EMCORE CEO Holds Business Update Call - Update Call Transcript

Aug.16.10 | About: EMCORE Corporation (EMKR)

EMCORE Corporation (NASDAQ:EMKR)

Business Update Call

August 16, 2010 5:00 pm ET

Executives

Victor Allgeier - IR, TTC Group

Dr. Hong Hou - President and CEO

Reuben Richards - Executive Chairman and Interim CFO

Analysts

Al Shams - Midsouth Capital

Michael Intrator - Natsource Asset Management

Operator

Good day, ladies and gentlemen and welcome to this Emcore business update. (Operator Instructions)

I would now like to turn the call over to Mr. Victor Allgeier.

Victor Allgeier

Thank you and good evening, everyone. Today after the close of market Emcore released a press release and related Form 8-K announcing that it would delay its quarterly report on Form 10-Q for the period ended June 30, 2010.

With us today from Emcore are Dr. Hong Hou, President and Chief Executive Officer; and Reuben Richards, Executive Chairman and Interim Chief Financial Officer.

Reuben will provide revenue guidance for the fiscal 2010 fourth quarter, and Hong will provide a general business update before we open the call up to questions. Unfortunately, because of the delay in the filing of the Form 10-Q, the company will not be able to answer questions regarding its fiscal 2010 third quarter.

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 various risks and uncertainties as described in Emcore's earnings press release and filings with the SEC.

I'll now turn the call over to Reuben.

Reuben Richards

Thank you, Vic. Good morning everybody. As we stated in the press release, Emcore is currently revealing accounting for certain inventory write-downs in the allowance against a specific account receivable that Emcore has determined should be recorded. Emcore is considering the effect and significance of these adjustments with respect to prior periods.

These issues must be completed in order for Emcore to be in a position to file its quarterly report. In addition, during the quarter, Emcore identified material weaknesses in connection with those inventory and revenue cutoff transactions as of June 30. The company intends to file its quarterly report as soon as reasonably practicable.

For the fourth quarter, which is a quarter we're going to talk about, and Hong will give us a business update, the forecast for the period ending September 30, the Company expects consolidated revenue to be in the range of $54 million to $56 million with increases in both Photovoltaics and Fiber Optics segments.

In Fiber, we expect revenues of $33 million or $34 million, up sequentially quarter-over-quarter from Q3 and Q2, and solar will be in the $21 million to $22 million range, again, showing the second sequential quarterly increase, up $54 million to $56 million.

In terms of liquidity in capital resources, for the quarter we expect our operations performance will continue to improve from previous quarters, and cash will be generated through profit margin improvement and working capital management. The delay in filing the quarter will not affect the availability of any credit facility on the Bank of America current terms.

Furthermore, on an operational strategic standpoint, Hong will describe the San'an transaction as well as the TCIC update. And San'an will create a low cost manufacturing capability, allowing the company to launch its CPV business in China without significant demand on our capital. Further, we are working to structure a similar deal with TCIC for low cost manufacturing capability in China on similar terms.

And with that, I will turn it over to Hong.

Hong Hou

As Reuben discussed, due to the delay of our filing of 10-Q, we are not in a position to discuss the details of financial performance of our Q3 results ended June 30. We're working very hard to resolving the accounting issues and get a Q filed as soon as reasonably practical.

However, we found it very important to give you an update on our strategy and business outlook. First, let me address some significant corporate events that happened in the last four months. As you know, the Emcore community experienced a terrible shock when domestic violence erupted in front of our building in Albuquerque on Monday, July 12, 2010.

A senseless act of violence occurred when a former employee, who had children with a current employee, came to the facility (inaudible). Police and the employees responded heroically, but not before two of our own were killed in the attack. We honor and remember Sharon Cunningham and Michelle Turner whose lives were tragically taken on July 12. Our prayers and hearts are with the mourning families and friends of the sad loss.

Emcore thanks the first responders for their rapid response to this tragedy. We specifically thank the local police and the city employees, the Mayor of Albuquerque and the fire department. We acknowledge the courageous efforts of many Emcore employees who saved and assisted their colleagues. Emcore had received an outpouring of support from the community. And we thank everyone for their kind words and the encouragement. Your messages of support and prayer have helped us through this terrible time so far, and we intend to properly honor those we have lost and to demonstrate that our spirit is greater than the tragedy by moving forward together.

Emcore has taken action to ensure that the needs of our victims' families are met and addressed. In addition, we established memorial funds for Michelle Turner and Sharon Cunningham at Bank of America branches. We're building a community who had expressed a desire to donate.

