EMCORE Corp (EMKR) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the EMCORE Corporation second-quarter 2014 earnings conference call. (Operator Instructions). As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Victor Allgeier. Please go ahead.

Thank you and good afternoon, everyone.

Before we begin, we would like to remind you that the information provided herein may include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act of 1934. These forward-looking statements are largely based on our current expectations and projections about future events and financial trends affecting the financial condition of our business. Such forward-looking statements include, in particular, projections about 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 performances 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 industry to be materially different from those (technical difficulty).

-- today from EMCORE, Dr. Hong Hou, President and Chief Executive Officer, and Mark Weinswig, Chief Financial Officer. Mark will review the financial results and Hong will discuss business highlights before we open the call up to questions.

I will now turn the call over to Mark.

Thank you very much, everyone. Thank you, Vic.

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 $42.2 million, which is a decrease of $2 million, or 4.4%, over the previous quarter. The decrease was due to lower photovoltaic revenue. Our Q2 revenue guidance was $40 million to $44 million.

On a segment basis, our photovoltaics business accounted for $18.6 million, or 44%, of the Company's total revenue. This represents a $2.3 million, or 11%, decrease from the prior quarter. As we have said previously, while we remain confident in the long-term prospects of the photovoltaics business, our revenue in any given quarter may be a bit lumpy.

The fiber optics segment accounted for $23.6 million, or 56%, of the Company's total revenue. This represents an increase of roughly $0.3 million, or 1%, 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 almost 10.5 percentage points to 26.5%. The primary reason for the decrease was due to lower shipments in the quarter and a less favorable product mix. We continue to believe that this business's target gross margin is at roughly 30%.

Fiber optic gross margin was 8.2%, 2.1 percentage points lower than the prior quarter, primarily due to an increase in warranty costs associated with already divested products. Excluding the $1 million in warranty costs, the fiber optic gross margins would have reached roughly 12.5%.

Over the next two quarters, with the launch of the micro-ITLA, we expect our margins to be under a little pressure. On a positive note, we have seen significant improvement in the 40 and 100 gig coherent market and we expect our overall gross margins for our telecom products to improve in future quarters as our revenue increases.

Consolidated gross margin was 16.3%, a 6.6 percentage point decrease from the prior quarter, primarily attributable to lower solar and fiber gross margins. Excluding the $1 million fiber warranty charge discussed earlier, our gross margins would have been roughly 19%.

Total operating expenses for R&D and SG&A were $12.1 million. We saw higher R&D expenses in our fiber optics segment from investments in our new platforms.

On a GAAP basis, the consolidated net loss for the second quarter was $5.4 million. Our GAAP net loss per basic and diluted share was $0.18.

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 $2.6 million versus $0.5 million in the prior quarter. The deterioration was primarily due to lower financial performance within the photovoltaics business. 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 onto 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 a space solar order backlog of approximately $51 million versus $55 million at the end of the prior quarter.

As Hong will discuss later, we are working with customers on finalizing certain long-term agreements.

Moving on to the balance sheet, at the end of March the Company's cash and cash equivalents balance was $18.2 million. The increase from the prior quarter was primarily due to lower investments in inventory. The line of credit remained roughly flat at $17.6 million.

Overall, the solar financial results show continued strength in the quarter. The fiber optics segment experienced some revenue growth in the telecom area, although the broadband cable TV business fell slightly.

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 a consolidated revenue of $42.2 million in the March quarter, which represents a $2 million, or 4.4%, sequential decrease from the December quarter. The decrease resulted from expected seasonal lower revenue within the space photovoltaic segment, while the revenue from the fiber optics increased slightly by about 1.4%.

Now let me give you an update on our businesses and the market conditions. First, I will start with the space photovoltaic business segment. Revenue for our photovoltaic segment was $18.6 million, a sequential decline from the previous quarter. This quarter represents a more nominal revenue run rate at the current state of our business. We're expecting a record level of the revenue for the entire fiscal year.

The lower gross margin of 26.5% is due to the lower revenue and a less favorable product mix compared to the first quarter. While we may experience some variability from quarter to quarter, we continue to execute on our plan for this business to achieve 30% targeted gross margin in the future. The net profit for the space photovoltaic division for the March quarter was $2.1 million.

In the past quarter, space photovoltaic division was awarded or authorized to begin work on a total of 12 separate contracts. These awards had a total value in excess of about $10 million. The backlog for this division as of March 31 for delivery over the next 12 months is $51.4 million at the end of March.

