EMCORE Corporation (NASDAQ:EMKR)
Q4 2009 Earnings Call
December 15, 2009 5:00 pm ET
Victor Allgeier – TTC Group
Hong Hou – President & CEO
John Markovich - CFO
Sam Dubinksy – Oppenheimer & Co.
Michael Intrator – Natsource Asset Management
Good day ladies and gentlemen and welcome to the EMCORE Corporation fourth quarter fiscal 2009 earnings conference call. (Operator Instructions) At this time I would like to turn the conference over to Victor Allgeier with TTC Group; please go ahead sir.
Good day everyone, today after the close of markets, EMCORE released its fiscal 2009 fourth quarter and year-end 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 for 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 Securities & Exchange Commission.
I’ll now turn the call over to John.
Thank you Victor, and good afternoon everyone. Thank you for taking the time to participate in our call this afternoon. I will start by providing you with some highlights of our fiscal fourth quarter and fiscal year operating results, review our backlog numbers, and conclude with an overview of our cash flow, balance sheet, and liquidity improvements.
Consolidated revenue for the fiscal fourth quarter totaled $40.5 million, an increase of $2 million or 5.3% from $38.5 million reported in the immediately preceding fiscal third quarter ended in June. On a segment basis, our photovoltaics business accounted for $16.4 million or 40% of the company’s total revenue for the quarter which represents an increase of approximately $300,000 or 2% from $16.1 million reported in the immediately preceding quarter with the increase due primarily to strong demand for our terrestrial concentrated photovoltaics products.
The photovoltaics segment continues to account for increasing percentage of the company’s total revenue rising from 24% in the fourth quarter of fiscal 2008 to 40% in the most recent fourth quarter. Our fiber optics segment accounted for $24.2 million or 60% of the company’s total revenue for the quarter which represents an increase of $1.7 million or 8% from $22.4 million reported in the immediately preceding quarter with the increase in revenue concentrated primarily in the broadband division CATV product lines.
Moving on to gross profit and margins, on a GAAP basis the consolidated gross profit for the fourth quarter was $4.1 million, an improvement of $6.5 million from a $2.4 million gross loss reported in the immediately preceding quarter and a $500,000 gross loss reported in the year earlier period.
This $4.1 million consolidated gross profit represents the company’s best GAAP gross profit performance since the third quarter of fiscal 2008. After excluding certain adjustments as set forth in the non-GAAP tables that are included in the earnings press release the fourth quarter consolidated non-GAAP gross profit totaled $4.9 million.
On a segment basis the fourth quarter photovoltaics GAAP gross margin was 28.5%, a decrease from a record 33.9% gross margin reported in the immediately preceding quarter with the decrease due primarily to product mix and one-time yield excursion for certain products.
On a non-GAAP basis the fourth quarter photovoltaics gross margin was 10.6%, a decrease from a record 33.9% non-GAAP gross margin reported in the preceding quarter with the decrease due primarily to the sale during the fourth quarter of $2.9 million in previously reserved legacy CPV terrestrial products.
The fourth quarter fiber optics non-GAAP gross margin was 13%, which represents a significant increase from a 1.9% gross margin reported in the immediately preceding quarter with the improvement due primarily to higher margins in our broadband product line.
On a GAAP basis the fourth quarter fiber optics gross margin was negative 2.5%, which is a significant improvement from a negative 35.2% gross margin reported in the preceding quarter with the improvement due primarily to a lower loss being recorded on firm inventory purchase commitments and lower inventory excess and obsolescence charges when compared to the preceding quarter.
During the quarter the fiber optics segment recorded approximately $2 million in non-cash losses on firm inventory purchase commitments and $2 million in non-cash inventory reserve adjustments, both of which adversely impacted gross profit and margins.
On a GAAP basis the consolidated net loss for the fourth quarter was $13.5 million, a $31.8 million improvement from the net loss of $45.3 million reported in the preceding quarter. After excluding certain non-cash and other adjustments as set forth in the non-GAAP tables the fourth quarter consolidated non-GAAP net loss was $9.1 million, compared to a $7.3 million non-GAAP net loss reported in the preceding quarter.
