EMCORE Corp (EMKR) 2012 Q4 法說會逐字稿

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

(Operator Instructions)

As a reminder, today's conference is being recorded. I would now like to turn the conference over to your host for today, Mr. Victor Allgeier. Sir, 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 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 and our business that are addressed in our filings with the US Securities and Exchange Commission that are available on the SEC's website located at www.SEC.gov, including the sections entitled Risk Factors in our annual report on Form 10-K, and our quarterly reports on Form 10-Q. We assume no obligation to update any forward-looking statements to conform such statements to actual results, or to changes in our expectations except as required by applicable law or regulation.

With us today from Emcore are Dr. Hong Hou, President and Chief Executive Officer, and Mark Weinswig, Chief Financial Officer. Mark will review the financial results, and Hong will discuss business highlights before we open the call up to questions. I'll now turn the call over to Mark.

Thank you Vic, and good afternoon everyone. Today, I'm going to focus my discussion on our fourth fiscal quarter operating results and balance sheet. Consolidated revenue for our first fiscal quarter totaled $47.5 million, which is an increase of $6.4 million or 16% over the previous quarter. The increase was primarily due to higher Fiber Optics revenue driven by ITLA sales and increases in our solar business. Our Q4 revenue guidance was $46 million to $49 million.

On a segment basis, our Photovoltaics business accounted for $17.4 million or 37% of the Company's total revenue. This represents a $2.2 million, or 14% increase from the prior quarter. In the fourth quarter, EMCORE sold assets relating to the terrestrial systems product lines to Suncore as part of the realignment strategy we discussed last quarter. As we have said previously, while we believe in the long-term growth prospects of the space solar power business, our revenues in any given quarter may be a bit lumpy. The Fiber Optics segment accounted for $30.1 million or 63% of the Company's total revenue. This represents an increase of roughly $4.3 million or 16.5% from the prior quarter, with the increase primarily from our recovery efforts after the flood in Thailand.

In the fourth quarter, we recognized zero million of revenues relating to the divested enterprise product lines, versus $1.8 million in the third quarter we recognized. Hong will discuss the prospects of the Fiber Optics business later in the call. Consolidated gross margin was 9.7%, a 1 percentage point decrease from the prior quarter, primarily attributable to lower Fiber Optics segment margins partially offset by an improvement in our Photovoltaics segment margins.

On a segment basis, Photovoltaics gross margins increased 9 percentage points to 22%, driven by higher revenue levels and improved yields. We believe that this business is on the path to reach gross margins of 30%. Fiber Optics gross margin was 2.4%, 7 percentage points lower than the prior quarter, primarily from higher excess and obsolete charges, work order variances for our new product lines, and yield and other variances associated with our manufacturing transfer from California to China and Thailand. The gross margin for our Fiber Optics segment would've been over 20% in the quarter if we exclude these items. We expect our gross margins in the Fiber Optics segment to improve in future quarters, as we complete the ramp-up of our product lines at our overseas locations.

Total operating expenses for R&D and SG&A were $14.9 million, excluding the flood related charges and recoveries, gain on sale of assets, legal settlements, and impairment charges. The increase in our SG&A operating expenses from the prior quarter was primarily due to severance realignment costs of $1.1 million. During the fourth quarter, EMCORE completed the sale of the terrestrial solar CPV assets to Suncore for $2.8 million. We did not recognize any meaningful gain or loss on the transaction in the quarter.

On a GAAP basis, the consolidated net loss for the first quarter was $6.6 million, $2.5 million better than the prior quarter. We believe that our results will continue to improve in future quarters as we you ramp up our fiber optics manufacturing lines overseas. Reduce our R&D investment levels in the CPV systems market and reduce our overhead cost. Our GAAP net loss per share was $0.27. Our non-GAAP adjusted net 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 $6.6 million, versus $7.5 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 to order backlog, which we define as purchase orders or supply agreements accepted by the Company with expected product delivery and/or services to be performed within the next 12 months. At September 30, the Company had a solar order backlog of approximately $43.3 million.

Moving onto the balance sheet, at the end of September the Company's cash and cash equivalents balance was $9.1 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, investment in AR due to the increase in revenues and mix shift, and operating losses partially offset by the insurance related proceeds received relating to the Thailand flood. Please note that the cash levels do not reflect the $9.5 million of net proceeds from the stock sale in October 2012.

