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EMCORE (NASDAQ:EMKR)

Q2 2012 Earnings Call

May 03, 2012 4:30 pm ET

Executives

Victor Allgeier -

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

Hong Q. Hou - Chief Executive Officer

Analysts

Edward A. Zabitsky - ACI Research

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

Stephen Koffler

Operator

Good day, ladies and gentlemen, and welcome to the EMCORE Second Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded.

I would like to turn the conference over to your host, Mr. Vic Allgeier. You may begin.

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 current 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 or our financial performance, and are subject to business, economic and other risks and uncertainties, both known and unknown, that may cause actual results to be materially different from those expressed or implied by any forward-looking statements, including, without limitation, the impact on the company, our customers, our suppliers from the effects of the floods in Thailand and consummating the asset sale transaction with Sumitomo, including the likelihood of obtaining regulatory and other necessary approvals to consummate the transaction.

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 report 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, everyone. Today, I'm going to focus my discussion on our second fiscal quarter operating results and our balance sheet. Please note that the effect of the reverse stock split is reflected in our share and per share amounts.

Consolidated revenue for our second fiscal quarter totaled $37.8 million, which is an increase of $0.3 million or 1% over the previous quarter. The increase was primarily due to higher Fiber Optics revenue, partially offset by a reduction in our Solar business. Our Q2 revenue guidance was $38 million to $40 million.

On a segment basis, our Photovoltaics business accounted for $15.8 million or 42% of the company's total revenue. This represents a $3.3 million or 17% decrease from the prior quarter. As we've said previously, while we believe in the long-term growth prospects of this business, our revenue in any given quarter may be a bit lumpy as illustrated in our last couple of quarter results.

The Fiber Optics segment accounted for $21.9 million or 58% of the company's total revenue. This represents an increase of roughly $3.6 million or 20% from the prior quarter, with the increase primarily from our initial recovery efforts after the flood in Thailand. Hong will discuss the prospects of the Fiber Optics business later in the call.

Consolidated gross margin was 14%, a 5 percentage point increase from the prior quarter, primarily attributable to the recovery in our Fiber Optics segment.

On a segment basis, Photovoltaics gross margin decreased 1.8 percentage points to 20.9%, as we were unfavorably impacted by the lower revenue base. We believe that this segment can reach gross margin targets of 30%.

Fiber Optics gross margin was 9.4%, a 14 percentage point increase from the prior quarter, primarily due to higher revenue and lower excess and obsolete charges. In the first quarter, the company recognized expenses of approximately $2.4 million, primarily from additional excess and obsolete charges and losses on outstanding purchase commitments relating to the Thailand flood. We expect our gross margins in our Fiber Optics segment to continue to improve in future quarters. After we complete the rebuild of the manufacturing lines damaged by the flood, we will begin to lay out the operating targets for the Fiber segment.

Operating expenses were $14.2 million, excluding the flood-related charges. It's important to note that at the end of January, we removed the compensation-related reductions that were previously implemented. We believe that our operating expenses will increase in future quarters as we focus our R&D resources from the manufacturing rebuild to new product development and product support. We recorded a flood loss of $0.1 million in the quarter related to our Fiber Optics segment.

For our Solar CPV joint venture, Suncore, we recognized an operating loss of $0.2 million for the quarter. Hong will discuss the Suncore strategy and opportunity in more detail.

On a GAAP basis, the consolidated net loss for the quarter was $9.3 million, $5 million better than the prior quarter. We believe our results will continue to improve in future quarters as we rebuild our Fiber Optics manufacturing lines and increase our revenues in our Solar segment. Our GAAP net loss per share was $0.40.

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 $3.4 million versus a $5.1 million loss in 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 on to 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. At the end of the quarter, the company had a Solar order backlog of approximately $55.7 million, an increase from $51.7 million in the prior quarter. The increase was driven by our Satellite Solar business.

Shipments in our Fiber Optics business are still gated by our manufacturing capacity. We have more order backlog than we can fulfill. Therefore, we are not using backlog as a measure of the strength of our Fiber Optics business at this time.

Moving on to the balance sheet. At the end of the -- as of the end of March 31, the company's cash and cash equivalents was $25.3 million. Our net cash decreased significantly from the prior quarter, primarily due to increased inventory levels to meet the ramp up in production, equipment purchases associated with our Fiber Optics production line rebuild and operating losses.

On March 27, we announced the intent to sell the VCSEL-based product lines to Sumitomo for $17 million subject to certain adjustments. The results of these products are included in our results for the March quarter. The revenues in the March quarter associated with these products was $4.3 million. We believe that the sale of these product lines will improve the company's immediate bottom line results. We expect to have the transaction closed within the next week.

