EMCORE Corp (EMKR) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the EMCORE Corporation first quarter 2012 earnings conference call. At this time all participant lines are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at the time. (Operator Instructions) As a reminder this conference is being recorded.

I would now like to turn the conference over to Mr. Victor Allgeier. Go ahead, please.

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 current expectations and projections about future event 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 or our 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 statement. Neither management nor any other person assumes responsibility for the accuracy 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 titled 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 statement to conform, such statements to actual result 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, everyone. Today I'm going to focus my discussion on our first fiscal quarter operating results and our balance sheet. Please note that the effect of the flooding of our contract manufacturer's facility in Thailand is reflected in our Q1 results. Hong will discuss the rebuild plan and our expectations later in the call.

Consolidated revenue for our first fiscal quarter totaled $37.5 million, which is a decrease of $14.7 million. Primarily due to the decline in our Fiber Optics revenue impacted by the flood. Our revenue was in line with our prior guidance of $36 million to $38 million. On a segment business, our Photovoltaics business accounted for $19.1 million, or 51% of the Company's total revenue. This represents a decline of $2 million from the revenue for this segment in the prior quarter. 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 last couple quarter results. The Fiber Optics segment accounted for $18.4 million, or 49% of the Company's total revenue. This represents a decrease of roughly $12.6 million from the prior quarter. With the decrease primarily due to the impact of the flood in Thailand.

Despite the challenges we met key accomplishments in the quarter including strong revenue growth in our active optical cables product. In fact, revenues for those product lines not impacted by the flood increased by more than 25% sequentially. Hong will discuss the prospects for the Fiber Optics business later. Consolidated gross margin was 9%, with the decline primarily attributable to the flood impact.

On a segment business, Photovoltaic gross margin increased 1.7 percentage points to 22.7%. We continue to focus on meeting our gross margin targets of 30% for this segment. Fiber Optics gross margin loss was 4.8%, a significant decrease from the prior quarter primarily due to the impact of the flood. During the quarter, the Company recognized expenses of approximately $1.5 million due to additional excess and obsolete charges from the reduction in our forecast. In addition, we recognized $0.9 million in losses on outstanding purchase commitments relating to legacy product lines that will not be rebuilt. These charges were classified in our cost of goods sold, and reduced gross margins by almost 13 percentage points for our Fiber Optics segment. We expect our gross margins to improve in future quarters after we rebuild the manufacturing lines damaged by the flood.

Operating expenses excluding the flood loss and insurance settlements, and impairments and other items, decreased $1.9 million from the prior quarter to $14.5 million. Primarily due to cost reduction activities put in place after the flood, including temporary salary reductions and rotating furloughs. At the end of January, we removed those compensation-related reductions.

In addition, the Company is in the process of implementing a single ERP system to improve its reporting capabilities. As a result, our R&D and SG&A expenses should increase in the March quarter to approximately preflood levels. We recorded a flood loss of $5.7 million in the quarter related to our Fiber Optics segment. This is primarily from $3.9 million due to destroyed inventory and $1.8 million of fixed assets. These amounts are based on estimates from our detailed review of the equipment and inventory. During the quarter we recorded $5 million of insurance gains from proceeds for our business interruption insurance policy which we recognized upon receipt. Any future receipts of proceeds will be accounted for as a gain. For our solar-CPV joint venture Suncore we recognized an operating loss of $1 million for Q1. We expect those losses to decrease over time as Suncore begins producing product in volume. Hong will discuss the Suncore strategy and opportunity in more detail. In addition, we realized a $1.6 million tax expense associated with a capital distribution from Suncore. There was no net cash impact for EMCORE from these activities with our joint venture.

On a GAAP basis, the consolidated net loss for the first quarter was $14.2 million, flat with the prior quarter. Our GAAP net loss per share was $0.15. Our non-GAAP adjusted operating loss after excluding certain adjustments, all OF which are set forth in THE non-GAAP tableS, including today's release, was a loss of $5.1 million versus A $1.4 million loss in the 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. We expect our results to improve throughout this year as we ramp up our product lines.

