11 February 2014

Emcore’s record quarter for Photovoltaics drives revenue to $44.2m

For fiscal first-quarter 2014 (to end-December 2013), Emcore Corp of Albuquerque, NM, USA, which makes compound semiconductor-based components and subsystems for the fiber-optic and solar power markets, has reported revenue of $44.2m, up 2.6% on $43.1m last quarter but down 10% on $49.3m a year ago.

Fiscal	Q1/2013	Q2/2013	Q3/2013	Q4/2013	Q1/2014
Revenue	$49.3m	$42.3m	$33.5m	$43.1m	$44.2m

Photovoltaics revenue was a record $20.9m, up 2% on $20.5m last quarter (unchanged from 47% of total revenue) and up 6.6% on $19.6m a year ago (40% of total revenue).

Fiber Optics revenue was $23.3m, up 3.1% on $22.6m last quarter (unchanged from 53% of total revenue). In the telecom division, shipment volumes of ITLAs (integrable tunable laser assemblies) were at a record level (with revenue up 7% for this product line), while revenue for tunable XFP modules was relatively flat quarter-to-quarter (at about $1m). In the broadband division, most of the $14.7m revenue came from a significant rise in shipments for cable TV applications. However, Fiber Optics revenue is still 22% down on $29.7m a year ago (60% of total revenue). “Our business in cable TV is recovering. However the rebound in demand for high-end transmitters from the slump in early 2013 has not been as rapid as our customers previously anticipated,” notes president & CEO Dr Hong Q. Hou. “When we conducted a more in-depth analysis from the breakdown of the 2013 CapEx spending as reported by two major cable TV service providers last week, it was very evident that their spending on customer premises equipment (CPE) and the equipment for the node increased in 2013 substantially,” he adds. “However, the spending on the high-end equipment has been on a slower growth path.”

Overall gross margin was 22.9%, up from 12.5% last quarter (due mainly to the higher Photovoltaics revenue) and above the 22.2% a year ago.

Photovoltaics gross margin was 37%, up greatly from 13.5% last quarter (due mainly to a significant increase in higher-margin shipments) and above 30.5% a year ago. “We continue to believe that this [Photovoltaics] business’ target gross margin is at roughly 30%,” says chief financial officer Mark B. Weinswig.

Fiber Optics gross margin fell to 10.3% from 11.6% last quarter (and 16.7% a year ago). “While we have seen a significant improvement in our tunable XFP product yields and margins, the manufacturing line is still under-utilized and margins are below our average,” says Weinswig.

Operating expenses have fallen slightly from $12.5m last quarter to $12.4m, though up on $8.1m a year ago (which benefited from flood-related insurance proceeds of $4.2m) due to certain audit-related and corporate costs (as discussed in December) and higher severance cost.

Operating loss was $2.2m, cut from $7.1m last quarter but still down from a profit of $2.8m a year ago. By sector, Photovoltaics has rebounded from the operating loss of $0.25m last quarter to an operating profit of $4.3m (one of the sector’s most profitable quarters), exceeding the $3.2m profit a year ago. Fiber Optics operating loss has been cut from last quarter’s $6.9m to $6.6m, although this compared with just $0.4m a year ago.

On a non-GAAP basis, net loss was $0.5m, cut from $5.8m last quarter but worse than $0.1m a year ago.

Nevertheless, during the quarter, cash and cash equivalents rose by $2m, from $16.1m to $18.1m, due mainly to the collection of receivables that were outstanding at the end of the quarter.

In the past quarter, the Space Photovoltaic division was awarded or authorized to begin work on a total of 13 separate contracts (with a total value of over $10m). Customers include the US government and several domestic and international aerospace defense and satellite integrators. “Although the business outlook is robust, we continue to rigorously manage the business with emphasis on technical and operational excellence. We reduced the cost structure in early January for this segment to further improve the business competitiveness,” Hou says. “We continue to expand our space solar market share by expanding the customer base, also by increasing the level of integration such as to provide fully integrated solar panel products instead of just providing solar cells,” he adds. “In the meantime we are aggressively pursuing adjacent market opportunities such as high-end mobile power for defense applications. Preliminary market study indicates that the high-end mobile power market is very elastic. In addition to the key requirement of high efficiency, net weight and flexibility, competitive cost structure is essential to enable adjacent applications to take-off.”