Regarding the insurance recovery for the flood damage, in September, we completed the agreement with our contract manufacturer relating to consigned inventory and equipment damaged in October 2011. We have finalized an agreement that is expected to yield $10 million in total cash proceeds and the elimination of certain liabilities. Gains will be recognized upon the receipt or title transfer, which we anticipate to occur by March 31. During the first quarter, we received $4 million out of the expected $10 million of cash proceeds. 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 sell of certain product lines. We look for 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 sale of the CPV assets to Suncore, the Company's strategic and operating initiatives, and provide revenue guidance for the first quarter.

Thanks Mark. Good afternoon everyone. As Mark discussed, we achieved consolidated revenues of $47.5 million, which represents a more than 15% sequential increase from $41.1 million in the June quarter. The revenue from the Fiber Optics segment increased $4.2 million up 16.5% sequentially, due to the further recovery of our production capacity and strong demand in coherent 40 gig and 100 gig market. And the revenue from the space power business interest, by $2.2 million up 14% sequentially, due primarily to stronger demand from satellite solar panel customers. First let me discuss a couple of significant transactions during the September quarter.

In August, we announced that we entered into a definitive agreement to consolidate our terrestrial CPV system products and business development efforts into our joint venture Suncore Photovoltaics. The deal was closed in late September. This transaction allows the Company to focus its efforts on our core competency of multi genesis solar cell technology for both space and terrestrial power applications. We will continue to support the CPV customers including Suncore by providing CPV solar cells, but EMCORE has significantly reduced its exposure to the dynamic solar power market.

We also expect our R&D expenditures for solar business segment to be reduced going forward, due to the CPV divestiture, with the resulting benefits to be first seen in the December quarter. We will continue to invest in advanced solar cell technology to drive higher solar cell efficiency, which will extend our performance advantage. The vast majority of the R&D programs in the solar segment going forward are sponsored by external funding sources, which support EMCORE's continued technology leadership in this area.

In our Fiber Optics business segment, by the end of the September quarter, we have built up the manufacturing infrastructure at our contract manufacturer Fabrinet, as well as our own facility in China. Our manufacturing capacity has been fully restored to pre-flood levels. Except for wafer [FET] for key optical components, palette production of newly introduced products and the specialty Photovoltaics products being manufactured here in the US, we completed transfer of the production for our commercial products to the overseas facilities in the September quarter. We expect an improved manufacturing cost structure going forward. That should allow us to expand our gross margins.

Now let me give you an update on our business. First, I will start with the solar Photovoltaic business segment. Our revenue in space Photovoltaic for the quarter demonstrated a substantial sequential interest although the revenue for the fiscal year 2012, was down slightly from 2011 due to international customer program delays. We reported a slight decline in solar backlog as of September 30, but we are poised for some key contract awards over the next couple months and those programs that were previously delayed are now being awarded in 2013. The fundamentals of the business remain robust, and outlook for the space programs remains promising. We have good visibility into our customer demand for the next 12 months, and expect to book several high-value contracts in our space solar segment in the near term.

Furthermore, we have increased our focus on our operational efficiency in the Photovoltaic area, and those efforts are paying off. Product yield and productivity are improving, and we expect the trend to continue throughout the next several quarters. With the divestiture of our terrestrial systems business and the improvement in the space solar business, we'd expect more consistent operating results in the future periods. Our forecasted fiscal year 2013 revenue for solar is expected to be at or near record level, and our profit margins are currently projected to show marked improvement over the 2012 results.

Finally, for solar segment, it's widely recognized by the industry that EMCORE maintains its technological lead in the next generation in solar cell and solar panel technology. Commonly referred to as IMM. We currently hold the world record for space solar cell efficiency with demonstrated results of greater than 35% efficiency, as compared to 29.5% that represents the current state of the practice. We plan to introduce IMM products to welding manufacturing in a year. Between our strong market position, growing international presence, improved operating efficiency in technology leadership, we feel our solar Photovoltaic business is very well positioned for success.

Now let me discuss our market position and business outlook in the Fiber Optics business segment. Post-restructuring, our product and technology portfolio in optical components and subsystems is strongly aligned to support current and future requirements in tunable 40G and 100G coherent transmission systems. Next year and next generation broadband architectures. With our product portfolio of CATV components and subsystems and external cavity laser-based coherent product, we are now positioned to be the technology and market leader in each of our product lines.

