EMCORE Corp (EMKR) 2012 Q2 法說會逐字稿

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

I would like to turn the conference over to your host, Mr. Vic Allgeier. You may begin.

Thank you and good afternoon, everyone. Before we begin we would like to remind you that the information provided herein may include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act of 1934. These forward-looking statements are largely based on our current 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 and trends in our business, and the markets in which we operate. Management cautions that these forward-looking statements relate to future events or financial performance and are subject to business, economic, and other risks and uncertainties, both known and unknown, that may cause actual results to be materially different from those expressed or implied by any forward-looking statements including, without limitation, the impact on the Company, our customers, our suppliers, from the effects of the floods in Thailand and consummating the asset sale transaction with Sumitomo, including the likelihood of obtaining regulatory and other necessary approvals to consummate the transaction.

Neither management or 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 will now turn the call over to Mark.

Thank you, Vic, and good afternoon, everyone. Today I'm going to focus my discussion on our second fiscal quarter operating results and our balance sheet. Please note that the effect of the reverse stock split is reflected in our share and per-share amounts.

Consolidated revenue for our second fiscal quarter totaled $37.8 million, which is an increase of $0.3 million or 1% over the previous quarter. The increase was primarily due to higher Fiber Optics revenue, partially offset by a reduction in our Solar business. Our Q2 revenue guidance was $38 million to $40 million.

On a segment basis, our Photovoltaics business accounted for $15.8 million or 42% of the Company's total revenue. This represents a $3.3 million or 17% decrease from the prior quarter. We have said previously, while we were believed in the long-term growth prospects of this business, our revenue in any given quarter may be a bit lumpy, as illustrated in our last couple quarter results.

The Fiber Optics segment accounted for $21.9 million or 58% of the Company's total revenue. This represents an increase of roughly $3.6 million or 20% from the prior quarter, with the increase primarily from our initial recovery efforts after the flood in Thailand. Hong will discuss the prospects for the Fiber Optics business later in the call.

Consolidated gross margin was 14%, a 5 percentage point increase from the prior quarter, primarily attributable to a recovery in our Fiber Optics segment. On a segment basis, Photovoltaic gross margin decreased 1.8 percentage points to 20.9%, as we were unfavorably impacted by the lower revenue base. We believe that this segment can reach gross margin targets of 30%.

Fiber Optics gross margin was 9.4%, a 14 percentage point increase from the prior quarter, primarily due to higher revenue and lower excess and obsolete charges. In the first quarter, the Company recognized expenses of approximately $2.4 million, primarily from additional excess and obsolete charges and losses on outstanding purchase commitments relating to the Thailand flood.

We expect our gross margins in our Fiber Optics segment to continue to improve in future quarters. After we complete the rebuild of the manufacturing lines damaged by the flood, we will begin the lay out the operating targets for the Fiber segment.

Operating expenses were $14.2 million excluding the flood-related charges. It's important to note that at the end of January we removed the compensation-related reductions that were previously implemented. We believe that our operating expenses will increase in future quarters as we focus our R&D resources from the manufacturing rebuild to new product development and product support.

We recorded a flood loss of $0.1 million in the quarter related to our Fiber Optics segment.

For our Solar CPV joint venture, Suncore, we recognized an operating loss of $0.2 million for the quarter. Hong will discuss the Suncore strategy and opportunity in more detail.

On a GAAP basis, the consolidated net loss for the quarter was $9.3 million, $5 million better than the prior quarter. We believe our results will continue to improve in future quarters as we rebuild our Fiber Optics manufacturing lines and increase our revenues in our Solar segment. Our GAAP net loss per share was $0.40.

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 $3.4 million versus a $5.1 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.

Now on the 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 the end of the quarter the Company had a Solar order backlog of approximately $55.7 million, an increase from $51.7 million in the prior quarter. The increase was driven by our satellite solar business.

Shipments in our Fiber Optics business are still gated by our manufacturing capacity. We have more order backlog than we can fulfill. Therefore we are not using backlog as a measure of the strength of our Fiber Optics business at this time.

Moving on to the balance sheet, at the end of March 31 the Company's cash and cash equivalents was $25.3 million. Our net cash decreased significantly from the prior quarter primarily due to increased inventory levels to meet the ramp-up in production, equipment purchases associated with our Fiber Optics production line rebuild, and operating losses.

On March 27 we announced the intent to sell the VCSEL-based product lines to Sumitomo for $17 million, subject to certain adjustments. The results of these products are included in our results for the March quarter. The revenues in the March quarter associated with these products was $4.3 million.

We believe that the sale of these product lines will improve the Company's immediate bottom-line results. We expect to have the transaction closed within the next week.