On a GAAP basis the fourth quarter net loss per share was $0.17 which is an improvement of $0.40 per share from a $0.57 net loss per share reported in the preceding quarter. On a non-GAAP basis the fourth quarter net loss was $0.11 per share which represents an increase of $0.02 per share from a 9% net loss per share reported in the preceding quarter.
Now moving on to fiscal year results, revenue for the fiscal year ended September 30, 2009 total $176.4 million, compared to $239.3 million in the prior year. On a segment basis, annual revenue for our photovoltaics segment totaled $62.2 million compared to $68 million in the prior year while annual revenue for the fiber optics segment totaled $114.1 million, compared to $171.3 million in the prior year.
On a GAAP basis the fiscal 2009 consolidated gross loss totaled $3.8 million compared to a gross profit of $29.9 million in the prior year. On a segment basis, annual photovoltaics GAAP gross margins improved from a negative 8.3% to a positive 13.6% while the fiber optics GAAP gross margins declined from 20.7% in fiscal 2008 to a negative 10.7% in fiscal 2009.
After excluding certain adjustments as set forth in the non-GAAP tables, the company’s non-GAAP net loss totaled $42.6 million compared to $31.7 million in the prior year. On a GAAP basis the company’s fiscal 2009 net loss totaled $136.1 million which includes $74.1 million in non-cash impairment and inventory reserve charges, compared to a net loss of $80.9 million in fiscal 2008.
This represents a net loss per share of $1.72 in fiscal 2009 compared to a net loss per share in fiscal 2008 of $1.20. Now I’ll move on to backlog, as of September 30, 2009 the company had a consolidated order backlog of approximately $62.6 million which is a $13 million or 26% increase from a $49.6 million order backlog reported as of the end of the June quarter.
On a segment basis the quarter end photovoltaics order backlog totaled $47.7 million, an $11.5 million or 32% increase from $36.2 million reported as of the end of the preceding quarter. This increase in order backlog was fairly broad based amongst numerous customers and programs.
Since the beginning of this calendar year EMCORE has received over $120 million of orders and purchase commitments for satellite solar products and service contracts many of which are multi year in duration.
The quarter end fiber optics order backlog totaled $14.9 million, a $1.5 million or 11% increase from $13.4 million reported as of the end of the preceding quarter with particular strength in our broadband product lines which experienced a 25% quarter-to-quarter improvement in order backlog. The fourth quarter is the second consecutive quarter where the company’s order backlog for both of our operating segments, photovoltaics and fiber optics, increased.
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 cash flow, during the quarter we continued to make significant progress in improving the company’s liquidity and strengthening the balance sheet. For the fourth quarter the company generated approximately $900,000 in cash from operations due to the combination of a lower cash operating loss and the continuation of improved working capital management.
The fourth quarter represents the second consecutive quarter that the company has been cash flow positive from operations and the third consecutive quarter that the company has generated cash from reductions in both inventories and accounts receivable.
Over the last three quarters we have generated nearly $40 million in cash from improvements in our inventory turns and collection of accounts receivable. For the fiscal year ended September 30 the company generated $32.4 million in cash from lowering both inventory and accounts receivable levels while paying down over $27 million in accounts payable obligations.
Although we have made significant progress in monetizing our inventories over the course of the last year, much of this improvement has been at the expense of lower average selling prices and corresponding lower gross margins.
To contrast the degree to which our operating performance, financial condition, and business outlook has improved from the first half of fiscal 2009 to the second half I highlight the following. From a cash flow perspective in the first half of fiscal 2009 we consumed $30.6 million in cash from operation. In the second half of the year we generated $1 million in cash from operations.
From a backlog perspective as of the end of the first half of the year our consolidated order backlog totaled $30.8 million and was somewhat concentrated amongst large customers. At the end of the second half of the year our consolidated order backlog totaled $62.6 million which represents over 100% improvement which is very broad based amongst a large number of customers and programs.