Now onto order backlog, which we define as purchase orders or supply agreements accepted by the company with expected product delivery and/or services to be performed within the next 12 months. At December 31, the company had a Solar order backlog of approximately $51.7 million, a significant increase from $43.5 million in the prior quarter. The increase was driven by a large order for terrestrial sales from Suncore. The company's reviewing its manufacturing capacity and customer commitments on the Fiber Optics business and therefore is not disclosing backlog for this segment at this time.

Moving on to the balance sheet. At the end of December 31, the Company's cash and cash equivalents and restricted cash balance was $24 million. Our net cash increased by $19 million from the prior quarter, primarily due to customer prepayments and lower working capital requirements for accounts receivable. With these cash levels we do not have any immediate needs for any equity financing.

Finally, on January 27, we recently announced a reverse split. We believe the reverse split will increase our ability to market to larger institutions and expand our research coverage. In addition, there are certain expense reductions from reducing the shares outstanding. The stock will begin trading with the effect of the stock split on March 16.

As we discussed in December, the Company has moved quickly over the past three months to improve its position, including implementing various cost reductions and spending cuts, receiving prepayments from customers, amending our line of credit with Wells Fargo to increase our borrowing capacity, submitting and receiving insurance claims, and negotiating special payment terms with our key suppliers.

Regarding the insurance recovery for the flood damage, EMCORE has received $5 million through its own carrier. In addition, our contract manufacturer has insurance coverage related to the confined 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 unconcern, we're working to maximize our recoveries. We believe that these measures significantly improve our financial position and we are confident that the strengthen in cash levels will enable us to purchase new equipment, replenish the inventory pipeline, and invest in working capital to drive our business forward. Overall, we will recover from this crisis caused by the flooding in Thailand with regained business focus and in a good financial position.

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

Thanks, Mark. Good afternoon, everyone. As Mark discussed in detail, we achieved a consolidated revenues of $37.5 million in the December quarter, within guided range. This represents a 28% sequential decline due primarily to the reduced revenue from our Fiber Optics business. Our revenue in the Fiber Optics segment for the December quarter was $18.4 million, representing a 40% sequential decline compared to the September quarter. This was due to the fact that we lost a significant amount of manufacturing capabilities due to the flooding at our contract manufacturer in Thailand.

The revenue in the Solar Photovoltaic segment for the December quarter was $19.1 million, which represents a 10% sequential decrease compared to the immediate preceding quarter. The consolidated gross margins for the solar segment were 22.7%, which represents an increase from the 21% reported in the September quarter. The improvement of gross margin continues as more profitable Space Photovoltaics business takes up a vast majority of the solar product mix.

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 Solar Photovoltaic space business sector can be somewhat lumpy due to the timing of the program completions and the product delivery of major orders. Although the revenue for the December quarter experienced a 10% sequential decline, after we set a record high revenue of $21.2 million in the September quarter. The fundamentals of the business are still very robust. We're continuing to expand our market share and ample solar cells will power more than 50% of all of the commercial telecom satellite programs awarded worldwide in 2011.

Our largest customer, with whom we have a long-term supply agreement for the majority of their requirements, continues to be the clear leader of market in the commercial telecom satellite market. Their success continues to assure our long-term business health and stability. In addition, we procured a multi-million dollar key government project in the December quarter. We expect to receive additional commercial and government program awards in 2012. And will fully illustrate the EMCORE advantage for customers.

Our wafer production volume is running close to record high levels. This should help our margins and fixed costs related to the fact, better absorbed by the increased wafer welding. Our program pipeline for space solar panels is very strong, as well. For the next several months we'll start production for multiple new solar panel programs. These programs will allow us to better utilize our production capacity, therefore give us additional leverage or the markings. Furthermore, we will be adding new environmental test capabilities, including thermal cycling so that we can reduce the total cycle time and cost of our products.

