EMCORE Corporation F3Q09 (Qtr End 06/30/09) Earnings Call Transcript

Aug.18.09 | About: EMCORE Corporation (EMKR)

EMCORE Corporation (NASDAQ:EMKR)

F3Q09 Earnings Call

August 17, 2009 5:00 pm ET

Executives

Victor Allgeier – TTC Group

Hong Q. Hou, Ph. D. – Chief Executive Officer & Director

John M. Markovich – Chief Financial Officer

Analysts

Analyst for Bill Choi – Jefferies & Company

Analyst for Jonathan Dorsheimer – Canaccord Adams

Sam Dubinsky – Oppenheimer & Co.

Operator

Welcome to the EMCORE Corporation third quarter fiscal 2009 earnings conference call. As a reminder, today’s conference is being recorded. At this time I would like to turn the conference over to Victor Allgeier of the TTC Group.

Victor Allgeier

Today after the close of markets, EMCORE released its fiscal 2009 third quarter and nine month 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 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 risk and uncertainty as described in EMCORE’s earnings press release and filings with the Securities & Exchange Commission. I’ll now turn the call over to John.

John M. Markovich

I will start by providing you with some highlights of our fiscal third quarter and first nine month operating results, review our backlog numbers and conclude with an overview of our liquidity and balance sheet improvements. Starting with the third quarter operating results, revenue for the fiscal second quarter totaled $38.5 million which was a decrease of $4.8 million or 11% when compared to the immediately preceding fiscal second quarter.

On a segment basis, our photovoltaic’s business accounted for $16.1 million or 42% of the company’s total revenue for the quarter which represents an increase of $1.2 million or 8% from $14.9 million reported in the immediately preceding quarter with the increase due primarily to a strong demand for our satellite solar power products. The photovoltaic segment continues to account for an increasing percentage of the company’s total revenue rising from 24% in the fourth quarter of fiscal ’08 to 42% in the most recent quarter.

Our fiber optics segment accounted for $22.4 million or 58% of the company’s total revenue for the quarter which represents a decrease of $6 million or 21% from $28.4 million reported in the immediately preceding quarter with the decline in revenue concentrated primarily in the telecom and cable TV product lines.

With respect to gross profit, after excluding certain adjustments as set forth in the non-GAAP tables that are included in the earnings press release, the third quarter consolidated non-GAAP gross profit totaled $5.9 million which represents a $4.5 million improvement from the $1.4 million reported in the preceding quarter with the corresponding non-GAAP gross margin increasing from 3.3% to 15.3%.

On a GAAP basis, the consolidated gross loss for the quarter was $2.4 million, an improvement of $4.6 million from a $7 million gross loss reported in the preceding quarter. During the quarter we reported approximately $6.4 million in non-cash losses on inventory purchase commitments and $1.9 million in non-cash inventory reserve adjustments in our fiber optic segments both of which adversely impacted gross profit and margins on a consolidated basis.

On a segment basis, the third quarter non-GAAP gross margin for the photovoltaic’s business was a record 33.9% which represents a significant improvement from the 20.5% gross margin reported in the immediately preceding quarter with the improvement due primarily to increase sales of higher margin satellite solar power products along with improved manufacturing yields on certain satellite solar panel contracts.

The third quarter marks the second consecutive quarter in which non-GAAP photovoltaic’s gross margins have improved and when compared to the prior year third quarter gross margins have increased by over 30%. On a GAAP basis, the third quarter photovoltaic gross margin mirrored the non-GAAP gross margin at 33.9% which compares to a negative 24.7% GAAP gross margin in the preceding second quarter.

The third quarter fiber optics non-GAAP gross margin was 1.8% which represents an improvement from a -5.7% gross margin reported in the immediately preceding quarter with the improvement due primarily to higher margins in our broadband product lines. On a GAAP basis the third quarter fiber optics gross margin was -35.2% which is a decrease from a -11.7% gross margin reported in the preceding quarter with the decline due primarily to the non-cash losses recorded on inventory purchase agreements, non-cash inventory valuation write downs and unabsorbed overhead expenses, the result of lower revenue levels.

