EMCORE Corp (EMKR) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the EMCORE Corporation Third Quarter 2012 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session and instructions will follow at that time.

(Operator Instructions).

As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Victor Allgeier. Please go ahead.

Thank you and good afternoon, everyone.

Before we begin, we would like to remind you that the information provided herein may include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act of 1934.

These forward-looking statements are largely based on 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 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 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 in our businesses 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 section entitled Risk Factors in our annual report in 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 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, everyone. Today I'm going to focus my discussion on our third fiscal quarter operating results and our balance sheet.

Consolidated revenue for our third fiscal quarter totaled $41.1 million, which is an increase of $3.3 million, or 9%, over the previous quarter. The increase was primarily due to higher fiber optics revenue offset by a reduction in our solar business. Our Q3 revenue guidance was $38 million to $41 million.

On a segment basis, our photovoltaic business accounted for $15.3 million, or 37% of the Company's total revenue. This represents a $0.6 million, or 4%, decrease from the prior quarter. As we've said previously, while we believe in the long-term growth prospects of this business, our revenues in any given quarter may be a bit lumpy.

The fiber optics segment accounted for $25.8 million, or 63% of the Company's total revenue. This represents an increase of roughly $3.9 million, or 18%, from the prior quarter, with the increase primarily from our recovery efforts after the flood in Thailand. In the third quarter, we recognized $1.8 million of revenues related to the divested Enterprise product lines versus $4 million in the prior quarter. Hong will discuss the prospects for the fiber optics business later in the call.

Consolidated gross margin was 10.7%, a 3.5 percentage point decrease from the prior quarter, primarily attributable to deterioration in our solar segment margins and a shift towards fiber optics, which typically have lower margins.

On a segment basis, photovoltaic gross margin decreased eight percentage points to 13% as we were unfavorably impacted by higher losses in our terrestrial solar business, various losses from a power outage in our Albuquerque location, and lower yields. We believe that this segment can reach gross margin targets of 30%.

Fiber optics gross margin was 9.3%, flat with the prior quarter, primarily from higher margins from an increase in revenues offset by higher excess and obsolete charges, losses on purchase commitments, and yield variances associated with our manufacturing ramp-up. The gross margin for our fiber optics segment would have been over 15% in the quarter if we exclude these items and our consolidated gross margins would have also been close to 15%. We expect our gross margins in the fiber optics segment to improve in future quarters as our revenues continue to increase.

After we complete the rebuild of the manufacturing lines damaged by the flood, we will lay out the operating targets for the fiber segment. Total operating expenses for R&D and SG&A were $13.8 million, excluding the flood-related charges, gain on sale of assets, legal settlements, and impairment charges.

During the third quarter, we recorded a gain on the sale of the Enterprise product lines of $2.8 million. We have deferred $4.9 million of the gain on sale until the indemnification obligation and adjustment contingencies are cleared.

We also recorded a loss on litigation settlement of $1.05 million. This settlement was related to a patent infringement lawsuit that was settled in the third quarter. As a result, we expect a reduction of legal expenses going forward.

In addition, we recorded an impairment loss on the CPV assets of $1.4 million. As we recently announced, we have entered into an agreement with our joint venture partner, Suncor, where EMCORE will transfer its CPV product lines. This sale is expected to close in the current quarter and will result in a reduction in our expenses of over $1.5 million per quarter. Hong will discuss the Suncor strategy and opportunity in more detail.

On a GAAP basis, the consolidated net loss for the third quarter was $9 million, $0.3 million better than the prior quarter. We believe that our results will continue to improve in future quarters as we ramp up our fiber optics manufacturing lines, increase our revenues in our solar segment, and reduce our R&D investment levels in the CPV product lines.

Our GAAP net loss per share was $0.40. Our non-GAAP adjusted net loss, after excluding certain adjustments, all which are set forth in the non-GAAP tables, including today's release, was a loss of $7.6 million versus $5.4 million in the prior quarter. Please note that we have included additional information regarding 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 June 30, the Company had a solar order backlog of approximately $46.2 million. 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 June, the Company's cash, cash equivalents, and restricted cash balance was $20.8 million. Our net cash decreased 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, partially offset by the proceeds received from the sale of the Enterprise product lines.

