins should also improve and fix the costs related to the fab are better absorbed by the increased wafer volume.

Now let me give you an update on the recent developments in Terrestrial CPV business and our CPV joint venture. Our CPV joint venture in China, Suncore Photovoltaics, has moved into its new facility in Huainan City, which is building the capacity to produce 200-megawatt of CPV modules per annum. They are developing and qualifying the manufacturing processes for CPV receivers and modules, and plan to commence full production in February 2012. In terms of the projects, Suncore has completed the installation of a two megawatt Gen-3 CPV-Solar project in Golmud, China. This solar park is scheduled to be connected to grid in a week.

As Suncore announced a couple months ago, they were awarded a 50-megawatt follow-on purchase order for CPV systems from Shenguang New Energy to be delivered and deployed in 2012, which we believe will be the world's largest CPV deployment to date. Emcore will be providing the CPV solar cells for this project. Suncore has received other committed cash and land loans from the Huainan Government, totaling over $100 million in value. We believe that Suncore has the necessary funds to execute its business plans for facility build out, capital equipment purchase, and the initial working capital. On our rooftop CPV products, our unique CPV systems for commercial applications have generated significant traction with customers. We are completing our 1,000-times system qualification, and have so far seen very promising results, with an establishment of the manufacturing infrastructure at Suncore, we expect that product line to launch before the end of this new fiscal year.

Now, let me discuss our market position and business outlook in our Fiber Optics business segment. The Fiber Optics revenue fell about 7% from the previous quarter. On the product basis, we saw a sequential decrease in shipment for cable TV broadband components in the September quarter. While overall revenues decreased, the full-band quadrature amplitude modulation transmitters, or QAM transmitter, continue to be the leading solution for cost-effective broadband, operate on the existing fiber collection network infrastructure, in the September quarter.

We were also pleased to continue to experience strong demand on our RFOG, our Radio Frequency Over Glass Fiber products. This product provides the last mile fiber optic solution in the traditional hybrid fiber collection network, utilizing passive optical network transceivers, and its becoming an increasingly effective solution to upgrade the HFC network to an all-fiber optic solution. We believe that we are very well-positioned in the cable TV broadband segment, and possess both a differentiating and a comprehensive intellectual property position and the capability, including the only vertically-integrated capability in the world.

For the telecom business, ITLA sales into 40 and 100 gigabit per-second coherent transponder and line card applications continues to be very strong. In the September quarter, we achieved another nearly 30% quarter-over-quarter revenue [drill] and reached a new record level to approximately $9 million in revenue. Our products are designed and qualified into almost all major telecom customers. We believe that demand for 40 and 100 gig coherent products will continue to ramp up aggressively in the foreseeable future. Our products provide most differentiating and enabling solutions to our customers' products and systems.

We are seeing increased booking activity for our Tunable XFP product in the September quarter. While the majority of the current Tunable XFP demand is in replacing DWDM XFPs, customers are ramping up their activity for 300-pin transponder replacement. We believe we're in an excellent position to address this premium market with the differentiated performance of our product. We continue to believe that our design is one of the few in the industry that will be successful at taking the $300 million to $400 million market opportunity currently served by 300-pin transponders. We expect to achieve the first over $1 million dollar product shipment in the current December quarter.

In the September quarter, we succeeded at introducing and ramping production of a newly-qualified four by 14 gigabit per-second FDR active optical cables. We shipped over 5,000 cables in the first quarter after its product release. In the current quarter, we expect production volume to continue to ramp up, and we are also set to deliver 12 by 10 gigabit per-second CXP active cables to customers for qualification. In addition, we expect CFP and CXP form factor transmitter and receiver modules for the high-end core router and enterprise applications to enter qualification phase in 2012. Please note that the production line for active cable products was not impacted by the flooding in Thailand.

