EMCORE Corporation (NASDAQ:EMKR)
F4Q2010 Earnings Call Transcript
December 21, 2010 4:30 pm ET
Victor Allgeier – IR, TTC Group Inc.
Mark Weinswig – CFO
Hong Hou – CEO
Michael Intrator – Natsource
Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the EMCORE Corporation fourth quarter fiscal 2010 earnings conference call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for question. (Operator instructions) This conference is being recorded today, Tuesday, December 21, 2010, and a webcast of the call will also be available at www.emcore.com.
At this time, I would like to turn the conference over to Victor Allgeier of TTC Group. Please go ahead.
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 EMCORE’s current expectations and projections about future events and financial trends affecting the financial condition of its business. Such forward-looking statements include, in particular, projections about EMCORE’s future results, statements about its plans, strategies, business prospects, changes and trends in its business and the markets in which they operate.
Management cautions that these forward-looking statements relate to future events or its future financial performance and are subject to business, economic, and other risks and uncertainties, both known and unknown, that may cause actual results, levels of activity, performance or achievements of its business or its 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 EMCORE’s business that are addressed in its 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 its Annual Report on Form 10-K and its Quarterly Reports on Form 10-Q. EMCORE assumes no obligation to update any forward-looking statement to conform such statements to actual results or to change in its 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.
Thank you, Vic, and good afternoon everyone. Before we begin our review of the quarterly results, I would like to express how exciting I am to be at EMCORE. EMCORE is a dynamic company with tremendous potential and a great team. I look forward to contributing to its future success.
Now let me turn to the highlights of our fourth fiscal quarter operating results. Consolidated revenue for our fourth fiscal quarter totaled $54.1 million, which is an increase of $7.5 million or 16% over the previous quarter. On a segment basis, our Photovoltaics business accounted for $19.7 million or 36% of the company’s total revenue, which represents an increase of approximately $4.5 million or 30% from the prior quarter. The increase in revenue was primarily driven by our base solar power generation products.
The Fiber Optics segment accounted for $34.4 million or 64% of the company’s total revenue, which represents an increase of roughly $3 million or 9% from the prior quarter, with the increase primarily driven by higher sales of ITLA, active optical cable, and CATV products. We are pleased with our results, especially considering the fact that this includes the effects of the ITC ruling on our parallel optics device products. I will discuss this in more detail later on in the call.
Consolidated gross margins fell to 23.6% from 27.5% in the prior quarter. On a segment basis, Photovoltaics gross margin was 29.3%, which is a decrease from 30.7% reported in the prior quarter, primarily due to higher manufacturing expenses and certain contract losses, partially offset by leverage from higher volume.
Fiber Optics gross margin was 20.4%, a 5.5 percentage point reduction from the prior quarter, primarily due to an unfavorable mix shift and higher material costs. The company’s Fiber Optics division is beginning to experience a product mix shift as customers migrate towards newer technology platform. We believe that this will cause margins in the Fiber Optics division to be under pressure until our new products begin to ramp in the latter part of this year.
Operating expenses fell $6.6 million from the prior quarter to $14.6 million primarily due to charges realized in the third quarter for the establishment of a bad debt reserve for a solar customer and the Tangshan joint venture termination fee.
On a GAAP basis, the consolidated net loss for the fourth quarter was $0.9 million, an improvement of $8.3 million from a net loss of $9.2 million in the prior quarter. On a non-GAAP operating loss basis, after excluding certain adjustments such as certain corporate legal expenses associated with patent litigation, the provision for doubtful accounts established for a solar customer and the Tangshan termination fee, all of which are set forth in the non-GAAP table, was $1.9 million, which represents an almost $1 million improvement over the preceding quarter. Our GAAP net loss per share was $0.01 versus $0.11 in the prior quarter.
On a year-over-year basis, fiscal year ’10 showed significant improvement in our financial operating performance in almost all categories. Revenues increased by 8% with increases in both segments. Gross margins improved over 30 percentage points to 26.5% and our operating loss fell 85% to $21.4 million. As we’ve discussed in prior periods, we are very happy with our year-over-year improvement.
Now onto order backlog, which we define as purchase orders or supply agreements accepted by the company with expected product delivery and/or services to be performed within the next 12 months. At September 30, the company had a consolidated order backlog of approximately $71.3 million, which is a $3.8 million increase or 6% from the prior quarter.