Now, on to operating expenses; sales, general and administrative expenses for the third quarter totaled $10.9 million which is a decrease of $1.1 million or 9% from the $12 million reported in the preceding quarter. Research and development expenses for the third quarter totaled $5.7 million, a decrease of $1.2 million or 18% from $6.9 million reported in the preceding quarter. As a result of the company’s ongoing cost reduction initiatives, SG&A expenses declined sequentially in each of the last two quarters while R&D expenses have declined in each of the last four fiscal quarters.

During the quarter we performed an evaluation of our fiber optics assets for impairment as required by statement of financial accounting standard number 144. As a result of this evaluation, we determined that an impairment existed and recorded a $27 million non-cash charge by writing down certain long lived assets to estimated fair value which was determined based upon a combination of guideline public company comparisons and discounted estimated future cash flows.

Current economic and financial market conditions had a significant adverse impact on our assessment of the fair value of certain of these assets. The magnitude of the impairment charge was due to the effect of recent declines in the market values of comparable public companies debt and equity securities in combination with the current slowdown in product orders and lower product pricing that was exacerbated by relatively high discount rates used in estimating fair values.

After excluding certain non-cash and other adjustments as set forth in the non-GAAP tables, the third quarter consolidated non-GAAP net loss was $7.3 million which represents a $7.4 million or 50% improvement from the $14.7 million non-GAAP net loss reported in the preceding quarter. On a GAAP basis, the third quarter consolidated net loss which includes a $27 million non-cash impairment charge was $45.4 million which represents an increase of $21.6 million from a net loss of $23.7 million reported in the preceding quarter.

On a per share basis the third quarter non-GAAP net loss per share was $0.09, an improvement of $0.10 per share from a per share net loss of $0.19 reported in the preceding quarter. On a GAAP basis the third quarter net loss per share was $0.57, an increase of $0.27 per share from a $0.30 net loss per share reported in the preceding quarter. On a consolidated basis, the company generated positive cash flow from operations during the third quarter due to the combination of lower cash operating loss and improved the continuation of improved working capital management. In addition, our photovoltaic’s segment also generated positive cash flow from operations.

Now, I’ll move on to the nine month results. Consolidated revenues for the nine months ended June 30th totaled $135.8 million which represents a decrease of $42.9 million or 24% from $178.7 million reported in the same period last year. On a segment basis the photovoltaic’s business accounted for $45.8 million or 34% of the company’s total revenue for the first nine months of the fiscal year which represents a decrease of $7.6 million or 14% from $53.4 million reported in the prior year period where the photovoltaic segment accounted for 30% of the company’s consolidated revenue.

Our fiber optics segment accounted for $90 million or 66% of the company’s total revenue for the first nine months of the fiscal year which represents a $35.2 million decrease from $125.2 million reported in the same period last year. After excluding certain adjustments as set forth in the non-GAAP tables, the nine month consolidated non-GAAP gross profit was $14.5 million which compares to a $36.8 million gross profit reported in the same period last year.

On a GAAP basis the nine month consolidated gross loss was $7.8 million which represents a decrease of $38.2 million from a $30.4 million gross profit reported in the prior year period. On a segment basis, the nine month photovoltaic non-GAAP gross margin was 23.2% which represents an increase from 10% reported in the same period last year and on a GAAP basis the nine month photovoltaic gross margin was 8.3% which represents an increase from -1.9% gross margin reported in the same period last year.

The nine month non-GAAP gross margin for the fiber optic segment was 4.3% compared with a 25.4% gross margin reported in the same period in the prior year. On a GAAP basis, the nine month fiber optics gross margin was -13% compared to 25.1% gross margin reported in the prior year period. After excluding certain non-cash and other adjustments as set forth in the non-GAAP tables, the nine month non-GAAP consolidated net loss was $33.1 million which compares to $22.9 million net loss reported in the same period last year.

