EMCORE Corp (EMKR) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the EMCORE Corporation fourth quarter and year end 2013 earnings results.

(Operator Instructions)

As a reminder, this conference may be recorded. I'll now hand the conference over to Victor Allgeier. Sir, 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 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 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 our balance sheet, and briefly discuss our financial highlights for the full fiscal year. Please note that we have included additional information in our press release regarding the non-GAAP figures.

Consolidated revenue for fourth fiscal quarter totaled $43.1 million which is an increase of $9.6 million or 29% over the previous quarter. The increase was primarily due to a higher Photovoltaic revenue as we had a significant increase in our international business, including a large order had been pushed from Q3. Our Q4 revenue guidance was $42 million to $45 million. On a segment basis, our Photovoltaic business accounted for $20.5 million or 47% of the Company's total revenue. This represents an $8.6 million or 72% increase from the prior quarter. As we have said previously, while we remain confident in the long-term prospects of the Photovoltaics business, our revenues in any given quarter may be a bit lumpy. In Q4, we experienced this lumpiness when the delivery of an international shipment of a few million dollars was not delivered in Q3.

The Fiber Optics segment accounted for $22.6 million or 53% of the Company's total revenue. This represents an increase of roughly $1 million or 5% from the prior quarter. Hong will discuss the outlook for the Fiber Optics business later in the call. On a segment basis, Photovoltaic gross margin decreased 15 percentage points to 13.5%. The primary reason for the decrease was a significant increase in our lower margin international revenue. We continue to believe that this business' target gross margin is at roughly 30%. Fiber optics gross margin was 11.6%, 8.6 percentage points higher than the prior quarter.

While we've seen a significant improvement in our tunable XFP product yield and margins, this manufacturing line is still underutilized and margins are below our average Fiber Optic gross margins. We expect our gross margins in the Fiber Optic 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 12.5%, roughly flat with the prior quarter. Photo operating expenses for R&D, SG&A were $12.5 million, excluding any flood related charges and recoveries, gain on sale of assets, legal settlements, and impairment charges. The increase of our operating expenses from the prior quarter was primarily due to increases in certain R&D expenses related to our solar business. We believe that our operating expenses should be at around the $11.5 million to $12 million range per quarter going forward, with our Q1 operating expenses being a little higher due to certain corporate related costs.

During the fourth quarter we recognized a $4.8 million gain from the sale of our stake in our joint venture. The cash from this investment sale has been collected. The net book value of our investment was zero at the time of sale. On a GAAP basis the consolidated net loss for the fourth quarter was $2.3 million. Our GAAP net loss per basic share and diluted share was $0.08. Our non-GAAP 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 $5.6 million versus $5.9 million in the prior quarter. Please note that we have included additional information regarding amortization, stock comp, and other items in today's lease.

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 space solar order backlog of approximately $57 million versus $58 million at the end of the prior quarter. Moving on to the balance sheet, at the end of September the Company's cash and cash equivalents was roughly $16.9 million. The increase was primarily due to fund raising activities we completed in the September quarter and the sale of our joint venture interest. We ended the quarter with $41.8 million in receivables, our highest level in the past few years. The increase was primarily due to sales with slower paying international customers. In the past two months, we have reduce the outstanding AR levels by more than $7 million. Going forward, we expect our sales to international customers to decrease, and therefore our DSO levels to be more in line with our historical average of roughly 60 days to 65 days.

Looking back over the past year, we have made significant strides in improving the business structure and our operations. A few of our accomplishments include EMCORE was profitable on a GAAP basis in the fiscal year, EMCORE's net income improved by more than $44 million over the prior year, revenues and gross margins increased over the prior year, and our operating expenses, specifically SG&A and R&D, fell by almost $10 million year-over-year. While we are please by the year-over-year performance, we need to show further progress as we continue to execute on our business plan. 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 first quarter.

Thanks, Mark. Good afternoon, everyone. As Mark discussed, we achieved a consolidated revenue of $43.1 million in the September quarter. This represents a 29% sequential increase. Revenues increased for both Fiber Optics and Photovoltaic segments, Photovoltaic increasing by $8 million, and Fiber Optics by $1 million. Our Photovoltaic business remains strong although we did experience a reduction in gross margin due to unfavorable margin from that CPV solar cell sales to terrestrial solar market. We experienced market recovery of our broadband Fiber Optics business and operating performance in both improvement in that telecom product division. We continue to improve our cost structure and believe that we can reach breakeven at a quarterly revenue level at about $47 million to $48 million.