During the quarter, we finalized the negotiation of large multiyear purchase agreements with two major aerospace clients and we expect to finalize those contracts this quarter. The associated orders should significantly increase our 12-month backlog and increase our backlog to an all-time high.

We're also pleased to note that one of our major customers with whom we have a long-term, exclusive supply agreement has secured several new satellite orders year to date. This should increase the uptake rate of our products to this customer.

Our space photovoltaic business remains robust. We continue to rigorously manage this business for cost reduction. With a robust outlook for our future business, we were able to renegotiate some supply contracts with our suppliers. Because of the reduced rate, we expect an approximately 150 basis point improvement in gross margin in the future quarters.

In addition, we are pursuing cost reductions through automation. Our solar cell manufacturing process is already highly automated. In close collaboration with our lead customers, we have made a concerted effort to automate the traditionally manual manufacturing process for solar panels. The success of this conversion will allow us to reduce manufacturing costs and also to capture more businesses through offering a higher level of integrated products. We will continue to look for ways to further improve our gross margins.

Now let me discuss our market position and business outlook in our fiber optics business segment. In the broadband cable TV business, revenue was down slightly, compared to the December quarter. We experienced some recovery of the cable TV infrastructure spending at the beginning of the year. However, the announced merger between two of the largest cable service providers in February stalled the recovery momentum. As a result, the cable TV revenue and booking activities in the March quarter was slow.

We have been closely monitoring the CapEx spending plan of the major MSOs as disclosed on their earnings calls. Two key MSOs announced last week that spending in the March quarter was lower than their projections, especially for the equipment purchases related to our businesses.

However, they were still holding the same CapEx projections for the entire year of 2014 as they have given early on. If those projections are materialized, we would expect the demand for our products to pick up in the back end of the year.

In addition, one of our major customers announced yesterday in the cable TV space in their earnings calls that they expect an increased demand on optical transmitters, which is very encouraging to us.

We continue to support our customers and transition to new vendors to protect and expand our customer base. We are deeply engaged in product design and qualification to address new standards in DOCSIS 3.1 and CCAP and finished several product releases. We anticipate MSOs will begin to operate to DOCSIS 3.1 in early 2015, rather than late 2014, due to the delay in the IC chipsets necessary for the upgrade.

During the March quarter, we demonstrated to our key customers a fully integrated transmitter based on our disruptive [millionaire ride] semiconductor laser technology called MELL -- LEML. This technology offers high-power modulation and transmission with a linearity performance similar to the externally modulated transmitters, but with a greatly reduced cost profile and power consumption.

Both service providers and equipment manufacturers have been very impressed with the performance and expect that our solution will play a key role in their future network design.

In general, our broadband business has an extensive technology base with high barriers for competition. We will continue to defend and expand our leading position in cable TV area. In the meantime, we plan to pursue higher-margin growth opportunities in selected niche markets by leveraging our core competency and infrastructure.

Moving on to our business in telecom division, during the March quarter the shipment of 100-gig coherent product was at another record level. The revenue from the business increased approximately 24%, compared to the December quarter. We continue to see a strong demand in the 100-gig coherent product and the book to bill for the coherent products in the March quarter was over 1.7.

This is largely driven by the strong CapEx spending of telecom carriers for coherent and also favored market share shift. The order activity for this quarter was very strong and our backlog is at record levels.

We have built a strong backlog on micro-ITLA, the smaller form factor tunable laser for 100-gig coherent applications as well. Some of our customers are projecting steep ramp-up in the shipment of line cards and transponders using the micro-ITLA in the second half of the calendar year.

We clearly welcome this trend. It has signaled a beginning of the coherent application in much larger metro market. We believe our micro-ITLA will be a market-leading product as well.

We continue to make tremendous progress in tunable XFP products. We have solid design wins and respectable demand from our customers.

As we mentioned before, we produce both tunable XFPs and micro-ITLAs using the same production line. With the expected strong demand from micro-ITLAs, we will focus on the production ramp of micro-ITLA and shift the production capacity to the fast-growing coherent components.

During the OFC show in March, we demonstrated our 100-gig integrated coherent transmitter, or ICT, for CFP2 transceivers. We believe that for the first family in the industry and it was very well received. The comments from carriers is that it is the right product for their planned expansion of coherent transmission into the metro market. We are allocating more engineering resources to accelerate the introduction of this product.

In summary, the strong bookings for existing products and tremendous attention to our new products under development, we are experiencing evidence the alignment of our product portfolio with the growth opportunities in the telecom space.