Regarding the insurance recovery for the flood damage, EMCORE received $5 million through its own carrier in the December quarter. We are working with our contract manufacturer and their insurance carriers relating to the consigned inventory and equipment that was damaged.

While the amount and timing of those receipts are uncertain, we are working to maximize our recoveries. Any future receipts of proceeds will be accounted for as a gain.

Over the past few months we have made significant strides in recovering from the Thailand crisis. We look forward to showing the results of these actions over the next few quarters.

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

Thanks, Mark. Good afternoon, everyone. As Mark discussed, we achieved consolidated revenues of $37.8 million in the March quarter, slightly below our guided range. This represents a slight sequential increase due to a 20% increase in Fiber Optics revenue, partially offset by a decrease in Solar revenue due to pushout of a major solar cell order from an international customer.

The consolidated gross margin increased to 14.2% from 9.3% in the prior quarter due to improved operational efficiency and recovery from the Thailand flooding. Gross margins improved sequentially in the Fiber Optics segment and decreased slightly in the Solar segment.

Now, let me discuss the current market dynamics and our position in each of the major business areas. First, I will start with the Solar Photovoltaics business segment.

As we have discussed previously, the revenue in our space Photovoltaics business can be somewhat lumpy due to the timing of program completions and product deliveries of major orders. In Q2, we experienced a sequential decline of approximately $3.3 million in revenue in our Solar business segment primarily related to a significant shipment for more than $4 million in revenue we were expecting to make to an international customer in the March quarter.

Unfortunately, due to the delay with their customers' demand, our customer notified us that they needed to delay delivery of our solar cells. It is important however, to notice that we still expect to ship this order in the latter part of 2012 and recognize the resulting revenue at that time.

In spite of the temporary decline in revenue of the space solar division, the fundamentals of the business remain very robust and outlook for our space programs and revenue is very promising. We recently announced a $6 million contract from Ball Aerospace, which represents an expansion of our customer base in the aerospace industry. With this award, EMCORE continues to cement its position as the primary supplier of space solar cells and solar panels to all major aerospace companies who purchase solar products externally.

In addition, we were selected to supply solar panels to two separate NASA missions recently, and we expect several other space solar panel contracts to be awarded to EMCORE in the next quarter. Lastly, there are several multi-million-dollar multi-year contracts that we expect to be awarded this year, and I look forward to discussing this with you in the near future.

With all of this, we continue to be very excited about our competitive position and expansion of our space Photovoltaics business.

Due to the increased demand from space programs and terrestrial CPV solar cells from both Suncore and other customers, we project a significant increase in demand of the wafer volumes going through our solar cell fab over the next several months. We have been adding capacity, and some of that operational expansion has been completed and ready for the ramp-up.

Regarding complete solar panels, our program backlog and pipeline are filling up the capacity of our manufacturing lines as well. This program will allow us to better utilize our solar panel production capacity and provide additional positive leverage on our margins. Furthermore, we will be adding new test capabilities including thermocycling for solar panels so that we can reduce the total cycle time and reduce the cost of our products.

Now let me give you an update on the recent developments regarding our CPV joint venture and our terrestrial CPV business. Our CPV joint venture in China, Suncore Photovoltaics, has established its high-volume manufacturing capacity in its new facility in Huainan City, which has a targeted capacity of 200 megawatt of CPV modules per annum.

Suncore commenced production in February for the 50-megawatt CPV system order. Thanks to the establishment of its manufacturing infrastructure and engineering team, Suncore is pursuing very aggressive cost-reduction plans while also producing products to meet its large purchase orders.

Regarding deployment of $50 million, while it has been challenging to secure project financing in the current economic environment, EMCORE has closed a project financing for a 2-megawatt distributed generation solar project in Albuquerque. Construction will start in early June, and the project is expected to be completed by the end of this calendar year.

Regarding our improved CPV design for commercial rooftop applications, we have entered into the qualification and certification phase and expect a general availability by the end of September for the newly designed low-cost rooftop CPV product.

With the investment of solar cell technology and the improved conversion efficiency, we have improved the cost structure of our product significantly. We still firmly believe that a CPV will be a market player for certain applications as its adoption continues.

Now let me discuss our market position and business outlook in our Fiber Optics business segment. The Fiber Optics revenue increased approximately 20% to $21.9 million from $18.3 million in the December quarter, and the gross margin improved significantly from negative 4.8% to 9.4% this quarter as we have started recovering from the flood-impacted manufacturing infrastructure. In line with our expectations, the manufacturing capacities for cable TV, lasers, modules, and transmitters were fully established as of the end of March, and the products from the new manufacturing line are being qualified by customers.

