Good day, ladies and gentlemen, and welcome to the EMCORE Corporation Fourth Quarter 2014 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded..

I would now like to turn the call over to Victor Allgeier. Please go ahead, sir. .

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 our current expectations and projections about future events and trends affecting our business.

Such forward-looking statements include, in particular, projections about our future results, 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 our 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 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 business that are addressed in our filings with the U.S.

Securities and Exchange Commission that are available on the SEC's website located 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 to 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, Vic, and good afternoon, everyone. Today, I'm going to focus my discussion on our fourth fiscal quarter operating results and our balance sheet. Consolidated revenue for our fourth fiscal quarter totaled $43.7 million, which is a decrease of $0.8 million or 1.9% over the previous quarter.

The decrease was due to lower Photovoltaics revenue as a result of lower international shipments, partially offset by higher Fiber Optics revenue, driven by strong growth in our telecom and cable TV product lines. Our Q4 revenue guidance was $41 million to $45 million..

On a segment basis, our Photovoltaics business accounted for $15.3 million or roughly 35% of the company's total revenue. This represents a $3.1 million or 17% decrease from the prior quarter. As we have said previously, the Photovoltaics revenue, in any given quarter, may be a bit lumpy.

With the closing of the sale of the division to Veritas on December 10, 2014, EMCORE will report the Photovoltaics business as discontinued operations beginning in Q1 '15..

The Fiber Optics segment accounted for $28.5 million or 65% of the company's total revenue. This represents an increase of roughly $2.3 million or 9% from the prior quarter.

We expect the telecom division of the Fiber Optics business to be a discontinued operation beginning in Q1 '15 due to the announced sale to NeoPhotonics expected to close in early January. Hong will discuss the outlook for the remaining business later in the call..

On a segment basis, Photovoltaics gross margins sequentially decreased 7.2 percentage points to 20.5%. The primary reason for the decrease was due to significantly lower revenues and unfavorable variances realized in the quarter.

Fiber Optics gross margin was 11.1%, a 5.3 percentage point decrease from the prior quarter, primarily due to higher excess and obsolete cost, partially offset by an increase in revenues and better absorption of the fixed cost from the broadband product lines.

We have seen improvements in the 100G and 400G coherent market and our position in the marketplace. This has led to an increase in our telecom revenues..

In the broadband division, we have seen a significant improvement in the results and outlook. Consolidated gross margin was 14.4%, a 6.7 percentage point decrease from the prior quarter, attributable to lower Photovoltaic and Fiber Optic gross margins. Total operating expenses for R&D and SG&A were $14.8 million, up 18% from the prior quarter.

The increase was primarily due to $1.2 million of severance expenses and a $1.7 million of transaction expenses associated with the Photovoltaic and telecom divestitures..

With the announced future departure of 2 of the other executives, we will have additional severance-related expenses in the first fiscal quarter..

As we have disclosed previously, EMCORE has significant net operating losses of almost $400 million to utilize to offset future taxable income and gains, if realized. In the fourth quarter, EMCORE recognized a $24.1 million benefit from its deferred tax assets.

EMCORE had previously reported 100% valuation allowance to offset these deferred tax assets due to the financial outlook and results. As a result of the expected significant taxable gain on the Solar transaction that closed on December 10, 2014, EMCORE will utilize the deferred tax assets to offset the gain in fiscal year '15.

Therefore, our release of the valuation allowance was deemed appropriate. .

On a GAAP basis, the consolidated net income for the fourth quarter was $15.5 million, an $18.6 million improvement from the prior quarter and includes the $24 million of tax benefits as noted previously. Our GAAP net income per basic and diluted share was $0.50.

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 $1.2 million versus $1.6 million in the prior quarter. The results are relatively flat.

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

In the fourth quarter, we identified transaction expenses as a non-GAAP adjustment, since the transactions had been signed and negotiated in Q4 or in early October..

Moving on to the balance sheet. At the end of September, the company's cash and cash equivalents and restricted cash was $22.1 million, an increase of $3.2 million from the prior quarter. The line of credit increased to $26.5 million..

