EMCORE Corp (EMKR) 2013 Q2 法說會逐字稿

-- ladies and gentlemen, and welcome to the EMCORE Corporation second-quarter 2013 earnings conference calls At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder, this call may be recorded. I would now like to introduce your host for today's conference, 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 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 your 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 second fiscal quarter operating results and our balance sheet.

Consolidated revenue for our second fiscal quarter totaled $42.3 million, which is a decrease of $7 million or 14% over the previous quarter. The decrease was primarily due to lower fiber optics revenue as our broadband fiber shipments fell. Our Q2 revenue guidance was $45 million to $49 million.

On a segment basis, our Photovoltaics business accounted for $19.2 million or 45% of the Company's total revenue. This represents a $0.5 million or 3% decrease from the prior quarter. As we have said previously, while we remain confident in the long-term prospects of the space solar power business, our revenues in any given quarter may be a bit lumpy.

The Fiber Optics segment accounted for $23.1 million or 55% of the Company's total revenue. This represents a decrease of roughly $6.5 million or 22% from the prior quarter. Hong will discuss the outlook for the Fiber Optics business later in the call.

On a segment basis, Photovoltaics' gross margin increased 2 percentage points to 32.5%. We were able to reach gross margins of greater than 30% this quarter, which is our target. Fiber Optics' gross margin was 7%, 10 percentage points lower than the prior quarter. We recorded a warranty charge on previously divested product lines of $1.4 million in the quarter. Excluding this, the gross margin from the continued operations in Fiber Optics would be 13.5%.

Our margins have been impacted primarily due to lower revenue levels and our $1 million negative impact from the TXFP product line through the ramp-up stage. We expect our gross margins in the Fiber Optics segment to improve in future quarters as we complete the ramp up of our new product line at our contract manufacturer and our Fiber Optics revenues increase.

Consolidated gross margin was 18.5%, a 3.7 percentage point decrease from the prior quarter, primarily attributable to lower Fiber Optics segment margins, partially offset by higher Photovoltaics segment margins. Excluding the warranty charge on previously divested product line, the consolidated gross margins would be 22%.

Total operating expenses for R&D and SG&A were $10.6 million, excluding the flood-related charges and recoveries, gain on sale of assets, legal settlements and impairment charges. The decrease in our SG&A operating expenses from the prior quarter was primarily due to reductions in certain R&D expenses. We believe that our operating expenses will be in the $11 million to $11.5 million range per quarter going forward.

On a GAAP basis, the consolidated net income for the second quarter was $11.7 million, $8.9 million better than the prior quarter. We recovered $14.8 million from the insurance claims during the quarter and do not expect any further amounts in future quarters.

Our GAAP net income per basic and diluted share was $0.44. Our non-GAAP income, after excluding certain adjustments, all of which are set forth in the non-GAAP tables included in today's release, was income of roughly $30,000 versus roughly $0.1 million of income 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.

This is the second consecutive quarter that the Company has been both GAAP and non-GAAP profitable and we are quite pleased by the achievement.

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 March 31, the Company had space solar order backlog of approximately $36.5 million.

Moving on to the balance sheet, at the end of March, the Company's cash, cash equivalents and restricted cash balance was $6.2 million. Please note that this did not include a receipt of $8.2 million of cash received on April 2 from these insurance recoveries we've discussed previously.

As a result of our final insurance recoveries, we have significantly improved our net working capital balance to be at the highest level in the last eight quarters. Regarding the insurance recovering for the flood damage, as we mentioned previously, we recognized $14.8 million of recoveries in the second quarter. The cash payment of $8.2 million was made in early April and is reflected in our other current assets at March 31.

Over the past few months, we have made significant strides in improving the business structure, as evidenced by our move to profitability. We look forward to showing further progress as we continue to drive execution and increase our revenue levels. With that, I will turn the call over to Hong, who will discuss 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 $42.3 million, which represents a 14% sequential decline from $49.3 million in the December quarter. We came in below our revenue guidance of $45 million to $49 million. The revenue decline is related primarily to the softness of our cable TV broadband business, which showed a sequential drop of $6.5 million, or about 30%, in revenues.

Despite the lower revenues and partly due to receiving the final payment from the insurance claim related to the Thailand flooding in the fall of 2011, we showed a significant net profit in Q2.

