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EMCORE (NASDAQ:EMKR)

Q4 2011 Earnings Call

December 27, 2011 4:30 pm ET

Executives

Mark B. Weinswig - Chief Financial Officer and Principal Accounting Officer

Victor Allgeier -

Hong Q. Hou - Chief Executive Officer, President and Director

Analysts

William Stein - Crédit Suisse AG, Research Division

Alex B. Henderson - Miller Tabak + Co., LLC, Research Division

Edward A. Zabitsky - ACI Research

Operator

Good day ladies and gentlemen, and thank you for standing by. Welcome to the EMCORE Corporation Fourth Quarter Fiscal Year 2011 Earnings Conference. [Operator Instructions] As a reminder today's call is being recorded. And at this time, I'd like to turn the call over to Vic Allgeier of TTC group. Please go ahead.

Victor Allgeier

Thank you, and good afternoon, everyone. Before we begin, we would like to remind you that the information provided herein 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 our expectations and projections about future events and financial trends affecting the financial condition of our business.

Such forward-looking statements include, in particular, projections about our future results, statements about our plans, strategies, business prospects, changes in trends in our business and the markets in which we operate. Management cautions that these forward-looking statements relate to future events on our 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 our business or our 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 our business that are addressed in our filings with the U.S. Securities and Exchange Commission that are available on the SEC's website, located at www.sec.gov, including the sections entitled Risk Factors in our annual report on Form 10-K and our quarterly reports on Form 10-Q. We assume no obligation to update any forward-looking statements to conform such statements to actual results or to changes in our 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 B. Weinswig

Thank you, Vic, and good afternoon, and happy holidays, everyone. Today I'm going to focus my discussion on our fourth fiscal quarter operating results and our balance sheet. In addition, I will update you on the initiatives we have undertaken since September 30.

Please note that the effect of the flooding of our contract manufacturer's facility in Thailand is not reflected in our Q4 results. Hong will discuss the impact of the flood later in the call.

Consolidated revenue for our fourth fiscal quarter was $52.1 million, which is an increase of $2.6 million or 5% over the previous quarter. This was in line with our prior guidance of $51 million to $55 million in revenue.

On a segment basis, our Photovoltaics business accounted for $21.2 million or 41% of the company's total revenue. This represents a $5 million or 31% increase in the revenue for this segment in the prior quarter and was an all-time high for the Space Solar business. We believe that the Space Solar business will continue to experience year-over-year growth, although our revenues in any given quarter maybe a bit lumpy, as illustrated with our significant increase in Q4.

The Fiber Optics segment accounted for $30.9 million or 59% of the company's total revenue. This represents a decrease of roughly $2.3 million or 7% from the prior quarter with the decrease primarily driven by lower sales of our Broadband business and our end-of-life products. The key accomplishment in the quarter was hitting revenue of $9 million from our tunable laser product.

Consolidated gross margin was flat at 19% from the prior quarter primarily attributed to a significant improvement in our Solar division partially offset by a decrease in our Fiber division.

On a segment basis, Photovoltaic gross margins increased to 21% and was driven by a return to the 30% gross margin level for our Satellite Solar business. This was due to higher revenues partially offset by lower margins from the Terrestrial Solar business. In the first quarter, we believe that our margins should improve for this segment.

Fiber Optics gross margin was 18% or 1.4 percentage point decrease from the prior quarter primarily due to lower revenues and excess in obsolete expenses.

Operating expenses, excluding the impairment loss and litigation settlements, decreased $2.8 million from the prior quarter to $16.4 million, primarily due to lower R&D expenses in both our Fiber and Solar segments and lower stock comp FAS 123R expenses.

We recorded an impairment loss of $8 million in the quarter related to our Fiber Optics segment.

Our Solar CPV joint venture, Suncore, had a loss of roughly $1 million for Q4. We expect those losses to decrease over time as Suncore begins producing product in volume. Hong will discuss the Suncore strategy and opportunity in more detail.

On a GAAP basis, the consolidated net loss for the fourth quarter was $14.3 million, a deterioration from $11.1 million as reported in the prior quarter. Excluding the impairments and litigation settlements, the net loss fell $3 million quarter-to-quarter.

Our GAAP net loss per share was $0.15 versus $0.12 in the preceding quarter. Our non-GAAP adjusted operating loss after excluding certain adjustments, all of which are set forth in the non-GAAP tables included in today's release, was a loss of $1.4 million, an improvement of $2.3 million from the prior quarter.

Please note that we have included additional information regarding depreciation, amortization, stock comp and other items in today's release to provide further clarity on our results.

Now onto order backlog, which we define 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. As we continue to analyze the impact of the flood on our Fiber Optics business, we will only be providing our Solar backlog at this time. At September 30, the company had a Solar order backlog of approximately $43.5 million.

Moving on to the balance sheet. At the end of September, the company's cash and cash equivalents and restricted cash balance was $16 million. DSOs improved to 60 days, better than our targeted range, and we did see a slight improvement in our inventory turns to 5x.

In order to improve our financial position, the company has moved quickly since September 30 to make some significant improvements.

First of all, in November, we implemented various cost reductions, including salary and discretionary spending cuts. We believe that those actions have reduced the company's cost structure significantly for the time being. The salary deductions are a temporary measure that reduces the cash burn while we are rebuilding our Fiber Optics production infrastructure.

Second, we are working with our key suppliers to expedite the building of our manufacturing line, which Hong will be discussing later. As part of those measures, we have extended payment terms on our payables to provide us with additional flexibility over the next 12 months.