Moving on to balance sheet and liquidity as of September 30 our cash, cash equivalents, or restricted cash totaled approximately $15.5 million which represents a $5.7 million or 59% increase from $9.8 million as of the end of the preceding quarter and net working capital totaled $37.5 million.
In addition to generating positive cash flow from operations over the last two quarters, the company continues to maintain a $14 million credit facility with Banc of America that we have full compliance with an immediately subsequent to the end of the fourth quarter we closed a two year $25 million committed equity line of credit with the Commerce Court Small Cap Value Fund.
Now I’ll provide some highlights of how this equity line of credit works. The two year committed facility provides for the issuance of up to the greater of $25 million or 16 million shares of EMCORE common stock if and when EMCORE elects to utilize the facility. If the company elects to utilize this facility the number of price of shares sold in each draw will be determined by a formula pursuant to which EMCORE would issue shares to Commerce Court at a 5% discount to the volume weighted average price of EMCORE’s common stock over a 10 day measurement period.
As set forth in the formula that is incorporated in the stock purchase agreement that we have filed with the SEC the maximum amount of each draw or issuance is a function of the company’s stock price at that point in time. However the price based formula limits each draw to a minimum of approximately 500,000 shares and a maximum of not more than two million shares.
The agreement provides for a maximum of 24 draws within a two-year timeframe and to date we have not utilized this facility. In addition several weeks ago the jury in our intellectual property trial against Optium Corporation found that all of our patents asserted against Optium were valid, that all claims asserted were infringed and that such infringement by Optium was willful where willfulness was claimed.
The jury has awarded EMCORE and JDSU monetary damages totaling approximately $3.4 million. Post trial motions are currently pending including EMCORE’s request for enhanced damages and an injunction.
Lastly the company continues to pursue and evaluate other capital raising alternatives including product joint venture opportunities and a potential separation of certain portions of the company’s business.
For the current quarter ended December 31, we expect consolidated revenue to be in the range of $41 to $43 million with sequential quarterly revenue increases expected in both the photovoltaics and fiber optics segments. With that I will turn the call over the Hong for his operational and strategic updates.
Thanks John, good afternoon everybody. John has just given you the numbers in detail and let me provide some updates on our operations and strategy.
Fiscal year 2009 has been one of the most challenging years in the history of the company. We entered the year were the world turned upside down in economic terms. For the first half of the year the demand for telecom and Ethernet components dropped significantly.
We were stranded with massive amount of excess inventory and purchase commitments liability in our fiber optics business. This created a huge liquidity challenge early in the year. For the product evolution in the new environment, for example requirement for [inaudible] compliance before the end of 2009 we had to put a concerted effort together to monetize the inventory.
Cash flow management became a key focus of the entire company. Today I’m happy to report that with the various measures we took throughout the year including headcount reductions, temporary reduction of salaries, reduction of capital expenditures, and other discretionary spending along with a substantial improvement in market conditions especially in the space photovoltaics and broadband fiber optics, these measures have all led to a significant improvement in our operating results and liquidity.
At this point we feel that we can focus on our business instead of fighting for our survival. Moving on let me give you some operations update, let me start with the fiber optics business segment first. For our broadband fiber optics business the revenue for the fourth quarter improved over 15% sequentially compared to the immediately preceding quarter.
Product revenues relating to the cable TV business represent the majority of the increase. With ability in the booking activity continuing to improve, with the recent customer demand trending towards the 2008 levels.
This increase is demand is still primarily to the infrastructure operations and the new build up to service small and mid sized businesses of multi service operators. Based on the recent industry research reports and customer feedback we believe that this sector of business will continue to experience robust growth throughout the next year.
During the last couple of quarters the inventory throughout the entire supply chain has [bled] down to a minimal level. This represents a challenge in fulfilling other with a short lead-time requirements. We are now focusing on longer-term [sending] in the supplier management to reduce the lead times.
