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EMCORE Corporation (NASDAQ:EMKR)

Q3 2012 Earnings Call

August 7, 2012, 04:00 pm ET

Executives

Victor Allgeier - TTC Group

Hong Hou - CEO

Mark Weinswig - CFO

Analysts

David Kang - B. Riley

Edward Zabitsky - ACI Research

Alex Henderson - Needham

Operator

Good day, ladies and gentlemen, and welcome to the EMCORE Corporation third quarter 2012 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the call over to your host Victor Allgeier. 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 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 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, levels of activity, performance or achievements of our business or 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 businesses that are addressed in our filings with the US 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 Weinswig

Thank you Vic and good afternoon everyone. Today, I am going to focus my discussion on our third fiscal quarter operating results and our balance sheet.

Consolidated revenue for our third fiscal quarter totaled $41.1 million, which is an increase of $3.3 million or 9% over the previous quarter. The increase was primarily due to higher Fiber Optics revenue, offset by reduction in our Solar business. Our Q3 revenue guidance was $38 million to $41 million.

On a segment basis, our Photovoltaic business accounted for $15.3 million or 37% of the company's total revenue. This represents a $0.6 million or 4% decrease from the prior quarter. As we've said previously, while we believe in the long-term growth prospects of this business, our revenues in any given quarter may be a bit lumpy.

The Fiber Optics segment accounted for $25.8 million or 63% of the company's total revenue. This represents an increase of roughly $3.9 million or 18% from the prior quarter, with the increase primarily from our recovery efforts after the flood in Thailand.

In the third quarter, we recognized $1.8 million of revenues related to the divested enterprise product lines versus $4 million in the prior quarter. Hong will discuss the prospects of the Fiber Optics business later on the call.

Consolidated gross margin was 10.7%, a 3.5 percentage point decrease from the prior quarter, primarily attributable to deterioration in our solar segment margins and the shift towards Fiber Optics which typically have lower margins.

On a segment basis Photovoltaic gross margin decreased 8 percentage points to 13% as we were unfavorably impacted by higher losses in our terrestrial solar business, various losses from power outage at our Albuquerque location and lower yields. We believe that this segment can reach gross margin targets of 30%.

Fiber Optics gross margin was 9.3% flat with the prior quarter primarily from higher margins from increasing revenues offset by higher excess and obsolete charges, losses on purchase commitments and yield variances associated with our manufacturing ramp up. The gross margin for our Fiber Optics segment would have been over 15% in the quarter if we exclude these items and our consolidated gross margins would have also been close to 15%. We expect our gross margins in the Fiber Optic segment to improve in future quarters as our revenues continue to increase.

After we complete the rebuild of the manufacturing lines damaged by the flood, we will lay out the operating targets for the fiber segment. Total operating expenses for R&D and SG&A were $13.8 million excluding the flood related charges; gain on sale of assets, legal settlements and impairment charges.

During the third quarter we recorded a gain on the sale of the enterprise product line of $2.8 million. We have differed $4.9 million of the gain on sale until the indemnification obligation and adjustment contingencies are cleared.

We also recorded a loss of litigation settlement of $1.05 million. This settlement was related to a patent infringement lawsuit that was settled in the third quarter. As a result, we expect the reduction of legal expenses going forward. In addition, we recorded an impairment loss on the CPV assets of $1.4 million. As we recently announced, we have entered into an agreement with our joint venture partner Suncore where EMCORE will transfer its CPV product lines. This sale is expected to close in the current quarter and will result in a reduction in our expenses of over $1.5 million per quarter. Hong will discuss the Suncore strategy and opportunity in more detail.

On a GAAP basis, the consolidated net loss for the third quarter was $9 million, $0.3 million better than the prior quarter. We believe that our results will continue to improve in future quarters as we ramp up our fiber optics manufacturing lines and increase our revenues in our solar segment and reduce our R&D investment levels in the CPV product lines.

Our GAAP net loss per share was $0.40. Our non-GAAP adjusted net loss after excluding certain adjustments all of which are set forth in the non-GAAP tables including today's release was a loss of $7.6 million versus $5.4 million in the prior quarter. Please note that we have included additional information regarding 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 June 30th, the company had a solar order backlog of approximately $46.2 million; 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 onto the balance sheet; at the end of June the company's cash, cash equivalents and restricted cash balance was $20.8 million. Our net cash decreased in 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, partially offset by the proceeds received from the sale of the enterprise product lines.