Now, let me give you an update on recent developments regarding our CPV joint venture and our threshold CPV business. Our CPV joint venture in China, Suncore Photovoltaics, has established its high-volume manufacturing capability in this new facility in Huainan City with a target capacity of producing 200 megawatts of CPV modules per annum. They are scheduled to host a grand opening next week and commence full production to complete the 50 megawatt CPV system order they secured several months ago. From the financial point of view, it is expected that the Suncore's loss from operations will be significantly reduced and eventually turned to profitability as the production volumes ramp up. The balance sheet of Suncore is very strong. We believe that they have the necessary funds to execute the business plan. We do not expect any capital contribution in the near future.

Suncore has the most advanced solar cell technology in the world. This is their key competitive advantage for the Company in the treacherous CPV market. Because of the significant challenges in securing and financing for profitable utility scale solar project deployment, we're currently focusing our effort in CPV solar cells and in solar cell receiver market. As well as developing new opportunities for roof-top CPV systems. In parallel, we will (inaudible) Suncore for ramping up manufacturing, cost reductions, system deployment and business throughout China. The market dynamics and incentives in China are still very favorable for CPV deployment. We believe that successful deployment in operations of utility scales, CPV solar farms, with Suncore in China, combined with cost reduction efforts through our joint venture, will strengthen our position to be successful in the utility CPV systems deployment outside of China in the future.

Now let me discuss our market position and business outlook in the Fiber Optics business segment. The Fiber Optics revenue fell approximately 40% from the prior quarter, as we expected, due to the fact that we lost half of our manufacturing infrastructure. As we discussed before, the production capabilities for three major product lines were impacted. Datacom products, such as ITLAs and turbo SLP lines. Cable TV laser components and transmitters. And the third line, the legacy products. Fortunately, our original tunable XFP line in the Bay Area was not impacted and has been producing product.

While we face challenges with certain products due to the Thailand floods, revenues from the product lines not impacted by the floods, as Mark discussed, including video transport, specialty photonics, fiber-to-the-home and active optical cable products, increased over 25% in the December quarter sequentially. And also, we've seen a strong increase in bookings for some of the product lines in the December quarter.

In order to meet the short-term customer demand, we've developed and implemented alternative manufacturing plan at our own facilities in China and in the US. Concurrently, we are reviewing our high-volume production infrastructure for impacted product lines at Fabrinet for telecom product line, as well as our own facility in China for cable TV product lines. For cable TV transmitter and laser modules, we were able to meet roughly one-third of the customer demand with the capacity at our own manufacturer sites by the end of the December quarter. New process and test equipment is being delivered, installed and qualified, as we speak. We expect to set up a full production capacity by the end of March and ramp up the volume significantly from there. Based on the forecasted CapEx spending of the largest cable service operators, and our visibility on purchase orders, the demand for cable TV throughout the equipment appears to be quite strong.

In the December quarter, we continued to experience strong demand for our RFOG, our Radio Frequency Over Glass, fiber optics product, with revenue of $1.5 million. This product provides an innovative last mile fiber optics solution in the traditional hybrid fiber coaxial network. This technology is becoming an increasingly effective solution to operate the HFC network to an all-optic solution.

One of our most exciting product offerings is our external cavity laser, ITLA. This product offers an extremely narrow line width, which provides the most depreciating and enabling solution for 40 and 100 gigabits per second coherent applications. It has become the laser of choice for the coherent applications industry. Consequently, some major system integrators have specifically required their suppliers to use EMCORE's ITLA in their coherent transponder and line chart products.

In the December quarter, we worked with our customers very closely to meet their very urgent demands with a finished goods inventory which was rescued before the flood water infiltrated manufacturing floor of the production line in Thailand. In the meantime, we are reviewing the ITLA production lines in Fabrinet Pinehurst facility. I'm happy to report that as of today we have all of the process and test equipment for our first production line ITLA installed. Over the next several weeks we will be working on integrating manufacturing processes and building initial stencils for product validation and qualification. Our recovery is on schedule and well underway.

We appreciate the support from our customers who demonstrated tremendous commitment through non cancellable purchase orders and prepayment. This enabled us to review the ITLA production line as quickly as possible. In the December quarter, we booked over $25 million industry in our orders for the ITLA product alone. As we look to expand our product launch and to improve our position as a key component supplier, we are prototyping the micro ITLAs with customers, and expect to transfer to well in production by the September quarter.

