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EMCORE (NASDAQ:EMKR)

Q4 2012 Earnings Call

December 06, 2012 4:30 pm ET

Executives

Victor Allgeier

Mark B. Weinswig - Chief Financial Officer and Principal Accounting Officer

Hong Q. Hou - Chief Executive Officer

Analysts

Dave Kang - B. Riley & Co., LLC, Research Division

Alexander B. Henderson - Needham & Company, LLC, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the EMCORE Corporation Fourth Quarter and Year End 2012 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded.

I would now like to turn the conference over to your host for today, Mr. Victor Allgeier. Sir, you may begin.

Victor Allgeier

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 U.S. 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.

Mark B. Weinswig

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.

Consolidated revenue for our fourth fiscal quarter totaled $47.5 million, which is an increase of $6.4 million or 16% over the previous quarter. The increase was primarily due to higher Fiber Optics revenue, driven by ITLA sales and increases in our solar business. Our Q4 revenue guidance was $46 million to $49 million.

On a segment basis, our Photovoltaics business accounted for $17.4 million or 37% of the company's total revenue. This represents a $2.2 million or 14% increase from the prior quarter.

In the fourth quarter, EMCORE sold assets relating to the terrestrial systems product lines to Suncore as part of the realignment strategy we discussed last quarter. As we have said previously, while we believe in the long-term growth prospects of the space solar power business, our revenues in any given quarter may be a bit lumpy.

The Fiber Optics segment accounted for $30.1 million or 63% of the company's total revenue. This represents an increase of roughly $4.3 million or 16.5% from the prior quarter, with the increase primarily from our recovery efforts after the flood in Thailand.

In the fourth quarter, we recognized $0 million of revenues relating to the divested enterprise product lines versus $1.8 million in the third quarter we recognized. Hong will discuss the prospects for the Fiber Optics business later in the call.

Consolidated gross margin was 9.7%, a 1 percentage point decrease from the prior quarter, primarily attributable to lower Fiber Optics segment margins, partially offset by an improvement in our Photovoltaics segment margins.

On a segment basis, Photovoltaics gross margins increased 9 percentage points to 22%, driven by higher revenue levels and improved yields. We believe that this business is on the path to reach gross margins of 30%.

Fiber Optics gross margin was 2.4%, 7 percentage points lower than the prior quarter, primarily from higher excess and obsolete charges, work order variances for our new product lines and yield and other variances associated with our manufacturing transfer from California to China and Thailand. The gross margin for our Fiber Optics segment would have been over 20% in the quarter if we exclude these items. We expect our gross margins in the Fiber Optics segment to improve in future quarters as we complete the ramp-up of our product lines at our overseas locations.

Total operating expenses for R&D and SG&A were $14.9 million, excluding the flood-related charges and recoveries, gain on sales assets, legal settlements and impairment charges. The increase in our SG&A operating expenses from the prior quarter was primarily due to severance-related realignment cost of $1.1 million.

During the fourth quarter, EMCORE completed the sale of the terrestrial solar CPV assets to Suncore for $2.8 million. We did not recognize any meaningful gain or loss on the transaction in the quarter.

On a GAAP basis, the consolidated net loss for the third quarter was $6.6 million, $2.5 million better than the prior quarter. We believe that our results will continue to improve in future quarters as we ramp up our Fiber Optics manufacturing lines overseas, reduce our R&D investment levels in the CPV systems market and reduce our overhead cost. Our GAAP net loss per share was $0.27.

Our non-GAAP adjusted net loss, after excluding certain adjustments, all of which are set forth in the non-GAAP tables included in today's release, was a loss of $6.6 million versus $7.5 million in the prior quarter. Please note that we have included additional information regarding amortization, stock comp and other items in today's release to provide further clarity in our results.

Now on to order backlog, which we define as purchase orders or supply agreements accepted by the company with expected product delivery and/or services to be performed within the next 12 months. At September 30, the company had a solar order backlog of approximately $43.3 million.

Moving on to the balance sheet. At the end of September, the company's cash and cash equivalents balance was $9.1 million. Our net cash decreased from the prior quarter, primarily due to increased inventory levels to meet the ramp-up in production, equipment purchases associated with our Fiber Optics production line rebuild, investment in AR due to the increase in revenues and mix shift and operating losses, partially offset by the insurance-related proceeds received relating to the Thailand flood. Please note that the cash levels do not reflect the $9.5 million of net proceeds from the stock sale in October 2012.