During the September quarter, we achieved significant interest in revenue for our Fiber Optics business. This is due primarily to the interest in ITLA shipment for 40G and 100G coherent systems. The revenue from this product line in the September quarter exceeded the highest level pre-flood. As we announced in the last quarter, we are increasing manufacturing capacity by 50% by adding more processing and testing equipment, as well as us shortening production cycle time. We are on track for increasing capacity, and reaching that level by March 2013. Although we have seen new entrants into this market during our recovery period from the flood, we believe that the coherent market segment continues to grow rapidly as represented by our strong growth last quarter even with additional competitions. We believe that our products deliver superior performance in their own bandwidth and high-power, which are key attributes especially for 100 gigabit per second applications. We are driving the production capacity increase and cost reduction to drive the market share shift and optimizing profitability.

We are introducing a new product called micro-ITLA, which is based on the same external cavity laser design platform. This product provides superior performances than the traditional ITLA, with the enhanced functionality in a much smaller form factor. It is being designed in by some of the largest coherent system integrators. And the feedback has been extremely positive. We commenced Telcordia qualification in September, and expect to reach the level necessary for qualification in the March quarter. The introduce of this product further improves EMCORE's leading position for coherent optical components. In addition, we have several programs ongoing to develop other key components. We intend to stay ahead with advanced technology development, and to commercialize a full line of products for 40G and 100G coherent applications.

Moving on to the tunable XFP product line. Our tunable XFP production line at Fabrinet has been qualified by tier one customers. And we have received significant share allocation commitments from key customers. As we discussed last quarter, we stopped production of tunable XFP products in the Bay Area in order to improve our cost competitiveness. We also improved some manufacturing processes when we transferred to Fabrinet. During the transition and the cleaning of the open work orders, we realized higher work order variances and significant charges as Mark discussed related to this. But this is a one-time charge. Due to the need to modify equipment for automation process, the ramp-up of tunable XFP production was delayed by a couple months at Fabrinet. This caused us a delay in tunable XFP revenue contribution in the December quarter. However, once the equipment modification and improvement is fully implemented, production yield will be improved significantly. We are working through this project, and expect to get yields to a very respectable level before the end of the year. We believe the production ramp to begin in the March quarter now. Our goal is to have capacity about to $15 million revenue per quarter beginning by April.

Our CATV transmitters and laser module components are primarily manufactured in our facility in China. During the recovery process from the flood damage, we were not able to capture the market share effectively due to our limited capacity. As a result, our revenue from the cable TV product will now show sequential growth in the December quarter. With the completed recovery in the manufacturing capacity, we are moving to recapture the lost market share. We are very encouraged and confident by the recent order activities which positions us for a substantial ramp in the March quarter. Concurrently, the cable TV industry is going through a rapid transition from the original transmission infrastructure to the DWDM and longer distance based transmission solutions. As the mandatory baseband offering was removed, the QAM modulation allows a significant increase in bandwidth. The standard setting committees have been busy in defining new standard road maps to allow substantial increase in transmission bandwidth in the linear optics broadband infrastructure.

A number of new products were introduced in 2012 to the market to allow the range of medium distance in the range of 50 kilometers. This requires high-powered DWDM lasers in connection with modulators. Our understanding is that our product has been used in a greenfield deployment in South American and Asian countries by our customers. A number of MSOs in the US are also testing and qualifying this product for domestic HFC network operations. The ramp of this product architecture in the US market should represent rapid growth and ensure EMCORE's leading position in this technology. This could be a very favorable development for EMCORE, with our industry leading QAM technology. We'll continue to stay ahead of our competition with our new technical solutions. As for the CapEx spending, we expect the spending for operate and scalable infrastructure will increase by about 5% based on the CapEx spending announcements by the leading multi-service operators recently.

As we wrap up fiscal year 2012, I'd like to give a quick summary of the accomplishments in the year before turning to the guidance. Fiscal year 2012 was very challenging. But, we successfully navigated through some very stormy waters and have much clearer visibility for the future. We started the year with a sound business plan to reach profitability in the June 2012 quarter. But the flood damage to our production lines reset our plan and our operations priorities. The immediate capital needs to support equipment and inventory material purchases to rebuild our production lines, and the delay in receipt of the insurance proceeds put a significant liquidity challenge upon the Company. We worked with our contract manufacturers at Fabrinet, our lender at Wells Fargo, and our customers in the telecom business very closely and gathered strong support. In the meantime, we implemented pay cuts and reduced discretionary spending. This initiative were essential to our successes in rebuilding our production infrastructure, and the recovering for our business.