Regarding the insurance recovery for the flood damage, EMCORE received $5 million to its own carrier in the December quarter. We are working with our contract manufacturer and their insurance carriers relating to the consigned inventory and equipment that was damaged. While the amount and timing of those receipts are uncertain, we are working to maximize our recoveries. Any future receipts of proceeds will be accounted for as a gain.

Over the past few months, we've made significant strides of recovering from the Thailand crisis. We look forward to showing the results of these actions over the next few quarters.

With that, I will turn the call over to Hong who will discuss the recovery from this flood in Thailand, the company's strategic and operating initiatives and provide revenue guidance for the third quarter.

Hong Q. Hou

Thanks, Mark. Good afternoon, everyone. As Mark discussed, we achieved consolidated revenues of $37.8 million in the March quarter, slightly below our guided range. This represents a slight sequential increase due to 20% increase in Fiber Optics revenue, partially offset by a decrease in Solar revenue due to push-outs of a major Solar sale order from an international customer.

The consolidated sales margin increased to 14.2% from 9.3% in the prior quarter due to improved operational efficiency and the recovery from the Thailand flooding. Gross margins improved sequentially in the Fiber Optics segment and decreased slightly in the Solar segment.

Now let me discuss the current market dynamics and our position in each of the major business areas. First, I will start with the Solar Photovoltaics business segment. As we have discussed previously, the revenue in our Space Photovoltaics business can be somewhat lumpy due to the timing of program completions and product deliveries of major orders.

In Q2, we experienced a sequential decline of approximately $3.3 million revenue in our Solar business segment, primarily related to a significant shipment for more than $4 million in revenue we were expecting to make to an international customer in the March quarter. Unfortunately, due to the delay with their customer's demand, our customer notified us that they needed to delay delivery of our solar cells. It is important, however, to note that we still expect to ship this order in the latter part of 2012 and recognize that resulting revenue at that time.

In spite of the temporary decline in revenue of the Space Solar division, the fundamentals of the business remain very robust, and outlook for our space programs and revenue is very promising. We recently announced a $6 million contract from Ball Aerospace, which represents an expansion of our customer base in the aerospace industry. With this award, EMCORE continues to cement its position as a primary supplier of space solar cells and solar panels to all major aerospace companies who purchase solar products externally. In addition, we were selected to supply solar panels to 2 separate NASA missions recently, and we're expecting several other space solar panel contracts to be awarded to EMCORE in the next quarter.

Lastly, there are several multimillion dollar, multiyear contracts that we expect to be awarded this year, and I look forward to discussing this with you in the near future. With all of these, we continue to be very excited about our competitive position and expansion of our Space Photovoltaics business.

Due to the increased demand from space programs and terrestrial CPV solar cells from both Suncore and other customers, we project a significant increase in demand of the wafer volumes going through our solar cell fab over the next several months. We have been adding capacity, and some of that operational expansion has been completed and ready for the ramp up.

Regarding complete solar panels, our program backlog and pipeline are filling up the capacity of our manufacturing lines as well. These programs will allow us to better utilize our solar panel production capacity and provide additional positive leverage on our margins. Furthermore, we will be adding new test capabilities, including thermal cycling for solar panels, so that we can reduce the total cycle time and reduce the cost of our products.

Now let me give you an update on the recent developments regarding our CPV joint venture and our terrestrial CPV business. Our CPV joint venture in China, Suncore Photovoltaics, has established its high-volume manufacturing capacity in its new facility in Huainan City, which had a targeted capacity of 200 megawatts of CPV modules per annum. Suncore commenced the production in February for the 50-megawatt CPV system order. Thanks to the establishment of its manufacturing infrastructure and engineering team, Suncore is pursuing very aggressive cost reduction points while also producing products to meet these large purchase orders.

Regarding deployment of CPV in the U.S., well, it has been challenging to secure project financing in the current economic environment. EMCORE has closed a project financing for a 2-megawatt distributed generation solar project in Albuquerque. Construction will start in early June, and the project is expected to be completed by the end of this calendar year.

Regarding our improved CPV design for commercial rooftop applications, we have entered into the qualification and certification phase, and expect the general availability by the end of September for the newly designed low-cost rooftop CPV product. With the advancement of solar cell technology and an improved convergent efficiency, we have improved the cost structure of our product significantly. We still firmly believe that CPV will be a market player for certain applications as its adoption continues.

Now let me discuss our market position and business outlook in our Fiber Optics business segment. The Fiber Optics revenue increased approximately 20% to $21.9 million from $18.3 million in the December quarter. And the gross margin improved significantly from negative 4.8% to 9.4% this quarter, as we've started recovering from the flood-impacted manufacturing infrastructure.

In line with our expectations, the manufacturing capacities for cable TV, laser modules and transmitters were fully established as of the end of March, and the products from the new manufacturing line are being qualified by customers. The primary manufacturing location is our facility in China, and we continue to use our plant in the U.S. while we're ramping up the capacity. And our site in China, we are ramping up the capacity and increasing the throughput every day and expecting to reach full production capacity this quarter, as originally scheduled.