Regarding the insurance recovery for the flood damage, we are working with our contract manufacturer and the insurance carriers related to the consigned inventory and equipment damage. We have made some strong progress. However, the amounts and timing of those receipts are uncertain and proceeds will be accounted for other gain upon received and contract finalization.

Over the past few months, we made significant strides in recovering from the crisis caused by the flooding in Thailand, including steps to streamline and focus our business with the sale of certain product lines. We look forward to showing the results of these actions over the next few quarters.

Finally as we announced today, Reuben Richards will be leaving the company at the end of September as the Executive Chairman.

With that, I'll turn the call over to Hong, who will discuss the recovery from the flood in Thailand, the sale of the CPV asset to Suncore, the company’s strategic and operating initiatives and provide revenue guidance for the fourth quarter.

Hong Hou

Thank you Mark. Good afternoon everyone. As Mark discussed, we achieved consolidated revenues of $41.1 million in the June quarter, slightly above the high end of our guided range. The revenue from the fiber optic segment increased by 18% sequentially due to the recovery of our production capacity and the revenue from the space power business declined slightly sequentially.

A year ago, EMCORE’s management presented to its Board of Directors a in-depth analysis on the business strength and growth opportunities of every product line. Given the market dynamics and the competitive landscape in the optical component in the solar power industries, we decided to focus our business plan to provide enabling and disruptive technical solutions in selected areas of fiber optic communications and solar photovoltaic by leveraging our compound semiconductor material and device expertise.

Thereby focusing our business scope on these areas with highest potential for growth and profitability. With that being a strategic focus defined we started formulating a restructuring plant. With expected closing of the sales of the Free TV product line, I am happy to report that we have now completed business and management realignment to practice in the company on the past for sustainable growth and profitability.

The first move with the sale of enterprise business, this product line include a VCSEL's parallel optical devices and active optical cables. For approximately 5% of revenue contributions to the entire business, it requires that infrastructural to support the business. In May, we closed the sale transaction of our Enterprise product line to Sumitomo Electric.

This divestiture briefly simplified our operating structure reduced a fixed cost and improved market focus. In addition, with subsequently settled the patent infringement lawsuit. How to retain a product and technology portfolio in optical components in sub systems, it is strongly aligned to support current and future requirements in tunable, coherent high-speed transmission systems and next-generation broadband architectures. When there is a product portfolio of the cable TV components and subsystems and external cavity laser based tunable laser products EMCORE is now positioned to be the technology and market leader in each of our product lines.

On the solar side, just yesterday we announced that we entered into a definitive agreement subject to closing conditions to consolidate our terrestrial CPV system product and business development efforts into our joint venture Suncore Photovoltaics. In order to streamline new product introduction and engineering effort on cost reductions for CPV systems, EMCORE will consolidate intellectual property and development efforts for both ground mounts and real top terrestrial CPV products to a wholly owned subsidiary of Suncore unit in US.

Suncore’s subsidiary will found our ongoing R&D marketing sales and business development related expenses to the terrestrial CPV systems. EMCORE will continue to own the intellectual property related to the solar cell technology and the maintaining investment activities to invest CPV sale performance to serve a broader customer base within the CPV industry.

This transaction when it closes will allow EMCORE to focus its efforts on our core competency of mounted multi-junction solar cell technology for both space and threshold power applications. Moving forward, EMCORE will continue to support Suncore through supply of advanced CPV solar cell products and maintain its presence in the terrestrial CPV system market through a 40% ownership in Suncore.

This transaction is very strategic to Suncore as well. With a strong IP portfolio applied through this transaction solid financial status and the lower confident high volume manufacturing capacity Suncore is now ready to serve the global renewable energy industry with a state-of-the art CPV products and technology.

EMCORE employees, who are currently engaging in product and business development for terrestrial CPV, won't be transferred to Suncore. EMCORE's Executive Vice President, Dr. Charlie Wang will also be joining Suncore serving as its General Manager on a full-time basis upon the closing of this transaction.