As noted a few quarters ago, within our current product portfolio, there are several products that were either reached the end of their life cycles, or are no longer cost competitive. We have completed the product transition this quarter. The revenue contribution from this legacy product was relatively minimal. In fiscal year 2011, our operation results were significantly impacted by the products discontinued, and the result of the ITC ruling related of the litigation with Avago. Despite the loss, we successfully managed and [badged] through the revenue gap through new products and new business. We felt very optimistic about our business prospects, and had a clear line of sight to profitability by the middle of fiscal year 2012.

Unfortunately, the recent flooding in Thailand impacted that plan, and forced us to reset our priorities and expectations. As the media has extensively reported, rainfalls in the northern part of Thailand from July through October caused tremendous flooding in most areas in Thailand, especially in the outskirts of Bangkok. As previously disclosed on October 24, 2011, flood waters infiltrated the offices and manufacturing floor space of our primary contract manufacturers in Thailand. The areas used to manufacture our Fiber Optics products and our process and test equipment was submerged in several feet-deep flood water for more than a month.

As a result, the manufacturing infrastructure that supports approximately 50% of Fiber Optics segment revenue was damaged. This has had a significant impact on our operations, and our ability to meet customer demand for Fiber Optics products. Production capabilities for three major product lines were impacted. These include telecom products, such as ITLA and the high-volume Tunable XFP line. Our low-volume Tunable XFP line in the Bay Area is totally not impacted and is producing products right now. The second product line is being impacted is cable TV, lasers components and transmitters, and the third one is a legacy product.

Over the past two months, we have been developing and implementing alternative manufacturing plans in our own facilities in China and in the US, to meet short-term customer needs. Concurrently, we have been focusing on rebuilding the high volume production infrastructure for impacted product lines in the other location owned by our primary contract manufacturer in Thailand, as well as our own facility in China. While we are rebuilding the production lines for the telecom and cable TV products, we intend to focus on the fastest task of the recovery and strategies to better configure the equipment efficiency, cost structure, and the future diversification, so that we turn this crisis into an opportunity.

Purchase orders to replace the damaged process and test equipment have been placed, and most of the equipment is scheduled to be delivered before the end of March. Between our own facility and our contract manufacturer, we expect to fully recover our production capacity for our cable TV business by the end of March 2012, and reviewed the production capacity of a telecom production line before the end of May 2012. We're working closely with our customers on our recovery manufacturing plan to align with their needs.

As for the inventory materials, we were able to move a significant portion of our finished goods inventory to the second story of the facility right before the flood waters reached the manufacturer's floor. This allows us to serve the near-term demands of some key customers with this inventory. The major focus to manage this crisis is to work with our customers to meet their near term needs and ascertain that the demand will still be there for our products when we are back up and running to full capacity.

We are very impressed that many of our key customers for telecom products have stepped up and committed their next year's demand through non-cancelable purchase orders and pre-payments. As a result, our production capacity for Tunable Lasers in calendar year 2012, when it's fully recovered, is almost fully-booked and almost fully booked with existing commitments from customers. This illustrates the differentiation of our product and the strong relationships with our customers.

We have been working with insurance carriers, banks, customers, and business partners to obtain findings for required capital expenditures to restart operations. In addition, the management of the Company have implemented various cost reduction measures since the flood occurred. Crises of this magnitude are true tests of the fundamental strength of our business and product technology, and more importantly, the partnerships with our customers, suppliers and lenders. We are very appreciative of our customers and the long term purchase commitment we received, that will allow us to focus on the production line reviewed. We expect that the products we have introduced over the last couple years and the new products in the pipeline will drive significant growth once we have our fulfillment infrastructure reviewed.

As Mark just discussed, we have entered agreements with our key contract manufacturing partner and Wells Fargo Business Credit. This agreement significantly improved the Company's liquidity position, while we process and receive proceeds from insurance claims. We believe that we have a solid action plan in place to rebuild our impacted business, and we expect to come out of this disaster with a stronger Company than compared to the pre-flood conditions. Due to our success in liquidity improvement, as outlined by Mark, we don't have a need to access the equity market in the near term. As we have noted previously, our manufacturing infrastructure in our Solar Photovoltaic segment was not impacted by the flooding.