In addition, our manufacturing partner will also assist in financing the rebuild of our manufacturing lines at their facility. This will help us finance the CapEx needs while we wait for payment of our insurance proceeds.

Third, we've also signed agreements with certain customers to receive prepayments for future shipments. This allows us to replenish the inventory and fund other working capital requirements.

Fourth, we amended our line of credit with Wells Fargo to increase the amount the company can borrow under the agreement. This gives the company up to $14 million of additional liquidity and borrowing base than otherwise expected.

And finally, we are working with our insurance carrier and our contract manufacturers insurance carriers to receive proceeds from the flood.

Regarding the insurance coverage, EMCORE had business interruption insurance through its own carrier. We expect to receive $5 million by January for those claims. In addition, our contract manufacturer has insurance coverage related to consigned inventory and equipment. We are working with them to finalize the claim and begin receiving proceeds.

While the amounts and timing of those receipts are uncertain, we are working to maximize our recoveries. We believe that these measures significantly improve our financial strength and we are confident that we can recover from this crisis caused by the flooding in Thailand, with regained business focus and in a good financial position.

In terms of our SEC 10-K filing, we expect to file the 10-K by the December 29 deadline.

With that, I will turn the call over to Hong, who will discuss the impact of the flood in Thailand, the company's strategic and operating initiatives and provide revenue guidance for the first fiscal quarter.

Hong Q. Hou

Thanks, Mark. Good afternoon, everyone. As Mark discussed in detail, we achieved consolidated revenues of $52.1 million in the September quarter, within the guidance range. This represents a 5% sequential increase. Our revenue in the Fiber Optics segment for the September quarter was $30.9 million, representing a 7% sequential decline compared to the June quarter. This was primarily due to the revenue decline from legacy and broadband products.

The revenue in our Solar Photovoltaic segments for the September quarter was a record-high $21.2 million, which represents a 31% increase compared to the immediate preceding quarter.

The consolidated gross margin for the Solar segments was 21%, which represents an increase from the 18.6% reported in the June quarter.

During the quarter, we recorded a program losses for some CPV projects. Gross margin for the Space Photovoltaic business reached 30%, showing a significant recovery from the challenges of the June quarter.

Now let me discuss the market dynamics and our position in each of our major business areas. First, I will start with the Solar Photovoltaic business segment. As we have discussed previously, the revenue in our Space Photovoltaic business can be somewhat lumpy due to the uneven timing of program awards and product deliveries. We experienced a significant increase in revenue in the September quarter due primarily to the increased demand from key customers.

In the quarter, we were able to secure several key contracts for commercial and government projects. As a result, the 12-month backlog for the Solar business increased approximately 10% from $39.6 million in the June quarter to $43.5 million, with the increase being solely from the Space Photovoltaics business. The business outlook in Space Photovoltaics continue to be very robust and we expect to receive several additional large commercial awards in 2012.

We have seen strong momentum interactions with the government and defense programs as well, which we expect to be an area of growth for us. We're happy to report that in the September quarter, our product yields returned to normal levels and our gross margins increased to 30%. We expect to maintain this high margin levels going forward. In addition, several customers for terrestrial CPV Solar Cells will be ramping up their demand in the next couple of quarters.

Our wafer production volume is now close to record high levels. To address this increase in demand, we are adding equipment in the fab to increase manufacturing capacity over the next couple of quarters. Our margins should also improve and fix the cost-related to the fab are better absorbed by the increased wafer volume.

Now let me give you an update on the recent developments in our terrestrial CPV business and our CPV joint venture.

Our CPV joint venture in China, Suncore Photovoltaics, has moved into its new facility in Huainan City, which is building the capacity to produce 200 megawatts of CPV modules per annum. We are developing and qualifying the manufacturing processes for CPV receivers and modules and plan to commence full production in February 2012.

In terms of the projects, Suncore has completed the installation of a 2-megawatt Gen III CPV Solar project in Gormont [ph], China. This Solar project is scheduled to be connected to a grid in a week.

Suncore announced a couple of months ago they were awarded a 50-megawatt follow-on purchase order for CPV systems from Shenguang New Energy to be delivered and deployed in 2012, which we believe will be the world's largest CPV deployment to date. EMCORE will be providing the CPV solar cells for this project. Suncore has received all the committed cash and land grants from the Huainan government, totaling over $100 million in value.

We believe that Suncore has the necessary funds to execute its business plans for facility buildout, capital equipment purchase and the initial working capital.

On our rooftop CPV product, our unique CPV systems for commercial applications, have generated significant traction with customers. We are completing our 1,000x system qualification and have so far seen very promising results.

With the establishment of the manufacturing infrastructure at Suncore, we expect that product line to launch before the end of this new fiscal year.

Now let me discuss our market position and business outlook in our Fiber Optics business segment. Our Fiber Optics revenue fell about 7% from the previous quarter. On a product basis, we saw a sequential decrease in shipments for cable TV broadband components in the September quarter.

While overall revenues decreased, the full band Quadrature Amplitude Modulation transmitters, or QAM transmitters, continue to be the leading solution for cost-effective broadband operate on the existing Fiber coaxial network infrastructure in the September quarter. We are also pleased to continue to experience strong demand on our RFoG, our radio frequency over glass fiber product.

This product provides the last mile fiber optic solution in the traditional hybrid fiber coaxial network, utilizing passive optical network transceivers and it's becoming an increasingly effective solution to upgrade the HFC network through an all-fiber optic solution.