The primary manufacturing location is our facility in China, and we continue to use our plants in the US while we are ramping up that capacity. At our [facility] in China we are ramping up the capacity, and increasing the throughput every day, and expecting to reach full production capacity this quarter as originally scheduled.

At the same time we are focusing on the recovery plan, we continue to introduce new products and secure customer wins. Most noticeable in the quarter was a win for a qual product with a major CATV equipment manufacturer.

In the March quarter, we continued to experience a very strong demand for our [RBOCs] and FTTx PON transceiver products. The market drivers for these products are to provide an innovative last-mile fiber optics solution in the traditional hybrid fiber collection network and the government and broadband initiatives.

The review for ITLA lines, narrow linewidth lasers for coherent 40- and 100-gigbit transmission application at our contract manufacturer's facility is going very well. The line was up and running in early March, about three weeks ahead of the original schedule. The products produced by the new lines have passed a key Telcordia qualification requirements. Customers are completing their qualification and starting to take shipments.

We continue to build backlog and expect this business to start ramping back up in this quarter. During the September quarter, we should be running to the pre-flood levels.

Our customer base continues to view our ITLA as the laser of choice due to its performance, as our products offers an extremely narrow linewidth, enabling solution for 40- and 100-gigabit-per-second coherent applications. This is evidenced by some major system integrators requiring their suppliers to use EMCORE's ITLAs in their coherent transponder and LAN card products.

We are continuing to improve our technology advantage through new product introduction. The newly designed micro-ITLA, which provides superior performances with enhanced functionality in a much smaller form-factor, is now being sampled with some key customers. The early feedback from customers has been extremely positive. We will be going in into Telcordia qualification this quarter and planning general availability in 2012.

Regarding the tunable XFP line, the review for capacity is going as planned. We expect the production capacity to be fully established at our contract manufacturer's facility by the end of June, with volume shipments starting in the September quarter. We have qualified three additional telecom customers with this product, bringing the total number of design wins to 13.

In the current quarter, we experienced component shortages arising primarily from Thailand flooding. As a result, our shipments in the March quarter were flat compared to the December quarter. We have since resolved the component shortage problem and expect significant business growth after we establish manufacturing capacity next quarter, as customer demand is very healthy.

Regarding our other product lines -- including video transport, RF and microwave links for satellite communications, specialty photonics systems for homeland security applications -- the business looks quite healthy. Revenues from these product lines were not impacted by the flood, and we have seen strong increases in bookings for some of these product lines.

The business in our enterprise product lines, which include a [mix] of components, parallel optic modules, and active optical cables, did well. The revenue contribution from these product lines in the March quarter were approximately $4.3 million.

As announced on March 27, we entered into a definitive agreement to sell the VCSEL-based components and module business to Sumitomo Electric Device Innovations USA. The consideration for this sale will be $17 million in cash, subject to certain closing adjustments.

The assets to be sold include fixed assets, inventory, and the intellectual property for the VCSEL-based product lines, including the parallel optical transceivers, [inactive] cables, as well as the VCSEL fab located in Albuquerque. EMCORE will retain all the rest of the Fiber Optics product portfolio, which include our indium phosphide based lasers, photodiodes, and modulators, telecom and cable TV fiber optics products, fiber-to-the-home transceivers, video transport, and the specialty photonics products.

The decision to sell the VCSEL-based product line is strategic and market-driven. This divestiture will greatly simplify our operating structure, reduce fixed costs, and improve market focus. The sale is also expected to reduce the time to reach profitability.

Our core competencies in compound semiconductor-based products and performance capabilities remain the cornerstone of our Fiber Optics business. Our retained products and technology portfolio is strongly aligned to support current and future requirements in tunable, coherent high-speed transmission systems and next-generation broadband architectures.

The proceeds from the transaction bolsters our balance sheet, improves our ability to invest in telecom, broadband, and specialty photonics products, to remain industry leaders in these respective product lines in our Fiber Optics business segment. We are getting an approval from the Committee on Foreign Investment in the United States, called CFIUS, and we plan to close this transaction next week.

Sumitomo plans to continue the [rate of] fab operations in Albuquerque and rent building space from EMCORE. This helps us to reduce our fixed costs. Concurrently, Sumitomo has entered into several ancillary agreements with EMCORE, including a transition service agreement to ensure a smooth business transition.

Over the past quarter, we purchased needed equipment for rebuilding the production lines and replenished the inventory pipeline. As a result, we consumed significant cash in the March quarter. We expect the cash flow from operations will be trending much more favorably going forward.