On a segment basis, Photovoltaics order backlog totaled $53 million, a 25% increase due to significant wins in our solar satellite – in our satellite business. Fiber Optics order backlog totaled $18.3 million, a reduction of 27% from the prior quarter, primarily driven by lower backlog in our parallel optics device business.
Moving on to the balance sheet, during the three months ended September 30, the company increased its cash and cash equivalents and restricted cash balance by over $6 million, primarily driven by higher advance payments. We also realized an improvement in our DSOs to 77 days and an increase in our inventory turns to 4.4 times. As we announced in November, the company found a new $35 million credit facility with Wells Fargo. This credit facility, which is subject to a certain borrowing base restriction, will be used for working capital and general business purposes.
With that, I would turn the call over to Hong Hou, who will discuss the company’s strategic and operating initiatives and provide revenue guidance for the first fiscal quarter.
Thanks, Mark. Good afternoon, everybody. As Mark has discussed in detail, we achieved a significant improvement in financial results in the September quarter over the previous quarter. Our fiscal year 2010 operating performance also realized a strong strength over the prior year. Revenue was $54.1 million, consolidated gross margin was 23.6%, and net loss was reduced to $885,000, or $0.01 loss per share.
The company also generated $6.6 million in gross profit and cash flow, together with a to-be-recognized gain in the customer prepayments, as company generated over $80 million free cash flow in the September quarter. We ended fiscal year 2010 with an almost 10% revenue increase compared to the fiscal year 2009. And more importantly, saw significant improvement in gross margin to 26.5%.
On the balance sheet, we exited fiscal year 2010 with $21.2 million in cash, with net cash of nearly $11 million. Despite some challenges, we feel that the company is on the right track and poised for a bright future.
First of all, let me address several significant events since the last conference call. In early October, Mark Weinswig joined us as our new CFO. Mark brings tremendous finance, accounting and operational experience, as well as fiber optic industry knowledge. Mark hit the ground running and had started implementing numerous initiatives in refining processes and procedures. We are excited about his addition to the executive team.
In early November, we established a line of credit facility with Wells Fargo. As Mark discussed, recognizing the significant operations and the financial turnaround, Wells Fargo offered a credit line with a total availability of up to $35 million and the interest rate at LIBOR plus 3%. Subject to certain borrowing base metrics, this facility has significantly improved the company’s financial capability. We plan to utilize this facility for capital expansion and general working capital purposes such as funding the construction space of our future terrestrial solar project.
In the last conference call, we discussed in detail the CPV or Concentrator Photovoltaic joint venture we established. Just to refresh your memory, on July 30, 2010, EMCORE entered into an agreement for the establishment and operation of a joint venture with San'an Optoelectronics in China for the purpose of engaging in the development, manufacturing and distribution of CPV receivers, modules and systems for our terrestrial solar power applications.
EMCORE owned 40% and San'an owned 60% of the joint venture, named Suncore. EMCORE’s Senior Vice President, Dr. Charlie Wang, served as General Manager of the joint venture. The main objective of this joint venture is to manufacture EMCORE-designed CPV components and systems at low cost and in high volume. Furthermore, JV will aggressively develop solar project opportunities in China’s emerging markets for solar renewable energy.
China is viewed as one of the most promising markets for the CPV solar power. China is projected to add one gigawatt solar renewable power per year after 2012, and it is expected to boost its capacity of solar generated more than 64 to 20 gigawatts by 2020.
Earlier this month, we entered into a new agreement with Huainan City in China and San'an Optoelectronics. In return for our joint venture of Suncore being located in Huainan City, Suncore will receive tremendous economic incentive, which includes land rent of 463 acres for establishing Suncore’s manufacturing operations and a $75 million cash grant to fund the manufacturing equipment purchases.
Furthermore, Suncore will receive a $0.21 rebate for every watt of the CPV products manufactured itself in China for the first 1000 megawatts. This financial incentive will accelerate the commercialization of EMCORE CPV technology and start production ramp. We believe that this investment by Huainan and establishing Suncore’s low-cost manufacturing base will enable our CPV technology to become a cost effective solution for commercial and power utility applications.
This important development allowed EMCORE to leverage the financial capability of its joint venture partner and the government incentive offered in China. The end result is that EMCORE can be established operation capacity and the capability and launch its CPV business with a very manageable investment.
We have started transferring the manufacturing processes to Suncore over the last four months. The key management is in place and about 70 operators have been trained and certified in manufacturing EMCORE-designed CPV receivers and modules. Currently, they are producing products for San'an-associated – San'an project for 2 megawatt CPV system.
