EMCORE Corporation
Q2 2011 Earnings Call Transcript

Published: 7 May 2011

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the EMCORE Corporation Second Quarter Fiscal 2011 Earnings Conference Call. [Operator Instructions] This conference is being recorded today, Thursday, May 5, 2011. I would now like to turn the conference over to our host, Mr. Victor Allgeier with TTC Group. Please go ahead, sir.

[Victor Allgeier:]

Thank you, and good afternoon, everyone. Before we begin, we would like to remind you that the information provided herein may include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act of 1934. These forward-looking statements are largely based on EMCORE's current expectations and projections about future events and financial trends affecting the financial condition of its business. Such forward-looking statements include, in particular, projections about EMCORE's future results, statements about its plans, strategies, business prospects, changes in trends in its business and the markets in which they operate. Management cautions that these forward-looking statements relate to future events or its future financial performance and are subject to business, economic and other risks and uncertainties, both known and unknown, that may cause actual results, levels of activity, performance or achievements of its business or its industry to be materially different from those expressed or implied by any forward-looking statements. Neither management nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We caution you not to rely on these statements without also considering the risks and uncertainties associated with these statements and EMCORE's business that are addressed in its filings with the Securities and Exchange Commission that are available on the SEC's website, located at www.sec.gov, including the sections entitled Risk Factors in its annual report on Form 10-K and its quarterly reports on Form 10-Q. EMCORE assumes no obligation to update any forward-looking statements to conform such statements to actual results or to changes in its expectations, except as required by applicable law or regulation. With us today from EMCORE are Dr. Hong Hou, President and Chief Executive Officer; and Mark Weinswig, Chief Financial Officer. Mark will review the financial results, and Hong will discuss business highlights before we open the call up to questions. I will now turn the call over to Mark.

[Mark Weinswig:]

Thank you, Rick. And good afternoon, everyone. Today, I'm going to focus my discussion on our second fiscal quarter operating results and our balance sheet. Consolidated revenue for our second fiscal quarter totals $47.2 million, which is a decrease of $4.9 million or 9% over the previous quarter. This was in line with our prior guidance of $46 million to $49 million in revenue. On a segment basis, our Photovoltaics business accounted for $17.2 million or 36% of the company's total revenue. This represents $3.5 million or a 17% decline from the record revenue for this segment in the prior quarter. The decrease of revenue was primarily driven by some large orders that we fulfilled in Q1 in our space solar power generation products. We believe that the Space Solar business will continue to experience a year-over-year growth, although our revenues in any given quarter are a little lumpy. The Fiber Optics segment accounted for $30 million or 64% of the company's total revenue. This represents a decline -- a decrease of roughly $1.4 million or 4.5% from the prior quarter. It's a decrease primarily driven by lower sales of our legacy products and decline with an Asian customer. As we noted last quarter, we are continuing to move into the end of life stage on a few products. We expect to see another $2 million to $3 million reduction in these products from this evolution. In Q2, we experienced solid results in our Cable TV business. In addition, our Tunable Laser business also saw some significant increases in business levels, specifically at 40G and 100G flavors. I will discuss this in more detail later in the call. Consolidated gross margin decreased to 22.4% from 24.3% in the prior quarter, primarily from a deterioration in the Photovoltaic margins driven by a reduction in revenue. On a segment basis, Photovoltaic gross margin was 30.2%, which is a decrease from 33% reported in the prior quarter. Fiber Optics gross margin was 18%, a 0.4% reduction from the prior quarter, primarily due to lower revenues and a $1.2 million inventory reserve related to the end of life legacy product, which was partially offset by a better product margin. The Telecom and Datacom division is experiencing a product mix shift as customers begin to move towards newer technology platforms. We believe that this evolution will cause margins in this division to improve when our new products begin to ramp in the latter part of this year. As we increase capacity, we will see certain start-up costs including NREs and capital expenses as we move these new products into full production. Operating expenses, excluding the award from the litigation settlement, increased $1.9 million from the prior quarter to $17.4 million, primarily due to higher headcount related costs and stock comp FAS123(NYSE

[Hong Hou:]

