EMCORE Corporation CEO Discusses F1Q11 (Qtr End 12/31/2010) Results - Earnings Call Transcript

| About: EMCORE Corporation (EMKR)


F1Q11 (Qtr End 12/31/2010) Earnings Call

February 3, 2011 4:30 pm ET


Victor Allgeier - TTC Group

Hong Hou - President and Chief Executive Officer

Mark Weinswig - CFO


Peter Conway -Cox Investment Advisors


Welcome to the EMCORE Corporation first quarter fiscal 2011 earnings conference call. (Operator Instructions). This conference is being recorded today, Thursday February 3, 2011. I would now like to turn the conference over to our host Mr. Victor Allgeier with TTC Group. Please go ahead sir.

Victor Allgeier

Before we begin, we would like to remind you that the information provided here in may include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act of 1934.

These forward-looking statements are largely based on EMCORE’s current expectations and projections about future events and financial trends affecting the financial condition of its business. Such forward-looking statements include, in particular, projections about EMCORE’s future results, statements about its plans, strategies, business prospects, changes and trends in its business and the markets in which they operate.

Management cautions that these forward-looking statements relate to future events or its future financial performance and are subject to business, economic, and other risks and uncertainties, both known and unknown, that may cause actual results, levels of activity, performance or achievements of its business or its industry to be materially different from those expressed or implied by any forward-looking statements. Neither management nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements.

We caution you not to rely on these statements without also considering the risks and uncertainties associated with these statements and EMCORE’s business that are addressed in its filings with the Securities and Exchange Commission that are available on the SEC's website located at www.sec.gov, including the sections entitled Risk Factors in its Annual Report on Form 10-K and its Quarterly Reports on Form 10-Q. EMCORE assumes no obligation to update any forward-looking statements to conform such statements to actual results or to change in its expectations, except as required by applicable law or regulation.

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

I'll now turn the call over to Mark.

Mark Weinswig

Today I am going to focus my discussion on our first fiscal quarter operating results. Conslidated revenues for our first fiscal quarter total 52.1 million, which is a decrease of $2 million or 4% from the prior quarter. This was inline with our prior guidance of 50 million to 53 million in revenue.

On a segment basis, our Photovoltaics business accounted for 20.3 million or 39% of the company’s total revenue. Quarter-over-quarter, the business increased 0.6 million or 3% from the prior quarter. The increase in revenue is primarily driven by our space solar power generation products.

It is important to note that this quarter Satellite Photovoltaics results were a record for EMCORE. The Fiber Optics segment accounted 31.8 million or 51% of the companys’ total revenue. This represents a decrease of roughly $2.6 million or 8% from the quarter, with the decrease primarily driven by lower sales of our digital products.

As we noted last quarter, the ITC ruling on our parallel optic device products has had a negative impact on our overall results. In addition, in Q4, we had some large super computer related connector cable orders which fell in the first quarter. The active cables business is lumpy and based on specific build-ups; we expect this product line to increase from its current levels in future period.

We continue to experience improvements in our Cable TV business, where we are seeing further traction from customers. In addition, our tunable laser business also saw some significant increases in business levels. Hong will discuss these and other details later in the call.

Consolidated gross margin increased to 24.3% from 23.6% in the prior quarter, primarily from an improvement in the Photovoltaic margins. On a segment basis, Photovoltaic’s gross margin was 33.1%, which is an increase from the 29.3% reported in the prior quarter. This was primarily due to leverage from higher volumes and a positive mix.

Fiber Optics gross margin was 18.7%, a 1.7 percentage point reduction from the prior quarter, primarily due to an unfavorable mix shift and higher material cost associated with our telecom and datacom Fiber Optics business. The Telecom and Datacom division has experienced a product mix shift, as customers began to move towards newer technology platforms.

We believe that this evolution will cause margins in this division to be under pressure until our new products begin to ramp in the latter part of this year. As we increase capacity, we will also see certain startup costs, associated with NREs in the manufacturing expansion, as these products move in to full production.

Operating expenses increased $0.9 million from the prior quarter, to 15.5 million primarily due to some benefits realized in Q4 that we do not expect to continue in future periods.

On a GAAP basis, the consolidated net loss for the fourth quarter was 3.6 million, a deterioration of 2.8 million from the prior quarter.

Our non-GAAP adjusted EBITDA after excluding certain adjustments all of which are set forth in the non-GAAP payables included in today’s release was $0.6 million. Please not that we have included additional information depreciation, amortization, stock comp and other items in today’s release to provide further clarity on our results.

Our GAAP net loss per share was $0.04, versus $0.01 in the prior quarter.

Now on to order backlog; which we define as purchase orders or supply agreement, accepted by the company with expected product delivery and/or services to be performed within the next 12-months.