Regarding the insurance recovery for the flood damage, in September, we completed the agreement with our contract manufacturer relating to consigned inventory and equipment damage in October 2011. We have finalized an agreement that is expected to yield $10 million in total cash proceeds and the elimination of certain liabilities. Gains will be recognized upon the receipt or title transfer, which we anticipate to occur by March 31. During the fourth quarter, we received $4 million out of the expected $10 million of cash proceeds.

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

With that, I will turn the call over to Hong who will discuss the recovery from the flood in Thailand, the sale of the CPV assets to Suncore, the company's strategic and operating initiatives and provide revenue guidance for the first quarter.

Hong Q. Hou

Thanks, Mark. Good afternoon, everyone. As Mark discussed, we achieved consolidated revenues of $47.5 million, which represents more than 15% sequential increase from $41.1 million in the June quarter.

The revenue from the Fiber Optics segment increased $4.2 million or 16.5% sequentially due to the further recovery of our production capacity and strong demand in coherent 40 and 100 Gb market, And the revenue from the space power business increased by $2.2 million or 14% sequentially due primarily to stronger demand from satellite solar panel customers.

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

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

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

Now let me give you an update on our business. First, I will start with the Solar Photovoltaic business segment. Our revenue in space photovoltaic for the quarter demonstrated a sequential -- substantial sequential increase, although the revenue for the fiscal year 2012 was down slightly from 2011 due to international customer program delays. We reported a slight decline in solar backlog as of September 30, but we are poised for some key contract awards over next couple of months. And those programs that were previously delayed are now being awarded in 2013.

The fundamentals of the business remain robust, and the outlook for the space programs remains promising. We have good visibility into our customer demand for the next 12 months and expect to book several high-value contracts in our space solar segment in the near term.

Furthermore, we have increased our focus on operational efficiency in the Photovoltaics area, and those efforts are paying off. Product yield and productivity are improving, and we expect the trend to continue throughout the next several quarters. With the divestiture of the terrestrial systems business and the improvement in the space solar business, we'd expect more consistent operating results in the future periods.

Our forecasted fiscal year 2013 revenue for solar is expected to be at or near record level, and our profit margins are currently projected to show marked improvement over the 2012 results.

Finally, for solar segment, it's widely recognized by the industry that EMCORE maintains its technology to lead in the next-generation solar cell and solar panel technology, commonly referred to as IMM. We currently hold the world record for space solar power -- solar cell efficiency, with demonstrated results of greater than 35% efficiency as compared to 29.5% that represents the current state of the practice. We plan to reintroduce IMM products to well-known [ph] manufacturing in the year.

Between our strong market position, growing international presence, improved operating efficiency and technology leadership, we feel our Solar Photovoltaic business is very well positioned for success.

Now let me discuss our market position and business outlook in our Fiber Optics business segment. Post restructuring, our products and technology portfolio in optical components and subsystems is strongly aligned to support current and future requirements in tunable 40 and 100G coherent transmission systems and next-generation broadband architectures.

With our product portfolio of CATV components and subsystems and external cavity laser-based coherent product, we're now positioned to be the technology and market leader in each of our product lines.

During the September quarter, we achieved significant increase in revenue for our Fiber Optics business. This is due primarily to the increase in ITLA shipment for 40G and 100G coherent systems. The revenue from this product line in the September quarter exceeded the highest level pre-flood. As we announced in the last quarter, we are increasing manufacturing capacity by 50% by adding more processing and testing [ph] equipment, as well as to shortening of production cycle time. We are on track for increasing capacity and reaching that level by March 2013.

Although we have seen new entrants into this market during our recovery period from the flood, we believe that the coherent market segment continues to grow rapidly as represented by our strong growth last quarter even with additional competitions. We believe that our products deliver superior performance in narrow linewidth and high power, which are key attributes, especially for 100-gigabit per second applications.

We are driving the production capacity increase and cost reduction to drive the market share shift and optimizing profitability. We are introducing a new product called micro-ITLA, which is based on the same external cavity laser design platform. This product provides superior performances than the traditional ITLA, with the enhanced functionality in a much smaller form factor. It's being designed in by some of the largest coherent systems integrators, and the feedback has been extremely positive. We commenced Telcordia qualification in September and expect to reach the level necessary for qualification in the March quarter. The introduction of this product further improves EMCORE's leading position for coherent optical components.