We shipped $1 million from the tunable XFP products for the first time in the December quarter. In addition, we have qualified three other telecom customers with this product in the quarter, making the total design wins of 10. These customers are taking our Tunable XFPs in their systems in commercial production. The booking activity for tunable XFPs in the December quarter was strong and we expect to more than double the revenue from this product line in the March quarter. Currently, our tunable XFP products has been manufactured and shipped from a line in the Bay Area. The production equipment for the high-volume line will be up and running by June at Fabrinet. The high-volume line will help to accelerate the growth of this product launch dramatically. Clearly, the market driver and demands are still there and EMCORE's position and competitive advantage in this arena continue to be very strong.

We are ramping up production of a newly qualified 4-by-14 gigabit per second FDR active optical cables. We shipped over 15,000 cables in the December quarter in the second quarter of the product release. Furthermore, we made the first commercial shipment of the 12-by-10 gigabit per second CXT active optical cables to the customers. Our priority for this product line is to continue the capacity ramps. And the demand outlook is very robust. As noted before, the production line for active optical cable products were not impacted by the flooding in Thailand.

As Mark just discussed, the liquidity situation for the Company has improved dramatically over the past quarters. And as of the end of the December, the net cash increased to approximately $18 million, due partly to customer prepayment and the lower working capital requirements for Company receivables. The available borrowing capacity under the $35 million credit facility with Wells Fargo has also increased significantly after the previously-announced amendment. In addition, we have been working closely with our contract manufacturer on insurance claims of the loss of inventory material and equipment from the flood. As Mark has discussed, significant proceeds are expected, although the timing of the payments are somewhat uncertain. We believe that actions we have implemented have significantly strengthened the liquidity for the Company. Also, we also have an equity line of credit facility in EMCORE's eligible S3 filer now. We do not have a need to access the equity market in the near term due to the greatly inflow in liquidity.

Turning to guidance, for the second quarter of the fiscal year 2012 ending March, we expect to have revenues in the range of $38 million to $40 million, with the growth primarily attributable to the partial recovery of Fiber Optics production capacity. Overall, we are very happy with the progress of our recovery for the Fiber Optics business and the strategy and outlook of our Solar Photovoltaic business. In addition, I'm very optimistic about our current position in our strategic plans going forward. Our priority over the next several months continues to be execution focus.

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

(Operator Instructions) Alex Henderson with Miller Tabak.

First question. Can you give us the non-GAAP optical and solar gross margin numbers since we don't have a breakout on that on a non-GAAP basis?

Yes. If we exclude the $0.9 million of purchase loss commitments for the fiber loss associated with the lines that we're not bringing back up. And if we also take out the additional $1.5 million of additional expenses that we had for excess and obsolete inventory, mainly for excess as a result of the reduction in our forecast. In addition to those figures, we also had some additional stock compensation charges that we exclude for these purposes. Our gross margins would have been greater by more than 15 percentage points. So we ended up with about a loss of negative 5%. We would have come in close to about 10% positive gross margins on the Fiber Optics side.

Can you tell us what the number would have been on a non-GAAP basis, just Optics gross margins? And I assume the Solar gross margin we can calibrate off of the stock comp adjustment, what portion went into the stock comp between the two

Yes, Mark is looking at that number right now.

While you're looking that up, second question. It sounded like you're running ahead of target on getting some of these lines up. First off, am I right in reading that? And then, second, within the context of getting these lines up, can you remind us a little bit about how you're seeing the requalfication process, specifically on the tunable XFPs, the ITLAs, and any other products that are of substance? For instance, cable. Are there anything where you've got an extended qualification period once you get the production up and running? Or is that going to be imminent production and then you ramp production and people take it immediately?

Alex, we are basically rebuilding three production lines. One is for ITLA for 40 and 100 gig. The second is tunable XFP. The third is cable TV lasers and transmitters. Out of these three lines, I would say that ITLA was running ahead of the schedule slightly. So we're very happy about that. The other two product lines are largely on schedule.