At December 31, the company had a consolidated order backlog of approximately 57.3 million, which is a 14 million or 20% decrease in the prior quarter. On a segment basis, Photovoltaics order backlog totaled 36 million, a 32% decrease due to certain contracts that are now complete.

Fiber Optics order backlog totaled 21.2 million, an increase of 15% from the prior quarter, primarily driven by higher backlog in our tunable laser business. Our tunable laser business continues to gain strong traction of customers due to its performance and our penetration in our 40 and 100 g market.

Moving on to the balance sheet, during the three months ended, December 31, the company’s cash and cash equivalents and restricted cash balance increased over 25 million, primarily driven by improved working capital management. DSOs improved to 70 days, which is a very respectable figure. We also saw a slight improvement in our inventory turns to 4.5 times.

As we announced previously, in November the company signed a new $35 million credit facility with Wells Fargo. The credit facility which is subject to certain borrowing based restrictions will be used for working capital and general business purposes.

Our net cash provided by operating activities was 3. 9 million, and is a key highlight of our fiscal result.

With that I would turn the call over to Hong, who will discuss the company’s strategic and operating initiatives and provide revenue guidance for the second quarter.

Hong Hou

As Mark has discussed in details about our financial results of the last quarter, we achieved a consolidated revenue for the December of 52.1 million, which is within the guided range of $50 million to $53 million.

On a non-GAAP basis, the adjusted EBITDA that is described in today’s release was positive $0.6 million. In addition, the company generated 3.9 million positive cash from the operations and ended the quarter with a cash, cash equivalent and restricted cash balance of $25.4 million.

Now let me discuss the details behind our Q1 financial results, as well as the outlook and opportunities in our businesses. Our revenue in the Fiber Optics segment for the December quarter as Mark discussed, was $31.8 million, which represents a $2.6 million sequential decline compared to the September quarter.

Over the past few years, we have experienced a significant quarter-over-quarter revenue growth and expense in our gross margin. The decline in the December quarter is the first in a while and it’s primarily due to the reduction in shipments of parallel optical modules related to the ITC orders.

We believe this business will have future growth over the next few quarters, as we begin to deliver our new solutions to customers. Our book-to-bill for the December quarter was higher than 1, with a significant increase in our tunable telecom product.

The backlog for the Fiber Optics segment increased $2.8 million or 15% from the prior quarter.

Now let me discuss the market dynamics and our position in the broadband Fiber Optics business. We continued to experience a robust increase in demand for cable TV equipment in the December quarter. The deployment of telco’s fiber-to-the-home infrastructure and the new service offering of telco are forcing the cable TV multi-service operators to operate their infrastructure.

One solution is the use of full band Quadrature Amplitude Modulation transmitters or QAM transmitter, which of course had brilliant demand of digital services which said to have high-definition channels, video-on-demand, Voice-over-IP and the high speed internet access. This new transmission architecture is based on full blend of QAM transmission not only increases the transmission capacity, but also significantly reduces the operating expenses of the MSO. As a result, the demand for this product line has increased dramatically.

Our vertically integrated structure from laser and detector chips through transmitters subsystems served us well as the lasers backed [ph] for the QAM transmitters have (inaudible) that they are not currently available from any other vendors.

As we continue to introduce new products to the market, we believe our technology leadership in this area is widening. Another area of potential growth in cable TV is the solutions for the last mile. In traditional hybrid fiber coaxial network, coaxial cables are used to deliver signals between no and end users. RFOG, our radio frequency over glass fiber utilizing passive optical network transceivers and a switch in architectural DOCSIS in cable TV provides increased bandwidth from no to end users.

We have been very closely with our customers on this solution and expect many more shipments to begin in this quarter. Based on our discussion with a major MSO, their CapEx spending on scalable infrastructure and upgrade will continue to increase. As a result, we are very excited about our growth prospects in this market.

Now let me discuss our Telecom Fiber Optics business. The revenue from this product line has nearly doubled over the past four-five quarters, primarily driven by the tunable lasers and ITLA sales in to 40 and 100 gigabyte applications.

Due to the excellent attributes of a narrow linewidth (inaudible) and high ultra power of full-band tunable external cavity lasers have become the laser of choice for the 40 gigabyte per second market.

We believe our market share is significantly greater than 50% for coherent [detection] system. We are working with our tier one OEM for their 40 gigabyte coherent laser need.

On the tunable XFP front that we have reported in our last conference call, our post assemblies and key XFP products are being shipped to major telco customers for qualification. This product has generated significant customer tracking, and our customers have been extremely impressed with the performance of our tunable XFP modules and the designing in our product as the 300-pin tunable transponder replacement.

We believe that our designs are one of the few in the industry which can be used to cannibalize the multi $100 million market currently served by 300-pin transponders.