With the closing of the Photovoltaics divestiture on December 10, EMCORE has realized net proceeds of over $140 million in the first quarter, which includes the legal, financial adviser and bonus expenses as noted in our proxy..

Overall, for the fourth quarter, the Photovoltaics financial results showed a little weakness in the quarter due to lower shipments. The Fiber Optics segment experienced some revenue growth in both the telecom and broadband area. In addition, the broadband cable TV division realized an increase in gross margin..

As a result of the tax benefit we realized in the fourth quarter, EMCORE has determined that it -- with its auditor that a material weakness was present at the end of the year relating to the recognition of the tax benefit.

Management believes that this finding should be able to be remediated with the additional assistance of outside tax advisers, which the company is engaging. The material weakness was limited to the assessment of the valuation allowance in recognition of the income tax benefit in the fourth quarter..

With that, I will turn the call over to Hong, who will discuss the company's strategic and operating initiative and provide revenue guidance for the first quarter. These results are expected to exclude the telecom Fiber Optics and Photovoltaics division. .

Thanks, Mark. Good afternoon, everyone. As Mark discussed, we achieved the consolidated revenue of $43.7 million in the September quarter, which represents a $0.7 million or 1.9% sequential decrease from the June quarter. This revenue attainment is within our guidance of $41 million to $45 million.

The revenue in Fiber Optics was $28.5 million or 9% sequential growth over the June quarter. While our revenue in Photovoltaics was $15.3 million or 17% decline from the previous quarter..

For our fiscal year ended September 30, 2014, our consolidated revenue was $174.8 million which represents a 4% increase compared to the FY '13 revenue of $168 million. The revenue from the Photovoltaics segment was $73.2 million, representing approximately 42% of total revenue contribution.

And the Fiber Optics revenue was $101.6 million, representing approximately 58% of the total revenue. The net loss on a non-GAAP basis for fiscal year 2014 was approximately $1.2 million..

On a GAAP basis, fiscal year 2014 net income was approximately $4.9 million due to the realization of a tax benefit as Mark discussed..

This fiscal year 2014, our Space Photovoltaics division had the best year ever, achieving revenue of $73.2 million with over $8 million operating income, if we exclude the transaction cost realized in the Q4. And we entered into several long-term purchase agreements with a major aerospace company.

As we previously discussed, on September 17, we entered into a definitive agreement to sell this business to affiliate of Veritas Capital, a private equity firm based in New York City, for $150 million. That transaction closed yesterday. The gross proceeds of $150 million in cash has been received..

The Space Photovoltaics business has been renamed SolAero Technologies that will continue to operate in Albuquerque. The former corporate functions which has been supporting EMCORE are now part of the SolAero. We wish them the best of luck in the future..

Now let me discuss our market position and business outlook in our Fiber Optics business segment. The revenue in Fiber Optics was $28.5 million, representing 9% sequential growth over the June quarter. GAAP gross margins declined to 11.1% from 16.4% sequentially..

In Q4 '14, where you -- we recognized a $2.8 million charge for E&O inventory related to our telecom product, which reduced the gross margin by roughly 10 percentage points..

Our revenue for the telecom business was strong during the September quarter, fueled by the robust demand for 100G coherent product. The shipment of combined ITLA and micro-ITLAs reached record levels. The company also introduced the key new product at ECOC in September during the quarter..

The dual ITLA, namely 2 turbo lasers in one package to support smaller form factor line charge and transponders. We also announced the availability of a high-power micro-ITLA for applications of up to 17 dBm, the key enabler to reduce the cost of optical networking..

On the operations front, for the telecom business, we made tremendous progress in manufacturing engineering, improving yield and reducing cost. With seeing record transition from our customer base from ITLA to micro-ITLA product platform. As a result, we are increasing the capacity of the micro-ITLA to support a strong customer demand..

We are finishing negotiations with most of our customers for market share allocation for the next year. What I can say is that the outlook for 2015 for our ITLA, micro-ITLA product is very robust..

