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Executives

Victor Allgeier – IR, TTC Group

Adam Gushard – Interim CFO

Hong Hou – President and CEO

Analysts

John Lau – Jefferies & Co.

John Harmon – Needham & Co.

Ramesh Misra – Collins Stewart

Jed Dorsheimer – Canaccord Adams

Sam Dubinsky – Oppenheimer

Emcore Corporation (EMKR) F3Q08 (Qtr End 06/30/08) Earnings Call Transcript August 8, 2008 9:00 AM ET

Operator

Good morning, ladies and gentlemen, my name is Kelly and I will be your conference facilitator today. At this time, I would like to welcome you to the Emcore Corporation third quarter fiscal 2008 earnings conference call. All lines have been placed on mute to prevent any background noise. Following the speaker's remarks, there will be a question-and-answer period. (Operator instructions) As a reminder, this call is being recorded. Listeners can also login to www.emcore.com to access the webcast. Thank you. It is now my pleasure to turn the call over to your host, Mr. Victor Allgeier of TTC Group. Sir, you may begin your conference.

Victor Allgeier

Thank you and good morning everyone. Yesterday, after the close of markets, Emcore released its fiscal 2008 third quarter and nine months results. By now, you should have received a copy of the press release. If you have not received the release, please call our office at 646-290-6400. With us today from Emcore are, Reubin F. Richards, Jr., Executive Chairman; Dr. Hong Hou, President and Chief Executive Officer; and Adam Gushard, Interim Chief Financial Officer.

Adam will review the financial results and Reuben and Hong will discuss business highlights before we open the call to questions. Before we begin, we would like to remind you that some of the comments made during the conference call, and some of the responses to your questions by management may contain forward-looking statements that are subject to risks and uncertainties as described in Emcore's earnings press release and filings with the SEC.

I'll now turn the call over to Adam.

Adam Gushard

Thanks Vic, and good morning to everybody. We've accomplished a lot since the last call, but before we inform [ph] the highlights of the quarter, let me first start off with the review of the quarter three financial results, and then afterwards pass on to Hong Hou to provide the operational update. Starting with the P&L, consolidated revenue for the quarter was 75.5 million. This represents a revenue increase of 70% when compared to last year and also a revenue increase of 34% when compared to last quarter. Consolidated revenue for the nine months ended June 30th exceeded a $178 million which represents an increase of 46% when compared to last year. Also of our operating segments posted significant increase in quarterly revenue when compared year-over-year in the prior quarter.

On a segment basis, fiber optics revenue totaled $53.6 million. That's a 94% increase when compared to last year and a 43% increase when compared to the last quarter. For the nine month ended June 30th, Fiber Optics revenue increased 58% when compared to last year exceeding $125 million. The increase in Fiber Optics revenue was primarily due to our recent acquisition of Intel's optical platform division. For competitive reasons, we are not planning to disclose revenue from the acquisition, however, we can report that revenue exceeded internal expectations for the quarter. Demand for our legacy datacom products increased a 144% year-over-year and 46% over last quarter, and this division, headquartered in the Albuquerque, New Mexico, posted its highest quarterly revenue performance in the company's history.

Photovoltaics revenue for the quarter totaled $21.9 million. That's a 30% increase when compared to last year and an 18% increase in revenue when compared to last quarter. For the nine months ended June 30th, photovoltaics revenue increased 23% when compared to last year exceeding $53 million. The increase in quarterly revenue was due to our introduction of new concentrated Photovoltaics or CPV products for commercial and utility scale application. For competitive reasons, we are not planning to disclose CPV related revenue. However, revenue is up significantly over last quarter. Also, as discussed in the last call, satellite related revenue's which includes government service related revenue declined in the quarter as expected. Hong will provide an update on the Terrestrial CPV solar market and the long-term purchase agreement previously announced.

Moving on to gross profit and margins. On a consolidated basis, gross margin for the quarter improved to 18% when compared to the prior quarter. However, this represents the decrease from 22% gross margin as reported last year. Consolidated gross margin for the nine months ended June 30th was 17%, which was just slightly lower than last year. Fiber optics gross margin in 2008 were 27% for the quarter and 25% year-to-date. This is the best consolidated gross margin performance for this segment in the company's history. The increase in fiber optics gross margins was probably due to increased revenue, lower manufacturing cost incurred at our China manufacturing facility, and the implementation of certain cost reduction initiatives including facility consolidation.

Photovoltaics gross margin in 2008 were -3% for the quarter, and -2% year-to-date. This represents the decrease in gross margin as reported in the prior year but an improvement from -12% as reported last quarter. During the quarter our Photovoltaic position increased manufacturing capacity or CPV components. However, equipment up-time was below plan therefore, production volume wasn't enough to completely excerpt [ph] all overhead cost. Also during the quarter, the division recorded a loss of $1.8 million on CPV system projects due to a higher expected freight and installation costs. The recording of contract losses in advance of revenue recognition puts that loss behind us, and depending on revenue project mix, this should improve Photovoltaics gross margins in the current quarter.

Moving on, operating expenses for the quarter exceeded $25 million of which over $7.2 million was related to the Intel acquisition. As discussed last quarter, as part of the acquisition, we incurred charges from Intel for transitional services which totaled $3.2 million, an additional OpEx for the quarter. The good news is that Sernair [ph] of the integration are ahead of schedule and we expect Intel's PSA charge to decrease over 50% in the current quarter with termination sometime around September 30th. Excluding Intel's PSA charges, operating expenses for the quarter would have totaled only $22 million.

