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13 May 2008


CPV sales boost Emcore, but start-up costs widen losses

For its fiscal second-quarter 2008 (to end March), Emcore Corp of Albuquerque, NM, USA has reported revenue of $56.3m, up 20% on $46.9m last quarter and 42% on $39.6m a year ago.

Fiber Optics revenue was $37.6m, up 11% on $34m last quarter. The rise was due to a significant boost from datacom products (particularly parallel optics) as well as the acquisition in late February of the telecom-related assets of Intel’s Optical Platform Division (including tunable lasers, tunable transponders, 300-pin transponders, and integrated tunable laser assemblies), which has since performed better than expected.

Photovoltaics revenue was $18.6m, up 44% on $12.9m last quarter, due mainly to new product launches driving concentrator photovoltaic (CPV) component and system revenue up ten-fold to $4.4m. “This quarter represents the first significant revenue from this new line of business [ terrestrial solar ],” says CEO Dr Hong Q. Hou. After investing $9.6m in CPV manufacturing equipment over the last year, PV GaAs fab capacity rose 35% during the quarter (to support over 250MW of annual terrestrial business, as well as supporting satellite solar cell business). Revenue also grew for satellite solar cells, from about $13m last quarter to $14.2m.

Excluding stock-based compensation expense, Fiber Optics gross margin has grown from 17% a year ago and 24% last quarter to 24.3%, due mainly to the increased revenue, facility consolidation (into Emcore’s low-cost plant in China), and lower overhead costs (from restructuring completed last year).

Photovoltaics gross margin was 22% (up from last quarter’s 17%), excluding non-recurring charges of $6.3m. These included $2.5m for inventory write-downs in the satellite PV business due to contaminated wafers from a supplier, $2.3m in start-up costs for the solar cell receiver line and CPV system manufacturing unit, and $1.5m for the GaAs fab capacity expansion. Accounting for these charges adjusts Emcore’s overall gross margin from 23% down to just 12% (down from 18% a year ago).

Operating expenses have risen $2.9m on last quarter: $1.6m from the acquisition of Intel’s telecom division and $1.3m from terrestrial CPV product and business development. Net loss has therefore widened from $13.4m a year ago and $14.5m last quarter to $17.5m.

During the quarter, despite the increased shipments (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 development in the terrestrial solar power area continues to be very successful,” says Hou. “We continue to broaden our customer base and book new orders.”

Also, after raising $100m in a private placement of shares in February to complete the $75m acquisition of the telecom assets of Intel’s Optical Platform Division, in late April Emcore also announced the acquisition of the division’s enterprise and storage assets (including XENPAK, X2, SFP, and SFP+ optical transceivers) as well as the Intel Connects Cable (ICC) business for high-performance computing cluster. Representing investment of more than $1bn by Intel over the last 7 years, the two acquisitions strengthen Emcore’s presence in the fiber-optics component/subsystem and local-area and storage-area network markets, the firm reckons. The enterprise business is being consolidated into the same location as the telecom business in the San Francisco Bay area. The combined headcount is about 100. This is just a third of the staffing level under Intel, which had duplicated manufacturing inhouse for components sourced from Emcore. Incorporating the businesses yields “tremendous amount of operating leverage” and a more nimble operating model, says Emcore.

“With the added and existing product portfolio, Emcore is poised as a major player in broadband, telecom, enterprise and high-performance computing markets with leading products and technology for sustainable and profitable growth in the future,” Hou reckons.

In early April, Emcore’s board of directors authorized management to prepare an operational and strategic plan for the previously announced separation of the Fiber Optics and Photovoltaic businesses into separate corporations. Emcore believes this allows it to maximize the potential of both business segments, says former CEO Reuben F. Richards Jr (who was also elected executive chairman, and succeeded by Hou as CEO). “We will be working closely with investment, accounting and legal advisors over the coming months to develop a structure for this separation that will maximize operating efficiencies as well as maximizing shareholder value,” he adds.

The PV division’s spin off will be eased by Emcore’s agreement (announced at the end of January) with holders of about 97.5% ($83.3m worth) of its outstanding 5.5% convertible senior subordinated notes (due in 2011) to convert them into about 11.9m shares of common stock (at $7.01 per share). The conversion should also save about $4.8m annually in interest expense through 2011 , which should accelerate Emcore’s path to profitability, Richards says.

“Our debt conversion and equity financing activities strengthened our balance sheet and provided enough capital to execute our current business plan,” says Hou.

“The business fundamentals remain strong for continued growth,” he adds. In response, in addition to the GaAs PV fab’s nine existing reactors, a tenth reactor is due for installation imminently and a further two are scheduled, says Hou. Also, after the delayed start-up of Emcore’s first automated CPV receiver assembly line in March, CPV revenue is expected to rise dramatically in the June quarter. A second manufacturing line is now in operation and a third should start shipments in June (giving a total monthly capacity of 600,000 units, or 20MW). A fourth line is being set up in Emcore’s facility in China, for production by August (giving a total annual capacity of 300MW).

Correspondingly, Emcore is increasing its revenue guidance for both the June quarter and the rest of fiscal 2008, says Hou. Due to the increase in CPV sales and the Intel acquisitions, for fiscal Q3 (to end June) Emcore expects an operating profit on revenues of $77-80m (up 75% year-on-year): $53-55m in Fiber Optics and about $25m in PVs. The latter includes CPV revenue more than tripling to $15m, boosted by shipping in high volume to a further three new customers. Satellite PV revenue is expected to fall to about $10m. However, Emcore is in the final stage of negotiations with a ‘major aerospace company’ for a supply agreement worth $35m over four years, so the satellite PV business is still ‘pretty robust’, according to Hou. In addition, all available GaAs solar cell fab capacity will be used for CPV customers. Currently, about two thirds of the fab capacity is used for satellite business. “It would not break our heart to reduce that percentage,” says Hou, explaining that the CPV business has a higher gross margin.

For fiscal Q4 (to end September), Emcore expects net profitability for both the Fiber Optic and PV businesses on total revenue of $100m (including $10-15m from satellite PVs and $30m from CPVs, with the latter driving gross margin up to 24-25%).

For full-year fiscal 2008, the firm has therefore raised its revenue guidance to $280-295m, from February’s forecast of $265-285m (which itself had been raised from October’s guidance of $210-230m).

See related items:

Korea’s ES orders $28m of Emcore’s CPV receivers

Emcore acquiring Intel’s enterprise, storage and optical cable assets

Emcore to deploy CPV systems with China’s XinAo

Emcore wins $4.6m follow-on order for CPV receiver assemblies

Emcore’s CPV order boom to drive spin-off

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