The joint venture company is securing various regulatory approvals and pursuing its business registrations with banks, customs and taxes, import, export and foreign currency infrastructures, and expects to complete the business registration in Huainan City early 2011 and start the construction and set up with the manufacturing lines shortly after.
Some purchase orders for long lead equipment have already been placed so as to meet our aggressive startup timeline. We expect Suncore manufacturing and production to start in September 2011. The immediate demand for this new production capacity is 50 megawatt, with 12 megawatt sourced by San'an and 3 megawatt sourced by EMCORE.
It is improvement to maintain that the CPV solar cells will continue to be manufactured in our Albuquerque facility using our patented technology. Suncore will serve as EMCORE’s primary low-cost, high volume manufacturing base for CPV receivers incorporating EMCORE solar cell and in providing business development in China.
This transaction has been reviewed by our government, and we do not believe there is any government contingency for the establishment of this joint venture. With the JV taking on the execution of manufacturing as well as the business development in China, EMCORE can focus on continued development of our next generation CPV products and solar business development in North America and Europe.
Now let me give you an update on our products and business development activities in the terrestrial solar power area. On the business development front, our strategy in this market segment continues to be a provider of technology in hardware to project developers and our fund owner-operator. In the initial stage of this technology introduction, we will likely develop the project first with the utility companies and work on selling them to operators at a later date.
During the September quarter, EMCORE signed a power purchase agreement with Tucson Electric Power, or TEP, for a 1 megawatt power plant to build in the Technology Park of University of Arizona. In addition, we have secured approval from all major regulatory commissions to build a 2 megawatt power plant for PNM, our local power utility company in New Mexico, distribute its generation program in Albuquerque.
The power generated will be directly connected to our facility. In addition to the benefits of netting out the cost of our power consumption, we will be receiving payment for renewable energy credit. We expect to complete both of these projects in the next 18 months.
Furthermore, we are aggressively developing some smaller sized projects. We believe the success in the projects will lead to some major follow-on opportunity. One strategic objective in fiscal year 2011 is to develop and expand partnership with owner-operators, both domestically and internationally, to drive deployment of our terrestrial CPV systems.
On the product development front, we continue to make excellent progress on the development of the inverted metamorphic multi-junction or IMM solar cells for terrestrial CPV applications. We expect that triple-junction IMM to reach efficiency of 42% under 1,000 times concentration in production by the end of 2011. And quadruple junction IMM with an efficiency close to 45% under a 1,000X concentration by the end of 2012.
Concurrently, we are formulating design concepts of improved CPV system performance by optimizing the optical chain. This will lead to a further cost reduction. In summary, we feel that we have put the right strategy in place to launch our industry-leading CPV design to commercialization and ramp up the business.
Now let me discuss our satellite solar power photovoltaic business. Our satellite solar power market remains very strong. And our customers that operate in this market have been very successful in securing new satellite support. In Q4, we achieved record revenue of $19.2 million for this business.
In fiscal year 2010, we booked orders totaling $64 million and expect to maintain or exceed this level in fiscal year 2011. Moreover, we place a good deal of emphasis in developing new government program opportunities that has identified a healthy pipeline of new orders that will significantly augment our existing commercial business.
Designing and manufacturing highly reliable base solar power components continues to be our hallmark. We maintain an excellent track record of no failures with our products powering 75 separate on-orbit spacecraft to date. We are proud to have been recognized by all four major US aerospace companies with excellent awards. We were recently awarded two major inter-planetary programs by NASA with total contract value approaching $20 million.
Our record-setting IMM-based solar cells with commercial efficiency of nearly 34% under space conditions continue to generate a great deal of interest for government programs. The successful completion of the Fast Access Spacecraft Testbed Phase 2 program has significantly increased the visibility and the recognition of EMCORE’s IMM technology among different government space agencies. We expect that our products and technology solutions will be integrated into many future events programs.
Moving on, let me discuss the significant developments in the Fiber Optics business. First, on the telecom products, the revenue from this product line almost doubled throughout the past year, primarily driven by the tunable laser sales into 40 and 100 gigabit per second applications.
Due to the excellent attribute, narrow linewidth, spectral purity, and high output power, our proven tunable external-cavity lasers have become laser of choice for 40 and 100 gigabit per second transponders, with an estimated market share of 70% for the coherent system. We are supplying to five tier-one OEMs in the US, Europe and Asia for their 40 and 100 gigabit per second program. This customer base is expanding as well.