Operating loss for the quarter totaled $11.6 million which represents a significant decrease when compared to last year and last quarter. And when you exclude the Intel's PSA charges, operating loss for the quarter totaled only $8.4 million. For the three month ended June 30th, net loss totaled $7.7 million or a loss of $0.10 per share. For the year, net loss totaled $39.6 million or a loss of $0.62 per share. Now, this represents a significant decrease in net loss when compared to year-over-year and the last quarter. Excluding Intel's PSA charges and stock based compensation expense, net loss for the quarter totaled approximately $2.8 million or a loss of only $0.04 per share.

In June 2008, we announced the sale of preferred stock and warrant of WorldWater and Solar Technologies and this sale took place to two closings – one, for one million shares of stock warrants which closed in June and the other in July. In the June quarter, the net gain on the sale of WorldWater stock totaled $3.7 million or $0.05 earnings per share. The July 2008 transaction will be reflected in the September quarter end results. Cash proceeds from the sale totaled $13.1 million which almost represents our entire cash investment that we made in WorldWater back in November 2006. Emcore still holds approximate 60% of its initial investment in World Water which totals $11 million on our balance sheet and is valued [ph] at original cost at $0.27 per share price. Our balance sheet does not reflect market value of the World Water investment which totals approximate $20 million.

Now, turning to the balance sheet. At June 30th, cash, cash equivalents, long-term investment, and restricted cash, totaled $23.5 million, but during the quarter, we spent over $5.5 million on Capital Expenditures. For the year, Capital Expenditures totaled over $15 million which was primarily spent on CPV component and system businesses – equipment. Cash was also used to pay for Intel GSA charges and we also made an investment in Lightron Fiber Optics devices, contract manufacturer of loc– based in South Korea. Increases in working capital specifically AI inventory as well as increases in fix assets, good will, and intangible assets, all related to our Intel acquisition.

Moving on to order backlog. As of June 30th, 2008, Emcore have an order backlog of $109 million, a decrease from $158 million as reported last quarter. As mentioned in our earnings release, management was informed by Green and Gold Energy last month that it was engaged in negotiations related to the salvage business through an act of sale, and that they could not commit to making any further purchases. So as a result, our Photovoltaics division has canceled production spots reserved for Green and Gold Energy and has adjusted the quarter impact value accordingly. As of June 30th, 2008, total CPV related backlog totaled $53 million. Our Backlog does not include previously announced terrestrial solar power agreement in Canada, South Korea, and the US since contract terms, production requirements and delivery dates are still being worked out. Backlog also does not include recently announced orders after June 30th.

Now, before I turn the call over to Hong, I just want to summarize some financial accomplishments for the quarter. On a GAAP basis, Emcore had its best quarterly P&L performance since December 2006 and that's even after you exclude the non-operating gain from the sale of WorldWater stock. Depreciation and amortization expense total $4.3 million for the quarter. As a percentage of revenue, our operating expenses for the quarter dropped to less than 34% of revenue and this include $3.2 million in Intel GSA charges excluding these non-recurring charges, OpEx dropped the list in 30% of revenue. Now, this is a huge accomplishments since historically our OpEx has been as high as 50% of revenue. With the significant increase in revenue, we've accomplished over the past few quarters, we've controlled our operating cost which is positioning Emcore towards profitability in 2009.

Financial performance at our Fiber Optics division exceeded internal expectation. On a pro-forma basis, excluding Intel's GSA charges, our Fiber Optics segment was net income positive. When you exclude stock based compensation expense, our Fiber Optic division, located in Albuquerque and Alhambra, individually achieve positive EBITDA results in the same quarter for the first time in the company's history.

Although Photovoltaics gross margins were affected by unabsorbed overhead, our Satellite and CPV Components business still posted positive EBITDA results after excluding non-cash stock based compensation expense. And we also have some good news regarding our auction rate securities. During the quarter, $2.3 million of our auction rate securities were redeemed at par value leaving only $3 million left in restricted arcs [ph] to deal with.

And finally in closing, profitability is still the main objective for Emcore manager and we expect continued improvement in our financials in quarter four. And with that, let me turn over the call to Hong for his operational update.

Hong Hou

Thanks, Adam. Good morning, everybody. First let me start with the executive summary on our Q3 financials. Revenue was $75.5 million as it represent a 34% quarter-over-quarter growth. This growth is largely due to the new business acquired from Intel during the quarter and a growth of internal CPV and parallel optical transceiver businesses. Consolidated growth margin was 18% with the fiber optics at 27%, and the Solar Photovoltaics at -3%. Operating expenses increased to over $25 million from the previous quarter due to the transition service charges for the acquired telecom and the enterprise businesses from Intel. Operating loss was approximately $11 million of which about half was due to the initial commercial deployment of the CPV system and accelerated effort for next generation cost to reduce system development. The other half is attributable to Intel PSA charges. However, we did achieved positive earnings net of non-recurring acquisition related expenses in our fiber optic segments, and are greatly encouraged by the broader acceptance of CPV technology and product.

Despite of the short-term cost issues of the CPV systems we've met the EPS guidance of $-0.04 per share. We have improved our operations dramatically and developed a much better path of the business growth and profitability. Specifically while the Transition service charges will disappear as we complete the transition and the fiber-optics business will generate positive EPS, the Company's focus is on the exclusion of the emerging CPE business where we have made a number of strategic moves.

Moving on, I will address the strategic opportunities and trends that are affecting our businesses. Let me first discuss our business in the fiber optics area. We successfully completed the transition of the telecom business acquisition. This product line represent the fastest growing sector of the Telecom components and subsystem business in the Intel's Communication and Network Design. The market demand is healthy. The customers are satisfied with the continuation of the supply and better customer service provided by Emcore. Many new products in the pipeline including low cost version of the 10 gigabit tunable transponders, small form factor 10 gigabit tunable and the 40 gigabit transponders will be introduced before the year-end. This sets a solid foundation for Emcore to grow its telecom business through company's handheld [ph] product offerings and broad customer base. Finally, we achieved the goal of the profitability of this product line in the first month under Emcore's management.