Regarding the insurance recovery for the flood damage, we are working with our contract manufacturer and their insurance carriers related to the consigned inventory and equipment damaged. We have made some strong progress; however, the amounts and timing of those receipts are uncertain and proceeds will be accounted for as a gain upon receipt and contract finalization.

Over the past few months, we have made significant strides in recovering from the crisis caused by the flooding in Thailand, including steps to streamline and focus our business through the sale of certain product lines. We look forward to showing the results of these actions over the next few quarters.

Finally, as we announced today, Reuben Richards will be leaving the Company at the end of September as the Executive Chairman. With that, I will turn the call over to Hong, who will discuss the recovery from the flood in Thailand, the sale of the CPV assets to Suncor, the Company's strategic and operating initiatives, and provide revenue guidance for the fourth quarter.

Thank you, Mark. Good afternoon, everyone. As Mark discussed, we achieved the consolidated revenues of $41.1 million in the June quarter, slightly above the high end of our guided range. The revenue from the fiber optics segments increased by 18% sequentially due to the recovery of our product capacity and the revenue from the space power business declined slightly sequentially.

A year ago, EMCORE's management presented to its board of directors an in-depth analysis on the business strength and the growth opportunities of every product line. Given the market dynamics and the competitive landscape in the optical component and the solar power industries, we decided to focus our business plan to provide enabling and disruptive technical solutions in selected areas of fiber optic communications and solar photovoltaics by leveraging our compound semiconductor material and device expertise, thereby focusing our business scope on these areas with the highest potential for growth and profitability.

With that theme and strategic focus defined, we started formulating a restructuring plan. With expected closing of the sales of the CPV product lines, I am happy to report that we have now completed business and management realignment to position the Company on the path for sustainable growth in profitability.

The first move was the sale of the Enterprise business. These product lines include [VCSEL's] parallel optical devices and active optical cables. For an approximately 5% of revenue contribution to the entire business, it requires a fast infrastructure to support the business. In May, we closed the sale transaction of our Enterprise product line to Sumitomo Electric. This divestiture greatly simplified our operating structure, reduced the fixed costs, and improved the market focus. In addition, we subsequently settled the patent infringement lawsuit.

Our retained products and technology portfolio in optical components and subsystems is strongly aligned to support current and future requirements in tunable, coherent high-speed transmission systems and next-generation broadband architectures. Within the product portfolio of the cable TV components and subsystems and external cavity laser-based tunable laser product, EMCORE is now positioned to be the technology and market leaders in each of our product lines.

On the solar side, just yesterday we announced that we entered into a definitive agreement subject to closing conditions to consolidate our terrestrial CPV system product and business development efforts into a joint venture, Suncor Photovoltaics. In order to streamline new product introduction and engineering effort on cost reductions for CPV systems, EMCORE will consolidate intellectual property and development efforts for both ground mount and rooftop terrestrial CPV products to a wholly-owned subsidiary of Suncor in the US.

Suncor's subsidiary will fund our ongoing R&D, marketing, sales, and business development-related expenses to the terrestrial CPV systems. EMCORE will continue to own the intellectual property related to the solar cell technology and to maintain investment activities to advance CPV cell performance to serve a broader customer base within the CPV industry. This transaction, when it closes, will allow EMCORE to focus its efforts on our core competency of multi-junction solar cell technology for both space and terrestrial power applications.

Moving forward, EMCORE will continue to support Suncor through supply of advanced CPV solar cell products and maintain its presence in the terrestrial CPV system market through our 40% ownership in Suncor. This transaction is very strategic to Suncor as well. With a strong IP portfolio acquired through this transaction, solid financial status, and the low cost and high volume manufacturing capacity, Suncor is now ready to serve the global renewable energy industry with a state-of-the-art CPV products and technologies.

EMCORE employees who are currently engaging in product and business development for terrestrial CPV will be transferred to Suncor. EMCORE's Executive Vice President, Dr. Charlie Wang, will also be joining Suncor, serving as its General Manager on a full-time basis upon the closing of this transaction.

