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EMCORE Corporation (NASDAQ:EMKR)

Q1 2009 Earnings Call

February 10, 2009 9:00 AM ET

Executives

Victor Allgeier - TTC Group

John M. Markovich - Chief Financial Officer

Hong Q. Hou - President and Chief Executive Officer

Analysts

John Harmon - Needham & Company

Jonathan Dorsheimer - Canaccord Adams

Operator

Good day everyone and welcome to the EMCORE Corporation First Quarter Fiscal 2009 Earnings Conference Call. Today's call is being recorded. All lines will be in listen-only until our Q&A session. At this time I'd like to turn the conference over to Victor Allgeier of the TTC Group. Please go ahead sir.

Victor Allgeier

Thank you and good morning everyone. Yesterday after the close of markets, EMCORE released its fiscal 2009 first quarter results. By now you should have received a copy of the press release. If you have not received the release, please call our office at 646-290-6400.

With us today from EMCORE are Dr. Hong Hou, President and Chief Executive Officer, and John Markovich, Chief Financial Officer. John will review the financial results and Hong will discuss business highlights before we open the call up to questions.

Before we begin, we would like to remind you that some of the comments made during the conference call and some of the responses to your questions by management may contain forward-looking statements that are subject to risks and uncertainties as described in EMCORE's earnings press release and filings with the SEC.

I'll now turn the call over to John.

John M. Markovich

Thank you Vic and good morning everyone. Thank you for taking time to participate in our call this morning. I will start by providing you with some highlights of our fiscal first quarter operating results and then address several backlog metrics, liquidating and financing matters and our recent cost reduction initiatives.

Consolidated revenue for -the first quarter totaled $54.1 million, an increase of 15% or $7.2 million when compared with prior year first quarter revenues of $46.9 million and a decrease of 11% or $6.5 million when compared to the immediately preceding fourth quarter of fiscal 2008.

Our Fiber Optics segment accounted for $39.2 million or 72% of the Company's total revenue for the quarter, which represents 15% or $5.2 million increase over $34 million reported in the prior year period, and 15% or $6.9 million decrease when compared to revenue of 46.1 million in the preceding quarter. The year-over-year growth of Fiber Optics revenue was primarily due to the revenue associated with the telecom, datacom and optical cable interconnects-related assets of Intel's Optical Platform Division that we acquired early last year.

Our Photovoltaics segment accounted for $14.9 million or 28% of the Company's total revenue for the quarter, which represents 15% or $2 million increase from 12.9 million reported in the prior year period and 3% or $400,000 increase when compared to revenue of 14.5 million in the preceding quarter. On a year-over-year basis all three product lines within the Photovoltaics segment experienced increases in revenue.

Moving on to gross profit and margins, after excluding non-recurring inventory reserve adjustments, first quarter consolidated gross profit on a non-GAAP basis was $7.2 million, representing a gross margin of 13.3%. On a GAAP basis, first quarter consolidated gross profit was $1.6 million, which represents an $8.5 million increase... decrease from $10.1 million reported in the prior year period and an increase of $2.1 million when compared to the immediately preceding quarter.

The first quarter gross profit was depressed due to a general decline in average selling prices, particularly in the telecom components products, unabsorbed overhead expenses and inventory write-downs totaling approximately $5.6 million that were concentrated primarily in our Fiber Optics segment.

On a segment basis, first quarter non-GAAP gross margin for the fiber optics segment was 11.2% and 18.8% for the Photovoltaics segment. For the quarter Fiber Optics gross margin on a GAAP basis was a negative 1.1% compared with 23.5% in the prior year period with the decrease in gross margin due primarily to the items I highlighted earlier. The Photovoltaic gross margin on a GAAP basis was 13.7% which is a decrease from 16.4% in the prior year period, but a significant increase from the negative 31.6% in the immediately preceding quarter which was adversely impacted by inventory write-downs.