In April, we successfully closed the acquisition of Intel's enterprise, storage in connect cable businesses. The integration of the enterprise business is progressing well. As projected, we have to discontinue non-profitable product line in this area such as XFP Transceivers to a broader market. It connects cable products based on Parallel Optics Transceivers is a gain changer for a high performance computing. Recently, we have gained a better visibility of demand through customers forecast and purchase orders. The new products including XFT plus transceivers and 10 gigabit per channel connect cables will further strengthen our position in this product line.

We expect to achieve earnings profitability from the enterprise and connect cable businesses after the completion of the TSA. As Adam said – talked about we – our business from the internally developed products continues to experience a very rapid growth. The Parallel Optical Transceivers used for back plan [ph] interconnect is the main driver. The demand has increased significantly from Cisco for the new switch and router platform CRS-1. After the restructuring a year-ago, Emcore's datacom business has turned the corner and delivered our 15%- 20% revenue growth sequentially in the last four quarters. With the last quarter, drilling 144% year-over-year.

With addition of the enterprise products from this acquisition, we have the most complete products portfolio to a major customer use some 10 gigabit Ethernet areas. The demand for Zantac products including Lx4, SR, and LR modules had been increasing.

We're very happy that our exclusion [ph] on high quality, on-time delivery and competitive pricing along with the enhanced portfolio, is being recognized by the major customer with an increased market share. This will help create future business opportunities.

The market conditions for our cable TV, broadband fiber optics business has rebounded from the first quarter as well. Recent earnings announcements from cable market service operators shows strong operating results and indications that they will be accelerating CapEx spending. Discussions with our direct customers, namely equipment OEMs, during a recent quarterly business reviews confirms that the fundamentals of their markets remains very strong. Additionally, we are expanding our product offering to our customers. The March quarter was below expectations but some of our customers have been working off even to reviews [ph] based on their early optimism of market demands. Upon completing this inventory consumptions in the past couple quarters, demand has started to pick up. We continue to expect a stronger second half of the year.

In the area of the passive optical network transceivers for fiber to the home applications, we have been very selective in booking business because of their significant margin pressure. As a result, the revenue for FTTx PON transceivers for the June quarter was lower than the prior quarter. Although this business contributes a positive contribution margin the lower FTTx volumes helped improved growth margin percentages.

The business unit sitcom [ph] in Video transport segment are growing nicely and achieving record revenue in Q3. We expect this trend to continue. Both revenue and the growth margin in Fiber Optics segment have increased from the previous quarter significantly. The revenue increased from $37.6 million to $53.6 million and the growth margin improved from 24% to 27% sequentially. The increase in the Fiber Optics growth margin, as Adam talked about, was primarily due to increase in revenue of China manufacturing and the cost reduction initiatives and the improved efficiencies driven by facility consolidation. The restructuring efforts recently completed in our Broadband Optical division will further improve growth margin in the future. This sector achieved a positive earning net after non-recurring personal-cost related to the acquisition.

The PSA work for enterprise business is expected to complete by August, early September, time frame, and additional PSA charges are expected to be reduced significantly to less than $1.5 million in the current quarter.

The acquisition of Intel Fiber Optics business strengthened Emcore's position in fiber optics component and sub-system area. With the added and existing product portfolio, Emcore's is poised as a major player in the broadband telecom enterprise and high performance computing market with comprehensive product portfolio, leading products and technology, vertically integrated and offshore local manufacturing infrastructure. We are optimistic that this segment of the business will deliver sustainable and profitable growth in the future.

Now, let me discuss the Solar Photovoltaic side of our business. First, the Satellite business. As we discussed in the previous conference call, we experienced a lower demand on space solar cell, solar panel products due to customers program delay. Business in the June quarter was primarily solar cell supply to a key aerospace customer. The margin was very challenging based on the firm fixed contract signed in 2005. We are drawing down the contract items [ph] significantly. In going forward, we are negotiating long term supply agreement with the two major aerospace companies which represent a more than $70 million commitment over three years. We expect this contract to go forward in the second half of the year and the product pricing in this contract will be based on the market pricing of the raw materials and commodities. In the meantime, Emcore's space product offering higher performance, outstanding reliability and heritage, and competitive pricing than our competition are qualified by almost every aerospace company in the world for applications in different space orbit. It is reported that 15 commercial satellite programs has been awarded year-to-date. We expect a significant growth of the space business going forward. In the government programs front, Emcore products are baselines in a number of new Satellites programs. Some of the programs have been awarded and some of them are delayed due to Congressional funding. We expect to receive some new program wins in the second half of the year. In summary, we expect the satellite business to rebound in the second half of 2008.

Now, let me turn the discussion to the terrestrial solar power business. A product we are offering include concentrated photovoltaics or CPV component and systems. The executive management team of the Emcore just conducted a two-week tour through major CPV markets and customers in the world. The objective in this tour was to gain a firsthand understanding of the solar market, of the drifting [ph] of CPV products and technology along with our customer status and their business demands. This information will help us in defining an effective business strategy in the operation front. We have toured the key markets in Spain, Portugal, Italy, UAE, Australia, Korea, China, and of course some of the key customers in the US. We have witnessed a tremendous progress of our customer based in developing products and the market acceptance.