Thanks, Mark. Good afternoon, everyone. As Mark discussed in detail, we achieved the consolidated revenue of $47.2 million in the March quarter, within the guidance range of $46 million to $49 million. While the revenue in our March quarter saw expected sequential decline compared to the prior quarter, we saw this a speed [ph] for strong revenue growth and for further operational improvement in the second half of the calendar year. Our revenue in the Fiber Optics shipment for the March quarter was slightly over $30 million, which represents a $1.4 million sequential decline compared to the December quarter. The decline in the March quarter is primarily due to lower revenue with a certain Asian customer and the discontinuance of some of our legacy products. Our book-to-bill for the Fiber Optics shipment in the March quarter was approximately 1.1%, where there's significant increase in our Tunable telecom products. As a result, the order backlog for the Fiber Optics shipment increased $2.9 million or almost 14% from the prior quarter. Because of the significant investment in new products, we are seeing some very positive traction in the Fiber Optics business. Hence, we expect revenue from the Fiber Optics to increase by 10% this quarter. Now let me discuss the market dynamics and our position in the Broadband Fiber Optics business. We continued to experience robust demand for cable TV equipment in the March quarter. Based on our discussions with the major MSOs, we expect that their CapEx spending on scalable user structure and upgrades will continue to increase. Customers of today are asking for new solutions to help them harvest additional bandwidth through the new transmitter-receiver equipment on their existing hybrid fiber collection infrastructure. The full band Quadrature Amplitude Modulation transmitters or QAM transmitters continues to be a leading producer for this application. The demand for this product line has increased dramatically over the past year. Our vertically integrated structure from semiconductor lasers and detector chips through transmitter’s subsystems serves us well as the laser stack for the QAM transmitters is so stringent that EMCORE today is the only vendor shipping this commercial volume. We have leveraged our expertise and technologies of the 2 broadband solutions, Cable TV and fiber-to-the-home, to design products for the last mile fiber optic solutions in the traditional XFP network. Our FOG or radio frequency over glass fiber utilizing passive optical network transceivers and the switching with adapters in cable TV, provides increased the bandwidth from nodes to end users. We have been working very closely with our customers on this solution and made our first significant shipment in the March quarter. In addition, our backlog and readability is improving as we hit the pavement. To summarize, our Broadband Fiber Optic product and business continues to be strong. New product introduced within the past year accounts for a significant portion of concurrent revenue. And this new products, in turn, award EMCORE with a competitive advantage. Our lead over competitors is widening, and we continue to expand our customer base with our new product solution. Now let me discuss our Telecom Fiber Optics business. The revenue from the Tunable Lasers and ITLA sales in the 40 and 100 Gigabit applications continuously increased significantly. Compared to the same time last year, revenue from this product line has more than doubled and the bookings are at their highest level. The External Cavity Laser platform allows us to optimize certain electro-optical properties separately compared to integrated DFB lasers, giving us superior attributes for the lasers such as narrow line width, spectrum purity and high output power. Our full band tunable External Cavity Lasers has become the laser of choice for the 40- and 100-gig markets for coherent applications. We believe that we are the market leader in tunable lasers for 40- and 100-gig transponders using coherent detecting. With our next-generation development efforts with tunable laser, EMCORE is now the leader in the micro-ITLA MSA market for future form factor 40- and 100-gig transponder applications. The micro-ITLA will maintain the same performance as the current version that reviews the form factor in that power consumption significantly. This development program will reinforce our leadership position in the proper drill [ph] and coherent market. On the tunable XFP front. Our process, I believe, in Tunable XFP products, are being shifted to many laser telecom customers for qualification. Two of the leading customers in this space have benefit systems verification and qualifications using a few XFP products to replace 300-pin tunable transponders and continue to be our primary target to cannibalize the roughly $300 million per year market of tunable transponders. Our product line -- our production line in the Bay Area serves to improve the production process and reviews assembly and test times and review the high-volume production line and our OFC contract manufacturer. The performance distribution of our products has improved as our process control matures. Our full power of the Tunable XFP devices is very important to replace 300-pin transponders in metro and long-haul applications. The rate in the output power distribution of our Tunable XFP transceivers is stated at around 3 dBm. In addition, we believe our products lead the pack in performance in many areas such as ideal churn [ph], full band tunability and so on. We expect to ship our first million-dollar revenue from this product line in the June quarter. As you can expect, we are closely monitoring the progress of this product within the market given the enormous opportunity. Our ability to deliver both the high-performance longer-range applications along with the lower performance requirement for the metro market, places us in a unique position to support all market segments and enhancing our ability for the long term. While there are still some risks, I feel confident that we have a robust plan in place to avert, overcome obstacles. Today, we are focusing on executing the production ramps, and I'm happy to report that our plans to ship these products in high volume, with the capacity up to 15,000 parts per quarter, in the second half of 2011 is on track. Another interesting market needs and the strength of EMCORE is in parallel optics, where we supply both active cables and pluggable modules for high-speed Internet connection from 40-gig to 150-gigabit per second solutions. Today, the active optical cables are used primarily in the high performance computing clusters, replacing heavy and rigid electrical cables. In this product area, we are the leading supplier, with over 100,000 units shipped to-date. The revenue from this product line, however, has been lumpy due to its nature of the primary use in supercomputer and the programs specific. In order to expand the total addressable market, we have a plan in place to expand active optical cables to computer server and the ethernet applications. Another parallel optics that place product opportunity for EMCORE is our new module products. 