In addition, we have several programs ongoing to develop other key components. We intend to stay ahead with advanced technology development and to commercialize a full line of products for 40G and 100G coherent applications.

Moving on to our tunable XFP product line. Our tunable XFP production line at Fabrinet has been qualified by Tier 1 customers. And we have received a significant share allocation commitment from key customers. As we discussed last quarter, we stopped production of tunable XFP product in the Bay Area in order to improve our cost competitiveness.

We also improved some manufacturing processes when we transferred to Fabrinet. During the transition and the cleaning up of the open work orders, we realized higher work order variances and significant charges, as Mark discussed, related to this. But it is a onetime charge. Due to the need to modify equipment for automation process, the ramp-up of tunable XFP production was delayed by a couple of months at Fabrinet. This causes a delay in tunable XFP revenue contribution in the December quarter.

However, once the equipment modification and the improvement is fully implemented, production yield will be improved significantly. We are working through these projects and expect to get yields to a very respectable level before the end of the year. We believe the production ramp to begin in the March quarter now. Our goal is to have capacity of up to $15 million revenue per quarter beginning by April.

Our CATV transmitters and laser module components are primarily manufactured in our facility in China. During the recovery process from the flood damage, we were not able to capture the market share effectively due to our limited capacity. As a result, our revenue from the cable TV product will now show sequential growth in the December quarter.

With a completed recovery in the manufacturing capacity, we are moving to recapture the lost market share. We're very encouraged and confident by the recent order activities and which positions us for substantial ramp in the March quarter.

Concurrently, the cable TV industry is going through a rapid transition from the original transmission infrastructure to the DWDM and longer-distance-based transmission solutions.

As the mandatory baseband offering was removed, the QAM modulation allows a significant increase in bandwidth. The standard-setting committees have been busy in defining new standard road map to allow substantial increase in transmission bandwidth in the linear optics broadband infrastructure.

A number of new products were introduced in 2012 to the market to allow the reach of medium distance in the range of 50 kilometers. This requires high-power DWDM lasers in connection with modulators. Our understanding is that our product has been used in a greenfield deployment to South American and Asian countries by our customers.

A number of MSOs in the U.S. are also testing and qualifying this product for domestic HFC network upgrades. The ramp of this product architecture in the U.S. market should represent rapid growth and ensure EMCORE's leading position in this technology. This could be a very favorable development for EMCORE with our industry-leading QAM technology. We'll continue to stay ahead of our competition with our new technical solutions.

As for the CapEx spending, we expect the spending for upgrade and scalable infrastructure will increase by about 5%, based on the CapEx spending announcements by the leading multi-service operators recently.

As we wrap up fiscal year 2012, I'd like to give a quick summary of the accomplishments in the year before turning to the guidance. Fiscal year 2012 was very challenging, but we successfully navigated through some very stormy waters and have much clearer visibility for the future. We started the year with a sound business plan to reach profitability in the June 2012 quarter. But the flood damage to our production lines reset our plan and the operation's priorities. The immediate capital needs to support equipment and inventory material purchases to rebuild our production lines and the delay in receipt of the insurance proceeds put a significant liquidity challenge upon the company.

We work with our contract manufacturers, Fabrinet; our lender, Wells Fargo; and our customers in the telecom business very closely and get their strong support. In the meantime, we implemented a pay cut and reduced discretionary spending. This initiative was essential to our successes in rebuilding our production infrastructure and the recovering from -- for our business.

Over the past year, we also undertook a critical review of our business units and decided to focus on our strength and to draw upon the strength. Accordingly, we divested our enterprise Fiber Optics business, as well as the terrestrial concentrator Photovoltaics business. We negotiated and closed these transactions in 2012. In addition to business restructuring, we also realigned management responsibilities. This will lead to a substantial reduction of corporate overhead.

During the fiscal year 2012, we also concluded several litigation matters, including settlement of a patent-related lawsuit and dismissal of both the class action and derivative lawsuits. In addition, our efforts to improve our internal control and accounting processes have led to a timely financial closing and reporting. As a result, the risk profile of the company has improved significantly.