Emcore's CPV components in the system are considered to be the best in class. We are very happy to see that our products are well-received and now positioned extremely strong. The Solar product [ph] developers in many markets have experienced the limitations of the other competing Photovoltaic technology and product. CPV provides a unique solution which is higher for Virgin [ph] margin efficiency, high land use efficiency, lower installation cost, and superior temperature co-efficient for operations in a hot temperature. Most importantly, more and more people believe that CPV will provide the lowest cost for ultimate power generation in selected markets. We firmly believe that CPV will become a viable solution to gain a significant portion of the solar Photovoltaic market and Emcore will be the first company to benefit from the ramp of CPV business.

Most of our component customers are finishing out from their product qualification and started initial deployment. Developers of solar farms are excited about the potential of this technology being the most cost competitive for their project. However, due to the lack of heritage, it's very important for the developers and the investors to gain a complete understanding of the power generation with the particular solar resources in their locations. So, we have seen 15 companies who had committed some small scale, namely 25 to 200 kilowatt, solar project installation to gain the understanding of the product performance and limitations and to derive an accurate assessment of the operations and maintenance cost. We see the near term opportunity of the system scale to multiple smaller projects in multiple market by our component customers. We expect that in this phase last for about six months but we are confident initial installation will yield a significant demand for the CPV system product from developers. The rest of this business will likely happen right after the successful initial evaluation.

From this trip, we have observed our component customers fall into three different categories. First, large cap, well-funded energy companies with such potential resources and business front. Second, well capitalized start-ups with solid designs and products and early (inaudible) of the market. A third category, a less well-funded start-ups, our observation is some of them will succeed and some of them will not. Our strategy however is not to focus on any particular customer but to develop a broader customer penetration so that we can always benefit from the CPV ramp up no matter who wins and in what market. We recognized that many of the CPV customers do have less credit history than our aerospace customers. We have implemented a different terms including advance deposit, letters credit, and even prepayment before the product shipment to different customers.

But based on the fact funding of this trip in a recent development of our customer base, I want to proactively address the controversy regarding the CPV backlog. Particularly with the drain on Gold energy of Australia. Recently, Emcore received a notice from Green and Gold Energy that it was engaged in a negotiation relating to the sale of this business. As a result this (inaudible) meet to making any further purchase and there's approximately $79 million of CPV related purchase orders. Their prior [ph] has indicated that they intend to negotiate a new purchase agreement with Emcore upon a consummation of the transaction. As a result, we have decided to cancel the production slot reserve for Green and Gold Energy and to reflect this event, we have adjusted quarter end backlog accordingly. The number that Adam was given early on was did not include the Green and Gold order. So, the conclusion of their strategic transaction, we're renegotiate our supply agreements. They have taken and paid for the product shipped to date. We're working with their life conceive [ph] directly to establish supply agreement.

In the meantime, we have been broadening and diversifying the CPV customer base. In the last three months, we have booked more than $50 million new purchase orders from six different companies addressing the North American, Spanish, and the Korean market for applications of US utility companies and commercial (inaudible). The new purchase orders are mostly with the feature of advanced deposit, and of establishment of letter of credit.

ESO [ph] for CPV products is substantially shorter than that of the company's overall business. So we believe that the present risk of the account receivable is negligible. The current CPV component backlog is approximately at $62 million, that's to date, of which $32 million is scheduled for shipment in the next 12 months.

We continue to improve the performance of market jumps [ph] in solar cells. Recently, we have achieved a new record performance on convergence efficiency for satellite applications with an inverted metamorphic solar cell technology. It is anticipated that an efficiency level in the 42% to 45% range will be achieved when adapted for use in the 500 to 1,500 concentrated illumination.

We expect to commercialize this technology for both space and terrestrial applications in 2009. This achievement, in conjunction with the national renewable energy laboratory and the newest army research laboratory, have been recognized for the prestige R&D 100 awards. With the investment in new solar cell components, we have built a capacity of approximately 450 megawatts cells to receivers and 1,000 ex-concentration [ph].

We have three receiver lines fully up and running in Albuquerque, and the fourth one installed in Emcore-China will be operational before the end of August. We believe this capacity will be able to serve the market demands for the next 12 months. Therefore, the CAPEX spending will slow down significantly.

As for the CPV systems, we have done a good job in designing for performance and reliability. Our Gem 2, CPV systems has been operating on the sun [ph] since January. Generated electricity and sitting [ph] through the Emcore building in Albuquerque, it has been performing to and above the designed target. In the meantime, many CE and UL certification tasks were performed on these systems. We expect to finish all reliability and compliance tests in this quarter.

The construction of solar parts in Extremadura of Spain is complete. We're in a process of tormenting to the grid. This project gave us an opportunity to develop a complete process and procedure for commercial installations. We have also sold our CPV systems to four other pilot programs in the market of Spain, UAE, China and Korea. All these products were manufactured in our shelter facility in Mexico.

The high cost of shipping, insurance, tax and overseas installation of these products makes this operation model prohibitive for a long run. As a matter of fact, more than half of this quarter's operation loss is due to the CPV system business. Recognizing that, we are negotiating a strategic agreement with an international conglomerate. This partnership had a clear synergy between the two companies. It's almost a perfect match.

For the solar business value chain. Emcore continue to improve the performance and the cost of CPV solar cells and systems. Emcore manufactures CPV systems – Emcore can leverage our partners' sourcing power and international operations to manufacture CPV systems in more cost effective manner and near the size of that large scale deployment. Our partner can be assured with a reliable and most cost effective CPV systems supply for the construction of solar props and only in operating levels, we'll be implementing this strategy in Spanish, Korean, Chinese, and Middle Eastern markets.

As for the product cost, CHI-GEN2 [ph] was designed for performance, reliability, and time to market. We have identified many areas for cost reduction through a new design GEN3. The cost target for GEN3 product is $1.75 per watt. Even considering the price erosion of the solar modules in the coming years, we still expect the GEN3 products to be extremely competitive.