At the same time, we are focusing on the recovery plan. We continue to introduce new products and to secure customer wins. Most noticeable in the quarter were the win for our QAM product with a major CATV equipment manufacturer.

In the March quarter, we continue to experience a very strong demand for our RFoG and FTTx PON transceiver products. The market drivers for these products are to provide an innovative last mile fiber optic solution in the traditional hybrid fiber collection network and the government broadband initiatives.

The review for ITLA launch of narrow-linewidth lasers for coherent 40- and 100-gigabit transmission application at our contract manufacturer's facility is going very well. The line was up and running in early March, about 3 weeks ahead of the original schedule. The products produced by the new line helped pass a key Telcordia qualification requirement. Customers are completing their qualification and starting to take shipments. We continue to build backlogs and expect this business to start ramping back up in this quarter. During the September quarter, we should be running to the pre-flood levels.

Our customer base continues to view our ITLA as the laser of choice due to its performance as our products offers an extremely narrow-linewidth enabling solutions for 40- and 100-gigabit per second coherent applications. This is evidenced by some major system integrators requiring their suppliers to use EMCORE's ITLAs in their coherent transponder and LAN card products.

We're continuing to improve our technology advantage through a new product introduction. The newly-designed micro-ITLA, which provides superior performances with enhanced functionality in a much smaller form factor, is now being sampled with some key customers. The early feedback from customers have been extremely positive. We will be going into Telcordia qualification this quarter and planning general availability in 2012.

Regarding the Tunable XFP line, the reboot of our capacity is going as planned. We expect the production capacity to be fully established as our contract manufacturers facility by the end of June, with volume shipments starting in the September quarter. We have qualified 3 additional telecom customers with this product, bringing the total number of design wins to 13.

In the current quarter, we experienced component shortages arising primarily from Thailand flooding. As a result, our shipments in the March quarter were flat compared to the December quarter. We have since resolved the component shortage problem and expect significant business growth after we establish manufacturing capacity next quarter as customer demand is very healthy.

Regarding our other product lines, including video transport, RF and microwave for satellite communications, specialty photonic systems for homeland security applications, the business looks quite healthy. Revenues from this product line were not impacted by the flood, and we have seen strong increases in bookings for some of these product lines.

The business in our enterprise product lines, which include our VCSEL components, parallel optic modules and active optical cables, did well. The revenue contribution from this product lines in the March quarter were approximately $4.3 million.

As announced on March 27, we entered into a definitive agreement to sell the VCSEL-based component and module business to Sumitomo Electric Device Innovations USA. The consideration for this sale will be $17 million in cash, subject to certain closing adjustments. The assets to be sold including fixed assets, inventory and the intellectual property for the VCSEL-based product line including the total optical transceivers and active cables, as well as the VCSEL fab located in Albuquerque. EMCORE will retain all the rest of the Fiber Optics product portfolio, which includes our indium phosphide-based lasers, photodiodes and modulators, telecom and cable TV fiber optics products, fiber-to-the-home transceivers, video transports and Specialty Photonics products.

The decision to sell the VCSEL-based product line is strategic and market-driven. This divestiture will greatly simplify our operating structure, reduce fixed cost and improve market focus. This sale is also expected to reduce the time to reach profitability. Our core competency is in compound semiconductor-based products and performance capabilities remain the cornerstone of our Fiber Optics business. Our retained products and technology portfolio is strongly aligned to support current and future requirements in tunable, coherent high-speed transmission systems and next-generation broadband architectures. The proceeds from the transaction bolsters our balance sheet, improves our ability to invest in telecom, broadband and specialty photonics products to remain industry leaders in this respective product line in our Fiber Optics business segment.

We are getting an approval from the Committee on Foreign Investment in the United States or CFIUS, and we plan to close this transaction next week. Sumitomo plans to continue the VCSEL fab operations in Albuquerque and rent building space from EMCORE. This helps us to reduce our fixed cost. Concurrently, Sumitomo has entered into several ancillary agreements with EMCORE, including a transition service agreement to ensure a smooth business transition.

Over the past quarter, we purchased needed equipment for rebuilding the production lines and replenished the inventory pipeline. As a result, we consumed significant cash in the March quarter. We expect the cash flow from operations will be trending much more favorably going forward. We are still working with our contract manufacturers and their insurance carriers on the insurance claims related to the equipment and inventory damaged by the flood. Significant proceeds are expected, although the timing and amounts are still unclear.

Turning to guidance for the third quarter of the fiscal year 2012 ending June, we expect to have revenues in the range of $38 million to $41 million. If we had included the contribution of VCSEL-based revenues which are being sold to Sumitomo for the entire quarter, our revenue would be in the range of $42 million to $45 million.