12x10 gigabit per second CXP transmitter and receiver modules for high-end core router and enterprise applications. We are currently providing samples to 2 leading customers, and our first commercial shipments are expected in early 2012. In our current product portfolio, there are some products, which are either approaching the end of their life cycle, or of course, is no longer competitive. These products currently make up about $2 million to $3 million in revenues for the company. We saw a further decrease in revenue and have, therefore, taken inventory reserves of approximately $1.2 million in the March quarter. On a positive note, we expect future revenues from the new products will be more than enough to offset the decline of the legacy product, and the gross margin is expected to improve due to a better product mix. Now let me move on to give you an update on our Solar Photovoltaics business. And we discussed in the December quarter conference call, the revenue in our Space Photovoltaics business experienced a sequential decline in the March quarter due to the completion of a few major programs over the last couple of quarters, afterward delivered record revenues in both September and December quarters. The demand in our Satellite Solar Power products continues to be very robust. As we announced today, we entered into another long-term purchase agreement with Space Systems/Loral to provide high-efficiency solar cells. This is the second-largest contract in terms of a dollar amount in the history of the company. In addition, we have received substantial orders from our international customers recently. As a result, our backlogs for space solar cells -- solar panel products have increased significantly since we closed the March quarter. We continue to make strides in improving our solar cell performance for applications in both space and terrestrial systems. We have achieved a 34.3% conversion efficiency from a large area of 4-junction inverted metamorphic or IMM solar cells for AM0 that is a phase illumination condition. Concurrently, our similar triple-junction IMM designed for CTV application has reached a 43.5% conversion efficiency, and there's 300x concentration. The improvement of solar cell conversion efficiency has served as a cheap avenue to reduce the overall system cost before our end customers. We have established the manufacturing infrastructure for IMM solar cells over the past year, and we're confident that this advanced product will enter into a well end-production phase in the near future. Now, let me give you an update on our CPV joint venture and the recent developments of our Terrestrial CPV business. Our CPV joint venture with San'an Optoelectronics in China, called Suncore Photovoltaics, received its business license and our relevant regulatory approvals in March 2011 -- in, I'm sorry, January 2011. We broke ground and started construction of the facility in Huainan City of China in February, which is planned to be capable of producing 200 megawatts CPV modules per annum. The facility construction's on schedule -- we expect the JVs manufacturing line to be up and running for producing CPV component and systems in September 2011. While the new facility is in construction, the EMCORE and the Suncore teams have been working very closely over the past several months to transfer the Gen-III CPV system manufacturing processes to Suncore's temporary facility in Xiamen, China. The process transfer and the training are almost complete. The Gen-III systems made in China have successfully gained a certification last week issued by China Qualification Center (sic) [China Certification Center]. With that, our Gen-III products are officially qualified for the Chinese terrestrial solar market. During the March quarter, we made our first capital contribution of $4 million to the joint venture. We expect to make the remaining $8 million capital contribution in the next couple of quarters, of which $4 million will be covered by the licensing fee to be paid by San'an to EMCORE. With the capital contribution from the shareholders and the significant cash and land grants from the city that Suncore has received from the financing, the joint venture has a very strong balance sheet to execute its business plan for facility build out, capital equipment purchase and the initial working capital to cover the production in its current backlog. Mark noted, this quarter, we recognized the activity in the income statement related to Suncore. Going forward, we expect the loss from this joint venture to be less than $500,000 per quarter until Suncore begins shipping products and rollout by the end of this calendar year. Another significant development in the March quarter is that we acquired certain assets of Soliant Energy of Monrovia, California, on March 29. Soliant Energy was the leading supplier of CPV systems for commercial rooftop applications. So once the rooftop CPV systems combined, that's the great module design that offer a high energy-density, lightweight, low-profile and low-cost solution. The Soliant assets acquired by EMCORE included an equipment inventory, intellectual property and tooling for the rooftop solar energy production line. The acquisition was completed as part of the Assignment for the Benefit of Creditors process so we did not assume any liabilities of Soliant. We have integrated, in the form of Soliant, the R&D and the power production into our existing facilities located in Alhambra, California. The commercial manufacturing operation is expected to transfer to EMCORE's low-cost manufacturing joint venture, Suncore. Key members of the former Soliant team has joined the EMCORE to facilitate the integration, ongoing product development and the business development and customer support. We're very pleased to add the Soliant solution to EMCORE's terrestrial CPV product portfolio. The addition of a rooftop CPV product line gives EMCORE immediate access to the reportedly multi-billion-dollar rooftop PV market and extends the reach EMCORE's existing [indiscernible] system. We're very impressed with the capability of the Soliant team. And with the establishment of a CPV design and customer service center in Southern California, we will be able to develop business opportunities and several customer base in the most active region of the solar installation. This integration allows us to leverage EMCORE's high business in solar cell technology and its low cost in manufacturing infrastructure. We believe this combined team will allow us to accelerate delivery of most cost-effective and highly reliable rooftop systems to the market. The operating cost associated with this development effort will be roughly about $400,000 to $500,000 per quarter for the next 2 quarters as we finalize the design activities and build up our business development pipeline. On another note, we are gearing up margin assembly production activities for CPV Solar Power projects in New Mexico and Arizona that are expected to be fulfilled in the next several months. In addition, we are in discussion on a number of project opportunities for both San'an [ph] and the rooftop applications in the pipeline. And I look forward to discussing this with you in the future periods as we finalize this project. In summary, our robust business units of Broadband Fiber Optics and Satellite Solar Photovoltaics continue to deliver excellent performance and provide a positive future outlook. We have made a great progress in the March quarter, setting the stage for the product portfolio to operate within our Telecom Enterprise Fiber Optic business, as well as ramping up production capacity within our Solar CPV business. On the revenue outlook. For our third fiscal quarter, we expect consolidated revenue to be in the range of $48 million to $50 million. Our Fiber Optics segment's revenue should represent the majority of sequential revenue drill. In this quarter, we will continue to solidify our strong market position in a more established Satellite Solar Photovoltaic and Broadband Fiber Optics businesses. At the same time, we are focusing on the capacity buildup of Tunable XFP production so that we'll be well positioned for a significant revenue ramp up in the second half of the year. In addition, we will be beefing up our efforts in business development and the project development for Terrestrial CPV. Overall, we'll continue on setting a strong foundation in this quarter for our future drill and profitability improvement. With that, I will turn it over to Q&A.