We believe that we are very well-positioned in the cable TV broadband segment and possess both a differentiating and a comprehensive intellectual property position and the capability, including the only vertically integrated capability in the world.

For the Telecom business, ITLA sales into 40- and 100-gigabit per second coherent transponder and line-card applications continue to be very strong. In the September quarter, we achieved another nearly 30% quarter-over-quarter revenue growth and reached a new record level to approximately $9 million in revenue.

Our products are designed and qualified into almost all major telecom customers. We believe that demand for 40- and 100-gig coherent products will continue to ramp up rapidly in the foreseeable future.

Our products provide the most differentiating and enabling solutions for our customers' products and systems. We are seeing increased booking activity for our Tunable XLP product in the September quarter. While the majority of the current tunable XLP demand has been replacing DWDM XFPs, customers are ramping up their activity for 300-pin transponder replacement. We believe we are in an excellent position to address this premium market with the differentiated performance of our product.

We continue to believe that our design is one of the few in the industry that will be successful at taking the $300 million to $400 million market opportunity currently served by 300-pin transponders. We expect to achieve the first over $1 million product shipment in the current December quarter.

In the September quarter, we succeeded in introducing and directing production of our newly qualified 4x14 gigabit per second FDR active optical cables. We shipped over 5,000 cables in the first quarter after its product release.

In the current quarter, we expect production volume to continue to ramp up. We are also set to deliver 12x10 gigabit per second CXP active cables to customers for qualification. In addition, we expect the CFP and CXP form-factor transmitter and receiver modules for the high-end cloud router and enterprise applications to enter qualification phase in 2012.

Please note that the production line for active cable products was not impacted by the flooding in Thailand.

As noted a few quarters ago, within -- our current product portfolio, there are several products that were -- either reached the end of their life cycles or no longer cause to be competitive. We have completed the product transition this quarter. The revenue contribution from this legacy product was relatively minimal.

In fiscal year 2011, our operating results were significantly impacted by the products discontinued as a result of the ITC ruling related to the litigation with Avago. Despite that loss, we successfully managed through and in fact filled the revenue gap through new products and new business. We felt very optimistic about our business prospects and had a clear line of sight to profitability by the middle of our fiscal year 2012.

Unfortunately, the recent flooding in Thailand impacted that plan and forced us to reset our priorities and expectations. The media has extensively reported rainfalls in the northern part of Thailand from July through October caused a tremendous flooding in most areas in Thailand, especially in the outskirts of Bangkok. As previously disclosed on October 24, 2011, floodwaters infiltrated the offices and manufacturing floor space of our primary contract manufacturers in Thailand.

The areas used to manufacture our fiber optics products and our process and test equipment was submerged in several feet deep floodwater for more than a month. As a result, the manufacturing infrastructure that supports approximately 50% of our Fiber Optics segment revenue was damaged. This has had a significant impact on our operations and our ability to meet customer demand for fiber optics products.

Production capabilities for 3 major product lines were impacted, which include telecom products, such as ITLA and the high-volume tunable XLP line. Our low-volume tunable XLP line in the Bay Area is apparently not impacted and is producing products right now. The second product line that's being impacted is cable TV lasers, the components and transmitters. And the third one is legacy products.

Over the past 2 months, we have been developing and implementing alternative manufacturing plants in our own facilities in China and in the U.S. to meet short-term customer needs. Concurrently, we have been focusing on rebuilding the high-volume production infrastructure for impacted product lines in the other location owned by our primary contract manufacturer in Thailand, as well as our own facility in China.

While we are rebuilding the production lines for the telecom and cable TV products, we intend to focus on the fastest tasks after recovery and strategies to better configure this equipment efficiency, how's the structure and the future diversification, so that we turn this crisis into an opportunity.

Purchase orders to replace the damaged process and test equipment have been placed, and most of the equipment is scheduled to be delivered before the end of March. Between our own facilities and our contract manufacturer, we expect to fully recover our production capacity for our cable TV business by the end of March 2012 and rebuild the production capacity of our telecom production lines before the end of May 2012. We're working closely with our customers on a recovery, manufacturing plan to align with their needs.

As for the inventory materials, we were able to move a significant portion of our finished goods inventory to the second story of the facility right before the floodwater reached the manufacturing floor. This allows us to serve the near-term demands of some key customers with this inventory.

The major focus to manage this crisis is to work with our customers to meet their near-term needs and ascertain that the demands will still be there for our product when we are back up and running to full capacity.

We are very impressed that many of our key customers for telecom products have stepped up and committed their next year's demand through noncancelable purchase orders and prepayments. As a result, our production capacity for tunable lasers in calendar year 2012 when it's fully recovered is almost fully booked and with -- almost fully booked with the existing commitments from customers. This illustrates the differentiation of our product and the strong relationships with our customers.

We have been working with the insurance carriers, banks, customers and business partners to obtain fundings for required capital expenditures to restart operations. In addition, the management of the company has implemented various cost-reduction measures since the flood occurred. Crisis of this magnitude are true tests of the fundamental strength of our business and product technology, and more importantly the partnerships with our customers, suppliers and lenders.

We are very appreciative of our customers in the long-term purchase commitment we've received that will allow us to focus on the production line rebuild. We expect that the products we have introduced over the last couple of years and the new products in the pipeline will drive significant growth once we have our fulfillment infrastructure rebuilt.