The sales of our enterprise product launch and the consolidation of CPV product lines, master completion of companies, businesses realignment and that will allow EMCORE to more effectively focusing its portfolio areas where EMCORE technology and product solutions have strong depreciation in the marketplace.

I am very excited about our current business portfolio. A combination of a solid sustaining business and high growth areas embedded with the most sought after technology.

As a part of this restructuring effort, Mr. Richards propose to EMCORE’s Board of Directors to eliminate the position of Executive Chairman and subsequently, he will retire from the Executive position at EMCORE, the effective September 30, 2012.

Mr. Richards will continue to be Chairman of the Board, while he will provide strategic guidance and the governance oversight. With Reuben’s retirement and company’s focus on business scope and operations, EMCORE has realigned its management responsibilities accordingly.

During Reuben’s 17 years at EMCORE’s top Executive, he has led the transformation of the company from a single product line start up to a leader in compound semiconductor technology and applications.

EMCORE has pioneered numerous leading technologies and product solutions with many compound semiconductor devices in our applications. He was instrumental in several strategic transactions defining the drill strategy and operational plan and raising capital to execute company’s business plan.

He is unparalleled in his ability to perceive market opportunities, develop technologies to lead the industry in those markets. I applaud his contributions to the compound semiconductor industry through his leadership of a very innovative company. I would like to also personally thank Ruben for his mentorship and leadership during this transition period and look forward to continuing working with him as Chairman of the Board to drive the shareholder value.

With this we have accomplished our goals in business and management realignment. The losses from the product lines included in these two transactions were approximately $50 million over the last four quarters.

With the company’s focus the business scope and much more streamlined operations, we have a clear line of sight for improved financial performance in the near future. EMCORE management is committed to driving its business to achieve profitability. Now let me give you an update on our businesses, first I will start with the solar photovoltaic business segment. The fundamentals of the business remain very robust and the outlook for our space programs and revenue is very promising.

We expect a strong revenue growth in this current quarter and we are very excited about our competitive position and expense in about space forward type business both in US and the global market. In June, the hundred on-orbit spacecraft powered by M4 Solar cells and solar panels were launched.

We especially proud to have achieved thus significant milestone the very old zero on orbited failures. We are also very proud that NASA JPL's Mars Science Laboratory spacecraft was successfully landed a rover on Mars last week was powered by our space solar panels for its two stages to reach the red planet.

Since we made our first commercial shipment of the solar cells just above 13 years ago and EMCORE is now recognized as a leader in the space solar cell supply. We currently have a total of $120 more satellites and their contracts to be launched and powered by EMCORE solar equipment over the next several years.

We look forward to continued success in this segment by delivering innovative high performance solar technology through the solar power industry. Now let me discuss our market position and business outlook in our fiber optics business segment. Since the flood disaster, EMCORE has developed and implemented a plan to rebuild impacted production lines at the Fabrinet as well as its own manufacturing facilities in China and the United States.

As we announced last month, EMCORE has reached pre-flood capacity on key telecom production lines and expects to achieve pre-flood levels on all impacted production lines by October 2012. EMCORE expects increased shipment for its Fiber Optic segment in coming quarters as manufacturing volume ramps to normal levels and we work out the high backlogs.

The production line for ITLAs for 40 and 100 gigabit per second coherent telecom applications has been up and running since March at Fabrinet ahead of schedule. Production line qualification has been completed and customers successfully completed full-line audits and started taking shipments in April.

As of this quarter the ITLA line is operating at a pre-flood capacity run rate. The cable TV laser module and transmitter production lines at EMCORE's facility in China reached pre-flood capacity levels in July. EMCORE expects that tunable XFP transceiver production line at Fabrinet to reach volume production levels by October 2012.

In the meantime TXFP manufacturing is continuing in the US site in Newark, California facility. Based on the strong demand for ITLA, we are increasing production capacity for 40 and 100 gigabit coherent applications by 50% to exceed the pre-flood levels to support customer demand. The increased capacity is expected to support a increased demand of the coherent transmission applications and a favorable market share shift.