Our strategy going forward is to use the current generation products to develop market acceptance by selling the product to different customers in different markets. In the meantime, we accelerate the GEN3 development and product introduction for large scale projects. The GEN3 product is scheduled to be transferred to production by April 2009.

A successful introduction of GEN3 product will be a key enabler to our CPV system business. As for the capacity of CPV systems, we currently have a capacity of approximately 10 to 12 megawatts through the manufacturing shelter in Mexico. This capacity and manufacturing location is adequate to serve the initial needs of pallet [ph] deployment throughout the world. When demands ramp up, we will establish local manufacturing in different markets, through either wholly owned subsidiaries, joint ventures or contract manufacturer arrangements. All facility in Mexico will then be utilized to serve the North American market primarily.

Now, let me give you an update of our business development efforts of CPV systems. Working with a partner, we are strong listed on utility project by a public utility company in Southern California for an aggregated opportunity of 110 megawatts. The down [ph] selection award will be made before the end of the year.

The top generating group in Canada have secured project financing with a large Europe convent [ph]. They also got initial commitments on tax equity financing but they are in a process of finalizing terms in pricing. But we expect the project to commence in the December quarter.

We're developing multiple small to mid-size projects opportunities aggressively in many market. We expect to use our 5 megawatts to 20 megawatts of CPV system in our fiscal year 2009. As you know the solar power business is still very policy driven as the (inaudible) in Spain is finalized and the investment tax credit in the U.S. has expanded, the demand in the installation will be accelerated. Because of the dynamic nature of this business, our revenue on the Solar business can be highly variable. It is very difficult to provide a various forecast for this segment at this stage. However, our strategy and our present fund is very clear.

As discussed by Adam, the revenue for our photovoltaic system improved from $18.6 million to $21.9 million sequentially, or 18% increase. The growth of the solar revenue is attributable to our emerging businesses CPV components and systems. The growth margins is improving as well. We do recognize that there's still a lot to do in this business segment. It's my commitment to focus my effort in this areas in next couple of quarters.

In summary, our fiber optics business is robust. We are addressing the business sectors where the rapid growth is. The business will have over 20% a year over year growth. This segment can be a stand alone profitable business going forward barring significant adverse market development. The space PV sector is also regaining strength. We are expanding our customer base and application scope of this product. The commercial satellite business will have a growth of more than 10% year over year and the government business tend to be lumpy, depend on the factors out of (inaudible). But we are base lined in many very large government programs.

The CPV business will be in a market development phase for the next six months. With the successful deployment of many pilot programs, our CPV business will finally take off with a fast growth and profitability. We will provide more details guidance once we gain adap-over-ability [ph] on timing. With that, I will turn it over to Q&A.

Question-and-Answer Session

Operator

At this time, we will open the floor for questions. (Operator instructions) Our first question comes from John Lau with Jefferies & Co.

John Lau – Jefferies & Co.

Great. Thank you very much. Hong, you talked extensively about the volatility in the CPV business. I know it's difficult to forecast but for our modeling purposes, if you were to – now that you've eliminated they are the Green and Gold backlog – orders from your backlog and also conservatively taking a look at the lower end, the most conservative method of what you believe the CPV revenues are going to be, can you give us an idea of what your next quarter revenue should be in the range of?

Hong Hou

You know, John, I would love to but at this point, it is still a few moving parts in there. For example, the systems side, we are building according to our operations fund – but before the end of the quarter, if we booked the orders we are chasing after, we are able to recognize the revenue based on the percentage of completion. But at this point, we just still know the timing yet. As for components, some of the customers in order to hatch the rift with prepayments, we're making the product but will not be stripping a recognize in revenue before they make the payment – for the prepayment. With those reasons, I think at this point it is hard for me to give you a number you can take it home. As we gain better understanding of visibility, we'll give you an update.

John Lau – Jefferies & Co.

Great. Well, I'm going to come back to CPU for a second but I want to follow up on the other piece of business. Do you anticipate that the – at least on the fiber optic side, where you have a little bit more visibility on, do you anticipate that that will grow quarter-over-quarter?

Hong Hou

Absolutely. The fiber optic side is very different in nature. We will pretty confident to say that we will be having about 10% that's quarter-over-quarter growth.

John Lau – Jefferies & Co.

Wow. Okay. So, a 10% quarter-over-quart– now, I want to comeback to CPV now because I know there's a lot of questions about this. I'm going to hit it straight on. In terms of your CPV business, I noticed that your receivable days went down. So my question is, for this– for your receivables being collected, are they being collect sometime for the CPV and all the terms and conditions such as your deposits that you mentioned, and down payment all set the quarter's business?

Hong Hou

Yeah. And so, we because the terms we use, as I said, the advance payments, payments deposits, the letters of credits and pre-payment, all of these mentioned made our DSO for the CPV area and we better than the average of the corporate, for example, 60 days of DSO, the corporate average is about 82 days.

John Lau – Jefferies & Co.

So in terms of your collection for the CPV business, you're collecting them better than the corporate average and around 60 days then?

Hong Hou

Yes.

John Lau – Jefferies & Co.

Okay. Let me let someone else get a question and I'll comeback to you. Thank you.

Hong Hou

Thank you.

Operator

Our next question comes from John Harmon with Needham & Co.

John Harmon – Needham & Co.

Hi, good morning.

Hong Hou

Hi, John.

John Harmon – Needham & Co.

First question, I got the turn out in the position from (inaudible) guidance for your photovoltaic business next quarter, it sounds like you're not going to stand by your goal of hitting profitability next quarter or are you?

Hong Hou

No. John, we standby our goal of hitting the profitability no matter what the revenue is for our CPV side.