The primary contribution to the sequential revenue increase is the further recovery of Fiber Optics production capacity and the higher shipment from our Solar business.

Just in summary, we have completed the product strategic realignment in our Fiber Optics segment post-flooding. The remaining business represents the latest technology in the fastest growing area. We are recovering from the flood impact as evidenced by the 20% sequential revenue increase in the March quarter and a 10% to 20% additional recovery guided for this quarter.

Booking is strong and the recovery is on track. In our Fiber -- in our Solar business, the market outlook is very promising, and we are poised for a strong growth in the latter part of this year. As our operation model becomes simpler, we plan to provide more guidance on revenue and margins from next quarter on.

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Edward Zabitsky of ACI Research.

Edward A. Zabitsky - ACI Research

I wanted to ask you guys a few questions. First of all, I might have missed it but the -- first of all, I want to congratulate you on really focusing your company down on what it does best. I think the Sumitomo transaction's fantastic for you guys. Second of all, I just wanted to ask you a couple of questions, one on the TXFP business and the second one on OpEx post-transaction. So I wanted to know what the revenue was in the quarter and then OpEx was self-explanatory.

Mark B. Weinswig

So on the Tunable XFP revenues, our Tunable XFP revenues in the quarter were $1 million, which was flat with the prior quarter. As Hong mentioned in his remarks, we did have some supply constraint issues and therefore, this quarter was a little bit below our expectation from the Tunable XFP revenue, but we do expect some additional growth going forward. And then regarding the OpEx, so post-transaction, we do expect there to be a significant reduction in our OpEx levels after the Sumitomo transaction is closed. We do expect that to happen by the end of -- within 1 week's time. At that time, we'll be able to kind of give you a little bit more feedback in terms of what it's going to mean for us. Just to give a little bit of clarification of what the transaction is for EMCORE, it will include the transfer of employees. It will also include the fact that we will be subletting some of our facility space, so that we'll also have some other additional fixed cost reductions as a result of the transaction.

Edward A. Zabitsky - ACI Research

Okay. So just to go back on to the TXFP business. Now can you give us a sense as to what the demand was, how much you could have shipped if you were able to, if you didn't have those shortages during the quarter?

Hong Q. Hou

We could have shipped 2 to 3x of the revenue we actually achieved, so $2 million to $3 million if we were not this component constrained in the last quarter.

Edward A. Zabitsky - ACI Research

Okay, very good, but, obviously, a lot better and probably what we expected or better. So what is the -- what's going to be the impact in terms of your cost and in terms of gross margins of moving that over to contract manufacturing?

Hong Q. Hou

So yes, that's a good question. Currently, we are making the Tunable XFP in our Bay Area facility even though it's qualified with multiple customers. We have the balance, the run off and also the cost. And as you know, the Bay Area is not the most cost effective. So when we get the full capacity established at contract manufacturer, we expect the gross margin to be improved by about 15% to 20% compared to what we manufacture in the Bay Area.

Edward A. Zabitsky - ACI Research

Okay, that's very helpful. And what's the timeframe for that, please?

Hong Q. Hou

So the full capability will be established in this quarter by the end of May and to mid-June timeframe. But then again, we'll be right through the line and sending the samples to customers and do the necessary qualification. We expect the full capacity to be established in the September quarter.

Edward A. Zabitsky - ACI Research

Okay. So does that mean -- so that means that basically the -- it will fully show itself in the results in the September quarter?

Hong Q. Hou

So yes, the September quarter really is going to be a production from both the Bay Area facility and our contract manufacturer. But the December quarter is going to be purely from contract manufacturer.

Operator

[Operator Instructions] Our next question comes from Alex Henderson of Miller Tabak.

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

So just to quickly clarify what I thought you just said on the Tunable XFP production. Did you say it was fully out of the contract manufacturer in the September quarter? Or did you say it would be partially out of this contract manufacturer in the September quarter because I thought you said both?

Hong Q. Hou

Yes. The possibility, the September quarter, we'll be having the production facility in the Bay Area continue to produce and ship. In the December quarter -- that's the September quarter. In the December quarter, we don't need the Bay Area facility anymore. It's not because in September quarter the capacity at the contract manufacturer is not enough, it's because of the customer cut over some -- they go a little slower than the others for qualifying the product produced in Thailand.

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

Great, that helps. So in the guidance that you gave for the upcoming quarter, you had a pretty big variance in the March quarter in Solar. Are you assuming that the $4 million that slipped out comes in the June quarter or in the September quarter or back half? What -- how should I be thinking about that? And could you give us any sense of what the split you would be expecting between those 2 in the June quarter?

Hong Q. Hou

The June quarter revenue were not counting on this deferred shipment, so that's likely to be the event in the December quarter. And so the Solar revenue is really based on all the backlog we have already in the book so we're producing according to those firm backlogs, but it was not counting on this delayed shipment.