Turning to guidance for the first quarter of fiscal year 2012, ending December 2011, we expect to have revenues in the range of $36 million to $38 million with a sequential revenue decline primarily attributable to the flood impact within our Fiber Optics business. Looking back at our fiscal year 2011, we have accomplished a lot. We set a solid foundation for our business and operations. Unfortunately, the Thailand flooding has presented a new set of challenges and opportunities. We're taking this opportunity to redefine our business priorities.

The strategy for the Company going forward is as follows. From a corporate perspective, by continuing to own and operate the Solar and Fiber Optics business, we will leverage our corporate infrastructure to spread cost over a larger revenue base. We believe that this will allow us to more fully leverage our core competencies and the infrastructure in the areas of compound semiconductor materials, devices and integrated products enabled by this technology. Furthermore, this combined portfolio with different market applications provides some diversification in this highly-cyclical economic environment.

In the Fiber Optics business segment, we will realign the current Fiber Optics product portfolio and focus on business areas where we believe we have strong technology differentiation and growth opportunities. We have demonstrated several disruptive products and platforms in the Fiber Optics business segment. New products such as Tunable Tosas and Tunable XFP transceivers, ITLA and the micro ITLA for 40 and 100-gig coherent transponders and line cards, full-band cable TV QAM transmitters and 14 gigabit per-channel parallel optics modules and active cables represent our leadership position in the industry and we believe this product has tremendous growth potential in the future.

The critical nature of these technologies to the industry was validated by the recent crisis caused by the flooding. Concurrently, we will exit the technology and the product area where we are not in a leading position, or where our products are approaching the end of their life cycle. For our solar CPV business, we'll focus on expanding our customer base for CPV solar cells, and developing new opportunities for rooftop CPV systems. In parallel we'll support our CPV joint venture for ramping up manufacturing, cost reduction system deployment and business growth in China. The success in deployment and operations of utility-scale CPV solar farms and the significant reduction in CPV module cost for Suncore manufacturing should strengthen the Company's position in domestic CPV Project Development in the future.

For Space Photovoltaics and Specialty Photonics businesses, we intend to aggressively develop business for government and defense applications by leveraging current business relationships and infrastructure. We believe our technologies in the inverted metamorphic multi-junction solar cells, fiber-optic general transceivers and terahertz spectroscopy are critical technology elements for many government programs.

We plan to continue to further solidify new business opportunities and programs in this area. Overall, we are optimistic about our current position, and our strategic plans going forward. Our priority in the next several months is to focus on the exclusion of our business plan. With that, I will turn it over to Q&A.

Thank you, sir. (Operator Instructions). Our first questioner in queue is Edward Zabitsky with ACI Research. Your line is open. Please go ahead.

So I don't know what kind of questions you're getting, but the typical questions involve Emcore's survival, and so let's really start there, although I don't usually focus too closely on that. So you said, the insurance should cover $5 million through Fabrinet and are those equivalent to your hard costs of recovery? How much would you say your hard costs of recovery will be?

Thank you very much for the question. Happy Holidays to you.

Absolutely, you too.

Couple things that we've done since the flood to basically make sure that we put ourselves in the best position financially. We implemented various cost reductions. We took salary cuts, furloughs, a significant amount of discretionary spending cuts. It's reduced our cost structure quite significantly. That's a short-term kind of effort. We do not plan on doing that for a long-term period.

Secondly, what we did is that we started working with some of our key suppliers, having them help us in terms of building up our manufacturing line. In addition, basically extending the payment plan for any payables that were on the books. So that basically has given us a significant amount of flexibility on that side. Third, one of the items that Hong mentioned is that we've been working with our customers on prepayments for future shipments and we've received a significant amount of prepayments at this time, and we have additional prepayments that will be coming in over the next few weeks. And then in addition, we also amended our line of credit with Wells Fargo, which gives us an additional capability of up to $14 million, based on the amendment that we've signed and put in place.