We are still working with our contract manufacturers and their insurance carriers on the insurance claims related to the equipment and the inventory damaged by the flood. Significant proceeds are expected although the timing and amount are still unclear.

Turning to guidance for the third quarter of the fiscal year 2012 ending June, we expect to have revenues in the range of $38 million to $41 million. If we had included the contribution of VCSEL-based revenues which are being sold to Sumitomo for the entire quarter, our revenue would be in the range of $42 million to $45 million. The primary contribution to the sequential revenue increase is the further recovery of Fiber Optics production capacity and the higher shipments from our Solar business.

Just in summary, we have completed the product strategic realignment in our Fiber Optics segment post-flooding. The remaining business represents the latest technology in the fastest-growing area.

We are recovering from the flooding impact, as evidenced by the 20% sequential revenue increase in the March quarter and a 10% to 20% additional recovery guided for this quarter. Booking is strong and the recovery is on the track.

In our Solar business, the market outlook is very promising and we are poised for a strong growth in the latter part of this year. As our operation model becomes simpler, we plan to provide more guidance on revenue and margins from next quarter on. With that, I will turn the call over to Q&A.

(Operator Instructions) Edward Zabitsky, ACI Research.

Hi, guys. Good afternoon. I wanted to ask you guys a few questions. First of all, I might have missed it, but the -- well, first of all, I wanted to congratulate you on really focusing the Company down on what it does best. I think the Sumitomo transaction is fantastic for you guys.

Second of all, I just wanted to ask you a couple questions. One on the TXFP business and the second one on OpEx post-transaction. So I wanted to know what the revenue was in the order; and then OpEx is self-explanatory.

Thank you, Ed, for the question. On the tunable XFP revenues, our tunable XFP revenues in the quarter were $1 million, which was flat with the prior quarter. As Hong mentioned in his remarks, we did have some supply constraint issues, and therefore this quarter was a little bit below our expectations on the tunable XFP revenue. But we do expect some additional growth going forward.

That's what -- sorry, go ahead.

Then regarding the OpEx, post-transaction we do expect there to be a significant reduction in our OpEx levels, after the Sumitomo transaction is closed. We do expect that to happen by the end of -- or within one week's time. At that time we will be able to give you a little bit more feedback in terms of what it is going to mean for us.

Just to give a little bit of clarification of what the transaction is for EMCORE, it will include the transfer of employees. It will also include the fact that we will be subletting some of our facility space, so that we will also have some other additional fixed-cost reductions as a result of the transaction.

Okay. Just to go back onto the TXFP business. Can you give us a sense of what the demand was? How much you could have shipped if you were able to, if you didn't have those shortages during the quarter.

We could have shipped 2 to 3 times of the revenue we actually achieved. So $2 million to $3 million if we were not this component-constrained in the last quarter.

Okay. Very good. That's obviously a lot better and probably what we expected or better. So, what is going to be the impact in terms of your costs and in terms of gross margins, of moving that over to contract manufacturing?

So yes, that is a good question. Currently, we are making the tunable XFP in our Bay Area facility, even though it is qualified with multiple customers. We have the balance -- the ramp-up and also the cost. As you know, the Bay Area is not the most cost-effective.

So when we get the full capacity established at our contract manufacturers, we expect the gross margin to be improved by about 15% to 20% compared to what we manufacture in the Bay Area.

Okay. That's very helpful. What is the time frame for that, please?

The full capability will be established in this quarter, by the end of May to mid June time frame. But then again, we run through the line and sending their samples to customers and do the necessary qualification; we expect the full capacity to be established in the September quarter.

Okay. So does that mean -- that means that basically it will fully show itself in the results in the September quarter?

Yes. The September quarter is going to be a production from both the Bay Area facility and our contract manufacturer. But the December quarter is going to be purely from our contract manufacturer.

Okay. Very good. I will let someone else ask a question. Thank you.

(Operator Instructions) Alex Henderson, Miller Tabak.

Hey, guys. So just to clarify what I thought you just said on the tunable XFP production, did you say it was fully out of the contract manufacturer in the September quarter? Or did you say it would be partially out of the contract manufacturer in the September quarter? Because I thought you said both.

Yes, approximately the September quarter we will be having the production facility in the Bay Area continue to produce and ship. In the December quarter (multiple speakers). That is the September quarter.

In the December quarter, we don't need the Bay Area facility any more. It is not because in the September quarter the capacity at the contract manufacturer is not enough; it is because of the customer cutover. Some, they go a little slower than the others for qualifying the product produced in Thailand.