After excluding non-recurring and other non-cash charges, the first quarter non-GAAP consolidated operating loss was $8.8 million. On a GAAP basis the consolidated operating loss was 52.5 million which includes $33.7 million in non-cash charges related to the impairment of goodwill and in process research and development that was concentrated primarily in our Fiber Optics segment. This GAAP basis operating loss represents an increase from the $9.2 million operating loss reported in the prior year period and the $41.5 million operating loss reported in the preceding quarter that included $22.2 million in non-cash charges also associated with the impairment of goodwill and intangible assets.

Net of non-recurring non-operating and other non-cash charges, the first quarter non-GAAP consolidated net loss was $8.9 million or $0.11 per share. On a GAAP basis, the first quarter net loss totaled $53.4 million or $0.69 per share compared to a net loss of $14.4 million or $0.28 per share reported in the prior year period.

Now moving on to backlog, as of December 31, we had an order backlog of approximately $53.2 million which consists of $30.2 million in Photovoltaics backlog and $23 million in Fiber Optics backlog. We define order backlog as purchase orders or supply agreements that had been accepted by the company where expected product delivery or service has to be performed within the next twelve months.

Moving on to the balance sheet and liquidity matters. As of December 31 cash, cash equivalence, restricted cash and available for sales securities totaled $18.8 million, and net working capital totaled approximately $75 million. As we've previously announced, we closed the $25 million secured line of credit with Banc of America last September and have loans outstanding under this facility totaling $15.4 million as of December 31.

During the quarter we freed up a total of $2.6 million of cash that was previously tied up in auction rate preferred securities and shortly after the end of the quarter we sold all of our remaining interest in WorldWater & Solar Technologies which has been recently renamed Entech Solar for $11.4 million in cash.

As previously disclosed, the Company has received indications of interest from a number of investors regarding a minority equity investment in the Company's wholly owned subsidiary that we are aggressively pursuing. Last month we signed a letter of intent with a major international investment group that involves both investment and operational agreements, and concurrent with this development, we're pursuing interest in a minority equity investment in our solar stub from additional investors through private placement process. In the very near future, we'll commence management meetings with a number of interested investors and are targeting to close one or more of these financing opportunities by late March or early April.

An addition to these liquidity and financing initiatives, we have also implemented a number of cost reduction initiatives including a reduction in our employee base of over 160 people or approximately 17% of our total workforce. This translates into annualized cost savings in excess of $9 million. A significant reduction in the fiscal '08 employee bonus plan payouts, the elimination of all fiscal '09, employee merit increases, significant reductions in capital expenditures and restrictions on employee travel and other discretionary expenditures.

Lastly, we're continuing to place great emphasis throughout the company on improving the management of our working capital, particularly our inventory levels and cycle times. With that I will turn the call over to Hong for his operational and strategic update.

Hong Q. Hou

Thank you, John. Good morning everybody. First of all let me summarize the Q1 financials. Revenue was 54.1 million representing approximately an 11% sequential decline of which the revenue of some consumer business increased while the revenues from the Fiber Optics business declined about 15%.

On a non-GAAP basis, the gross margins for the Photovoltaics and Fiber Optics business was 18.8% and 11.2% respectively. And the consolidated net loss was 8.9 million on a non-GAAP basis.

We impaired $31.8 million of goodwill and $1.9 million intangible assets this quarter related to the telecom business acquired from Intel Corporation. At this time all of the goodwill related to our Fiber Optics business has been impaired in recent months (ph).

Next, I will address the market and business environment and our strategy in the various sectors of our business. Let me first discuss our business in the Fiber Optics area. Although, we have built a comprehensive product portfolio in Fiber Optics component and subsystems, the demand was soft pretty much across all of the platforms in the last quarter, as a result of the industry-wide slowdown related to the economic downturn.

So, Broadband Fiber Optics business the revenue within the cable TV product line for Q1 was relatively flat compared to the preceding quarter. The capital spending for transmission products, as reported from the U.S. service providers, remains low in the December quarter. But the projections say Time Warner Cable, one of the largest market service operators for the year 2009, said that capital spending could be increased by 20 % year-over-year for all business sectors.