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

So you have been running $19 million a quarter, $20 million a quarter kind of run rate. You missed by $4 million relative to this order. Should we be thinking $19 million to $20 million run rate per quarter excluding that in the June, September quarter or is there some other variance that we should be anticipating?

Hong Q. Hou

The June, September quarter, we're probably running at a level of $17 million plus/minus. Then the significant ramp up is going to be happening. There's number of programs, all going to be hitting us in the December quarter pretty strong in both from solar cells side and also solar panel programs.

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

So the 40% increase in backlog through the December quarter is still going to be deferred out into the December timeframe because it's about 1 year from the time you built the backlog to when you realize the revenues on that, is that the right way to think about it?

Hong Q. Hou

Yes.

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

Okay. And then on the ITLA side of the business, which you talked about Tunable XFP and ITLA being the predominant piece of flux in telco, I assume that you're expecting those final customer evaluations back imminently, and you've got the production up. My sense was that the yield on that initial production was pretty good up in the 70%, 80% range. So I would think that you'd be able to start to deliver pretty aggressively against that in the June quarter with, obviously, with full ramp up not happened until September quarter. But am I right in thinking that sequentially, there should be a pretty good increase there?

Hong Q. Hou

Yes, this June quarter, we're going to be seeing all the ITLA revenue are from the line we've produced and from the new line we produce. This quarter, the March quarter, we're talking about ITLA revenue was from the inventory we rescued before the flood got into the floor. So you're absolutely right. We are starting the production and the -- we're loading the production line very aggressively, and most of the customers has already signed off based on our qualification results. Right now, this quarter is going to be the most intense ramp up for ITLA.

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

Now my sense is that there's a little bit of a lag from the time that you guys got qualification on your testing and when the customer qualification came back. Are you producing product in anticipation of them passing it so that you already have built some inventory into that qualification acceptance?

Hong Q. Hou

Right, absolutely. We are building the risk inventory even when we are very confident the product is qualified because we have finished the selected Telcordia qualification requirement as we defined it with customers before we entered into the qualification test. But some customers are still -- will be doing the system validation test, but again, between -- before they take the product, we are loading the inventory and the work in the line and do the risk build.

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

I assume that you're not running full multiple 2.5 shifts against a risk build. So are we running what 1, 1.5 shifts here at this point?

Hong Q. Hou

We're running probably like in 60%, 70% of the full tilt. You have to balance the risk you're taking and also the reward you're getting when the floodgate is opened.

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

Okay. So you're building in front but you're not at full capacity. You're going to get those orders in. By the time we get out of the quarter, will we be running at full capacity on multiple shifts?

Hong Q. Hou

Right. We're just waiting for the high sign from the customers. We get orders from them, and right now, the ITLA firm orders is over $25 million, that product line alone. The orders are not a problem. It's just the customer's system validation testing, we got a number of them giving us the high sign already, so yes, that's where we're at.

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

So as you are producing the product in the March quarter, did we absorb a bunch of excess inventory that the initial product coming off the line that we had to expense through the system? Is there a net that we can estimate how big that was during the quarter?

Mark B. Weinswig

Yes, Alex. We actually -- most of the units that we actually produced in the March quarter were really just sampling units, so we didn't really have full production during that time. As Hong mentioned, really right now is the time where we're really starting to ramp up with about 60% of the capacity being utilized today for the ITLA products.

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

Okay, I get it. Over on the cable side, and I apologize for the longer list of questions here, but the cable side there, can you give us some sense of what this quarter-to-quarter progression looks like in cable and what you're thinking as we go into the June quarter into the cable piece?

Hong Q. Hou

Yes. So the cable production capability is fully established by the end of March, and that the production infrastructure was reviewed in our wholly-owned subsidiary in China. And right now, we are also in a similar phase. We've produced products with a new line in sending to customers for qualification. In the meantime, we conduct internal qualification as well. And the product is qualified from internal testing, and it's also being signed off by a number of customers. So this quarter is basically ramping up the production, and we're doing the same strategy at the risk build even when some of the customers still going through the qualification testing. We expect by the end of June, we should be reaching the full capacity for the cable TV production.

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

So that would put you back to the pre-flood revenue levels. Can you talk a little bit about what the demand's doing on that side of the equation? Heard from a number of companies that the cable end market demand for CapEx is a little bit more resilient than the Tier 1 service provider market. Is that an accurate read relative to what you guys saw?

Hong Q. Hou

You're absolutely right. You're absolutely right. So we sit here -- well, we have been following the multiservice operators and their CapEx spending. We have also been following the cable TV equipment manufacturers. In the worst case, you know CapEx is flat quarter-over-quarter but in a couple of better cases, they have been increased by about 10% quarter-over-quarter. So we are pretty optimistic. As Mark mentioned, we have very healthy backlogs. But right now, we just don't have enough capacity to meet the customer requirement. I think the demand side so far just looks very robust.

