Good day, ladies and gentlemen, and welcome to the EMCORE Corporation's First Quarter 2015 Earnings Call. [Operator Instructions] I would now like to turn the call over to your host for today, Victor Allgeier. Sir, you have the floor. .

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 and 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 are Jeff Rittichier, President and Chief Executive Officer; and Mark Weinswig, Chief Financial Officer. Mark will review the financial results, and Jeff 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 first fiscal quarter operating results and our balance sheet. Please note that today's results include the effect of classifying our telecom division and Photovoltaics segment as discontinued operations.

Therefore, the results we have released and we will discuss today are primarily for the Broadband Fiber Optics division..

Consolidated revenue for our first fiscal quarter totaled $18.4 million, which is an increase of $3.8 million or 26% over the prior year's first quarter. The significant increase was due to higher cable TV revenue from numerous customers and strength in our components product lines. Our Q1 '15 revenue guidance was $17 million to $19 million.

Jeff will discuss the outlook for the businesses later in the call. .

Broadband Fiber Optics gross margin was 28.1%, a 12 percentage point increase from the prior year's first quarter, primarily due to higher revenue, better factory [ph] utilization absorption of the fixed cost and lower department cost as a percentage of revenue.

In the broadband cable TV segment, we have seen a significant improvement in the results and outlook as Jeff will discuss further. .

In general, after more than 2 years of tough times, we believe the cable TV optical network infrastructure business is seeing improving market trends. .

Total operating expenses for R&D and SG&A were $10.8 million, up $3.3 million from the prior year's first quarter. The increase was primarily due to $2.1 million of transaction-related compensation and $1 million of severance expenses, primarily associated with the departure of executives. .

Regarding the Photovoltaics divestiture, the business was sold on December 10. The total gain from these discontinued operations, including both the sale and the operations for the stub period was $89 million. We recognized roughly $30 million of income taxes associated with this gain. .

For the telecom division, the transaction to sell the business was announced on October 22 and the deal closed on January 2, 2015. We expect to recognize a gain during the second quarter associated with the transaction, subject to certain valuation and working capital adjustments.

As we noted last quarter, the consideration for the telecom division was $1.5 million of cash and a 2-year note for $16 million of principal, which will be recognized or realized in the March quarter. .

On a GAAP basis, the consolidated net income for the first quarter was $56.1 million and includes the $59 million of net income from discontinued operations as noted previously. Our GAAP loss from continuing operations before any income tax benefit and which excludes the impact from the divestitures was $5 million.

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 $0.9 million versus $3.9 million in the prior year's first quarter. The significant improvement was due to higher revenues and gross profits, partially offset by higher corporate costs.

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

Moving on to the balance sheet. At the end of December, the company's cash and cash equivalents balance, and restricted cash was $148 million. We paid down the line of credit of $26.5 million at the end of the prior quarter. The significant cash balance was primarily due to the sale proceeds of $147 million received from the Photovoltaics sale.

We expect our cash balance to decline by $6 to $8 million in the March quarter as we pay down certain accrued expenses associated with the transactions. .

Regarding our 10-Q filing, due to the divestitures and other changes, we plan to file our 10-Q within the 12b-25 extension period. We believe that the financial regarding challenges will simplify during the March and June quarters with the completion of the financial reporting requirements for the divestitures. .

Overall, for the first quarter, the Broadband Fiber Optics financial results show significant revenue growth primarily in the cable TV area. This culminated in higher margins and stronger overall operating results. .

Our corporate costs were higher than usual due to related work and activities associated with deintegrating the 2 divisions we have sold. In addition, we have moved our corporate headquarters to Alhambra, California, which has resulted in some increased near-term spending. .

As a result, we expect to see small cost reductions in G&A over the next couple of quarters as we begin to operate normally out of our new headquarters.

Our goal is to be at a breakeven level on a non-GAAP basis, excluding the items we noted earlier at between $17 million to $19 million per quarter of revenue depending on product mix and the timing of certain spending. .