In addition, on a non-GAAP basis, which excludes certain items that Mark noted, we were able to achieve a slightly positive operating income, which continues to be the positive outcome of the restructuring that the Company has been focused on over in the last year and our progress in the (inaudible) payment.

While we do not have control on the pace of capital spending of the service providers for the Fiber Optics communications, we have established a business structure and an operational business plan that should make our financial performance more predictable going forward.

We continue to be excited about the combination of our business and product portfolios and the strong potential of revenue (inaudible) and an improvement in profitability from the emerging business in the Fiber Optics segment.

Now let me give you an update on our businesses and how we respond to the market challenges. First, I will start with the Space Photovoltaics business segment. Please note that the scope of the business is primarily in the aerospace and defense area now.

Our revenue in the Space Photovoltaics for the quarter demonstrated a slight sequential decline comparing to the December quarter, from $19.6 million to $19.2 million. With the benefit from the early CapEx investment to improve the production yields and also due to the more efficient loading of the manufacturing in our (inaudible), the gross margin improved from 30.5% to 32.5%. The operating income from this business segment also improved to more than $4 million in the March quarter, which is among the best results this business has been able to achieve over the last several years.

Since the beginning of the year, EMCORE has been awarded a number of contracts with a total value in excess of $40 million for both commercial and government space programs over the next two years. The order backlog as of March 31 for delivery over the next 12 months showed a sequential increase to $36.5 million.

As we discussed last quarter, in May we signed a contract with an international customer with a total contract value in excess of $20 million, and we believe there are other major opportunities in this market, which we are pursuing very aggressively.

The overall market demand in the US commercial satellite space is softening, but we are seeing strong demand from international customers and believe that we remain well-positioned with our technology and cost structure to continue to be very competitive.

We have a number of government-sponsored research programs which are targeting higher-efficiency and lighter-weight solar cells for spacecraft applications. We have recently set another world record for space solar cell performance with the IMM design, with a measured efficiency of 34.8% in flight-ready hardware. We are leveraging our existing contract from the US Air Force ManTech to accelerate a commercialization of this advanced technology. We plan to introduce this new solar cell to (inaudible) production over the next couple of years.

In the June quarter for our Space Photovoltaic business, we expect approximately $4 million to $5 million sequential decline in revenue. This is mainly due to some delays we are experiencing with the start of a few new programs. In addition, we are seeing a mix shift towards more international-based business, which has a lower margin traditionally.

In summary, our position in our Space Photovoltaics business is well-positioned in the industry and our production infrastructure is well-capitalized. The decline in the June quarter is temporary, and we are confident that the business will recover. Our forecasted revenue for 2013 is expected to be near record levels, and our profit margins are currently projected to show marked improvement over the last year's results.

Now let me discuss our market position and the business outlook and our Fiber Optics business segment. In the broadband cable TV business, during the December quarter, all manufacturing infrastructure was fully restocked and the revenue recovered to pre-flood levels.

The gross margin recovered to 29%. However, they booking activities for the cable TV business have been very slow starting in December 2012. We thought in the beginning it was an issue of seasonality, because the March quarter is usually weaker. However, the softness continued throughout the March quarter due to the overall decline in capital spending from the CATV service providers.

Over the past two weeks, two major cable service operators reported their CapEx in the March quarter and their budget for the entire 2013. Compared to the December quarter, their March quarter CapEx spending decreased over 20% in the infrastructure upgrade category, which is related to our products. On a positive note, they reported generally higher total annual CapEx spending plans for 2013 versus 2012.

For instance, one MSO reported a 16% increase in their annual CapEx budget [or average] spending, and their March quarter spending represents only about 18% of their annual 2013 total budget. This suggests a much higher spending (inaudible) toward the second half of the year. So we are hopeful that the CapEx will be more back-end loaded for the 2013.

We believe that the slowdown in MSO CapEx spending, in addition to the macro softness in (inaudible) CapEx, is still partially to the requirement and the validation of transport equipment and its suitability for the new DOCSIS 3.1 standard. The transport equipment is required to be able to transmit signal up to 1.2 gigahertz over the legacy HFC infrastructures, some of which were deployed decades ago and designed to transmit signals up to 1 gigahertz only.