We believe our broadband fiber optics business has a long-term growth potential once current headwinds abate. While we expect our topline growth potential remains robust, our business cannot be profitable at its current revenue levels. We have started implementing a solid plan to improve the financial performance in the future periods (technical difficulty) selective cost reductions, our personnel efficiency improvements, and aggressive targeting of higher growth near-term revenue opportunities.

During the March quarter, our book to bill for the fiber optics segment altogether was 1.3, so we do expect the fiber optics business to grow from the current levels. Based on our current expectations, we would expect to reach breakeven at a consolidated quarterly revenue level of approximately $47 million.

Turning to guidance for the third quarter of fiscal-year 2014 ending June, our revenue expectation is in a range of $40 million to $44 million, which represents a flat, consolidated revenue sequentially with improvement from fiber optics and sequential decrease from the space photovoltaics segment, which is consistent with the historic quarterly trends in the space solar industry.

The strong growth in our telecom business will offset the relatively flat performance in broadband in our fiber optics business segment.

In summary, we feel that our technology and products are well positioned to address the fast growth areas of marketplace. We'll be focusing on improving operational performance, including driving revenue growth, cost reduction, and new product introductions. We're working diligently to improve the Company's financial performance.

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

(Operator Instructions). Dave Kang, B. Riley.

Just wanted to make sure, you said that book to bill for 100G was 1.7, not 1.07, correct?

That's right. The 1.7 for coherent 100G, and the consolidated fiber optics, including broadband altogether, book to bill is 1.3.

1.3, got it. So, very strong bookings, but what are you doing about it, because you can't really accommodate all the bookings because of your capacity constraint, right?

Yes, but you are right. So the ITLA line is almost reached the capacity limit, but it just shows the strong demand from the customer and their commitment to our business for both ITLA and micro-ITLA for current period and also future period, so (multiple speakers)

So are you on allocation right now or --

We are not use the allocation word, per se, but we are prioritizing for the projects from our customers, so that we are working with them very closely that we don't cause delay for their projects. In the meantime, we do have a limitation on the ITLA capacity because we see the momentum of the coherent product advantage shifting to micro-ITLA and we do have capacity there, as Mark provided remarks.

Right. So actually, that was my follow-up was that. So 1.7 includes both the regular ITLA and micro-ITLA or --

Yes.

Okay, okay, okay. So we should be able to see some nice growth, not necessarily this -- obviously not this quarter, but next quarter when micro production comes in?

Yes, that's absolutely right.

And then on tunable XFP, so it sounds like you are shifting that TXFP production and capacity to micro, so are you implying that you are beating the excess strategy for tunable XFP? Any more color on that?

So certainly, we are supporting the customer base on both fronts, but with a faster growth activity opportunities in the micro-ITLA area, we can definitely place our priority in the micro-ITLA than the tunable XFP.

Okay, so let me rephrase that question. So assuming some of that TXFP production gets filled by micro, what will be the drag on earnings -- what was the first -- first of all, what was the drag on earnings on tunable XFP for the March quarter? And then, when micro starts to fill up, what do you think the drag will be from tunable XFP, say, September or December quarter? Just want to see the relative numbers.

Dave, thanks for the question. This is Mark. We are still seeing very low margins on the tunable XFP product. In addition, as I mentioned in my script, for this quarter and the next quarter we are expecting to see lower gross margins also in the micro-ITLA as we start to ramp that product.

We believe that the micro-ITLA will have a very significant opportunity. We see the metro market for 100-gig coherent really growing and we believe that the micro-ITLA will be in a very good position.

So over the next couple quarters, there is going to be a little bit of noise as we start to fill up the manufacturing line for micro-ITLA. But as Hong mentioned in his remarks, we are seeing a very bright future for 100 gig in the metro, especially as we go forward over the next couple months -- quarters.

Got it. Okay, I guess we will talk more off-line. But just moving on to cable TV, so the customer you talked about yesterday, obviously their numbers were strong and they actually talked about strong optical transmitters. Isn't that you guys? So why are we still struggling?

And then, also, you talked about M&A, [emm ess] M&A, but then, certainly, that didn't impact your customers, so I don't know why you're using that as a factor. So I just wanted to get more color on that situation.

Certainly, Dave, I was just trying to provide some background. The two biggest service providers in the US, they do have combined market share at this point about 40%. But the 40% is not the entire market. And you look at the growth from the equipment manufacturers. They may be to them. They may be to some other service providers as well.

Yes, and it is strong earning from one of our key customers, as announced yesterday. It is very encouraging, but we supply to other customers, and I don't know if everyone has the same level of the book to bill and strong outlook for their future quarters.