With that, I will turn the call over to Jeff who will discuss his initial reflections on the company's strategic and operating initiatives, and provide revenue guidance for the second quarter. Our guidance will exclude the telecom division.

Jeff?.

Thank you, Mark, and good afternoon, everyone. First of all, I'd like to take a moment to thank the EMCORE board for selecting me as the company's new CEO. I'm truly happy to be back in the driver seat of the EMCORE broadband business, and look forward to building a growing and profitable enterprise going forward. .

As Mark discussed, our consolidated revenue for the first fiscal quarter totaled $18.4 million, an increase of $3.8 million or 25% over the prior year's first quarter. The significant increase was due to higher cable television revenue from numerous customers and strength in our component product lines.

With the realignment of the business now complete in early January, EMCORE has become a significantly more focused business..

Optical components and transmitters for cable TV infrastructure; video and specialty products; and optoelectronic devices. Over the past couple of years, the CATV business has experienced a fair bit of turbulence due to reduced spending.

Our customers, the OEMs, have gone through a significant consolidation that we've seen their customers, the MSOs, delay infrastructure spending, pending to release DOCSIS 3.1 IT chipsets. .

Based on what I've seen so far, I do think that market conditions have began to improve and that MSO CapEx spending has been directed more toward optical infrastructure equipment as opposed to nodes and set-top boxes, strengthening EMCORE's business.

The evidence for this is the growing demand for DOCSIS 3.1 transmitters and components in the quarter that we expect to see this trend continue. We're also developing some new customer engagements within the equipment OEM space that we hope will start to contribute as well. .

Going forward, we're going to have a strong operational focus on excellence as we work to return to the position of technical strength that this business once had when it was the unquestioned leader across all of CATV components. .

During my first month on the job, I visited our Langfang facility, our operations at Fabrinet, and surveyed the changes in Alhambra since I was here last.

While I was pleased to see that we've been able to ramp up substantially to meet our customers' needs, we've got lots of opportunity ahead of us to redesign our manufacturing strategy, to take advantage of our technical position, and create a stronger and more agile manufacturing operation. .

Technology development has remained a focus at EMCORE over the past few years, and the results are tangible. One of the recent key developments is a new high-performance component, which has virtually unmatched specifications as a stand-alone device and is now being designed into transmitters for our customers.

The successful commercialization of this technology represents an important new opportunity for our CATV business over the next few years. .

in aerospace, satellite communications and industrial markets, with unique long life cycle and high gross margin products. .

During the December quarter, we shipped additional production units of our fiber optic gyroscopes and expect increased volumes over the next few quarters. We're also continuing to supply chip level products to several customers and see this as an area of opportunity going forward. .

With the overwhelming amount of heavy lifting of strategic alignment behind us, the Board of Directors of the company has directed me and my team to focus on building EMCORE into an organization with stronger and more predictable financial performance.

At the same time, the board will continue to explore a wide spectrum of strategic options to increase shareholder value. .

Turning to guidance for the second quarter of fiscal 2015 ending March 31. Our revenue expectation is in the range of $17 million to $19 million despite the normally quarterly down cycle of CapEx, which occurs in the first calendar quarter.

We continue to rightsize our cost structure and work to improve our margins, and we fully expect the non-GAAP net loss to shrink in the March quarter. .

While I've only been on the job for a month or so, I'm getting my hands around the opportunity and the challenges. So far, I've been pleased to see that we have some opportunities for investment that can be quite lucrative. Consequently, looking through those in detail is a top priority.

I'd like to thank the EMCORE team for helping me get up to speed, and especially our board for their trust and support. And finally, I look forward to working with all of you and our shareholders to build a stronger EMCORE going forward. .

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

[Operator Instructions] Our first question is from the line of Alex Henderson from Needham. .

It looks like you've done a good job of putting the company on the right direction. I do have a couple of questions for you, though. One of the challenges, from my perspective of trying to figure out what to do with the stock, what I should tell investors is it's a considerable cash position, is probably the largest asset on the company.

Certainly, it's a large piece of the valuation.