The sale of our Enterprise product lines and the consolidation of CPV product lines marks the completion of the Company's business realignment and it will allow EMCORE to more effectively focus its portfolio on areas where EMCORE technology and product solutions have strong [depreciation] in the marketplace. I am very excited about our current business portfolio, a combination of a solid, sustaining business in high growth areas, embedded with the most (inaudible) technology.

As a part of this restructuring effort, Mr. Richards proposed to EMCORE board of directors to eliminate the position of Executive Chairman, and subsequently he will retire from the executive position at EMCORE, effective September 30, 2012. Mr. Richards will continue to be Chairman of the Board while he will provide strategic guidance and the governance oversight. With Reuben's retirement and the Company's focus on business scope and operations, EMCORE has realigned its management responsibilities accordingly.

During Reuben's 17 years as EMCORE's top executive, he has led the transformation of the Company from a single product line start-up to a leader in compound semiconductor technology and applications. EMCORE has pioneered numerous leading technologies and product solutions with many compound semiconductor devices and applications. He was also instrumental in several strategic transactions, defining the growth strategy and operational plans, and raising capital to execute the Company's business plan.

He's unparalleled in his ability to pursue market opportunities, develop technologies, to lead the industry in those markets. I applaud his contributions to the compound semiconductor industry through his leadership of a very innovative Company. I would also like to personally thank Reuben for his mentorship and leadership during this transition period and look forward to continue working with him as Chairman of the Board to [slide] the shareholder value.

With this, we have accomplished our goals in business -- in the management realignment. The losses from the product lines included in these two transactions were approximately [$50 million] over the last four quarters. With the Company's focus and business scope and much more streamlined operations, we have a clear line of sight for improved financial performance in the near future. EMCORE management is committed to driving its business to achieve profitability.

Now, let me give you an update on our businesses. First, I will start with the solar photovoltaic business segment. The fundamentals of the business remain very robust and the outlook for our space programs and revenue is very promising. We expect a strong revenue growth in this current quarter and we're very excited about our competitive position and expansion of our space photovoltaic business both in the US and the global markets.

In June, the 100th on-orbit spacecraft powered by the EMCORE solar cells solar panels were launched. We were especially proud to have achieved this significant milestone with zero on-orbit failures. We are also very proud that NASA JPL's Mars Science Laboratory spacecraft was successfully landed Rover on Mars last week was powered by our solar panels for its crews staged to reach the red planet.

Since we made the first commercial shipment of the solar cells just about 13 years ago, EMCORE is now right in line as the leader in the space solar cell supply. We currently have a total of 120 more satellites in their contract to be launched and powered by EMCORE's solar equipment over the next several years. We look forward to continued success in this segment by delivering innovative, high performance solar technology to the solar power industry.

Now let me discuss our market position and this new outlook in our fiber optics business segment. Since the flood disaster, EMCORE has developed and implemented a plan to review the impacted product lines at Fabrinet as well as its own manufacturing facilities in China and the United States. As we announced last month, EMCORE has reached pre-flood capacity on key telecom production lines and it expects to achieve pre-flood levels on all impacted production lines by October 2012.

EMCORE expects the increased shipment for its fiber optics segment in the coming quarters as manufacturing volumes ramps to normal levels and we work off the high backlog. The production line for ITLAs for 40 and 100 gigabit per second coherent telecom applications has been up and running since March at Fabrinet ahead of schedule. Production line qualification has been completed and customers successfully completed full-line audit and started taking shipments in April. As of this quarter, the ITLA line is operating at a pre-flood capacity run rate.

The cable TV, laser module and transmitter production lines at EMCORE's facility in China reached pre-flood capacity levels in July. EMCORE expects a tunable XFP transceiver production line at Fabrinet to reach volume production levels by October 2012. In the meantime, TXFP manufacturing is continuing in the US site in Newark, California facility.

Based on the strong demand for ITLA, we are increasing production capacity for 40 and 100 gigabit coherent applications by 50% to exceed pre-flood levels to support customer demand. The increased capacity is expected to support an increased demand of the coherent transmission applications and a favorable market share shift.