On a GAAP basis, the nine month consolidated net loss which includes $60.8 million in non-cash impairment charges was $122.5 million which compares with a $39.6 million net loss reported in the same period last year. Now, on to backlog, as of June 30th, the company had a consolidated order backlog of $49.6 million which represents an $18.9 million or 62% increase over the $30.7 million order backlog that was reported as of the end of the preceding second quarter.

On a segment basis, the quarter end photovoltaic’s order backlog totaled $36.2 million which represents a $16.4 million or 83% increase from the $19.8 million order backlog reported as of the end of the preceding quarter. During the quarter we entered in to a number of significant multiyear satellite supply agreements with customers such as Space Systems Loral, Boeing Corporation, NASA and the Air Force Research Laboratory.

Since the beginning of the calendar year, we have received over $100 million in firm orders and purchase agreements for satellite solar products and service contracts. The quarter end fiber optics order backlog totaled $13.4 million which is a $2.5 million or 23% increase from a $10.9 million order backlog reported as of the end of the preceding quarter with the increase being fairly broad based across multiple product lines. Our order backlog is defined 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.

Moving on to liquidity and the balance sheet, during the quarter we continued to make progress in improving the company’s liquidity and strengthening the balance sheet. On a consolidated basis we generated positive cash flow from operations during the quarter as well as positive free cash flow, that is net of capital expenditures. This is the first quarter in several years that the company has achieved positive cash flow from operations in a fiscal quarter and over the last three quarters our cash flow numbers have improved dramatically from a cash burn of $21.1 million and $9.5 million in the December and March quarters respectively to the achievement of positive cash flow in the June quarter.

As we have highlighted in our last two earnings conference calls, we have placed tremendous organizational effort on improving our working capital management and these efforts are beginning to result in some meaningful numbers. Over the last two quarters we generated $15.9 million from the reduction in inventory levels and $15.4 million from the collection of accounts receivable while at the same time lowering accounts payable obligation by $23.6 million.

In addition, over the last two quarters we have reduced the amount of debt outstanding under our line of credit with Bank of America by over $10 million from $15.4 million at the end of December to just under $5 million at the end of the third quarter and we are in full compliance with the financial covenants associated with the Bank of America credit facility. We exited the quarter with cash, cash equivalents and restricted cash of approximately $9.9 million and net working capital of $45.3 million.

In addition to continuing to focus on improving profitability and managing our working capital, we continue to pursue and evaluate a number of capital raising alternatives including debt and/or equity financings, product joint venture opportunities and the potential separation or divestiture of certain portions of the business. Subsequent to the end of the third quarter we filed an S3 registration statement with the Securities & Exchange Commission which has become effective that provides for up to $50 million in debt and/or equity securities.

With that, I will turn the call over to Hong for his operational and strategic update.

Hong Q. Hou, Ph. D.

First of all, let me summarize the Q3 financials and John has presented many numbers. Q3 revenue was $38.5 million representing approximately an 11% decline of which the revenue from the solar business was up by 8% sequentially while the revenue from the fiber optic business declined by slightly over 20% sequentially. On a non-GAAP basis the gross margin improved from 3.3% in the March quarter to 15.3% in the June quarter and the net loss reduced from $14.7 million in the March quarter to $7.3 million in the June quarter.

We achieved record profitability last quarter in the photovoltaic segment with 33.9% gross margin. We have received over $100 million in firm orders and purchase agreements in the last seven months for our space powered businesses and we have achieved some major milestones on our [inaudible] or concentrator photovoltaic, our CPV business as well. The fiber optics business continued to be soft however, we feel that we have reached the bottom of the cycle last quarter and the book-to-bill ratio has improved substantially especially for our broadband products of our fiber optics business, the book-to-bill ratio improved to 1.3 in the last quarter.