By having the visibility of the demand from our customers remains very poor. The revenue from our broadcasting and the qualm (ph) transmission products, shifts our contributing to our revenue within the next couple of quarters. Those are the new product lines we just recently qualified with the customers. And we believe this will continue our gains in market share. Once capital spending resumes, we expect to be better positioned than ever for the (inaudible) this segment.

In the area of fiber-to-the-home application, we were awarded a major design win for GPON transceivers in the September quarter from a leading equipment OEM. And commenced the volume shipments in now fiscal Q1. The demand for the rest of the fiscal year '09 for this product line appears very healthy. Verizon is looking to deploy units to over 1 million homes in 2009. We are one of the only two qualified PON transceiver suppliers to the fiber-to-the-home or FTTH (ph) programs.

Further more, we have been leveraging our expertise in cable TV and fiber-to-the-home area and gained multiple design wins in this called RF (ph), the radio frequency over plus (ph). We believe that RF (ph) will be the future expense of a Greenfield deployment for cable TV hybrid fiber connection networks.

In the fiber, the fiber will be brought out of the way to the home from business. This could potentially be the ultimate architecture to penetrate to every home or businesses through the current HFC network.

Our video transport and microwave photonic (ph) specialty product sector continues to perform well. Revenue remains flat on the sequential basis, thus the gross margin remains at a typical 50%. This and a number of new programs of opportunities under development and that represented significant upside for this product segment.

In general the Broadband business units did a good job in managing costs and then improving out recently. We're able to achieve positive EBITDA even with a depressed revenue level.

For the ten time (ph) business we're having a process of transitioning to low cost product platforms for laser margins and transponders. However the Q1 demand was substantially lower then our forecast and the product have been eroded significantly.

We expect to improve the gross margin of this product line and we've managed to inventory and fully transitioning to the new low cost product platforms. As a result of this platform transitioning and decision to use lot time buys on some products, we took charges on some inventory in this segment of Fiber Optics business.

We continue to invest in the telecom business, we're leveraging the depreciating capability of our external cavity laser technology and the vertically integrated infrastructure to focus our engineering resources in the development of pinnacle (ph) XFT product lines and applications of our DCL for next generation 40 and a 100 gigabyte per second application.

In the December quarter, we experienced a moderate decline in demand for (inaudible) transceivers and parallel optical transmitter receiver product line. However we saw increase in demand for the Connects cable product, which are the active cables with a electrical connectors based on parallel optical transceivers on both ends of a fiber cable.

We continued to lead this area through the introduction of a new product, a quad data rate cable operating an aggregated bandwidth of 40 gigabyte per second. As the transmission bandwidth of our cables increases, it becomes more and more advantages and cost effective to replace the copper cable with fiber.

In Q1, we expanded our vendor managed inventory, our VMI program for our major customers, which include the parallel optical transmitters and receivers. The VMI program improves the demand visibility but it will continue to require more of working capital and a more certainty in the revenue recognition, especially in this market where every company is managing their inventory very closely.

As I discussed earlier, while we pretty much have our cost structure in line for the broadband business, we are experiencing a industry wide slowdown in demand in telecom and datacom businesses. We'll continue to focus improving operational efficiencies and closely managing the working capital in this area.

Now, let me discuss the solar photovoltaic side of our business. First, the satellite power business. The visibility in our satellite business is relatively good through the mid of 2009. In the December quarter, we signed a long-term purchase agreement for approximately $70 million with a major satellite integrator. In addition, we are finalizing the negotiation of a new purchase agreement with a major existing customer for their future demand totaling approximately $50 million. We expect to be sole and primary supplier of a space solar cells solar panels for three out of the four major aerospace companies in the U.S. Furthermore we have been recently awarded a number of geosynchronous orbit satellite programs in the international markets.

We continue to make great progress and the technology advancements and the product commercialization of Inverted Metamorphic, our IMM solar cell. We have demonstrated yet another world record performance of converting efficiency of 33.7 %. In (inaudible) this is space illumination condition with a quadruple-junction IMM solar cell design. This performance together with the ultra-light weight of the IMM solar cells will enable a disruptive new application for amend (ph) high flying aircraft for communication and (inaudible). We expect major program wins in the next several months.