Our new product for telecom applications is a micro-ITLA, which is based on the same external cavity laser design platform and provides superior performances with the enhanced functionality in a much smaller form factor. It is being designed in by some key customers and the feedback has been extremely positive. We're still on track for volume production in 2012.

For cable TV and video transport applications, we have introduced several new products during the quarter with a cater to some specific territories and this product will help to expand the market penetration internationally.

Now let me discuss the market outlook in the areas of our product offering in fiber optics. We believe that the 40 and 100 gigabit coherent products represent the fastest growing area in fiber optics today. Our ITLA is experiencing healthy and robust demand.

As for the cable TV market, we expect that the spending for upgrade and scalable infrastructure will increase by about 5% in the second half of the year based on the CapEx announcement by the leading multi-service operators recently. We have seen record demand for our externally modulated transmitter product, which relates to more upgrades and new networks being deployed in cable TV networks.

Turning to guidance for the fourth quarter of fiscal year 2012, ending September, we expect to have revenues in the range of $46 million to $49 million, representing 12% to 20% sequential growth, with revenue increased from both space solar and fiber optics business segments for the reasons we discussed today.

In summary, we have completed the products' strategic realignment. The remaining businesses represent the latest technology in the fastest growing area. We are recovering from the flood impact as evidenced by the 18% sequential revenue growth in the June quarter and 12% to 20% additional recovery guided for this quarter.

Business going forward will be less related to flood activity recovery, but more on industry demand. Booking activity is strong and our production ramp-up is on track. In our solar business, the market outlook is very promising and we look forward for a strong growth in latter part of this year. Our goal now is very simple, profitability, and we look forward to discussing our progress in future quarters.

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

(Operator Instructions). Our first question comes from David Kang from B. Riley. Your line is open.

Thank you. Good afternoon and congratulations on a strong quarter and also guidance. The first question is regarding your $25 million ITLA orders you received right after the flood. So, can you ship the balance this calendar year? And any kind of penalty will you incur for not shipping all of them this year?

Dave, thank you for the question. We're still working out the balance of the backlog. But in the meantime, we have been replenishing the backlog with new orders and we are current with our promised shipment to each of the customers that placed purchase orders with us during the flood disaster. So that area continued to have a very healthy demand as we increased revenue and we're getting more purchase orders as well. We will not be penalized because we don't have any delayed shipment.

Got it. Got it. And then, you talked about additional capacity. Can you quantify a little bit? So, what's the -- what is the expected capacity? And then, what is the 50% add on top of that? And then, by when will you have that 50% capacity in production?

Right. So, currently with a full recovery with the current capacity, the run rate is about 12,000 units per quarter.

12,000, okay.

And we want to add another 50% on top of that, so that will be another 6,000 per quarter.

Got it.

And it usually takes about three to four months, and this process has started already.

Got it. Got it. And then, any idea as far as the mix between 40G versus 100G? And when do you expect 40G to peak? Alcatel's 100G is about 40% of their 40G/100G shipments. It sounds like 40G is already starting to peak.

Yes. So that part, I think -- and probably, our product line managers will have more clarity on that, but I can tell -- what I can tell, right now our customers are using our products primarily for 100G.

Yes.

It's not like they don't want to use it for 40G because we were told our product is the only one that worked for 100G. So as we increase the capacity, we expect a favorable market share shift, and then we will take more -- a lion's share for the 40G applications as well.

Got it. Got it. And when should we expect your micro-ITLAs to ramp?

We have sampled in two key customers and they have designed into their transponders and line cards. And right now, design already done is more [building] samples to get into the qualification. So we expect the general availability and start of [twonewvall] in production before the end of the year.

The end of the year?

And it's not going to be contributing to the revenue in the December quarter significantly, but more the quarters following.

Could some of your customers [kind of pause for] your micro-ITLAs, or are they just so hung up on getting 100 parts that they don't care at this point?

That's what we were concerning about. Is the micro-ITLA going to be cannibalizing ITLA -- regular ITLA market? It doesn't seem to be that way. So the regular ITLA demand still very, very strong and customers are not saying, "Gee, I wish you had the micro-ITLA. I can use that." But micro-ITLAs seem to be more designed into low power transponders, small form factor 100 gig and 40 gig solutions.