Working capital management continued to be the priority for the quarter. The monetization of excess inventory while hurting our gross margins it contributed cash to our balance sheet. Now, I will address the operations and market conditions and our strategy in the various sectors of our business. For our broadband fiber optics business, the revenue within the cable TV product lines for the third quarter declined sequentially. However, it is clear that the demand is starting to come back.

As I said, for the first time in the last five quarters, our book-to-bill ratio has been greater than one and reached approximately 1.3 last quarter. In a recent report released early August by Comcast, they reported that the capital spending for the operate and scalable infrastructure categories will increase 170% to 300% in the second half of the year 2009 compared to the first half. Throughout the last couple of quarters the inventory throughout the entire supply chain has went down to minimal levels and the demand is coming back quite strongly.

In the June quarter we have achieved several important design wins in the multiyear contract awards for our sat com and specialty business. The newly designed fiber optic gyroscope demonstrated excellent performance in the system test. This product is primarily for technical missile guidance applications represents a substantial new market opportunity for us.

With a broad customer penetration, a very comprehensive product portfolio, strong intellectual property position and several new products introduced during the last couple of quarters, we now expect very robust growth in our broad band business. With the right working capital level and the cost structure in place, our operations focus for this business sector is to aggressively participate in the upturn of the business opportunity and optimize the profitability and positive cash flow.

For the telecom business, the demand continues to be pretty soft. Our primary focus has been to manage down the inventory. We continue to expect the pressure on gross margins in this area as we had to offer incentives to move the inventory before it becomes obsolete especially the previous version designed products. We continue to invest in our telecom business, we are leveraging the depreciation capability of our external cavity laser technology and the vertically integrated infrastructure to focus our engineering resources in a development of tunable XFP products in applications of ECL external cavity lasers for next generation 40 and 100 gigabyte per second applications.

In the quarter we provided evaluation samples to several key customers for both transceivers and TOSA product. The feedback of the evaluation has been very positive. The initial target of the applications is to replace the 300 pin transponders for high density and lower power applications in the central offices. As we established, high volume manufacturing infrastructure will broaden the market opportunities by going after the DWDM XFP market. Furthermore, the platform of the tunable TOSA packages will serve at the low cost platform for the 10 and 40 gigabyte per second components.

We’ve also made tremendous progress in developing internal game chip and modulator components for the mini packaged tunable TOSA. The operations focus for this line of business is to continue monetizing the excess inventory and work with partners closely to accelerate the time to market of this tunable XFP product with the objective of leap froging our competition. For data com enterprise product lines, the demand for 10 gigabyte per second transceivers was soft for the last quarter although it started picking up moderately towards the end of the quarter as our key customers were working off their inventories.

The demand for our parallel optical transmitters and receivers were healthy. Our new products across data reach cable offerings an aggregated bandwidth of 40 gigabyte per second is fully qualified. As transmission bandwidth over cables increases, it becomes more advantageous and cost effective to replace the copper cable with fiber. Our competitive position for this product line is further strengthened by the award of a patent for the active cable. We believe this new patent is broad and fundamental and covers the application for the active cable applications.

In summary, we have seen the stabilization of our enterprise and data com business. The upside of this business sector is the demand of parallel optical transceivers and active optical cable. The focus for this quarter is to maintain the market share and monetize the excess inventories. This may lead to the continued pressure on gross margins of this product.

Now, let me discuss the solar photovoltaic side of our business. First, the satellite power business, our satellite solar power lines continue to experience an increase in revenue on a year-over-year and sequential basis. Due to the improvement in engineering and the manufacturing processes, our manufacturing team has achieved the highest level of the yield. In addition, we have started shipping against a new purchase order in the June quarter to a major aerospace company which has a better margin.

Along with a great product mix of higher margin solar panel products, we have achieved a record level of profitability in the June quarter. John gave the consolidated solar margin but here I wanted to single out space power product the gross margin was nearly 39% and the operating margin was 24.5%. The booking activity of our space business is extremely strong. In the last seven months we have booked over $100 million new orders from essentially every major aerospace company in the US.