Our new product for telecom applications is in micro-ITLA, which is based on the same external cavity laser design platform and provides superior performances with the enhanced functionality in a much smaller form factor. It is being designed in by some key customers and the feedback has been extremely positive. We’re still on track for volume production in 2012.

For cable TV and video transport applications, we have introduced several new products during the quarter, which are catered to some specific territories and this product will help to expand the market penetration internationally.

Now, let me discuss the market outlook in the areas of our product offerings in fiber optics. We believe that the 40 and 100 gigabit coherent products represent a fastest growing area in fiber optics today. Our ITLA is experiencing a healthy and a robust demand.

As for the cable TV market, we expect that the spending for upgrade and scalable infrastructure will increase by about 5% in the second half of the year based on the CapEx announcement by the leading multi-service operators recently. We're seeing record demand for externally modulated transmitter product, which relates to more upgrades and new networks being deployed in cable TV networks.

Turning to guidance. For the fourth quarter of fiscal year 2012, ending September, we expect to have revenues in the range of $46 million to $49 million, representing 12% to 20% sequential growth, with revenue increase from both Space Solar and Fiber Optics business segment for the reasons we discussed today.

In summary, we have completed the product strategic realignment. The remaining businesses represent latest technology in the fastest growing area. We are recovering from the flood impact as evidenced by the 18% sequential revenue growth in the June quarter and 12% to 20% additional recovery guided for this quarter.

Business going forward will be less related to flood activity recovery, but more on industry demand. Bookings activity is strong and our production ramp up is on track. 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. Our goal now is very simple, profitability and we look forward to discussing our progress in future quarters. With that I will turn the call over toe Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from David Kang from B. Riley. Your line is open.

David Kang - B. Riley

The first question is regarding your 25 million ITLA orders you received right after the floods. So can you ship the balance this calendar and any kind of penalty will you occur for not shipping all of them this year?

Hong Hou

We are still working on the balance of the backlog, but in the meantime we have been replenishing the backlog with new orders. And we are current with our promised shipment to each of the customers they've placed the purchase orders with us during the flood disaster.

So that area continue to have a very healthy demand as we increased revenue and we are getting more purchase orders as well. We will not be penalized because we don't have any delayed shipment.

David Kang - B. Riley

And then you talked about additional capacity, can you quantify a little bit so what is the expected capacity and then what is the 50% add on top of that and then when, by when will you have the 50% capacity in production?

Hong Hou

Right, so currently with a full recovery, with the current capacity, the run rate is about 12,000 units per quarter. And just want to add another 50% on top of that, so that will be another 6,000 per quarter and it usually takes about three to four months and that process is started already.

David Kang - B. Riley

And then any idea as far as the mix between 40G versus 100G and when do you expect 40G to peak? Alcatel's 100G is about 40% of their 40G, 100G shipments, it sounds like 40G is already starting to peak.

Hong Hou

Yeah, so that part I think and probably our product line managers will have more clarity on that, but I can tell right now our customers are using our product primarily for 100G. It's not they don't want to use it for 40G because we were told our products only work for 100G. So as we increase the capacity, we expect a favorable market share shift and then we will take more lion share for the 40G applications as well.

David Kang - B. Riley

And when should we expect your micro-ITLAs to ramp?

Hong Hou

So, we have sampled in two key customers and they have designs in to their transponders and line cards and right now, design already done is more (inaudible) samples to get it to the qualification.

So we expect the general availability at the start of doing well in production before the end of the year and it's not going to be contributing to the revenue in the December quarter significantly, but more of the quarters following.

David Kang - B. Riley

Could some of your customers kind of pause for your micro-ITLAs or are they just so hung up on getting hundred parts that they don’t care at this point?

Hong Hou

That’s what we were concerning about you know, is the micro-ITLA going to be cannibalizing ITLA, regular ITLA market. It doesn’t seem to be that way. So, the regular ITLA demand is still very, very strong and the customers are not saying, gee I wish you have the micro-ITLA, I can use that. But micro-ITLA seem to be more designed to low power transponders, small form factor 100 gig and 40 gig solutions.

So it seem to be incremental product, not the same product cannibalization at least at this point in time.

David Kang - B. Riley

And just a one clarification Hong, when you talked about your cable TV CapEx, going up 5% second half, I am assuming that this versus first half then?

