Hong Q. Hou - President and CEO Mark B. Weinswig - CFO Victor Allgeier - IR.

David Kang - B. Riley & Co., LLC.

Good day, ladies and gentlemen, and welcome to the EMCORE Corporation Third Quarter Fiscal 2014 Earnings Call. At this time, all participants are in a listen-only mode. (Operator Instructions) As a reminder, this conference is being recorded. I’d like to introduce your host for today's conference, Mr. Victor Allgeier. Sir, you may begin..

Thank you, and good afternoon, everyone. Before we begin, we’d 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 our current expectations and projections about future events and financial trends affecting the financial condition of our business.

Such forward-looking statements include, in particular, projections about our future events, statements about our plans, strategies, business prospects, changes in trends in our business and the markets in which we operate.

Management cautions that these forward-looking statements relate to future events or future financial performances, 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 our business or our 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 our businesses that are addressed in our filings with the U.S.

Securities and Exchange Commission that are available on the SEC's Web site at www.sec.gov, including the sections entitled Risk Factors in our annual report on Form 10-K and our quarterly reports on Form 10-Q.

We assume no obligation to update any forward-looking statements to conform such statements to actual results or changes in our expectations, except as required by applicable law or regulation. With us today from EMCORE, 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'll now turn the call over to Mark..

Thank you, Vick, and good afternoon, everyone. Today I'm going to focus my discussion on our third fiscal quarter operating results and our balance sheet. Consolidated revenue for our third fiscal quarter totaled $44.6 million, which is an increase of $2.3 million or 5.5% over the previous quarter.

The increase was due to higher Fiber Optics revenue driven by strong growth in our telecom and cable TV product line. Our Q3 revenue guidance was $40 million to $44 million. On a segment basis, our Photovoltaic business accounted for $18.4 million or 41% of the Company's total revenue.

This represents a $0.2 million or 1% decrease from the prior quarter. As we’ve said previously, while we remain confident in the long-term prospects of the Photovoltaics business, our revenues in any given quarter may be a bit lumpy. The Fiber Optics segment accounted for $26.2 million, or 59% of the Company's total revenue.

This represents an increase of roughly $2.6 million or 11% from the prior quarter. Hong will discuss the outlook for the business later in the call. On a segment basis, Photovoltaic gross margin increased sequentially almost 1.2 percentage points to 27.7%. The primary reason for the increase was due to favorable variances realized in the quarter.

We continue to believe that this businesses target gross margins are at roughly 30%. Fiber Optic gross margin was 16.4%, and 8.2 percentage point increase from the prior quarter, primarily due to increase in revenues, better absorption of the fixed costs and lower warranty costs.

As we’ve discussed previously, with the initial launch of the micro-ITLA product, we expect our margins to be under some pressure. We’ve seen significant improvement in the 100 and 400 gig coherent market. This has led to an increase in our revenues and in our overall gross margins for our telecom products.

Consolidated gross margin was 21.1%, or 4.8 percentage point increase from the prior quarter, primarily attributable to the higher Fiber Optics gross margins. Total operating expenses for R&D and SG&A were $12.5 million, up 3% from the prior quarter.

On a GAAP basis, the consolidated net loss for the third quarter was $3.2 million, a $2.2 million improvement from the prior quarter. Our GAAP net loss per basic and diluted share was $0.10.

Our non-GAAP net loss, after excluding certain adjustments, all of which are set forth in the non-GAAP tables included in today’s release, was a loss of $1.6 million versus $2.6 million in the prior quarter. The improvement was primarily due to better financial performance within the Fiber Optics segment.

Please note that we’ve included additional information regarding amortization, stock comp and other items in today’s release to provide further clarity on our results.

Now on to order backlog, which we defined as purchase orders or supply agreements accepted by the Company with expected product delivery and/or services to be performed within the next 12 months. At June 30, the Company’s Space Photovoltaic order backlog was approximately $70.5 million versus $51.4 million at the end of the prior quarter.

As we announced publicly over the past few months, we’ve signed two very significant long-term agreements with key customers. Moving on to the balance sheet, at the end of June, the Company's cash and cash equivalents balance was $18.2 million, flat with the prior quarter.

The line of credit increased to $20.9 million with the increase in revenues, our accounts receivable increased over $5 million in the quarter. Overall, the solar financial results showed continued strength in the quarter.