[Operator:]

[Operator Instructions] Our first question comes from the line of Edward Zabitsky with ACI Research.

[Edward Zabitsky:]

I've got about 10 questions, so I'll ask a few and just get back in queue. I wanted to know about the TXFP run rate -- the current run rate of production?

[Hong Hou:]

Yes, so the TXFP production, it's going to be happening in 2 sites. One is in our production line in the Bay Area, but the high-volume line is going to be at our contract manufacturers, OFC. So our Bay Area line, it's capable of producing about 2,000 to 3,000 pieces per quarter but majority of that 15,000 per quarter capacity is going to be on our contract manufacturer. So right now, the contract manufacturer line is not up and running yet, and we're getting all equipment delivered and be hooked up. I think take majority of the equipment will be delivered within this quarter. But the line would not be up and running until next quarter.

[Edward Zabitsky:]

Sure, I understand. So in terms of your own production facility, where are you in that ramp?

[Hong Hou:]

So we are able to produce a few hundred units right now, but we are building up the entire infrastructure for components testing assembly, as well. So we get a multiple level of capacity ramp going on. And right now, we are at a capacity only about a few hundred to a thousand per quarter level.

[Edward Zabitsky:]

Okay, and in terms of -- so is there going to be any knowledge transfer between you and the contract manufacturer?

[Hong Hou:]

Absolutely. So we're leveraging their engineering capability and have been working with them in the last 3, 4 months already. So they have been in our newer Bay Area facility while designing the high throughput line but also helping us with the process engineering. Then, when the line's up and running, we'll be sending a lot of engineers from our Bay Area and within the company, our different sites to the contract manufacturer to support the production ramp and the process transfer.

[Edward Zabitsky:]

Okay. So I'm not sure if I caught it. Did you say you expect $1 million in revenue in the June quarter?

[Hong Hou:]

Yes, we expect to shift about $1 million revenue from the Tunable XFP in the June quarter.

[Edward Zabitsky:]

Fantastic. And I think you mentioned 2 wins. Would you characterize the size of these customers, first?

[Hong Hou:]

They are probably all within the top 5. The both are in the top 5 telecom equipment manufacturers. So they are significant to us.

[Edward Zabitsky:]

Sounds significant to me. Good. And one more question, and then I'll give up for someone for a bit. You mentioned that 40G to 100G revenue doubled year-over-year. What roughly was that level, please?

[Hong Hou:]

So right now, it's just still below $10 million but the rest of the backlog builds up very quickly. So we expect that trend is to continue -- the momentum to continue in almost in the same pace.

[Edward Zabitsky:]

So when you say below $10 million, is it close to the $5 million, close to the $10 million?