So we are still trying to see when the turn is going to start, but I can tell you so far, it has not been good, until we hear encouraging news of they need more optical transmitters.

Then it sounds like with TV, you were saying that 18, 19 is your -- or 18 to 20 is your run level, regular run level, and then cable TV around the 14 to 16. So, incremental growth basically will be coming from ITLA going forward then, right? So, how strong can this ITLA and micro-ITLA provide growth for you if the other two segments are flatlining?

Dave, I think the important thing to note is that the solar business currently for us is a $70 million to $75 million a year business. It is a little bit lumpy because we do have -- we do ship the program. It is a nice, profitable business. We do think that there is real opportunities for growth in some adjacent markets, as we talked about in previous calls.

On the broadband business, I think that our belief on that business is that there are some opportunities in some adjacent markets that could be quite lucrative for us. We have been investing over the last year in some of these markets, and due to areas such as sequestration and other challenges, we have not seen the ramp, but I will turn it to Hong. But I think that we do believe that the broadband business have some opportunity for growth.

Okay, and then, can I just get a couple of numbers, Mark? Depreciation, amortization, and CapEx, and what the budget is for the year?

Yes, on the depreciation and amortization, it was $2.1 million for the quarter that just ended. Our CapEx was $0.4 million. We had relatively low CapEx this quarter.

And it (multiple speakers) be around the $0.5 million level going forward?

No, our CapEx per year averages typically right around $4 million to $5 million a year.

Okay.

In the first half of the year, we have seen a little bit of a lower CapEx spend, but due to some of the market opportunities that Hong can talk about in terms of whether it is ICT, some areas on the broadband side, we do expect then that there could be some additional spending to get up to more of our normal run rates for CapEx.

Got it. All right, thank you.

(Operator Instructions). Alex Henderson, Needham.

A couple of questions for you. First up, congratulations on the orders, but I was wondering if you could talk a little bit about what the embedded margin is on some of those orders. Was that mostly orders for the micro-ITLA or is that mostly orders for the macro-ITLA? And if it is the macro-ITLA, I assume that the margins on that are still going to stay fairly low. Is that correct?

Hi, Alex. Thanks for the question. So the backlog -- strong backlog and strong bookings happened on both micro-ITLA and ITLA front.

So, the ITLA came out of the annual price negotiation. We do have some challenges immediately on the margin, but we also have been working on the cost-reduction opportunities, so that will be translating to about 10% standard margin improvement and we expect to cut in in July/August timeframe. So engineering qualification, as outlined, is in the phase of customer signoff.

Micro-ITLA, as Mark said, initially is going to be margin challenged because we have never run that volume that hard yet. So fundamentally, the process has been optimized, but it just has to go through the regular ramp-up process, so the yield will be -- the challenge in the initial ramp-up phase. But we have achieved with level of the yield -- respectable level of yield in the past, so we're optimistic with the ramp, we will eventually get the margin for micro-ITLAs improved.

So, if I could, just the issues on the recognition of revenue for the micro-ITLA, is that a function of finished goods qualification, so needing to be worked through, or is it a function of simply ramping the production volume and getting the yields up on the production volume?

It is simply ramping the production volumes.

Okay, so can you give us some sense of what the schedule is or what the plan is for reaching material revenues on that product? I assume that right now it is sub $1 million run rate for at least another quarter or so. Is that accurate, and when do we start to see that becoming 25% or 30% of your volume in the ITLA space?

Yes, so our line capacity for the micro-ITLA, the current line can support up to 11,000, 12,000 units per quarter. The ASP ranges pretty widely between the different customers because of the specification and power level requirement.

So at this point, we are poised for ramp-up and the customers are ready for that as well. But I think it is going to be between this quarter to start ramping to the next quarter really seeing significant revenue contribution.

They need multiple components, not only is this the micro-ITLA for this, so we're not exactly keeping the pace for the ramp. We have the capacity to support the near-term projections as they provided up to -- all the way until the end of this year. Further than that, they haven't provided. I think that sooner or later, we need to add capacity to the micro-ITLA line.

That's great, but can you talk to us a little bit about what that capacity would imply in terms of revenues? Because right now, you have been extraordinarily cryptic about what you mean by available capacity. Is it going to -- can we think of 2014 as achieving 25% to 50% of your volume coming from micro-ITLA by the end of year? Is it very slow ramp, and then a big pop in the end of the year? What does the slope look like? Can you give us some granularity around this thing? This is obviously the most important product you are ramping, and (multiple speakers)

Yes, Alex, maybe we can help clarify some of this. So with the line that we have right now, we believe that we can support between $5 million and $8 million a quarter of micro-ITLA, depending on how much of tunable XFP revenue we have coming out of that line. We believe that for the remainder of this year, the vast majority of our business is going to be still in the ITLA, but by the time we get to the end of the calendar year, we should start to see micro-ITLA become a much more significant part of the revenue base.