John Harmon – Needham & Co.

Fantastic. Second question, I was wondering if you could just breakdown maybe unlisted [ph] Photovoltaics revenue, by component and systems and talk about the one that you mentioned in your press release something about an equipment uptime issue.

Hong Hou

Yes. The breakdown the revenue between the business segments, we decided not to do it for the competitive reason. As for the equipment uptime, the solar cell receiver lines, we, in April and May, the one of the automatic wire [ph] boundary equipment uptime was not very good because of the customize automation and in June starts running full-toot [ph]. So, that's issue is behind us.

John Harmon – Needham & Co.

So, does that mean that you have some pent up? Some backlog going into this quarter or we're you able to satisfy all the orders that came in?

Hong Hou

Yes. We are able to satisfy the orders week [ph] came in– but you know, in June time frame, almost we have to do with allocating mode.

John Harmon – Needham & Co.

Alright. Thank you very much.

Hong Hou

Thank you.

Operator

Our next question comes from Ramesh Misra with Collins Stewart.

Ramesh Misra – Collins Stewart

Hi, good morning, gentlemen. First question in regarding to Green and Gold. Hong, have you guys been in discussions with the acquire at this point?

Hong Hou

Yes. Our team went to Australia and sit down with the acquirer and developed a very clear understanding that the process is still ongoing and we don't know exactly the timing for the transaction but as soon as that's consummated, they will be coming over here and negotiate with a new supply agreement.

Ramesh Misra – Collins Stewart

Okay. Now, in general, Hong, in many situations, the acquirer inherits the contracts and the of the preceding entity. So I want to kind of get a sense of – so why are you negating that entirely, is it your contrary decision of being extremely conservative at this point or is there something else? And why is this acquirer [ph] acquiring Green and Gold, is it – I mean there is a side of you still to pursue CPV and terrestrial CPV or is something changing?

Hung Hou

We don't know if that detail that I will can [ph] speculate it that two things going on. One, is they are changing their business model and also changing console [ph]. The business model they're changing from a licensing to manufacturing. So they would not have to consolidate the demand from their licensees, the east U.S. the purchase order. They encouraging their licensees to work with us directly and so we have done some of that. So that's why – the purchase order they placed early on, this is very fixed in the current business model. The second reason I believe, that transaction they are negotiating is an asset purchase or asset sale. They may not take the liability. So we just wanted to wipe the slate clean and go forward. If they have a demand we'll negotiate a new supply agreement, if they don't, we have enough demand from other customers.

Ramesh Misra – Collins Stewart

Okay, now, out of $79 million backlog, I know you've already been in discussion of it all of the licensees of Green and Gold, can you give us some sort of an estimate of how much of that was for internal Green and Gold consumption or to its own customers, or – and how much of it was follow through from their licensees?

Hong Hou

I don't know the exact distribution of their internal needs or their licensees need. We announced one of their licensees established a direct purchase agreement from us, that's ES systems.

Ramesh Misra – Collins Stewart

Got it. When is the installation of the CPV systems at the research center Siasalam [ph] in Spain going to be completed and when does operational data start getting published?

Hong Hou

Yes. This is – right now is in the process of being connected. We are getting permit and before that we clearly was not operating, and measuring the performance type of the grid, and once we've gotten operating before the end of September, the current – with the current regime it was to apply, I believe shortly after that, we will be able to get operation data. But we have been using mega power generator to attach the tractors and testing the performance. Actually, the performance on individual systems are above our designed target. And we have – we don't have the height of the grid data yet.

Ramesh Misra – Collins Stewart

Just to get a clarification on this. I think – so you had a project over at Extremadura and also the research center?

Hong Hou

Ah yes, the East Coast.

Ramesh Misra – Collins Stewart

Yes, the East Coast.

Hong Hou

The East Coast, the hardware [ph] has shifted before the end of June and the installation has not started yet.

Ramesh Misra – Collins Stewart

I see. And that was for about 300 kilowatts right?

Hong Hou

Yes.

Ramesh Misra – Collins Stewart

Got it. Okay, and a data for that, when do you expect – because that will be publicly available data, right?

Hong Hou

Yes and we've visited the East during this trip and their plan is installation and commissioning done before the end of November. What's delaying the process (inaudible) and ready.

Ramesh Misra – Collins Stewart

Got it. Okay. And then a final question at the – you've got to forgive me for trying. But, can you put a floor on your PV revenue? I mean, I know it's difficult to give a range or, but – is there a certain minimum number that you're 100% comfortable with.

Hong Hou

You know, Ramesh, when I have better visibility, I will not let you know. At this point, I would not provide a floor, I will not provide a ceiling either.

Ramesh Misra – Collins Stewart

Okay. Alright. I'll stop there, thanks.

Hong Hou

Thank you.

Operator

Our next question comes from Jed Dorsheimer with Canaccord Adams.

Jed Dorsheimer – Canaccord Adams

Hi. Thanks. Hong, first question, on the 32 million backlog, did you give a split between cells receivers and systems?

Hong Hou

That's all the components backlogs.

Jed Dorsheimer – Canaccord Adams

Alright, great. And then on the – in terms of guidance, I assume at this point, just with the moving parts and the lack of visibility, the 470 to 475 for fiscal '09, that's off the table at this point, correct?

Hong Hou

We will have to – I think you know that the moving parts ruling [ph] in the CPV area. Right now, to know with Spanish sitting turf [ph] has not been finalized with the ITC in the US not been extended, a number of programs we are engaging which are going to be finalized very quickly and it's a little delayed. So, we don't know exactly the timing but I think we would know the timing once we gain some more visibility, we'll update you. But we have some strategic relationship in the development and in negotiation and finalization so, tempering big opportunity to our revenue and huge impact to our CPV business.