Over the past year, we also undertook a critical review of our business units and decided to focus on our strength and the growth upon the strength. Accordingly, we divested our enterprise Fiber Optics business as well as a terrestrial concentrated Photovoltaics business. We negotiated and closed these transactions in 2012. In addition to business restructuring, we also realigned management responsibilities. This will lead to a substantial reduction of corporate overhead. During fiscal year 2012, we also concluded several litigation matters, including settlement of a patent related lawsuit and dismissal of both the class action and derivative lawsuits. In addition, our efforts to improve our internal control and accounting processes have led to a timely financial closing and reporting. As a result, the risk profile of the Company has improved significantly.

As Mark discussed briefly, during the September quarter, we also settled insurance claims with our contract manufacturer related to the flood damage. In addition to the $9 million recovery we received between business interruption and damaged equipment, we expect an additional $6 million to $8 million cash payment over the next four months. And substantial reduction in certain payment obligations. This will greatly improve our balance sheet.

In summary, I'm pleased that we have concluded all the strategic realignment activities at the corporate level, and tactical recovery of our Fiber Optics product lines. From flood based on the --Fiber Optics production lines from the flood, based on our plan we put together a year ago. We are very excited about our current product portfolio that focuses on providing, enabling, and disruptive technical solutions in selected areas of Fiber Optics communications and solar Photovoltaics. By leveraging our compound semiconductor materials and device expertise, we believe EMCORE is the leading supplier in almost every product line, some of which represent the Company's largest potential for growth.

Over the last couple months, we have conducted a in-depth review on the competitive strength and the growth opportunities of all the existing product lines. We have identified some great opportunities, and are formulating a clear strategy and three-year business plan. We are very excited about our future perspective. I feel that we entered into the new fiscal year with a clean slate and ample opportunities. This allows the management to focus on the operations in 2013 to position the Company for sustainable growth and improved profitability.

Turning to guidance for the first quarter fiscal year 2013 ending December 31, we expect to have revenues in the range of $49 million to $51 million, which represents about 5% sequential growth. In summary, we achieved strong sequential revenue growth in the September quarter, and expect continued revenue growth and substantial financial performance improvement in the December quarter and throughout the next year. Our focus is on the exclusion of the recovery of a CATV market share and improvement in yield and production output of tunable XFP. We expect to see improved financial results from these actions. We look forward to discussing our progress in future quarters.

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

(Operator Instructions)

David Kang from B. Riley.

Thank you, and good afternoon. Nice quarter gentlemen. So first on the ITLAs, are you guys still on allocation?

Dave, we were in allocation mode in the September quarter. And, but we decided to add 50% of capacity some of them will be achieved by adding new equipment which takes a longer time. Some of the capacity increases was achieved by shortening the production cycle time, which we have already achieved that. So right now we get a little bit of headroom for production capacity.

Got it. Got it. And did I hear you correctly, that 50% will be done by the March quarter, is that correct?

Yes. So we are on track for that. And we're pretty excited about the progress we made so far.

Okay. And then before I go, just wanted to clarify. So ITLA revenue you said you exceeded previous peaks, so I'm assuming over $9 million but under $10 million because of capacity? Is that a fair assumption?

Right. Pre-flood the highest level we got for ITLA was $9 million. We are higher than that. In the --

Okay. And then on that $25 million ITLA orders you received, during the floods from a consortium of customers, so how much of that has been shipped? And then how much is left, and will you be able to ship all of that in the December quarter? The balance of it?

I don't have an exact balance for that. But we have shipped substantial amounts of that $25 million backlog. In the meantime, we have been booking new orders as well. So, in a way, we lost track of that, but we continue to book new orders and shipping existing orders.

Okay. And then regarding the 50% capacity add. Based on your current outlook, obviously things are ramping up fairly rapidly. Is there reason or motivation for you to be even more aggressive to add maybe 60%, 70% rather than 50%? And what do think your capacity will be by end of next calendar year?