[Hong Hou:]

Yes, about $7 million, $8 million. Kind of right in the middle, between $5 million to $10 million.

[Operator:]

[Operator Instructions] Our next question comes from the line of Alex Henderson with Miller Tabak.

[Alex Henderson:]

I didn't catch, did you give a Solar guidance there on the revenues?

[Hong Hou:]

Alex, we did not give a separate Solar guidance, and so -- but we gave the overall revenue guidance.

[Alex Henderson:]

Right, I can back it out. But it sounds like the Solar is essentially flat, if I'm up $3 million or so from OpEx.

[Hong Hou:]

Right, it is flattish. And yes, that's a pretty good assumption.

[Alex Henderson:]

I'm a little confused, then. I thought you were implying that you had a "substantial order" in April and implying the strength in orders there. Is that a -- could you help me out on with the lead time on from the time those orders come in to shipment, just so I get some clarity on that?

[Hong Hou:]

Right. So the backlogs, Alex, we report, is for the backlog to be shipped within 12 months. And then the long-term purchase agreement, we just entered into with Space Systems/Loral, is to be delivered in the next couple of years. So it's a good thing for the Space Solar business, that we have a very good visibility for the next 12 months, even beyond. And that is not all of them to be shipped in the next quarter or 2.

[Alex Henderson:]

All right, so am I reasonable to think that some of that international kicks in, in the back half and gives you some visibility to get to the upper end of the sort of $16 million, $18 million run rate band?

[Hong Hou:]

Right, right. As Mark has described in his part, we still expect year-over-year growth for revenue in the Space Photovoltaics. But between quarters, it's a little bit lumpy and program-specific. And we talked before -- one satellite program represented about $3 million revenue to us. So it can fall into any quarter. And, yes, for the June quarter, we expect for our Solar side, the revenue, to be a little flat.

[Alex Henderson:]

The ITLA business in the quarter, can you tell us what the quarter-to-quarter growth from that business was?

[Hong Hou:]

Yes, so we talked about -- the same period last year, the revenues was about half, and the quarter-over-quarter drill's 25%, 30%.

[Alex Henderson:]

25% to 30%. And is it reasonable to think that the and growth in the suitable XFP are the primary drivers for the sequential growth into the June quarter?

[Hong Hou:]

Yes. That's a good assumption.

[Alex Henderson:]

Yes, and so the plays out of all the products, you suggest that was, what, $2 million to $3 million less in the March quarter. Are you looking that to decline another $1 million or so sequentially into the June quarter?

[Hong Hou:]

Probably, it would be another $1 million -- a little bit more than that. And I think, as we talked about better from the inventory side, the exposure is very minimal after the $1.2 million of reserve on the raw material. So for the legacy product, we are more like in a monetizing-the-inventory mode. We certainly would not be the replenishing the inventory to continue this product line with 0 or very minimal gross margin.

[Alex Henderson:]

Right, so we've been thinking about a couple of million dollars worth of write-offs left in the inventory write-down through the end of the year. Is that too much after the June, September, December quarter?

[Mark Weinswig:]

Yes. Over the last couple of quarters, we've been averaging a little bit more between $1 million to $1.5 million per quarter in, basically, excess in obsolete charges. So in the Optics business, we typically will have some -- depending on customer demand changes over period, but the normalized level of that should be less than $500,000 a year. So we hope that, within the next quarter or 2, it will be back down to our normal levels.

[Alex Henderson:]

I got that, okay. Just one last question. Can you give us a sense of what the assumption is for the Cable portion of the business going into the June quarter?

[Mark Weinswig:]

The June quarter -- in general, that businesses is pretty strong in the March quarter. In the June quarter, we expect to be similar strength in, namely, pretty flat or minimal drills, for the majority of the drills is the Fiber Optics. It's going to be in the 40- to 100-gig ITLA. And the Tunable XFP, as we talked about -- June quarter will be having the first million-dollar revenue shift, that's our expectation. So the drill is in the Telecom product.

[Operator:]

Our next question comes from the line of Stephen Copper with Convio [ph].

[Stephen Copper:]

On the solar JV, Hong, you were saying that -- it sounds like you're indicating volume shipment of product sometime around the end of this current calendar year, and at that stage, the losses from the JV should go to pretty negligible level. So my question is, are there firm commitments from any customer to the JV? Or was there any kind of commitments about consumption regardless of where it was going? I'm just trying to understand where the confidence comes from that the JV gets to, basically, break even for EMCORE, by then. I wasn't expecting that to happen so fast.