On October 22, 2014, the company entered into a definitive agreement to sell the telecom business unit to NeoPhotonics for $17.5 million. This transaction is expected to close in early January. We expect to report the telecom business as discontinued operations in our future financial reporting.

Therefore, we will not provide outlook for this business at this time..

optical components and transmitters for cable TV infrastructure, video and specialty products and optoelectronic devices. The revenue for this division in the September quarter was $14.3 million and the gross margin was 28.5%..

Over the last couple of years, this business has experienced a significant headwind, especially in the cable TV space. Consolidation of our customer base and of our customers' customers at MSOs, as well as the delay of DOCSIS 3.1 IC chipsets have contributed to a depressed spending for optical networking product..

In addition, due to the relatively high fixed cost nature of our fab and our China manufacturing facility lower sales has a disproportional effect on profitability..

While we were pushing strategic options -- pursuing strategic options to our other businesses, the management team never lost its focus in our process improvement for the broadband business over the last year. We launched a number of initiatives to improve the performance of this division, including the consolidation of our U.S.

manufacturing sites to one in Alhambra, exiting some product lines to allow focus and rightsizing the support and investments in different areas to reduce operating expenses. This restructuring initiatives have resulted in over $1.8 million annualized savings..

In addition, we made a couple of important decisions on our product strategy. We started to push aggressively for the sales of optical components for cable TV applications. We also began to sell other electronic devices for fiber-to-the-home, wireless, silicon photonics and data center applications.

All of this have contributed to the improvement in the financial performance of this business..

While we have been focusing on improving our internal operations, external market conditions have begun to improve as well. Numerous headwinds I noted earlier have started to abate. Beginning in June 2014, we saw a clear sign of market recovery.

While the reported CapEx spending from MSOs is projected to increase only moderately, the allocation towards the spending for optical infrastructure equipment is clearly increasing. With some of our direct customers, the merger-related hiatus of spending is giving ways to numerous new engagement with us that we hope will drive spending in 2015..

In addition, 2 leading equipment manufacturers started shipping transmitters with DOCSIS 3.1 specifications from the June quarter and ramped up rapidly in the September quarter.

With a leading supplier of transmitters for this emerging standard, we believe that the MSOs have to increase their infrastructure spending to continue to compete with the telco providers. Overall, the winds appear to be at our back..

In addition, during the past 6 months, we have expanded our engagement with our customers and even with some MSOs on our new technology. Our fully integrated transmitters based on our disruptive linearized semiconductor laser technology called LEML [ph].

This technology offers high-power modulation and transmission with the linearity performance similar to externally modulated transmitters and with a significantly lower cost and power consumption. It is viewed as a disruptive solution to the linearized optical networks for cable TV transmission. We're designing several platforms for our customers.

The successful commercialization of this technology represents a new opportunity for our cable TV business over the next few years..

While the size and the visibility of our cable TV operation have tend to obscure our video and specialty product area, we are actually quite excited about the prospects of this product line, leveraging the same core technology of linearized optics as cable TV.

This specialty and video product addresses fragmented market applications in the aerospace, satellite communications and the industrial market with unique, long life cycle and high gross margins solutions. .

During the September quarter, we completed the qualifications and tests of our Fiber Optics Gyro or FOG designs for applications with 2 key defense contractors, setting us up for a commercial revenue sales in 2015 and the many years after..

In addition, our newly introduced video switching platform has generated significant traction since its introduction in the June quarter..

Due to our heritage over the past 20 years, we have extensive manufacturing capabilities at our Indium Phosphide fab within the broadband division. Historically, the majority of our chip production has been used for internal consumption, and that's for cable TV integrated systems.

In recent quarters, we have started to sell certain products at a chip level directly from the fab. This effort improves our fixed cost absorption tremendously. Over the last several quarters, we have experienced the significant increase in the revenue from the sales of devices..

In the September quarter, for example, the sales of APD product alone exceeded $2 million. And fab provided a positive contribution to the bottom line instead of generating, say, up to $750,000 and have absorbed the cost that has been -- that we have been experiencing in the past..