In addition, we have the option to supply an additional $36 million with the same terms under the current contract. We believe that the profitability of this product line is sustainable and the selling price has increased across several recent long term purchase agreements and the cost has decreased through engineering improvements and improved supply chain management. As of today, we have successfully supported our customers with our solar cell and solar panel product for 64 separate space missions. I’m proud to report here that we have not experienced any on orbit performance deficiencies from our product.

Through our technology leadership, excellent reliability track record we have been expanding our customer base internationally. The recent grant through commercial jurisdiction by the US government removed the barriers to export to friendly countries and provide level playing field against our competitors. As we become the primary supplier of space solar cells and solar panels for most US aerospace companies we are making significant headway in to some major European aerospace customers.

We expect to overcome the local geographical advantage of European solar cell suppliers to the local aerospace companies in the near future. This should result in a significant revenue growth through the expansion of our customer base. We continue to make great progress in the technology advancements and product commercialization of inverted metamorphic multi-junction IMM solar cells. After demonstrating record conversion efficiency of 33.7% in [AM zero] that is a space illumination condition with a quadruple junction IMM solar cell design, we have made tremendous progress in improving the manufacturing processes.

We are currently working on the first commercial program with volume to commercialize the IMM solar panels for the fast access spacecraft [inaudible] program with aims to develop the next generation ultra light weight and high power solar panels for future spacecraft and space stations. The same technology platform of IMM can be used for CPV terrestrial applications as we discussed earlier and it is anticipated that efficiency levels of approximately 45% could be achieved when we establish these on platform for use and a 500 to 1,500 times concentrated illumination for terrestrial applications. Our strategy of technology and product development is to commercialize the IMM technology through space programs first and then apply the same manufacturing process for terrestrial applications.

Now, let me turn the discussion to the terrestrial solar power business. The products again, we are offering include concentrated photovoltaic or CPV components and systems. We continue to be the leading supplier of CPV components including solar cells and packaged solar cell receivers and we continue to expand our customer base. Our Gen-III CPV systems have been installed and operating in the solar test field behind our [inaudible] facility since early this year.

The performance in the operations have been excellent meeting our design expectations. We are finishing up the product qualification while designing tooling for high volume manufacturing. The Gen-III product will be much more cost effective than the prior Gen-II design. In the June quarter we signed a formal agreement with the PNM of New Mexico to participate in PNM’s large distributed generations solar power program. This 20 year agreement with EMCORE consists of 114 kilowatt of solar power produced on site by our Gen-II and Gen-III CPV systems.

The power is fed in to EMCORE’s buildings through PNM approved renewable energy certificate meter or [reg] meter. Of [inaudible] one megawatts of EMCORE’s CPV systems have been deployed across eight locations throughout the world. This is the first distributed generation applications. EMCORE’s CPV system is ideally suited for such applications because of their cost competitiveness and high energy conversion [inaudible] particularly in certain geographical areas such as the Southwest in the United States.

Our industry leading CPV modules generate the highest level of power per square meter and we look forward to pursuing additional distributed generation programs with PNM as well as other utility companies. The principle challenges centered around our CPV business are twofold, the first cost of competitiveness. Due to the slow demand and the industry over capacity, the selling price of competing technologies have eroded significantly over the last year and it looks like this trend will continue albeit at a slower pace. We have to have our product designed and manufactured cost competitively today and in the future.

The second challenge is that the new technology is viewed as a risk rather than an advantage in the current economic environment. We’re often asked to provide performance heritage of utility side installation. Through our [18] installations throughout the world and many more by other CPV systems companies, CPV has been increasingly recognized as a viable alternative to the competing technologies due to its high efficiency, advanced product road map for higher performance and lower cost and a lower cost for installations and the balance of the systems, less capital demanding and easier to scale up for production. It is certainly a superior technology in the area with high indirect [inaudible].