So it seems to be incremental products, not the same product cannibalization, at least at this time.

Got it. Got it. And just one clarification, Hong. When you talked about your cable TV CapEx going up 5% second half, I'm assuming that's versus first half then?

Yes. We have been watching very closely, for example, Comcast and Time Warner, their CapEx. They gave a very clear CapEx forecast, even though overall CapEx has actually declined slightly for the second half. But for our segment, the area we provide the product, mostly for reboot and upgrade and the scalable infrastructures, and the increase of the CapEx ranged from 4% to 12% for different companies. So we think 5% is a pretty conservative view.

And as I talked about, the external modulated transmitter demand has reached record levels, usually at four almost from the head-end to hub. So once you increase the pipe at that level in the remaining transmission infrastructure, demand is going to be increased as well.

Sure. And one final, I promise. I may have missed this, but did you break out the cable TV segment from your fiber optics revenue?

No, we did not.

Okay. All right. Fine. Thank you.

Thank you, Dave.

Our next question comes from Edward Zabitsky from ACI Research. Your line is open.

Hi, Ed.

Thanks. Hi, good afternoon. So, first of all, I want to congratulate you guys on focusing down. It's always tough to make those decisions.

I wanted to ask a number of different questions. On the photovoltaic side, I'm wondering, the reduction -- you had a couple of things going on and I'm wondering if they were related -- you had a reduction in backlog and you also had a lot of wastage. But you're talking about strong revenues, so is there kind of a slowdown in orders? It's just related to inability to get deliveries, or what would be causing that?

So, Ed, you picked that out really well and it maybe sounds a little confusing. So, when we gave the backlog it's for the deliverable for the products and service to be provided within the next 12 months. And we got a big, long-term purchase agreement coming in in chunks, so we're expecting big purchase orders to be added to the backlog in a week or two.

So it's not a continuous stream. They renew the purchase contract once every three years, so the demand is absolutely going to be increasing. Our revenues are going to be increasing in the current quarter compared to the June quarter. [And yes, but] the backlog numbers seem to be a little lower because we [work off the orders] from the current backlog, but we haven't finalized the contract and contract renewal for the next big orders yet.

Okay, that makes a lot of sense. And, Mark, I'm wondering -- so the OpEx this quarter, you said was around $13.8 million? What do you expect in Q4 -- in fiscal Q4? And I'm wondering, just with the numbers you announced this morning of $50 million annualized, does that mean about $11 million per quarter ultimately in OpEx, or how should we look at that, please?

Ed, this quarter was a little bit unusual in the third quarter. We still had the Enterprise product lines as part of our operating structure. And then, looking at Q4, we'll still have the CPV business in our -- the entire CPV business in our portfolio until the deal is closed. So as a result, depending on the timing of the closing of the CPV transaction to Suncor, there may be -- our expenses may be flat or they may actually decline. It really depends on the timing of that.

Right now, we're expecting it to close in the quarter; we're just not exactly sure of the timing of that. On a go-forward basis, as we mentioned in the script, we do expect our overall expenses as a result of selling the CPV product lines to Suncor, we do expect that our OpEx structure and our total expenses will decline by about $1.5 million per quarter.

So, $12.3 million is something we should expect as a ballpark?

That's a good number to kind of start with, yes.

Okay. That helps. And then, I'm also wondering about the TXFP revenue. Obviously, it's being manufactured in the states right now, but last quarter you said you had a material -- some sort of bottleneck. And I'm just wondering how you did this quarter and what the prospects are looking forward there.

Yes. You know that we are building up the volume capacity at Fabrinet and the line is fully up and running and the product is going through the qualification, a customer on-site audit. So even though we have the capacity and capability established, we cannot run full throttle at this point.

As for the Newark line, we did not increase the capacity during the quarter. So our revenue of the TXFP is still between $1 million and $2 million. But also, we used that very same infrastructure to prototype the micro-ITLA, which shared the same assembly line as the tunable XFP. So our focus in the current quarter was really not a push for the revenue increase of tunable XFP with a new work line, but it best utilized that capability for next-generation product development and accelerate the qualification and customer audit for Fabrinet line.