Today we are shipping in small volumes to fulfill orders to multiple tier-one OEM and are aggressively ramping up the manufacturing capacity to accommodate the significant market demand. We expect to ship this product in volume in the second half of 2011.

According to a recent industry research report, a demand for tunable XFP product will grow at nearly a 120% year-over-year in the next four years. The market risk is very minimal and our focus is on the capacity ramp.

We are a leading supplier for active optical cable utilizing a high speed transceivers embedded in the connectors to perform E/O and O/E conversion. These are used primarily in the high performance computing clusters, replacing a heavy and a rigid electrical cable.

According to a recent market research report by (inaudible). The sales of active cables in the last several years were over 285,000 units, and projected annual growth rate nearly 60%.

As a leading supplier, EMCORE has shipped over a 100,000 units of Double Data Rate and Quad Data Rate cable to date. We will be introducing new product soon, which include recently demonstrated 4 by 12 gigabit per channel FDR and 12 [line] 10 gigabit per channel CXP modules and active optical cable for high speed interconnect market.

However the sales in this nascent product line are quite lumpy and the products are program specific. For example, in the prior quarter our sales were low, but we are well positioned to increase the future sales of active cable for new program.

Now let me move on to discuss our financial results of our Solar Power business segment and discuss the business acquirement going forward. Our Space Photovoltaic business delivered record revenue in the December quarter. The satellite solar power market continues to have a very bright future.

Our reliability heritage provides a competitive advantage for most of the commercial programs and the superior performance of our solar cell product has been a key enabler for many new interplanetary missions that we have been awarded recently.

As we mentioned previously, the company is looking to expand its business into government program. On that end, we were notified recently that we have achieved preliminary facility security clearance as a trusted supplier government programming. This clearance will ultimately position EMCORE to take on and perform government defense works in the near future.

The total addressable market at the space solar panel level is reportedly $400 million, of which 250 million is in the commercial space area and a 150 million is in the defense programming. The business in the defense area represents a new market to pursue in the expansion of our addressable market opportunities.

On a sequential basis, revenue in the March quarter will decline for Photovoltaic due to the completion of a few major programs over the last couple of quarters, and the program delay from international customer for our new program.

While the 12-month backlog decreased sequentially as well, we are confident that our business fundamentals are still very strong. For example, already in the past month after we closed the Q1 December quarter, we have added a couple of program wins in to our backlog, and there’s been additional significant booking opportunities in the very near future. So it’s more a timing issue, we’ll view back the backlog this quarter.

Now let me give you an update on the CPD joint venture and the recent developments of our terrestrial CPV business. As we discussed in our last quarter, we entered in to a joint venture agreement with San'an Optoelectronics in China. The JV entity Suncore is making a significant progress.

A couple of weeks ago, Suncore received its business license and our relevant regulatory approval to set up a manufacturing operation in Huainan City of China. We plan to break ground for the new manufacturing facility later this month and expect the JV manufacturing alliance to be up and running for producing CPV components and systems in September 2011.

The current backlog for CPV systems at Suncore is 15 megawatt. With the establishment of Suncore, we expect to make capital contribution to the JV this quarter, as per the contract. The total cash outlay for the company is $3.5 million to fulfill our capital contribution obligation for the 40% of the $30 million initial registered capital requirement. This will be receiving a $8.5 million consultant fee paid by Huaianan. The 3.5 and plus 8.5 million of that will give us a total of $12 million capital contribution to the JV.

With the commitment we have received related to the cash, working capital loan, land and the cash grants as well as various incentives and subsidies from Huainan City, we believe Suncore will have the necessary capital to establish a state-of-the-art high volume, low cost manufacturing facility for CPV systems.

At this time we do not expect any further capital requirements beyond the $12 million from EMCORE.

With the JV taking on the task of manufacturing as well as business development in the China market, EMCORE can now focus its effort on the development of our next generation CPV product as well as solar business development activities in the North American and Europe.

We plan to complete two CPV solar power project in New Mexico and Arizona totaling 3 megawatts this calendar year, using CPV components manufactured by Suncore.

This year we expect to expand our solar project development capability as well. This will drive additional sales of our CPV products and also remove margin backing by distributors and the project developers. To that end, we are in the process of adding necessary skill set to expand our business development.

In summary, we feel that our path is clear among the four business unit that Space Photovoltaic and Broadband Fiber Optics divisions are market leaders and are generating significant positive cash. This operation provides cash flows that we are investing in the areas where we have significant near-term and long-term growth opportunities.

We are expanding our product portfolios in our datacom, telecom businesses and we’ll be [shepherding] some legacy products through the end of their life cycle over the next couple of quarters.

As we complete the introduction of this new product, we will totally upgrade our datacom, telecom product portfolio by increased sales and improved gross margin in the near future.