As Mark just discussed, we have entered into agreements with our key contract manufacturing partner and Wells Fargo business credit. This agreement significantly improved the company's liquidity position while we process and receive proceeds from insurance claims.

We believe that we have a solid action plan in place to rebuild our impacted business and we expect to come out of this disaster as a stronger company than -- compared to the pre-flood conditions.

Due to our success in liquidity improvement, as outlined by Mark, we don't have a need to access the equity marketing in the near term. As we have noted previously, our manufacturing infrastructure in our Solar Photovoltaic segment was not impacted by the flooding.

Turning to guidance for the first quarter of fiscal year 2012 ending December 2011, we expect to have revenues in the range of $36 million to $38 million, with a sequential revenue decline primarily attributable to the flood impact within our Fiber Optics business.

Looking back at the fiscal year 2011, we have accomplished a lot. We set a solid foundation for our business and our operations. Unfortunately, the Thailand flooding has presented a new set of challenges and opportunities.

We're taking this opportunity to redefine our business priorities. The strategy for the company going forward is as follows:

From a corporate perspective, we are continuing to own and operate the Solar and Fiber Optics business. We will leverage our corporate infrastructure to spread cost over a larger revenue base. We believe that this will allow us to more fully leverage our core competencies and the infrastructure in areas of compound semiconductor materials, devices and integrated products enabled by these technologies.

Furthermore, this combined portfolio with different market applications provides some diversification in this highly cyclical economic environment.

In the Fiber Optics business segment, we will realign the current Fiber Optics product portfolio and focus on business areas where we believe we have strong technology differentiation and growth opportunities. We have demonstrated several disruptive products and platforms in the Fiber Optics business segments. New products such as Tunable TOSAs and Tunable XLP transceivers, ITLA and the micro-ITLA for 40- and 100-gig coherent transponders and line cards, full band cable-TV QAM transmitters and 14 gigabit parallel optics modules and active cables represent our leadership position in the industry, and we believe these products have tremendous growth potentials in the future.

The critical nature of these technologies to the industry was validated by the recent crisis caused by the flooding. Currently, we will -- concurrently we will exit the technology in the product area where we are not in the leading position. Our products are approaching the end of their life cycle.

For our Solar CPV business, we'll focus on expanding our customer base for CPV solar cells and developing new opportunities for rooftop CPV systems. In parallel, we'll support our CPV joint venture for ramping up manufacturing, cost reduction, system deployment and business growth in China.

The success in deployment and operations of utility scale CPV solar farms and the significant reduction in CPV module costs through Suncore manufacturing should strengthen the company's position in domestic CPV project development in the future.

For Space Photovoltaics and Specialty Photonics businesses, we intend to aggressively develop business for government and defense applications by leveraging our current business [indiscernible]. We believe our technologies [indiscernible] Fiber optical general transceivers and [indiscernible] environments for many government programs. We plan to continue to further solidify new business opportunities and programs in this area.

Overall, we are optimistic about our current position and our strategic plans going forward. Our priority in the next several months is to focus on the execution of our business plan.

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first questioner in queue is Edward Zabitsky with ACI Research.

Edward A. Zabitsky - ACI Research

So I don't know what kind of questions you're getting but the typical questions involve EMCORE's survival. And so let's really start there, although I don't usually focus too closely on that. So you said the insurance should cover $5 million, $5 million through Fabrinet, and are those equivalent to your hard costs of recovery? How much would you say your hard costs for recovery will be?

Mark B. Weinswig

There's a couple of things that we've done since the flood to basically make sure that we put ourselves in the best position financially. We implemented various cost reductions. We took salary cuts, furloughs, significant amount of discretionary spending cuts. This reduced our cost structure quite significantly. That's a short-term kind of effort. We do not plan on doing that for a long-term period. Secondly, what we did is that we started working with some of our key suppliers, having them to help us in terms of building up our manufacturing line. In addition, basically extending the payment plan for any payables that were on the books. So that basically has given us a significant amount of flexibility on that side. Third, one other item that Hong mentioned is that we've been working with our customers on prepayments for future shipments. And we received a significant amount of prepayments at this time and we have additional prepayments that will be coming in over the next few weeks. And in addition, we also amended our line of credit with Wells Fargo, which gives us an additional capability of up to $14 million based on the amendment that we've signed and put in place. Now those are just a number of actions. The fifth one, which I think we've -- you mentioned and hit on was the insurance proceeds. So we currently have 3 different insurance avenues that we're going down. First of all, we have EMCORE's business interruption insurance. And with that policy, we expect to have $5 million in our hands by the end of -- by January, and we're actually in very good shape from that perspective. The other one is with our contract manufacturer on the consigned inventory under their policy. And under that policy, we are not a named beneficiary. So it would take a little bit longer to receive insurance proceeds because we have to go through, in a sense, another step in the process. And third is also on the fixed asset side. And on the fixed assets, it's the same thing. It's consigned fixed assets from our contract manufacturer. And those fixed assets insurance proceeds would be coming again through our contract manufacturer. So those are the 3 different avenues that we're going down in terms of being able to receive insurance proceeds. And again our own business interruption, we feel very confident about having that money in the bank by January.

Hong Q. Hou

So just to clarify, this is Hong, the $5 million proceeds Mark was talking about, that's for our business interruption insurance only. The other 2 policy, namely for the consigned equipment and consigned inventory, it has much, much greater business coverage, insurance coverage. So we are making the claim. We're processing that. We expect the proceeds to trickle in, start from January. But that's not limited to $5 million, significantly higher than that.