The Fiber Optics segment experienced some revenue growth in both the telecom and broadband cable TV area and in addition we realized an increase in gross margins. With that, I’ll turn the call over to Hong, who will discuss the Company’s strategic and operating initiatives and provide revenue guidance for the fourth quarter..

Thanks, Mark. Good afternoon, everyone. As Mark discussed, we achieved consolidated revenue of $44.6 million in the June quarter, which represents a $2.3 million or 5.5% sequential increase from the March quarter. This was better than the high-end of our guided range of revenue of $40 million to $44 million.

The increase was attributable to stronger demand in our Fiber Optics segment. The revenue in Fiber Optics grew approximately 11% sequentially, while the revenue for the Space Photovoltaic division declined slightly. Consolidated gross margins improved significantly from the March quarter as well.

The improvement comes primarily from the Fiber Optics segment. The improvement from the Fiber Optics business was primarily due to the telecom ITLA business for 100 gigabit applications. Now, let me give you an update on our businesses and their market conditions. First, I will start with the Space Photovoltaic business segment.

Revenue for our Photovoltaic segment was $18.4 million, a $0.2 million sequential decline from the previous quarter. This quarter represents a pretty typical revenue run rate for the current state of this business. We expect a record revenue for the entire fiscal year.

Gross margin in the third quarter was 27.7%, slightly better than the last quarter’s 26.5%. And the non-GAAP profit after corporate allocations for the Space Photovoltaic division for the June quarter was $2.4 million.

In the June quarter, Space Photovoltaic division entered into large long-term supply agreements, our LTAs with the two leading aerospace clients, Space Systems/Loral, and Lockheed Martin. This represents the first LTA we have established with Space Systems/Loral, but it’s a first LTA with Lockheed Martin in the history of our business.

In addition, we secured multiple contracts with other customers during the quarter for an additional $4.7 million. The backlog for this division, as of June 30, for delivery scheduled over the next 12 months, was $70.5 million, a record high for us. Strong backlog evidences the level of customer commitment that we have never seen before.

Needless to say, our Space Photovoltaic business remained very robust. We continue to invest significantly in R&D and the new product development by leveraging sponsored R&D and engineering service contracts.

For aerospace applications, our engineering projects are focusing on providing our customers with product with the best dollar per watt, dollar to kilogram in weight, dollar per volume as well as more highly integrated products, for example, solar panels instead of solar cells.

The division is seeing good traction in the adoption of new products and technologies from our customers and there exists multiple opportunities for selling more value added products in fiscal year 2015. This long-term purchase agreement provide us with a robust outlook for our future business.

We believe that consistent long-term demand will enable us to continue to drive economics throughout our operations and provide the best value to our customers. The steady growth and the visibility of this business is also enabling us to manage our working capital more effectively.

[Ph] [PIO] and our inventory levels reached a record low level in this quarter. Now let me discuss our market position and business outlook in the Fiber Optics business segment. Revenue for the segment was $26.2 million in the June quarter compared to the $23.6 million in the March quarter. Gross margin improved from 8.2% to 16.4% sequentially.

The non-GAAP loss was approximately $4 million. In the broadband cable TV business, revenue improved slightly compared to the March quarter. We have seen signs after a recovery in the cable TV infrastructure spending, especially towards the end of the quarter when we started seeing orders flowing in.

The book-to-bill for the quarter was over 1.1 and the booking momentum into the September quarter seems to be continuing. We have been closely monitoring the CapEx spending plan after MSOs has disclosed in their earnings calls. The outlook for CapEx from MSOs have been trending very positively.

For instance, the CapEx for network infrastructure at one of the largest MSOs which is now addressable market, increased by 61% sequentially. This MSO expected their CapEx to be 14% of their revenue in the 2014, which is significantly higher than the 12.4% for 2013.

And this implies a strong spending plan for the second half of the year as their first half CapEx was only at 12.1% of their revenue. For another key MSO, the CapEx for scalable infrastructure in operate was up approximately 130% from the same period of last year.

CapEx increased primarily due to their investment to improve networks reliability, operate order of customer premises equipment and expand their networks to additional residence, commercial buildings, and cell towers. And then they expect their CapEx to revenue ratio to increase from 14.5% in 2013 to 18.3% in 2014.

Therefore CapEx spending projections look favorable for our cable TV business and this trend is consistent with the recent demand we have experienced. We continue to support our customers on this transition to the new DOCSIS 3.1 standard and remain focused on both protecting our existing and expanding our customer base.