In light of the current situation of the government policy, the financial market conditions and the competitive landscape of the other solar technologies, we are revising our strategy for the CPV system business. As for our business proposition in the solar business value chain, we’ll retain our competitive edge as the only vertically integrated CPV player by providing CPV solar cell components and systems and the CPV systems supplier will continue to develop market acceptance and industry recognition of CPV systems through the development of smaller projects.

However, in the longer term, the centerpiece of our new go to market strategy is to be the leading supplier of CPV systems and CPV modules which integrates our high efficiency solar cell receivers with 1,000 times concentrated reflected optics. This strategy [inaudible] through the earlier one of being a solar project developer of EPC engineering procurement and construction suppliers. We’ll develop and license our customers or partners our [inaudible] design and supply CPV modules in high volume.

This will allow us to focus better our effort on our core competencies. As for developing market acceptance and product cost competitiveness we are aggressively pursuing a joint venture or partnership opportunity in China to tap in to their new [inaudible] renewable energies. We believe that we’ll be positioned to serve a near term opportunity to supply our Gen-III modules for [inaudible] utility scale project. In the meantime, the joint venture serves as our centralized low cost manufacturing base for CPV modules. We will develop several manufacturing partners for the [treasures] in the different continents so that the only components that need to be shipped from a long distance are the CPV modules. This will effectively reduce the shipping cost and the total cost structure significantly.

Now, let me discuss the management focus in this challenging economic environment. Cost reductions and liquidity are clearly the focus of the management team. The cost cutting initiatives we have undertaken over the last couple of quarters had a clear positive impact to our liquidity situation. As John discussed, we generated positive free cash flow from the last quarter. That was a significant improvement from about $21.7 million burn in the December quarter and about $9.5 million burn in the March quarter.

In the past quarter we continue to make progress on monetizing excess inventories. As a result, our inventory level was reduced by approximately another $8 million or nearly 17%. Based on our internal inventory churn objectives, we believe we still have approximately $10 to $15 million in the inventory reduction opportunities and that consists primarily of raw materials in the area of enterprise and telecom businesses. The effective monetization of this inventory will help our liquidity position and the gross margin improvement will be realized after we manage through this existing on hand inventory.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Analyst Bill Choi – Jefferies & Company.

Analyst for Bill Choi – Jefferies & Company

What was your cash flow from operations for the quarter and free cash flow?

John M. Markovich

The cash from operations and free cash flow were in the $10,000 to $50,000 range positive.

Analyst for Bill Choi – Jefferies & Company

Secondly, could you talk a little bit about when you are trying to divest part of your businesses, what would be your priorities, how are you considering internally liquidating some of your assets which assets will be on the block first and which will be the second priority and things like that?

John M. Markovich

Well, we continue to evaluate all of the businesses as well as the assets associated with those businesses. We have not disclosed anything in particular because we have not made any decisions or entered in to any agreements with respect to any potential divestitures. So, we can’t provide you any specifics as it relates to what other than once we’ve made a decision and have entered in to an agreement with respect to any separation or divestiture we’ll announce it accordingly.

Analyst for Bill Choi – Jefferies & Company

This quarter the satellite [PV] business came back pretty strongly so was this just a snap back from an earlier depressed level so to speak or is this kind of the beginning of new levels of demand that you expect to be sustained over the next two or three quarters or even a couple of years?

Hong Q. Hou, Ph. D.

The strong demand in our space solar business is coming from two factors, first of all the overall market demand is very healthy, it’s increasing as well. The second is we are gaining market share so this business had the advantage of having good visibility. As I talked about, in the last several months we booked $102 million new orders plus $36 million of additional options in there and there definitely was a greater visibility in to the next two years instead of a couple of quarters. So, you can expect as this business continues to do well and this level of profitability is sustainable.

Analyst for Bill Choi – Jefferies & Company

Are you breaking our your photovoltaic revenue along satellite and terrestrial?

Hong Q. Hou, Ph. D.

Usually we don’t. The reason we single out the gross margin and the [inaudible] margin for the space business is that illustrates the new level of the business and profitability that we are expecting going forward for that line of the products.