As Mark discussed briefly, during the September quarter, we also settled insurance claims with our contract manufacturer related to the flood damage. In addition to the $9 million recovery we received between business interruption and the damage to equipment, we expect additional $6 million to $8 million cash payment over the next 4 months and substantial reduction in certain payment obligations. This will greatly improve our balance sheet.

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

Over the last couple of months, we have conducted an in-depth review on the competitive strength and the growth opportunities of all the existing product lines. We have identified some great opportunities and are formulating a clear strategy and a 3-year business plan. We're very excited about our future perspective. I feel that we enter into the new fiscal year with a clean slate and ample opportunities. This allows the management to focus on the operations in 2013 to position the company for sustainable growth and the improved profitability.

Turning to guidance for the first quarter of fiscal year 2013 ending December 31, we expect to have revenues in the range of $49 million to $51 million, which represents about 5% sequential growth.

In summary, we achieved strong sequential revenue growth in the September quarter and expect continued revenue growth and substantial financial performance improvement in the December quarter and throughout the next year. Our focus is on execution of the recovery of the CATV market share and the improvement in yield and production output of tunable XFP. We expect to see improved financial results from these actions. We look forward to discussing our progress in future quarters.

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Dave Kang from B. Riley.

Dave Kang - B. Riley & Co., LLC, Research Division

First on ITLAs, are you guys still on allocation?

Hong Q. Hou

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

Dave Kang - B. Riley & Co., LLC, Research Division

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

Hong Q. Hou

Yes. So we're on track for that, and we're pretty excited about the progress we've made so far.

Dave Kang - B. Riley & Co., LLC, Research Division

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

Hong Q. Hou

Right, right. Pre-flood, the highest level we got for ITLA was $9 million. We are higher than that [indiscernible]

Dave Kang - B. Riley & Co., LLC, Research Division

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

Hong Q. Hou

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

Dave Kang - B. Riley & Co., LLC, Research Division

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

Hong Q. Hou

Yes. It's a very good question. And certainly, we believe the coherent market, that's one of the fastest growing area in the optical component industry. But we also have to be sensitive about this shift of a micro -- the regular and traditional ITLA to micro ITLA, as I said, a smaller form factor, enhanced functionality. And the production uses [ph] structure accepted for testing are different. So we continue to invest very heavily on the traditional ITLA manufacturing. It's going to move away and move to the micro-ITLA in a couple of years. We may not get the adequate return for the investment...

Dave Kang - B. Riley & Co., LLC, Research Division

Right. That was actually my next question.

Hong Q. Hou

I'm sorry, go ahead.

Dave Kang - B. Riley & Co., LLC, Research Division

No go ahead, finish your thoughts.

Hong Q. Hou

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

Dave Kang - B. Riley & Co., LLC, Research Division

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

Hong Q. Hou

They care, and I think we basically see 2 camps of the customers. For some leading customers, they are already thinking ahead to more micro-ITLA and using our ITLA -- micro-ITLA to design their systems for higher density and lower power consumption. But the other camp, they are just trying to get coherent product. They probably have not really get to the point that they wanted to use a micro-ITLA yet.

Dave Kang - B. Riley & Co., LLC, Research Division

I thought micro-ITLA was more for metro. No? So shouldn't there be 2 different set of customers for 2 different set of markets?

Hong Q. Hou

I think the 2 sets about the case is, one, is to replace the regular ITLA and they don't want to sacrifice any performance. The other application is getting into the shorter distance, including the micro area in transponder. So there, they probably can use a bit of a watered-down version of a performance specification.

Dave Kang - B. Riley & Co., LLC, Research Division

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

Hong Q. Hou

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

Dave Kang - B. Riley & Co., LLC, Research Division

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

Hong Q. Hou

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

Operator

Our next question comes from Alex Henderson from Needham.

Alexander B. Henderson - Needham & Company, LLC, Research Division

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

Hong Q. Hou

The moving parts are 3. We're talking about the enterprise sale that happened a long time ago...

Alexander B. Henderson - Needham & Company, LLC, Research Division

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

Hong Q. Hou

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

Alexander B. Henderson - Needham & Company, LLC, Research Division

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

Hong Q. Hou

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

Alexander B. Henderson - Needham & Company, LLC, Research Division

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

Hong Q. Hou

Right.