[Hong Hou:]

Yes. So the JV is producing the products in their temporary facility in Xiamen, right now. But we do not expect running at this volume without automation for the module assembly to be very cost competitive. That's why we incurred our fair share of the loss of that joint venture. But the permanent facility is being built right now, and construction will be done by mid-July, and production will start in September of this year. Currently, the joint venture had a firm backlog, about $5 million, to be delivered in the early part -- before the middle of 2012. Then they have a top line of another $10 million -- 10 megawatts to be finalized in the next month or so. So to answer your question, yes, they do have firm backlog, which is 5 megawatt, immediately, and we also need our joint venture to deliver -- that manufacturing deliver the CPV components for about 2.5 megawatts after backlog we have for the project in New Mexico and Arizona. So they will be manufacturing other key components. And to get them to that, send it over to the U.S, and we do the final fast view [ph] here. That way, from our current cost model, we'll get the most competitive -- cost competitive product. So they are in the situation. They do have a capacity utilization expectation.

[Stephen Copper:]

Okay, just a follow-up on that. I'm not sure about much about all the elements of the JV, especially San'an's part it. Is San'an consuming -- are they committed to themselves, taking actual sales for they use or resell, is that I was going to work?

[Hong Hou:]

No, San'an Optoelectronics is the largest LED manufacturer. So through the formation of the joint venture with EMCORE, they basically step up the effort of Photovoltaics side. So whether the joint venture, has 2 business objectives. One is, of course, to do high-volume low-cost manufacturing. The second is, aggressively developing the business in, primarily, Chinese Solar Photovoltaic market. So they have been pretty successful so far in getting the firm order of 5 megawatts and get another 10 megawatts coming in very shortly.

[Stephen Copper:]

Okay, are they allowed to -- are those orders allowed to be canceled? Meaning, is there any kind of take-or-pay to the JV? When do you call them firm, if you could just describe it a little better?

[Hong Hou:]

Yes, they're firm, they signed a power purchase agreement. They have the firm delivery date. They have prepayment for it, and the number is -- before the formation, the joint ventures, San'an had manufactured and installed 1 megawatt already, so that's up and running with this customer. And they have been the performance of Gen-III installation in the last, what, 4, 5 months, already. So this is not new to them. They know the product, they know the performance, they know what to expect and the economics of it. So for the last megawatt, to get paid -- now really, we do not expect they will changing their form because they already got the permitting and the financing for it.

[Stephen Copper:]

Okay, so I'll just one last question, and then I'll leave it. It doesn't sound like there's any reason to expect losses from the JV, say, beyond calendar Q1 of 2012. Is that correct?

[Hong Hou:]

Yes, you are correct. And I think the joint -- actually we actively expect our cost model to be competitive -- the cost to be competitive compared to the sales price. And as you know, the original government provided cash grants for capital expenditures, and the depreciation cost is very low. The working capital is covered, and we have our internal transfer cost for solar cells as also to be very competitive. From our current expectation from the first calendar quarter 2012, this joint venture should be breakeven or generating slight profit.

[Operator:]

Our next question comes from the line of Edward Zabitsky with ACI Research.

[Edward Zabitsky:]

I wanted to make Mark work for a little bit. On the gross margin side -- embedded in the gross margin, the 18% gross margin, I think you said there was a $1.4 million inventory charge?

[Mark Weinswig:]

Yes, $1.2 million.

[Edward Zabitsky:]

$1.2 million, my apologies. So without it, you would have had a 22% gross margin?

[Mark Weinswig:]

If we exclude that amount, yes.

[Edward Zabitsky:]

Okay, just trying to understand. So actually, even in spite of the revenue decline in your Fiber Optics business, you actually have better gross margins?

[Mark Weinswig:]

Well, just to be fair, in the last quarter, not Q1 period, the December quarter, we also had an E&O charge that was actually slightly higher. So to be fair, that would have also been close to about 4 to 5 percentage points of margin deterioration from the E&O charge in the last quarter?

[Edward Zabitsky:]

Right, so take us through -- I mean, in the past, you said that the gross margins should rise to be with the ITLA and the TXFP gaining momentum and gaining greater share of your business. When do you think we're going to see that?

[Mark Weinswig:]

Well, I mean -- we haven't given any guidance on margins, but what we would say is kind of a -- first of all, as I mentioned a few minutes ago, we don't believe that these high E&O charge will continue. There will always be E&O in this area but we've having a significantly higher amount due to end of life of some of these products. Second, we do see much higher margins on our newer product lines in terms of our forecasts. So once those start to ramp up in higher volume, we do expect to have some margin improvement. So these things should benefit our business. And then finally, as Hong mentioned during his part of the call, we are expecting a 10% revenue decline -- increase for the quarter in Fiber Optics. And as we've had said before, we do expect our Fiber Optics business to continue to see good growth in future periods.

