EMCORE's CEO Discusses Q3 2011 Results - Earnings Call Transcript

EMCORE (EMKR)

Q3 2011 Earnings Call

August 03, 2011 4:30 pm ET

Executives

Mark Weinswig - Chief Financial Officer and Principal Accounting Officer

Victor Allgeier - IR, TTC Group

Hong Hou - Chief Executive Officer, President And Director

Analysts

Alex Henderson - Miller Tabak + Co., LLC

Cobb Sadler - Catamount Strategic Advisors LLC

Edward Zabitsky - ACI Research

Presentation

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the EMCORE Corporation Third Quarter Fiscal 2011 Earnings Conference. [Operator Instructions] As a reminder, today's call is being recorded. At this time, I'd like to turn the conference over to Vic Allgeier of TTC Group. Please go ahead.

Victor Allgeier

Thank you, and good afternoon, everyone. Before we begin, we would like to remind you that the information provided herein may include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act of 1934. These forward-looking statements are largely based on 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 in 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 statement.

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 in EMCORE's business that are addressed in its filings with the U.S. Securities and Exchange Commission that are available on the SEC's website, located at www.sec.gov, including the sections entitled Risk Factors in its annual report on Form 10-K and its quarterly reports on Form 10-Q. EMCORE assumes no obligation to update any forward-looking statements to conform such statements to actual results or to changes 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.

Mark Weinswig

Thank you, Vic, and good afternoon, everyone. Today, I'm going to focus my discussion on the third fiscal quarter operating results and our balance sheet. Consolidated revenue for our third fiscal quarter totaled $49.5 million, which is an increase of $2.3 million or 5% over the previous quarter. This was is in line with our prior guidance of $48 million to $50 million in revenue. On a segment basis, our Photovoltaics, this has accounted for $16.2 million or 32% of the company's total revenue. This represents $1 million or 6% decline from the revenue for the segment in the prior quarter. The decrease in revenue was in line with our prior expectations for our Space Solar products business. We believe that the Space Solar business will continue to experience year-over-year growth, although revenues to any given quarter maybe a bit lumpy. With a higher bookings levels we saw this quarter, we believe that this business will grow over the next couple of quarters.

The Fiber Optics segment accounted for $33.3 million or 67% of the company's total revenue. This represents an increase of roughly $3.2 million or 10% from the prior quarter with the increase primarily driven by higher sales of attributable product and broadband business, partially offset by reduction on our legacy products. As we noted last quarter, we are continuing to move into the end of life phase of a few product line, we expect that the other $1 million to $1.5 million reduction in these products from this evolution over the next quarter or 2. I would discuss this trend in more detail later in the call.

Consolidated gross margin decreased to 19.1% or 22.4% in the prior quarter primarily attributable to the significant deterioration in our Photovoltaic margin. On a segment basis, Photovoltaic gross margin were 18.6% which is a sizable decrease in the 30.2% report in the prior quarter. This is primarily due to 3 factors: First, fire departmental expenses as we geared up for a significant ramp in our business. This was primarily a one-time related charges, and we should expect to be back to normal levels this quarter. Number two, a new excursion issue at the beginning of the quarter that increased our scrap metals. We consider this to be an unusual expense. Number three, higher startup expenses on new products lost in the manufactured -- manufacturing during the period. It's important to note that we believe that these new products help further differentiate our product lines due to better performance, improved quality and higher eventual gross margin.

In the fourth quarter, we believe that our margins will improve for this segment. We look forward to updating you in the future on our progress in terms of improvement on our gross margin. Fiber Optics gross margin was 19.4% or 1.4% improvement from the prior quarter primarily due to higher revenues. The telecom and datacom division is experiencing a products mix shift as customers move towards newer technology platforms. We believe that this evolution will cause margins in this division to improve, while our new products begin to ramp in the latter part of calendar 2011. As we increase capacity and move these new products into full production, we will see an increase in certain startup costs including NREs and capital expenses. Operating expenses, excluding the litigation settlement loss in Q3 and litigation settlement gain in Q2, increased to $1.9 million from the prior quarter to $19.2 million, primarily due to higher R&D investment in both our Fiber and Solar segment and higher stock comp of [indiscernible]. The higher Solar investments that relate to the Soliant acquisition and the higher Fiber Optics investment relate to the Tunable XFP product. We believe the investment level will remain flat to slightly decline in this next quarter.

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