Second Quarter ResultsFor its fiscal second-quarter 2008 (to end March), Emcore Corp ofAlbuquerque, NM, USA has reported revenue of $56.3m, up 20% on $46.9mlast quarter and 42% on $39.6m a year ago.
Fiber Opticsrevenue was $37.6m, up 11% on $34m last quarter. The rise was due to asignificant boost from datacom products (particularly parallel optics)as well as the acquisition in late February of the telecom-relatedassets of Intel’s Optical Platform Division (including tunable lasers,tunable transponders, 300-pin transponders, and integrated tunablelaser assemblies), which has since performed better than expected.
Photovoltaics revenue was $18.6m, up 44% on $12.9m last quarter, duemainly to new product launches driving concentrator photovoltaic (CPV)component and system revenue up ten-fold to $4.4m. “This quarterrepresents the first significant revenue from this new line of business[ terrestrial solar ],” says CEO Dr Hong Q. Hou. After investing $9.6min CPV manufacturing equipment over the last year, PV GaAs fab capacityrose 35% during the quarter (to support over 250MW of annualterrestrial business, as well as supporting satellite solar cellbusiness). Revenue also grew for satellite solar cells, from about $13mlast quarter to $14.2m.
Excluding stock-based compensationexpense, Fiber Optics gross margin has grown from 17% a year ago and24% last quarter to 24.3%, due mainly to the increased revenue,facility consolidation (into Emcore’s low-cost plant in China), andlower overhead costs (from restructuring completed last year).
Photovoltaicsgross margin was 22% (up from last quarter’s 17%), excludingnon-recurring charges of $6.3m. These included $2.5m for inventorywrite-downs in the satellite PV business due to contaminated wafersfrom a supplier, $2.3m in start-up costs for the solar cell receiverline and CPV system manufacturing unit, and $1.5m for the GaAs fabcapacity expansion. Accounting for these charges adjusts Emcore’soverall gross margin from 23% down to just 12% (down from 18% a yearago).
Operating expenses have risen $2.9m on last quarter:$1.6m from the acquisition of Intel’s telecom division and $1.3m fromterrestrial CPV product and business development. Net loss hastherefore widened from $13.4m a year ago and $14.5m last quarter to$17.5m.
During the quarter, despite the increasedshipments (e.g. for CPVs), order backlog rose again, from $156m to$158m ($25m for Fiber Optics and a huge $133m for Photovoltaics,comprising $41m satellite and $92m terrestrial). “Business developmentin the terrestrial solar power area continues to be very successful,”says Hou. “We continue to broaden our customer base and book neworders.”
Also, after raising $100m in a private placementof shares in February to complete the $75m acquisition of the telecomassets of Intel’s Optical Platform Division, in late April Emcore alsoannounced the acquisition of the division’s enterprise and storageassets (including XENPAK, X2, SFP, and SFP+ optical transceivers) aswell as the Intel Connects Cable (ICC) business for high-performancecomputing cluster. Representing investment of more than $1bn by Intelover the last 7 years, the two acquisitions strengthen Emcore’spresence in the fiber-optics component/subsystem and local-area andstorage-area network markets, the firm reckons. The enterprise businessis being consolidated into the same location as the telecom business inthe San Francisco Bay area. The combined headcount is about 100. Thisis just a third of the staffing level under Intel, which had duplicatedmanufacturing inhouse for components sourced from Emcore. Incorporatingthe businesses yields “tremendous amount of operating leverage” and amore nimble operating model, says Emcore.
“With the addedand existing product portfolio, Emcore is poised as a major player inbroadband, telecom, enterprise and high-performance computing marketswith leading products and technology for sustainable and profitablegrowth in the future,” Hou reckons.
In early April,Emcore’s board of directors authorized management to prepare anoperational and strategic plan for the previously announced separationof the Fiber Optics and Photovoltaic businesses into separatecorporations. Emcore believes this allows it to maximize the potentialof both business segments, says former CEO Reuben F. Richards Jr (whowas also elected executive chairman, and succeeded by Hou as CEO). “Wewill be working closely with investment, accounting and legal advisorsover the coming months to develop a structure for this separation thatwill maximize operating efficiencies as well as maximizing shareholdervalue,” he adds.
The PV division’s spin off will be easedby Emcore’s agreement (announced at the end of January) with holders ofabout 97.5% ($83.3m worth) of its outstanding 5.5% convertible seniorsubordinated notes (due in 2011) to convert them into about 11.9mshares of common stock (at $7.01 per share). The conversion should alsosave about $4.8m annually in interest expense through 2011 , whichshould accelerate Emcore’s path to profitability, Richards says.
“Our debt conversion and equity financing activities strengthened ourbalance sheet and provided enough capital to execute our currentbusiness plan,” says Hou.
“The business fundamentalsremain strong for continued growth,” he adds. In response, in additionto the GaAs PV fab’s nine existing reactors, a tenth reactor is due forinstallation imminently and a further two are scheduled, says Hou.Also, after the delayed start-up of Emcore’s first automated CPVreceiver assembly line in March, CPV revenue is expected to risedramatically in the June quarter. A second manufacturing line is now inoperation and a third should start shipments in June (giving a totalmonthly capacity of 600,000 units, or 20MW). A fourth line is being setup in Emcore’s facility in China, for production by August (giving atotal annual capacity of 300MW).
Correspondingly, Emcoreis increasing its revenue guidance for both the June quarter and therest of fiscal 2008, says Hou. Due to the increase in CPV sales and theIntel acquisitions, for fiscal Q3 (to end June) Emcore expects anoperating profit on revenues of $77-80m (up 75% year-on-year): $53-55min Fiber Optics and about $25m in PVs. The latter includes CPV revenuemore than tripling to $15m, boosted by shipping in high volume to afurther three new customers. Satellite PV revenue is expected to fallto about $10m. However, Emcore is in the final stage of negotiationswith a ‘major aerospace company’ for a supply agreement worth $35m overfour years, so the satellite PV business is still ‘pretty robust’,according to Hou. In addition, all available GaAs solar cell fabcapacity will be used for CPV customers. Currently, about two thirds ofthe fab capacity is used for satellite business. “It would not breakour heart to reduce that percentage,” says Hou, explaining that the CPVbusiness has a higher gross margin.
For fiscal Q4 (to endSeptember), Emcore expects net profitability for both the Fiber Opticand PV businesses on total revenue of $100m (including $10-15m fromsatellite PVs and $30m from CPVs, with the latter driving gross marginup to 24-25%).
For full-year fiscal 2008, the firm hastherefore raised its revenue guidance to $280-295m, from February’sforecast of $265-285m (which itself had been raised from October’sguidance of $210-230m).
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