During and for two weeks following this tragedy, Emcore offered on-site grief counseling to meet with employees as well as their families. Both one-on-one and group counseling sessions were facilitated. We committed the continuous availability of these resources on an 'as needed' basis by our employees and their families.

As employees returned to work, we were extremely impressed with their dedication, support of each other, and their resiliency. As a team, we are moving forward, intend on honoring those we have lost, supporting those who are hurt and afraid, and intend on going forward boldly together reflecting our compassion and our resolve.

To that end, we are pleased to announce that our employees and our operations are returning to the normal condition with regained focus and commitment on customer satisfaction and business growth. The executive team is both proud and humbled to be leading such a strong, resilient, courageous and dedicated group of professionals.

Another significant event is that our former Chief Technology Officer, John Iannelli and Chief Financial Officer, John Markovich have left the company literally to pursue other opportunities. We thank them for the leadership and contributions to the company and wish them well in their future endeavors.

As we are a hi-tech company, continued innovation and product development is our business lifeline. We'll continue to invest tremendous resources in new technology and product development.

As a technical leadership responsibility, I already belong to the fiber optics and solar photovoltaics properties and businesses, we had no need to back fill the CTO position. As back filling the CFO position, we have been interviewing, and have zoomed into some very qualified candidates. We expect to have the position filled within weeks, not days.

Next, let me discuss the significant development of our plan going forward in the fiber optics business. On February 3, 2010, the company entered into a share purchase agreement to create a joint venture with the Tangshan Caofeidian Investment Corporation in China. A purchase agreement provided for the company to sell 60% interest in its fiber optics business, excluding its satellite communications and specialty photonics fiber optics businesses through TCIC, which is an investment corporation for Tangshan Caofeidian, and that would have been operated as a joint venture had the transaction been closed.

The transaction was pending upon matters of regulatory approvals from the U.S. government. In April 2010, the company and TCIC made a voluntary filing with the Committee on Foreign Investment in the U.S., or CFIUS, in connection with this proposed transaction.

On June 24, 2010 the company announced that both parties withdrew their joint filing with CFIUS in response to an indication from CFIUS that it has certain concerns about the transaction as it was proposed. By August 2, 2010, the proposed transaction was officially terminated.

According to the share purchase agreement, Emcore is obligated to pay TCIC a termination fee of approximately $2.8 million in the event of a termination due to Emcore's inability to secure certain regulatory approvals. So we are working very actively with TCIC to contemplate a restructuring of the deal which does not require the same export control licensing and CFIUS review, and as a result of that the termination fee will be waived.

We expect a favorable outcome of this negotiation, although we have not consummated any agreement yet. So when we entered into this agreement with the TCIC that was a very difficult time for the company and the overall market. With the improvement of operations the last year and our liquidity situation, we believe that it might be even better for our shareholders without going down this path of a proposed transaction as we entered into in February 2010.

We continue to explore a broad strategy to meet the company's objectives that we outlined before; number one, creating a low cost manufacturing base for the fiber optics business to improve its competitiveness. Number two, to separate Emcore's fiber optics and the photovoltaic business to be pure plays in each of the business segment eventually. Number three, providing Emcore with improved liquidity to launch it's concentrating photovoltaic or CPV business.

Due to the successful agreement and formation of the joint venture with San'an on CPV business as I will discuss in greater detail later on, our need on capital to launch the CPV business is actually addressed probably more favorably. So at this point, we are not under any pressure to enter into any strategic transaction on this business.

On the operations side, wanted to hit at couple of highlights. The first one is regarding a new product we have been investing and developing for supporting the applications of telecom transport. We are the market leaders in the technology of Tunable TOSA and Tunable XFP in order to support high speed and high density low power transmission applications. Our focus has been developing internal key components using our indium phosphide-based fabs located in our hardware.

I'm happy to report that our internal key components have been fully developed and integrated into the TOSA structure. And the TXFP products were shipped to five major telecom customers and have been qualified. Right now we are in the process of addressing the production for volume and we expect the volume production to occur before the end of this September quarter. Another important op data on the fiber optics side, this is regarding the litigation with Avago for the internal optics product.

But we have been vigorously defending the allegation by Avago on patent infringement. But on July 12, 2010 the International Trade Commission issued its final determination as well as a limited exclusion order and cease and desist order directed for the company's accused product. The company has been formulating and implementing a product redesign that eliminates the impact of the accused infringement and the exclusion of cease and desist order issued by the ITC. We expect the product with the new design to be fully qualified in the September quarter and interruption to this line of business is minimal.

In the June quarter, we also successfully wrapped up the production of Quad Data Rate Active Optical Cable and we believe we are the larges volume provider to the high performance computing applications and with our newly released QDR Cable. We are very focused right now to develop the next generation CXP cables using the same technology and manufacturing platform.