It is anticipated that the efficiency levels of approximately 45 % could be achieved when we adopt this design platform for used and are 500 to 1,500 times concentrated illumination for terrestrial applications. We expect some commercial line to this technology through applications for space power first then for terrestrial applications by the end of 2009.

With our lead in manufacture inquisitive and engineering improvement our product yield and operational efficiencies in our solar cells have improved significantly. Along with our favorable currency conversion rate for (inaudible) purchases, our space business was back to profitability in Q1.

Now let me turn the discussion to the terrestrial solar power business. The products we are offering include concentrated photovoltaic or CPV component in systems. As a leading supplier of CPV components including solar cells and packaged solar cells receiver, we continued to expand our customer base in the December quarter. We have signed supply agreements with two major customers, having CPV system products qualified for the Spanish market.

However to take route of CPV components, therefore our revenue from CPV components continues to be low due to the challenges that our customers face in securing financing for their projects, even the situations (inaudible) global credit markets.

Our strategy continues to focus on the development of a broad customer base rather than any specific customer, so that we can always benefit from the CPV ramp up no matter who wins in the world market. We firmly believe that CPV will become a valuable technology which will gain a significant portion of the solar photovoltaic market in the next couple of years. We believe that EMCORE will be the first company to benefit from the runs of the CPV business.

We have the capacity to serve the needs up to 250 megawatts. And therefore we do not anticipate the need for additional CapEx spending for this line of business in the next couple of years. As for the CPV systems we completed another installation of 50 kilowatt in China. All five installations in Spain, China and U.S. are operating in accordance to the specification. The longest operating history is demonstrated by the installations in the U.S. in December 2007.

The development of our Gen-III CPV systems products is progressing very well. It looks very achievable to a attain a margin efficiency of 30% at a cost which would be very competitive with the future pricing of silicon and lithium products. The new margins have already been introduced for demonstration and certification purposes. We expect the production of the generation stream products begin in the second half of 2009. All of our major future bids for solar utility projects will be based on our Gen-III products. In mid-January, we were officially notified that EMCORE was placed on the short list of a bid in a major Southwestern public utility company worth 50 to 80 megawatts.

Working with our strategic partner, we're providing regulatory and preventing information for the size of our bid. We expect the final awards to be in the next couple of months. In the meantime we are commencing the discussion and finalization of a definitive agreement with our strategic partner, which is an international conglomerate. The role of our partner in this project is to organize equity and projects financing and to serve at owner operator of the project. We continue to use it as a business model for other projects in the horizon.

We're still hopeful that we could win the 115 megawatt project in Southern California in the future. The construction of the solar product project is scheduled to start in late 2009 and the renewable portfolio standard or RPS will taken in effect by 2011 in many states. Furthermore we expect an acceleration of this renewable energy project under the current administration if such projects serve to stimulate economic growth.

It's a clearly very exciting opportunity for the company. We're also in active discussions with several potential international partners to license the projects for CPV systems manufacturing in each of their local markets. This business arrangement allows us to penetrate the key international market with local advantages allowing EMCORE to grow its business internationally in the more cost effective and efficient fashion.

In summary, we continue to experience the slowdown of our Fiber Optics business as a whole industry in this macroeconomic situation. We need to continue to improve our operational efficiency and closely manage working capital and to take rate for our products significantly below the previous forecast. On the other hand, we have made significant improvements in solar photovoltaic sector. This space, satellite business is back to profitability with a stronger competitive position and good visibility.

We continue to expense and secure a leading position in the CPV area. The new CPV system products development is on schedule on the cost target. The new business opportunity with the Southwestern utility company and the relationship with our strategic partner represents a exciting opportunity for EMCORE.