This retrofit strategy is most effective in expanding the bandwidth capacity of the HFC infrastructure to compete with the fiber-to-the-home services provided by telcos. The validations, however, seem to be taking longer than expected.

In light of the DOCSIS 3.1 upgrade for the MSOs, we plan to take advantage of these dynamics and expand product offerings to nodes and return path transmitters, as the DOCSIS 3.1 has imposed new requirements for these products. These are the product areas where EMCORE has not had its product present traditionally. The lower hub manufacture base for cable TV products established in China enables us to compete more aggressively and (inaudible) in expanding our product offerings to the same customer base represents a solid business field opportunity.

The revenue outlook for the cable TV broadband business still appears soft for the June quarter. We are optimistic about the future of this business based on the engagement levels and qualification activities on our new products, as well as the CapEx outlook given by the MSOs. Our goal is for the cable TV business to return to the approximately $18 million to $20 million quarterly revenue levels in the second half of the calendar year.

During the March quarter, the revenue from our telecom product lines increased approximately 5% compared to the December quarter. The revenue contribution from new products, tunable XFPs and micro ITLAs for the March quarter is approximately $1 million.

Despite the general decline in optical components in the telecom market, we saw relatively strong demand for ITLA products. While demand is still strong, we lost some market share for the 40-gig slot during the annual price negotiations, as we discussed before. But we believe that the (inaudible) market segment continues to grow and EMCORE will be the leading player in the 100-gigabit market.

EMCORE's ITLA design continues to demonstrate advantages over our competition, especially when it comes to longer distance and higher data [reads], such as 100 and 400 gigabits per second. While it is still early, we are starting to see demand for new coherent modulation applications, such as a 16-QAM targeted at a greater than 100 gigabit per second application. For instance, during the quarter, we secured ITLA design wins for two 400-gig coherent systems.

During the March quarter, we completed the comprehensive Telcordia qualification for our new product micro ITLA and commenced (inaudible) production. Since the general availability in March, we have increased our customers and design wins with micro ITLA to a total of six OEMs so far. EMCORE's micro ITLA enable the first multi-transponder coherent 100-gig line cards in the optical industry.

The qualification and validation processes of our customers' next-generation 100 gig platforms are expected to be completed in the September quarter. We expect a significant increase in demand for micro ITLA in the second half of the calendar year, when customers commence volume manufacturing of their new line cards. The projected demand for these programs is about 50,000 units or about $40 million per year.

The micro ITLA not only enables new applications due to its superior performance with a low power consumption, smaller form factor and a lower cost in operating and also in the product itself, but also serves as our key strategy to drive positive market share shift, as the micro ITLA will eventually cannibalize the regular ITLA market. We believe that EMCORE has a significant lead over our competition in micro ITLA technology and production readiness.

We are also formulating some new product strategies' (inaudible) by leveraging the superior performance of our tunable laser technology. Our goal is to stay ahead of the competition with advanced technology development and to commercialize a full line of products for 40- and 100-gigabit in the higher coherent applications.

On our tunable XFP, we had challenges in ramping up the volume in production. During the March quarter, we improved the process and tightened the spec distribution of the key components. As a result, the yield has improved dramatically. Although still slightly below the levels needed to make this product line profitable, our tunable XFP products have been designed in for 15 customer programs and we have received some significant share allocation commitments from some key customers. We expect the tunable XFP product will start to contribute to our revenue in a meaningful way in the near future.

We continue to work on improving the yield to improve our product margin structure. We understand that the field is crowded with the three leading suppliers already shipping in volume. The competitive advantage of EMCORE's tunable XFP is that our products demonstrate better performance with both negative and zero chirps, full band tunability and higher output power. This is a key attribute requirement for replacing 300-pin transponders. The primary application for tunable XFP in 2012 had been to replace fixed-wavelength DWDM XFPs. We believe the 300-pin transponder replacement cycle is starting now.

Turning to guidance for the third quarter of the fiscal year 2013 ending June 30, our revenue expectation is in the range of $35 million to $39 million. We expect revenue from optical components to remain roughly flat in the June quarter. However, we will experience a revenue decline of approximately $4 million to $5 million due to a gap in our Space Photovoltaics program, as we have discussed previously. We have implemented certain cost reduction activities in our Fiber Optics business to reduce overhead expenses. We have restructured several departments and moved some non-essential functions to our operations in China. Although we are seeing revenue pressure, we have worked hard to establish a profit-focused culture and we are seeing the benefit of that hard work now.