Yes. So it's a very good question. And certainly we believe the coherent market, if you know that's one of the fastest-growing areas in the optical component industry. But we also have to be sensitive about this shift from regular traditional ITLA to micro-ITLA which as I said a smaller from factory enhanced functionality. And the production infrastructure except for testing are different. So if we continue to invest very heavily on the traditional ITLA manufacturing, it's going to move away and move to the micro-ITLA in several years. We may not get adequate return for the investment.

Right that was my next question. (multiple speakers) Go ahead. Finish your thoughts.

So that's why we are ramping up the micro-ITLA and accelerating the qualification activity on our micro-ITLA as well.

So do your customers have to redesign their board their line card with micro-ITLAs? And if that is that the case and if value proposition is compelling then could there be a little bit of a pause for your micro-ITLAs or are they in such a hurry that they don't care? How is that going to work?

They care. And I think we basically see like two camps of the customers. For some leading customers, they are already thinking ahead to a micro-ITLA and using our micro-ITLA to design their systems for higher density and lower power consumption. But the other camp, they are just trying to get coherent product. They probably have not really get to the point that all they wanted to use the micro-ITLA yet.

I though micro-ITLA was more for Metro? No? So should there be two different set of customers for two different set of markets?

I think the two sets of applications, one, is to replace the regular ITLA and they don't want to sacrifice any performance. The other application is getting into the shorter distance including the natural area in transponder. So there they probably can use a little bit watered-down version of performance specification.

Okay. And then just lastly on the tunable XFP piece, so did I hear you correct that you shut down or you ramped down Newark production line as we speak today? Or is that still ongoing process?

No. We shut it down the production in the Bay Area by September 30.

September 30, okay. So is there going to be any kind of residual effect for the December quarter as far as margins are concerned? Or we should get pretty clean margins starting December quarter?

Yes, so the December quarter will not have any adverse impact from the Bay Area manufacturing because there is none. But the Fabrinet line the ramp as I said was delayed by a couple months because of the yield is specifically related to an optical alignment automated process we need to really modify tooling a few times. But we see the light. We have got our arms around it before the end of the year, we should be getting a yield improved to respectable level to commence volume production. Right now we have a balance allocating some line for optimizing the process and allow the vendors coming in for improving the automated improvement and also the through put. So it is hard to do.

Got it. All right thank you.

Thank you Dave.

Alex Henderson from Needham.

Thank you very much. So there's lots of moving parts in the puzzle here. Fortunately we're getting rid of some of them. But before we get rid of them, can you give us a little bit more information on some of the costs associated with some the elements that were shut down? For instance, the terrestrial loss I believe it was running at $2.2 million for the terrestrial investment. And you wanted to bring that down towards $800,000. I think was what you said in your last conference call. And you announced the sale, and I was thinking it was going to be happening a little quicker and it took a little longer. What was the incremental cost associated with that line in the September quarter? And what does it fall out to as we go into the December quarter?

Yes. So the moving parts there are three. We were talking about -- the enterprise sale it happened a long time ago.

Let's start with one at a time. Do terrestrial first.

Terrestrial the loss for the allowance was total of $2.2 million. And we have been regularly incurring about $1.8 million in R&D expenditure for CPV systems. The deal is done. You're not going to hear from us about a CPV system anymore. Any charges or whatever related. So we will be reducing the loss from that action from that transaction by $1.8 million or better going forward.

So in the September quarter there was a $1.8 million cost associated with that, that falls out in the December quarter?

Right. Right. The September quarter is the last time you're going to see that and --

I just want to make sure I got the magnitude right. The fall out $1.8 million quarter-to-quarter.

Right.

Okay. The second question, you had the tunable XFP in Newark, you were printing dollar bills two send to your customers. Now that's gone. What was the cost delta on that piece when you moved it -- when you drop it? How much was the cost in the September quarter associated with that that will fall out sequentially into the December quarter? I know that you've got a production issue in Fabrinet, but quarter-to-quarter what is that?

Yes. September we took $2.2 million charges for the tunable XFP to clean up the open work orders in some of the production builds due to the different configurations of different component material. And that's -- and also we took the charge related to the workforce reduction for production crew in the Bay Area. That's all gone. In the December quarter and going forward, that element will never show up.

I understand. But aren't those backed out of the non-GAAP numbers, yes?