Great, thanks. That helps. In the guidance that you gave for the upcoming quarter, you had a pretty big variance in the March quarter in Solar. Are you assuming that the $4 million that slipped out comes in the June quarter, or in the September quarter, or back half? How should I be thinking about that?

Can you give us any sense of what the split you would be expecting between those two in the June quarter?

The June quarter revenue we're not counting on this deferred shipment. So that is likely to be an event in the December quarter.

So the Solar revenue is really based on all the backlog we have already in the book. So we are producing according to the this firm backlog; but it was not counting on this delayed shipment.

So it had been running $19 million a quarter, $20 million a quarter kind of run rate. You missed by $4 million relative to this order.

Should we be thinking $19 million to $20 million run rate per quarter excluding that in the June and September quarter? Or is there some other variance that we should be anticipating?

The June -- September quarter we are probably running at a level of $17 million plus-minus. Then the significant ramp-up is going to be happening. There is a number of programs are going to be hitting us in the December quarter pretty strong, both from solar cell side and also solar panel programs.

So the 40% increase in backlog through the December quarter is still going to be deferred out into the December time frame. So it's about a year from the time you built the backlog to when you realize the revenues on that; is that the right way to think about it?

Yes.

Okay. Then on the ITLA side of the business, which you have talked about tunable XFP and ITLA being the predominant piece of flex in telco, I assume that you are expecting those final customer evaluations back imminently.

You have got the production up. My sense was that the yield on that initial production was pretty good, up in the 70%, 80% range.

So I would think that you would be able to start to deliver pretty aggressively against that in the June quarter, obviously with full ramp not happening till the September quarter. But am I right in thinking that sequentially there should be a pretty good increase there?

Yes, the June quarter we are going to be seeing all the ITLA revenue are from the line we produced, from the new line we produced. This quarter, the March quarter, we are talking about the ITLA revenue was from the inventory we rescued before the flood got into the floor.

So you are absolutely right. We are starting the production and we are loading the production line very aggressively. And most of the customers have already signed up based on our qualification results. Right now this quarter is just going to be the most intense ramp-up quarter for ITLA.

Now, my sense is that there is a little bit of a lag from the time that you guys got qualification on your testing and when the customer qualification came back. Are you producing product in anticipation of them passing it, so that we already have built some inventory into that qualification acceptance?

Right. Absolutely. We are building the risk inventory even when we are very confident the product is qualified, because we had finished the selected Telcordia qualification requirement as we defined it with customers before we entered into the qualification test.

But some customers still will be doing the system validation test. But in between, before they take the product, we are loading the inventory and the work in the line and do the risk build.

I assume that you are not running full multiple 2.5 shifts against a risk build. So are we running 1, 1.5 shifts here at this point?

We are running probably like 60%, 70% of the full tilt. You have the balance risk you are taking and also the reward you are getting with the floodgate is opened.

Okay. So you are building in front but you are not at full capacity. You are going to get those orders in. By the time we get out of the quarter, will be we be running at full capacity on multiple shifts?

Right. We are just waiting for the high-sign from the customers. We get orders from them, and right now, the ITLA firm orders is over $25 million in that product line alone.

The orders are not a problem. It is just the customers' system validation testing. We got a number of them giving us the high sign already. So yes, that is where we are.

So, as you were producing the product in the March quarter, did we absorb a bunch of excess inventory that -- the initial product coming off line that we had to expense through the system? Is there a nut, that we can estimate how big that was during the quarter?

Yes, Alex, thank you for the question. We actually -- most of the units that we actually produced in the March quarter were really just sampling units. So we didn't really have full production during that time.

As Hong mentioned, really right now is the time when we are really starting to ramp up, with about 60% of the capacity being utilized today for the ITLA products.

I see. I get it. Over on the cable side, and I apologize for the laundry list of questions here, but the cable side there, could you give us some sense of what the quarter-to-quarter progression looks like in cable, and what you are thinking as we go into the June quarter, in the cable piece?

Yes. So the cable production capability is fully established by the end of March. That is the production infrastructure was reviewed in our wholly-owned subsidiary in China.

Right now we are also in a similar phase. We produced product with a new line in sending to customers for qualification. In the meantime we conduct internal qualification as well.

The product is qualified from the internal testing and also been signed off by a number of customers. So this quarter is basically ramping up the production. We are doing the same strategy of the risk build even when some of the customers still going through the qualification testing.

We expect by the end of June we should be reaching the full capacity for the cable TV production.

But still that would put you back to the pre-flood revenue levels? Can you talk a little bit about what the demand is doing on that side of the equation?

Heard from a number of companies that the cable end-market demand for CapEx is a little bit more resilient than the Tier 1 service provider market. Is that an accurate read relative to what you guys sell?

