Is Emcore Blinded By the Light?

On August 7, 2008, Emcore Corp. (EMKR) announced in a press release that: 

[C]onsolidated gross margin for the quarter ended June 30, 2008 improved to 18% compared with 12% as reported in the immediate prior quarter.

In that same press release, Emcore stated that:

[O]perating loss for the three and nine month periods ended June 30, 2008 totaled $11.6 million and $33.8 million, respectively, which represents a significant decrease in operating loss when compared to the prior year quarter and the prior year losses of $13.5 million and $40.8 million, respectively.

I believe that the improvements touted by Emcore were created by managing the allowance for excess and obsolescence, a reserve account for inventory. Historically, the allowance as a percentage of gross inventory and the cost of revenue as a percentage of revenue were as follows (all numbers in thousands):

click to enlarge

Prior to the June 2008 quarter, the allowance as a percentage of gross inventory never dipped below 20%. Then, for the quarter ended June 30, 2008, the allowance as a percentage of gross inventory fell to 12%. In fact, gross inventory dropped $2.5 million from the March 2008 quarter to the June 2008 quarter, yet net inventory (gross inventory less allowance) went up $6.5 million. The drop in the allowance as a percentage of gross inventory does not seem warranted, given the fact that the cost of revenue as a percentage of revenue for the June 2008 quarter seems in line with prior quarters and years.

If the allowance as a percentage of gross inventory should be 23% for the June 2008 quarter, then the allowance for excess and obsolescence should be $13.017 million ($56.594 million X 23%). This allowance would result in a $6.489 million decrease to inventory and a corresponding $6.489 million increase to cost of revenue. A $6.489 million increase to cost of revenue would cause gross margin to drop to 9.48%, which is almost half of the stated gross margin of 18% for the June 2008 quarter and even lower than the 12% reported in the March 2008 quarter. A $6.489 million increase to cost of revenue would also elevate the operating loss for the three and nine month periods ended June 30, 2008 to $18.1 million and $40.2 million, respectively.

The alteration of the allowance for excess and obsolescence is alarming for several other reasons. Emcore's stock price (5.13 as of September 17, 2008) has risen 15% since their press release on August 7, 2008, when its stock price closed at 4.46. Emcore is considering splitting its fiber optics and photovoltaic businesses into separate corporations. The lower allowance for doubtful accounts and higher unbilled receivables have not been considered. Finally, the lower allowance for excess and obsolescence for the June 2008 quarter leaves little room for manipulation in the September 2008 quarter.

Disclosure: Author is short EMKR.

Comments

[mmsax:]

The cell lines are up and running at full performance and reliability after several quarters of startup equipment issues that drove allowance higher than desired. Now that the production issues are behind them, as they have clearly stated, the allowance settles to the expected lower level reflecting the improved and fully operational lines. Readily explained - nothing sinister.

2008 Sep 19 03:47 AM

[Enrico:]

Disclosure: Author is desperately short emkr on the day that the market is going to rally and short sellers are in a serious dilemma with the SEC. No coincidence that he stayed up all night writing this piece.

2008 Sep 19 08:42 AM

[shorty_is_s...:]

Nice...."Disclosure: Author is short EMKR"...no kidding!!! Up all night frantically trying to save his a$$.....too funny.

2008 Sep 19 08:52 AM

[keefwivanef:]

Once again for the slow learners.
Most of Emcore's "order backlog" for CPV was to shonky customers like GGE and the SCIG group.
There is not one single company that has a CPV device suitable (or available) for domestic roof mounting.
The claims of "soon to be built" Megawatt solar farms are unproven.
How could any company borrow the kind of money needed for the farms against an unproven technology with (best case) returns of only about 10% pa.
The costing for these proposed farms totally ignores the cost of infrastructure and maintenance.
CPV is attracting the same kind of get rich quick scammers that created the dotcom bubble.
The same result will ensue.
Woof

2008 Sep 19 08:07 PM

[tomhill9:]

Don’t let the up-and-down emotion get the best or you. Use your cool head and make the right decision. Let’s look at the current numbers, as of 9/12/2008:

- Total Shares: 77.5M, Float: 66.4M
- Institutions: 75.5M (97.4% of Total, or 113.7% of Float).
- Insiders: 24.5M (31.6% of Total, or 36.8% of Float).
- Shorts: 33.8M (43.6% of Total, or 50.9% of Float).

For insiders and institutions alone: they own 100M shares, or 129% of total (151% of Float)!!!