Hong Hou

Yes you know we are happy to watching very closely example Comcast and Time Warner, their CapEx and they give a very clear CapEx forecast. Even though overall CapEx has actually declined slightly for the second half, but for our segment, the area for wider product mostly for rebuild and upgrade and the scalable infrastructure and the interest of the CapEx range from 4% to 12% for different companies. So we take 5% pretty conservative view and as I talked about it the external modulator transmitter demand has reached record levels; usually at four almost from (inaudible). So once I increase the pipe at that level and the remaining transmission infrastructure demand is going to be increased as well.

David Kang - B. Riley

One final I promise, I may have missed this, but did you break out the cable TV segment from your fiber optics revenue?

Mark Weinswig

No we did not.

Operator

Our next question comes from the Edward Zabitsky from ACI Research. Your line is open.

Edward Zabitsky - ACI Research

So first of all I want to congratulate you guys and you have always focuses down; it’s always tough to make those decisions; I wanted to ask a number of different questions. On the Photovoltaic side, I am wondering the reduction you had a couple of things going on I am wondering if they are related, you had a reduction in backlog and you also had a lot of wastage but you are talking about so is there kind of a slowdown in orders as, or its just related to inability to get deliveries or what would be causing that?

Hong Hou

Yeah, so you picked that out really well, and this might sound little confusing. So well we gave the backlog is for the deliverable, for the products and the service to be provided within the next 12 months and we've got a big long-term purchase agreement come in, in chunks, so we are expecting big purchase orders to be added to the backlog in a week or two.

So its not only continue stream; it renew the purchase contract once in every two-three years so the demand is absolutely got to be increasing our revenue is going to be increasing in the current quarter compared to the June quarter and yeah, but the backlog number seem to be a little lower because we work out our orders from the current backlog, but we haven't finalized the contract renewal for the next big orders yet.

Edward Zabitsky - ACI Research

And Mark I am wondering sort of the OpEx this quarter you said was around $13.8 million; what do you expect in Q4, in fiscal Q4 and I am wondering just with the numbers you announced this morning of $15 million annualized does that mean about $11 million per quarter ultimately in OpEx or how should we look at that thing?

Mark Weinswig

So Ed this quarter was a little bit unusual in the third quarter. We still had to be enterprise product lines as part of our operating structure and then looking at Q4, we’ll still have the CPV business in our entire CPV business in our portfolio until the deal is closed. So as a result, depending on the timing of the closing of the CPV transaction to Suncore, you know, there may be, our expenses maybe flat or they may actually decline. It really depends on the timing of that.

Right now, we're expecting to close in the quarter. We're just not exactly sure of the timing of that, on a go forward basis as we mentioned, you know, in the script, we do expect our overall expenses as a result of selling the CPV product lines to Suncore; we do expect that our OpEx structure and our total expenses will decline by about $1.5 million per quarter.

Edward Zabitsky - ACI Research

So the 412.3 million is something we should expect as a ballpark?

Mark Weinswig

That’s a good number to kind of start with, yes.

Edward Zabitsky - ACI Research

And I am also wondering about the TXFP revenue; obviously it’s being manufactured in States right now, but last quarter you said you had a material, some sort of bottleneck and just wondering how you did this quarter and what the prospects are looking forward?

Hong Hou

Yeah Ed, so you know that we're building up the volume capacity at the Fabrinet and the line is fully up and running and the product is being going through qualification, customer onsite audit. So even though we have the capacity and capability established we can now run full throttle at this point. As for the new work line, we did not increase the capacity during the quarter.

So our revenue of the TXFP is still between $1 million to $2 million, but also with uses, very same infrastructure to prototype the micro ITLA which shared the same assembly line as the tunable XFP. So our focus in the current quarter was really not to push for the revenue increase of tunable XFP with the new work line but to best utilize that capability for next generation product development and accelerate the qualification and the customer audit for Fabrinet line.

Edward Zabitsky - ACI Research

Okay. Very good so you are really just focused forward on the volume at Fabrinet and so should we expect to see what things look like realistically in the December quarter as far as XFP production goes?