Operator

Your next question comes from Analyst for Jonathan Dorsheimer – Canaccord Adams.

Analyst for Jonathan Dorsheimer – Canaccord Adams

Just a couple here, you’ve done a great job so far in improving your operating expenses, can you give us a little more color as to how much more quantitative improvements you can make? I’m just trying to get a picture of what this model could look like. Or, maybe put differently, could you tell us a little bit about your target model and what that looks like?

Hong Q. Hou, Ph. D.

I think as the starting point of the Q3 performance can be probably the base line of your model but that model will be applied to the solar business applicable to our broadband business. As I said early on, our telecom and enterprise product lines for our fiber optics business will continue to experience the gross margin pressure because we still have about $10 to $15 million more inventory than we need we have to monetize and manage through. So, this will give us additional liquidity over the next couple of quarters but the next couple of quarters, the operating model, especially the gross margin for this line of business should not be used as a base line.

John M. Markovich

The target for fiber optics business, although we can’t put a time frame on it at this point is margins in the mid 20% range and in the photovoltaic business, on a combined basis margins in the mid 30% range. Again, subject to time frame.

Hong Q. Hou, Ph. D.

And operating expenses as we breakout, except one or two things, the non-recurring items pretty much the level we want to maintain even when the business comes back strongly. So, you can probably use the same type of operating expenses in your model.

Analyst for Jonathan Dorsheimer – Canaccord Adams

Just lastly, I’m not sure if I missed this, can you give me a little bit of color about what your cap ex plans are, if any?

Hong Q. Hou, Ph. D.

The cap ex plan, the good news is that we don’t have to spend much and we have invested pretty heavily in 2008, 2007 in our photovoltaic business and fiber optic business. I will say the total cap ex plan for the year will be less than $2 million.

Analyst for Jonathan Dorsheimer – Canaccord Adams

For the remainder of the year, just for Q4 or in total for one year going forward?

Hong Q. Hou, Ph. D.

For the entire fiscal year.

Analyst for Jonathan Dorsheimer – Canaccord Adams

For fiscal ’10 or fiscal ’09.

Hong Q. Hou, Ph. D.

Fiscal ’09.

Analyst for Jonathan Dorsheimer – Canaccord Adams

So only $2 million total?

Hong Q. Hou, Ph. D.

Yes.

Operator

Your next question comes from Sam Dubinsky – Oppenheimer & Co.

Sam Dubinsky – Oppenheimer & Co.

Just a couple of quick ones, your R&D has come down a decent amount this quarter, could you just give us some color on what business segments you stopped investing in and then I have a follow up.

Hong Q. Hou, Ph. D.

I can go sector by sector, our space photovoltaic business we continue to invest in the IMM technology, we’re probably putting more effort in investing and commercializing that technology than ever but fortunately that effort is leveraged by a number of commercial and government programs, supported by DOD, NASA and some commercial programs as well. So, our internal R&D spending is actually very limited in I would say probably less than 2% of total revenue.

Our CPV business R&D is still pretty healthy because we are in the final qualification stage for our Gen-III CPV systems and we are at R&D of about $1.5 million per quarter level. The fiber optics side we are more selective in choosing the projects and prioritize the development projects in more sequential manners rather than going several projects all together. So, the broadband is very healthy, we’re in the leading position and we have introduced a few new products and we have a couple of more in the pipeline and we will deploy the resources in the new business area.

For example, I talked about the fiber optic gyros. But, in the telecom and data com business because our customer base, they do not have a lot of engineering resources available to qualify the new product we’re developing so we have five total programs in early development. So, the current level R&D spending is the same level we plan to go forward.

Sam Dubinsky – Oppenheimer & Co.

Then you mentioned that normalized gross margin in op ex is mid 20% range. To get back to that rate does that mean you have to either exit certain businesses or that certain businesses are struggling and just won’t come back to what they have historically been?

Hong Q. Hou, Ph. D.