This ridiculous situation is a result of SEC not enforcing the rules already in the book and let the shorts running naked all over the market. The more shares the institutions bought, the more shares the shorts printed out to supply them, and in the process skewed the supply/demand equation, pushing the share price downward. I know, I witnessed it first hand: I came in to buy 30K EMKR at around $5.40 about 4 wks ago, saw it move to $6.50, then another so-called “research” article came out from Andrew Left and all hell broke loose. I think this guy single-handedly pushed the price down from $6.50 to $4.20 in a matter of a few days (I checked insiders and institutions, they did not sell).

I asked myself: How could anyone stand against such an unchecked power of naked selling? These guys have an entrenched interest to defend their short position (about $200M), they have very deep pocket from all the filthy money sucked out of previous victims in the last few years. I read from someone on the EMKR Yahoo board, while cursing the short sellers, nevertheless vowing never again to buy into such a heavily shorted stock! After getting a quick -22% haircut, I almost agreed with the poster and headed for the exit door myself. So I can understand the fear and anxiety of my fellow longs, especially now that they are even, or even slightly positive as in my case. I definitely would get out now if the rule of the game remains the same.

However, THE GAME RULE HAS INDEED CHANGED with the new naked shorting rule, and the shorts no longer have the unlimited capability to do shares printing, no matter how much money they have. In this new situation, the law of supply and demand reigns supreme and is the only game in town. Considering the VERY, VERY thin effective float, and no additional artificial supply from naked shares, price will have to move upward strongly with any increase in demand. Institutions have bought aggressively in the last few months at the darkest moments. I don’t see why they would stop that momentum now, especially when technical indications and fundamental ingredients are brighter and more compelling.

So the only games left for the shorts are: 1. Flooding the discussion board with scary tales or "researches" by paid bashers who work for Left, 2. Conspiring with MM’s to manipulate trading, especially during pre-hours and after-hours when the volume is thin. All these efforts can only succeed in delay the inevitable price increase if the longs get scared, co-operate, and sell their shares prematurely.

Think about it. You longs have suffered grievously this year from shorts attack. You have shown resiliency, toughness and conviction in not selling your position. Now you finally have a game changer, a chance to make something big to compensate for your suffering days, a fork to stick into the shorts and twist 180 degrees for a change, letting experience what you have gone through. What will you do: Finish them up or wimp out at $6.24, $6.50 because you let Andrew Left get into your head?

I continue to bet with the insiders and the institutions that they collectively know exactly what they are doing, and the actions in the last week are nothing compared to what will come in the next 3 months and 2009:

DATE Bought Sold Net

5/30/2008 16,614,449 -2,668,803 13,945,646
6/30/2008 150,920 -329,840 -178,920
7/31/2008 3,186,677 -285,791 2,900,886
8/8/2008 1,940,943 -1,548,855 392,088
8/15/2008 27,445,805 -9,552,307 17,893,498
8/22/2008 8,959,719 -370,940 8,588,779
8/29/2008 393,532 0 393,532
9/5/2008 500 0 500
9/12/2008 0 -177,169 -177,169

2008 Sep 20 02:03 PM

[tomhill9:]

I am encouraged by the EMKR stock price in the aftermath this latest attack article by a shorts. Normally, after a 26% up day (38% in 2 days), one would see the gains get wiped out or cut in half due to such an article. However, EMKR shook off the negative attack and only lost 1.2% for the day. This confirms my conviction about the beauty of the law of supply and demand, and that Andrew Left's ability to depress EMKR price is diminishing: the insiders did not sell, the institutions did not sell, the shorts could attack until hell freezes over, but they could not naked sell. The only ones who sold on Friday were the scared longs, and those who liked to play the dangerous game of market timing. However, there weren't enough of these sellers to overwhelm the buyers’ demand and make a big dent in share price, as has happened in all previous attacks. Now these sellers are rationalizing their actions on the discussion board, but perhaps secretly worrying that they may not be able to buy back at lower price. So much for the desire to move on and to have a peaceful weekend!

No doubt Andrew Left and followers will be using all the tricks they have in the coming days and weeks to defend, and then safely exit from their $200M short position. Unfortunately for the shorts, there aren't enough wimpy longs to help them, going forward. Considering this short attack article and its aftermath, I am convinced that they are losing the terror grip on EMKR price, and will be increasingly fighting a losing war.

2008 Sep 21 02:43 PM

[bowater:]

why would someone short a 5 dollar stock, when they could short HIG at 50.

2008 Oct 19 11:14 AM

[User 226214:]

no way I will sell EMJR until it reaches $15.

2008 Nov 08 01:50 PM