14 August 2012

Emcore reports higher-than-expected quarterly growth of 9%, as Fiber Optics revenue rises a further 18%  

For its fiscal third-quarter 2012 (to end-June), Emcore Corp of Albuquerque, NM, USA, which makes components, subsystems and systems for the fiber-optic and solar power markets, has reported revenue of $41.1m. This is down 17% on $49.5m a year ago but up 9% on $37.8m last quarter, and slightly above guidance of $38-41m, due mainly to higher Fiber Optics revenue offset by a reduction in Solar business.

Photovoltaics revenue has fallen further, by 4% on $15.8m last quarter (41% of revenue) to $15.3m (37% of total revenue), with revenue from the space power business declining slightly. However, Photovoltaics revenue has historically fluctuated significantly due to the timing of program completions and product shipments of major orders, notes the firm.

Although though still down 22% on $33.3m a year ago (67% of total revenue), after falling to $18.3m in the December quarter Fiber Optics revenue has continued its recovery, rising 18% from $21.9m last quarter (58% of total revenue) to $25.8m (63% of total revenue), driven mainly by flood recovery. In October 2011, flood waters severely impacted inventory and production operations at primary contract manufacturer Fabrinet Co Ltd (which normally accounts for half of Emcore’s Fiber Optics revenue). Impacted areas included product lines for the telecom and cable television (CATV) market segments. This had a significant impact on Emcore’s ability to meet demand for certain fiber-optic products in the near term.

For fiscal 2012, lower fiber-optics-related revenues due to the flood have resulted in higher manufacturing overhead as a percentage of revenue. Manufacturing of certain fiber optics-related components was moved to Emcore-owned facilities in the USA, involving higher labor and other related costs. Instead of completely rebuilding all flood-damaged manufacturing lines, management decided to realign its fiber-optics product portfolio and focus on business areas with strong technology differentiation and growth opportunities.

After recovering from just 9.3% in the December quarter to 14.2% last quarter, gross margin has fallen back to 10.7%, down on 19.1% a year ago. In particular, Photovoltaics gross margin has fallen further, from 20.9% last quarter to 13% (down on 18.6% a year ago), impacted by higher losses in terrestrial solar business, losses from power outage at the Albuquerque site, and lower yields. After recovering from minus 4.8% in the December quarter to +9.4% last quarter, Fiber Optics gross margin fell back, but only slightly, to 9.3% (down on 19.4% a year ago). This was due mainly to higher margin from increasing revenue being offset by higher excess and obsolete charges, losses on purchase commitments, and yield variances associated with ramping up manufacturing on new products. Also, Fiber Optics products typically have lower margins than Photovoltaics products, so the swing in revenue mix from Photovoltaics back to Fiber Optics is unfavorable to margins.

Operating loss has been cut slightly, from $8.9m last quarter to $8.8m. Although down on $11.2m a year ago, it is due mainly to a $2.8m gain recorded in May on the sale of the Fiber Optics segment’s enterprise product lines – consisting of vertical-cavity surface-emitting laser (VCSEL)-based products – to optical and wireless communications product maker Sumitomo Electric Device Innovations USA Inc of San Jose, CA (SEDU, a subsidiary of Japan’s Sumitomo Electric Ltd).

In May, Emcore settled an outstanding patent infringement lawsuit (in exchange for a release of all related claims), resulting in a charge of $1.05m. Also, the firm recorded a $1.4m impairment charge related to long-lived assets associated with its concentrated photovoltaic (CPV) product lines as it announced consolidation of activities into its Suncore Photovoltaics CPV joint venture with San’an Optoelectronics Co Ltd in Xiamen, China.

Excluding flood-related charges, the gain on sale of assets, legal settlements and impairment charges, operating expenses have been cut from $19.2m a year ago and $14.1m last quarter to $13.8m. In particular, selling, general & administrative (SG&A) expenses have been cut from $9.7m a year ago to $8.8m due to cost-reduction measures (including a reduction in discretionary spending on staffing and infrastructure, as well as lower stock-based compensation expense). R&D expenses have been cut from $9.5m a year ago and $5.8m last quarter to $5m due to cost-reduction measures, as well as lower expense incurred related to the development of fiber-optics products.

Non-GAAP net loss was $7.5m, up on $6.3m a year ago and $5.4m last quarter. During the quarter, cash, cash equivalents and restricted cash fell from $25.4m to $20.8m. This was due to increased inventory levels to meet the ramp up in production, equipment purchases associated with the rebuild of the fiber-optics production line, and operating losses, offset partially by proceeds from the sale of the enterprise product lines.

Order backlog for Photovoltaics has fallen by 17% from $55.7m at the end of March to $46.2m at the end of June (which included $10.1m and $5.1m, respectively, of terrestrial solar cell orders from Suncore). Emcore notes that Fiber Optics product sales are made pursuant to purchase orders, often with short lead times, and revenue from this segment is still limited by the rebuilding of production capacity. “We have more order backlog than we can fulfill. Therefore we are not using backlog as a measure of the strength of our fiber-optics business at this time,” notes chief financial officer Mark Weinswig.

For its fiscal fourth-quarter 2012 (to end-September) Emcore expects revenue of $46-49m (up 12-20% sequentially), with growth from both the Photovoltaics and Fiber Optics business segments.

“Our results will continue to improve in future quarters as we ramp up our fiber-optics manufacturing lines and increase our revenues in our solar segment and reduce our R&D investment levels in the CPV product lines,” believes Weinswig. The Suncore CPV transaction is expected to close in fiscal Q4 and result in a reduction in expenses of more than $1.5m per quarter.

See related items:

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