EMCORE has taken the leadership position within the industry regarding the tunable laser multi-source agreement, or MSA, and is now the editor of micro-ITLA MSA agreements for future small form factor 40 and 100 gigabit per second transponder applications.
On the tunable XFP front, as we reported in our last conference call, our internal game chip and modulator components have been fully developed and integrated in-situ post-assembly, and our tunable XFP products would shift to major telecom customers for qualification. This product has generated significant customer traction with sales to five tier one OEMs in Europe and in Asia and in North America as well. Right now, we are in the process of finalizing new designs in programs and ramping up for volume production. And we expect that this product will contribute to our revenue substantially in the second half of the fiscal year 2011.
Another highlight is EMCORE’s Connects Cables product. This is our active optical cables, utilizing high-speed parallel optic transceivers embedded in the connectors to perform electrical to optical and optical to electrical conversions. They are used primarily in high performance computing clusters, replacing heavy and rigid electric cables.
As a leader in supplying, EMCORE has shipped over 100,000 units of CDR and QDR cables to date. Our QDR cables are connecting the world’s fastest supercomputers. Our new product includes recently demonstrated 4 by 14 gigabit per second FDR [ph] and 12 by 10 gigabit per second CXP active cable product for high-speed inter-connect project.
Our parallel optic device product has been a major source for revenue and positive for our Fiber Optics business. However, say, International Trade Commission or ITC’s limited exclusion order and cease-and-desist order related to a lot of addressees [ph] has had an adverse impact to our business in the near-term. We have filed an appeal in Federal Circuit Board against ITC’s determination.
While we are vigorously defending the allegations, the company has formulated and implemented a product redesign and eliminate the impact of accused infringement and the exclusion and cease and desist orders issued by the ITC. We have finished the qualifications with some customers and achieved market share allocation. Although we may see a short-term witness on this product line, we expect that it will be able to recover over the fiscal year.
On broadband side, the Fiber Optics business continues to experience a robust growth. Our full-band QAM transmitter products enable the cable TV to its providers a more effective approach to expand the bandwidth over the hybrid fiber coaxial transmission infrastructure to compete with the telco’s fiber-to-the-premise’s installations. As a result, the demand on this product has increased dramatically.
As we introduce new products to the market, our technology leadership over our competitors is widening. Judging from the announced CapEx spending plan on scalable infrastructure and upgrades of the cable TVs or its providers, we believe that our growth in Fiber Optic business will continue to grow throughout the year 2011.
With a great turnaround in fiscal year 2010, we are preparing to build long-term strength for our business going forward. Now let me discuss our strategy and plan for our fiscal year 2011. For the past several years, the company has engaged in a design and the deployment of CPV systems for commercial and utility scale solar power applications.
We believe that our current Gen III CPV system design is superior in performance and is competitive in cost to silicon solar power module, for example, when deployed innovations with high solar exhibit. We also believe that our CPV systems business has the potential to generate significant revenue growth for the company.
Our CPV systems business will require a substantial amount of capital to establish a high voltage, low-cost manufacturing infrastructure and to find working capital needs as this business develops. As a result, the company has in the past pursued several strategic opportunities towards separating company’s Photovoltaics and Fiber Optic businesses to raise capital for our CPV systems business.
In addition, the company has also been pursuing strategies specifically related to the CPV systems business. The commitment we received from San'an joint venture related to the cash, working capital loan, and achievement of land and cash grant as well as various incentives and subsidies from Huainan City to provide Suncore with adequate working capital to establish a new high volume, low cost manufacturing facility for our CPV systems business. As a result, the financial burden related to the launch of the company’s new Gen III CPV system design should be greatly reduced.
Due to our leading technology position, intellectual property, broad customer base, and our cost competitive fulfillment infrastructure, we have been profitable in the business areas of space solar power generations and the broadband fiber optics. The visibility in our outlook in this area remained robust. We should provide a solid foundation for the company to invest and aggressive pursue various opportunities in both our terrestrial solar power and telecom datacom fiber optics business.
Therefore at this time, the company will continue to own, operate, grow and improve the operational results of both companies, Photovoltaics and Fiber Optic, businesses in the near term. Operationally, the key elements of EMCORE’s strategy include, number one, Non-cell [ph] terrestrial solar power business to aggressive business development; the establishment of Suncore joint venture with San'an that provided the company the key strategy of commercializing its CPV system design using a low-cost, high-volume manufacturing facility.