In the fourth quarter in addition to ramping up volume we signed a multi year supply agreement with a leading equipment manufacturer and we introduced multiple new products including the industry leading 48 channel QAM transmitters for digital [inaudible] cable TV hybrid fiber [coaxial] infrastructure.
As John talked about early on in October, 2009 the patent infringement lawsuit we filed against Optium was filed before a jury in the US District Court for the western district of Pennsylvania. The jury found that our patent asserted against Optium were valid and all claims asserted were infringed and such infringement by Optium was willful. The jury awarded EMCORE and JDSU the total plaintiff money damage totaling approximately $3.4 million.
The post trial motions are currently pending including EMCORE’s request for an enhanced damage and an injunction. The victory of this litigation significantly strengthened our market position in broadband fiber optics area.
For the telecom business we have seen an improvement in the demand for tunable transponders in components. However the competition is still fierce. Our primarily focus continues to be managing down the inventory while we transition to lower cost platforms. The monetization of the existing inventory levels is a primary contribution to the pressure on the gross margin in the September quarter. However we are making great progress in moving this inventory before it becomes obsolete. The tunable XFP has been widely acknowledged as the next generation standard for 10 gigabyte per second transport.
It provides high density and a low power advantage compared to the 300-pin transponder product. According to feedback from multiple customers our product is the only one in the industry which meets the 300 pin transponder performance specifications while providing advantage of the lower power consumption in the high density to the customers.
We continue to invest in our telecom business, we’re elaborating the differentiating capability of the external cavity laser technology and the vertically integrated infrastructure to focus our engineering resources in the development of tunable XFP products and the applications of our ECL for next generation 40 and 100 gigabyte per second applications.
In the last quarter we fulfilled the first commercial TXFP order for a customer who is developing the first high density [inaudible] in the industry. The internally developed laser game chip modulators will be replacing the external supply to reduce the cost and to gain performance advantage. We’re in the final stage of the quality testing at a leading telecom equipment manufacturer of a 10 gigabyte per second tunable component product. [inaudible] based on ECL technology platform will serve as a low cost alternative of the key 10 gigabyte and 40 gigabyte per second components.
In our other product launch we have seen a significant rebound in demand for parallel optic transmitters and receivers. This product family utilizing [inaudible] provides aggregated bandwidth of 40 to 80 gigabytes per second in one link. We were able to gain market share at our existing customers and finished the quality testing with another new customer in the last quarter.
The booking activity has recently doubled. Our product offering of parallel optical devices also include active cables. Our new product, a quad data reach cable offering an aggregated bandwidth of 40 gigabyte per second is fully qualified. As the transmission bandwidth over cables increases it becomes more and more advantageous and cost effective to replace the copper cable with fiber.
Going forward we will focus our business development and product development efforts on several world leading com cable equipment manufacturers. Our objective is to express the business opportunities with key accounts by offering an enhanced product portfolio, improved customer service, and technology technical support, excellent fulfillment performance as well as competitive costs.
With our extensive technical resources establish the vertical integrated and low cost manufacturing infrastructure we’re well positioned to leverage our resources and infrastructure to expect our revenues through new product introductions and market share gains. We have [invested] substantially in research and development and product engineering over the past several years and developed a clear technology leadership position with many of our product areas.
In fiscal year 2010 we’ll continue the investment in R&D but we will be very selective in allocating our R&D resources to develop competitive technologies and products as a means towards leap forging our competitors. We will focus our R&D in product engineering efforts to develop a broader range of products for a more focused customer base while at the same time cost reducing the existing product.
Now let me discuss the solar photovoltaics side of our business, first satellite power business. Even in this past economic environment last year, our satellite solar power product lines had experienced a [inaudible] in revenue on a year over year basis. More importantly our profit has improved significantly due to the improvement in engineering and manufacturing processes.