Okay, very good. So you're really just focused forward on the volume at Fabrinet. And so should we expect to see what things look like realistically in the December quarter as far as the XFP production goes?

Right. The December quarter will have some meaningful revenue from the production line at Fabrinet. The demand is there. The customers are pushing us to work with them on getting them qualified as soon as possible, but I think more substantial ramp is going to be in the December quarter.

Sure. So clearly, we're looking for higher gross margins from both the ITLA business and TXFP business. Is that still something that you would expect? Something -- gross margins well north of 30%, maybe even higher?

The ITLA is there. It's more established product, but a tunable XFP is going to be going through a learning curve and ramp curve.

Sure. But in time with volume, you still expect that to be the case based on pricing in the market?

Absolutely.

Okay, that's what we're looking for, of course. Thanks very much.

(Operator Instructions). Our next question comes from Alex Henderson from Needham. Your line is open.

Hi, Alex.

Hello, guys. How are you doing today?

Good. How are you?

Well, I'm pleased to see you guys taking some hard actions. I'm glad you've made some tough decisions there and it sounds like you really did the right thing on a couple of key issues.

I was wondering if we could get a little bit more granularity on a couple of metrics, though. The first one, you're saying that you're back to full production level on ITLAs, comparable to where you were before the flooding. If I recall correctly, you were in the $10 million -- $9 million to $10 million quarter range in the September quarter of last year before the flooding occurred. Is that sort of the benchmark that we were talking about here?

Yes. It was actually $9 million right before the flooding, and right now we're running at a run rate at that level or slightly higher. And we are adding another 50% on top of it.

So let's go to that 50%. So that 50% on top of that would then come in through the December quarter and March quarters, not all in the December quarter?

I think it's going to be finished building in the December quarter. The revenue contribution is going to be in the March quarter.

That would imply that you'd be up around the $13 million range per quarter. Is that sort of the right way to think about that?

Yes. That's what we are building the run rate for.

Okay, great. That was very helpful. Thank you. On the tunable XFP piece, you made a couple of comments in there that I was aware of, the one being that the ITLA testing was running across the same facilities. So you're saying that you did between $1.5 million to $2 million in tunable XFP with the micro-ITLA testing running on the same line? Is that what I heard?

Right. So the micro-ITLA assembly -- the micro-ITLA is a much smaller form factor. It's really an elaborately designed package platform tunable TOSA, which is much smaller than the [big] butterfly for the regular size ITLA. So all the assembly equipment are totally compatible to make packaging for micro-ITLA or making packaging for tunable XFPs.

So the packaging was the constraint on the production of the tunable XFP in the US facility?

Right. Right. It's not --

And you used the same packaging; therefore, that reduced the amount of production you would have had out on that product?

Exactly, yes.

So is it reasonable to think that if you're in the $1.5 million to $2 million range, that now that you're no longer doing test runs in the micro-ITLA that that would then pick up to some higher level in the September quarter?

Right. Right. But we have to stage the new production introduction, so I think -- and yes, the demand, even if we run full throttle in Newark, is still for the two, couple of key customers. It will be an incremental improvement in capacity delivery to them. They'd rather to see we got a volume production at Fabrinet.

So would I, because you're wrapping up some sort of 20, 30, 50 dollar bill around each one of those things as a gift to the customers that are buying them, and that's why I'm trying to get a handle on it. Does that imply an increase in the overage costs on those products in the September quarter?

For the September quarter, I think we will have a mix of micro-ITLA and tunable XFP units in Newark line as well. You're right. Even in the September quarter for the shipment of the tunable XFP out of the Newark facility in California, we have to wrap around some bills around it to the customers.

So you're losing money on each unit shipped just to keep this customer happy until you can get the Fabrinet lined up. That makes good sense. It's a good tactical decision. I'm just trying to determine is that increment of cost higher in the September quarter, or is it the same as the June quarter?

I think we were planning to be as the same in the June quarter.