Now those are just a number of actions, the fifth one, which I think you've mentioned and hit on was the insurance proceeds, so we currently have three different insurance avenues that we're going down. First of all, we have Emcore's business interruption insurance, and with that policy, we expect to have $5 million in our hands by the end of -- by January and we're actually in very good shape from that perspective. The other one is with our contract manufacturer, on the consigned inventory under their policy, and under that policy, we are not a named beneficiary so it will take a little bit longer to receive insurance proceeds, because we have to go through in a sense another step in the process. And third is also on the fixed asset side, and on the fixed assets, the same thing.

It's consigned fixed assets from our contract manufacturer, and those fixed assets insurance proceeds would be coming again through our contract manufacturer, so those are the three different avenues that we're going down in terms of being able to receive insurance proceeds and again, our own business interruption, we feel very confident about having that money in the bank by January.

So just to clarify, this is Hong. The $5 million proceeds Mark was talking about, that's for business interruption insurance only. The other two policies, namely for the consigned equipment and consigned inventory. It has much greater business coverage, insurance coverage, so we are making the claim, we're processing that, we expect the proceeds to trickle in starting from January, but that's not limited to $5 million. It's significantly higher than that.

So to net it out, I'm not talking about operating costs but do you feel like all of your hard costs of recovery are more than covered or you expect that they will be more than covered?

Yes.

Okay, that's what I needed to net out.

Yes, as I talked about, when we review the line, we will take into consideration of the equipment efficiency, as some of the equipment was manufactured over the last few years are less capable and now there are more capable equipment in the market for both processing and testing, so matter of fact, we can use, hopefully a portion of the insurance proceeds to build a more efficient line for the production.

So a couple things were nice to see during quarter. One was the strength of your solar business, and another one was the orders for the TXFPs, or your expectation rather, of a $1 million quote on TXFP, and I wanted to talk about both of those. Can you go through it again, why Mark maybe, why, if you had 30% gross margins in the space business why the overall gross margin I think you said was 21%?

Yes, on the solar gross margins, the [IMnet] partially deteriorated our margins on that side, was actually on the terrestrial business, so with our move of a significant amount of our work over to Suncore. In addition, we've also been looking at finalizing our Gen-3 systems. We've also been replacing some of the prior systems out in the marketplace, where we've come up with a better design that's more reliable and more robust. So we had a significant amount of costs associated with that Terrestrial CPV business, but that was, we consider those to be more along the lines of unusual items in the quarter, and we don't expect those to continue in future quarters. So from the Satellite Solar business, we did see a significant recovery back up to the 30% gross margin level. That's been our norm over the last couple years.

Okay, so we should expect things to come back toward that level, at similar revenue of course.

We should.

And just quickly on the TXFP, I'm wondering, do you have obviously, we had --it's normal and it happens a lot with new products, it had a little bit of a false start earlier this year, what makes, how much of that $1 million is in hand in terms of orders at this point?

So the mention of $1 million that we will be shipping in this December quarter, so currently we had orders in hand already for those, and we'll be shipping over a $1 million in this December quarter.

Got it. So both ordered and shipping. Fantastic. Okay, I'll let someone else ask a question. Thank you very much.

Thank you, sir. Our next questioner in queue is Alex Henderson with Miller Tabak. Please go ahead. Your line is open.

First off, my condolences to the pain you must be suffering going through all of this turmoil. Anyway, a couple of quick questions on just the balance sheet and cash flow. So if you were to aggregate all of the CapEx and operating loss expenses that you're looking at, can you give us a quantification of how much cash out is necessary to get your footprint back underneath you. And then conversely, can you give us an estimate of roughly what the income, cash income opportunities are from the variety of things you just pegged? So is it $20 million out and $20 million in? $10 million out and $20 million in? Or vice versa? What does the balance look like?