In our terrestrial CPV business, we are ramping up to win new project opportunities with competitively priced product from our joint venture in China. The terrestrial solar opportunities should add to our revenue substantially over the next couple of years.

On the revenue outlook for our second successive quarter, we expect consolidated revenue to be in the range of $46 million to $49 million.

Our Fiber Optics segments revenue should be flat to a slight increase as our next generation telecom product begin to ramp. Our Photovoltaic segment will see a decline attributable to the completion of some large satellite orders within our prior quarters and the delay of a new international program.

Inspite of this, the expected sequential decline in revenue, I hope that you get a sense that this is a temporary and our business fundamentals are very solid.

In this quarter, we’ll continue to solidify our strong market positions in our more established Satellite Photovoltaic and Broadband Fiber Optics businesses. In the mean time, we will be focusing on the capacity buildup of the tunable XFP production, so that we’ll be positioned for a significant revenue ramp up in the second half of the year. In addition, we will be beefing up our efforts in business development and project development for our terrestrial CPV.

We will continue with the same rigor for cost control and cost of reduction. With these efforts, we are setting a strong foundation for our future drill.

With that I will turn it over to Q&A

Operator we are ready for the Q&A part of the conference call.

Question - and - Answer Session


(Operator Instructions). Our first question is from the line of [Peter Conway] with [Cox Investment Advisors]. Please go ahead.

Peter Conway -Cox Investment Advisors

I was wondering if you could jus offer, may be a little bit more granularity on the Fiber Optics side and the digital, and how you would see tunable ramp play out. Would you expect a little bit more revenue this quarter, but then a more significant step up as we move into Q3 and Q4.

Hong Hou

Peter we are ramping up the production capacity in two locations simultaneously. One is in our Newark facility in California. So that will be up and running and contributing to the revenue this quarter, even though it would not be significant. In the second rounds we are doing right now is at a contract manufacturing in Thailand and they are scheduled to be up and running by about mid-June.

So the revenue contribution from that line which is going to be significantly higher volume than new work line will be more in the September quarter.

Peter Conway -Cox Investment Advisors

So as you enter or exit the September quarter may be you can offer clarity on that. What kind of capacity would you have in place?

Hong Hou

Right now, we are still using the new work line not only to produce parts, but also improving the process cycle time. We hope that we are using at about a 5000 per month level at a fiber net; 5000 to 10000 per month. It really depends on the cycle time in processing and testing. So 5000 per month is our target for the [line] in Thailand.

Peter Conway -Cox Investment Advisors

And that’s by the end of September.

Hong Hou

The line will be up and running by mid June, but I think the revenue contribution will be in the September quarter.

Peter Conway -Cox Investment Advisors

Can you remind me what kind of ASP is generally the tunable lasers carry?

Hong Hou

For the tunable [XOP] we are providing is primarily as I discussed targeting this replacement of 300-pin transponders. And this day for 300-pin transponders, as you will probably know that the price is in the range of $1700 to $2200 depending on specification. So we are slightly different in focus compared to an established vendor in this industry. They as I understand are targeting to replace the fixed wavelength TWDM [XOPs]. So for fixed wavelength that’s probably typical AXP is in the $1000 range. Of course the tenability will demand a premium for pricing.

Peter Conway -Cox Investment Advisors

Can you in any way characterize the demand or the reception that you are seeing from prospective customers at present. Are they positioned at take whatever you can produce or is that something you need to build towards?

Hong Hou

Absolutely we are in a very weird situation; kind of live in over the years in the Fiber Optics industry. We are in a position, we feel a day will come and they will take everything we can deal with right now. Even when we have the capacity of 5000 per month, based on the current projection that’s probably only about half or one-third of their demand. So we are going to have a third place capacity expansion plan either at a fiber net or our facility in China.

Peter Conway -Cox Investment Advisors

And I suspect that that has not gotten to the point where it is even 10% of fiber optic revenue that present. But when it does get to that point or to a certain point where you breakout what your tunable XMP revenues are.

Hong Hou

Yes, we will.

Peter Conway -Cox Investment Advisors

Is that a correct that’s it not at that time at present.

Hong Hou

Right, we are not over 10% of the total fiber optics revenue mix from the tunable XFP yet.

Peter Conway -Cox Investment Advisors

As this is ramped in the tune of the September quarter, would you characterize this as a margin that’s better than average for the fiber optics product set.

Hong Hou

Absolutely. That is going to be one of the high margin products in our portfolio for fiber optics segment.


With that we will turn the call back over to Hong for closing remarks.

Hong Hou

I appreciate your participation in our call today. We look forward to seeing some of you in the optical fiber conferences in Los Angeles in the first week of March, talking to you next quarter. Thank you very much.


Ladies and Gentlemen, this completes the EMCORE Corporation first quarter fiscal 2011 earnings conference call. Thank you for your participation, you may now disconnect.

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