We are also providing an opportunity for the company to penetrate China’s emerging renewable energy market. Through Suncore, we expect our Gen III CPV terrestrial solar power system will provide a competitive cost of the energy option for commercial and utility field projects in certain geographical regions. In order to drive deployment of our terrestrial CPV components of systems, the company will continue to develop and expand partnership with major companies, grow dramatically and internationally.
We will accelerate the development of high efficiency terrestrial concentrator solar cells and the CPV systems, including the use of the inverted metamorphic technology to further reduce the cost of CPV systems through improved power output. We expect the development in our order backlog of CPV project opportunities in the fiscal year 2011 to support the business growth in the following year.
Number two, accelerate Fiber Optics business growth through new products and customer expansion. The company has demonstrated several new products and platforms in its Fiber Optics business segment, which has originally generated significant customer interests. New products such as the tunable TOSA and XFP transceivers, ITLA and the micro-ITLA for 10, 40 and 100 gigabit per second transponders; 10 and 14 gigabit per second per channel parallel optical modules and active cables; and full-band CATV transmitters represent our leadership position in the industry.
The company is committed to investing the necessary capital to establish high volume manufacturing capacity to accelerate the launch of this new product. Successful launch of this product represents significant opportunities as the revenue grows in our Fiber Optics business. Concurrently, we will continue our strong momentum of expanding penetration to several world-leading communication equipment manufacturers by offering an enhanced product portfolio, industry-leading customer service and technical support, and other fulfillment at competitive costs. Through our expansive technical resources, established vertical integration, and low-cost manufacturing infrastructure, we are well positioned to leverage these resources to increase revenue and market share.
Number three, leverage our infrastructure and technology to increase revenue growth. Over the past several years, the company has invested a significant amount of capital to establish state-of-the-art manufacturing fulfillment capacities and technical expertise in areas such as semiconductor device fabrication and solar panel manufacturing and testing. These infrastructures are critical to support our current business to improve utilization to further lower our fixed cost for a unit and enable some additional revenue growth opportunities.
We believe that if we can achieve critical revenue growth by leveraging our existing capabilities in a number of areas, our video transport business offers the leverage of customer recognitions and distribution network, which we have established through both internal development effort and a recent acquisition. With more strategic focus, we expect the revenue from this business to increase in the future periods.
Furthermore, some of the advanced technologies in our specialty photonic area and space photovoltaic technology area, having enabled new capabilities and technology solutions, is typically designed for the defense and government sectors. We will continue to further solidify new business opportunities and build the program within this area.
Number four, reduce product and business costs and improve profitability. We’ll continue to drive cost reductions throughout our organization. The low-cost manufacturing strategy in our solar photovoltaic segment is well established. We expect to expand our low-cost fiber optic manufacturing infrastructure in fiscal year 2011. We will continue to focus our efforts on product lines that are strategic and capable of achieving desired revenue and profitability growth.
Our current corporate structure and management strategy should reduce corporate expenses and overhead costs in 2011. We will continue the strong fiscal discipline established during the last economic downturn and continue to improve the financial performance of our operations.
Now let me turn to our guidance for the first quarter of fiscal year 2011 ending by December 31. We expect the consolidated revenue to be in the range from $50 million to $53 million. This slight decrease sequentially is primarily driven by a decrease in our Fiber Optics business, and this could be a short-term effect. The key reason is a result of the ITC ruling, as we have discussed above.
So with that, I will turn it over to Q&A.
Thank you, sir. (Operator instructions) And we do a question from the line of Michael Intrator with Natsource. Please go ahead.
Michael Intrator – Natsource
Thank you. (inaudible)
Michael, we can’t hear you.
Michael Intrator – Natsource
Sorry. I think –
Michael Intrator – Natsource
Could you be a bit more specific about the costs (inaudible) in light of the fact that there is going to be a decreased revenue and how that’s going to impact profitability in the next quarter?
Yes. Michael, we give guidance on the revenue and we – actually the flat decline exclusively, solely due to the decline – temporary decline in the revenue in the parallel optical devices. And we are now giving guidance on the profitability at this point.
Thank you. And I’m showing that there are no further customers at this time. I’ll turn it back over to EMCORE for any closing remark.
Well, thank you very much for participating. We look forward to talking to you next quarter, and happy holidays. Bye.
Ladies and gentlemen, this concludes the conference call. You may now disconnect. Thank you for your participation.
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