As of end-December, order backlog for Photovoltaics (Space Solar) was $55.3m, down 3.2% on last quarter’s $57.1m. “However, several significant contract awards are expected during fiscal Q2,” notes Hou. “These expected long-term purchase agreements should increase our 12-month backlog significantly above the $55m and also provide long-term commitment and business outlook to a level that Emcore has not previously seen,” he adds.

Regarding Fiber Optics, in the telecom division: “We continue to see strong demand in ITLAs for coherent 100G deployment,” notes Hou. “Order activity for this quarter is very strong. It is likely that the shipment volumes of ITLAs in the March quarter will reach a new record level.”

For fiscal Q2/2014 (to end-March), Emcore expects overall revenue to fall to $40-44m. “The Space Photovoltaic segment can be quite lumpy due to the binary nature of a certain large orders to either ship all of them or none of them by the end of the quarter. So this wider range is primarily from the uncertainty on the Photovoltaic side,” comments Hou. The decrease in Space Photovoltaics revenue will outweigh an increase in Fiber Optics revenue.

“During the annual price and market share allocation negotiations [with telecom customers] at the end of last year, price erosion was approximately 10% with existing customers,” notes Hou. “A significant portion of our volumes shipped in the December quarter came from the new pricing for some customers, and we have realigned our engineering resources to not only developing new products but also define cost reductions in the future for our current products.”

Regarding broadband business, production consolidation has been largely completed and Emcore’s cost structure is more competitive. “We are continuing to defend and expand our leading position in cable TV. In the meantime, we want to pursue a higher-margin growth opportunity to selected niche market by leveraging our core competency and infrastructure with significant opportunity for future business growth in our broadband division,” says Hou.

Emcore expects quarterly operating expenses to be down to about $11.5m per quarter going forward. “We continue to improve our cost structure and believe that we can reach breakeven at a quarterly revenue level at approximately $45-47m, depending on the product mix,” says Hou. This is down from the $47-48 breakeven revenue figure given in December.

“Recently, we started a new program to drastically reduce the cost of tunable TOSA [transmitter optical subassembly], confident about the competitive advantage of the Emcore tunable XFP, both negative- and zero-chirp, with full-band tunability and better OSNR [optical signal-to-noise ratio] and a higher output power,” says Hou. “These are the key attribute requirements for replacing 300-pin transponders, which started last year,” he adds.

“Over the next two quarters, with the launch of the micro-ITLA, we expect our margins to be slightly under pressure,” says Weinswig. “Customer demand [for micro-ITLAs] has been increasing moderately recently,” says Hou. “Recently, however, we are seeing an accelerated effort from all customers to migrate to micro-ITLA platform before the end of the calendar year 2014,” he adds. “It is largely driven by our customers’ desire to increase their line charge sensitivity and also design for metro applications using coherent transmissions.”

“We have seen some more aggressive pricing for our flagship ITLA product,” Weinswig says. “We expect our overall gross margins in the Fiber Optic segment will improve in future quarters as we complete the ramp-up of our new product line at our contract manufacturer and our Fiber Optic revenues continue to increase.

“The recent earning releases from the leading cable service providers in the North America, such as Comcast and Time Warner Cable indicated that the 2014 CapEx spending approached about 14.5% of their revenues, while Comcast it is a substantial increase from 12.9% of their revenue in 2013 and for Time Warner Cable it is in line with their 2013 percentage of spending on CapEx,” says Hou. “Although we do not have the exact breakdown of their spending between CPE and infrastructure, we are hopeful that, when choke points near customer interfaces and node in HSB networks are removed through the recent spending in 2013, demand for higher-end products will increase more rapidly in the near future.”

See related items:

Emcore quarterly revenue rebounds by 29% to $43.1m

Emcore’s revenue falls 20.8% quarter-on-quarter

Emcore reports below-guidance quarterly revenue of $42.3m, but breaks even

Emcore’s increased solar shipments drive return to profit

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