So I guess my question to you is, how should we be thinking about the mechanics of how you can return cash to shareholders if you were to choose to do so? Is there an opportunity to use a distribution mechanism that would not require it to be a dividend so that it would be considered more of a capital gain or a capital return? Are there any other ways to the shield the cash value in the future?.

Alex, it's Mark. Thank you for the question. The company is in a very good position right now having roughly $148 million of cash and restricted cash, in addition to the proceeds that we received in January associated with the sale of telecommunications business.

In terms of the opportunities to distribute cash or to get cash back to shareholders, as Jeff mentioned in his commentary, we are looking at every and all option of ways to increase shareholder value. This includes a whole variety of options. In terms of being able to nail those down right now, I mean, the board has brought Jeff in.

Jeff's working on -- in terms of putting together our plan. As we go forward, we'll be looking forward to sharing more of the details with you, with our investor base in terms of where we expect to take the company.

But for right now, it's probably a little bit preliminary for us to discuss some of the mechanisms to and options that we currently are exploring. .

Okay. Second question. You normally experience cable seasonality in the first quarter. The company did say that they were seeing strength through the end of the fourth quarter.

Is the sequential guidance that's comparable to what the guidance, I believe, was for the fourth quarter, an indication of some of the strength of the fourth quarter sloshing into 1Q getting you better than seasonal? Or should we expect that, that improved conditions in the broader industry around the DOCSIS 3.1 chipset and the like are going to allow you to have not only better seasonal but considerable seasonal improvement as you move into the seasonally stronger summer quarters?.

Yes. Thanks for the question, Alex. I think what I'm trying to say here is, yes, we do expect to do better than seasonal. We want to get our hands around a few of the customer opportunities to make sure that we understand the real strength versus some of the peak requirements, which we saw back in Q4.

But going forward for the next couple of quarters, we see continued strength in customer demand that is certainly above seasonal. .

So that would imply sequential improvement in the June time frame which is the normal seasonal pattern after the better than normal base?.

I hesitate to stick my neck out that far. But certainly for the March quarter, I think we're in a good position to see, again, adjusted upward from seasonal. .

And then finally, one last question in terms of the way you're thinking about growth.

Is that a focus on, at least, over the next, say, 12 months, on growth internally? Or do you think the utilization of the cash position to append additional businesses to your operational structure would be something that you'd be interested in doing as well? How should we think about that aspect of the use of capital?.

First of all, all options are on the table as far as -- especially what the strategic committee of the board is considering.

But from my perspective, at this point, I'm confining my comments today largely to, call it the current market for CATV and our other products within that current space and within incremental product technology improvements, where can we see revenues start to push? And I do see strength at this point.

Hope is not a strategy, so there's a lot of execution along the way. But we do see some strength that we think we're going to be able to take advantage of. .

Our next question is from the line of Krishna Shankar from Roth Capital. .

As you look over the next few quarters, it looks like DOCSIS 3.1 will be a key driver.

Are you seeing broad-based strength in orders for DOCSIS 3.1 from multiple MSOs? Can you give us some sense for the granularity of your orders?.

Yes. At this point, I would say that it's safe to say that we are seeing strength in demand across several OEMs for components that are used in DOCSIS 3.1 applications. And these are parts with more stringent specifications and are sort of at the higher end of the product line.

So we see that demand being pulled through the OEMs from MSOs in response to the need to compete against the telcos. .

Okay. And then, you mentioned that you're also starting to refocus on the components business, foundry components.

Can you give us some flavor for that business? How that is doing and what types of products and customers you're targeting with that components business?.

Yes, I'm really going to have to defer on that -- on the answer to that a little bit. We're still trying to get our hands around components and chip level opportunities. Suffice it to say that it will be an area of emphasis going forward. I'm just not quite ready to provide any input on that. .

Okay.

And then, Mark, can you give us some indication of gross margin trends, both for the March quarter and beyond, as capacity utilization and your operating efficiency improves?.

Yes, of course. Thanks for the question, Krishna. Obviously, last quarter and this quarter, we started seeing some significant improvements in our gross margins. Primarily, that was really due to the additional absorption and utilization of the factory.