Because this is very important agreement, we just at this point, we can't tell where the timing is going to be and the impact of the revenue. So, I'd rather just do not provide a guidance with any certainty.

Jed Dorsheimer – Canaccord Adams

I understand. I guess, the reason for the question is it sounds like with this reset here, you're taking the liberty to reassess the business, get better visibility and then, you'll be providing some further guidance for both this year and for next year. Is that the right way to look at it?

Hong Hou

Absolutely. I think, we did the tour of the two weeks, we still need to do some more study on their project opportunity and timing so as I said, next six months, pretty much more of a market development phase. So, I think, we do not need six months to gain the visibility but we need a bit more time to provide a guidance.

Jed Dorsheimer – Canaccord Adams

Alright. Maybe just a more strategic question for you on the systems business because it looks like there's two suppliers; the cells and receivers are pretty much to the market, you and Spectra Labs. And on the systems business, it becomes a much wider scope of competitors in the marketplace. And if we look at this particular quarter, help me understand it. Looks as if with the Extremadura ISFOC, you would have done around $5 million in systems sales by our calculations. The loss that you took there, I'm just wondering the strategic rationale for being in this system versus just selling the cells and receivers.

Hong Hou

Yes. That system we certainly our core competency is to manage, design, and manufacturing CPV components in the systems but we have to develop a process and procedures in for the installation in operation and maintenance. So, in the future, we're not planning to really be shifting our center of gravity into the owning and operating side of the solar product or EPV side of the solar prospect. It's our responsibility to develop a very robust process we can hand it over to our partners for installation. So, this, n many ways, it's a top finding effort and we have developed a very robust process to this commercial installation.

Jed Dorsheimer – Canaccord Adams

Great. I appreciate the update. Thank you.

Hong Hou

Thank you.

Operator

Our next question comes from Sam Dubinsky with Oppenheimer.

Sam Dubinsky – Oppenheimer

Hey, guys. Just a couple of housekeeping question. You figure if 400 megawatts in component capacity coming online, or mostly that's already online with some extra coming online, I think from the China production facility, Can you maybe just discuss how much CPV capacity you have today?

Hong Hou

Yes. So, Sam, the (inaudible) solar cells and the receiver assembly, when the fourth line is up and running, the capacity, the flow, is pretty much balanced. NASA give us a 250 megawatts capacity and there are thousands ex-concentration.

Sam Dubinsky – Oppenheimer

250 megawatts of component capacity?

Hong Hou

Yes.

Sam Dubinsky – Oppenheimer

Okay. And what about CPV, the actual system capacity?

Hong Hou

The system capacity right now in the shelter facility in Mexico is about 10 megawatt to 12 megawatt.

Sam Dubinsky – Oppenheimer

Okay.

Hong Hou

As we developing this strategic agreements and with this international conglomerate as we are working with our partner in the Southern California utility project and part engineering, any of those project materialize, we need to increase our capacity at a system level pretty quickly. Fortunately, we had the experience to set up the new capacity and expand the capacity within two months and that's what we did. Initial capacity was done in Albuquerque, then we got to process successfully to transfer over to Mexico in 2.5 months including renting the space and remodeling of the facility.

Sam Dubinsky – Oppenheimer

Okay. In terms of global partnership. You may just discuss how that will be structured? I mean, will they be making the CPV system or you'd be splitting the revenue or we use to be signing [ph] components? Can you please discuss how that will be structured?

Hong Hou

Yes. Because there are international pressures for the area they already have the facility and manufacturing the infrastructure and they will be manufacturing the system. They can be all contract manufacturers. They are totally flexible but the synergy is very clear, and they don't have solar cell capability, they are not the designers, and – but they have a huge power in sourcing raw material commodity. As I said, they have international presence. In some areas they have the manufacturing facility, and in some areas they only have sales offices. In those cases, it only has the sales offices or branches, we will be establishing our own manufacturing facility.

Sam Dubinsky – Oppenheimer

The East Coast, will this go to more states, where its headquarters are?

Hong Hou

I'm not going to be able to provide that you for (inaudible).

Sam Dubinsky – Oppenheimer

Okay. In terms of our Green and Gold Energy, would you consider their buyer to be credible? Have you heard of their buyer or is it relatively unknown? And I've a couple of last follow up question.

Hong Hou

You know, I think at this point it's too early to tell because the deal hasn't gone through. We don't want to get in the middle of commenting their credibility. Certainly we have our standing in that segment but I don't want to openly comment on their –

Sam Dubinsky – Oppenheimer

But if Green and Gold being the sought after by known entity. Would most people recognize the name or is they relatively unknown person looking at Green and Gold?

Hong Hou

It's not going to be an international conglomerate.

Sam Dubinsky – Oppenheimer

Okay. And then on your OpEx – can you re discuss how we see OpEx for the next couple of quarters?

Hong Hou

The OpEx is where it is. The Q3 was over $25 million which – there's $3.2 million was TSA non-recurring part of the TSA. So I think going-forward, we probably at about $21.5 million to $22 million per quarter.

Sam Dubinsky – Oppenheimer

And is that going to be consistent, or should we think about ramping over time if solar starts accelerating?

Hong Hou

Right. When the solar accelerated the OpEx definitely is going to be increasing. We need Northwood [ph] on the grounds to cover the different market.

Sam Dubinsky – Oppenheimer

Okay. And also with respect to the solar side , on the production hiccup this quarter, what guarantee that another production hiccup won't occur? What was the primary issue with the equipment that we won't see this issue going forward and if this issue did not happen, what would gross margin have been in the solar business?