In summary, we achieved another quarter of profitability on both GAAP and non-GAAP basis, despite a depressed revenue level. We have established a business structure and operational discipline that will put more emphasis on profitability. Our focus this quarter is on completing multiple new product introductions for our cable TV business and ramping up the revenue contribution from tunable XFP product line. We look forward to discussing our progress in the future quarters.

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

(Operator Instructions) Krishna Shankar, ROTH Capital.

As you look to the second half of calendar year 2013, what kind of signals are you getting from your cable broadband customers in terms of a revival in CapEx? Do you have orders which could suggest a revenue recovery in the September and December quarters in the cable part of your business?

Yes, thank you for the question. What we have been tracking the market CapEx spending is to look at our customers' customer. For example, Comcast and Time Warner Cable's capital spending plan. Usually very good in breaking down the different categories. Again the categories related to our product are related to the upgrade in scalable infrastructures.

As I discussed, for example, Time Warner Cable, in their March quarter, they only spent about 18% of an entire year's CapEx plan, but they were still giving the entire year CapEx plan the same as they guided before, which is 16% higher than 2012. But we should have seen our customer level start looking to (inaudible) the outer [reach], but we are still waiting for that to happen. And when we talk to the customers, very frequently, a couple of times a week, they are anxiously waiting for that flood gate to open.

But so far, as I discussed, the outer reach is still a little soft. So that is why we only guided to a flat sequential revenue for Fiber Optics.

Okay. And then the Space Photovoltaics business, is this just kind of timing in terms of some of the international programs ramping and softness in the US? So you would expect revenues perhaps to resume growth again in the September quarter?

So for the Space Photovoltaics business, business has been very robust. Traditionally, we do $65 million to $70 million a year in revenue, and this year we believe we will be doing $70 million to $75 million. So the first couple of quarters have been extremely strong in terms of the top line and bottom line; we achieved over 20% of operating income for that business.

And yes, you are right. Because of the international -- there are a couple international program delays, so they create a gap for the current quarter. But as I said, this is temporary. We have the visibility. Good thing for that business is that we have the bookings for multi-years through purchase contracts and purchase orders. September, December quarters will be very strong. It is going to be recovered back to the same level.

So the guidance in the June quarter, if it is a little soft, it is just because of the temporary dip in the Space Photovoltaics business. But fundamentally it has not changed. It is still a very strong and profitable business.

Okay. And my final question, on the tunable XFP, you said you have seen a dramatic improvement in yields. Are gross margins there improving nicely and do you expect to recapture some market share in the June and September quarter? You said you had some commitments, some customers.

Yes, we do have the commitments from some certain customers in the share allocation. Here, we have made significant progress in improving the yield. But, as I said, at the current level, still not -- it's just a little shy, below, the product line profitability. So the dilemma is we can run at this, and then we will be losing money from this product line. Or we can run in a moderate rate, but in the meantime, to get our yield level to the next level so that we are making money from this product line as well.

So we proceeded very cautiously. But the commitment is still there from the customers.

Okay, thank you.

Thank you.

Dave Kang, B. Riley.

Thank you. Good afternoon. First, regarding your third-quarter guidance, you said Optical to be flat. Now, all three products, cable TV, ITLA and tunable XFP, to be flat literally? Or can you just go over the dynamics between those three products?

So for the cable TV, usually you get a little bit better visibility than the (inaudible) product. We know it is going to be probably flat or slightly lower. And for the telecom, it is going to be flat or slightly higher sequentially.

So it doesn't sound like tunable XFP will ramp any -- like $2 million, $3 million that you guys talked about before.

It is going to be better than the March quarter. And we -- again, as I said, we're just ramping up cautiously because to balance the output with the yield further improvement. So it is definitely going to be better than the March quarter. But I think we wanted to work out a couple of things in the production line and the processes to enable the September quarter to be a more significant ramp.

At [OSE], you guys said yield was about 70%, so I thought that was the number that -- your target. So has it dipped below 70% recently, or just the latest on the yield situation?