Operator

Our next question comes from.

[Audio Gap]

with ACI Research.

Edward A. Zabitsky - ACI Research

I wanted to go back to the ITLA product line. Obviously, your micro-ITLA, I think you said Telcordia qualification is about to happen. And just wondering if you have any design wins at this point or measures of customer interest you can speak about?

Hong Q. Hou

Yes. So the process of new introduction is we design utilizing our secret sauce and the best technology, then we send it to customers for sampling and soliciting their feedback in the performance of the -- in their systems. We have done that. And now, we've got, as I've said, very, very positive feedback, so we basically get it all buttoned up and finalize the design and building samples for 9 legs of different Telcordia qualification requirements. So the building of those core samples is happening right now, and in this quarter, we'll start the Telcordia qualification. Again, this same platform we're going to be using the external -- based on our external cavity lasers. Expect some of the customers is going to be start taking sample -- start taking the product earlier than others. But from strictly design win point of view, we sampled to a few customers, they all like to have this product as quickly as possible but we would not be having the production ready shipment to them until the later part of this year because of Telcordia's qualification cycle.

Edward A. Zabitsky - ACI Research

Right. So obviously, you really have a great performance advantage in the long-haul market, and I guess ultra long-haul and submarine. Just wondering is that translating into a similar kind of interest in your micro-ITLA as there was in the ITLA when it came out?

Hong Q. Hou

Absolutely.

Edward A. Zabitsky - ACI Research

Okay. Good, good. So I was wondering about the timing of cash from Sumitomo. Will that close -- will that cash come when the deal closes?

Mark B. Weinswig

Yes. It will be -- for the question the day after the transaction closes, we should expect to receive the funds minus certain customer adjustments regarding inventory and other asset levels. And then in addition, there is also an escrow that would be set up. So we expect the net proceeds would be less than the $17 million figure, but most of those differences will be held basically in escrow for a period of time.

Edward A. Zabitsky - ACI Research

Right, good, okay. And on insurance proceeds, have we seen all -- have all the insurance proceeds hit the balance sheet or are we going to see more?

Mark B. Weinswig

We received $5 million in cash and checks in the December quarter. We are, as we talked about briefly in the script, we are also expecting to -- we're working right now with our contract manufacturer in terms of the inventory and the fixed assets that were damaged as a result of the flood, and we hope to -- we're working with them in terms of submitting claims and also resolving those -- their claims so that we can receive our monies from those damages. And in terms of timing, the timing of insurance is always tough especially when it's insurance that we don't -- that's not in our name. So it's going to take a little bit of time, but we do think we're on a very positive path.

Edward A. Zabitsky - ACI Research

Okay, very good. Just shifting back to the PV business for a minute. When do you do -- when did you say you expect to see some higher volumes that we -- is that just -- with higher volumes, is that just associated with the program sitting in Q4? Or was that associated with demand from the CPV joint venture?

Hong Q. Hou

Yes, it's primarily from the Space Solar programs, and as I talked about, the end market demand is very healthy. A number of programs is going to be start hitting us from the December quarter on. So we, based on the outlook, we see this sustainable strong demand start from the December quarter primarily from the space programs. The terrestrial CPV will have the demand from Suncore, the 50 megawatts right now we're producing for them, and we also have other customers demand but the line was loaded primarily for Space programs.

Edward A. Zabitsky - ACI Research

Right. So looking forward, let's go to the December quarter and assuming you get this large volume of orders, what kind of gross margin is that business looking at and also factoring, of course, the new test equipment? Just can you give us a sense as to what that will do to gross margins in that business?

Mark B. Weinswig

Yes. So Ed, on the gross margin side for the Solar Satellite business, if you look historically over the last couple of years, our gross margins in that business have averaged between about 25% and 30%. We do expect that with the volume levels that we're talking about, that we should be able to get close to that 30% level, which is our gross margin target for the Space Solar business.

Operator

Our next question comes from Stephen Koffler.

Stephen Koffler

I was thinking here about potential market share shifts which are -- often happen in situations where everybody's capacity constrained following exhaustion of shock like we had. So I mean, I'm just looking at some notes in JDS Uniphase earnings report, they have Tunable XFPs, as you know, stated $23 million. I honestly don't know who you compete with in the ITLA. But I'm just wondering, as probably the smallest or one of the smallest competitors in the segment, what do you think is the potential of market share losses? And that when the high signs you're waiting for may not materialize because a bigger player got in there, got some of the capacity that was needed? You see where I'm going. I just -- I want to think about what could be down the road in terms of somebody -- a bigger player getting some business that should have been yours but just wasn't.