Now let me give you an update on our businesses and how we are responding to the current market conditions. First, I will start with the space Photovoltaic business segment. The revenue for Photovoltaics segment in the September quarter was $29.5 million, a near-record level. The gross margin was 13.5%, significantly lower than the target level of approximately 30%. As we discussed in the last quarter's conference call, we made a deferred shipment to an international customer after receiving permission to ship early in the September quarter. In addition, revenue from CPV solar cell sales in the quarter was at a record level of over $6 million. CPV sales are lower in margin, typically with a single-digit gross margin although they do help absorb the fix cost of a solar cell [fab]. The gross margin going forward is expected to improve significantly.

For our fiscal year 2013 the total revenue for the Photovoltaic segment was $71.1 million. Gross margin was 25.8%, and the divisional operating income was $8.6 million. This is for the whole fiscal year 2013. This represents a significant improvement from fiscal year 2012, the division of revenue in 2012 of $64.7 million, gross margin of 24.2%, and operating income of $2.5 million.

In the past quarter, the space Photovoltaic division was awarded more than 15 separate orders from several major aerospace firms in the US and in Asia. This contract served both the US government and commercial satellite missions with a total value of in excess of $20 million. As a result, order backlogs for this division as of September 30 for delivery over the next 12 months showed a total of $57 million which is very close to the record level of $58 million at the last quarter. EMCORE is in the process of finalizing negotiations on long-term agreements for 100% of solar product and requirements from two major aerospace companies. With this, our outlook for the fiscal year 2014 for this segment looks very solid. Elaborating the business and production infrastructure, we're pursuing business opportunities for products and a higher integration level such as a solar panels, (inaudible) markets such as high-end mobile power for defense applications. We expect to see business contributions from this area towards the latter part of next year.

Now let me discuss our market position and business outlook in our Fiber Optics business segment. In the broadband cable TV business, shipments increased over the June quarter. We are keeping track on the CapEx spending of MSOs very closely. Reported by the two major service providers at their overall CapEx spending for the September quarter was flat sequentially, but they expect their spending related to the product lines namely scalable infrastructure and upgrade to increase for the remainder of the year. In addition to the normal business flow, we are supporting our customers with a number of large international opportunities. When they materialize, they will significantly contribute to our business.

The industry in cable TV continues to be dynamic in formulating and finalizing their equipment design strategy to better utilize the new standard of DOCSIS 3.1 and the CCAP. The primary objective is to modernize the MAC and physical layers and spectrum plan to increase the transmission bandwidth with existing cable (inaudible) infrastructure to improve power efficiencies and channel densities. New ideas of for transmitters and receivers such as XFPs and return path transmitters are emerging. We are engaging with all the equipment manufacturers very closely in designing and qualifying transmitter and receiver products which comply with this new standard. We are finishing some final touches on the disruptive laser technology which offers a high-power modulation and transmission with the leading performance similar to the externally modulated transmitters. The cost and the power consumption will be greatly reduced. It has been the highly sought after solution for years, and our customers are quite excited.

One additional area that has generated significant market traction is the optical component sales for DAS, or distributed antenna system, applications. Our customers and systems integrators are retrofitting, for instance, football fields with new broadband infrastructure, to allow spectators to get life and interactive experiences on their mobile devices. Optical components needed to be very linear in their electronic optical performance, and our technology fits extremely well. We've started seeing a noticeable contribution of the business from this application.

Another important development is that a product enabled by our linearized optoelectronic components for fiber optic [gyros] is finally about to become a commercial reality. It's been largely a development project over the last several years. (inaudible) due to per superior performance in the reduce cost compared to the incumbents, we are getting production contracts from multiple prime contractors. This can increase our revenues quite meaningfully when the volume shipment starting from April 2014. The revenue for the cable TV broadband business is expected to show a continually improvement in the December quarter. We are optimistic about the future of this business based on the engagement levels and the qualification activities on our new products, as well as a CapEx outlook given by the MSOs. When we finish the manufacturing consolidation this quarter for all cable TV production lines, we believe the business can return to profitability and further improve revenue level to about $17 million a quarter.

Moving on to our business in telecom segment, during be September quarter the revenue from telecom product lines was down slightly compared to the June quarter. Shipment of ITLA is near record level, however the revenue stayed about the same due to some price erosion. We entered into a VMI, or vendor managed inventory, with a major customer on tunable XFP products during the quarter. As a result, the revenue from tunable XFPs did not contribute as much as we anticipated.

Deployment of 100 gig optical transport product long-haul networks have been a real success story. It was reported that shipments of 100 gig the DWDM ports reached 15,000 in the first half of 2013 and are projected to climb to 40,000 for the whole year. While these numbers remain modest compared to the shipment of 10 gig and even 40 gig DWDM ports, contribution of 100 gig ports to our network bandwidth is already significant. Coherent standard is proliferating to the [metro] and even data center space. Market for the [metro] is expected to be three times as large as the telcos, though the demand is projected to increase significantly over the next year.