Thank you, Alex. In terms of rebuilding our production line, currently, we are estimating those costs could be up to about $6 million to $7 million over the next nine months. Now of those amounts, some of those will be paid for by our contract manufacturer so that will lessen the amount of the--

Let's put that aside. Just focus on what the outs are. So $6 million to $7 million on the product line, how about on the inventory side?

So this, at this point, we are looking at that, it will probably cost us about $5 million to $6 million of disbursements in order to rebuild inventory line to be able to continue shipping product.

And how about on an operating basis in the interim? Is there enough cash that there should be a fairly sizeable loss from just operating, without revenues in that business?

Yes, I mean we haven't quantified that number. We're not going to quantify that number right now. We're still going through that, but I can tell you Alex, through the salary reductions, through the significant reduction on our discretionary spending, through a lot of those other activities, through the business interruption insurance that we're in the process of finalizing, we believe that will assist us in basically recovering most of those costs for the first quarter and maybe the first quarter and a half, so we think that will leave us in a position where the amount of the outflows will be minimized as a result of those actions that we've taken.

Okay, so let's look at the other side of the equation. How much magnitude, you're talking about, on the all of the insurance combined, and you're talking about in the $15 million to $20 million range?

We're still working with our contract manufacturer on that, but just to give you some order of magnitude, the $5 million business interruption is our own insurance. The other insurance policy on inventory, our gross value on the books at the time of the flood was about $15 million to give you some perspective. Now, we have had some recoveries of those amount, as Hong mentioned in his script, but we still have a significant amount of claims that we'll be making on the inventory side.

Net $10 million-ish?

That's kind of where we're going down, but again we're still working on additional recoveries that might be made from the inventory. On the fixed asset side, while the net book value was not as high, due to the fact some of this equipment had been depreciated, or items along those lines, the gross value of the inventory was quite high, and the equipment was quite high, and upwards of even $30 million to $40 million.

So, can you recover half of that?

Our goal is to do whatever we can to recover the amount that we need to continue to rebuild our lines, and put ourselves in the best position possible. So that's why we're working as closely as we are with our partner to make sure we're able to maximize the proceeds.

So it sounds like at the end of the day, you're looking at a cost of cash out, that's probably in the order of $20 million but you're looking at recoverables that are considerably in excess of that, so this could be actually a net cash positive event?

Yes.

I mean the only challenge we have is just the uncertainty with timing and obviously certain amounts. Insurance is one of those items where you have to work with them for a significant amount of time and it's a lot of back and forth.

Well, so that brings me to the latter question which is, you said a net increase in your line of credit of $14 million. What is the aggregate amount of that line of credit, including that $14 million that's not tapped?

So the line of credit still remains at the $35 million it was before, but what we've done is we've done two different changes to the line. First of all, we've added in some additional assets. So for example, we're adding in our machinery and equipment and real estate into that line and that will give us up to an additional $10 million of borrowing capacity.

So the borrowing capacity then is $45 million?

No, sorry on the $35 million, we previously were not able to utilize the entire amount of the line, because it was based on the amount of assets that we had for inventory and AR. Basically, we are increasing the pool of assets that can be used to borrow against.

So the net borrowing capacity is $35 million now?

It's still up to $35 million.

And that $35 million is net of the $17 million that's already drawn?

Yes, $17 million is already drawn so we have an additional, in a sense, an additional $18 million of total capacity that we can draw on the line.

So just to mechanically put that in place, that $18 million is larger than the operating cost, the inventory and product line costs that you're talking about absorbing, so even if you didn't have insurance, you'd be roughly able to cover your cash flows?

That's correct.

That is correct.

And then the insurance on top of that gives you some buffers?

Yes. All of these actions, all I can tell you, Hong and myself and the rest of the team, we've been doing whatever we can to make sure we put ourselves in a very sound financial footing, and through all of the activities we've had over the last two months, we think we've put ourselves in a position where we can weather this storm and come out of it stronger on the back end.

Okay, the other piece that you'd mentioned was, from cash flow, was the prepayment. Can you give us a rough sense of what the prepayment number might look like in terms of cash in? $4 million, $5 million, $6 million, $8 million, or what are we talking about?