Hong Q. Hou

So that's a very good question. The ITLA, we have a commanding share before the flooding, and we have virtually every equipment manufacturer have our products designed as a primary supply in their LAN card and transponders. When we were hit by the flood and the supply became constrained, that certainly opened up opportunities for our competitors. But we have been constantly getting comments and getting requests from our customers. Basically, they said they tried all products in the market, ours has absolutely performed head and shoulder above, anything they can get, and they wanted to have our line up and running as quickly as possible. So we can't really control what other people do. We will just focus our own rebuild effort and, as I said, we are 3 weeks before ahead of the schedule. The customers are extremely happy about that, and I think if we lost any market shares in the past, we will be able to get them back pretty quickly as soon as we get the capacity established.

Stephen Koffler

Okay. Have you asked for take-or-pay contracts on these products? Is that something you're in a position to at least ask for?

Hong Q. Hou

Right. Yes, absolutely. We had that, we reported in the last quarter over $23 million take-or-pay on NCNR contract, noncancelable non...

Stephen Koffler

Okay, I wasn't -- so much information came over this Thailand situation, I didn't -- I missed that. That's great that you got that. So I mean, this visibility you're talking about being able to do double or triple, does that -- do you have that kind of visibility in terms of take-or-pay on the key products?

Hong Q. Hou

For Tunable XFP, I was answering you if we were not limited by this key component in their March quarter, we would do 2 or 3x of the revenue. That's have the more competition, but we have healthy backlog to deliver that level of the product revenue. So going forward, we're ramping up the capacity. We continue to expand our customer base. We expect Tunable XFP will do well as well.

Stephen Koffler

And let me just ask one more question on this, just to quantify in a simple way. What remains in the entire division in the Fiber Optics, what remains, orders in terms of take-or-pay in dollars?

Hong Q. Hou

So the ones take-or-pay, I think we are in the strongest position to do that is ITLA, let's say, for the narrow-linewidth for 40- and 100-gig coherent system. And I can say it is over $25 million.

Stephen Koffler

Over $25 million is orders on a take-or-pay basis?

Hong Q. Hou

Yes.

Operator

We have a follow-up question from Alex Henderson of Miller Tabak.

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

Since we're talking about the take-or-pay contract, could you remind me what the metrics were on how much of that was prepaid because I know that you got money in front -- upfront on that. What portion of the full year was covered by those contracts? And it sounds like you're actually having a better response. Are you expecting that you'll end up essentially with fulfillment into the first half of fiscal next year on those take-or-pay contracts? And what was the price differential? I know you said your pricing was higher on these fill-in orders.

Mark B. Weinswig

So out of the $25 million that Hong was mentioning, we received a prepayment of about $6.5 million, so roughly 1/4 of that figure we had as a prepayment. And then in addition to your other question, in terms of being able to fulfill that, I mean, as Hong mentioned, as we start going into the later part of this year, we'll be up in full capacity, and by full capacity prior to the flood, we were at a capacity level of doing $10 million or more a quarter in ITLA business. So we have a -- once we get that product line back up and running at full volume, we'll be able to reach those limits, if not more as part of this -- as part of all the work that we did in association with the rebuild, we've actually increased our capacity level so that we can actually meet our customer demands. I think you kind of talked a little bit about it before, but we really see such a strong growth in 40- and 100-gig coherent that we just looked at this as an opportunity to expand our capacity to make sure that we can meet the growing demand that we're seeing.

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

So the pricing on this was higher. If I recall, it was something in excess of 20% higher on the product that you've got in backlog?

Mark B. Weinswig

Yes, it was.

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

Does that imply that if you were at $10 million before, you're now at $12 million excluding expansion in the capacity?

Mark B. Weinswig

Yes, that would be correct.

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

And that -- those contracts at that higher level of price point through the end of calendar 2012 and even a little bit into 2013?

Mark B. Weinswig

Yes, only through the end of this year actually for the pricing increase, yes.

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

I see. Okay. And just going back to the cost side of the equation for a second, and I apologize for this, but I'm always mystified by the spending that you've been doing to support the terrestrial business that shows up as a cost against the solar -- space solar business. Can you remind me what that looks like because I'm always mystified by that piece of the puzzle.

Hong Q. Hou

That's a very good question. Alex, the solar market backdrop is very challenging. We've seen that months before so that's why we were focusing our strategy on solar cells side and CPV, concentrated solar cells supply to the industry, and they will be developing projects. We only build on the projects we see very profitable. For example, the distributed generation project 2-megawatt in our backyard, this should be a very profitable project. We also are watching our spending very, very carefully because we have the joint venture in China and having them be the path finder for the market to establish the CPV heritage and also to penetrate into Chinese solar market. So from our side going forward, we basically will be having very limited spending on OpEx, and we're reviewing our current effort on that and watching very closely. So the Solar side, we're not going to be counting on the trends of solar in the near term for revenue in -- a whole lot. So therefore, we will be pare down our supporting activities accordingly.