I see. Okay, that's very helpful. Thank you. The second question is I just wanted to go back to the terrestrial IP piece that is being sold. Was there any revenue attached to that piece? I know that you'd said in the March quarter that you'd had a $2.2 million cost associated with it. But was there any revenue attached to that?

Very little. Very little. We are finishing up a couple of projects in the shipment, but it's very little revenue, about $1.5 million to $2 million loss per quarter. So you will see a significant improvement in the (inaudible).

So, that went from $2.2 million -- I'm assuming it's down to about $1.6 million in the June quarter? Is that right?

Yes.

And then, so when you say it's going to be down $1.5 million a quarter, that would imply by the December quarter you'd be down to about $100,000 or so loss from those type of -- that piece of the business, very minimal if at all.

Right. Very minimal by the December quarter, right, or nothing.

So those numbers are in the right ballpark, then?

Yes.

Okay. That's very helpful. The second piece, I'm really a little confused around the solar side. You had, obviously, a very nice build in backlog over the last year. You've talked about 20% to 30% to 40% increases in backlog ordering, and yet your revenues clearly as well off from where they -- where I would have expected them to be here in the current period given you've actually declined sequentially.

And your commentary about up, while I should hope it would be up sequentially in the September quarter, but you were doing a number that was a lot higher than the September quarter last year. It think it was $21 million. Where are we relative to those type of numbers? Can you get back into the $19 million to $20 million vicinity in the back half of the year, or are we talking still a much lower rate than that?

Yes. So, Alex, we will be back to the historic level. This June quarter and March quarter were the two -- kind of like the slow quarters because of the push-out of the two major programs, and each of those programs representing about $3.5 million to $4 million revenue. So we will be picking up the pace in the current quarter for the [space PV]. And also, our visibility for the quarters after -- two to three quarters after that is going to be very robust as well.

So, I'm thinking about it correctly when you're saying back to the levels that you were at, you're doing $18 million to $20 million kind of quarters as sort of a sustainable rate with a little bit of growth on it? Is that the right way to think about it?

Yes, $18 million to $19 million and 5% to 10% accrual. On an annualized basis, you'd still look at a very nice growth. But quarter to quarter, it's a little bit rocky.

Okay, I get it. The other question I wanted to ask was on the insurance recoverables. You didn't really talk that much about that side of the equation. Can you give us a little bit of sense of what's going on on the cash flow for the next couple of quarters?

It's Mark. Thank you for the question. Regarding the flood recovery, we've been working very diligently with both our contract manufacturer and their insurance carriers. We've made some strong progress over the last quarter and we hope that over the next few months we can get to a -- kind of conclude on all of these outstanding items.

We are coming to the one-year -- kind of the one-year mark, which makes things a lot easier because pretty much you typically receive all of the payments, have everything closed out after one year. So the good news is that I think by the next time that we do talk we'll be able to have a firm update of exactly the amounts, the timing, and what our expectations are. But so far, our contract manufacturing partner has been very, very -- a great partner with us and has been willing to kind of help us in terms of making sure that we can maximize the recovery that we're entitled to.

There was one other question I wanted to ask, then I'll cede the floor. Over on the tunable XFPs, when you get off of the facilities in Newark and get that production full over to the Fabrinet facility, how much of a cost fall-out does that represent?

Yes. So, the cost structure, we modeled the gross margin in the run rate as that steady state, when we reached to the volume it's going to be slightly north of 30% of gross margin at Fabrinet. But right now I think our gross margin of the product is basically zero in the Bay Area. So it's that much improvement.

So if it was $2 million, you're talking about 30% cost absorption --

Exactly.

-- on $2 million that will fall out once you get off of the Newark facility and get to the Fabrinet facility.

Right.

Okay. That was very helpful. Thank you very much. I'll cede the floor.

Thank you.

I'm showing no further questions at this time. I will now turn the call back over to management for closing remarks.

Thank you very much for dialing in today. We just have an announcement. We will present at the 2012 Citi Technology Conference at the Hilton New York Hotel on September 6 at 2:00 p.m. We look forward to seeing you there or talking to you in the near future. Thank you again.

Ladies and gentlemen, that does conclude today's conference. You may all disconnect and have a wonderful day.