As for the qualifications requirement, we could have taken a pass to get a product of the line recovered quicker. But after working with the customers very closely, we chose the copy-exact strategy. Basically we rebuild the line with the same design, same components, same machine processes. And so in that scenario, the product qualification cycle will be greatly reduced. We still have to optimize the process for each workstation to ensure the process capability of CPKs. We still have to build some samples for some accelerated qualification tasks. But this is not going to be a 5,000-hour Telcordia requirement because the designs are identical to the product we have been shipping in volume pre flood. So most of the product we work with the customers. They require about 500 hours qualification. And our strategy is, after all of the process are finalized and optimized, we're going to be doing the risk production while we are doing the qualification, waiting for 500 hours. Because we are pretty confident that this process, copy-exact strategy, will work for that purpose. So, I think we wanted to ship to customers after 500 hours, but some of the customers may take the same strategy. Namely, taking our products, start integrating into their systems, and waiting for a high sign, the qualification result, after 500 hours.

So, just to summarize, what was a fairly lengthy answer, is there a window of time that we should be anticipating across those three lines for how long it takes to qualify? If they're up, say, by, just to choose a date, May 1, is it 30 days to qualify or 60 days to qualify on ITLAs, tunable XFPs and cable production? What's the length?

For cable production the qualification time is two weeks after we deliver the process record samples. For telecom it's going to be three weeks, roughly that's 500 hours.

All right, so a very short period then. So you can do that relatively quick. So you would be at the end of June fully back to existing previous production rates, cleaned out all of the old obsolete and older technologies, and fully qualified. No issues and therefore able to run at your prior production rates?

Yes, so by the end of June we will be in a position to get all of the process and production lines set up ready for ramp. Some customers may require little longer hour of qualifications. But again, as I said, we're going to be producing full throttle. So we may not be shipping the product until some of the qualification hours accumulated. Yes, so the production infrastructure will completed for recovery and review by the end of June, but the ramp is going to be in the September quarter.

And so just one last question on the same subject. If there's a lot of production to get the line up initially, I assume that you'll have some product that will come off those lines that won't be up to snuff as you're debugging the lines. Can you give us an estimate of how large a nut that might be in terms of incremental cost that really ought to be viewed as one-time in nature but are associated with production that can't be eliminated?

I think the material for engineering and testing and setting up the line and optimizing the line is, you're right, it's going to be a one-time in nature. I think it's going to be comped for rthat in the range about $500,000 to $750,000 range. So that's going to be incurred in the June quarter.

Great, thank you. Do you have those numbers, Mark?

Ye.s For the Fiber and Solar gross margins, respectively, it was just over 10% and 24% for what we'll call the gross margins, excluding these one-time items we discussed and also the stock compensation charges.

Okay, thank you.

(Operator Instructions) Edward Zabitsky of ACI Research.

I have a few questions, of course. First one's on the TXFP product line. You said you shipped over $1 million and you expect to more than double it in the March quarter. I think you had said your internal capacity was about $3 million per quarter, is that still roughly correct?

Yes, so when we run full, around the clock, we'll be about a $3 million capacity in the Bay Area. Clearly, we like to have a full production capacity and capability established at Fabrinet as quickly as possible.

Absolutely. And understanding that, do you expect to have good gross margins on the products you're manufacturing internally, the TXFP modules?

The TXFP modules in the Bay Area have a pretty respectable margin. But look at the manufacturing in the Bay Area and running round the clock, it's primarily for meeting the customer demand in the short term. The margin is expected to improve dramatically when we are finally running at full production in Thailand. So right now we expect to go, but in the future we expect margin to be north of the 30%.

Yes, okay. Well north of 30% or just a little north?

Well north.

Okay, good. Without tipping off your competitors, just wanted a direction on that. Design wins -- you mentioned 10 design wins in TXFP and qualified with 3 new customers. Is that 10 products or 10 customers? 10 different corporations that are buying your TXFPs?