Our core competencies in the space photovoltaics area has been the design and the manufacturing of high efficient multi [inaudible] solar cells. We have been [inaudible] our business in this area through a significant expansion of the customer base over the last decade. With the acquisition of [inaudible] solar panel capability in 2002 and the expansion of solar panel capacity in 2004 we have been able to service a broader customer base in recent years. In the last 11 months we have booked over $122 million new orders with an option of additional $33 million to be fulfilled in the next three years.
We are proud of our heritage in outstanding reliability record of supporting over 70 missions that been launched and put in service in orbit with zero failures. The recent solar panel program award allow us to improve the utilization of our solar panel manufacturing facility thereby lowering our fixed costs per unit and allowing our solar panel products to be more price competitive.
This will in turn provide additional opportunities for the company to increase the market share for this product line. We believe that the profitability of our space photovoltaics system is sustainable and the [selling] price has been [inaudible] across several recent long-term purchase agreements and the cost has decreased through engineering improvements and the improved supply chain management.
We continue to improve the performance of our multi Gen solar cell product. The first commercial program based on the advanced inverted [inaudible] our IMM design is for fast access spacecraft [inaudible] program which aims to develop next generation ultra light weight and high powered solar panels for future space stations.
This program will help to accelerate an introduction of IMM technology and the successful commercialization of this technology and product will enable a whole range of new program opportunities. We are investing significant resources to develop new programs and build opportunities in this area and this represents a very obtainable upside to our current business.
The same technology platform of IMM as is discussed can be used for CPV terrestrial applications. It is anticipated efficiency levels of approximately 45% can be achieved when we establish these design platforms for use under 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 apply the same manufacturing process and infrastructure for terrestrial applications.
Now let me turn to our terrestrial solar power business, the products we offering including concentrated photovoltaics CPV components and systems. We are in the process of completing the product quality testing and certification of our Gen-III CPV systems. The cost structure of this design is very competitive compared to the competing technology. And we expect the competitiveness of this design will be further enhanced once we’ve ramped to a higher production level.
In the last quarter we were awarded three demonstration programs in the Middle East and in the US. These orders will be fulfilled with our newly designed Gen-III products. We are currently ramping up the manufacturing capacity in our China facility to package the solar cells and manufacture the CPV modules.
Given the fact that our business opportunities are utility scale solar power projects in the US has been slow, we are focusing on developing business opportunities and addressing the solar power opportunity in the emerging markets, for instance in China. We expect our Gen-III CPV terrestrial solar power systems to provide a competitive cost of energy for commercial and [inaudible] projects in certain geographic regions. As for developing market acceptance and product cost competitiveness we are aggressively pursuing a joint venture or partnership opportunities in China to tap into the country’s new [inaudible] policy on renewable energy.
We believe that we will be positioned to serve a relatively near-term opportunity to supply our Gen-III modules for initial utility scale project. We have implemented a new marketing strategy which allows us to focus on our traditional [inaudible] in technology, innovation, systems design, and engineering while retaining our unique competitive advantage as the only vertically integrated CPV manufacturer.
We will continue to develop and pursue partnerships in other ventures with major companies both domestically and internationally to drive the deployment of the terrestrial CPV components and systems. We are committed to a successful launch of our Gen-III CPV products and business in the second half of fiscal 2010.
Now let me discuss the management focus operationally and strategically. Operationally as John has discussed during the fourth quarter the company generated $0.9 million in positive cash from operations due to the combination of lower operating loss and a continuation of the improved working capital management.
This represents the second consecutive quarter that the company has been cash flow positive from operations and the third consecutive quarter that the company has generated cash from reductions in both inventory and account receivables. By now it is pretty safe to say that the company has survived through this economic storm. While it has been tough for every company in our industry there are tremendous business opportunities as well.
We will return our business development effort from defensive mode, namely protecting our market share to offensive and gaining market share. We have commenced engagement with multiple leading telecom equipment manufacturers and the commercial engineering and executive levels. Currently we are in the process of developing and qualifying products for a leading telecom equipment manufacturer.