Hong Hou

We didn't do that– that fulfillment – I can answer the first question. The issue coming around for this new capability and with developing, so that in a way, that anyone going through this area, it goes through the same learning curve. So, it's similar to the last quarter, the Q2. It's equipment uptime for the customized automation. Because it's not standard off the shelf capability, and some of the customizations was not done very nicely, so when you start exercising the equipment for 7/24 operations, it starts showing up, but again as I said, these issues are behind us.

Sam Dubinsky – Oppenheimer

Okay. My last question is, (inaudible) capacity, given all the subsea [ph] risk, I know you got to mention caution. Do you think the factories will be underutilized over the next quarter or so? Is that what you're sort of building your mouth [ph] to, or do you think you're pretty much going to match capacity at this point?

Hong Hou

We are running right now, to capacity but we don't know. It's again depend on the still moving parts [ph]–

Sam Dubinsky – Oppenheimer

Okay. Thank you, guys. I appreciate it.

Adam Gushard

Sam, this is Adam. Just on the OpEx number, when Hong was saying 21, right now we're still going to the file purchase type allocation of those acquisitions from Intel and so, depending on how the fixed assets and IPO fall out, we could have some more non-cash after (inaudible) of IP. So, on an EBITDA basis, that's not going to really effect anything and it's not cash going out the door. But that should bring up OpEx to around $23 million, kind of number, on the quarterly basis. Okay?

Sam Dubinsky – Oppenheimer

Our pro forma should be 21.5 to 22?

Adam Gushard

Yes. When you back out the non-cash job, I think that's fair.

Sam Dubinsky – Oppenheimer

Okay. Thank you.

Operator

Our next question comes from John Lau with Jefferies & Company.

John Lau – Jefferies & Co.

Great. Thanks. I wanted to follow back with you. I think it's great that you're now focusing more on a strategic partner model for your manufacturing. I have a follow up question on that. For your strategic partner, will they be one global exclusive or will that be – will it be several based upon the regional system demand. It will be flexibility to establish regional manufacturing? And I have a follow up. Thank you.

Hong Hou

The occurrence three more may not play to tie us up for exclusivity. But they do want to have the most cost effective supply and they have multiple country presence. They're actually doing with this one company and probably will be addressing 3 out of the 5 market places we're targeting.

John Lau – Jefferies & Co.

Okay. The follow up is that, when do you think those agreements will be done?

Hong Hou

I think we are targeting to get a complete this quarter.

John Lau – Jefferies & Co.

And then, when you diminish your system installs, will your cost go down now that you're not – you're shipping over from a lot of the pilot system productions yourself over to your strategic partner and I guess, the corollary of that question is if one step strategic partner is up and running and really leveraging on their expertise, can you then use their products on to implement some of your big system contracts that you're talking about in the U.S?

Hong Hou

Absolutely. Actually, this is the cost competitive and–but from our experience, the shipping cost can be pretty significant. So, we wouldn't want it to ship from Spain back to the U.S for the installation in the U.S. But as I said, really, the beauty for this CPV system installation is it's not a cattle [ph] demanding- for example, we setup a 10 to 12 megawatts; the capacity in Mexico could only spend less than $2 million and in less than three months. So, once we finalized and materialized some of the bigger program opportunity, we can ramp up the capacity very quickly and does not need a whole amount of CapEx to do that either.

John Lau – Jefferies & Co.

But it make sense on the regional basis of where your large contracts are, you could still– that strategic partner could be a contract manufacturer to you then still though?

Hong Hou

Certainly. Very definitely. Despite aspects, the strategic synergy where we are negotiating including the contract manufacturer they do for our program.

John Lau – Jefferies & Co.

Great. Thank you.

Operator

Our next question comes from John Harmon with Needham & Co.

John Harmon – Needham & Co.

Hi. My question is– I was wondering if the recent developments in your Photovoltaic business changed the timing or your intention to take that system business off and maybe could you give us a status update of how the accounting is going.

Hong Hou

Yes. John, we – no, that will not change our timing for that, and so we have the board authorization to a funding and operational aspect, we are still scheduled to complete this work by the year-end of 2008 and, depending on the capital market, we are planning to have the solar IPO in the mid-2009.

John Harmon – Needham & Co.

Great. Thank you.

Operator

Okay. At this time, we have reached the end of the question portion of the call. I would now like to turn the floor back over to management for any closing comments.

Hong Hou

Thank you very much. We are very pleased to have achieved the improved operating results in the company's fiber optics divisions, achieving positive earnings net of non-recurring transition service projects. Our fiber optics divisions have a very robust and new products tax-one [ph] with a number of the high growth opportunities, and we look forward to continued earnings growth over the next few quarters. In satellite Photovoltaics, we experienced a gap in demand for the June quarter. We expect a significant rebound in the satellite related revenues over the next few quarters.

In the aerialCPV business, although we were adversely affected by the equipment uptime, the company still achieved a significant revenue improvement in its terrestrial CPV product line. Demands continue to be significant as this company continues to sign long-term CPV related supply agreements with a much more diverse customer base for both non-based and commercial rooftop applications in different market places. Where there is some uncertainty of incentive and subsidy in some of our end solar power market with the increased market acceptance and continued growth in our terrestrial CPV business. But we're extremely confident in our position in this emerging market. We're committed to our profitability target and expect continued progress for all the goal in the following quarter. When I talk to John Harmon, as for this strategic fund separating the fiber optic and solar photovoltaic business, we continue the funding and operating – operational aspect that were on schedule to complete this work by the end of this 2008 and transfer solar IPO in the mid of 2009.

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

Operator

Ladies and gentleman, that concludes today's conference call. You may now disconnect your line. And have a wonderful day.

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Source: Emcore Corporation F3Q08 (Qtr End 06/30/08) Earnings Call Transcript
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