Yes, so this is for a specific product line the ITLA for 40 and 100 gigabit coherent transponders and line cards. Because of the product uniqueness and enabling capability, the customers, they wanted to have the production capacity allocation, so for that reason, they are placing purchase orders NC-NR they called, non-cancellable, non-returnable for the next 12 months. Demand was typically between 20% to 30% of the proceeds prepaid, but in the meantime, many customers have momentarily increased the price, the sales price by that amount, so we're not really mortgaging our future.

So are we talking about $40 million worth of orders and 20% of that coming in, so we're talking probably $8 million or so of cash over the next four or five months from that?

So I'm a little reluctant in giving you detailed numbers because this is a--

Considering the investment community needs to make sure that you're cash flow viable, I think you need to be as up front as possible. If it's in the vicinity of $5 million to $10 million that's a significant amount.

In the vicinity of $5 million to $10 million prepayment.

Okay, so that gives a lot of visibility then. So when I combine the prepayments, the insurance, the line of credit, you easily cover your operating costs and other production line investments, correct?

Absolutely. Absolutely, and also in addition to the ITLA product prepayment, we talked about the large CPV orders, our joint venture have deteriorated, and they will be using all solar cells exclusively, and they have made 35% of prepayment as well. So you characterize it absolutely correct. Even say with the uncertainty in timing and receiving the insurance proceeds. And put that all on the side, the increased liquidity from Wells Fargo credit facility plus the prepayment from our customers will be enough to not only provide a CapEx to rebuild the line, provide working capital to replenish the inventory, but also found the near term in the next two or three quarters, will still have a gap in revenue compared to our pre-flood level and fund the loss for that part.

If I were to look out to the back half of calendar 2012 and look at the telecom piece, we've been expecting that the cable would be around $20 million and the telecom revenues around $20 million some-odd. Is it at all viable to get anywhere near that ballpark of revenues back or is that just way out of line with reality, given how much you're taking a hit here in terms of availability?

The cable TV line is about $20 million, we'll get to that level, and there's no doubt for it, and you have seen the strong momentum of the ITLA for 40 and 100 gig. We have been in the last five quarters anywhere from 22% to 32% quarter-over-quarter growth and I think the purchase order commitment and the prepayment speaks for the strong demand in that product line as well, so I don't really worry about that in terms of the demand side. That's why our near-term focus is to get our fulfillment infrastructure reviewed. In addition to that, the Tunable XFP will finally start generating significant traction in adding to the revenue in a meaningful way, so that will be a growth engine, so if we fast forward two or three quarters, I can see that we'll be getting to that level of revenues for Fiber Optics over $35 million.

So essentially you're arguing that your customers have lined up behind you, that you've got better visibility on Solar, that your cable Company is fairly unique and defensible and that your ITLA and tunable XFP which is the bulk of the forecast for the back half of 2012 anyway should be fully up and ramped and has hard commitments at least for the ITLA piece to get you to the prior forecasts.

That's right. So Alex, needless to say, that has been our biggest concern. We now know, with time, we can rebuild the product line, production lines, but our biggest concern was the customer will still be there when we have the capacity to manufacture to deliver, and through this firm commitment, now we know that it will be there and so that makes our job a little easier just to keep our head down to rebuild the production line.

Okay, thank you. I'll cede the floor.

Thank you, sir. Our next questioner in queue is William Stein with Credit Suisse. Please go ahead. Your line is now open.

So it sounds like we've mostly put to bed the question about liquidity and solvency. Maybe we can talk about the cycle in particular. In the optical systems cycle there's been so much discussion of upgrades to the 40 and 100 gig coherent systems. Can you talk about where you see the demand for those products, relative to expectations prior to the flood. Whether you think this is going to be a really significant growth year for your customers in demand and then maybe talk a little bit about, if you can, the March quarter. You're giving December guidance here. It's at the very end of the quarter. Can you give us some thoughts on March?