Hence we are very encouraged that this progress has been made and two of the nine products will be qualified by the end of this year. As our Gen-III CPV system is qualified we are kicking into high gear for solidifying some substantial business opportunities in China. In the meantime we need to continue the culture of relentless cost reduction for our products and business.
While we are ramping up the production activity and revenue we’ll continue to pay close attention to the working capital management. Now let me discuss our strategic focus, we have improved our liquidity position significantly. The Board and the management still believes that due to significant differences in operating strategy between the company’s fiber optics and photovoltaics businesses, they would provide greater value to shareholders if we were operated as two separate business entities.
While the management has instituted a series of initiatives and that conserving and generating cash going forward we are aggressively pursing strategic alternatives for separating the two operating segments through joint venture and recapitalization of opportunities. We expect to have further updates on the status of this initiative in the relatively near future.
As for the business lookout we are gaining much better visibility in our business as demonstrated by the 26% increase of the 12 months shippable order backlog and we expect that consolidated revenue to be in the range of $41 to $43 million for the December quarter with increases in both of our operating segments, and substantial increases for the quarters afterwards.
With that we’ll turn it over to Q&A.
(Operator Instructions) Your first question comes from the line of Sam Dubinksy – Oppenheimer & Co.
Sam Dubinksy – Oppenheimer & Co.
Some of your revenue this quarter was from terrestrial solar, now what percentage of your solar backlog is from terrestrial.
Approximately $3 million in the quarter was from terrestrial solar and we don’t break the backlog down in PV between terrestrial and space. But suffice it to say the bulk of that is space.
Sam Dubinksy – Oppenheimer & Co.
And how should we think about pro forma gross margins going forward.
I can provide you a model on an annual basis. In our broadband business we expect margins to be in a low 30% range throughout the year. Margins in our EVP fiber optics business gradually expanding to low 20% by the end of the year. In our PV business on the space side, margins are fairly consistent throughout the year in the high 20’s to low 30’s.
And on the terrestrial side since we’re still in a development mode and relatively low revenue base negligible margins for the balance of, for most of this year.
Sam Dubinksy – Oppenheimer & Co.
And could you just go through your cost per watt on terrestrial CPV for next gen systems and what ASP you need to price your terrestrial systems at to be competitive versus [inaudible] technologies.
Our design target for the Gen-III systems is at $1.60 since per watt for cost and of course the price will be determined based on the competitive landscape and I think at a $1.60 per watt we can have a pretty nice margin.
Sam Dubinksy – Oppenheimer & Co.
What the cost per kilowatt-hour if you were to sell let’s say where current [inaudible] pricing is for some of the Chinese competitors around $2.00 per watt.
That’s a CPV, its more sensitive to the solar resources so translating to dollar per kilowatt hours will depend on the solar resources for the area where we, the installation is going to be happening. So its going to be case by case. But its fair to say for the area where the direct normal [inaudible] is high CPV does provide a significant cost advantage compared to the competing technology.
Your next question comes from the line of Michael Intrator – Natsource Asset Management
Michael Intrator – Natsource Asset Management
I wondered if you could discuss the R&D budget expectations for 2010 and maybe split it out by product.
We don’t break that out other than it’s a fairly significant amount in terms of that amount of dollars associated with the photovoltaics and that on the fiber side but we’re not breaking out the 2010 budget to that level.
But probably what we can give you is in general for our fiber optic business 2010 and going forward we’d like to have the R&D spending less than 15% of the total revenue. So for example a target of 13.5%. For our photovoltaics sector, the space business because of the leverage of the government research contract, and we are spending roughly about 3% of total revenue in keeping up with a leading position of technology and for the terrestrial as we launch the Gen-III product, our R&D and engineering budget is going to be significantly reduced because a lot of resources will be reallocated to support the product engineering.
So for the terrestrial solar side the total budget for the 2010 allocation will be less than $4 million.
There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.
Thank you very much for your attention today and we look forward to talking to you next call. Thank you.
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