[Edward Zabitsky:]

Okay, very good. And on the Photovoltaics side, the gross margin decline, was it purely volume-related or was there something else...

[Mark Weinswig:]

It was purely volume-related. That business was operating very effectively and efficiently. There really was just that -- with the high variable margins that we make on those products, any type of revenue decline actually affects the gross margin line pretty significantly.

[Edward Zabitsky:]

Okay. And Loral, what was rough size of the contract that you pursued?

[Mark Weinswig:]

We haven't given any guidance or any specific figures. The only thing we are willing to say is that it is worth tens of millions of dollars. And that it is our second largest contract acquired that the company have had in history. It's a real win for the company. And I think Hong wants to give you a little more detail on some of the sort of benefits of this contract.

[Hong Hou:]

Yes. So Loral was our first customer when we get into the Photovoltaic Space side. And when we were a new kid on the block, they were banking on us, and so far, we're having a great relationship with them. We were the sole supplier to them. They are the largest commercial telecom manufacturer integrator in the world. So this would be our third long-term purchase agreement with them, and the size wise, I would say, the second largest one. The last one was from them, as well.

[Edward Zabitsky:]

And do you have 100% of Loral's business? And did you have 100% of Loral's business?

[Hong Hou:]

Yes, we do.

[Edward Zabitsky:]

Okay. So that's constant?

[Hong Hou:]

Yes, yes, absolutely. So you have any other flavor. We have served with them, and we were awarded for excellence in supplier award 3 years in a row. So that relationship goes very well.

[Edward Zabitsky:]

So what has changed within in terms of their actual business flow that they're reflecting to you? With that said, do they have some new wins? I thought from obviously wriggling the relationship, do they have more business flowing through?

[Mark Weinswig:]

For the Aerospace side, what they usually do is really negotiate the terms and conditions, and the quality assurance and quality product qualification impacting funds upfront then they enter into a long-term agreement. And then they do a 12-month rolling forecast on the volume demand in which will be drawn soon with a long-term purchase agreement. So we don't negotiate order by order like very often we experienced in the Fiber Optics space. So we got a good visibility. We don't want to go worry any competitors going in there for the next couple of years, and we know exactly where the price is going to be, where the product flavor is going to be. And that helps us a lot in managing the workforce, and inventory and all of that. So that's really we've got -- we're in a very good position. Loral is a customer, we are the sole supplier to them. The others and like also we announced that before, we are a sole supplier to them for solar cell and solar panel needs. We have the long-term purchase agreement in place as well. And we are in the active discussion on the long-term purchase agreement, arrangement with another major aerospace customer even though we are today already a primary supplier to them.

[Edward Zabitsky:]

Okay, so very good. I understand. And one more question related to the Fiber Optics. The 12x10, and this is I guess interesting news. Can you describe the application? Is it an interswitch like let's say between a router and a piece of optical transmission equipment? Is it in a data center, what kind of application are we looking at?

[Hong Hou:]

Yes, mostly the telecom central office is using different telecom racks and the core routers. It will be to replace the current products of 12x2.5 gigabit per channel or 12x5 gigabit per channel. So the CXP product is going to be cannibalizing the current, we call the SDR or S-12, a single data rate 12-lane of D-12, the double data rate 12-lane. So for example, the large -- the enterprise equipment manufacture that in the future -- products much more -- this will be the standard interconnect format. And we expect it will be taking a broader product start in early of 2012.

[Edward Zabitsky:]

Okay. Can you help us understand the size of this market, the potential? I mean obviously, their market estimates are very healthy but in terms of that specific application, how big could this be for you?

[Hong Hou:]

So it depends on what research reporting, we have been anywhere projecting from $100 million to $180 million a year by 2012 timeframe.

[Operator:]

[Operator Instructions] Our next question is a follow-up from the line of Alex Henderson with Miller Tabak.

[Alex Henderson:]

I think I drop my line there in the middle of my questions so I apologize for that. Anyway, I was trying to ask what you thought the sequential growth would look like within the cable piece alone if you just look at that segment?

[Mark Weinswig:]

Right. And that would be pretty much flat in the June quarter compared to the March quarter.

[Alex Henderson:]

So then I'm a little perplexed as to how I get a 10% growth rate sequentially. By my calculations, you'll get about $1.5 million out of the ITLA, about $1 million from -- or a little less than a $1 million from the tunable XFP. What are the other pieces that are contributing to that growth? Is it the cable, parallel optics sequentially? I mean you've still got to offset the phase out from those older products?