The guidance that Jeff provided in terms of where the company is going, obviously, we're going to see some continued opportunities there. As we've said in prior quarters, our goal is to have this business operating at 30% gross margins, if not, better.

And in future calls, Jeff will be lining up exactly how we're going to get there and how we're going to have additional improvements. Obviously, with Jeff being on the job 4 weeks, it's probably early to probably talk about some of the model items at this point.

But we are seeing positive trends, and I think we all feel comfortable with where the business is going. .

Is there a target revenue level that you would be able to get to that sort of 30% gross margins? Or is it too early to talk about that?.

We've targeted that between $17 million and $19 million is where we hope to get to an EBITDA breakeven basis, excluding certain items as noted in our release. So that's kind of the target level where we like to get to in terms of being able to hit our -- those target gross margins. If not, do better. .

Our next question comes from the line of Dave Kang from B. Riley. .

First of all, can I get some numbers? Can I get depreciation and also CapEx? And what's your budget for this year, or calendar year?.

Yes, I'll answer the first 2 questions, and the third one I'll defer to Jeff, Dave. Our CapEx for the quarter for just the broadband business, the business that we have left, is about $350,000. And our depreciation and amortization was about $500,000.

In general, Dave, as you know, over the last 18 months, we've been going through this strategic review process, our CapEx had been a little bit lower than normal years. Normally, we have historically spent for the total EMCORE, when we had the other businesses, roughly $5 million per year, with about $2 million being in the broadband business.

Last year, we were closer to about $1 million. So obviously, there are opportunities, as Jeff mentioned -- I'll let Jeff kind of describe what some of those are and what that might mean from a CapEx perspective. .

I'm sorry, Dave, is there a specific -- trying to understand exactly where you're headed with this question. .

No, I'm just interested in what the CapEx budget is going to look like, but I think Mark kind of answered that. I mean, maybe $0.5 million per quarter or less.

Is that kind of a fair statement?.

Or thereabouts. We're thinking to look at some of the needs inside of the manufacturing operation. And we'll be bringing that forward to the board as needed. But it's a pretty high internal hurdle rate to get those expenditures approved. .

And can you talk about your customer base? I'm assuming it's -- you must have fairly highly concentrated customers. .

Yes. That's fair. When you take a look at the major customers, I mean, the sorts of people you'd expect, right? You've got the ARRISis and the Ciscos and Aurora Pace of the world. We do sell to smaller OEMs, primarily components.

But the ODM transmitter business, which has been pretty much the bread and butter of this division for some time, is concentrated among those 3 customers. .

Got it. And just how -- it seems like your business, cable TV business is back to the historical level, but how sustainable is it? It went to a pretty significant downturn the last couple of years. So just trying to see what -- how the visibility looks like going forward. .

Yes, my crystal ball still got a little bit of fog in it, so I'm going to defer on some of that. But what I will say is, I think, we had an unusual period in the OEM space of consolidation.

And that, in concert with lack of availability on the DOCSIS 3.1 chipsets, really sort of forced MSOs to say, "Maybe we do more of our CapEx spending at the node, node splitting and the set-top box level as opposed to infrastructure." And so as I think we see this trend start to break and move more toward the infrastructure side, that's going to be very helpful for us.

.

Got it. And then lastly, on the stock compensation, $1.8 million.

Can you just break out what the normal rate will be? And how much of that was one-time related?.

Yes. It's a great question. We expect our stock comps to be back down for this business to the normal levels that we were at. We're historically, right around $500,000 to $600,000 a quarter, and even less than that. So obviously, with the transactions and a lot of the events that happened this quarter, our amounts are a little bit higher. .

[Operator Instructions] And that looks like all the questions that we have for today. So I'd like to turn the call back over to the speakers for closing remarks. .

Thank you very much for participating in today's call, and we look forward to speaking with you on future calls. .

Ladies and gentlemen, thank you again for your participation in today's conference. This now concludes the program, and you may all disconnect your telephone lines. Everyone, have a great day..