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First Union Securities Covers EMKR
EMCORE Corporation (EMKR-NYSE) Earnings Reported Strong Q1 2001 and Promising Outlook Rating: 1 Price: $42.06 52-Wk. Rng.: $87-20 Shares Out.: (MM) 33.9 Market Cap.: (MM) 1,425.2
Key Points
Emcore reported Q1 2001 earnings that exceeded our estimates on top and bottom line. Revenue of $40.06 million or 17.6% sequential growth was above our estimate of $38.14 or 12.0%. Loss per share was $0.18 versus our estimate of a loss of $0.22.
Backlog during the quarter came in at $155 million ($108 million for equipment and $47 million for materials) versus $125 million last quarter ($85 million for equipment and $40 million for materials) representing a 24% sequential growth.
The fiber optic business, which includes the VCSEL-based technology, grew 188% sequentially and 184% year-over-year. Growth is expected to continue at these levels for the next two quarters. This quarter, for the first time, the fiber optic business was profitable.
Although demand is strong and momentum likely will continue, the quarter was back-end loaded. A product transition in solar cells, a shutdown in the Albuquerque plant for a week due to weather issues, and disruptive plan expansions caused 56% of the revenue to be shipped in December.
We believe that Emcore is very well positioned to benefit from some key technology transitions occuring in the communications industry, most notably a transition to VCSEL-based components used in for the very short reach fiber (VSR) applications.
We are raising our F2001 estimates to reflect the upside this quarter. We are raising revenue estimates from $191.8 million to $193.7 million and EPS from $0.05 to $0.08. Our $85 target price is based on 13x our current calendar 2001 revenue estimate of $217 million. Maintaining Strong Buy.
Company Description
EMCORE is a vertically integrated compound semiconductor manufacturer with products for the telecommunications, wireless, satellite and consumer electronics markets. Products include Metal Organic Chemical Vapor Deposition (MOCVD) reactors, Radio Frequency (RF) materials, high-efficiency satellite solar cells, and Vertical Cavity Surface Emitting Lasers (VCSELs). Additionally, the company formed joint ventures with General Electric and Uniroyal. Representative customers include Agilent, AMP, Boeing, General Motors, Hewlett Packard, IBM, JDS Uniphase, LG Semiconductor, Lucent, Motorola, and Texas Instrument.
Quarterly Highlights Revenue and EPS Results. Emcore reported Q1 2001 earnings that exceeded our estimates on top and bottom line. Revenue of $40.06 million or 17.6% sequential growth was above our estimate of $38.14 or 12.0%. Systems revenue grew approximately 125% year-over-year and 16% sequentially to $26.7 million. Materials revenue grew close to 200% year-over-year and 20% sequentially to $13.2 million. Loss per share was $0.18 versus our estimate of a loss of $0.22.
Material Revenue Breakdown. Solar Cells. Solar cells increased 251% year-over-year but decreased 16% sequentially to $4.5 million, due to a product transition during the quarter. The company started shipping its solar cells with 26% efficiency to Loral and won a new contract with a large European customer during the quarter. This new customer improves visibility and will increase revenue from this product line by approximately 30%. Yields are improving by 15% - 20% and ASPs are higher than anticipated. During the quarter, Loral represented 10% of revenue from solar cells.
RF Materials. RF Materials were approximately $6 million during the quarter representing 172% year-over-year growth and 79% seguential growth. During the quarter, production began at new accounts including Nortel, Triquent, and Anadigix. Motorola represented 10% of revenue from RF Materials.
VSCEL Technology. The fiber optic business, which includes the VCSEL-based technology, grew 188% sequentially and 184% year-over-year to $2.5 million. Growth is expected to continue at these levels for the next two quarters. For the first time this quarter, the fiber optic business was profitable. The company is seeing demand accelerate ahead of schedule. Corning, Finisar, JDSU, Agilent and others are sampling Emcore™s VCSEL products. The additional R&D investment has accelerated time to market for new products and manufacturing ramp ups. Emcore is experiencing significant yield improvements for VCSEL-based technologies. Margins for these products are north of 50%. We belive Emcore is the dominante player in the parallel optical market. During the quarter, Agilent represented 10% of revenue from fiber optics.
Backlog. Backlog during the quarter came in at $155 million ($108 million for equipment and $47 million for materials) versus $125 million last quarter ($85 million for equipment and $40 million for materials) representing a 24% sequential growth.
Margins. Gross margins of 41.3% were in line with our estimate. As product mix becomes more heavily weighted toward fiber optic revenue, we expect gross margins to trend upward. R&D expenses were $13.17 million or 32.9% of total revenue reflecting the introduction and accelerated production ramp of VCSEL-based technologies. This was $360 million below our estimate. SG&A was $6.9 million or 17.4% of total revenue versus our estimate of $6.7 million.
Joint Ventures. The loss from joint ventures was $4.2 million during the quarter. GELcore reported a loss of $1.4 million which is ahead of plan. GELcore has won 60%-65% of the traffic light market in California. This includes both red and green LEDs. GELcore is expected to break even in CQ3 2001. Uniroyal Optoelectronics demonstrated improved operating performances and capacity is ramping. This joint venture reported a loss of $2.8 million during the quarter. This joint venture has the potential to break even in CQ4 2001.
Balance sheet results. DSOs were 46 days, essentially flat with last quarter. Inventory turns was flat at 2.6 turns. As we stated above the quarter was back-end loaded causing a significant increase in accounts receivable during the quarter. This increase was driven by product transition in solar cells, a shutdown in the Albuquerque plant for a week due to weather issues, and disruptive plan expansions. We believe Emcore has a strong collection program in place and are not concerned with this increase in accounts receivable.
Additional information available upon request.
First Union Securities, Inc. maintains a market in the common stock of EMKR.
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