We are deeply engaged in product design and qualification to address DOCSIS 3.1 standard and have finished the several related product releases. We are excited that our leading customers have released their first DOCSIS 3.1 transmission product recently.

We started shipping transmission product -- products that comply with the DOCSIS 3.1 standard in the June quarter. During the quarter, we conducted demonstration for our customer base in major MSOs on the new technology, a fully integrated transmitter based on our disrupted linearized semiconductor laser technology, we called LEML.

This technology offers a high-power modulation and transmission with a linearity performance similar to externally modulated transmitters for cable TV infrastructure and with significantly lower costs and power consumption.

Due to our heritage over the past 20 years, we have extensive manufacturing capabilities at our (indiscernible) fab within our broadband division. Historically, most or all of our chip production it has been for internal consumption and mostly used for our mortgage equated product that was cell.

In recent quarters, we’ve started to sell certain products at the chip level directly from the back. These efforts improved our fixed cost absorption tremendously, we expect continued contribution to our top line and profitability due to this initiative.

In general, our broadband business has an extensive technology base and the high barriers to competition, we expect to continue to defend and expand our leading position in cable TV. In the meantime, we plan to pursue growth opportunities in selected niche markets by leveraging our core engineering competency and fulfillment infrastructure.

Moving on to our telecom business, during the June quarter, the shipment of 100 gig coherent product at another record level and the revenue from this business increased approximately 18% compared to the March quarter.

We continue to see strong demand in the 100 gig coherent product, and the book-to-bill for the telecom product in the June quarter was 1.2. This is driven by strong demand for 100 gig coherent transmission of telecom carriers. The order activities for this quarter it was very strong, and our backlog for this product line reached a record level.

We started shipping substantial volume of micro-ITLAs this quarter. The revenue contribution from micro-ITLA was over $2 million. We are seeing a faster transition to micro-ITLA. We are ramping up our capacity aggressively to meet the increased demand from our customers.

Although there are several companies have demonstrated or announced potential micro-ITLA offering, we believe we still have the lion share with the main -- major telecom OEMs and our micro-ITLA is a market leading product in terms of the performance and value. Thanks to better absorption of the fixed cost and successful cost reduction efforts.

The telecom division achieved positive EBITDA in the June quarter, excluding corporate allocations. This is an important milestone for our telecom product line. Based on the current demand and the cost structure, we anticipate stronger performance results from this division in the September quarter.

We anticipate that the pricing of the micro-ITLAs may get more competitive when more suppliers come online. In response, we’re focusing our engineering efforts to significantly reduce the cost of current micro-ITLA design in the efforts to further secure the competitiveness of our product in the marketplace.

In the meantime, we’re prioritizing our R&D projects to make sure that the projects we do undertake are adequately supported to ensure their success and timely introduction to the marketplace.

Also we have developed a new concept of external-cavity laser design recently which will allow us to produce high power laser output well in excess of 20 dBm in a reproducible manner.

This will be the superior component to meet the power requirement for next generation coherent applications needs and especially for the integrated coherent transmitter. We plan to provide prototype samples to a selective customer base before the end of this calendar year.

The ITLA business has been running very strong in the last two -- last couple of quarters. We are very pleased to see that our broadband fiber optics business appears to have navigated through the industry headwinds and is now gaining speed. We have achieved strong top line and improve the bottom line performance.

We are encouraged by the improvement in our Fiber Optic segment. And in a -- at a meantime, we’re now satisfied and therefore we’re implementing certain cost reduction initiatives to further reduce cost and improve our personal efficiency.

We expect that our Fiber Optics business will be more sustainable financially once this initiatives are fully implemented. Based upon our current expectations, we’d expect to reach breakeven at a consolidated quarterly revenue level of approximately $46 million to $48 million.

Turning to guidance for the fourth quarter of fiscal year 2014 ending September, our revenue expectation is in a range of $41 million to $45 million.

We expect a sequential revenue increase in Fiber Optics segment and sequential decrease from the Space Photovoltaic segment, which is consistent with the seasonality that we’ve experienced in the Space business. We expect the Space Photovoltaic segment to rebound in December quarter based on our (indiscernible) backlog and the current demand.