So we have different layers of (inaudible). Yes, the profit yields have improved to the level we expected, but more now it is the integration, the firmware, the tests, the criteria, where the customers have to be totally synced up. And in that process, we found there are a couple of things in testing we need to improve. And that is costing a couple percent -- few points lower than our expected breakeven yield point.

Okay. Will that be addressed -- I mean, are you confident that will be worked out this quarter then?

Yes, yes. So that is -- I have to say it is easier to address; in many ways, you can rework it, and you will not be scrubbing the materials. So we're just working on that pace in improving the firmware/software test protocols to improve our output.

Right. Now, you said your customers -- you still have commitments from your customers, but obviously there are three other alternatives. I mean, are they willing to wait before they go to your competitors?

That's right. Our original commitment from customers was really for both the fixed wavelength replacement and the 300-pin transponders. You are absolutely right. We wanted to get this to market, to production, to volume as soon as possible. But right now, I think we are still very confident for this allocation for 300-pin replacements. Where even though the field is a little bit crowded already, but our product had the performance advantage which enables the customers for replacing the 300-pin transponders.

And then your ITLA, I mean, so ITLA will also be kind of flat to up slightly?

Actually, we expect to be flat or if up, a little bit. But I think really we are seeing a lot of activity with the micro ITLA. Even some of the traditional ITLA customers, they love to get their product fully qualified and validated in using micro ITLA. So that is why we were expecting the ITLA level to be about the same.

So what is your current capacity for micro now and what is your plan over the next couple of quarters?

So we are -- for the next couple of quarters, we are planning to add some more capacity. Because as you know, the micro ITLA is sharing the same manufacturing processes as tunable XFP, tunable [COSA]. We are watching for the timing of the market and we plan to add more capacity in the future.

Are you concerned at all that you might be losing market share even 100-G? Because NeoPhotonics, their call is right after you, and they give a pretty big guidance for the current quarter. Obviously, not much information, but their 40-G/100-G is pretty strong. So are you concerned at all that maybe you are losing market share? Can you just talk about the competitive landscape?

As I said, for 40-gig, we know we lose some market shares. But for 100-gig, we believe we still have the leading market shares. It is also dependent on customers. But no matter what, I think the 100-gig is going to be a growing market and the trend is going to be shifting more from 40 to 100, and the trend is also going to be shifting from regular ITLA to micro ITLA.

So that is why I think the best strategy and counter on that competition is not to drop the price and have a depressed margin to get some more market share in the sort of challenging customer accounts. But rather to provide enabling product -- for example, micro ITLA -- for 100-gigabit applications, because the market is moving into that general direction.

Got it. And last question is -- I mean, cable TV, obviously softer than expected. I mean, how much of an impact from a couple of your customers involving the M&A activities? Did that play a significant role in the March quarter drop?

We don't believe so, Dave. The reason is that the platform has been deployed in different MSOs, in their franchise, in their head-end and hub and the different offices. Yes, certainly, we are paying close attention to our customer level. There has been consolidation going on, and the five major OEMs become three major OEMs.

But the slowdown we have (inaudible) to all of them has nothing to do with the consolidation at their level, and is really primarily due to CapEx spending slow in the first quarter, it is that from the MSOs reported and also the DOCSIS 3.1, the new standard adaption, slowed down the validation of the new gearboxes to run on the legacy infrastructure a little bit.

Got it. What about Motorola going over to Aries. Aries is not exactly your major customer. So will there be any changes far as Aries is concerned now that they own Motorola?

Certainly, what we have recognized as an important thing is that, as I said, the platform has already been deployed in the different offices and the hubs and the head-ends. And no matter what the technology and the business management, what company they are managing it, that product, that infrastructure, that platform has to be continued to be supported.

And we got the clear direction from our customers as well. We asked them -- so should we consider to converge the platform? Is there any dominant platform versus the others? And they all told us, in the two consolidated situations, they will be going forward supporting both platforms.

So we are watching this very closely, but we don't think there are any risks to our business because of their consolidation.

Got it. Thank you.

(Operator Instructions) I am not showing any further questions in the queue. I would like to turn the call back over to management for any further remarks.

Thank you very much for dialing in today. Over the next couple weeks, we plan to present at the 2013 [G&P] Technology Conference in San Francisco on May 13, and B. Riley annual conference in Santa Monica on May 21. We look forward to talking to you during these events. Thank you very much. Goodbye.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.