Edward A. Zabitsky - ACI Research

So to net it out all, I'm not talking about operating costs, but do you feel like all of your hard cost of recovery are more than covered? Or you expect that they will be more than covered?

Hong Q. Hou

Yes. So as I've talked about...

Edward A. Zabitsky - ACI Research

That's what I needed to net out.

Yes. As I've talked about when we rebuild the line, we will take into consideration of the equipment efficiency as some of the equipment were manufactured over the last few years are less capable, and now they are more capable equipment in the market for both processing and testing. So as a matter of fact, we can use hopefully a fraction of the insurance proceeds to build a more efficient line for the production.

Edward A. Zabitsky - ACI Research

Okay. So a couple of things were nice to see during the quarter. One was the strength of your Solar business and another one was the orders for the TXFPs -- or your expectation, rather, of $1 million core [ph] TXFPs. I wanted to talk about both of those. Can you go through it again why, Mark maybe, why if you had 30% gross margin from the Space business, why the overall gross margin -- I think you said it was 21%.

Mark B. Weinswig

Yes. On the Solar gross margins, the Imnet [ph] partially deteriorated our margins on that side, was actually on the terrestrial business. So with our move of a significant amount of our work over to Suncore, in addition, we've also been looking at finalizing kind of our Gen-III systems. We've also been replacing some of the prior systems that were out in the marketplace where we've come up with a better design that's more reliable and more robust. And so we had a significant amount of cost associated with that terrestrial CPV business. But that was -- we consider those to be more on the lines of unusual items in the quarter, so we don't expect those to recover -- or to continue in future quarters. So from the Satellite Solar business, we did see a significant recovery back up to the 30% gross margin level. That's been our normal for the last couple of years.

Edward A. Zabitsky - ACI Research

Okay. So we should expect things to come back toward that level?

Mark B. Weinswig

We should.

Edward A. Zabitsky - ACI Research

At similar revenue of course. And just so quickly on the TXFPs, I'm wondering what -- do you have -- obviously, we had -- it's normal and it happens a lot with new products, you had a little bit of a false start earlier this year. What made -- how much of that $1 million is in hand in terms of orders at this point?

Hong Q. Hou

So I've mentioned about $1 million we'll be shipping in this December quarter. So currently we have orders in hand already for those, and we'll be shipping over $1 million in this December quarter.

Operator

Our next questioner in queue is Alex Henderson with Miller Tabak.

Alex B. Henderson - Miller Tabak + Co., LLC, Research Division

A couple of quick questions on just the balance sheet and cash flow. So if you were to aggregate all of the CapEx and operating loss expenses that you're looking at, can you give us a quantification of how much cash out is necessary to get your footprint back underneath you? And then conversely, can you give us an estimate of roughly what the income -- cash income opportunities are from the variety of things you just pegged. So I mean is it $20 million out and $20 million in, $10 million out and $20 million in or vice versa? What does the balance look like?

Mark B. Weinswig

In terms of rebuilding our production line, currently, we are estimating those costs to be, could be up to about $6 million to $7 million over the next 9 months. Of those amounts, some of those will be paid for by our contract manufacturer, so that will lessen the amount of the...

Alex B. Henderson - Miller Tabak + Co., LLC, Research Division

Let's put that aside. Let's just focus on what the outs are. So $6 million to $7 million on the product line, how about on the inventory side?

Mark B. Weinswig

So at this point, we are looking at that it will probably cost us about $5 million to $6 million of disbursements in order to rebuild inventory line, to be able to continue shipping product.

Alex B. Henderson - Miller Tabak + Co., LLC, Research Division

How about on an operating basis in the interim, is there enough cash? There should be a fairly sizable loss from just operating without revenues in that business.

Mark B. Weinswig

I mean we haven't quantified that number. We're not going to quantify that number right now. We're still going through that. But I can tell you, Alex, that through the salary reductions, through the significant reduction in our discretionary spending, it will allow those other activities through the business interruption insurance that we're in the process of finalizing. We believe that, that will assist us in basically recovering most of those costs for the first quarter and maybe in the first quarter and a half. And so we think that, that will leave us in a position where the amount of the outflows will be minimized as a result of those actions that we've taken.

Alex B. Henderson - Miller Tabak + Co., LLC, Research Division

Okay. So let's look at the other side of the equation. How much magnitude you're talking about on all of the insurance combined? And are we talking about something in the $15 million to $20 million range?

Mark B. Weinswig

All we know, we're still working with our contract manufacturer on that. But just to give you some order of magnitude on the $5 million business interruption is our own insurance. The other insurance policy on inventory, our gross value on the books at the time of the flood was about $15 million, to give you some perspective. Now we have had some recoveries of those amount, as Hong mentioned in the script. But we still have a significant amount of complaints that we will be making on the inventory side.

Alex B. Henderson - Miller Tabak + Co., LLC, Research Division

Net 10-ish?

Mark B. Weinswig

That's the -- I mean that's kind of where we're going down. But again, we're still working on additional recoveries that might be made from the inventory. On the fixed asset side, while the net book value was not as high due to the fact that some of this equipment was either -- had been depreciated or items along those lines, the gross value of the inventory was quite high, up -- the equipment was quite high, upwards of even $30 million to $40 million.

Alex B. Henderson - Miller Tabak + Co., LLC, Research Division

So can you recover half of that?