We are on the launching pad for what we believe could be a significant business growth starting in the later part of 2009. However we are still consuming cash from our operations, cost reduction and the liquidity are clearly the focus of the management. We have undertaken several cost cutting initiatives intended to conserve cash including recent reductions in force, the elimination of fiscal 2009 merit increases, a significant reduction in capital expenditures and greater emphasis on improving working capital management. We'll continue to closely managing our business and cash.

As John discussed already about our initiatives and activities in the financing area already, I'm not going to repeat over here but I will be commencing management's presentations this week and targeting to close the financing by the end of March, early April timeframe. Although we have fairly good visibility and believe that our Photovoltaics business will continue to grow. Our Fiber Optics business revenue is expected to be flat to 15% down on a sequential quarterly basis.

With that I will turn it over to Q&A.

Question-and-Answer Session

Operator: Thank you. (Operator Instructions). Our first question will come from John Harmon with Needham & Company.

John Harmon - Needham & Company

Hi good morning.

John Markovich

Good morning, John.

John Harmon - Needham & Company

A couple of questions please, maybe I didn't hear, I heard you gave some revenue guidance for your Fiber Optics business but I didn't hear you give any guidance for your Photovoltaics business?

Hong Hou

Yeah, John, so for the sort of Photovoltaics business we have a better visibility than Fiber Optics business. Probably the best we can expect, it is flat quarter-over-quarter. Our Fiber Optics business... there is a range we gave from minus 15% to flat on a sequential basis.

John Harmon - Needham & Company

Okay. Thank you. Help me with the numbers please, I don't know if you gave any EBITDA number, but it looks like your cash decreased by about 5 million in the quarter. Certainly you are looking at revenues down a little bit than the March quarter. And assuming you took all of your annual cost reductions, 9 million a year, that's a couple of million a quarter. So you'd still probably be burning about 3 to 4 million a quarter after your cost reductions, am I doing the math correctly?

John Markovich

You are, John.

Hong Hou

Yeah, John. Instead of... one asset in there is well run in (ph) capital. We added into the quarter totaled up about 70 to $75 million, that's our inventory level. And the quality after the revaluation of this inventory is fairly good. They are several products that access inventory. So that's why we said, we place very strong emphasis on the working capital management. We can convert a lot of the inventory into cash, we expect to do that in this quarter.

John Harmon - Needham & Company

Thank you, but a follow up to that one please. You said you would have to add some inventory to participate in VMI program and optical, how much inventory you think that would mean?

Hong Hou

The VMI inventory level is anywhere some 3 to $7 million and that's in a way a one-time event. We have done for major product lines by the end of September, so we added parallel optical transmitters and receivers into the VMI inventory. So in that bucket probably the inventory level will increase by a couple of million dollars. Just across the boards, we have a very high inventory level, because the comfort manufacturing models, you will give us forecast, they'll purchase the material on our all behalf. When the demand drops, all of sudden, we can't react right away, so a lot of inventory flow over to ourselves. So we put a lot of efforts in analyzing that, in this quarter and next quarters. We're going to be liquidating a lot of the inventory we have.

John Harmon - Needham & Company

Okay. I'll pass it on. Thank you.

Operator: (Operator Instructions). We'll go next to Jon Dorsheimer with Canaccord Adams.

Jonathan Dorsheimer - Canaccord Adams

Hi, thanks. Just a couple of quick questions. The Banc of America credit line, is that or all of your assets actually tied to that credit facility and then how will that work if you... if and when you are able spread out the PV business. Will that have to be paid off?

John Markovich

The majority of our assets are secured under the credit facility and once we get to the point of actually shifting assets and spinning off the subsidiary, we'll require concurrent agreements with Banc of America in terms of that course of action.

Jonathan Dorsheimer - Canaccord Adams

Alright, great. And then Hong, on the New Mexico project or bid, excuse me. I think you would mention or I think the timeframe in terms of expectations was that the international partner will be signed by year-end. I am wondering should you actually win that New Mexico project, how should we look at the... since the partner hasn't been signed yet, how should we look at the financing of that business? Can you maybe help elaborate on how that bid will actually be... will financed, should you win it?