Ten different corporations. And some of them, they probably used for two, three different product lines. But we count 10 different companies.

That's great. Can you give us a sense as to where you're competing well in the market? Obviously, you have a top tier of competitors that are pushing into the TXFP market. Maybe not the 25 to 30 we had before but maybe four or five. What's the competition like? Where are you seeing the best demand for your TXFPs?

Apparently, our designs really shine for the more demanding applications. Namely 300-pin transponder replacements I think out of the 10 customers, our sense is one or two of them are doing the application to replace 300-pin. But a majority of the demand at this point is for still to replace the fixed wavelength DWDM XLPs. We're one of the few suppliers out there. And I think it's certainly our product has a performance advantage. But good enough is good enough. So in that area we are one of the suppliers. We really looking forward to the industry's migrating to 300-pin replacements. And, there again, our product will show a significant performance advantage.

Right, I was assuming so. When do you expect the 300-pin replacement market to start to take off?

I think the industry consensus is a little bit slow but it's going to be happening in the second half of this year. More significant ways than the last year.

Okay. So, just moving on. The gross, one of your larger competitors mentioned that there was some heavier than normal pricing pressure with the annual price negotiations. Just from your own perspective, what's happening to pricing across your product lines? You had mentioned last quarter you thought you would get some better gross margins with the ITLAs going forward. How did these price negotiations go for you in general?

So far so good. I have to say we have not experienced a similar problem. Our problem right now is more capacity limited. And we have to work with our customers very closely to allocate our capacity to meet their most urgent demands. I'm sure the price pressure and the discussion around long-term pricing is going to become later. But at this point that has not been a problem for us.

Okay, that's good. I was a little confused on the ramp up of [CAD-Fi] manufacturing capacity. You said last quarter you met one-third of your capacity from your own facility in China. And you expect to have -- did you say a full ramp, full production in March? Or start full production at your contract manufacturer in March?

We will getting our equipment tuned up, qualified by the end of March for that full capacity. So the ramp up really for delivery is going to be in the June quarter.

Right, so you expect to have the same sort of revenue from the CAD-Fi product line this quarter as in the last quarter, the December quarter?

We give the guidance for the revenue in the range of $38 million to $40 million. The increase is all from Fiber Optics area. We expect a pretty significant improvement in revenue from the Fiber Optics segment from the December quarter to the March quarter. But it's still the production capacity is limited. We have more orders than we can produce. And we are pushing out suppliers as hard as possible to get equipment delivered. For most of the three production lines, we got pretty much all the critical pieces equipment delivered. And right now we're in the process of fine--tuning for process capability integration. We'll be producing samples for qualification at the (inaudible). We wanted to get all set up and ready to go for high capacity, high volume manufacturing by the end of March. But clearly we will not be benefiting the full capacity of the rebuild in the March quarter.

Right. Now, on the Solar side of the house, I just had one question. It seems like your three processes is going pretty well with the gross margins rising. What kind of yields are you getting at this point? Are they rising? Do you expect them to continue to improve from here?

Yes, Space Photovoltaic side, we reported a couple quarters ago. We introduced a whole range of new products and product mix on the floor. It's record high. So we have been working through the CUCs, and manufacturing yield has been improving. And that is the reason that we have experienced increased gross margins. But we have more room to improve and the trends will continue.

Okay. Thanks very much.

Steven Coughler with Cambrero.

Could you help me reconcile a few comments. It really sounds like, on the demand side of things, things are looking pretty good. The backlog in Photovoltaic increased nicely. And all the commentary and qualitative commentary you gave on Optics was very constructive. And it also sounds like supply is coming on, and will be coming on all through the quarter in the Thailand situation. So I'm a little perplexed at the guidance. It's great that you're going to show growth but it sounds like it's constrained to a flattish $1 million or $2 million absolute dollar growth number. And I'm wondering, is there any part of the business, maybe PV that's got some seasonality in the revenues, that nets out to that kind of guidance?