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

Just so I can be clear, weren't you running about a $2 million per quarter expense associated with terrestrial IP investments? And isn't that expected to come down over the next 2 or 3 quarters from $2 million plus to about $0.5 million by year end?

Hong Q. Hou

Probably in the -- by the year end, the half of that.

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

So it's running at $2 million in the December quarter and it goes down to a couple of hundred thousand by the end of December?

Hong Q. Hou

To the $1 million level. Right now, we're running about $2 million a quarter, and we -- probably, December quarter, we expect to reduce to about above $1 million a quarter.

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

Okay, so to about $1 million. So is this coming down, can you get rid of that altogether or is that an expense that is necessary? Why are we spending money on terrestrial IP investments?

Hong Q. Hou

I still have a dream. We still are optimistic. In some applications for example, commercial rooftop, the concentrator photovoltaics provide the highest power density, and in many space, the incentives was provided for commercial rooftop, this should be the generation to offset the highest power cost at the high noon time, for example, at about in California it's $0.32 per kilowatt-hour. So it depends on the product. I think for our commercial rooftop, we still have a very good chance to make that a viable business.

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

Just so I understand. So you think that spending $1 million to $2 million a quarter on terrestrial solar is going to improve the value of your stock in any way?

Hong Q. Hou

That's, at this point, our view. But we evaluate our business in every product line very routinely, a couple of times a quarter. So if the situation changes, we're not afraid of taking action.

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

One last question. So given all you know right now and I realize you don't want to forecast out multiple quarters or anything of that sort, but I mean, does it look like you can get back to profitability in the CY 2012 timeframe? I mean, is the September or December quarter a viable target to get back to staunching losses and actually turning a profit possibly? That's kind of the bottom line question, isn't it?

Mark B. Weinswig

Yes. I mean, Alex, our goal is definitely to do that. At this point, I think you've seen that with the Solar area, we're expecting a significant ramp up in our business, increasing the gross margins to kind of our target levels. On the Fiber Optics side, we're forecasting significant growth this quarter for the June quarter. Hong mentioned that we're also looking at continued growth for September and December. And with the product base that we have that we're focusing on, and these are all areas that have very strong IP content and which we believe we can get strong margins for the Fiber Optics area. So with all that, I mean, our goal is to go into next calendar year with the plan of being able to be a profitable organization. But at this point, we're still -- we love to look up but at this point, we're just looking straight ahead and how we're going to ramp up the ITLA product line, the Tunable XFP product line over the next 3 to 6 months.

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

One last question and then I'll cede the floor. You'd given the comment about -- well, Ed asked the question and I don't think you quite answered it which is, you told us how much revenue was associated with the assets being sold, but you did not say how much the net overhead reduction and OpEx reduction was. So if I assume the product was selling at, let's say, a 40% gross margin, how much overhead am I dropping and how much OpEx am I dropping? I assume that if I were to put those in, that we'd be running at a net loss on that $4 million of what, $1 million or $2 million?

Mark B. Weinswig

Yes. I mean, at this point, with our agreement with Sumitomo, we can't really disclose some of those details, unfortunately, Alex, I'm sorry. But what we can say is that there were -- the fab itself, as we had talked about before, the gallium arsenide fab had overhead structure that was more than $1.5 million a quarter, roughly. In addition, the total number of employees that will be transferring over to Sumitomo is about 60 employees, with the vast majority of those kind of focused on the manufacturing operations. So unfortunately, we can't really give you much more disclosure than that at this point.

Hong Q. Hou

But you can imagine we have 3 wafer fabs. Again, the margin on wafer fab for laser only supporting $4.3 million revenue like last quarter, a quarter in. And indium phosphide fab that's very synergistic to support our key leading technology area of ITLA, Tunable XFP and cable TV broadband product. That's located in Alhambra in Pasadena area, so we'll continue to operate and expand in that fab and then we have our solar cells fab. So by divestiture, we basically get rid of one fab, which is only supporting a very limited amount of revenues. So that's the gain from the fixed cost reduction, we're going to be pretty significant.

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

It does sound like you were losing a couple of million dollars on this business. So reselling it is going to be a net positive to your margin and your profitability.

Mark B. Weinswig

Yes, that's definitely the case.

Operator

I'll now hand the call back to the speakers for closing remarks.

Hong Q. Hou

Thank you very much for dialing in today. Just to give a heads-up, the management will be presenting at the 13th Annual B. Riley Conference in Santa Monica on May 22, and we look forward to seeing you there. If we don't, we look forward to talking to you in the next conference call. Thank you.

Operator

Thank you. Ladies and gentlemen, this concludes the conference for today. You may all disconnect and have a wonderful day.

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