The fiber optics there are two segments, one is the broadband sector has never been very bad. We expect to be the high 20s low 30s gross margin and telecom and data com side, I just can’t tell at this point. We are, as I said, our present focus is not to optimize the gross margin but is really more managing the inventory to the acceptable levels so that we’ll get to the normal pace of the business.

Sam Dubinsky – Oppenheimer & Co.

But once you burn through this high cost inventory does that mean the blend of business goes back to a more normalized gross margin rate or is there still issues with underutilization or pricing pressure that we should think about?

Hong Q. Hou, Ph. D.

I would say the data com and telecom business when we burn through the high cost inventory it will get in to the low 20s range. I would continue to expect the price erosion and price pressure but we are working very hard on a cost reduction with our suppliers and with our contract manufacturing partners as well. We hope that we can keep up the same pace as the price erosion.

Sam Dubinsky – Oppenheimer & Co.

Forgive me if I missed this but can you give me an update on your Gen-III system ASP targets?

Hong Q. Hou, Ph. D.

The ASP for the systems is slightly over $2 per watt at our price target. Our cost is clearly lower than that.

Sam Dubinsky – Oppenheimer & Co.

What’s the cost target? In the past I think you mentioned like $1.75 per watt?

Hong Q. Hou, Ph. D.

$1.60.

Sam Dubinsky – Oppenheimer & Co.

Is that benefit from commodity prices coming down or what percentage of that is things like steel that we need to start tracking?

Hong Q. Hou, Ph. D.

That’s a very, very good question. That certainly benefited from a drop in the commodity prices but as I said early on we are shifting our go to market strategy more by providing the parts, we’re adding most of the value. It’s hard to mark up 20% to 30% on the steel but we supply the modules and license our [inaudible] to our partners so they can source the metal frames and module structures locally close to the site of installation. We wanted to push that part of the cost along with the revenue over to our customer side.

Sam Dubinsky – Oppenheimer & Co.

My last question is at a $2 per watt ASP, is this viewed as competitive in the market anymore? When you talk to your customers is there the same level of interest there was say a quarter ago and do you still expect this business to ramp to some extent in 2010 or is it more of a longer term ramp?

Hong Q. Hou, Ph. D.

I think probably in the second half of 2010, yes when we talk to our customers they still have a lot of interest for CPV especially for the advantages I talked about the higher efficiency, the road map to get it, more cost effective and people also understand you just simply cannot compare apples to oranges in ASP because for example the thin film with 6% conversion efficiency, the cost for metal frames and harnessing in the balance of the systems in much higher than the CPVs. So, right now we are talking more to the customers are levelized cost of energy rather than the cost of the systems.

Sam Dubinsky – Oppenheimer & Co.

What’s the levelized cost of energy in sort of the most variable region?

Hong Q. Hou, Ph. D.

When you talk about that there are several factors that come in to play. We are unfortunately only one piece of the puzzle, including the capital costs, the land costs, the solar condition and everything else, so I can’t give you an answer just yet.

Operator

That does conclude our question and answer session. I’d now like to turn the call back over to Dr. Hou for any additional or closing remarks.

Hong Q. Hou, Ph. D.

With that I would like to make some remarks for the Q4 focus and the guidance. For the fiscal Q4 the management will continue to focus on cost reduction and liquidity management. We expect the consolidated revenue for the fourth quarter to be in a range of $38 to $42 million due to the growth of the photovoltaic and broadband fiber optic businesses. We expect the photovoltaic business will continue to be profitable and our broadband sector of the fiber optic business should turn in to operational profitability during the September quarter.

We’ll continue to see margin pressure for our telecom and enterprise business as the demand in these business sectors are coming back more slowly and our priority in managing that business is monetizing the inventories to generate cash rather than optimizing the gross profit margins. The management team feels strongly that we have the issues under control. We expect to generate positive cash flow from operations this quarter as well. Thank you very much for your attention today and we look forward to the next call.

Operator

That does conclude today’s call. We do appreciate everyone’s participation.

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