Hong Hou

Well the December quarter we will have some meaningful revenue from the production line at Fabrinet, the demand is there the customers are pushing us to work with them and getting that qualified as soon as possible, but I think more substantial rent isn’t going to be in the December quarter.

Edward Zabitsky - ACI Research

Sure. So clearly I mean we are looking for higher gross margins from both the ITLA business and TXFP business is that still something that you would expect something gross margins well north of 30% may be even higher?

Hong Hou

ITLA is there that is more established product but a tunable XFP is going to be going through a learning curve and ramp curve.

Edward Zabitsky - ACI Research

Sure but in time with volume you still expect that to be the case based on the pricing in the market?

Hong Hou

Absolutely.

Edward Zabitsky - ACI Research

Okay, that’s what we are looking for of course thanks very much.

Operator

(Operator Instructions) Our next question comes from Alex Henderson with Needham. Your line is open.

Alex Henderson - Needham

Well I am pleased to see you guys taking some hard actions but made some tough decisions there and it sounds like you are really did the right thing on a couple of key issues. I was wondering if we get a little bit more granularity on the couple of metrics the first one you are saying that your back to full production level on ITLA comparable to where you where before the flooding and If I recall rightly you were in the $9 million to $10 million quarter range in the September quarter of last year before the flooding occurred, is that sort of a benchmark that we are talking about here?

Hong Hou

Yes it was actually $9 million right before the flooding and right now we are running at run rate off that level of slightly higher and we are adding another 50% on top of it.

Alex Henderson - Needham

So let's go to that 50% so that 50% on top of that would then come in through the December quarter and March quarter is not all in December quarter?

Hong Hou

I think it is going to be finished building in December quarter the revenue contribution is going to be in the March quarter

Alex Henderson - Needham

That would imply the up around $13 million range per quarter is that sort of the right way to think about that?

Hong Hou

That’s when we are building the run rate for.

Alex Henderson - Needham

Okay that’s very helpful thank you. Now on the tunable excess XFPs you made a couple of comments in there that was unaware of the one being the ITLA testing was running across the same facilities so you think they did between $1.5 million and $2 million in tunable XFP with the micro-ITLA testing running on same line? Is that what I heard?

Hong Hou

Right, the micro-ITLA assembly, micro-ITLA is a much smaller form factor, it's really leverage the own package platform tunable TOSA which is much smaller than the big butterfly for the regular size ITLA. So all the assembly equipment, they are totally compatible to make packaging for micro-ITLA or making packaging for tunable XFPs.

Alex Henderson - Needham

So the packaging was the constraint on the production of the tunable XPF in the US facility?

Hong Hou

Right.

Alex Henderson - Needham

And you use the same packaging therefore that reduced the amount of production you would have had out on that product.

Hong Hou

Exactly yeah.

Alex Henderson - Needham

And so is it reasonable to think that if you are in the $1.5 million to $2 million that now that you are now that you are no longer doing test runs on the micro-ITLA that that would then kick up to some higher level in the September quarter?

Hong Hou

Right, but we have to stage the new product introductions so I think and yeah the demand evenly runs full throttle at Newark it is still for the two couple of key customers, it will be an incremental improvement in capacity or delivery to them, they would rather to see we've got volume production at Fabrinet.

Alex Henderson - Needham

So would I because you are wrapping up some sort of $20, $30, $50 bill around each one of those things as a gift to the customers that are buying and that's why I'm trying to get a handle on it. Does that imply an increase in the overage costs on those products that in the September quarter?

Hong Hou

For the September quarter I think we will have a mix of micro-ITLA and tunable XFP unit in Newark alliance as well, you are right even in the September quarter for the shipment of the tunable XMP out of the Newark facility in California we have to wrap around some bills around it to the customers.

Alex Henderson - Needham

So, you are losing money in each unit shift and just to keep this customer happy, until you can get the Fabrinet lined up. That makes some sense to good tactical decision. I am just trying to determine, is that incremental cost higher in the September quarter or is it the same as the June quarter?

Hong Hou

I think we were planning to be at the same in the June quarter.

Alex Henderson - Needham

The second question is, I just want to go back to the terrestrial IP piece that is being sold. Was there any revenue attach to that piece? I know that you had said in the market quarter and you added $2 million cost associated with it but was there any revenue attached to that?