We believe that we won't really see the cutover right now from ITLA to micro-ITLA until sometime beginning early next year. It is still debatable. If you had asked us where we thought we would be six months ago, I think we would have probably told you we expected micro-ITLA to ramp a little bit faster, and we've actually been surprised by the fact that ITLA has actually been the growth engine over the last couple quarters in terms of the demand, as Hong mentioned on the book to bill.

Right, so --

(multiple speakers) I think see a lot of opportunity coming up, but we think micro-ITLA will be a story that is more towards the end of this calendar year, towards early next calendar year.

So, what I'm hearing you say is that the customers are not willing to take large volume of that product until we get into the very back half of 2014 and it is not a production ramp problem, per se. It's more of a timing of when they want the product that's driving your production rate. Is that correct, what you just said?

So I'm talking about the broad-based customer dynamics to be starting from the latter part of this year, but a couple customers, they will be start ramping from this quarter, even back half of this quarter, for micro-ITLA demand.

But right now, for example, 20-some customers we have, they all have pretty strong demand on ITLA, but the micro-ITLA right now is just on a couple customers, two or three customers. I think their opportunities is there ahead of their competition in addressing the demand in the metro market.

And we really see the micro-ITLA being primarily focused on the metro market as we go forward. We think that's going to be really the best opportunity for us for that product, and at this point, we are seeing that really ramping up as we go towards the back half of this year.

Okay, so going to the tunable XFP, I was under the impression that you had virtually no shippable orders for that product line. Are you suggesting that you have more than $1 million worth of quarterly demand in that product?

Yes, we're actually seeing an increased demand, but we are not necessarily producing whole lot more. We have a good inventory for it, and to meet customer demand. So the increase of the demand is really more like it demonstrated customers' commitment, and when they would like to get more product and the higher priority for their ITLA shipment, we are also getting orders for tunable XFPs.

I see. So just to be clear, you were talking about sub $1 million, $1.5 million? What kind of numbers are we talking about in terms of micro-ITLA revenues here? (multiple speakers) XFP, excuse me.

It changes from quarter to quarter. It ranges from $0.5 million to $1.5 million, so it's about a $1 million level.

Okay. And are you still losing $1 million to $1.5 million, $2 million on that product, or --

No, we don't. We don't -- the yield is much better, but some of the product was produced early on, so we do have a higher cost base.

Okay. And then, going back to the ramp-up cost on the micro-ITLA, if your production ramp is going to happen over the next two or three quarters, how should we be parsing the ramp-up cost for that? What is the nut that we are talking about swallowing to absorb in, say, the June quarter and then the September quarter to get that ramp-up going and cost overruns or yield issues or things of that sort? What nut should we be swallowing?

Yes, there are some yield impacts as we start to ramp up the product. We believe that in the June quarter, we will see some yield levels that are below our expectations.

We're still able to produce significant product to meet customer demand, but the yields are a little bit less than what we would like to be, which is very, very common when we are ramping up a brand-new product and being one of the first to market.

We believe that the ramp-up costs will be somewhere right around $0.5 million, perhaps a little bit more over the next couple quarters as we start to ramp that up and we start to see some of those lower yields in the first quarter or two. But the nice thing about this product line is that we have a significant amount of history on the ITLA, which is really the guts and the technology behind this product. So, working on some of the normal yield-related challenges that happens with new products is something that we feel comfortable with.

Okay, I will cede the floor. Thanks.

Thank you. At this time, I am not showing any further questions. I would like to turn the call back over to management for any closing remarks.

Thank you very much for dialing in today. The Company plans to present in the 15th Annual B. Riley Investor Conference in Santa Monica, California, on May 21. We look forward to talking to you soon. But before we end the conference call, I would like to turn back to Mark and he is going to be providing some additional information.

So, our apologies. At the beginning of the call, there was -- seemed to be some voice quality issues, so I'm going to reread our disclaimer real quickly.

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 trends affecting 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 of achievement of our business or our industry to be materially different from those expressed or implied by any forward-looking statements.

As 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 titled 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 future forward-looking statements to conform such statements to actual results or to changes in our expectations, except as required by applicable law or regulation.

Thank you very much for participating in today's call. Have a good day.

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