In summary, we feel that our technology and products are well positioned to address the growth areas in our markets. Simultaneously we continue to work diligently on improving the Company’s financial performance. With that, I’ll turn the call over to Q&A..

(Operator Instructions) Our first question comes from the line of Mr. Dave Kang of B. Riley. Your line is open..

Good afternoon.

First of all, regarding your fiscal fourth quarter guide, so TV is expected to decline, I was wondering if you can quantify that?.

Yes. So Dave, thank you for the question. We expect a sequential decline in the range of $1 million to $2 million..

Okay.

And then, so it sounds like if that is the case, then I guess Fiber Optics will kind of offset that, so basically we’re looking at flat or down little bit in fiscal fourth quarter?.

Flattish, yes. That’s as we guided, yes..

Okay.

And then, so within Fiber Optics, what’s your assumption on Cable TV, is that kind of be flattish in September quarter as well or …?.

The Cable TV is going to grow, revenue is going to increase compared to the June quarter. The booking activities started really accelerating towards the end of the June quarter, but usually just product it has been like a four to six weeks lead time and the demand in increase in CapEx spending from MSOs usually they were clear to pipeline first.

For our customer base, which are equipment manufacturers and then they really kick start and accelerate the ordering activity to us..

So if cable TV is going to be up little bit, then I guess telecom will be kind of we’re looking at kind of maybe flat to some -- slight growth then, is that the case?.

We will a sequential growth for telecom product as well..

Okay.

So when you say cable TV, you’re throwing in the foundry business in to that cable TV?.

Yes..

Oh, I see. I see. Okay. Okay, that’s -- that will make sense there. Okay.

And then, on the -- I was wondering if you can just talk about North American telecom market, there has been lot of talk about being soft and all that and also -- comment about the Chinese 100 gig activities?.

Yes, the 100 gig activities we see nothing, but growth. Maybe the telecom overall market in the access area and metro soften up a little bit. But we see for the long haul applications which that’s primarily the market we’re addressing with our ITLA products is the demand increases across the board..

Okay, even from the American customers?.

American customers, European customers and Chinese customers..

Got it.

Is there any kind of price or margin differential between Chinese versus non-Chinese?.

So there is some difference, yes, by the requirement or specification are different as well..

Okay.

And then, you said you guys -- last quarter you guys were fully booked for the next few months, is that still the case? Book-to-bill kind of drop a little bit, so what’s the capacity situation at this point, especially with micro ramping?.

Yes, so the -- we’re still at this point the capacity were fully utilizing. And -- but as I said, we’re seeing a very fast transition. Our demand increased for micro-ITLA. So really instead of adding more capacity for ITLA, and we’re aggressively ramping up the capacity for micro-ITLA..

So would you say micro, I mean, as far as like your backlog or orders in the -- during the quarter, is micro about on par with ITLA or is ITLA still much bigger than micro at this point..

So the contribution for revenue, ITLA still the mainstream..

Okay..

Micro-ITLA contributed to $2 million in revenue in the June quarter, but we expect to more than double for this quarter and ITLA the (indiscernible) is not going to be on the same trajectory..

Right..

In micro-ITLA it’s going to be growing much faster..

So with that said, then when should we expect ITLA to start tapering?.

I will say probably the December quarter..

Okay, okay..

And we’ve started seeing the signs. But it will take some time to transition over..

Got it. Got it. And lastly, and then I will cede the floor. Regarding gross margin, so Hong you said you expect -- I think you said cable TV or I think you said Fiber Optics, Fiber Optics performance will be stronger in the current quarter, September quarter, but marks there could be some pricing pressure with micro launch.

So I was wondering if you can kind of add more color on that topic?.

Yes, I think in general -- I think Mark you can feel free to comment. But micro-ATLA the margin pressure, it’s during the early stage of the product introduction.

And we have gone through the learning curve and its a cycle time reduction, yield improvement, throughout improvement, had all gone through the learning curve and right now we expect equal or better margin from micro-ITLA..

Got it. All right. Thank you, guys..

Thank you, Dave..

Thank you. At this time, I’m showing no further questions. I’d like to return the call back over to management for closing remarks..

All right. Thank you very much for dialing in today. We know there are other two conferences going on at the same time, but we look forward to talking to you soon and if you have any questions, feel free to reach us to us -- reach out to us. Thank you. Bye..

Ladies and gentlemen, thank you for participating in today’s conference. This concludes the program. You may now disconnect..