Our broadband business continues to experience a pretty robust (drift). We believe this trend will continue throughout the end of the year.

Now let me discuss the photovoltaic side of our business. First, the satellite power business, the overall satellite solar power market continues to remain very strong. And our customers that operate within this market have been very successful securing satellite awards. These awards impact the solar cells as well as solar panel demand for Emcore.

We believe that a profitability improvement within this business segment will continue as the selling prices have increased across several recent long term purchase agreements, and the cost has decreased through both engineering design improvement and the improved supply chain management. The visibility within our satellite business remains robust. Our customers report very good transparency and with continued strong demands through 2011.

One of the largest customers in this sector, we are going to process to negotiate with them on the increase of a long-term process agreement for a significant amount of backlog. We expect to be the sole primary supplier of the space solar cells and solar panels for three out of the four major aerospace companies in the U.S.

We have made tremendous progress in top several quarters engaging commercial discussion with major European aerospace customers. We expect the product performance offered by our most advanced Triple Junction Solar Cell and world record result of our Inverted Metamorphic Multi-junction or IMM solar cells will be a depreciator for Emcore as we expand our customer base.

We are also very proud to report that we received two significant supplier performance awards within this quarter. Emcore was notified by a major defense prime contractor that we have been selected to receive Platinum Supplier Award. Additionally, EMCORE also received supplier excellence award form a major commercial satellite company for product performance and on-time delivery for human records.

We continue to make tremendous progress in technology advancement and the commercialization of our Inverted Metamorphic Multi-junction design or IMM. After demonstrating record conversion efficiency of 33.7% in the space solar illumination condition called AM0 with a quadruple-junction IMM solar cell design, our engineering team has made great strides preparing this product line for full scale production.

As previously announced, the Boeing Company awarded Emcore a contract from DARPA which baselined our IMM solar cell in the Fast Access Spacecraft Testbed or in short FAST program. This program aims to develop a new ultra-light weight high powered generation system that can generate up to 175 KW for spacecraft than anything is available commercially.

When combined with an electrical propulsion, in fact will form the foundation of future self-deployed, high-mobility spacecraft to perform ultra-high power communication space radar, satellite transfer and servicing mission. We recently notified by Boeing that our IMM cells successfully completed our performance and fulfilled the criteria of the current phase of the program; very excited about the future opportunity of this technology.

And this technology has designed into the future flagship technology demonstration platform by several government agencies and the views as really disruptive space power technology element. As a result of the success of this program, we expect significant business in the coming years based on this technology platform.

Now, let me turn to our terrestrial solar power business. The products, again, we are offering in this area including the solar cell components and the CPV or concentrating photovoltaic systems which will track the sunlight and convert sunlight into electricity as a whole system level. I will focus on the discussion on the recently announced transaction.

On July 30, 2010, Emcore entered into a serious agreement for the establishment and operation of a joint venture with San'an Optoelectronics Corporation located in Xiamen, China. For the purpose of engaging in the development manufacturing and the distribution of high concentration photovoltaic receivers, modules and systems for terrestrial solar power applications.

The joint-venture agreement between Emcore and San'an provides for the party to form a joint-venture at this point called Suncore Photovoltaics, and in the law of China, Emcore will own a 40% of interest, San'an will be owning a majority 60% of interest.

The total initial investment of Suncore is expected to be $30 million with which Emcore will be contributing $12 million and San'an contributing $80 million. And in the joint-venture agreement, both Emcore and San'an maybe able to contribute asset in lieu of cash in order to fulfill their respective capital contribution requirements.

So Emcore's Senior Vice President, Dr. Charlie Wang will serve as a General Manager of Suncore and our operations activities and the business for CPV receiver margin in the system currently reside at San'an. And Emcore China manufacture facility will eventually transfer to Suncore. But Emcore will continue to develop next generation products and continue to focus on the development of CPV business and those parts of the operations will still stay at Emcore.

The joint venture majority at the primary manufacturing operations will be located in Wuhu city in Anhui province of China. The reason for that is because the economic development organization of Wuhu city has agreed to provide Suncore with significant economic incentives, including land, subsidies, funds and the other incentives.

So right now, we are in the process of securing business license and as the license is granted by the local authorities we will be transferring some assets and contributing cash for the full operation of the joint venture. The joint venture agreement further provides for Emcore to enter into a technology licensing agreement with Suncore following the establishments of the joint venture entity. The licensing agreement will be providing for Emcore to license to Suncore the joint venture certain technologies related to the design and manufacturing of CPV receivers.

