3 January 2012

Emcore’s quarterly revenue grows 5% sequentially to $52.1m

For fiscal 2011 (to end-September), Emcore Corp of Albuquerque, NM, USA, which makes components, subsystems and systems for the fiber-optic and solar power markets, has reported revenue of$200.9m, up 5% on fiscal 2010’s $191.3m. By segment, Fiber Optics revenue was $125.6m (up 3% on $121.7m) and Photovoltaics was $75.3m (up 8% on $69.6m).

For fiscal fourth-quarter, revenue was $52.1m, down 4% on $54.1m a year ago but up 5% on $49.5m last quarter.

By segment, Fiber Optics fell 10% from $34.4m a year ago and 7% from $33.3m last quarter to $30.9m (59% of total revenue, down from 67% last quarter). This was due mainly to the decline in sales of end-of-life legacy products and cable TV broadband products. However, the full-band quadrature amplitude modulation (QAM) transmitters continue to be the leading solution for cost-effective broadband operating on the existing fiber coaxial network infrastructure. Also, demand continued to be strong for Emcore’s RFoG (radio frequency over glass) fiber product, which uses passive optical network (PON) transceivers to provide the last-mile and is becoming increasingly effective for upgrading the traditional hybrid fiber coaxial (HFC) network through an all-fiber optic solution, says Emcore. The Telecom business saw another quarter of nearly 30% sequential growth to a record $9m in revenue for the tunable laser product, with ITLA (integrable tunable laser assembly) sales into 40 and 100Gb/s coherent transponder and line-card applications continuing to be very strong. Emcore also introduced and produced its newly qualified 4x14Gb/s FDR active optical cables (AOCs), shipping more than 5000 cables in the first quarter after product release.

Photovoltaics revenue rose 8% from $19.7m a year ago and 31% from $16.2m last quarter to a record $21.2m (41% of total revenue, up from just 33% last quarter). This was driven by record Space Photovoltaics business, due mainly to increased demand from key customers. However, Space Photovoltaic business can be “somewhat lumpy, due to the uneven timing of program awards and product deliveries,” cautions CEO, president & director Hong Q. Hou.

For full-year fiscal 2011, gross margin was 21.3%, down from fiscal 2010’s 26.5% (including Fiber Optics falling from 23.1% to 18.5% and Photovoltaics falling from 32.3% to 26%). For fiscal Q4, gross margin was 19.2%, down from 23.6% a year ago but up slightly from 19.1% last quarter, due mainly to a significant improvement in the Photovoltaics division (partially offset by a decrease in the Fiber Optic division). Although Fiber Optics has fallen further, from 20.4% a year ago and 19.4% last quarter to 18%, Photovoltaics has rebounded from 18.6% last quarter to 21% (although this is still well down on 29.3% a year ago). In particular, counter-acting some program losses for CPV projects, gross margin for the Space Photovoltaic business rebounded strongly from last quarter to 30% as product yields returned to normal levels.

Net loss has risen further, from just $0.89m a year ago and $11.1m last quarter to $14.3m in fiscal Q4. However, excluding a $8m impairment charge recorded on the long-lived assets of the Fiber Optics segment as well as settlements related to litigation with Avago Technologies, net loss was cut by $3m quarter-to-quarter. Full-year net loss was $34.2m, up from fiscal 2010’s $23.7m.

During fiscal 2011, Emcore recorded $1.8m of non-operating expense related to the Suncore concentrated photovoltaic (CPV) component- and system-making joint venture with San’an Optoelectronics Co Ltd in Xiamen, China, including $1m in fiscal Q4. However, Suncore’s losses are expected to fall as it enters volume production. Suncore has moved into its new facility in Huainan City. Emcore is now developing and qualifying the manufacturing processes for CPV receivers and modules, and plans to start full production (with an annual capacity of 200MW of modules) in February. The product line is expected to launch by the end of fiscal 2012.

During Q4, Emcore’s cash, cash equivalents and restricted cash balance fell back from $21.1m to $16.1m. Regarding measures taken to improve liquidity, in December Emcore amended its three-year, $35m credit facility with Wells Fargo bank to increase potential borrowings by up to $14m. Also, in August the firm entered into an equity line of credit arrangement with Commerce Court Small Cap Value Fund Ltd enabling it to sell up to $50m in shares of common stock over the 24-month term.