You're absolutely right. You're absolutely right. So, we sit here -- well, we have been following the multiservice operators and their CapEx spending; we have also been following the cable-TV equipment manufacturers.

In the worst-case CapEx is flat quarter-over-quarter. In a couple better cases they have increased by about 10% quarter-over-quarter.

So we are pretty optimistic. As Mark mentioned, we have very healthy backlog; but right now we just don't have enough capacity to meet the customer requirement. I think the demand side so far looks very robust.

Understood. I will get back in queue. Thanks.

(technical difficulty) ACI Research.

Hi. Thanks again. I wanted to go back to the ITLA product line. Obviously your micro-ITLA -- I think you said Telcordia qualification is about to happen. Just wondering if you have any design wins at this point or measures of customer interest you can speak of.

Yes. So the process of new introduction, Ed, is we design utilizing our secret sauce and the best technology; then we send it to customers for sampling and soliciting their feedback in the performance of it in their systems.

We have done that. And now we have got, as I said, very, very positive feedback. So we basically get it all buttoned up and finalize the design and building samples for nine legs of a different Telcordia qualification requirement. So that building those qual samples is happening right now, and in this quarter we will start the Telcordia qualification.

Again, this same platform we are going to be using, the external baseline, external cavity lasers, expect some of the customers is going to be start taking samples -- start taking the product earlier than others. But from strictly design win point of view, we sampled a few customers; they all like to have this product as quickly as possible. But we will not be having the production ready shipment to them until the latter part of this year, because of Telcordia qualification cycle.

Right. So obviously, you have a great performance advantage in the long-haul market and I guess ultra-long-haul and submarine. Just wondering; is that translating into a similar kind of the interest in your micro-ITLA as there was in the ITLA when it came out?

Absolutely.

Okay. Good, good. So, I was wondering about the timing of cash from Sumitomo. Will that close -- will that cash come when the deal closes?

Yes, it will be -- yes, for the question, the day after the transaction closes we should expect to receive the funds, minus certain customary adjustments regarding inventory and other asset levels. Then in addition there is also an escrow that would be set up.

So we expect the net proceeds would be less than the $17 million figure, but most of those differences will be held basically in escrow for a period of time.

Right, good. Okay. On the insurance proceeds, have we seen all -- have all the insurance proceeds hit the balance sheet, or are we going to see more?

We received $5 million in cash and checks in the December quarter. As we talked about briefly in the script, we are also expecting to -- we're working right now with our contract manufacturer in terms of the inventory and the fixed assets that were damaged as a result of the flood. We hope to -- we're working with them in terms of submitting claims and also resolving those, their claims, so that we can receive our monies from those damages.

Okay, good.

In terms of timing, the timing of insurance is always tough, especially when it is insurance that we don't -- that is not in our name. So it's going to take a little bit of time, but we do think we are on a very positive path.

Okay, very good. Just shifting back to the TV business for a minute. When did you say you expect to see some higher volumes? Higher volume, is that just associated with the programs hitting in Q4? Or was that associated with demand from the CPV joint venture?

Yes, it was primarily from the space solar programs. As I talked about, the end-market demand is very healthy. A number of programs is going to start hitting us from the December quarter on.

So we -- based on the outlook we see it is sustainable, strong demand start from the December quarter, primarily from the space programs.

The terrestrial CPV, what happens in that from Suncore, the 50 megawatts right now we are producing for them. And we also have other customers' demand, but the line was loaded primarily for space programs.

Right. So looking forward, let's go to the December quarter, and assuming you get this large volume of orders, what kind of gross margin is that business looking at? And also factoring in, of course, the new test equipment. Can you just give us a sense as to what that will do to gross margins in that business?

Yes. Ed, on the gross margin side for the solar satellite business, if you look historically over the last couple years our gross margins in that business have averaged between about 25% and 30%. We do expect that with the volume levels that we are talking about that we should be able to get close to that 30% level, which is our gross margin target for the base Solar business.

Okay. Thanks very much, guys.

Stephen Koffler.

Hi, Mark. Hi, Hong. I was thinking here about potential market share shifts, which often happen in situations where everybody's capacity-constrained following an exogenous shock like we had. So I mean I am just looking at some notes from JDS Uniphase earnings report; they have tunable XFPs as you know; they did $23 million.

I honestly don't know who you compete with in the ITLA. But I am just wondering, as probably the smallest or one of the smallest competitors in the segment, what do you think is the potential of market-share losses then, when the high-signs you're waiting for may not materialize because a bigger player got in there, got some of the capacity that was needed? You see where I am going.