Mark B. Weinswig

Our goal is to do whatever we can to recover the amount that we need to continue to rebuild our lines and put ourselves in the best position possible. So that's why we're working as closely as we are with our partner to make sure that we're able to maximize the proceeds.

Alex B. Henderson - Miller Tabak + Co., LLC, Research Division

It sounds like at the end of the day, you're looking at cost of cash out that's probably in the order of $20 million, but you're looking at recoverables that are considerably in excess of that. So this could be actually a net cash positive event?

Hong Q. Hou

Yes.

Mark B. Weinswig

Yes. I mean the only challenge we have is just the uncertainty with timing and obviously certain amounts. Insurance is one of those items where you have to work with them for a significant amount of time, and it's a lot of back and forth. So that's been the challenges...

Alex B. Henderson - Miller Tabak + Co., LLC, Research Division

So that brings me to the latter question, which is you said the net increase in your line of credit of $14 million, what is the aggregate amount of that line of credit including that $14 million that's not capped?

Mark B. Weinswig

The line of credit still remains at the $35 million it was before. But what we've done is we've done 2 different changes to the line. First of all, we've added in some additional assets. So for example, we're adding in our machinery equipment and real estate into that line, and that will give us up to an additional $10 million of borrowing capacity.

Alex B. Henderson - Miller Tabak + Co., LLC, Research Division

So the borrowing capacity is then $45 million?

Mark B. Weinswig

No, no, no. I'm sorry, on the $35 million we previously were not able to utilize the entire amount of the line because it was based on the amount of assets that we had for inventory and AR, so basically we're increasing the pool of assets that can be used to borrow again.

Alex B. Henderson - Miller Tabak + Co., LLC, Research Division

So the net borrowing capacity, $35 million now?

Hong Q. Hou

Still up to $35 million.

Alex B. Henderson - Miller Tabak + Co., LLC, Research Division

And that $35 million is net of the $17 million that's already drawn?

Mark B. Weinswig

Yes. $17 million is already drawn, so we have an additional, in a sense, additional $18 million of total capacity that we can draw on the line.

Alex B. Henderson - Miller Tabak + Co., LLC, Research Division

So just to mechanically put that in place, that $18 million is larger than the operating costs, the inventory and the product line costs that you're talking about absorbing. So even if you didn't have insurance, you'd be roughly able to cover your cash loss?

Hong Q. Hou

That's correct.

Mark B. Weinswig

That is correct.

Alex B. Henderson - Miller Tabak + Co., LLC, Research Division

And with the insurance on top of that, that gives you some buffers?

Mark B. Weinswig

Yes. I mean all these actions. I mean, Alex, I can tell you, I mean Hong and myself and the rest of the team we've been doing whatever we can to make sure that we've put ourselves in a very sound financial footing. And through all the activities that we've had over the last 2 months, we think we've put ourselves in a position where we can weather the storm and come out of it stronger on the back end.

Alex B. Henderson - Miller Tabak + Co., LLC, Research Division

Okay. The other piece that you mentioned was from cash flow was the prepayment. Can you give us a rough sense of what the prepayment number might look like in terms of cash in? $4 million, $5 million or $6 million, $8 million, or what are we talking about?

Hong Q. Hou

So yes. So this is for a specific product line, the ITLA for 40- and 100-gigabit coherent transponders and line cards. Because of our product uniqueness and the enabling capability, customers, they wanted to have a production capacity allocation. So for that reason, they are placing purchase orders, NCNR, they call it noncancelable, nonreturnable for the next 12 months demand, with typically between 20% to 30% of the proceeds prepaid. But in the meantime, many customers has -- voluntarily increased the price, the sales price by that amount. So we're not really mortgaging our future.

Alex B. Henderson - Miller Tabak + Co., LLC, Research Division

So we're talking about $40 million worth of orders and 20% of that coming in, so we're talking probably about $8 million or so of cash over the next 4, 5 months from that?

Hong Q. Hou

So I'm a little reluctant in giving you detailed numbers because this is a collection number.

Alex B. Henderson - Miller Tabak + Co., LLC, Research Division

Considering that the investment community needs to make sure that your cash flow is viable, I think you need to be as upfront as possible. If it's in the vicinity of $5 million to $10 million, that's a significant amount.

Hong Q. Hou

We're in the vicinity of $5 million to $10 million prepayment.

Alex B. Henderson - Miller Tabak + Co., LLC, Research Division

Okay. So that gives a lot of visibility then. So on a combined prepayments, the insurance, the line of credit, you easily cover your operating costs and other production line investments, correct?

Hong Q. Hou

Absolutely, absolutely. And also in addition to the ITLA product prepayment, we talked about the large CPV orders, our joint venture have secured, and they will be using our solar cells exclusively and they have made 35% of prepayment as well. So you characterized it, you're absolutely correct. Even say, with the uncertainty in timing and receiving the insurance proceeds and put it all that on the side, the increased liquidity from Wells Fargo credit facility plus the prepayment from our customers will be enough to not only provide a CapEx to rebuild the line, provide a working capital to replenish the inventory, but also fund the near-term in the next 2, 3 quarters, we'd still have a gap in revenue compared to our pre-flood level and the fund that lost for that part.

Alex B. Henderson - Miller Tabak + Co., LLC, Research Division

If I were to look out to the back half of calendar 2012 and look at the telecom piece, we've been expecting that the cable would be around $20 million and the telecom revenues were around $20-some-odd million. Is it all viable to get anywhere near that ballpark of revenues back? Or is that just way out of line with reality given how much you're taking a hit here in terms of availability?