Hou says that Emcore had a “clear line of sight to profitability” by the middle of fiscal 2012. However, flooding in Thailand has impacted that plan and forced it to reset priorities and expectations. As disclosed on 24 October, after rain in the northern part of Thailand from July through October caused flooding in most areas of Thailand (especially the outskirts of Bangkok), flood waters infiltrated the offices and manufacturing floor-space of Emcore's primary contract manufacturer in Thailand, Fabrinet Co Ltd. The areas used to manufacture Emcore's fiber-optic products and process & test equipment were submerged in several feet of flood water for more than a month, damaging the manufacturing infrastructure that supports about 50% of Fiber Optics revenue. This has had a significant impact on Emcore’s operations and ability to meet customer demand for fiber-optics products.

Production capabilities for three major product lines were impacted, including: Telecom products, such as tunable lasers (ITLAs) and the high-volume tunable XFP line (Emcore’s low-volume TXFP production line is in the Bay Area and producing products); Cable television (CATV) lasers (components and transmitters); and legacy products. Over the past two months, Emcore has been developing and implementing alternative manufacturing plans in its own facilities in China and the USA to meet short-term customer demand. Concurrently, it has been focusing on rebuilding the high-volume production infrastructure for impacted product lines in other locations owned by Fabrinet, as well as its own facility in China. “Our focus during the rebuild is on a quick recovery and strategies to better configure the equipment for efficiency, reduce our cost structure, and provide manufacturing diversification in order to turn this crisis into an opportunity,” says Hou.

Purchase orders have been issued to replace the damaged process and test equipment, and new equipment is now being received. Between Emcore’s own facilities and Fabrinet, the firm expects to rebuild production capacity for the CATV business by the end of March and production capacity for the Telecom production lines by the end of May. “We are working closely with customers on our recovery manufacturing plan to align with their needs,” says Hou.

“We are working with our key suppliers to expedite the building of our manufacturing line,” notes chief financial officer & principal accounting officer Mark B. Weinswig. “As part of those measures, we have extended payment terms on our payables to provide us with additional flexibility over the next 12 months. Our manufacturing partner will also assist in financing the rebuild of our manufacturing lines at their facility. This will help us finance the CapEx needs while we wait for payment of our insurance proceeds,” he adds.

“We've also signed agreements with certain customers to receive prepayments for future shipments. This allows us to replenish the inventory and fund other working capital requirements,” says Weinswig. Emcore was able to move a significant portion of finished goods inventory to the second story of the facility just before flood water reached the manufacturing floor. The main focus is to meet near-term needs of key customers and to ascertain that demand will still be there for products on return to full capacity. “Many of our key customers for Telecom products have stepped up and committed their demand through non-cancelable purchase orders and pre-payments,” notes Hou. “As a result, our production capacity for tunable lasers in calendar 2012, when it is fully recovered, is almost fully booked with the existing commitments,” he adds. “We are very appreciative of our customers in the long-term purchase commitment we've received that will allow us to focus on the production line rebuild. The products we have introduced over the last couple of years and the new products in the pipeline will drive significant growth once we have our fulfillment infrastructure rebuilt,” Hou says.

“We have been working with the insurance carriers, banks, customers and business partners to obtain funding for required capital expenditures to restart operations,” notes Hou. Emcore had business interruption insurance through its own carrier, and expects to receive $5m in January for those claims. In addition, Fabrinet has insurance coverage related to consigned inventory and equipment, although the amount and timing of receipt remains uncertain.

Emcore has entered into agreements with Fabrinet and Wells Fargo Business Credit, significantly improving its liquidity position while it processes and receives proceeds from insurance claims. “We have a solid plan in place to rebuild our impacted business, and we expect to come out of this disaster as a stronger company compared to the pre-flood conditions,” Hou believes.

To improve its financial position, Emcore has since moved quickly to make some significant improvements. In November, it implemented cost reductions including salary and discretionary spending cuts, reducing the cost structure significantly. “The salary deductions are a temporary measure that reduces the cash burn while we are rebuilding our Fiber Optics production infrastructure,” comments Weinswig.

As Emcore continues to analyze the impact of the flood on the Fiber Optics business, it is currently providing order backlog information only for the Photovoltaics segment (for which manufacturing infrastructure was not impacted). During Q4, Emcore secured several key contracts for commercial and government projects, boosting the 12-month backlog by about 10% (from $39.6m to $43.5m, due solely to the Space Photovoltaics business).

Despite this, for its fiscal first-quarter year 2012 (to end-December 2011) Emcore expects revenue to drop sequentially to $36-38m, due to the impact of the flooding on the Fiber Optics business.

Nevertheless, the business outlook in Space Photovoltaics continues to be very robust, with several additional large commercial awards in 2012 expected to maintain the year-on-year growth. In addition, several customers for terrestrial CPV solar cells will be ramping up their demand in the next couple of quarters.

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