I just want to think about what could be down the road in terms of somebody -- a bigger player getting some business that should have been yours but just wasn't.

That's a very good question. The ITLA, we had a commanding share before the flooding; and we had -- virtually every equipment manufacturer have our products designed as a primary supply in their LAN card and transponders. When we were hit by the flood and supply became constrained, that certainly opened up opportunities for our competitors.

But we have been constantly getting comments and getting requests from our customers. Basically they said they'd tried all products in the market, ours absolutely performed head and shoulder above anything they can get. And they wanted to have our line up and running as quickly as possible.

So we can't really control what other people do. We will just focus our own reviewed effort. And, as I said, we are three weeks before -- ahead of the schedule. Customers are extremely happy about that. I think if we lost any market shares in the past we will be able to get them back pretty quickly as soon as we get the capacity established.

Okay. Have you asked for take-or-pay contracts on these products? Is that something you are in a position to at least ask for?

Right, yes, absolutely. We had that. We reported in last quarter that over $23 million [orders] take-or-pay, NCNR contracts, non-cancellable non- (multiple speakers).

Oh, okay. I wasn't -- so much information came over this Thailand situation I didn't -- I missed that. That's great that you got that.

So, I mean this visibility you are talking about, being able to do double or triple, does that -- do you have that kind of visibility in terms of take-or-pay on the key products?

For tunable XFP, I was answering to if we were not limited by this key component in the March quarter, we would do 2 or 3 times of the revenue. That has more competition, but we have healthy backlog to deliver that level of the product revenue.

So going forward, ramping up the capacity we will continue to expand our customer base. We expect tunable XFP will do well as well.

All right. Let me just ask one more question on this. This is just to quantify in a simple way. What remains in the entire division, the Fiber Optics? What remains, orders, in terms of take-or-pay in dollars?

So, the ones take-or-pay I think we are in the strongest position to do that is ITLA. That is for the narrow linewidth, for 40-, 100-gigs coherent system. And I can say it was over $25 million.

Over $25 million is you have orders on a take-or-pay basis?

Yes.

That's great. All right. Great job of recovering, because I know this was a nightmare. Thanks for the great work.

Alex Henderson, Miller Tabak.

Since we are talking about the take-or-pay contracts, just can you remind me what the metrics were on how much of that was pre-paid? Because I know that you got money in front, upfront on that. What portion of the full year was covered by those contracts?

And it sounds like you're actually having a better response. Are you expecting that you will end up essentially with fulfillment into the first half of fiscal next year on that, on those take-or-pay contracts?

And what was the price differential? I know you said you your pricing was higher on the new, on these fill-in orders.

Yes, thank you, Alex. Out of the $25 million that Hong was mentioning, we received a pre-payment of about $6.5 million. So roughly one-fourth of that figure we had as a prepayment.

Then in addition to your other question, in terms of being able to fulfill that, as Hong mentioned, as we start going into the later part of this year we will be up in full capacity. And by full capacity -- prior to the flood we were at a capacity level of doing $10 million or more a quarter in ITLA business. So we have -- once we get that product line back up and running at full volume, we will be able to reach those limits if not more.

As part of this -- as part of all the work that we did in association with the rebuild, we have actually increased our capacity levels so that we can actually meet our customer demands. I think you talked a little bit about it before, but we really see such a strong growth in 40- and 100-gig coherent that we just looked at this as an opportunity to expand our capacity to make sure that we can meet the growing demand that we are seeing.

So, the pricing on this was higher. If I recall it was something in excess of 20% higher on the product that you have got in backlog.

Yes; yes it was.

Does that imply that if you were $10 million before you are now at $12 million, even excluding the expansion in the capacity?

Yes, that would be correct.

And that -- those contracts at that higher level of price play through the end of calendar 2012 and (multiple speakers)

Going through the end of this year.

(multiple speakers) a little in 2013?

Yes, going through the end of this year, actually for the pricing increase, yes.

I see. Okay. Just going back to the cost side of the equation for a second -- and I apologize for this, but I am always mystified by the spending that you have been doing to support the terrestrial business that shows up as a cost against the Solar, space solar business. Can you remind me what that looks like? Because I am always mystified by that piece of the puzzle.

Yes, that's a very good question. Alex, you know the solar market backdrop is very challenging. We have seen that months before, so that is why we were focusing our strategy on solar cell side and CPV, concentrated solar cells supply to the industry. They will be developing projects.

We only build on the projects we see very profitable. For example, the distributed generation project, 2-megawatt in our backyard. This will be a very profitable project.