Alexander B. Henderson - Needham & Company, LLC, Research Division

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

Hong Q. Hou

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

Alexander B. Henderson - Needham & Company, LLC, Research Division

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

Hong Q. Hou

We did not. We cannot -- I mean, that's kind of still considered part of the...

Alexander B. Henderson - Needham & Company, LLC, Research Division

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

Mark B. Weinswig

Correct.

Alexander B. Henderson - Needham & Company, LLC, Research Division

And the workforce charge was what?

Mark B. Weinswig

The workforce charge and also the cost for their facility shutdown were over $350,000 in the quarter.

Alexander B. Henderson - Needham & Company, LLC, Research Division

Okay. So my understanding is the tunable XFP, as it was being produced, was costing you a net negative margin of $1.5 million, plus you've got $2.2 million, plus you got $350,000. So the cost associated with that was the combination of those 3. And 2 of those fall out, the $1.5 million, I guess, falls to a much lower level in the December quarter. What should we think that loss looks like in the December quarter?

Hong Q. Hou

The December quarter is just the only thing of these 3 elements that you said. It's a margin -- lower margin due to the ramp-up phase. I would say probably right now, it looks like that $1.5 million will be reduced to about $1 million.

Alexander B. Henderson - Needham & Company, LLC, Research Division

About $1 million. So it's a little higher than we had thought before. When we were guessing, it was $0.5 million. So that extra half smudge is associated with the slowdown in the timing of ramping it because of that...

Hong Q. Hou

That's right.

Alexander B. Henderson - Needham & Company, LLC, Research Division

The yield issue?

Hong Q. Hou

Right. We didn't ramp up very cleanly, so it was pushed out by a couple of months. And I think it's worse than we expected by less than -- about $1 million that's due to this yield issue.

Alexander B. Henderson - Needham & Company, LLC, Research Division

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

Hong Q. Hou

No. So it's very clean and everything cleaned up. The settlement charges for the patent-related was recorded in the June quarter. And there's 2 related to the CPV components, the class action and derivative was dismissed by the court. So there are no further actions. And the plaintiff, they signed an agreement, they will not appeal or modify the claims. So there are no -- absolutely no charges related to that.

Alexander B. Henderson - Needham & Company, LLC, Research Division

Okay. So if I'm doing this correctly, those charges that you just identified total about $5 million. You produced a $6.6 million loss. If everything else was the same, your operating level would be the new -- on an apples-to-apples basis going sequentially, would be more like a $1.5 million loss and presumably you're going to show some improvements on some of the other areas. So is it reasonable to think that your narrowing close to breakeven or possibly even a profit? Or where do we -- how do we think about that?

Hong Q. Hou

The loss is going to be greatly reduced, and I think it's -- we are very close. And you're absolutely right that the loss would be greatly reduced. And as the Photovoltaics business improves, the 3 areas of the solar in March quarter, the cable TV market share shift is going to be back based on the current booking activities. The ITLA continue to grow. We're excited about that. And really the only thing is this tunable XFP. So that's why, Alex, I'm a little reluctant to give you a definitive answer on the current quarter, but we get our arms around -- we sent 9 engineers in Thailand. I am going there next week. So this is the only thing we need to focus on to turn the financial performance.

Alexander B. Henderson - Needham & Company, LLC, Research Division

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

Hong Q. Hou

Right. So this quarter is just largely dependent on the yield and -- but when we fixed the tunable XFP, getting the yield to a respectable level and we should be turning into the profitability.

Alexander B. Henderson - Needham & Company, LLC, Research Division

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

Hong Q. Hou

Unfortunately, no. The lower performance, we have set it on the side. So when we get out of the problem, the process variability is fixed, we have to review why the performance is a little lower. If there is some fundamental issues, those materials need to be scrubbed. But it's really just due to some distribution of the process, and we can sell the lower performance parts to less demanding customers. So that's why that itself, it can be a swing of a few hundred thousand dollars.

Alexander B. Henderson - Needham & Company, LLC, Research Division

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

Hong Q. Hou

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

Alexander B. Henderson - Needham & Company, LLC, Research Division

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

Hong Q. Hou

Yes, we are -- I mean, that's just $200,000. But at this level, it's kind of not very meaningful. The customers' commitment is much higher than that. So that's why we're not beating the drum on the revenue of a few hundred thousand dollars.

Operator

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

Hong Q. Hou

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

Operator

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

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