No we did not. We could not. And that's kind of still considered part of the --

So the workforce reduction and the $2.2 million charge was in the non-GAAP numbers?

Correct.

And the workforce charge was what?

The workforce charge and also the costs for their facility shut down, were over $350,000 in the quarter.

Okay, so my understanding is the tunable XFP as it was being produced was costing you a net negative margin of $1.5 million, plus you've got $2.2 million, plus you've got $350,000. So the costa associated with that was the combination of those three. And two of those fall out, the $1.5 million I guess falls to a much lower level in the December quarter. What should we think that loss looks like in the December quarter?

The December quarter -- the only thing of the three elements that you said, is the lower margin due to the ramp-up phase. I would say probably right now is it looks like that $1.5 million will be reduced to about $1 million.

About $1 million. So that's a little higher than we had thought before when we were guessing it was $0.5 million. So it's -- that action half smudge is associated with the slowdown and the timing of ramping it because of that yield issue?

That's right. We didn't ramp up very cleanly, so it was pushed out by a couple of months. And I think it's worse than we expected by about $1 million. That's due to the [zeodisu].

Okay, got it. And the lawsuit cleanup. Is there any charges associated with that that are in the non-GAAP numbers?

No. So it's very clean. And everything cleaned up. The settlement charges for the patent related was recorded in the June quarter. And these two related to the CPV components the class action and derivative was dismissed by the court. So there are no further actions, and the plaintiff they signed a agreement they would not appeal or modify the claims. So there are no absolutely no charges related to that.

Okay. So if I'm doing this correctly, those charges that you just identified total about $5 million. You produced a $6.61 loss. If everything else was the same, your operating level would be the new on an apples-to-apples basis going sequentially, would be more like a $1.5 million loss? And presumably you're going to show some improvements on some of the other areas. So, is it reasonable to think that you're narrowing close to breakeven or possibly even a profit? Or where do we -- how do we think about that?

The loss is going to be greatly reduced and I think it's -- we are very, very close. And you are absolutely right. The loss would be greatly reduced, and it the Photovoltaic business improves. The three areas of the solar, in the March quarter, the cable-TV market share shift is going to be back based on the current booking activities. The ITLA continues to grow. We are excited about that. And really the only thing is this tunable XFP. So that's why Alex I am a little reluctant to give you a definitive answer on this current quarter. But we get our arms around -- we sent nine engineers in Thailand, I am going there next week. So this is the only thing we need to focus on to turn the financial performance.

Not to put words in your mouth, but it sounds like you not sure whether you'll be profitable, but you'll be close this quarter. And you feel like you'll be profitable as soon as the first quarter in the March quarter at this point you feel pretty comfortable.

Right. So this quarter it's just largely dependent on the yield. And but when we fix the tunable XFP, getting the yield to a respectable level we should be turning in the profitability.

One last question on the tunable yield piece, so it's my understanding that your yields have been running actually in the 75% plus range, which isn't bad. But the dispersion of the quality performance of the devices within the produced units that were not deemed to be unusable, was a little wider than normal. So if that's the case, I would assume you still sold the lower performance stuff, just sold it at a much lower margin. Is that the right way to think of it?

Unfortunately not. The lower performance, we had set it on the side. So when we get out of the process of variability fixed we have to review why the performance was a little lower. If there's some fundamental issues, those materials need to be scrubbed. But it's really just due to some distribution of the process than we can sell the lower performance parts to less demanding customers. So that's why that itself can be a swing that of $300,000

So would the tunable XFP be flat or up sequentially in revenues as you look into the December quarter?

The December quarter, I'm really not counting on much revenue, and really the focus is to fix its process to set a stage for stronger revenue ramp in the March quarter and after.

But don't you have to have a minimum amount of production falling in to satisfy your required minimum amount of sales just to stay on the list?

Yes. We are -- it's $300,000. But at this level is kind of not very meaningful. The customer's commitment it's much higher than that. So that's why were not beating a drum on the revenue of $300,000.

Okay. I'll cede the floor there. I'll come back in. Thank you.

Thank you Alex.

Thank you. I'd like to turn the conference back to management for closing remarks.

All right. Thank you for dialing in today. As for the upcoming event, we will be presenting at the 2013 Needham Conference in New York City on January 17, 2013. And we look forward to talking to you in the near future. Happy holidays. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may all disconnect at this time.