I want to make it clear that that does not include the actual technology or solar cell design or core technology related to any of the solar cells. We're talking about the packaged product of the solar cell; receivers, modules and systems for specific application of terrestrial solar power, currently owned by Emcore under its intellectual property portfolio.

And this licensing to the joint venture will be exclusive for the manufacturing right in greater China area. As long as, we Emcore still owns 20% equity interest in the joint venture. Concurrently, we have entered into another agreement with an affiliate of San'an to provide technology assistance in the strategic consulting services to the affiliate of San'an. As a result of that, we’ll be paid for $8.5 million in fee and that money along with our assets in the CPV area for assembly of tech equipment and inventory will serve as a majority of the contribution to fulfill the capital contribution requirement for the joint venture of Suncore.

One more important aspect is that we also enter into this agreement with affiliate of San'an that they committed to provide loan to support the business ramp up of CPV. So they will be shouldering all the future working capital needs. One other piece of this agreement is that the affiliate will provide Suncore a way that NCNR order of 10 megawatt since they already have a project need for it. The CPV system, NCNR stands for non-cancelable non-returnable. So that gives the joint venture an initial demand and assurance so that we can design and contribute the production along accordingly.

With that, we expect these GEN3 manufactured by Suncore, the cost will be significantly reduced and will be very competitive compared to a competing technology. Suncore will serve as Emcore’s primary low cost, high volume manufacturing base, for CPV receivers incorporating the CPV solar cell which will be continued to be manufactured in Albuquerque facility. And they will also be providing CPV modules and systems to support both Emcore’s and San'an's worldwide sales effort.

Subsequent to the establishment of the Suncore, the company will commence work on production on the 12 megawatt of CPV system which include a 10 megawatt, as I just mentioned NCNR order. And also the two megawatt of CPV component system order sourced by the Emcore side.

In addition, Emcore and San'an aggressively fulfilling multiple CPV project opportunities including the 280 megawatt solar energy plant in the six western regions of China, recently announced by the Chinese government.

Just to give you a little background about San'an, they are the largest producer of the LED chips and type of wafers in China. They are also a leader in CPV manufacturing and deployment having total install base about one megawatt right now in the north western region of China.

San'an is the publicly listed company on Shanghai stock exchange and currently has a market capitalization over U.S. dollar of $3 billion. So they have adequate capital to support this venture and the joint venture with Emcore really highly leverage our technology leadership with their capital resources, and with sharing the same passion, and vision on CPV, we believe this is going to be a very successful venture.

So that's for the manufacturing. Now business development side, our strategy in this market segment continues to be a provider of technology and hardware to our customer base. Fortunately, we have seen an object in the activities within the CPV market. Primarily, outside of the U.S. at this point, which we believe will create tremendous opportunities for the company.

For the low cost manufacturing operations in the commercial resources available and also technical resources freed up, so we can focus on the next generation products continue to improve the performance, continue to lower the cost of the CPV product; we've very optimistic that this finally marks the beginning of a successful launch of the CPV business.

So that's on the operations update, and except for continuing our past to closely manage the business growth, cash and the working capital and newly created CPV joint venture, finding accounting issues to a closer and complete the filing of quarterly report for Q3, its clearly the priority of the management focus.

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

Question-and-Answer Session

Operator

(Operator Instructions) Up first is Al Shams, Midsouth Capital.

Al Shams - Midsouth Capital

Mr. Hong, you went through a lot of different items but let me just kind of pose a couple of real brief questions to you. Number one, financially we are in really good shape and have no need to additional financing, correct?

Hong Hou

Yes we, as Reub has discussed, we clearly cannot discuss the Q3 results, but our outlook and guidance for Q4, we give our revenue range to be in $54 million to $56 million and we wish, from that operation, generate positive cash, and with our cash balance by the end of Q3, the positive cash generated from operations and also the most recent agreement with San'an to have them shoulder any capital needs to support the CPV business.

We really, in the near term to not the cash, so we are in pretty good shape for the liquidity.

Al Shams - Midsouth Capital

And then secondly, you touched on a number of different things. Could you possibly summarize, just in a few sentences the high point that you discussed?

Hong Hou

Yes. That's a very good point, I give some probably segmented information, but if you take that back, we are basically having three business segments, one in the fiber optics for communication; one as a solar cell, solar panels, for aerospace application; the third one is more in the past years has been in development, that is CPV for solar power applications.

For the fiber optic side, you have seen before Q3 we have demonstrated improvement of operations quarter-over-quarter with revenue growth and gross margin improvement and backlog improvement. So we do expect that trend to continue going forward. And you can see some other fiber optics communication component companies in the same area have largely demonstrated the same trend.