Optical components for 100 gig are becoming more competitive on the other hand. Price erosion has been accelerated due to the new entrants in the space. EMCORE's product still has a lead in performance. The pricing becomes more important to some customers who have less stringent requirements for their network performance. During the annual bidding price erosion is about 10%.

On the micro-ITLA front, we continue to support more than 10 design programs in customer qualification and production ramp up activities for 100 gig coherent transfer [owners] and LAN cards. First volume is expected to start this month, and EMCORE is well-positioned to ramp up. We expect big significantly increase demand for micro-ITLAs once the customers commence volume manufacturing for the new line cards early 2014. For the tunable XFPs we had challenges early in the new product introduction. Yield was low, and at the same time, manufacturing was long. We have been working on the yield improvement and cycle time reduction over the last several months in optimizing and improving the design and assembly and testing processes. I'm happy to report today that we have finally resolved all the significant issues in testing and assembly. Current yields in all areas are above 90%. This improved yield has been shown to be sustainable.

The yield and capacity improvement in tunable XFPs are able to ramp, however we see a pause in demand interest with a major customer reporting slowdown in current tunable XFP [ramp]. We believe however tunable XFPs will be serving the telecom industry as the workhorse for 10 Gb transmission for many years to come. Therefore, we started a new program to a drastically reduce the cost of the tunable laser which is a key component in tunable XFP. Low-cost laser engine can reduce a tunable XFP cost significantly. It also enables low-power tunable XFP plus transceivers. On that we'll working aggressively to further reduce the cost structure, improve our product competitiveness, and this will help drive the customer penetration. We are confident about the competitive advantage of EMCORE's tunable XFP in both negative and zero chirp with a full-band tunability, better OSNR, and a higher output power. This is a key attribute requirements for replacing 300-pin transponders, which had started this year.

We successfully demonstrated a 100 Gb EP QPSK integrated coherent transmitter at the ECOC in London back in September, along with tunable laser integrated best-in-class indium phosphide IQ modulator to represent a first demonstration of 100 gig ICT, integrated coherent transmitter, in the industry. This integrated capability will enable the industry to transition to smaller form factors and eventually [from CFP2] to CFP4 solutions. Success of the demonstration underscores our advanced technical capability and commitment to delivering innovative and enabling solutions to our high-speed communications customers. In addition, we are actively pursuing applications for [metro] and data centers utilizing our core technology and these areas.

We made solid progress for our year 2013 in the Fiber Optics segment. Having devoted much resources with intention to recover from the flood disaster in fiscal year 2012, we experienced an unprecedented slowdown in the cable TV industry in early 2013. We are now seeing solid recovery. We have improved our production yield to a respectable level for tunable XFPs after challenges in the new product introduction. We introduced a micro-ITLA to production and improved the processes throughout the ramp up process and expect this product to ramp shortly. Although we faced some challenges in execution, EMCORE's product performance and technology leadership was very evident in the industry. We will work diligently on capitalizing (inaudible) for the next fiscal year.

The revenue from our Fiber Optic segments in 2013 was approximately $97 million. It shows a slight sequential increase compared to 2012. Gross margin improved from 4.5% to over 10%. We do expect a significant improvement for 2014 fiscal year results, due to the dramatic improvement yield and product cost as our new products are moving into production at a higher yield in the margins.

In light of the challenges in our Fiber Optics business, we have completed realignment in engineering, operations, and general management functions over the last several months. Most recently we welcome to Dr. LC Chiu as our new General Manager for our Fiber Optics business. Dr. Chiu is a veteran in the fiber optics industry, bringing over 20 years of experience in engineering design, manufacturing quality, and business processes, and a wealth of knowledge and expertise in the fiber optics industry. With his deep technical and operations background, we believe he can drive further improvements in our business for new product introduction, cost reduction, and operational efficiency. We are optimistic about the future contribution from him.

I would also like to use this opportunity to provide an update on changes to our Board structure. Back in October 2013, Becker Drapkin Management acquired approximately 8% of the Company's common stock. We filed a 13D stating their intention to be closely involved in Company strategy and corporate governance going forward. Over the last couple months, the Company has been discussing with Becker Drapkin closely and constructively. I'm happy to report to date that we have entered into an agreement. As a result, Steve Becker of Becker Drapkin Management, Dr. Gerry Fine, Professor and Center Director of Boston University, and Steve Domenik, general partner of Sevin Rosen Funds will join EMCORE's Board of Directors effective next Monday, December 9, 2013. They bring significant experience in all different aspects of business and strategy. They are great additions to our Board of Directors. We look forward to working with them closely as we continue to focus on increasing value for shareholders.