[Hong Hou:]

Yes. We're going to see, in general, sequential decline of the legacy products, which will be good for us. We will be having $1 million TXFP shipped. We will have sequential increase in revenue of tunable ITLA. And I think another area we're going to have some really good growth in the June quarter is the video transport products, which -- that the part of the Broadband business portfolio and what we want it -- if we stay singled out the cable TV related product revenue, the June quarter is going to be flat compared to the March quarter but the video transport product will have a pretty good growth. So that will be.

[Alex Henderson:]

I'm sorry there's a video transport product in the cable piece?

[Mark Weinswig:]

It's managed by the same business unit and that would have to sensationalize the video transport product. It's all worth it. The difference about that infrastructure, can be cable TV, can be telecom and can be private network as well. It depends on which level of granularity we were talking about. But yes, if you say just the EMCORE Broadband business units we'll have some drills and the drills that was coming from the video transport product.

[Alex Henderson:]

Is it reasonable to think that, that combined would be up about $1 million sequentially then?

[Mark Weinswig:]

Yes. I think the Fiber Optics side in total we're going to be having about $3 million through quarter-over-quarter.

[Alex Henderson:]

Yes. I was just talking about the cable piece within the Optical segment. The cable plus the video piece combined, that's about $1 million increase?

[Mark Weinswig:]

Yes.

[Alex Henderson:]

Okay. That's what I was looking for. And now that you're seeing your volumes going in the other direction, can you talk a little bit about how much of a push or pull that has on the optical sector margins? I know you don't want to give a specific guidance to the margin number, but can you give us some sense of as the near 0 margin older products phase out and as the new products are ramping, you've got a lot of push and pull there? Can you give us a sense where do you think margins would sequentially improve more than typical or typical seasonal improvement from, to the June quarter? How do we think about it?

[Mark Weinswig:]

Alex, there's a few things. First on the product mix side as you mentioned with our end-of-life products with very, very low margins kind of moving away. These are the newer products taking over. We will see a margin boost from that in addition to the revenue increases that we're expecting. But in addition to all those things, we are also really focusing a lot on some benefit in terms of cost reductions that we've been implementing. So typically, in Fiber Optics side, we too expect to have 25% to 35% gross margin as kind of a target range. So obviously below that number, and we've not mention when we expect to meet those levels, but our goal is to be at those levels. And we're working very hard to make sure that we're there in the next few quarters.

[Alex Henderson:]

Okay. And then the Parallel Optics, that's not going to show sequential growth in the near term? That products just launched I assume that's more into the September, December timeframe when they start to ramp?

[Mark Weinswig:]

The Parallel, probably the revenue will start ramping up in early 2012, calendar 2012 when the CXP that will start shipping this product in volume.

[Alex Henderson:]

Okay. So Cable, Parallel Optics, another pretty much flattish then?

[Hong Hou:]

Yes. It is a little bit lumpy and for the computer cluster applications, if it's too programs specific that's ramping around this in different quarters, and as I mentioned in the script, we do have that fund to broadening applications to go into the data center, and that requires a pretty substantial cost reduction. We're working with our partner doing that. When that happens, the Active Cable can have a new and expanded total addressable market. And that revenue will drill up more rapidly. But at this current application level, we expect the Cable revenue to be about the same quarter-over-quarter.

[Alex Henderson:]

One last detail and then I'll see the floor again. The terrestrial investment that's not included in this space that would separate us from the space portion for Solar. Can you give me a sense of how much that was in the March quarter and what you think it might look like going forward into the June quarter?

[Hong Hou:]

Yes. The transferring is from the internal, the internal effort is not for the joint venture.

[Mark Weinswig:]

So as we talked before, the internal thresholds for Solar efforts for product development and business development, roughly about $5 million, $6 million a year total cost. Of course, the acquisition of the lines, we'll be adding some cost initially as I mentioned about $400,000 to $500,000 a quarter. But after a couple of quarters, we should be able to have revenue from the rooftop system to offset that.

[Alex Henderson:]

So I guess it's running somewhere between $1 million, $1.5 million a quarter currently, and you expect it to step up towards a $1.5 million? That's the way we should to think about it?

[Mark Weinswig:]

Yes. That's right. If that will be...

[Operator:]

And that's all the time we have for questions. At this time, I'd like to turn the conference back to management for closing remarks.

[Victor Allgeier:]

Thank you very much for participating in today's call. Just one last thing, we will be presenting at the 12th Annual B. Riley Conference on Wednesday, May 25. We hope to see you there. Thank you.

[Hong Hou:]

Thank you for your time today, and we look forward to talking to you soon.

[Operator:]

Ladies and gentlemen, this includes the EMCORE Corporation Second Quarter Fiscal 2011 Earnings Conference Call. Thank you for your participation. You may now disconnect.