So we are optimistic about the fiber optic side. The aerospace side of the solar cell application, that part has absolutely provided us with the ability through the long term purchase agreement and improved revenue and improved gross margin and that continues to be a cash cow for us. Say, with a run rate for the revenue in the range of about $70 million to $80 million range a year and we'll be able to generate about $25 million positive cash from operations. So that's in very good shape.

Our concern has been on the CPV side for primarily two reasons. Number is a unique emerging technology and need the market acceptance. So we have been really agonizing on the strategy, how do we launch this new line of product? We believe joining forces with San'an is the best way because China is a emerging market; one that I think they want to buy what is the latest, greatest stuff. So through the new installation in China, we can gain the operational heritage and get a technology proved and accepted.

Furthermore, the consideration on the CPV side was a capital need. So that's why we were working very hard to enter into some agreement on the fiber optic side so that we can improve our balance sheet through launching the CPV business. But with this agreement that we don't really need cash for capital contribution which we will get a perceived through the consulting agreement plus the current asset related through CPV from inventory and tech assembly equipment of view will be enough to fulfill the capital contribution requirement, working capital they will provide any time we need in the near term.

So I think CPV, we are probably in the best position to launch that business with assured working capital and the low cost in more competitive and more robust technology. So in the three areas if I happen to say, fiber optics is cyclical, but right now in the good cycle. We're going the way the flow of the industry that right now looks like the near term is going to continue to improve. Aerospace, solar cell is doing great; it will continue to do well in the next year or two. And CPV I think we are on a very good platform to get that business launched successfully.

Unidentified Analyst

Would this be a fair statement, aside from the price of the stock, are we in the best position we've been in from an operational and product point of view over the last couple of years?

Reuben Richards

Very definitely.

Operator

(Operator Instructions) Our next question comes from Michael Intrator, Natsource Asset Management.

Michael Intrator - Natsource Asset Management

I was wondering if you could speak to the Avago ruling. Is there any residual liability other than the cease and desist order that exists, and how should we be looking at that going forward?

Reuben Richards

We care about that very much as well. And since the litigation was brought up, the ITC, International Trade Commission, as you know is now their charter or beyond their scope to assess any cost damage or injunction. So none of those indications is on the table. The only thing is we are banned from importing the accused product across the border. And the biggest impact is this cease and desist order. But currently the case has entered a Presidential review, and that a final decision, his decision, on whether to approve those orders is expected to be on or about September 13, 2010.

Until that time, we are free to import and sell accused products on conditions that it pays a 3% bond. So this remedial orders does not apply to any product already sold by the company's customers that may contain the accused products. So I'll just make it simple. Before September 13, we're free to import and sell the product as long as we put aside a 3% bond. We may use or we may not use it in the future.

So that's the current version. But we saw this coming a few months ago. We have started a terrible effort to redesign the product, and we got this tremendous support from our customers to support its qualifications. We are one-and-a-half way through by August 28, and I think the qualification with one customer will be complete, that's in a couple of weeks.

And that the cleanest way to resolve this issue going forward and we want to pursue that half. But we do have the option to appeal which we're considering at this point. And with regard to that we took a strategy that said, we may continue to fight this from an IP standpoint, but we want to take any of the questions around our product out of our customers mind.

So we cut in at the non-infringing technology, which as Hong pointed out is in the midst of qualification, and the revenue impact on cutting this over, it will be de minimis.

Michael Intrator - Natsource Asset Management

That was helpful, although I'm not totally familiar with the process that you're referring to. I guess I'll have to do my homework on that.

On the accounting issues that you've identified, how many quarters are you expecting that to go back?

Hong Hou

At this point, we haven't finished sort of the write-up on the balance sheet items in question. I think our position, we'd like this to be a one-time charge, but we haven't crossed that threshold yet.

Operator

(Operator Instructions)

Hong Hou

If no further questions, I wanted to thank everybody for participating in the call today. We apologize that we are not in a position to give you the details on the financials due to the delay in filing the quarterly report. But as Reuben indicated, we are comfortable in providing guidance for the next quarter for revenue to be in the range of $54 million to $56 million, and with a operation to generate positive cash.

So certainly, we are working very hard, achieving the total profitability and that we are comfortable to guide on the revenue side at this point. And we expect the accounting issues to be resolved with hard work in the next, say, phase rather than weeks, and we hope that will be the situation.

Thank you very much for your attention today. We look forward to talking to you in the next call.

Operator

Ladies and gentlemen, that does conclude today's conference. Thank you all for your participation.

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