Hong Hou

Yes. So the process has two, three steps. The first step, they generated is sort of list based on their evaluation and the technical and financial, non-technical financial aspects. So, we pass that and we are on the shorted list and they now, the second step of the process is we have to just provide the regulatory and the permitting information for the sites we bid on, and they will be doing an analysis of interconnect and capacity of the grid. And so we expect that process to take another two, three months or so, and there will be the final award. So for the project's timing, approximately it will be the later part of the 2009. The reason as I said already, just most of the utility companies they have to meet the RPS, renewable portfolio standard by 2011 and so this utility company has a need of the solar power in their renewable portfolio.

And with our strategic partners and we have signed an agreement. But now with us on the shorted list drawn, we are commencing the discussion and the negotiation of a definitive agreement. Again, as I said, they will be the company, we'll be the owner operator for just the project. We are the project manager; we're just acquired of the Photovoltaics. We will be doing operating and maintenance service when the solar product is established. So, certainly I think they have the capability of doing equity financing. They have a good credit to organize the project financing to their leverage.

Jonathan Dorsheimer - Canaccord Adams

So let me ask the question little bit differently. Is this project contingent upon you, signing this international partner? And then why is it taking much longer than you expected in terms of partnering with this international conglomerate?

Hong Hou

Yes, this project was going to bid by us and even partnership with the partners. So, it's in a way the joint bid between us and that partner. And why it takes so long, its gives and everybody like dispute upon success. So, it's really when we get selected to be one of the suppliers on our shorted list, that characterize the first half of the success. You can have a strong identification internally to push forward for that partnership, advance to the next level.

Jonathan Dorsheimer - Canaccord Adams

And how are you dealing the lack of test statistic. I think you said that the longest project which I presume is the one on the EMCORE facilities for is December 2007. And the biggest push back that we've seen with CPV is not that the technology, questions around the technologies that it lacks that the statistic to actually rap the financing around some of these projects. So how are you dealing with that in terms of this particular New Mexico bid?

Hong Hou

Yes, for the product, statistics operating of the reliability performance, clearly we are designing the system for operation of 20 to 25 years. We can do the reliability but just let it run for 25 years. But there is none acceleration tax defined by the international standard. So, we're doing acceleration tax on other key some components according to the international standards, that then you can from that project an operation life and the reliability performance. I think that applies to every technology, thin-film solar panel, I don't think they start deployed for application after a 20 years of the attached in the tax field (ph).

Jonathan Dorsheimer - Canaccord Adams

Sure, I think, said differently, lack of real world statistics, there is a greater risk with acceleration lifetime risk is usually offset by lower pricing, in the case of thin-film I think when it was first introduced, had to offer a lower price compared to crystalline. In the case CPV, could you may be elaborate on, are you having to come in at the 30% discount to the other bids that are out there?

Hong Hou

Yeah. I'm not sure you need to go that far but you certainly need to give them a reason to use the CPV. And I think the CPV works extremely well in the Southwestern state because of the direct normal radiance, and also the efficient use up from land. When we are in a process of bidding for multiple projects, start realizing more and more strongly that cost of land is not a small perspective in there. So, I think all in all, we have to provide a situation that the CPV is very beneficial compared to other computing technology.

Jonathan Dorsheimer - Canaccord Adams

Got you. Then lastly and then I'll jump back in the queue. You announced that you are commencing a financing. Have you filed a shelf for that financing? Or will you be filing that today?

John Markovich

We have not filed it, but we are considering it.

Jonathan Dorsheimer - Canaccord Adams

Alright.

John Markovich

I think the financing involves for the most of the investment in the subsidiary.

Jonathan Dorsheimer - Canaccord Adams

So, how would that work, could you maybe elaborate on how that will work, John?

John Markovich

It would a private placement and a wholly owned... it was currently a wholly owned subsidiary of EMCORE Corporation. That's the current structure that we're contemplating.

Jonathan Dorsheimer - Canaccord Adams

Alright, thank you.

Operator: (Operator Instructions). We'll take a follow up question from John Harmon with Needham & Company.