Hong Hou

Very little. We’re finishing up a couple of projects and the shipment but a very little revenue in about $1.5 million to $2 million loss per quarter. So you will see a significant improvement.

Alex Henderson - Needham

So, is that one $2.2 million, I am assuming it's down to about $1.6 million in the June quarter, is that right?

Hong Hou

Yes.

Alex Henderson - Needham

So, when you say it's going to be down on $1.5 million a quarter, is that what implied by the December quarter, you would be down about a $100,000 or so lost from that piece of the business, very minimal at all.

Hong Hou

Right, very minimal by the December quarter, nothing.

Alex Henderson - Needham

And should those numbers are right in the ball park?

Hong Hou

Yes.

Alex Henderson - Needham

That’s very helpful. The second piece, I am really a little confuse around the solar side. You had obviously a very nice build in backlog over the last year. You talked about, you know, 20% to 30% to 40% increases in backlog ordering and yet your revenues, clearly are well off from where I would have expected them to be here in the current period, given your actually declined sequentially and your commentary about up -- while I should hope it would be up sequentially in the September quarter, but you are doing a number that was a lot higher than the September quarter last year I think it was about 21 million. Where are we relative to those type of numbers. Can you get back into the 19 million to 20 million vicinity in the back half of the year or are we talking still a much lower rate than that?

Hong Hou

Yeah so Alex we will be back to the historic level. This June quarter and March quarter were the two kind of like slow quarters because of the push-out of the two major programs. And each of those programs representing about $3.5 million to $4 million revenue. So we will be picking up the pace in the current quarter for the space [TV] and then also our visibility for the quarters after two, three quarters after that it’s going to be very robust as well.

Alex Henderson - Needham

So thinking about it correctly when you are saying back to the levels that you were at that you are doing $18 million to $20 million kind of quarters as a sort of sustainable rate with a little bit of growth on it, is that the right way to think about it?

Hong Hou

Yeah 18 million to 19 million, then 5% to 10% accrual. On an annualized basis you still look at a very nice growth but quarter-to-quarter it’s a little bit rocky.

Alex Henderson - Needham

Okay, I get it. The other question I wanted to ask was on the insurance recoverables, you didn’t really talk that much about that side of the equation. Can you give us a little bit of sense of what’s going on the cash flow for the next couple of quarters?

Mark Weinswig

Regarding the flood recovery, we have been working very diligently with both our contract manufacturer and their insurance carriers. We have made some strong progress over the last quarter and we hope that over the next few months we can get to a -- kind of conclude on all of these outstanding items. We are coming to the one year -- kind of the one year mark which makes things a lot easier because pretty much you typically receive all the payments if everything closed out after one year.

So the good news is that I think by the next time that we do talk we will be to have a firm update of exactly the amounts, the timing and what our expectations are, but so far our contract manufacturing partners have been very, very -- a great partner with us and has been willing to kind of help us in terms of making sure that we can maximize recovery that we are entitled to.

Alex Henderson - Needham

I know there was one other question I wanted to ask and I will cede the floor. Over on the tunable XFPs when you get off of the facilities in Newark and get those, that production fully over to the Fabrinet facility, how much of a cost fallout does that represent?

Hong Hou

Yeah, so the cost of structure, we modeled the gross margin in a run rate at that steady state and when we reached to the volume it's going to be slightly north of 30% of gross margin at Fabrinet. But right now I think our gross margin for the product was basically zero, in the Bay area. So it's that much improvement.

Alex Henderson - Needham

So if it was $2 million you are talking about 30% cost absorption on $2 million that will fall out once you get off of the Newark facility and get to the Fabrinet facility.

Hong Hou

Right.

Operator

I'm showing no further questions at this time. I will now turn the call back over to management for closing remarks.

Hong Hou

Thank you very much for dialing in today. We just had an announcement. We will present at the 2012 Citi Technology Conference at Hilton New York Hotel on September 06 at 2 PM. We look forward to seeing you there or talking to you in the near future. Thank you again.

Operator

Ladies and gentlemen that does conclude today’s conference. You may all disconnect and have a wonderful day.

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