Hong Q. Hou

The cable TV line, as you said, is about $20 million. We'll get to that level, and there's no doubt for it. And you have seen the strong momentum of the ITLA for 40 and 100 gig, we have been in the last 5 quarters, ranging from anywhere 22% to 32% quarter-over-quarter growth. And I think the purchase order commitment and the prepayment speaks for the strong demand in that product line as well. So I don't really worry about that in terms of the demand side. That's why our near-term focus is to get a fulfillment infrastructure rebuild. In addition to that, the tunable XFP will finally start generating significant traction and adding to the revenue in a meaningful way. So that will be a growth engine. So if we fast-forward 2, 3 quarters, I can see that we'll be getting to that level of revenues for Fiber Optics, over $35 million.

Alex B. Henderson - Miller Tabak + Co., LLC, Research Division

So essentially you're arguing that your customers have lined up behind you, that you've got better visibility on Solar, that your cable is fairly unique and defensible and that your ITLA and tunable XFP, which is the bulk of the forecast for the back half of 2012, anyway, should be fully up and ramped and has hard commitments at least for the ITLA piece to get you to the prior forecasts?

Hong Q. Hou

That's right, that's right. So Alex, needless to say, that has been our biggest concern. We now know, with time, we can rebuild the product line, production lines. But our biggest concern was customer will still be there when we have the capacity to manufacture, to deliver. And through this firm commitment, now we know that they will be there. And so that makes our job a little easier, just keep our head down to rebuild the production line.

Operator

Our next questioner in queue is William Stein with Credit Suisse.

William Stein - Crédit Suisse AG, Research Division

So it sounds like we've mostly put to bed the question about liquidity and solvency. Maybe we can talk about the cycle, in particular in the optical system cycle there's been so much discussion of upgrades to the 40- and 100-gig coherent systems. Can you talk about where you see the demand for those products relative to expectations prior to the flood, whether you think this is going to be a really significant growth year for your customers and demand. And then maybe talk a little bit about, if you can, the March quarter. You're giving December guidance, you're very end of the quarter, can you give us some thoughts on March?

Hong Q. Hou

Yes, okay. As for the 40- and 100-gig coherent system, I think we're still in the early stage of the ramp-up cycle. And as we have reported in the last 8 quarters, we have been able to experiencing average 25% of quarter-over-quarter growth. And finally in the September quarter, the revenue from that product line alone reached to $9 million. And right now the firm commitment provided by our customers currently is significantly higher than $9 million. And despite talking to them certainly -- initially it was not a pleasant conversation, they're all pretty upset about we've lost the capability of producing that. But they have been telling us through the last 2 months, this component is so critical for their systems and they have a much bigger plan to continue to ramp up. My understanding is this is mostly for the line side of system deployment. In the beginning, there are some system manufacturers are reluctant about this algorithm or architecture. But now there's no doubt, everyone is jumping on the bandwagon of the coherent system. So my feeling is this is only the beginning of the cycle, and even though we have enjoyed a pretty significant increase in revenue. So that's why we are very, very committed to work with our -- working with our suppliers on equipment side and to pull in the lead time, to shorten the rebuild cycle, and so that we can get back in business in that product line as soon, as quickly as possible. As for the guidance, the December quarter, you're right. We're a few days away from it. We gave the range, and we know that the Fiber Optics revenue at this point is mostly from the unimpacted product lines. For example, the Specialty Photonics business, the enterprise business and also the inventory where we are able to recover. In the March quarter, on top of this baseline level of the revenue, we expect the cable TV side to start ramping back in terms of production capacity because started from a couple of months ago, we have implemented alternative manufacturing plan using the limited capacity between our locations in China and in the U.S. to provide the product to the customers. In some of the lines, we can build backup faster. Cable TV lines, I think at the end of the quarter, in March, will be ramped up to full capacity, but the March quarter will not have the full contribution of the full capacity. So it's going to be higher than the December quarter. For the June quarter, we hope to -- well, we expect by the end of the quarter we will have all the production infrastructure to ramp up. And certainly from -- in the September quarter, we expect the full revenue coming back from the manufacturing infrastructure. No, I'm not giving you a definitive number, but that's the best I can provide at this point.

William Stein - Crédit Suisse AG, Research Division

Can you talk about what your capacity, what your total revenue capacity would be by, let's say, the end of the June quarter on a quarterly run-rate basis?

Hong Q. Hou

Yes. So our -- if every product line is running full tilt, we should be making about $50 million to $60 million revenue capacity for the Fiber Optics alone. But from that point on, we'll continue to see the market demand. And by spending incrementally and adding some capital equipment, at the capacity chokepoint, we should be able to increase capacity from that point on. So we're not going to be limiting at that level, but it all depends on the market demand.

William Stein - Crédit Suisse AG, Research Division

And then one final one before I get out of line. The orders that you've received from customers out until May with prepayments and the NCNR terms, any concern that, that's a pull forward of actual demand in order to get in line and get the product they want and make the commitments now versus a view that, that's real kind of in-line demand?

Hong Q. Hou

So first of all, the NCNR orders cover for 12 -- next 12 months. Secondly, if I have to say, the customer holding back a little bit, this and there only be upside than the NCNR -- you know the NCNR basically take or pay type of terms. So they would not commit more than what they know for sure. If anything, I would say, there are going to be upside compared to the NCNR commitment.

Operator

And we have time for one final questioner. Our final question in queue comes from Edward Zabitsky.