Yes. Well, thank you for your questions. As for the 40 and 100 gig coherent system, I think we are still in the early stage of the ramp-up cycle and as we have reported in the last eight quarters, we have been able to experience an average 25% quarter-over-quarter growth, and finally in the September quarter, the revenue from that product line alone reached to $9 million. And right now, the firm commitment provided by our customers currently is significantly higher than the $9 million, and despite talking to them, certainly initially it was not a pleasant conversation, they were all pretty upset about we've lost the capability of producing that, but they have been telling us through the last two months that this component is so critical for their systems, and they have a much bigger plan to continue to ramp up.

My understanding is this is mostly for the line side system deployment. In the beginning, there was some system manufacturers are reluctant about this algorithm or architecture, but now there's no doubt everyone is jumping on the bandwagon of the coherent system, so my feeling is, this is only the beginning of the cycle, and even though we have enjoyed a pretty significant increase in revenue, so that's why we are very committed to work with our suppliers on the equipment side, and to pull in the lead time to shorten the rebuild cycle so that we can get back in business in that product line as quickly as possible.

As for the guidance, the December quarter, you're right. A few days away from it, we give the Grinch, and we know that Fiber Optics revenue at this point is mostly from the un-impacted product lines, for example, the Specialty Photonics business, the enterprise business, and also the inventory we are able to recover. In the March quarter, on top of this baseline level of the revenue, we expect the cable TV side to start ramping back in terms of production capacity, because it started from a couple months ago, we have implemented alternative manufacturing plans using the limited capacity between our locations in China and in the US to provide the product to the customers.

In some of the lines we can build back up faster, cable TV lines, I think at the end of the quarter in March, we'll be ramped up to full capacity, but the March quarter will not have the full contribution of the full capacity, so it's going to be higher than the December quarter. The June quarter, we hope to, we expect by the end of the quarter, we'll have all of the production infrastructure to ramp up, and certainly in the September quarter we expect the full revenue coming back from the manufacturing infrastructure. I know I'm not giving you a definitive number, but that's the best I can provide at this point.

Can talk about what your total revenue capacity would be by, let's say the end of the June quarter on a quarterly run rate basis?

Yes, so if every product line is running full-tilt, we should be making about $50 million to $60 million revenue capacity for the Fiber Optics alone, and but from that point on, we'll continue to see the market demand, and by spending incrementally, and adding some capital equipment at the capacity choke point, we should be able to increase the capacity from that point on, so we're not going to be limiting at that level, but it all depends on the market demand.

And then one final one before I get out of line. The orders that you've received from customers out until May, with prepayments and the NC-NR terms, any concern that's a pull-forward of actual demand in order to get in line and get the product they want, and make the commitments now versus a view that's real kind of in-line demand?

So first of all, the NC-NR order covers for the next 12 months. Secondly, if I have to say, the customer is holding back a little bit. There should only be upside then the NC-NR. The NC-NR is basically take-or-pay type of terms, so they would not commit more than what they would know for sure. If anything, I would say there's going to be upside compared to the NC-NR commitment.

Great. Thank you very much.

Thank you, sir. We have time for one final questioner. Our final question in queue comes from Edward Zabitsky. Please go ahead. Your line is now open.

Thank you. So I interpreted from your comments on the NC-NR that when you do ship those, when you do -- excuse me record revenue on the ITLAs, that you'll actually get better gross margins than you have now, is that correct?

Yes. So there's three pieces on that NC-NR order. One is the long-term commitment. The second is increased ASP, and the third is a prepayment.

Increased ASM in the optics business, cool.

This hasn't really unprecedented but it really, we are working with our customer to accelerate the build up of the line.

That's good. That's good and I agree. Obviously it says that the product is critical, and you're critical to them. So I'm wondering, without getting specific to individual customers, how are the equipment vendors going to cope over the next six months, without Emcore delivering ITLAs? And specifically, when it comes to the coherent market?