We also are watching our spending very, very carefully. Because we have the joint venture in China, and having them be the pathfinder for the market to establish the CPV heritage and also to penetrate into Chinese solar market. So from our side going forward, we basically will be having very limited spending on our part; and we are reviewing our current effort on that and watching very closely.

So, the solar side we are not going to be counting on the terrestrial solar in the near term for revenue in -- a whole lot, so therefore we will be paring down our supporting activities accordingly.

Just so I can be clear, weren't you running about a $2 million per quarter expense associated with terrestrial IP investments? Isn't that expected to come down over the next two or three quarters from $2 million plus to about $0.5 million by year-end?

Probably by the year end, half of that.

So it is running at $2 million in the December quarter, and it goes down to a couple hundred thousand by the end of December?

To the $1 million level. So right now we are running about $2 million a quarter, and by the December quarter we expect to reduce to about $1 million a quarter.

Okay, so about $1 million. So it is coming down.

Can you get rid of that altogether? Or is that expense that is necessary? Why are we spending money on terrestrial IP investments?

I still have a dream. We are still optimistic.

In some applications, for example commercial rooftop, the concentrator photovoltaics provide the highest power density. And in many states the incentive was provided for commercial rooftop distributed generation to offset the highest power costs. At high noon time, for example, at about -- in California it is $0.32 per kilowatt-hour.

So it depends on the product. I think for commercial rooftop we still have a very good chance to make that a viable business.

Well, just so I understand, so you think that spending $1 million to $2 million a quarter on terrestrial solar is going to improve the value of your stock in any way?

That is at this point our view. But you know, we evaluate our business and every product line very routinely, a couple times a quarter. So if the situation changes, we are not afraid of taking action.

One last question. So given all you know right now -- and I realize you don't want to forecast out multiple quarters or anything of that sort. But does it look like you can get back to profitability in the CY 2012 time frame? Is the September or December quarter a viable target to get back to stanching losses and actually turning a profit possible? It's kind of the bottom-line question, isn't it?

Yes, Alex, our goal is definitely to do that. At this point I think you have seen with the Solar area, we are expecting a significant ramp-up in our business, increasing the gross margins to our target levels.

On the Fiber Optics side we are forecasting significant growth this quarter, for the June quarter. Hong mentioned that we are also looking at continued growth for September and December. And with the product base that we have, that we are focusing on, these are all areas that have very strong IP content in which we believe we can get strong margins for the Fiber Optics area.

So with all that, our goal is to go into next calendar year with a plan of being able to be a profitable organization. But at this point we are still -- we love to look up, but at this point we are just looking straight ahead at how we are going to ramp up the ITLA product line and the tunable FXP product line over the next three to six months.

Okay, one last question then I will cede the floor. You have given the comment about -- Ed asked the question and I don't think you quite answered it. Which is, you told us how much revenue was associated with the assets being sold; but you did not say how much the net overhead reduction and OpEx reduction was.

So if I assume the product was selling at say a 40% gross margin, how much overhead am I dropping and how much OpEx am I dropping? I assume that if I were to put those in, it would be running at a net loss on that $4 million of -- what, a million or two?

Yes, I mean at this point, with our agreement with Sumitomo, we can't really disclose some of those details unfortunately, Alex. I'm sorry. But what we can say is that there were the fab itself as we talked about before, the gallium arsenide fab had overhead structure that was more than $1.5 million a quarter roughly. In addition, the total number of employees that will be transferring over to Sumitomo is about 60 employees, with the vast majority of those focused on the manufacturing operations.

So, unfortunately we can't really give much more disclosure than that at this point.

I'll cede the floor. Thanks.

Yes, but you can imagine -- we have three wafer fabs. Gallium arsenide wafer fab for laser only supporting $4.3 million revenue like the last quarter, a quarter; and then indium phosphide fab, that is very synergistic to support our key leading technology area of ITLA, tunable XFP, and cable TV broadband product. That is located in Alhambra in Pasadena area.

So we will continue to operate and expand in that fab; and then we have our solar cell fab. So by divestiture we basically get rid of one fab which is only supporting a very limited amount of revenue. So that's the gain from the fixed-cost reduction, it is going to be pretty significant.

But it does sound like you were losing a couple million dollars on this business. So selling it is going to be a net positive to your margins and your profitability.

Yes, that is definitely the case.

Thank you.

Thank you. I will now hand the call back to the speakers for closing remarks.

Thank you very much for dialing in today. Just to give a heads up, the management will be presenting at the 13th annual B. Riley conference in Santa Monica on May 22, and we look forward to seeing you there. If we don't, we look forward to talking to you in the next conference call. Thank you.

Thank you. Ladies and gentlemen, this concludes the conference for today. You may all disconnect and have a wonderful day.