We plan to expand our efforts and our product offering to begin selling uncooled lasers 10 gigabit per second of Fiber Pro and DFB lasers, APD and thin photodiodes and silicon photonics chips. With the change of focus in some leading device suppliers, we believe that there is a significant opportunity for us in this area of business..

In general, our broadband business has extensive technology base with high barriers to competition, and the comeback of the CATV demand is very evident from design, manufacturing, strong booking activity and our revenue outlook for this quarter. The new product in the pipeline strengthened our technology leadership and the customer relations.

In addition, our chip and specialty video businesses are contributing to the revenue growth and operating profit improvement..

In Broadband Fiber Optics business, we can achieve EBITDA positive with a quarterly revenue run rate of $18 million to $19 million. Gross margin typically in the high 20s to low 30%. And we plan to reduce certain operating corporate expenses..

With the sale of our Space Photovoltaics division, EMCORE will not have an ongoing presence in Albuquerque. As a result, our corporate functions will be located in Alhambra, California. We'll go from having multiple businesses in multiple locations in the U.S.

to a single main site and focus the business built around our linearized optics expertise and world-class indium phosphide fab. We're committed to reducing corporate expenses with this narrow and focused business scope.

As part of this effort, we announced today that our General Counsel, Alfredo Gomez; and Chief Administrative Officer, Monica Van Berkel, will leave the company over the next couple of months. I wanted to take this opportunity to thank Alfredo and Monica for their leadership and support over the years.

They have demonstrated the utmost professionalism and dedication, and I wish them well in their future endeavors. .

We have made several other changes to drastically reduce the corporate expenses as well. With all of this, the annualized corporate expenses is expected to reduce by 40% from average of $12 million to $7.5 million..

We have also announced that the company has hired Jeff Rittichier as my successor as CEO, starting on January 3, 2015. Jeff has tremendous experience in fiber optics space and knows the broadband business well. I will work with Jeff over the next couple of weeks for an orderly handover..

Our current CFO, Mark Weinswig, will continue to serve as the CFO of the company, providing a continuity of our financial reporting and the institutional knowledge..

Turning to guidance. For the first quarter of fiscal year 2015 ending December 31, our revenue expectation for the Broadband Fiber Optics business, excluding telecom, is in the range of $17 million to $19 million.

This represents a significant growth from the revenues for the same business in Q3 and Q4 of $13.6 million and $14.3 million, respectively..

We expect that the non-GAAP net loss from this business will be limited to $1 million to $2 million, excluding certain items, such as transaction cost, discontinued operations, stock compensation expenses, amortization, severance and restructuring costs and other items. .

There are a lot of changes for the company as we move in this new direction.

With the sale of Space Photovoltaics division and anticipated sale of telecom division, the company has a strong balance sheet of more than $140 million cash, no debt, EBITDA-positive Broadband Fiber Optics business and approximately $350 million to $400 million net operating loss, which could be used to offset taxable income liability.

We believe the company has many options to increase shareholder value going forward. The Board of Directors of the company has directed the management to focus on the operations performance improvement. At the same time, they will continue to work with our advisers to explore a wide spectrum of strategic options to increase shareholder value..

With my planned departure from EMCORE on January 2, 2015, this is my last earnings call as EMCORE's President and CEO. I want to thank all of you for your trust and support over the years. I'm sure our paths will cross again sometime down the road. I wish the best of luck to EMCORE, its employees and its shareholders in the future..

With that, I will turn the call over to Q&A. .

[Operator Instructions] And the first question comes from Dave Kang from B. Riley. .

So several questions.

First of all, on the cable TV side, should we expect some seasonality in the March quarter, fiscal second quarter?.

Dave, the cable TV -- thank you very much for your question. The cable TV industry historically does demonstrate a typical seasonality, so namely the end of the year seemed to be higher and that the first quarter, calendar quarter, seemed to be slower. But so far, as you know, this turned to be a turn business.