Edward A. Zabitsky - ACI Research

So I interpreted from your comments on the NCNR that when you do ship those -- when you do excuse me, record revenue on the ITLAs that you'll actually get better gross margins than you have now, is that correct?

Hong Q. Hou

Yes. So there's 3 pieces from that NCNR order. One is the long-term commitment. The second is increased ASP and the third is the prepayment.

Edward A. Zabitsky - ACI Research

Increased ASP in the Optics business, cool.

Hong Q. Hou

This is hasn't really unprecedented, but really we are working with our customer to accelerate the buildup of the line.

Edward A. Zabitsky - ACI Research

That's good. And I agree. Obviously it says that the product is critical, and you're critical to them. So I'm wondering without getting specific to individual customers, how are the equipment vendors going to cope over the next 6 months without EMCORE delivering ITLAs, and specifically when it comes to the coherent market?

Hong Q. Hou

So that's why we said fortunately that we're able to save a significant portion of the inventory before the floodwater got onto the floor, and this part we lucked out in a significant portion. Now this saved inventory are for ITLAs. So we are using the currently limited inventory to serve the near-term demands of our key customers.

Edward A. Zabitsky - ACI Research

So what are you doing? Are you moving the ITLA inventory to another location to build?

Hong Q. Hou

Yes. So the impacted facility in Thailand have 2 stories. When the flood happened, they're building barricades, so levy around the facility. And they suspended operations. We have like several times a day communications, so we instructed our contract manufacturer to move the lighter equipment, especially the inventory to the second story of that facility. So even though process equipment and test equipment, most of them are submerged in the water, and the inventory was in a safe place on the second floor. So when they were able to get into the facility and they moved their inventory into a dry land, and then we revalidate, retest those inventory, confirm they're good, reliable, and we'll ship to the customers.

Edward A. Zabitsky - ACI Research

But so what's the timeframe for shipping? Is there -- isn't there a pause period where there's not enough product?

Hong Q. Hou

We're doing right now even though with a limited amount that we are allocating to our key customers.

Edward A. Zabitsky - ACI Research

Okay. So they're going to be short basically for the next 6 months, though?

Hong Q. Hou

They're going to be short, but they're utilizing this product for the most critical system delivery.

Edward A. Zabitsky - ACI Research

Sure. Now do you expect that they would get this product from competitors? Or even given -- of course, they're committing to you as a long-term supplier, but this is giving share to competitors in the short run.

Hong Q. Hou

This certainly provides a better opportunity for our competitors to get in. I think they may not have a supply issue but they do, from the conversations we have with our customers, have performance issue. So how well can our customers cope with the performance of their product from our competitors, we are not entirely clear that -- we are very assured that for high-end product, they cannot use -- our customers cannot use what they can get from other people.

Edward A. Zabitsky - ACI Research

So they're going to be really specific by application, whether they're going to use a competitor's product. In other words, how precise they need to be, how long the line distance is?

Hong Q. Hou

Yes.

Edward A. Zabitsky - ACI Research

Okay. So one last question -- actually, sorry, 2 last questions. One is on what you expect OpEx to be this quarter and maybe sort of a direction for next. And further, I wanted to talk about the broadband business, there was a decline you mentioned, what was the cause of that decline? Do you think it has something to do with the transition to full band QAM?

Mark B. Weinswig

So on the broadband business, the major reason for the decrease quarter-to-quarter was in Q3 we had -- so first of all, our video systems business has been significantly increasing over the last 1.5 years. To give you an idea, in 2010, our revenue was about $3 million. In 2011, we more than doubled it. The Q3 period was a record level for us. We -- actually it was more than, say, 2 quarters combined. So in Q4, our revenues did decline in that business but was still up significantly from a year-over-year basis. So that was one of the major areas on the broadband area that led to the decline quarter-to-quarter. In terms of kind of OpEx levels, in terms of what we expect to see for the first quarter, first fiscal quarter, we expect our OpEx levels to be down quite significantly, mainly due to the cost-reduction measures in terms of salary reductions, furloughs and other discretionary spending cuts that we've been doing. So we do expect to see a decline on those expenses quarter-to-quarter.

Edward A. Zabitsky - ACI Research

So what's the range we can expect?

Mark B. Weinswig

I mean to give you an idea, we did implement a 20% pretty much across-the-board pay cut for the company.

Hong Q. Hou

And also going forward, the operating expenses should be pretty clean. We don't have any open issues about litigation or settlement. It was in the last year. This number has gotten skewed in different quarters by those one-time nonrecurring events. But as Mark discussed, the reduction in discretionary spending and salary will contribute to the reduction in this current quarter in OpEx. But that will not be a continued trend going forward.

Edward A. Zabitsky - ACI Research

Okay. And sorry if there's one more question. The TXFP shipments. How many customers did you ship to in this quarter? Let's say, we've been quoting tier 1s, so how many did you ship to in the December quarter?

Hong Q. Hou

December quarter, I will say primarily to 7 customers.

Operator

And again that does conclude our time for questions. I'd like to turn the program back over to management for any closing or additional remarks.

Hong Q. Hou

Well thank you very much for dialing in today. The management is scheduled to present at the 14th Annual Needham Growth Conference in New York City on January 12, so we look forward to seeing you there. I'll give you an update next quarter. Happy holidays. Thank you.

Operator

Thank you, gentlemen. Ladies and gentlemen, this does conclude today's program. Thank you for your participation, and have a wonderful day. Attendees, you may now disconnect.

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