So that's why fortunately, we were able to save a significant portion of the inventory before the flood water got on to the floor and this part we left out, a significant portion of this saved inventory are for ITLAs, so we are using the currently-limited inventory to serve the near-term demands of our key customers.

So what are you doing? Are you moving the ITLA inventory to another location to build?

Yes, so the impacted facility in Thailand, they have two stories. When the flood happened, they were building barricades, a levy around the facility, and they suspended operations, we have like several times a day communications, so we instructed our contract manufacturer to move the lighter equipment, especially the inventory to the second story of that facility, so even though process equipment and pack equipment, most of them are submerged in the water and the inventory was in a safe place on the second floor, so when they were able to get into the facility, and they moved the inventory into dry land and then we revalidate repack orders inventory, confirmed they were good and reliable, we shipped to the customers.

But so what's the time frame for shipping? Isn't there a pause period where there's not enough product?

We are doing right now, even though with a limited amount that we are allocating to our key customers.

Okay, so they're going to be short basically for the next six months though?

They are going to be short, but they are utilizing the product for the most critical system delivery.

Sure. Now do you expect that they would get this product from competitors, or even given, of course they're committing to you as a long-term supplier but is this giving share to competitors in the short run?

This certainly provides a better opportunity for our competitors to get in. I think they may not have a supply issue, but they do from the conversation we have with our customers, have performance issues, so how well can our customers cope with the performance of the product from our competitors, we're not entirely clear. But we're very sure that for high-end product, they cannot use -- our customers cannot use what they can get from other people.

So they are going to be really specific by application whether they are going to use a competitors' product, in other words, how precise they need to be, how long the line distance is?

Yes.

Okay. So one last question, actually, sorry two last questions. One is on what you expect OpEx to be this quarter and maybe sort of a direction for next. And further, I wanted to talk about the broadband business. There was a decline you mentioned. What was the cause of that decline? Do you think it has something to do with the transition to full-band QAM?

So on the broadband business, the major reason for the decrease quarter-to-quarter was that in Q3, we had, so first of all, our video systems business has been significantly increasing over the last year and a half, to give you an idea, in 2010, our revenue was about $3 million. In 2011, we more than doubled it. The Q3 period was a record level for us. We actually -- it was more than almost any two quarters combined, so in Q4 our revenues did decline in that business, but was still up significantly from a year-over-year basis, so that was one of the major areas on the broadband area that led to the decline quarter-to-quarter. In terms of OpEx levels, in terms of what we expect to see for the first fiscal quarter, we expect our OpEx levels to be down quite significantly, mainly due to the cost reduction measures in terms of salary reductions, furloughs, and other discretionary spending cuts that we've been doing, so we do expect to see a decline on those expenses quarter-to-quarter.

So what's the range we can expect?

To give you an idea, we did implement a 20% pretty much across-the-board pay cut for the Company.

Okay, so that's fair enough.

Okay.

And also going forward, the operating expenses should be pretty clean. We don't have any open issues about the litigation or settlement. In the last year, this number is skewed in different quarters by those one-time non-recurring events. But as Mark discussed, this reduction in discretionary spending and salary will contribute to the reduction in this current quarter in OpEx, but that will not be continued trends going forward.

Okay, and sorry, one more question, the TXFP shipments, how many customers did you ship to in this quarter? Let's say we've been quoting Tier 1s, so how many did you ship to in the December quarter?

In the December quarter I would say primarily to six or seven customers.

Great. Thanks very much.

Thank you, Ed.

Thank you, sir. That does conclude our time for questions. I'd like to turn the program back over to management for any closing or additional remarks.

Well thank you very much for dialing in today. The Management is scheduled to present at the 14th Annual Needham Group Conference in New York City on January 12th, so we look forward to seeing you there and giving you an update on next quarter. Happy holidays. Thank you.

Thank you, gentlemen. Ladies and gentlemen, this does conclude today's program. Thank you for your participation, and have a wonderful day. Attendees, you may now disconnect.