Steven, this is Mark. Thank you very much for the question. Regarding our guidance for the quarter, as Hong mentioned, we're going to have the cable TV line up and running by the end of March. And then basically going into full production thereafter. The March quarter will be similar in some sense to what December was in that we will not have our lines up and running at full capacity at that time. But going into the June quarter, that's where you should start to see more of a ramp up in our Fiber Optics revenues at that point going forward. And as we start to have our other lines up and running.

One important thing we mentioned on the call is that for the lines not impacted, the optical components lines not impacted by the flood, they were up more than 25% quarter to quarter. So we are seeing pretty good demand in some of these other product lines. In fact, that's actually where most of the growth will come from this quarter.

Yes, I think the clear depreciation, Steven, is, by the end of March, we'll be getting pretty much all of the new lines set, ready to go. But through this quarter, we spent a lot of time rebuilding the line, developed tremendous engineering and increased resources in tuning the line. So there's no weakness in business but it's really a lack of capability in the capacity. So we wanted to focus on building the long-term capability and capacity rather than struggle for the short-term revenue, then we still prolong the rebuild of the manufacturing infrastructure. So that's the choice we have to take. Yes, I think that sequentially from the December quarter to March, the Fiber Optics revenue is going to improve. But it's not back to the pre-flood levels. But I hope by the end of June quarter we'll be at that level.

Okay. But I would think that the manufacturing capacity March versus December quarters should be substantially higher in Fiber Optics, isn't that correct?

Yes. But the thing is, the December quarter we had half month, three weeks, normal production. And we also had some inventories we rescued from before the flood got in. That was the finished goods inventory kept us going in December quarter. In the March quarter, all revenue have to be from the new product. There's no finished goods inventory we could sell anymore.

Yes, I understand. That makes perfect sense. Thanks very much.

Alex Henderson of Miller Tabak.

I was wondering if you could dig down a little bit more into the cable business. There's been some volatility in that business the last couple of quarters. Some of it had to do with availability, some of it had to do with mix. Can you talk a little bit about what is going on in the mix of that business and the margins of it?

Yes, that cable business, Alex, was hit pretty hard by the floods. So, you're right, in the September quarter we experienced a little bit softness compared to the June quarter. But the demand actually, the backlog, we exit the September quarter very strong. And then we lost the entire manufacturing capability. Especially the lasers, it requires a new unique custom-made laser welders to make. Fortunately, we had some capacity and capability in our facility in LA, but capacity-wise is only about 20% compared to the pre-flood capacity. So we help in really running around the clock and pretty much hand to mouth for this line. The new laser welders just got in to our China facility. So getting back to your original question. Is the business outlook robust? Yes, because we have been watching the MSOs, their CapEx spending very closely. As recently as last week Time Warner table they announced that their CapEx spending in the scalable infrastructure and upgrade area would increase by about 10% sequentially. So I think when we get the capacity back, we should be able to drill that business back to the pre-flood level and expand from there for revenue from the new products.

If I recall correctly, coming out of the June quarter into the September quarter, there was a mix shift that hurt your gross margins in that business. Are we seeing a mix shift back as we get into the March and into the June quarters with some of that video-related product? Or is this more of the basic stuff which comes at a lower margin?

Yes, the shift is going to be back. The cable TV broadband business has been traditionally running about 35% of gross margin, plus or minus. And in the September quarter, because of the product mix, it dropped by about 10 percentage points. So I would expect, when our production capacity is ramped back up, our gross margins should get back to the 35% range again.

That would be not in the June quarter though but probably by the September quarter?

I would say by the September quarter is fully recovered.

Okay, thanks.

Thank you, I'm showing no additional questions at this time. I would now like to turn it back over to management for any further remarks.

Great. On one note to clear up from my statements before. The reverse stock split will become effective on February 16. And with that, I'll turn it over to Hong for any last final statements.

Thank you very much for dialing in today. We'll be attending the optical fiber conference at LA convention center in a couple of weeks. We look forward to seeing you there, talking to you soon. Thank you very much.

Ladies and gentlemen, thank you for your participation. That concludes the presentation. You may disconnect and have a wonderful day.