Turning to guidance for the first quarter of fiscal year 2014 ending December, our revenue expectation in the range of $43 million to $45 million with the improvement from both the Fiber Optics and space Photovoltaic segments. We expect to see a significant positive impact to our bottom line, due to the increased revenue, more favorable product mix, and the yield improvement results. In summary, we feel that we have managed through some significant challenges to the Company over the year. Our technology and product are well-positioned to address the faster growing areas in the marketplace. We will be focusing on improving our presence, performance including driving revenue growth, cost reduction, and a new product introduction. It defines a clear operating plan for fiscal year 2014. We'll review periodically and drive accountability throughout the organization. We are expecting a significant improvement in the financial performance for the new fiscal year. With that, I will turn the call over to Q&A.

(Operator Instructions)

Krishna Shankar, Roth Capital.

As you look at the December quarter with the revenue guidance, will you see growth in the cable telecom and the tunable XFP product segments for the December quarter?

Yes, Krishna, thank you for your question. Yes, we expect the revenue growth in both segments for Fiber Optics and for the Photovoltaic. For the product lines, we expect that ITLA revenue is about flat, and we started seeing the first volume contribution for micro-ITLA. Tunable XFP revenue is going to be about flat compared to the September quarter. As I discussed earlier, in the revenue contribution for tunable XFP is from a major customer. They probably consume the largest volume of the tunable XFPs. They reported a little slow in demand. Also, we entered into a VMI program, even though we continue to manufacture and ship tunable XFPs to the material hub. But the revenue recognition is only realized when they start pulling from the shelf. We expect basically flat tunable XFP and ITLA revenue in the December quarter's sequentially, and we expect a first meaningful revenue from micro-ITLA as one of the major customer start ramping in using micro-ITLA for the transponder (inaudible) manufacturing pretty aggressively.

Okay. Did you touch on the outlook for gross margins in the Fiber Optic and the telecom business for the December quarter?

Hi, Krishna, it's Mark. Regarding the gross margins, one thing that we mentioned is that in this quarter, we were unfavorably impacted by the significant amount of international revenues and lower margin international revenues in our Photovoltaic area. In fact, our gross margins in the Photovoltaics area reached one of the lowest points it had been at in the entire year. We do expect our gross margins to bounce back to the normal levels. Our target margins in this area is roughly 30%, so we do expect a meaningful increase in our Photovoltaic gross margins. The margins on the Fiber Optics side, as Hong mentioned, with the recovery in the business and also with our improve yields, we do believe the gross margins in the Fiber Optics should be able to increase. Obviously, one challenge, as we mentioned, is pricing pressure that we'll start seeing in January. It's a little early right now to understand the full impact of that.

Thank you.

Dave Kang, B. Riley.

Thank you, good afternoon. Mark, can I get a couple of numbers first? Can I get depreciation and amortization and CapEx for the quarter?

Of course. Our amortization was about $1.3 million for the year, and $300,000 for the most recent quarter.

And CapEx?

On the CapEx side, our CapEx was about $1 million which is in line with our typical quarterly figure. On average EMCORE's structure is that we have about $5 million of CapEx per year. The $1 million we had this quarter was pretty much in line. Our depreciation for the quarter was about $2.1 million, and we expect that number to be relatively flat.

Got it. Regarding the balance sheet cash item, did you receive the $7 million to $8 million from Suncore that was expected? If not, then when?

Yes, that's a great question. As I mentioned in my part of the script, we did realize, and by realize I mean we collected, the $4.8 million of proceeds associated with our sale of the joint venture interest in the September quarter. What we also mentioned is that our receivables were at the highest level they've been at in the last couple of years at $41.8 million this quarter, primarily due to the international shipments to really one customer. We have seen a collection of about $7 million, so we are expecting our DSOs to come back down to roughly 60 to 65 day range, in which is our historical average. The last few quarters we have seen a slight uptick there almost each quarter, but now that we're seeing a reduction in our international revenues associated with that part of the terrestrial cell business, we do believe our DSOs will go back down to normal levels.

Then Hong, you talked about some cost reduction programs, especially tunable XFP. Will that lower your breakeven point of $47 million to $48 million? Any more color there?

Right. When it's cut in, it will pretty significantly. Our guys wanting to call this disruptive in the engine for transceivers. But it takes a little bit of time to get a qualification and acceptance by the customers. We do not expect an immediate impact over the next two quarters.