We don't have as long a visibility in bookings, but the booking activity, as I discussed, is very strong for the December quarter and some of the orders are into the March quarters. It's hard to tell. I think so far, we are very -- it looks very promising. .

Got it, got it.

And then, let's see, what was the broadband gross margin? It's certainly -- very pleased with 28.5%, but what was the gross margin in the previous quarters, like fiscal second and third quarters?.

Yes, Dave. In Q2 and Q3, which is the March and June quarter, we were right around 19% to 20%. So in the fourth quarter, in our September quarter, we saw significant improvement as a result of a little bit of higher revenues and also a lot of the improvements that Hong had mentioned in his remarks. .

Okay. And then, Hong, you talked about optoelectronics as part of a broadband business.

Is this something you are starting to focus more, considering what something like BinOptics got recently?.

Yes. So as I mentioned, some of the leading device manufacturers, including the BinOptics and CyOptics in the past and certainly with a bigger company, they have expanded strategy in thinking -- in some cases that created opportunities for us. And we see it really is easy business for us to snap some more market shares.

As I mentioned, in the September quarter, the sales from APD alone it generated about $1 million favorable variance in terms of the cost. So we turned the fab from a money-losing area to a money-generating area and we see many more opportunities for our chip business. This is one easy product to start with APD.

But as I mentioned, Ortel, our broadband division of EMCORE has a 20 years -- or more than 20 years history, and we're one of the pioneers in the high-volume DFB laser manufacturing.

So we're going to expand the chip business into the laser area, the photodetector area, the modulator areas, in the custom-designed chips for some silicon Photonics applications. So that's clearly -- we've seen the early success and we're going to be continuing to that pursuit. .

Right.

And was that one of the reasons why Jeff, being an ex-Ortel guy, that he was chosen as CEO?.

Yes. Jeff was chosen for many reasons. He certainly had a lot of experience in the fiber optic space and very familiar with Ortel and broadband and many other things as well as we noted in the press release. .

And then, Mark, I'll ask some cash-related questions and stop there.

What was the cash burn in the quarter because it looks like the line of credit went up by like, what, $5 million? And what's the expected cash usage in the -- for fiscal first quarter and second quarter?.

Yes. The cash flow from operations was a negative $2.5 million and that's just from operations. Additionally, we had about $1.3 million of CapEx. .

Okay.

And then what's the cash -- expected cash usage in the first and second quarter?.

Yes. In the first quarter, obviously, everything is going to be a little bit different because of the significant proceeds that we received from the sales of the Photovoltaics business.

And then as we go into the second fiscal quarter, with the sale of the telecom business to NeoPhotonics, there will also be a little bit of an influx of cash as a result of that activity. So the next couple of quarters, we'll have some sale of assets that will have an impact on our cash flows.

But as Hong mentioned, right now, for the first quarter, with the revenue guidance that we've given and, obviously, with the small operating loss that we're expecting, the burn rate should be relatively low. .

Right. And then according to your proxy, so as of June quarter, and you say -- it include the proceeds from the PV, your cash would be about $140.3 million.

Correct?.

Yes. .

And then what does not include that? I'm assuming it doesn't include like executive severance pay or can you go over some of those items, expected cash outlays?.

Yes. As I mentioned in my prepared remarks, we will be having some additional severance costs associated with the 3 executives leaving. So we will see those... .

How much would that be?.

Yes. We've mentioned that in the proxy that Hong's severance and the other severances in total, we would expect there to probably be over the next year. Again, this is not all current. Over the next year that we would see roughly about -- a little bit more than about $1.5 million and that will be over the next... .

For all 3?.

Over the next -- that will be in over the next 4 quarters. .

Next four quarters. Got it. .

[Operator Instructions].

It looks like we don't have any further questions. .

There are no further questions. I would like to turn the call back over to management for closing remarks. .

Okay. Thank you. .

Yes, thank you very much for dialing in today. We look forward to talking to you more in the future. Happy holidays. .

Ladies and gentlemen, that does conclude the conference for today. Again, thank you for your participation. You may all disconnect. Have a good day..