John Harmon - Needham & Company

Hi there. You talked a bit about credit crises, acting on your CPV business. I mean I was wondering if you could maybe talk about just three topics in relation to the business, and maybe a little more information on credit. The competitive environment, there is certainly a number companies out there that are developing cells and concentrators. And finally, how much price competition that has right now, you talked about your Gen-III customers being more priced competitive?

Hong Hou

Yeah, John I think for the CPV, the sweet spot of the application is for commercial and large scale utility deployment. So, I think most of those projects do need a financing. We know some of our customers who are buying the component from us, give us a schedule in the past, it was a more optimistic because they feel that they can have the financing arranged to start a project. And we see some of these opportunities get delayed. And primary information that we got from our customers that they were not able to get the project financing for those. So that's, I think once the credit market is back, I think that sector is going to be accelerated. Second question, we did take a notice. Some of the companies that did advertising, the multi-junction solar cells for our concentrator applications. We have some competitors in there, but in a way it's good, and that a cheapest motivator to continue to advance the technology. But in this area, the solar cells only accounts for only 15 to 20% of the total system cost. At 39% conversion efficiency and 35% solar efficiency made a huge difference. You basically have six times more leverage for the performance for the little premium you pay on high efficiency of solar cells. When you sit down do the calculation, even the people give you 34, 35% solar cell for free with still not be cost competitive compared to buying high performance solar cells. And the territory. Yes, we are continue do the development in Gen-III and Gen-II from the designed concept of point of view there is no significant difference, but Gen-III is a more disciplined engineering effort to take the cost out of the Gen-II design.

In many ways, Gen II was designed for performance and time to market. We achieved that but, we over-engineered in many areas. So that's why we took it back to the drawing board and had a Gen-III and the Gen-III will be maintaining a lot of nice features of Gen II and improve the module converging businesses from 27.5% to 30%. So, that's a further improvement because of the optics design and improvement of the solar cell performance. But the cost structure will be significantly lower than Gen II.

John Harmon - Needham & Company

Thank you. And I have a follow-up to an answer you gave to another analyst question. I think it was regarding the project in New Mexico. You said that you were going to manage the project and provide maintenance services. I... just my question is, it seems like they are getting a bit of outside of your purview and the things that you do very well, particularly comment on that please?

Hong Hou

Yes, the core competency for us, we realize that is for CPV is that product design and manufacturing. But for a lot of those solar utility projects, you need to have a partner, strong partner. So, that you don't have to go back to the bank every time and negotiate and that's why this partnership with the strategic international company is very important to us because once we have this umbrella agreement, we can go after many projects because we are local, we have a better visibility in that connection into the local community. So, we will be managing the project mainly and we will be finding and hiring construction companies and to have the solar product set up and once its operational ongoing operational maintenance, we may not to hold up the sleeve to ourselves, but we'll be finding some companies locally to do that, on behalf of the owner operator, in this case, the strategic partner.

John Harmon - Needham & Company

Okay, understood. Thank you.

Hong Hou

Thank you.

Operator: We have no other questions at this time. I'd like to turn the conference back to Dr. Hong Hou for closing remarks.

Hong Hou

Thank you. With that let me make some closing remarks. We're off to a rough start in a fiscal 2009, our Fiber Optics business continues to experience slow demand and the increasing prices on product pricing, especially for our telecom product lines, due to the extremely challenging macroeconomic environment. We have implemented several cost reduction initiatives in the past couple of months and we'll continue to focus on in increasing our operational efficiency and the working capital management. On the other hand, we are turning around of sort of Photovoltaics business, the space business factory is profitable again and the development of cost effective concentrate of photovoltaic systems is unscheduled for production in the second half of this year.

In addition there has been exciting developments on the solar photovoltaic business. We are officially on the short list of a major Southwestern utility company in starting project funding. We're also building some major business opportunities based on our market leading technology of inverted metamorphic triple and quadruple junction solar cells. And I thank you for your attention today, we look forward to the next talk.

Operator: This does conclude our call. We'd like to thank everyone for their participation. Have a great day.

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