For the next couple of quarters, it's still $47 million to $48 million? But then after two quarters, or two or three quarters, what's the new breakeven point? Are we talking maybe like mid-forties then?

Yes, so our goal is to get into the $45 million on a quarterly run rate to be breakeven.

Maybe by June or September quarter?

Yes.

Okay. Got it. Mark, you didn't give us a cable TV number, the revenue. What was that? And what should we expect for the December quarter?

Yes, for the September quarter, our revenues in the broadband division were about $13.5 million. The remaining part of the Fiber Optics segment was relating to be telco area.

What's baked into the December quarter?

As Hong mentioned earlier in this call, he can give a little more clarity, his statements, we do expect the cable TV business or the broadband business to continue to see growth throughout this next fiscal year. With our guidance, our guidance is flat to up slightly for the next quarter. We should expect to see some small improvements in the Fiber area in the December quarter.

This seems to be a little different. One of your competitors talked about it a few weeks ago. They were a lot more bullish than you guys. Is this market share issue? Or why are you guys not seeing that type of growth that your competitor is?

No, Dave, you need remember our broadband division including the cable TV and also the microwave photonics is specialty product and video transport. The cable TV is growing. The CapEx is increasing. We see the trend in the booking activity has been much improved compared to before. Overall division because of sequestration and the delay in some government programming in a couple microwave photovoltaics areas, that area is decreasing. The increase of the cable TV is overcompensating the decrease of the microwave photovoltaics in the short term. We are seeing the same trend of the cable TV. I don't think we are competing too much on the high-end transmitter side. We pretty much have a lion's share for it, but we are stepping up in recovery, the component shares market shares that we lost during the flood a couple of years ago. We're seeing the same dynamics.

Okay. Then, I also talked about potentially driven by DOCSIS 3.1, they're expecting possible upgrade cycle next year. Care to add your thoughts on that?

Absolutely. We talked about these market dynamics in the previous conference calls. Because of the industry consolidation, we used to have five leading equipment manufacturers in the US. Now we have three. One of them was acquired by British company. That consolidation delayed some of the deployment and together with of the formulation of the new standard, so once they have finalized which platform they're going to be going forward, I do expect 2014 cable TV spending on upgrade and scalable infrastructure to be very healthy, to be much more accelerated than 2013 level.

Next year, without you guys providing too much details, but is it safe to assume that your cable TV business will be back to that $15 million to $20 million quarterly run rate?

I think by the June quarter, we're seeing that. We just said several new products are being introduced and qualified, which complies with DOCSIS 3.1. As I mentioned also, the CCAP is adding a new twist in the new product design in network design, so we're supporting a lot of activities in that area, from traditionally strong area we had in transmitters to return costs to low-noise receivers and known product. When all these products start ramping, I think it is safe to say that cable TV will be resumed to the historic high level, and also I'm hoping to exceed the historic level.

Okay, and then going to ITLA you said 10%. Was that the year, or for the quarter? 10% decline in pricing.

The telco customers, they all have this bidding process from November to December. The price erosion will start from January. But with one particular customers is starts immediately.

That's a Chinese customer, right?

Yes, they have the good volume demand.

That's why your competitors also are seeing the similar dynamics for the September quarter as well.

We are serving the same masters.

Got it. Then just lastly, speaking of China, with China issuing 4G license today, what should we expect out of China going forward? They certainly did make a whole lot of impact this year as we hoped, but how do you foresee things unfolding with China, and the 4G activities and 100 G deployment?

Yes, that's a very good question. Last year, there were a lot of signals that they would be ramping up very quickly. They would be upgrading their network 4G LTE. Come to reality, the volume increase has been moderate. Recently, the system level of activity, we almost have a daily conference call, the capacity, ramp up. I'm optimistic that probably the significant ramp up is finally coming.

Maybe I can ask more bluntly, or more specifically, I heard there were couple of small 100 G tenders this year, but the big enchilada, that has yet to happen. When do we see that big tender since the 4G license has been issued? Can it happen this month? Or maybe within the next couple of months, or is it a couple of quarters out? Give us a timeframe for that.

Yes, they give us at the high level overview every time when we have a face-to-face meeting. They help us out in investing and inventory capacity. As for the timing, they really don't know. We're watching closely to see the development. We try to get ourselves ready once the ramp up is happening.

Got it. Thank you.

I see no further questions in the queue at this time.

Thanks for coming in today, and the Company plans to present at the 16th Annual Needham Growth Conference on January 16, 2014, in New York City. We look forward to talking to you soon. Thank you all.

Ladies and gentlemen, thanks for your participation in today's conference. This does conclude the program, and you may now disconnect. Everyone have a good day.